REG - Phoenix Grp Hldgs - Phoenix Group Holdings - 2015 Annual Results <Origin Href="QuoteRef">PHNX.L</Origin> - Part 9
23/03/2016 08:18
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the adopted assumptions and methodology, and checked that the assumptions used are consistent with this experience analysis;· evaluated the choice of the industry
standard Continuous Mortality Investigation ('CMI') model and the parameters used to ensure that it was appropriate given the demographics of policyholders; and·
benchmarked the demographic and economic assumptions against those of other industry participants.
Actuarial modellingWe consider that this risk has decreased in the current year following the successful implementation of the new actuarial modelling system in the prior year.Whilst the risk associated with actuarial models has decreased, we still consider the integrity and appropriateness of models to be critical to the overall valuation of insurance contract liabilities.Over £39bn of the £41bn of insurance contract liabilities are modelled using the new actuarial modelling system with the residual balance modelled outside this system to cater for ancillary business. The key risk is therefore associated with the new modelling system but risks also exist in the calculation of amounts outside this system. In obtaining sufficient audit evidence to conclude on actuarial models, including those models outside the core system, we:· confirmed in the prior period that the core We determined that the models used are appropriate and that changes to the models were implemented as intended.
system is appropriately valuing liabilities, we assessed the design, implementation and operating effectiveness of key controls over management's process for model
changes during the year;· confirmed, on a sample basis, that model changes have been appropriately implemented by comparing the impacts of model changes to our own
calculations of what we would expect the impact to be;· assessed the results of the analysis of movements in insurance contract liabilities in order to confirm the
completeness of model changes;· tested the design, implementation and operating effectiveness of key controls over management's process for modelling liabilities outside
the core system; and· tested, on a sample basis, the appropriateness of the valuations modelled outside the core system by comparing the results to our own calculations.
DataThere has been no change in our assessment of this risk from the prior year.The actuarial data is a key input into the valuation process. The valuation of insurance contract liabilities is therefore conditional upon the accuracy and completeness of the data used. In obtaining sufficient audit evidence to assess the integrity of actuarial data we:· tested the adequacy of outsourced service ('OSP') provider controls regarding the We determined based on our audit work that the data used for the actuarial model inputs are materially complete and accurate.
maintenance of policyholder data, and where applicable reviewed the Service Organisation Controls ('SOC1') Reports provided by the OSPs;· confirmed that the actuarial
model data extracts provided by the OSPs were those used as an input to the actuarial model;· tested the design and operating effectiveness of key controls including
information technology general controls over management's data collection, extraction and validation process;· assessed the appropriateness of management's grouping of
data for input into the actuarial model; and· tested reconciliations of premiums and claims information from the actuarial data extract to the general ledger, where
applicable.
Valuation of complex and illiquid financial investments ('Level 3 assets') (£1.4bn; 2014: £1.8bn)There have been a number of disposals of Level 3 assets in the year and there have also been investments in new areas such as equity release mortgages. Overall we have assessed that the risk has reduced compared with the prior year.Refer to the Audit Committee Report (page 50 to 52); Critical accounting estimates (page 103); Accounting policies and notes E1 and E2 of the consolidated financial statements (pages 118 to 127)The extent of judgment applied by management in valuing the Group's financial investments varies with the nature of securities held, the markets in which they are traded and the valuation methodology applied.We focused our audit procedures on the financial investments which require judgment to be applied and for which quoted market prices are not readily available and consequently where management use models and other inputs to estimate their value.These investments are referred to as Level 3 assets in the financial statements. In obtaining sufficient audit evidence to conclude on valuation of complex and illiquid financial investments, we:· tested the design and operating effectiveness of key Based on our procedures performed on the marked to model assets and manually priced investments we are satisfied that the valuation of these complex and illiquid assets is reasonable.
