REG - Phoenix Grp Hldgs - Phoenix Group Holdings - 2015 Annual Results <Origin Href="QuoteRef">PHNX.L</Origin> - Part 2
23/03/2016 08:18
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million to £250
million.
Cash remitted reflects free surplus within the life companies and the benefit of management actions implemented in the
period. The reduction from the prior period reflects the retention of capital in the life companies in advance of the
transition to the new Solvency II capital regime.
Target
To generate cash flows of £2 billion between 2016 and 2020, of which £350 million to £450 million to be generated in 2016.
IFRS Operating Profit
GRAPH
£324m
2014: £483m
26 Read more about IFRS operating profit
Why is it important?
Group IFRS operating profit is considered a more representative measure of performance than Group IFRS profit before tax as
it provides long-term performance information unaffected by short-term economic volatility.
ANALYSIS
Group IFRS operating profit has decreased by £159 million to £324 million principally due to the lower impact of management
actions compared to the previous period.
Group MCEV
GRAPH
£2,513m
2014: £2,647m
29 Read more about Group MCEV
Why is it important?
MCEV has provided a consistent means of assessing our ability to increase value through the delivery of incremental
management actions.
Following the implementation of Solvency II, this is the last time we will report MCEV.
ANALYSIS
With cumulative incremental embedded value from management actions of £466 million, the Group has exceeded the cumulative
incremental embedded value target of £400 million from 2014 - 2016.
The reduction of Group MCEV from the prior period primarily reflects dividend and financing costs, the adverse impacts of
economic conditions and changes in asset portfolios ahead of Solvency II implementation, partly offset by management
actions.
02 Manage capital
As a Group we continue to focus on the effective management of our risks and the efficient allocation of capital against
those risks.
We focus on optimising our capital structure while addressing the diverse needs of various stakeholders, including
policyholders, shareholders, lending banks, bondholders and regulators.
We aim to ensure that unrewarded exposure to market volatility is minimised or the risks from market movements are managed
through hedging.
In addition, regular re-balancing of asset and liability positions is required to ensure that only those assets which
deliver appropriate risk-adjusted returns are held within life funds, taking into account any policyholder guarantees.
KEY INITIATIVES AND PROGRESS IN 2015
· In January 2015, we completed an exchange offer of the Group's Tier 1 notes into new subordinated notes with a maturity
of 2025, with a 99% take-up rate by noteholders. The new notes meet the requirements of Tier 2 capital under Solvency II,
at the PLHL level.
· We achieved an investment grade credit rating by Fitch Ratings in August 2015. This provides a lower interest margin on
the Group's bank debt and broader access to the capital markets improving our ability to issue regulatory compliant
subordinated debt to support the Group's capital position.
· We completed a Part VII transfer of the business of National Provident Life Limited into Phoenix Life Assurance Limited.
This fund merger reduces the number of UK life insurance companies to two, resulting in greater capital efficiencies within
the Group.
· We continued to simplify the Group's corporate structure following the single silo bank facility put in place during
2014, with Impala Holdings Limited now 100% owned by PLHL. This Group simplification provides a more appropriate Group
structure for the Solvency II capital regime.
· We further simplified the Group's capital structure with the divestment of the Group's Irish subsidiary, Scottish Mutual
International ('SMI') which had become inefficient due to its small scale.
· PLAL recaptured £1.4 billion of reinsured annuities from the Group's Bermudan reinsurer, Opal Reassurance Limited
('Opal'), and we entered into a new reinsurance agreement with an external reinsurer in November 2015.
· In December 2015, the Group received PRA approval of our Solvency II full internal model, transitional adjustment and
matching adjustment applications. In line with approvals received from the PRA, the Group will continue to monitor and
measure its solvency position at the PLHL level.
· We resolved a number of legacy tax issues during the year which have further reduced risk and uncertainty and
facilitated the release of capital.
PRIORITIES FOR 2016
· Continued enhancement of the Group's capital position under Solvency II through the implementation of new management
actions and further review of the investment portfolio allocation.
· Exploring opportunities to further enhance our capital structure through the continued diversification of the Group's
debt structure.
How we measure delivery
Solvency II Surplus (Estimated)
GRAPH
£1.3bn
32 Read more about Solvency II
Why is it important?
The Solvency II surplus is the regulatory assessment of capital adequacy at the PLHL level, implemented on 1 January 2016.
ANALYSIS
Our opening Solvency II surplus of £1.3 billion represents a robust and resilient capital position.
PLHL ICA surplus (Estimated)
GRAPH
£0.6bn
2014: £0.7bn
31 Read more about PLHL ICA surplus
Why is it important?
The PLHL Group's measure of capital adequacy on an economic basis until 31 December 2015. This measure is replaced by the
Solvency II surplus from 1 January 2016.
ANALYSIS
The PLHL ICA surplus decreased during the period as capital generation items, including management actions, were offset by
dividend payments, debt financing and repayments and the adverse impact of management actions undertaken to enhance the
Solvency II position.
IGD surplus (Estimated)
GRAPH
£1.5bn
2014: £1.2bn
31 Read more about IGD surplus
Why is it important?
The Pillar I regulatory assessment of capital adequacy at the PLHL level until 31 December 2015. Again, this measure is
replaced by the Solvency II surplus from 1 January 2016.
