REG - Phoenix Grp Hldgs - Phoenix Group Holdings - 2016 Annual Results <Origin Href="QuoteRef">PHNX.L</Origin> - Part 11
20/03/2017 07:07
- Part 11: For the preceding part double click ID:nRST8776Zj
- (58)
Segmental result before the tax attributable to owners 40 (168) (128)
2015
Phoenix Unallocated Total
Life Group £m
£m £m
Net premiums written (474) - (474)
Fees 95 - 95
Net investment income 1,048 16 1,064
Other operating income 7 - 7
Net income 676 16 692
Net policyholder claims and benefits incurred 441 - 441
Amortisation and impairment:
Amortisation and impairment of acquired in-force business (148) - (148)
Amortisation of other intangibles (15) - (15)
(163) - (163)
Other expenses (651) (31) (682)
Total expenses (373) (31) (404)
Profit/(loss) before finance costs and tax 303 (15) 288
Finance costs (60) (76) (136)
Profit/(loss) before tax 243 (91) 152
Tax attributable to policyholders' returns 33 - 33
Segmental result before the tax attributable to owners 276 (91) 185
B1.2 Reconciliation of operating profit to the segmental result
The Group has chosen to report a non-GAAP measure of performance being operating profit. Operating profit is considered to
provide a more relevant measure of the underlying performance of the Group's business as it excludes the impact of
short-term economic volatility and other one-off items. This measure incorporates an expected return, including a
longer-term return on financial investments backing shareholder and policyholder funds over the period, with consistent
allowance for the corresponding expected movements in liabilities. Operating profit includes the effect of variances in
experience for non-economic items, such as mortality and expenses, and the effect of changes in non-economic assumptions.
It also incorporates the impacts of significant management actions where such actions are consistent with the Group's core
operating activities (for example, actuarial modelling enhancements and data reviews).
Impacts arising from the difference between the actual and expected experience for economic items (on both assets and
liabilities) and the impacts of changes in economic assumptions on the valuation of liabilities are excluded from operating
profit and are presented in profit before the tax attributable to owners (see note B2). Phoenix Life operating profit is
net of policyholder finance charges and policyholder tax.
Operating profit also excludes the impact of the following items:
- amortisation and impairments of intangible assets;
- finance costs attributable to owners; and
- other non-operating items which include:
- gains or losses on the disposal of subsidiaries, associates or joint ventures (net of related costs of disposal);
- the financial impacts of mandatory regulatory change;
- integration, restructuring or other significant one-off projects; and
- any other items which, in the Directors' view, should be excluded by virtue of their nature or incidence to enable a
full understanding of the Group's financial performance.
2016
Phoenix Unallocated Total
Life Group £m
£m £m
Operating profit/(loss) 357 (6) 351
Investment return variances and economic assumption changes on long-term business (207) - (207)
Variance on owners' funds 11 (16) (5)
Amortisation of acquired in-force business (68) - (68)
Amortisation of other intangibles (14) - (14)
Other non-operating items (15) (80) (95)
Financing costs attributable to owners (24) (66) (90)
Segmental result before the tax attributable to owners 40 (168) (128)
Other non-operating items include:
- a gain of £26 million on the implementation of a longevity swap reassurance contract on a portfolio of the Group's
annuities;
- a gain of £14 million arising as a result of a premium adjustment on the 2015 reassurance arrangement with RGA
International following completion of a data review;
- acquisition related costs of £31 million, comprising £12 million of transaction costs related to the acquisition of
AXA Wealth's pensions and protection business and £19 million of transaction costs related to acquisition of Abbey Life
(see note H2);
- a provision for costs of £30 million associated with the integration and restructuring of the acquired AXA
businesses (see note G1);
- the costs of providing for claims and associated costs relating to creditor insurance underwritten prior to 2016 by
a subsidiary of the Group, PA(GI) Limited ('PA(GI)'), of £33 million (see note G1);
- recognition of costs of £10 million associated with the introduction of regulations that cap early exit charges for
pension customers aged over 55 at 1%, which will come into force from 2017;
- costs of £6 million associated with the transfer of non-profit annuities from with-profit funds to non-profit
matching adjustment funds;
- the costs of £4 million on PGL Pension Scheme buy-in;
- other corporate project costs of £19 million; and
- net other one-off items totalling a cost of £2 million.