controls over management's process in respect of the valuation of investments;· evaluated the methodology, inputs and assumptions used for a sample of mark to model
investments, by comparing yields, spreads, earnings, house prices and market rents to published market benchmarks to confirm that key valuation inputs were consistent
with industry norms and our understanding of the asset type;· recalculated a sample of modelled valuations to assess their reasonableness. This year this included
assessing the appropriateness of the models and assumptions used for the portfolio of equity release mortgages;· obtained net asset valuation ('NAV') statements provided
by third party administrators in respect of direct equity and fund of fund structures and compared them with management's valuations. We performed back testing of recent
realisations in order to confirm that NAV continues to be an appropriate proxy for fair value;· used our real estate valuation specialists to assess the reasonableness
of investment property valuations; and· assessed the fair value of the fixed and variable rate income securities valuations. This included benchmarking the fair value
against comparable bonds and where applicable obtaining broker quotes to assess the reasonableness of management's price.
In the prior year, our auditor's report included a significant risk in relation to the provision of taxation and the
recoverability of deferred tax assets. In the current year, the Group settled the majority of their uncertain tax positions
with HM Revenue and Customs ('HMRC'). Refer to note C5 on pages 114 and 115 of the consolidated financial statements. The
residual exposure to the Group for outstanding tax issues has decreased significantly and thus we no longer deem this to be
a significant risk. The risk attaching to recoverability of the deferred tax assets has also reduced following the
settlement with the HMRC and thus we no longer deem the recoverability of deferred tax as a significant risk.
The scope of our audit
There were no material scope changes from the prior year.
Tailoring the scope
Our assessment of audit risk, our evaluation of materiality and our allocation of performance materiality determine our
audit scope for each reporting unit ('component') within the Group. Taken together, this enables us to form an opinion on
the consolidated financial statements. We take into account size, risk profile, the organisation of the Group and
effectiveness of Group-wide controls, changes in the business environment and other factors when assessing the level of
work to be performed at each entity.
In assessing the risk of material misstatement to the consolidated financial statements, and to ensure we had adequate
quantitative coverage of significant accounts in the financial statements, we selected all three reporting components of
the Group. The Group reporting components consists of Insurance Companies, Group Function and Other Companies. In the
Insurance Companies component the most significant insurance companies are Phoenix Life Assurance Limited and Phoenix Life
Limited. The Group Function consists of Group entities that primarily hold external debt and the pension schemes of the
Group. The Other Companies are the service companies and Opal Reassurance Limited.
Of the three components selected, we performed an audit of the complete financial information of the Insurance Companies
and the Group Function components ('full scope components') which were selected based on their size or risk
characteristics. For the remaining Other Companies component ('specific scope component'), we performed audit procedures on
specific accounts within that component that we considered had the potential for the greatest impact on the significant
accounts in the financial statements either because of the size of these accounts or their risk profile.
For the Other Companies component, we performed audit procedures on provisions and administrative expenses for the service
companies and on cash and investments for Opal Reassurance Limited. The extent of audit work in respect of the Other
Companies component was based on our assessment of the risks of material misstatement at a financial statement line level.
The reporting components where we performed audit procedures accounted for more than 99% of the Group equity and the
Group's operating profit. For the current year, the full scope components contributed 97% (2014: 98%) of the equity and 88%
(2014: 93%) of the Group's operating profit. The specific scope component contributed 2% (2014: 2%) of the Group's equity
and 11% (2014: 7%) of the Group's operating profit.
The charts below illustrate the coverage obtained from the work performed by our audit teams.
Involvement with component teams
In establishing our overall approach to the Group audit, we determined the type of work that needed to be undertaken at
each of the components by us, as the primary audit engagement team, or by the component auditors operating under our
instruction.
The Group audit team provided detailed audit instructions to the component teams which included guidance on areas of focus,
including the relevant risks of material misstatement detailed above, and set out the information required to be reported
to the Group team.
The Group audit team is responsible for the audit of the Group Function. The Group team visited the full scope component of
the Insurance Companies, and reviewed key work papers and participated in the planning and execution of the component
team's audit of the identified risks. The Group team attended the closing meetings with the management of the Insurance
Companies and attended key audit committee meetings. For the specific scope component, the Group team have reviewed the
audit procedures performed by the component team on the specific accounts.