ANALYSIS
IGD surplus increased to £1.5 billion at 31 December 2015 mainly reflecting simplification of the Group's corporate
structure, with Impala Holdings Limited now 100% owned by PLHL.
Financial Leverage
GRAPH
37.8%
2014: 39.3%
33 Read more about financial leverage
Why is it important?
The ratio provides an indicator of the Group's financial strength as it measures the level of debt as a percentage of the
Group's gross MCEV. Following achievement of the investment grade credit rating and the discontinuance of MCEV reporting,
this is the last time we will report financial leverage.
ANALYSIS
Financial leverage decreased to 37.8% at 31 December 2015 reflecting repayments of £190 million made in respect of the PGH
Capital facility during the period.
03 IMPROVE CUSTOMER OUTCOMES
Improving customer outcomes is central to our vision of being the saver-friendly 'industry solution' for closed life
funds.
We have six key areas of focus related to our customer offering:
· Security: ensuring all policy promises and guarantees are delivered.
· Improving value and effective with-profits fund run-off: through accelerating estate distribution where possible and
providing appropriate investment exposure.
· Effective service delivery: using our outsourced model to leverage expertise and ensure costs run off in line with
policy volumes.
· Clear and effective communication: recognising the importance of clarity and simplicity for what can be complex
products.
· Product governance: including a rolling review of our products to ensure they continue to deliver appropriate outcomes
for our customers.
· Customer journey: improving customer experience wherever possible.
KEY INITIATIVES AND PROGRESS IN 2015
· We completed an enormous amount of work to implement the new pension freedom rules introduced by the Government. Our
customers now have access to all of the new freedoms either within Phoenix Life or via one of our specialist partners.
· In March we established an Independent Governance Committee ('IGC') charged with overseeing the fair treatment of our
customers in workplace pensions arrangements. During the course of the year, we have worked with the IGC to understand
where those customers are at risk of receiving poor value from their products and formulated proposals seeking to address
those areas.
· We have again achieved a positive customer satisfaction score based on the results of the satisfaction survey managed by
Ipsos MORI (an external research firm). Customers surveyed were asked to give a satisfaction rating of between 1 and 5 to a
number of questions asked (with a rating of 3 or above regarded as satisfied) and 96% was the percentage of all questions
scoring a rating of 3 or above.
· Our Financial Ombudsman Service ('FOS') overturn rate was the lowest yearly overturn rate to date. The FOS overturn rate
is the percentage of resolved cases where the FOS, upon reviewing a complaint, make a change to our original decision in
favour of the customer.
· We beat the industry target related to the speed of pension transfer payouts in 2015. This is measured in the time in
calendar days taken from when a transfer request is put on Origo (an electronic pension transfer system) to when the
transfer is cleared and the receiving scheme receives the money in its bank account.
PRIORITIES FOR 2016
· Make ongoing improvements to customer outcomes, with a particular focus on strengthening communications with our
customers.
· Continue to take actions to support customers as they approach retirement age, so that they are able to make fully
informed decisions at the right time.
· Enhancement of our website, to encourage customer engagement with the products they hold with Phoenix.
· Ensure our products continue to deliver appropriate outcomes for our customers.
How we measure delivery
Customer Satisfaction Score
GRAPH
96%
2014: 93%
Why is it important?
This is an externally calculated measure of how satisfied customers are with Phoenix's servicing proposition.
ANALYSIS
The Group achieved a satisfaction score of 96% reflecting our commitment to ensuring customers are satisfied with our
products and services.
Target
To maintain a customer satisfaction score of 90%.
FOS Overturn Rate
GRAPH
18%
2014: 21%
Why is it important?
This is an independent view of how firms are handling complaints. It provides us with an opportunity to review and adjust
our complaint handling proposition in line with best industry practice.
ANALYSIS
The FOS overturn rate of 18% is the lowest yearly FOS overturn rate to date.
Target
To maintain a FOS overturn target of less than 33%.
Speed of Pension Transfer Payouts - ORIGO
GRAPH
11 days
2014: 9.83 days
Why is it important?
This is a recognised industry measure for the speed of processing Pension Transfers, Open Market Options and Immediate
Vesting Personal Pensions. It allows us to benchmark performance and our overall servicing and claims proposition against
our peers.
ANALYSIS
The Group's pension transfer times are again better than the industry target.
Target
12 days in line with the industry stated target for Origo Pension Transfers.
04 ENGAGE PEOPLE
Ensuring our workforce is engaged is central to the success of the Group. In 2015, we maintained our focus on ensuring our
people were challenged, motivated and rewarded through opportunities for growth, both professionally and personally.
For the fourth consecutive year, we were listed as one of the UK's Top Employers, an accreditation awarded to the best
companies to work for in the UK. We also achieved fourth place in the mid-sized category in Britain's Healthiest Workplace
(a benchmark in association with Pru Health, Mercer and The Telegraph).
We maintained an employee engagement index of 78%. This index is an aggregation of scores against a number of questions
considered the most important for staff engagement and was completed by 88% of employees.
KEY INITIATIVES AND PROGRESS IN 2015
· We continued to grow our development offering for all employees with an increased emphasis on management and leadership
development.
· The first cohort of our Open University Executive Education programme successfully completed 90-day business challenges.
Set by our Executive Committee, the challenges delivered genuine business improvements as a result of delegates' learning.
· We continued to build partnerships with prestigious business schools, including Ashridge and the London Business School,
and a number of our most senior employees attended development programmes with them.