2015
Phoenix Unallocated Total
Life Group £m
£m £m
Operating profit/(loss) 336 (12) 324
Investment return variances and economic assumption changes on long-term business 13 - 13
Variance on owners' funds (7) (5) (12)
Amortisation of acquired in-force business (75) - (75)
Amortisation of other intangibles (15) - (15)
Other non-operating items 47 2 49
Financing costs attributable to owners (23) (76) (99)
Segmental result before the tax attributable to owners 276 (91) 185
Other non-operating items include:
- gain of £49 million (net of a £64 million impairment of associated acquired in-force business) arising as a result
of the reassurance arrangement entered into with RGA International (see note F3.1);
- release of provisions associated with external regulatory changes, including the cap on workplace pension charges
and the pension guidance levy, of £17 million;
- corporate project costs of £13 million; and
- net other one-off items (including Solvency II implementation and systems transformation costs) totalling a cost of
£4 million.
B2. Investment return variances and economic assumption changes
The long-term nature of much of the Group's operations means that, for internal performance management, the effects of
short-term economic volatility are treated as non-operating items. The Group focuses instead on an operating profit measure
that incorporates an expected return on investments supporting its long-term business. The accounting policy adopted in the
calculation of operating profit is detailed in note B1.2. The methodology for the determination of the expected investment
return is explained below together with an analysis of investment return variances and economic assumption changes
recognised outside of operating profit.
B2.1 Calculation of the long-term investment return
The expected return on investments for both owner and policyholder funds is based on opening economic assumptions applied
to the funds under management at the beginning of the reporting period. Expected investment return assumptions are derived
actively, based on risk-free yields at the start of each financial year. In line with changes made to align assumptions and
estimates used in the valuation of insurance contracts with the requirements of the Solvency II regime (see note F4.1), the
assumptions used in the calculation of the long-term investment return have also been updated.
From 1 January 2016, the long-term risk-free rate used as a basis for deriving the long-term investment return is set by
reference to the swap curve plus 10bps (2015: annualised return on the FTSE UK Gilt Index plus 10bps). A risk premium of
350bps is added to the risk-free yield for equities (2015: 300bps), 250bps for properties (2015: 200bps), 150bps for other
fixed interest assets (2015: 100bps) and 50bps for gilts (2015: nil). If the current period long-term investment return had
been calculated using a gilts plus 10bps reference rate adjusted for the relevant risk premium (as used in prior periods),
the impact on operating profit for the period would be negligible.
The principal assumptions underlying the calculation of the long-term investment return are:
2016 2015
% %
Equities 5.8 5.3
Properties 4.8 4.3
Gilts 2.8 2.3
Other fixed interest 3.8 3.3
B2.2 Life assurance business
Operating profit for life assurance business is based on expected investment returns on financial investments backing
owners' and policyholder funds over the reporting period, with consistent allowance for the corresponding expected
movements in liabilities. Operating profit includes the effect of variance in experience for non-economic items, for
example mortality, persistency and expenses, 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 disclosed separately
outside operating profit.
The movement in liabilities included in operating profit reflects both the change in liabilities due to the expected return
on investments and the impact of experience variances and assumption changes for non-economic items.
The effect of differences between actual and expected economic experience on liabilities, and changes to economic
assumptions used to value liabilities, are taken outside operating profit. For many types of long-term business, including
unit-linked and with-profit funds, movements in asset values are offset by corresponding changes in liabilities, limiting
the net impact on profit. For other long-term business the profit impact of economic volatility depends on the degree of
matching of assets and liabilities, and exposure to financial options and guarantees.
The investment return variances and economic assumption changes excluded from the long-term business operating profit are
as follows:
2016 2015
£m £m
Investment return variances and economic assumption changes on long-term business (207) 13
Negative investment return variances and economic assumption changes on long-term business of £207 million (2015: positive
£13 million) primarily resulted from the adverse impact of a fall in yields on the life funds, which has increased the
margin held within insurance liabilities in respect of longevity risk. The investment return variances have also been
adversely impacted by losses arising on equity hedging positions held by life funds following equity market gains in the
period. Equity market gains have resulted in an unfavourable variance as the value of the hedging instruments fall without
the corresponding benefit from expected future profits within the life funds being recognised. Included in the negative
variance is the minority share of the result of the consolidated UKCPT property investment structure prior to its
deconsolidation during the year of positive £1 million (2015: positive £46 million).
B2.3 Owners' funds
For non-long-term business including owners' funds, the total investment income, including fair value gains, is analysed
between a calculated longer-term return and short-term fluctuations.