The work performed on the components, together with the additional procedures performed at Group level, gave us appropriate
evidence for our opinion on the consolidated financial statements as a whole.
Our application of materiality
We apply the concept of materiality in planning and performing the audit, in evaluating the effect of identified
misstatements on the audit and in forming our audit opinion.
Materiality
The magnitude of an omission or misstatement that, individually or in the aggregate, could reasonably be expected to
influence the economic decisions of the users of the financial statements. Materiality provides a basis for determining the
nature and extent of our audit procedures.
We determined materiality for the Group to be £46 million (2014: £41 million), which is 1.9% (2014: 1.7%) of Group equity.
Our aim is that materiality should not exceed 2% of year end Group equity. At the planning stage we have set a slightly
lower level of materiality to allow for forecasting error. Whilst profit before tax or operating profit are common bases
used across the life insurance industry, we believe that the use of equity as the basis for assessing materiality is more
appropriate given that the Group is a closed life assurance consolidator and as such equity provides a more stable,
long-term measure of value. We note also that equity more closely correlates with key Group performance metrics such as
Insurance Group Directive ('IGD') surplus and Market Consistent Embedded Value ('MCEV'). However, as these measures are
non-GAAP measures, we consider equity to be most appropriate.
During the course of our audit, we reassessed initial materiality and concluded that materiality assessed at planning
stages of our audit remained appropriate.
Performance materiality
The application of materiality at the individual account or balance level. It is set at an amount to reduce to an
appropriately low level the probability that the aggregate of uncorrected and undetected misstatements exceeds
materiality.
On the basis of our risk assessments, together with our assessment of the Group's overall control environment, our
judgement was that performance materiality was 50% (2014: 50%) of our planning materiality, namely £23.0 million (2014:
£20.5 million).
Audit work at component locations for the purpose of obtaining audit coverage over significant financial statement accounts
is undertaken based on a percentage of total performance materiality. The performance materiality set for each component is
based on the relative scale and risk of the component to the Group as a whole and our assessment of the risk of
misstatement at that component. In the current year, the range of performance materiality allocated to components was £4.6
million to £18.4 million (2014: £4.2 million to £13.7 million). In the prior year performance materiality was allocated
separately to the two life companies but in the current year it was allocated to the Insurance Companies component taken as
a whole.
Reporting threshold
An amount below which identified misstatements are considered as being clearly trivial.
We agreed with the Audit Committee that we would report all uncorrected audit differences in excess of £2.3 million (2014:
£2 million), which is set at 5% of planning materiality, as well as differences below that threshold that, in our view,
warranted reporting on qualitative grounds.
We evaluate any uncorrected misstatements against both the quantitative measures of materiality discussed above and in
light of other relevant qualitative considerations in forming our opinion.
Scope of the audit of the financial statements
An audit involves obtaining evidence about the amounts and disclosures in the financial statements sufficient to give
reasonable assurance that the financial statements are free from material misstatement, whether caused by fraud or error.
This includes an assessment of whether the accounting policies are appropriate to the Group's and the parent company's
circumstances and have been consistently applied and adequately disclosed; the reasonableness of significant accounting
estimates made by the Directors; and the overall presentation of the financial statements. In addition, we read all the
financial and non-financial information in the Annual Report and Accounts to identify material inconsistencies with the
audited financial statements and to identify any information that is apparently materially incorrect based on, or
materially inconsistent with, the knowledge acquired by us in the course of performing the audit. If we become aware of any
apparent material misstatements or inconsistencies we consider the implications for our report.
Respective responsibilities of directors and auditor
As explained more fully in the Statement of Directors' Responsibilities set out on page 86, the Directors are responsible
for the preparation of the financial statements and for being satisfied that they give a true and fair view. Our
responsibility is to audit and express an opinion on the financial statements in accordance with applicable law and
International Standards on Auditing (UK and Ireland). Those standards require us to comply with the Auditing Practices
Board's Ethical Standards for Auditors.