· Over 1,000 learning requests were supported by the Group which included professional qualifications, coaching and
continuing professional development.
· Our Corporate Responsibility agenda played a key part in the engagement of our people and in 2015, we expanded our
community programme to provide opportunities for teamwork and leadership development.
· Our employees contributed a total of 1,942 volunteering hours to charity and community projects.
· Staff-led fundraising activity during 2015 raised a total of over £174,000 for both our corporate partners and for other
charities. Employees elected to extend our corporate charity partnership with Midlands Air Ambulance Charity and London's
Air Ambulance for a further two years and, during the first two years of the extended partnership, we have raised over
£402,000.
PRIORITIES FOR 2016
· Continue to attract and retain the very best talent by focusing on developing our people and strengthening our internal
succession pipeline through targeted management and leadership development intervention, with particular emphasis on
increasing the number of high-potential female managers undertaking formal management development activity.
· Build upon our efforts to support the physical and mental wellbeing of our employees.
· Maintain support to our communities through employee volunteering, fundraising and engagement with community projects.
How we measure delivery
Employee Engagement Index
GRAPH
78%
2014: 78%
Why is it important?
We aim to ensure employees understand the purpose of their role and feel that their contribution is valued. The index
provides an indicator of how well we are performing against these aims.
ANALYSIS
The group maintained its employee engagement index at 78%.
Target
To maintain an employee engagement index above 72%.
Diversity
We are committed to all forms of diversity and want to see greater equality of opportunity for all our employees. A key
focus for 2016 will be to progress actions aimed, over time, at increasing the number of females in senior positions.
Key employee metrics and diversity statistics are summarised below.
2015 2014
Total workforce 741 748
Male 433 424
Female 308 324
Directors (includes Non-Executive Directors) 10 10
Male 8 8
Female 2 2
Senior Managers 8 8
Male 7 7
Female 1 1
Workforce that is of Black, Asian or Minority Ethnic background 115 107
Financial performance
Cash generation
"The Group has delivered a strong set of results and has met all of its published financial targets."
JAMES McCONVILLE
GROUP FINANCE DIRECTOR
22 March 2016
Cash generation
The Group's cash flows are generated from the interest earned on capital, the release of excess capital as the life funds
run off and policyholder charges earned on assets under management. The Group's closed life funds provide predictable fund
maturity and liability profiles, creating stable long-term cash flows for distribution to shareholders and for repayment of
outstanding debt. Although investment returns are less predictable, some of the investment risk is borne by policyholders.
HOLDING COMPANIES' CASH FLOWS
The statement of cash flows prepared in accordance with IFRS combines cash flows relating to shareholders and cash flows
relating to policyholders, but the practical management of cash within the Group maintains a distinction between the two.
For this reason, the following analysis of cash flows focuses on the holding companies' cash flows, which reflect cash
flows relating only to shareholders and which are, therefore, more representative of the cash that could potentially be
distributed as dividends or used for the prepayment of debt, the payment of debt interest, Group expenses and pension
contributions (subject to the Group's liquidity policy, regulatory and other restrictions on the availability and
transferability of capital). This cash flow analysis reflects the cash paid by the operating companies to the holding
companies, as well as the uses of those cash receipts.
In 2015, the Group delivered cash flows from its operating subsidiaries of £225 million, including cash flows of £20
million from management actions. The latter increased cash flows through operational enhancements and de-risking
activities.
Cash receipts
Cash remitted by Phoenix Life during 2015 was £225 million (2014: £567 million excluding Ignis divestment proceeds)
including the £20 million impact of management actions implemented in the period. The reduction from the prior period
reflects the retention of capital in the life companies in advance of the transition to the new Solvency II capital regime.
The prior period also included cash receipts from Ignis Asset Management of £32 million which was disposed of in the second
half of 2014 and other cash receipts of £89 million which included the sale of BA(GI) Limited and a one-off benefit
relating to the restructure of the PGL pension scheme.
The Group met its cash generation target range of between £200 million to £250 million for the year ended 31 December
2015.
RECURRING CASH OUTFLOWS
Operating expenses of £26 million (2014: £29 million) decreased as a result of reduced corporate office costs, primarily
staff costs.
Pension scheme contributions of £55 million (2014: £88 million) are in line with the latest triennial funding agreement,
the decrease reflects that 2014 included a one-off £5 million payment to the PGL Pension Scheme and a scheduled step-down
in the funding of the Pearl Group Staff Pension Scheme.
Debt interest increased to £91 million (2014: £80 million), mainly reflecting the coupon payment in relation to the new PGH
Capital subordinated notes which replaced the Tier 1 notes in January 2015. This was partially offset by lower principal
balances on the PGH Capital facility following repayments made during the period.
NON-RECURRING CASH OUTFLOWS
Non-recurring cash outflows of £25 million (2014: £46 million) reflect Group restructuring and corporate related projects.
The decrease compared to the prior period reflects that £14 million of consent fees were paid in 2014 in respect of
refinancing of the Group's banking facilities.
DEBT REPAYMENTS AND SHAREHOLDER DIVIDEND
Debt repayments of £190 million were made in respect of the PGH Capital facility, including prepayments of £70 million in
respect of payments due in 2016 and £30 million in respect of payments due in 2017.
The shareholder dividend of £120 million comprises the payment of the 2014 final and 2015 interim dividend.