The variances excluded from operating profit in relation to owners' funds are as follows:
2016 2015
£m £m
Variances on owners' funds of subsidiary undertakings (5) (12)
The negative variance on owners' funds of subsidiary undertakings of £5 million (2015: £12 million) is principally driven
by losses from equity hedging positions held in the Group holding companies offset by gains on interest rate hedging
positions held in the Life Companies' shareholders' funds arising from falling yields.
B3. Earnings per share
The Group calculates its basic earnings per share based on the present shares in issue using the earnings attributable to
ordinary equity holders of the parent, divided by the weighted average number of ordinary shares in issue during the year.
Diluted earnings per share are calculated based on the potential future shares in issue assuming the conversion of all
potentially dilutive ordinary shares. The weighted average number of ordinary shares in issue is adjusted to assume
conversion of dilutive share awards granted to employees and warrants.
Following the completion of the rights issue in November 2016 the earnings per share calculations, for all periods up to
the date the rights issue shares were issued, have been adjusted for the bonus element of the rights issue. The bonus
factor used was 1.18. Further details of the rights issue are included in note D1.
B3.1 Basic earnings per share
The result attributable to owners of the parent for the purposes of computing earnings per share has been calculated as set
out below. This is after adjusting for the result attributable to non-controlling interests.
2016 2015
£m £m
(Loss)/profit for the period (100) 249
Share of result attributable to non-controlling interests (1) (48)
(Loss)/profit attributable to owners of the parent (101) 201
The weighted average number of ordinary shares outstanding during the period is calculated as detailed below:
2016 2015
Number Number
million million
Issued ordinary shares at beginning of the period (restated for bonus element of rights issue) 266 266
Effect of ordinary shares issued 30 -
Own shares held by the employee benefit trust (1) (1)
Weighted average number of ordinary shares 295 265
Basic earnings per share is as follows:
2016 2015
pence pence
Basic earnings per share (restated for bonus element of rights issue) (34.3) 76.1
B3.2 Diluted earnings per share
The result attributable to owners for the parent used in the calculation of diluted earnings per share is the same as that
used in the basic earnings per share calculation in note B3.1 above. The diluted weighted average number of ordinary shares
outstanding during the period is also the same as that used in the basic earnings per share calculation in note B3.1 above.
As losses have an anti-dilutive effect, none of the share-based awards have a dilutive effect for the year ended 31
December 2016. The Group's deferred bonus share scheme and sharesave schemes increased the weighted average number of
shares on a diluted basis by 490,276 shares for the year ended 31 December 2015.
Diluted earnings per share is as follows:
2016 2015
pence pence
Diluted earnings per share (restated for bonus element of rights issue) (34.3) 76.0
5 million warrants issued on 2 September 2009 to certain entities providing finance to the Group could potentially dilute
basic earnings per share in the future. The warrants have not been included in the diluted earnings per share figure
because they did not have a dilutive effect for the periods presented due to the exercise price being significantly higher
than the share price of the Company. Details of the warrants are given in note E3.3.
B4. Dividends
Final dividends on ordinary shares are recognised as a liability and deducted from equity when they are approved by the
Group's owners. Interim dividends are deducted from equity when they are paid.
As permitted by Cayman Islands Companies Law, dividends have been charged within equity against the share premium account.
Dividends for the year that are approved after the reporting period are dealt with as an event after the reporting period.
Declared dividends are those that are appropriately authorised and are no longer at the discretion of the entity.
2016 2015 £m
£m
Dividends declared and paid in 2016 126 120
On 22 March 2016, the Board recommended a final dividend of 26.7p per share in respect of the year ended 31 December 2015.
The dividend was approved at the Company's Annual General Meeting, which was held on 11 May 2016. The dividend amounted to
£60 million and was paid on 13 May 2016.
On 24 August 2016, the Board declared an interim dividend of 26.7p per share for the half year ended 30 June 2016. The
dividend amounted to £66 million and was paid on 3 October 2016.
C. Other Income Statement notes
C1. Net investment income
Net investment income comprises interest, dividends, rents receivable, net interest income/(expense) on the net defined
benefit asset/(liability), fair value gains and losses on financial assets, financial liabilities and investment property
at fair value, and impairment losses on loans and receivables.
Interest income is recognised in the consolidated income statement as it accrues using the effective interest method.
Dividend income is recognised in the consolidated income statement on the date the right to receive payment is established,
which in the case of listed securities is the ex-dividend date.