Phoenix Group Holdings is a non-UK company and as such is not required to comply with the UK Companies Act 2006. As the
Group is listed on the UK Stock Exchange, the Directors have voluntarily chosen to comply with the Companies Act 2006 and
listing rules that apply to UK Companies and have engaged us to provide an opinion as if they were. Accordingly we have
been engaged to:
· report as to whether the Strategic Report and Directors' Report for the financial year for which the financial
statements are prepared is consistent with the financial statements;
· report as to whether the information given in the Corporate Governance Statement with respect to internal control and
risk management systems in relation to financial reporting processes is consistent with the financial statements;
· report as to whether the section in the Directors' remuneration report that is described as audited has been properly
prepared in accordance with the basis of preparation described therein; and
· report if we are not satisfied that:
· adequate accounting records have been kept (including returns from those branches which have not been visited); or
· the financial statements are in agreement with the records and returns; or
· we have obtained all the information and explanations which we consider necessary for the purposes of the audit.
This report is made solely to the Company's members, as a body, in accordance with our engagement letter dated the 1 August
2014 and subsequent engagement letter dated the 10 March 2016. Our audit work has been undertaken so that we might state to
the Company's members those matters we are required to state to them in an auditor's report and for no other purpose. To
the fullest extent permitted by law, we do not accept or assume responsibility to anyone other than the Company and the
Company's members as a body, for our audit work, for this report, or for the opinions we have formed.
Report on matters prescribed by our engagement letter
In our opinion:
· the information given in the Strategic Report and the Directors' Report for the financial year for which the financial
statements are prepared is consistent with the financial statements;
· the information given in the Corporate governance report set out on pages 47 to 56 with respect to internal control and
risk management systems in relation to financial reporting processes is consistent with the financial statements; and
· the part of the Directors' remuneration report that has been described as audited has been properly prepared in
accordance with the basis of preparation as described therein.
Matters on which we are required to report by exception
ISAs (UK and Ireland) reporting We are required to report to you if, in our opinion, financial and non-financial information in the Annual Report and Accounts is:· materially inconsistent with the We have no exceptions to report.
information in the audited financial statements; or· apparently materially incorrect based on, or materially inconsistent with, our knowledge of the Group acquired in
the course of performing our audit; or· otherwise misleading.In particular, we are required to report whether we have identified any inconsistencies between our
knowledge acquired in the course of performing the audit and the Directors' statement that they consider the Annual Report and Accounts taken as a whole is fair, balanced
and understandable and provides the information necessary for shareholders to assess the entity's performance, business model and strategy; and whether the Annual Report
and Accounts appropriately addresses those matters that we communicated to the audit committee that we consider should have been disclosed.
Listing rules review requirements We are required to review:· the Directors' statement in relation to going concern set out on page 82 and the longer-term viability set out on page 39; and· the part of We have no exceptions to report.
the Corporate governance report relating to the company's compliance with the provisions of the UK Corporate Governance Code specified for our review.
Engagement letter reporting We are required to report to you if, in our opinion:· adequate accounting records have not been kept (including returns from those branches which have not been visited); We have no exceptions to report.
or· the financial statements are not in agreement with the accounting records and returns; or· we have not received all the information and explanation which we require
for the audit.
Statement on the Directors' Assessment of the Principal Risks that Would Threaten
the Solvency or Liquidity of the Entity
ISAs (UK and Ireland) reporting We are required to give a statement as to whether we have anything material to add or to draw attention to in relation to:· the Directors' confirmation in the Annual We have nothing material to add or to draw attention to.
Report and Accounts that they have carried out a robust assessment of the principal risks facing the entity, including those that would threaten its business model,
future performance, solvency or liquidity;· the disclosures in the Annual Report and Accounts that describe those risks and explain how they are being managed or
mitigated;· the Directors' statement in the Annual Report and Accounts about whether they considered it appropriate to adopt the going concern basis of accounting in
preparing them, and their identification of any material uncertainties to the entity's ability to continue to do so over a period of at least twelve months from the date
of approval of the financial statements; and· the Directors' explanation in the Annual Report and Accounts as to how they have assessed the prospects of the entity, over
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