Year ended Year ended
31 December 2015 31 December 2014
£m £m
Cash and cash equivalents at 1 January 988 995
Operating companies' cash generation:
Cash receipts from Phoenix Life 225 446
Cash receipts from Ignis Asset Management - 32
Other cash receipts - 89
Total receipts of cash by holding companies1 225 567
Proceeds from the divestment of Ignis Asset Management - 390
Total receipts 225 957
Uses of cash:
Operating expenses (26) (29)
Pension scheme contributions (55) (88)
Debt interest (91) (80)
Total recurring outflows (172) (197)
Non-recurring outflows (25) (46)
Uses of cash before debt repayments and shareholder dividend (197) (243)
Debt repayments (190) (601)
Shareholder dividend (120) (120)
Total uses of cash (507) (964)
Cash and cash equivalents at 31 December2 706 988
1 Includes amounts received by the holding companies in respect of tax losses surrendered to the operating companies of £71
million (2014: £43 million).
2 Closing balance at 31 December 2015 includes required prudential cash buffer of £150 million (31 December 2014: £150
million).
TARGET CASH FLOWS
The previous cumulative cash flow target for 2014 to 2019 is £2.8 billion, against which £1.2 billion had been achieved by
31 December 2015. This includes the proceeds received from the divestment of Ignis. The Group has announced a new five year
cumulative cash flow target for 2016 to 2020 of £2.0 billion, of which £350 million to £450 million is expected to be
achieved in 2016.
Sources of cash flows 1 January 2016 to
31 December 2020
£bn
Future cash flows:
Emergence of surplus 1,2 0.9
Release of capital 1 1.1
Operating companies' cash generation target 2.0
1 Includes cash flows from management actions.
2 Assumes transitionals run-off on a linear basis.
The resilience of the cash generation target is demonstrated by the following stress testing:
Stress testing1 1 January 2016 to
31 December 2020
£bn
Base: 1 January 2016 2.0
Following a 20% fall in equity markets 2.0
Following a 15% fall in property values 2.0
Following a 75bps interest rates rise1 2.1
Following a 75bps interest rates fall1 1.9
Following credit spread widening2 1.9
Following 5% decrease in annuitant mortality rates3 1.8
1 Assumes recalculation of transitionals (subject to PRA approval).
2 Credit stress equivalent to an average 100bps spread widening across ratings, 10% of which is due to
defaults/downgrades.
3 Equivalent of 6 months increase in longevity.
One-off shocks would be expected to lead to a deferral of cash emergence rather than a permanent diminution.
Financial performance
Group IFRS
GROUP IFRS OPERATING PROFIT
The Group has generated an IFRS operating profit of £324 million (2014: £483 million).
Group operating profit Year ended Year ended
31 December 2015 31 December 2014
£m £m
Phoenix Life 336 487
Ignis Asset Management - discontinued operations - 17
Group costs (12) (21)
Operating profit before adjusting items 324 483
PHOENIX LIFE
Operating profit for Phoenix Life is based on expected investment returns on financial investments backing shareholder and
policyholder funds over the reporting period, with consistent allowance for the corresponding expected movements in
liabilities (being the release of prudential margins and the interest cost of unwinding the discount on the liabilities).
The principal assumptions underlying the calculation of the longer-term investment return are set out in note B2 to the
IFRS consolidated financial statements.
Operating profit includes the effect of variances in experience for non-economic items, such as mortality and persistency,
and the effect of changes in non-economic assumptions. Changes due to economic items, for example market value movements
and interest rate changes, which give rise to variances between actual and expected investment returns, and the impact of
changes in economic assumptions on liabilities, are accounted for outside of operating profit. Phoenix Life operating
profit is net of policyholder finance charges and policyholder tax.
Phoenix Life operating profit Year ended Year ended
31 December 2015 31 December 2014
£m £m
With-profit 92 89
With-profit where internal capital support provided 84 33
Non-profit and unit-linked 124 320
Longer-term return on owners' funds 6 9
Management services 30 36
Phoenix Life operating profit before tax 336 487
The with-profit operating profit of £92 million represents the shareholders' one-ninth share of the policyholder bonuses,
which shows an increase compared to the prior year due to higher bonus rates (2014: £89 million).
The with-profit funds where internal capital support has been provided generated an operating profit of £84 million (2014:
£33 million). This increase in profit reflects the positive impact of modelling enhancements undertaken in the period of
£49 million (2014: £2 million), including the implementation of the Group's new actuarial modelling system by the NPLL
with-profit fund.
The operating profit on non-profit and unit-linked funds was £124 million (2014: £320 million). The decrease compared with
the prior period reflects the lower positive impact from modelling enhancements, balance sheet, processes and controls
reviews of £17 million (2014: £167 million) together with the negative impact of strengthening longevity and mortality
assumptions.
Also contributing to the reduction in the non-profit and unit-linked IFRS operating profits is a loss of £4 million
generated on annuity new business (2014: £24 million profit). The loss reflects a decrease in volumes and the adverse
impact on profit margins of market pricing pressures that followed the implementation of the new rules on Pension Freedoms
from 1 April 2015.
The longer-term return on owners' funds of £6 million (2014: £9 million) reflects the asset mix of owners' funds, primarily
cash-based assets and fixed interest securities. The investment policy for managing these assets remains prudent.