Rental income from investment property is recognised in the consolidated income statement on a straight-line basis over the
term of the lease. Lease incentives granted are recognised as an integral part of the total rental income.
Fair value gains and losses on financial assets and financial liabilities designated at fair value through profit or loss
are recognised in the consolidated income statement. Fair value gains and losses include both realised and unrealised gains
and losses.
2016 2015
£m £m
Investment income
Interest income on loans and receivables at amortised cost 1 3
Interest income on financial assets designated at fair value through profit or loss on initial recognition 859 1,076
Dividend income 902 911
Rental income 38 90
Net interest income on Group defined benefit pension scheme asset/liability 21 17
1,821 2,097
Fair value gains/(losses)
Financial assets and financial liabilities at fair value through profit or loss:
Designated upon initial recognition 3,236 (1,178)
Held for trading - derivatives 1,278 5
Investment property 26 140
4,540 (1,033)
Net investment income 6,361 1,064
C2. Administrative expenses
Administrative expenses are recognised in the consolidated income statement as incurred.
2016 2015
£m £m
Employee costs 99 81
Outsourcer expenses 91 97
Professional fees 55 33
Office costs 25 23
Investment management expenses and transaction costs 129 150
Direct costs of life companies 6 15
Direct costs of collective investment schemes 11 17
PA(GI) provision (see note G1) 33 6
Pension past service costs 3 -
Pension administrative expenses 4 5
Advertising and sponsorship 7 -
Restructuring and integration costs (see note G1) 30 -
Other 13 3
506 430
Employee costs comprise:
2016 2015
£m £m
Wages and salaries 90 73
Social security contributions 9 8
99 81
2016 2015
Number Number
Average number of persons employed 837 750
C3. Auditor's remuneration
During the year the Group obtained the following services from its auditor at costs as detailed in the table below.
2016 2015
£m £m
Audit of the consolidated financial statements 0.7 0.5
Audit of the Company's subsidiaries 3.5 2.3
Audit of MCEV supplementary information - 0.4
4.2 3.2
Audit-related assurance services 0.5 0.9
Reporting accountant assurance services 0.3 0.1
Total fee for assurance services 5.0 4.2
Corporate finance services 3.6 0.6
Tax advisory services - 0.1
Other non-audit services 0.1 0.3
Total fees for other services 3.7 0.5
Total auditor's remuneration 8.7 4.7
No services were provided by the Company's auditors to the Group's pension schemes in either 2016 or 2015.
Audit-related assurance services includes fees payable for services where the reporting is required by law or regulation to
be provided by the auditor, such as reporting on regulatory returns. It also includes fees payable in respect of reviews of
interim financial information and services where the work is integrated with the audit itself.
Reporting accountant assurance services relate to assurance reporting on historical information included within investment
circulars. In 2016, this includes public reporting associated with the issuance of equity as part of the acquisition of
Abbey Life and the issuance of a Medium-Term Note Programme.
Corporate finance services fees were £3.6 million (2015: £0.1 million). The increase in the year reflects services provided
in connection with the acquisition of the AXA businesses and Abbey Life. £1.9 million of the fees relates to the engagement
of the external auditors to perform actuarial and finance due diligence procedures where synergies were anticipated to
arise with subsequent audit work. The remaining balance of £1.7 million relates to the provision of assurance services to
the Board and the sponsoring banks in support of disclosures made in the public transaction documentation relating to the
two acquisitions.
Other non-audit services of £0.1 million (2015: £0.3 million) primarily include fees payable in respect of assurance over
aspects of the Group's Solvency II internal model. In 2015, the fees principally related to applications made to the
regulator with regard to the Group's implementation of Solvency II.
Further information on auditor's remuneration and the assessment of the independence of the external auditor is set out in
the Audit Committee report on page 52.
C4. Finance costs
Interest payable is recognised in the consolidated income statement as it accrues and is calculated using the effective
interest method.
This note analyses the interest costs on the Group's borrowings which are described in note E5.
2016 2015
£m £m
Interest expense
On financial liabilities at amortised cost 109 122
On financial liabilities at fair value through profit or loss 13 14
122 136
Attributable to:
- policyholders 32 37
- owners 90 99
122 136
C5. Tax charge/(CREDIT)
Income tax comprises current and deferred tax. Income tax is recognised in the consolidated income statement except to the
extent that it relates to items recognised in the statement of consolidated comprehensive income or the statement of
consolidated changes in equity, in which case it is recognised in these statements.