The operating profit for management services of £30 million (2014: £36 million) comprises income from the life companies in
accordance with the respective management service agreements less fees related to the outsourcing of services and other
operating costs. The decrease compared with the prior period reflects the impact of life company run-off and a reduction in
project activity during the period.
IGNIS asset management
The prior period operating profit of the asset management business of £17 million represents its divisional result for the
six months prior to its divestment from the Group on 1 July 2014.
GROUP COSTS
Group costs in the period were £12 million (2014: £21 million). The reduction compared to the prior period reflects an
increased return on the higher opening pension scheme surplus for both the PGL Pension Scheme and the Pearl Group Staff
Pension Scheme and a decrease in operating costs.
IFRS RESULT AFTER TAX
The IFRS operating result is reconciled to the IFRS result after tax:
Year ended31 December 2015 £m Year ended31 December 2014 £m
Operating profit before adjusting items 324 483
Investment return variances and economic assumption changes on long-term business 13 12
Variance on owners' funds (12) (14)
Amortisation of acquired in-force business and customer relationship intangibles (90) (103)
Non-recurring items 49 126
Profit before finance costs attributable to owners 284 504
Finance costs attributable to owners (99) (88)
Profit before the tax attributable to owners:
From continuing operations 185 336
From discontinued operations - 80
185 416
Tax credit/(charge) attributable to owners from continuing operations 64 (22)
Tax credit attributable to owners from discontinued operations - 12
Profit for the period attributable to owners 249 406
INVESTMENT RETURN VARIANCES AND ECONOMIC ASSUMPTION CHANGES ON LONG-TERM BUSINESS
Positive investment return variances of £13 million (2014: £12 million positive) include the minority share of the result
of the consolidated UKCPT property investment structure of £46 million (2014: £75 million) and a £19 million gain on the
purchase of a portfolio of equity release mortgages arising from the yield uplift on assets available to back annuity
liabilities. Increases in yields during the period have also had a positive impact reflecting short asset positions that
were held relative to the longer term IFRS basis liabilities prior to the re-hedging activities that took place towards the
end of 2015. These positive items have been partly offset by the adverse impacts of changes in asset portfolios undertaken
in preparation for the implementation of the new Solvency II regime, together with the impact of widening credit spreads
during the period.
VARIANCE ON OWNERS' FUNDS
The negative variance on owners' funds of £12 million (2014: £14 million negative) is principally driven by fair value
losses on investments and hedging positions held by the shareholder funds and holding companies.
AMORTISATION OF ACQUIRED IN-FORCE BUSINESS AND OTHER INTANGIBLES
Acquired in-force business and other intangibles of £2.7 billion were recognised on the acquisition of the operating
companies in 2009. The acquired in-force business is being amortised in line with the run-off of the life companies.
Amortisation of acquired in-force business during the period totalled £75 million (2014: £88 million). Amortisation of
customer relationship intangibles totalled £15 million in the period (2014: £15 million).
NON-RECURRING ITEMS
Non-recurring items of £49 million (2014: £126 million) include a gain of £49 million arising on the reassurance of a
portfolio of PLAL annuities with an external reinsurer (net of a £64 million impairment of associated acquired in-force
business), and a £17 million release of cost provisions associated with external regulatory changes, including the cap on
workplace pension charges and the pension guidance levy. These positive items have been partly offset by £11 million of
corporate project costs and negative £3 million of net other items. The prior period result included the gain on the
disposal of Ignis of £107 million and £68 million of income received by Pearl Group Holdings (No. 1) Limited ('PGH1') in
relation to the close-out of the PGL Pension Scheme longevity indemnity agreement with the with-profit funds. This was
partly offset by £17 million of adverse financial impacts associated with external regulatory changes, corporate project
costs of £15 million and net other one-off items of negative £17 million, including costs associated with the
implementation of Solvency II and systems transformation projects.
FINANCE COSTS ATTRIBUTABLE TO OWNERS
Year ended31 December 2015 £m Year ended31 December 2014 £m
Bank finance costs 28 56
Other finance costs 71 32
Finance costs attributable to owners 99 88
Bank finance costs have decreased by £28 million, reflecting lower debt principal balances following the repayments and
restructuring activity in the second half of 2014.
Other finance costs have increased by £39 million mainly reflecting the recognition of £27 million of finance costs
relating to the new PGH Capital subordinated notes which were exchanged for the Tier 1 notes in January 2015. The coupon
payable on the Tier 1 notes was previously recognised directly in equity and therefore is not included in finance costs.
This has been largely offset by the impact of lower debt principal balances following debt repayments and the restructuring
of the bank debt.
TAX CREDIT ATTRIBUTABLE TO OWNERS
The Group's approach to the management of its tax affairs is set out in its Tax Strategy document which has been shared
with the UK Tax Authority and approved by the Board. The Group welcomes the Government's initiative for companies to
publish their Tax Strategy which it believes accords with the Group's own approach to Corporate Social Responsibility.
Following the recapture of the internal reassurance agreement with the Group's Bermudan captive reinsurer, Opal Re, and the
disposal of the Irish subsidiary, SMI, which took place in 2015, all of the Group's insurance operations now reside in the
UK and are liable to tax in accordance with applicable UK legislation.
Whilst the Company is a Jersey resident holding company (and therefore subject to a 0% tax rate), its primary source of
income is its UK subsidiaries. Therefore the tax residency of the parent company has little impact on the tax payable by
the Group.
The Group tax credit for the period attributable to owners from continuing operations is £64 million (2014: £22 million
charge) arising on a profit (after policyholder tax) of £185 million (2014: £336 million). The tax credit differs from the
expected charge of £37 million (based on a UK corporate tax rate of 20.25%) as a result of factors including a prior year
tax credit (reflecting the utilisation of unprovided tax losses brought forward and the release of provisions following the
settlement of previously uncertain tax positions with HMRC), the impact of enacted future corporate tax rate reductions on
the Group's deferred tax position, and the impact of profit items that are either non-taxable or taxed at rates other than
20.25% (including the gain arising on the Opal Re reassurance recapture transaction and tax payable by the consolidated UK
Commercial Property Trust).
Financial performance
Group MCEV
group mcev reporting
The Group has historically provided supplementary reporting information on its MCEV basis. Following the implementation of
the Solvency II regulatory regime, this will be the last time the Group presents MCEV information. As Solvency II will be
the primary driver of the Group's cash generation, going forward we will focus on regulatory capital disclosures.
GROUP MCEV OPERATING EARNINGS1
The Group has generated MCEV operating earnings after tax of £223 million (2014: £288 million), a decrease of £65 million
on the comparative period.
MCEV operating earnings Year ended Year ended
31 December 2015 31 December 2014
£m £m
Life MCEV operating earnings2 274 341
Management services operating profit 30 36
Ignis operating profit - discontinued operations - 17
Group costs (26) (28)
Group MCEV operating earnings before tax 278 366
Tax on operating earnings (55) (78)
Group MCEV operating earnings after tax 223 288
1 The Phoenix Group Market Consistent Embedded Value methodology (referred to herein and in the supplementary information
as MCEV) is set out in note 1 to the supplementary information. The asset management and management services businesses are
included in the Group MCEV at the value of their IFRS net assets. The Group MCEV does not include the future earnings from
their businesses.
2 Life MCEV operating earnings are derived on an after tax basis. For presentational purposes, Life MCEV operating earnings
before tax have been calculated by grossing up the after tax Life MCEV operating earnings. Life MCEV operating earnings
before tax of £274 million (2014: £341 million) are therefore calculated as £220 million operating earnings (2014: £268
million) grossed up for tax at 20.25% (2014: 21.50%).
LIFE MCEV OPERATING EARNINGS AFTER TAX
Other than vesting annuities and increments to existing policies, the Group's life division is closed to new business. The
principal underlying components of the life MCEV operating earnings are therefore the expected existing business
contribution together with non-economic experience variances and assumption changes.
Life MCEV operating earnings after tax Year ended Year ended
31 December 2015 31 December 2014
£m £m
Expected existing business contribution 109 137
New business value 2 11
Non-economic experience variances and assumption changes:
Experience variances (21) 53
Assumption changes 20 (15)
Other operating variances 110 82
Total non-economic experience variances and assumption changes 109 120
Life MCEV operating earnings after tax 220 268
Expected existing business contribution
The Group uses long-term investment returns in calculating the expected existing business contribution. The expected
contribution of £109 million after tax is £28 million lower than in 2014, primarily due to a decrease in the long-term
risk-free rate used to calculate operating earnings. The long-term risk-free rate is based on the opening position at 1
January 2015.
New business value
New business value generated from vesting annuities without guarantees was £2 million (2014: £11 million) after tax. New
business value represents the value of vesting pension policies not reflected in the opening MCEV. These arise from pension
policies which have no attaching annuity guarantees. The reduction reflects a decrease in volumes and lower margins
following the implementation of the new rules on Pension Freedoms from 1 April 2015.
The MCEV also includes the value of future profits expected to be earned on annuities with guaranteed rates, based on
long-term profit margins and projected take-up rate assumptions. As at 31 December 2015, the Group MCEV included £165
million in respect of these policies (2014: £180 million).
Non-economic experience variances and assumption changes
Non-economic experience variances and assumption changes increased MCEV by £109 million after tax in the period. The main
driver of the increase is other operating variances of £110 million (2014: £82 million) which principally comprised the
positive impacts of modelling enhancements undertaken in the period, including the extended roll-out of the Group's new
actuarial system and the refinement of actuarial methodologies in a number of areas. Assumption changes have increased MCEV
by £20 million during the period (2014: £15 million reduction). Changes in expense assumptions to reflect the
implementation of revised agreements with the Management Services companies and the impact of corporate tax rate reductions
have positively impacted the MCEV. These changes have more than offset the adverse impacts of the strengthening of
longevity and persistency assumptions. Experience variances in the year were negative £21 million (2014: £53 million
positive), principally reflecting an increase in claims and a reduction in the value of future profits expected to be
earned on guaranteed rate annuity vestings following the implementation of the new Pensions Freedoms.
MANAGEMENT SERVICES
Commentary on the management services companies is provided in the Group IFRS operating profit section.
GROUP COSTS
The Group costs of £26 million (2014: £28 million) have remained broadly in line with the prior period.