Current tax is the expected tax payable on the taxable income for the year, using tax rates and laws enacted or
substantively enacted at the date of the statement of consolidated financial position together with adjustments to tax
payable in respect of previous years.
The tax charge is analysed between tax that is payable in respect of policyholders' returns and tax that is payable on
owners' returns. This allocation is calculated based on an assessment of the effective rate of tax that is applicable to
owners for the year.
C5.1 Current year tax charge/(credit)
2016 2015
£m £m
Current tax:
UK corporation tax 46 11
Overseas tax 15 8
61 19
Adjustment in respect of prior years (8) (99)
Total current tax charge/(credit) 53 (80)
Deferred tax:
Origination and reversal of temporary differences (13) 7
Change in the rate of UK corporation tax (10) (24)
Total deferred tax credit (23) (17)
Total tax charge/(credit) 30 (97)
Attributable to:
- policyholders 58 (33)
- owners (28) (64)
Total tax charge/(credit) 30 (97)
The Group, as a proxy for policyholders in the UK, is required to pay taxes on investment income and gains each year.
Accordingly, the tax credit or expense attributable to UK life assurance policyholder earnings is included in income tax
expense. The tax charge/(credit) attributable to policyholder earnings was £58 million (2015: £(33) million).
C5.2 Tax charged to other comprehensive income
2016 2015
£m £m
Current tax credit on share schemes (1) (1)
Deferred tax charge on defined benefit schemes 3 5
Deferred tax on share schemes (1) 1
1 5
C5.3 Reconciliation of tax charge/(credit)
2016 2015
£m £m
(Loss)/profit before tax (70) 152
Policyholder tax (charge)/credit (58) 33
(Loss)/profit before the tax attributable to owners (128) 185
Tax at standard UK1 rate of 20% (2015: 20.25%) (26) 37
Non-taxable income and gains2 (10) (13)
Disallowable deductions3 24 6
Prior year tax credit for shareholders4 (6) (41)
Movement on acquired in-force amortisation at less than 20%5 (2015: 20.25%) 2 15
Profits taxed at rates other than 20%6 (2015: 20.25%) - (36)
Recognition of previously unrecognised deferred tax assets7 (5) (6)
Deferred tax rate change8 (9) (24)
Temporary differences not valued - (1)
Other 2 (1)
Owners' tax credit (28) (64)
Policyholder tax charge/(credit) 58 (33)
Total tax charge/(credit) for the period 30 (97)
1 The Phoenix Life operating segment operates predominantly in the UK. The reconciliation of the tax charge/(credit)
has, therefore, been completed by reference to the standard rate of UK tax rather than by reference to the Jersey income
tax rate of 0% which is applicable to Phoenix Group Holdings.
2 Includes non-taxable dividends and gains and non-taxable pension scheme items.
3 Includes non-recurring disallowable deductions in relation to claims and other costs relating to creditor insurance
underwritten by PA(GI) Limited of £7 million and a consolidation adjustment on the PGL Pension scheme 'buy-in' agreement of
£12 million.
4 The 2015 prior year tax credit represents the impact of reaching agreement with HMRC in respect of the Group's
uncertain tax positions for the years 2007 to 2014.
5 2015 included a non-recurring write off for the acquired in-force business relating to Opal Reassurance Limited
('Opal Re') of £13 million as a result of the reinsurance of annuity liabilities.
6 2015 included non-taxable profits arising in Opal Re of £23 million and UKCPT of £10 million. The 2016 element for
both is de minimis.
7 Represents the recognition of losses in acquired businesses.
8 Represents the effect of the 1% reduction in the tax rate from April 2020 which was substantively enacted in the
year (2015: 2% reduction).
D. equity
D1. Share Capital
The Group has issued ordinary shares which are classified as equity. Incremental external costs that are directly
attributable to the issue of these shares are recognised in equity, net of tax.
2016 2015
£ £
Authorised:
410 million (2015: 410 million) ordinary shares of E0.0001 each 31,750 31,750
Issued and fully paid:
392.8 million (2015: 225.4 million) ordinary shares of E0.0001 each 33,112 18,463
The value of the authorised share capital was translated at a historical rate. Issued and fully paid share capital
transactions are translated at the rate prevailing at the date of issue.
The holders of ordinary shares are entitled to one vote per share on matters to be voted on by owners and to receive such
dividends, if any, as may be declared by the Board of Directors in its discretion out of legally available profits.