RECONCILIATION OF GROUP MCEV OPERATING EARNINGS TO GROUP MCEV EARNINGS
Group MCEV operating earnings are reconciled to Group MCEV earnings as follows:
Year ended Year ended
31 December 2015 31 December 2014
£m £m
Group MCEV operating earnings after tax 223 288
Economic variances on life business (221) 54
Economic variances on non-life business (8) (64)
Other non-operating variances on life business 98 (94)
Non-recurring items on non-life business (39) 317
Finance costs attributable to owners (91) (90)
Tax on non-operating earnings 64 -
Group MCEV earnings after tax 26 411
ECONOMIC VARIANCES ON LIFE BUSINESS
Negative economic variances on life business of £221 million before tax (2014: positive £54 million) include the negative
impact of the difference between actual short-term returns and the long-term investment return assumptions used to
determine operating earnings and the adverse impact of widening credit spreads during the year. Also included here is the
£98 million adverse impact of changes in asset portfolios undertaken in preparation for the implementation of the new
Solvency II regime. This has been partly offset by a gain on the purchase of a portfolio of equity release mortgages and
the resultant increase in liquidity premium, together with positive policyholder tax and inflation variances.
ECONOMIC VARIANCES ON NON-LIFE BUSINESS
Economic variances on non-life business are negative £8 million (2014: negative £64 million), principally driven by a net
increase in the market value of the PGH Capital debt instruments of £4 million (2014: £24 million). The prior period result
included losses of £27 million relating to an increase in the market value of the Tier 1 notes, which were exchanged for
new PGH Capital subordinated notes in January 2015.
OTHER NON-OPERATING VARIANCES ON LIFE BUSINESS
Other non-operating variances on life business increased Group MCEV by £98 million (2014: decrease £94 million) and
principally comprise the partial release of provisions associated with external regulatory changes, including the cap on
workplace pension charges and the pension guidance levy together with the positive impact arising on the reassurance of a
portfolio of PLAL annuities with an external reinsurer of £19 million.
NON-RECURRING ITEMS ON NON-LIFE BUSINESS
Non-recurring items on non-life business decreased MCEV by £39 million before tax (2014: increase £317 million).
Non-recurring items include a loss of £22 million recognised on the exchange of the Tier 1 notes and related transaction
expenses, together with corporate project costs of £13 million. Net negative other one-off items total £4 million.
Non-recurring items in the comparative period included a gain of £288 million on the divestment of Ignis and £68 million
income received by PGH1 from the with-profit funds in relation to the close-out of the PGL Pension Scheme longevity
indemnity agreement. Partly offsetting these items was £11 million of Group corporate project costs, debt issue costs of
£16 million, with net other one-off items having a negative impact of £12 million.
FINANCE COSTS ATTRIBUTABLE TO OWNERS
Year ended Year ended
31 December 2015 31 December 2014
£m £m
Bank finance costs 28 56
Other finance costs 43 8
Tier 1 notes coupon 20 26
Finance costs attributable to owners 91 90
Bank finance costs have decreased by £28 million, reflecting lower debt principal balances following repayments made and
the restructuring activity completed in the second half of 2014.
Other finance costs have increased by £35 million, reflecting a full year of interest costs on the senior bond issued in
July 2014, together with the finance costs accrued on the new PGH Capital subordinated notes, which were exchanged for the
Tier 1 notes in January 2015.
Finance costs exclude the costs pertaining to the PLL subordinated debt, which are included in the life division's result.
GROUP MCEV
The movement from opening to closing Group MCEV is shown below:
Movement in Group MCEV Year ended Year ended
31 December 2015 31 December 2014
£m £m
Group MCEV at 1 January 2,647 2,378
Group MCEV earnings after tax 26 411
Other comprehensive expense (40) (27)
Capital and dividend flows (120) (115)
Group MCEV at 30 December 2,513 2,647
Other comprehensive expense of £40 million includes pension contributions of £12 million (net of tax) in respect of the PGL
Pension Scheme (2014: £16 million) and £32 million (net of tax) in respect of the Pearl Group Staff Pension Scheme (2014:
£54 million), partly offset by a revaluation gain of £4 million on owner occupied property. The prior year comparative
included an actuarial gain of £43 million (net of tax) in respect of the Pearl Group Staff Pension Scheme that was capped
at the point at which the scheme returned to surplus on an IFRS basis.
Planned future contributions will cause a strain to the MCEV as pension surpluses are not recognised under the Group's MCEV
basis.
Capital and dividend flows in the period include external dividend payments of £120 million (2014: £120 million).
Financial performance
Capital management
CAPITAL MANAGEMENT FRAMEWORK
The Group's capital management framework is designed to achieve the following objectives:
· To provide appropriate security for policyholders and meet all regulatory capital requirements while not retaining
unnecessary excess capital.
· To ensure sufficient liquidity to meet obligations to policyholders and other creditors.
· To optimise the overall financial leverage ratio to maintain an investment grade credit rating.
· To meet the dividend expectations of shareholders as set by the Group's dividend policy.
The framework comprises a suite of capital management policies that govern the allocation of capital throughout the Group
to achieve these objectives under a range of stress conditions. The policy suite is defined with reference to policyholder
security, creditor obligations, dividend policy and regulatory capital requirements.
Since 1 January 2016, regulatory capital adequacy for the Group is no longer monitored under the European Union Insurance
Groups' Directive ('IGD') or the PRA requirement for an Individual Capital Assessment ('ICA'). The Group will now monitor
its regulatory capital adequacy under the new Solvency II regime, details of which are included below.
REGULATORY CAPITAL REQUIREMENTS
IGD surplus (estimated)
Each UK life company must maintain sufficient capital at all times to meet the regulatory capital requirements mandated by
the PRA. Under the Solvency regime effective prior to 1 January 2016, these measures were aggregated under the European
Union Insurance Groups' Directive ('IGD') to calculate regulatory capital adequacy at a Group level.