Movements in issued share capital during the year:
2016
Number £
Shares in issue at 1 January 225,419,446 18,463
Placement of ordinary shares 22,542,000 1,748
Ordinary shares issued under the rights issue 144,727,282 12,888
Other ordinary shares issued in the period 161,089 13
Shares in issue at 31 December 392,849,817 33,112
On 1 June 2016, the Group completed an equity placing of 22,542,000 new ordinary shares in association with the proposed
acquisition of the AXA businesses (see note H2) which raised gross proceeds of £194 million. The proceeds from the equity
placing, net of deduction of commissions and expenses, were £190 million.
On 9 November 2016, the Group issued 144,727,282 shares following a rights issue undertaken in connection with the proposed
acquisition of Abbey Life, where 7 rights issue shares were issued at 508 pence per share for every 12 existing Phoenix
Group Holdings shares held. The rights issue raised gross proceeds of £735 million and proceeds, net of deduction of
commission and expenses, were £717 million.
During the year, the Company issued 161,089 shares at a premium of £1 million in order to satisfy its obligations to
employees under the Group's sharesave schemes (see note I2).
2015
Number £
Shares in issue at 1 January 225,090,284 18,439
Other ordinary shares issued in the period 329,162 24
Shares in issue at 31 December 225,419,446 18,463
During 2015, the Company issued 329,162 shares at a premium of £2 million in order to satisfy its obligations to employees
under the Group's sharesave schemes.
D2. Shares held by the employee benefit trust
Where the Phoenix Group Holdings Employee Benefit Trust ('PGH EBT') acquires shares in the Company or obtains rights to
purchase its shares, the consideration paid (including any attributable transaction costs, net of tax) is shown as a
deduction from owners' equity. Gains and losses on sales of shares held by the PGH EBT are charged or credited to the own
shares account in equity.
The PGH EBT holds shares to satisfy awards granted to employees under the Group's share-based payment schemes.
2016 2015
£m £m
At 1 January 5 8
Shares acquired by the PGH EBT in year 7 6
Shares awarded to employees by the PGH EBT in year (5) (9)
At 31 December 7 5
During the year 690,711 (2015: 1,398,290) shares were awarded to employees by the PGH EBT and 1,196,011 (2015: 735,068)
shares were purchased. The number of shares held by the PGH EBT at 31 December 2016 was 1,092,634 (2015: 587,334).
The Company provides the PGH EBT with an interest-free facility arrangement to enable it to purchase the shares. Details of
this loan are included in note 9 to the parent company financial statements.
D3. Non-controlling interests
Non-controlling interests are stated at the share of net assets attributed to the non-controlling interest holder at the
time of acquisition, adjusted for the relevant share of subsequent changes in equity.
2016
Perpetual Reset Capital Securities UK Total
£m Commercial Property Trust Limited £m
£m
At 1 January 7 563 570
Profit for the year - 1 1
Coupon paid, net of tax relief (1) - (1)
Redemption of Notes (6) - (6)
Derecognition of non-controlling interest following loss of control - (564) (564)
At 31 December - - -
2015
Perpetual UKCommercial Property Trust Limited Total
Reset Capital Securities £m £m
£m
At 1 January 408 505 913
Profit for the year 2 46 48
Dividends paid - (23) (23)
Coupon paid, net of tax relief (15) - (15)
Exchange of Notes for subordinated notes (388) - (388)
Shares in subsidiaries subscribed for by non-controlling interests - 35 35
At 31 December 7 563 570
D3.1 Perpetual Reset Capital Securities
On 1 January 2010, Pearl Group Holdings (No.1) Limited ('PGH1') had in issue £500 million of Perpetual Reset Capital
Securities ('the Notes'). Following amendments made to the Notes during 2010, the aggregate amount payable on redemption of
the Notes was £425 million. On 23 January 2015, the Group exchanged 99% of the Notes for £428 million of new subordinated
notes, issued by PGH Capital plc, and £3 million of cash. £32 million of the new notes were held by Group companies. The
exchange resulted in a loss of £12 million which was recognised in equity. On 23 January 2015, the coupon that was due on
the Notes was settled with the noteholders that exchanged their Notes. On 25 April 2015, the 2015 coupon was settled in
full with the remaining noteholders.
On 25 April 2016 the coupon that was due on the remaining Notes was settled and PGH1 redeemed the remaining £6 million of
Notes at par.
D3.2 UK Commercial Property Trust Limited
UK Commercial Property Trust Limited ('UKCPT') is a property investment company which is domiciled in Guernsey and is
admitted to the Official List of the UK Listing Authority and to trading on the London Stock Exchange. In February 2016,
the Group reduced its holdings to 48.9% (2015: 50.0%) of the issued share capital of UKCPT. The Group deems that it no
longer exercises control over UKCPT and as a result UKCPT has been deconsolidated from the effective date of this loss of
control. The Group's remaining interest in UKCPT is recognised as an associate and held at fair value (see note H3 for
further details).
E. Financial assets & liabilities
E1. fair values
Financial assets
Purchases and sales of financial assets are recognised on the trade date, which is the date that the Group commits to
purchase or sell the asset.
Loans and receivables are non-derivative financial assets with fixed or determinable payments that are not quoted in an
active market. For the majority of the Group's loans and receivables these investments are initially recognised at cost,
being the fair value of the consideration paid for the acquisition of the investment. All transaction costs directly
attributable to the acquisition are also included in the cost of the investment. Subsequent to initial recognition, these
investments are carried at amortised cost, using the effective interest method. The Group holds a portfolio of loans that
are designated at fair value through profit or loss.
Derivative financial instruments are classified as held for trading. They are recognised initially at fair value and
subsequently are remeasured to fair value. The gain or loss on remeasurement to fair value is recognised in the
consolidated income statement.
Equities, fixed and variable rate income securities, collective investment schemes and certain loans and receivables are
designated at fair value through profit or loss and accordingly are stated in the statement of consolidated financial
position at fair value. They are designated at fair value through profit or loss because this is reflective of the manner
in which the financial assets are managed and reduces a measurement inconsistency that would otherwise arise with regard to
the insurance liabilities that the assets are backing.
Reinsurers share of investment contracts liabilities without DPF are valued on a basis consistent with investment contracts
liabilities without DPF as detailed under Financial liabilities below.
Impairment of financial assets
The Group assesses at each period end whether a financial asset or group of financial assets held at amortised cost is
impaired. The Group first assesses whether objective evidence of impairment exists. If it is determined that no objective
evidence of impairment exists for an individually assessed financial asset, the asset is included in a group of financial
assets with similar credit risk characteristics and that group of financial assets is collectively assessed for impairment.
Assets that are individually assessed for impairment and for which an impairment loss is, or continues to be recognised,
are not included in the collective assessment of impairment.
Fair value estimation
The fair value of financial instruments traded in active markets such as publicly traded securities and derivatives is
based on quoted market prices at the period end. The quoted market price used for financial assets is the applicable bid
price on the period end date. The fair value of investments that are not traded in an active market is determined using
valuation techniques such as broker quotes, pricing models or discounted cash flow techniques. Where pricing models are
used, inputs are based on market-related data at the period end. Where discounted cash flow techniques are used, estimated
future cash flows are based on contractual cash flows using current market conditions and market-calibrated discount rates
and interest rate assumptions for similar instruments.
For units in unit trusts and shares in open-ended investment companies, fair value is determined by reference to published
bid-values. The fair value of receivables and floating rate and overnight deposits with credit institutions is their
carrying value. The fair value of fixed interest-bearing deposits is estimated using discounted cash flow techniques.
Associates
Investments in associates that are held for investment purposes are accounted for under IAS 39 Financial Instruments:
Recognition and Measurement as permitted by IAS 28 Investments in Associates and Joint Ventures. These are measured at fair
value through profit or loss. There are no investment in associates which are of a strategic nature.
Joint ventures
Investments in joint ventures that are held for investment purposes are accounted for under IAS 39 Financial Instruments:
Recognition and Measurement as permitted by IAS 28 Investments in Associates and Joint Ventures. These are measured at fair
value through profit or loss. There are no investments in joint ventures which are of a strategic nature.
Financial liabilities
On initial recognition, financial liabilities are recognised when due and measured at the fair value of the consideration
received less directly attributable transaction costs (with the exception of liabilities at fair value through profit or
loss for which all transaction costs are expensed).
Subsequent to initial recognition, financial liabilities (except for liabilities under investment contracts without DPF and
other liabilities designated at fair value through profit or loss) are measured at amortised cost using the effective
interest method.
Financial liabilities are designated upon initial recognition at fair value through profit or loss and where doing so
results in more meaningful information because either:
- it eliminates or significantly reduces accounting mismatches that would otherwise arise from measuring assets or
liabilities or recognising the gains and losses on them on different bases; or
- a group of financial assets, financial liabilities or both is managed and its performance is evaluated and managed
on a fair value basis, in accordance with a documented risk management or investment strategy, and information about the
investments is provided internally on that basis to the Group's key management personnel.