The Group's IGD assessment was made at the level of the highest EEA insurance group holding company, which is Phoenix Life
Holdings Limited ('PLHL'), a subsidiary of Phoenix Group Holdings. The estimated IGD surplus at 31 December 2015 was £1.5
billion (2014: £1.2 billion). The components of the estimated IGD calculation are shown below:
Year ended Year ended
31 December 2015 31 December 2014
£m £m
Group capital resources ('GCR') 5.9 5.5
Group capital resource requirement ('GCRR') (4.4) (4.3)
IGD surplus (estimated) 1.5 1.2
The IGD surplus increased by £0.3 billion during the year as a result of the following factors:
· £0.3 billion positive impact arising from the simplification of the Group's corporate structure, with PLHL now
recognising 100% of the capital resources and requirements of Impala Holdings Limited and its subsidiaries;
· capital generation items of £0.3 billion, including capital benefits from management actions such as the Part VII
transfer of the business of NPLL into PLAL and the acquisition of a portfolio of equity release mortgages; partly offset
by; and
· dividend payments, debt financing and repayments of £0.3 billion.
The Group's regulatory capital policy, prior to 1 January 2016, was to maintain GCR at the PLHL level of:
· 105% of the with-profit insurance component ('WPICC'), being an additional capital requirement of with-profit funds
plus; and
· 145% of the GCRR less the WPICC.
The Group's headroom above the IGD regulatory capital policy at 31 December 2015 was £0.7 billion (2014: £0.5 billion).
PLHL ICA surplus (estimated)
In accordance with PRA requirements, effective prior to 1 January 2016, the Group undertook an ICA at the level of the
highest EEA insurance group holding company, which is PLHL. This involved an assessment, on an economic basis, of the
capital resources and requirements arising from the obligations and risks which exist outside the life companies.
As agreed with the PRA, the Group aimed to ensure that PLHL maintained an ICA surplus of at least £150 million. The
estimated PLHL ICA position at 31 December 2015 is set out below:
Year ended Year ended
31 December 2015 31 December 2014
£m £m
Capital resources1 0.8 1.0
Capital resource requirements2 (0.2) (0.3)
PLHL ICA surplus (estimated) 0.6 0.7
1 Capital resources includes the surplus over capital policy in the life companies and the net assets of the holding
companies less pension scheme obligations calculated on an economic basis.
2 Capital requirements relate to the risks arising outside of the life companies including those in relation to the Group's
staff pension schemes, offset by Group diversification benefits.
Headroom over the Group's £150 million capital policy was £0.5 billion as at 31 December 2015 (2014: £0.6 billion).
The PLHL ICA surplus decreased during the year and reflects:
· dividend payments, debt financing and repayments of £0.3 billion;
· the adverse impact of management actions undertaken to enhance the Group Solvency II position ahead of implementation of
the new regime of £0.2 billion; partly offset by; and
· capital generation items of £0.4 billion, including the positive impacts of other management actions delivered in the
period of £0.2 billion.
The simplification of the Group structure did not impact the PLHL ICA surplus as the risk-based calculation has
historically recognised 100% of the capital resources and requirements of Impala Holdings Limited and its subsidiaries.
PLHL Solvency II surplus (estimated)
In accordance with European Insurance and Occupational Pension Authority ('EIOPA') and PRA requirements, from 1 January
2016 the Group now undertakes a Solvency II capital adequacy assessment at the level of the highest EEA insurance group
holding company, which is PLHL.
This involves a valuation in line with Solvency II principles of the Group's own funds and a risk based assessment using an
internal model of the Group's solvency capital requirements ('SCR').
The Group's own funds differ materially from IFRS equity for a number of reasons, including the exclusion of the Group's
bank debt held outside of the PLHL sub-group, the recognition of future shareholder transfers from the with-profit funds
(but not the shareholder share of the estate), the treatment of certain subordinated debt instruments as capital items, and
a number of valuation differences, most notably with regard to insurance liabilities and intangible assets.
The SCR is calibrated so that the likelihood of a loss exceeding the SCR is less than 0.5% over one year. This ensures that
capital is sufficient to withstand a broadly '1 in 200 year event' and is calculated in accordance with the Group's PRA
approved internal model. As a closed fund insurer, the Group does not need to hold capital to fund the writing of new
business.
The estimated PLHL Solvency II surplus position at 31 December 2015 is set out below:
Year ended
31 December
2015
£bn
Own funds1 5.8
Solvency capital requirement2 (4.5)
Solvency II surplus (estimated)3 1.3
1 Own funds includes the net assets of the life and holding companies calculated under Solvency II rules, pension scheme
surpluses calculated on an IAS19 basis not exceeding the holding companies' contribution to the Group SCR and qualifying
subordinated liabilities. It is stated net of restrictions for assets which are non-transferrable and fungible between
Group companies within a period of nine months.
2 Solvency capital requirements relate to the risks and obligations, to which the Group is exposed, calculated using an
internal model, offset by Group diversification benefits.
3 Equates to a coverage ratio of 130% as at 31 December 2015
These figures exclude surpluses arising in the Group's with-profit funds and Group pension schemes of £0.5 billion. In the
calculation of the Solvency II surplus, the SCR of the
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