Investment contracts without DPF
Contracts under which the transfer of insurance risk to the Group from the policyholder is not significant are classified
as investment contracts and accounted for as financial liabilities.
Receipts and payments on investment contracts without DPF are accounted for using deposit accounting, under which the
amounts collected and paid out are recognised in the statement of consolidated financial position as an adjustment to the
liability to the policyholder.
The valuation of liabilities on unit-linked contracts is held at the fair value of the related assets and liabilities. The
liability is the sum of the unit-linked liabilities plus an additional amount to cover the present value of the excess of
future policy costs over future charges.
Movements in the fair value of investment contracts without DPF are included in the 'change in investment contract
liabilities' in the consolidated income statement.
Investment contract policyholders are charged for policy administration services, investment management services,
surrenders and other contract fees. These fees are recognised as revenue over the period in which the related services are
performed. If the fees are for services provided in future periods, then they are deferred and recognised over those
periods. 'Front end' fees are charged on some non-participating investment contracts. Where the non-participating
investment contract is measured at fair value, such fees which relate to the provision of investment management services
are deferred and recognised as the services are provided.
Deposits from reinsurers
It is the Group's practice to obtain collateral to cover certain reinsurance transactions, usually in the form of cash or
marketable securities. Where cash collateral is available to the Group for investment purposes, it is recognised as a
'financial asset' and the collateral repayable is recognised as 'deposits received from reinsurers' in the statement of
consolidated financial position.
Net asset value attributable to unitholders
The net asset value attributable to unitholders represents the non-controlling interest in collective investment schemes
which are consolidated by the Group. This interest is classified at fair value through profit or loss and measured at fair
value, which is equal to the bid value of the number of units of the collective investment scheme not owned by the Group.
Obligations for repayment of collateral received
It is the Group's practice to obtain collateral in stock lending and derivative transactions, usually in the form of cash
or marketable securities. Where cash collateral is available to the Group for investment purposes, it is recognised as a
'financial asset' and the collateral repayable is recognised as 'obligations for repayment of collateral received' in the
statement of consolidated financial position. The 'obligations for repayment of collateral received' are measured at
amortised cost, which in the case of cash is equivalent to the fair value of the consideration received.
The table below sets out a comparison of the carrying amounts and fair values of financial instruments as at 31 December
2016:
2016
Carrying value
Total Amounts Fair value
£m due for settlement after £m
12 months
£m
Financial assets measured at carrying and fair values
Financial assets at fair value through profit or loss:
Held for trading - derivatives 3,003 2,909 3,003
Designated upon initial recognition:
Loans and receivables 812 789 812
Equities1 17,759 - 17,759
Investment in associate1 (see note H3) 525 - 525
Fixed and variable rate income securities 29,290 26,408 29,290
Collective investment schemes1 18,432 - 18,432
Reinsurers' share of investment contract liabilities1 6,808 - 6,808
Loans and receivables at amortised cost 420 14 420
Total financial assets 77,049 77,049
Carrying value
Total Amounts Fair value
£m due for settlement after £m
12 months
£m
Financial liabilities measured at carrying and fair values
Financial liabilities at fair value through profit or loss:
Held for trading - derivatives 1,567 1,482 1,567
Designated upon initial recognition:
Borrowings 270 270 270
Net asset value attributable to unitholders1 1,040 - 1,040
Investment contract liabilities1 27,332 - 27,332
Financial liabilities measured at amortised cost:
Borrowings 1,766 1,735 1,879
Deposits received from reinsurers 392 363 392
Obligations for repayment of collateral received2 1,623 - -
Total financial liabilities 33,990 32,480
1 These assets and liabilities have no expected settlement date.
2 These liabilities have no expected settlement date. As the obligations relate to the repayment of collateral
received in the form of cash, the liability is stated at the value of the consideration received and therefore no fair
value has been disclosed.
2015
Carrying value
Total Amounts due for settlement after Fair value
£m 12 months £m
£m
Financial assets measured at carrying and fair values
Financial assets at fair value through profit or loss:
Held for trading - derivatives 1,498 1,335 1,498
Designated upon initial recognition:
Loans and receivables 268 245 268
Equities1 12,351 - 12,351
Investment in joint venture1 149 - 149
Fixed and variable rate income securities 31,814 24,176
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