REG - Phoenix Grp Hldgs - Phoenix Group Holdings - 2016 Annual Results <Origin Href="QuoteRef">PHNX.L</Origin> - Part 12
20/03/2017 07:07
- Part 12: For the preceding part double click ID:nRST8776Zk
31,814
Collective investment schemes1 3,826 - 3,826
Loans and receivables at amortised cost 309 24 309
50,215 50,215
Less amounts classified as held for sale (see note I1) (149) - (149)
Total financial assets 50,066 50,066
Carrying value
Total Amounts due for settlement after Fair value
£m 12 months £m
£m
Financial liabilities measured at carrying and fair values
Financial liabilities at fair value through profit or loss:
Held for trading - derivatives 1,360 1,255 1,360
Designated upon initial recognition:
Borrowings 194 194 194
Net asset value attributable to unitholders1 5,120 - 5,120
Investment contract liabilities1 7,905 - 7,905
Financial liabilities measured at amortised cost:
Borrowings 1,804 1,772 1,907
Deposits received from reinsurers 378 347 378
Obligations for repayment of collateral received2 725 - -
Total financial liabilities 17,486 16,864
Fair value hierarchy information for non-financial assets measured at fair value is included in note G8 for property held
at valuation and in note G9 for investment property.
E2. Fair value hierarchy
E2.1 Determination of fair value and fair value hierarchy of financial instruments
Level 1 financial instruments
The fair value of financial instruments traded in active markets (such as exchange traded securities and derivatives) is
based on quoted market prices at the period end provided by recognised pricing services. Market depth and bid-ask spreads
are used to corroborate whether an active market exists for an instrument. Greater depth and narrower bid-ask spread
indicate higher liquidity in the instrument and are classed as Level 1 inputs. For collective investment schemes, fair
value is by reference to published bid prices.
Level 2 financial instruments
Financial instruments traded in active markets with less depth or wider bid-ask spreads which do not meet the
classification as Level 1 inputs are classified as Level 2. The fair values of financial instruments not traded in active
markets are determined using broker quotes or valuation techniques with observable market inputs. Financial instruments
valued using broker quotes are classified at Level 2, only where there is a sufficient range of available quotes. The fair
value of unquoted equities, over the counter derivatives, loans and deposits, and collective investment schemes, where
published bid prices are not available, are estimated using 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 flows are used,
estimated future cash flows are based on management's best estimates and the discount rate used is a market-related rate
for a similar instrument.
Level 3 financial instruments
The Group's financial instruments determined by valuation techniques using non-observable market inputs are based on a
combination of independent third party evidence and internally developed models. In relation to investments in hedge funds
and private equity investments, non-observable third party evidence in the form of net asset valuation statements are used
as the basis for the valuation. Adjustments may be made to the net asset valuation where other evidence, for example recent
sales of the underlying investments in the fund, indicates this is required. Securities that are valued using broker quotes
which could not be corroborated across a sufficient range of quotes are considered as Level 3. For a small number of
investment vehicles and debt securities, standard valuation models are used, as due to their nature and complexity they
have no external market. Inputs into such models are based on observable market data where applicable. The fair value of
loans, derivatives and some borrowings with no external market is determined by internally developed discounted cash flow
models using appropriate assumptions corroborated with external market data where possible.
For financial instruments that are recognised at fair value on a recurring basis, the Group determines whether transfers
have occurred between levels in the hierarchy by re-assessing categorisation (based on the lowest level input that is
significant to the fair value measurement as a whole) at the start of each reporting period.
E2.2 Fair value hierarchy of financial instruments
The tables below separately identify financial instruments carried at fair value from those measured on another basis but
for which fair value is disclosed.
2016
Level 1 Level 2 Level 3 Total fair value
£m £m £m £m
Financial assets measured at fair value
Derivatives 74 2,876 53 3,003
Financial assets designated at fair value through profit or loss upon initial recognition:
Loans and receivables - - 812 812
Equities 17,078 10 671 17,759
Investment in associate 525 - - 525
Fixed and variable rate income securities 17,282 11,862 146 29,290
Collective investment schemes 13,548 4,795 89 18,432
Reinsurers' share of investment contract liabilities - 6,808 - 6,808
48,433 23,475 1,718 73,626
Total financial assets measured at fair value 48,507 26,351 1,771 76,629
Financial assets for which fair values are disclosed
Loans and receivables at amortised cost - 420 - 420
48,507 26,771 1,771 77,049
Level 1 Level 2 Level 3 Total fair value
£m £m £m £m
Financial liabilities measured at fair value
Derivatives 25 1,270 272 1,567
Financial liabilities designated at fair value through profit or loss upon initial recognition:
Borrowings - - 270 270
Net asset value attributable to unitholders 1,040 - - 1,040
Investment contract liabilities - 27,332 - 27,332
1,040 27,332 270 28,642
Total financial liabilities measured at fair value 1,065 28,602 542 30,209
Financial liabilities for which fair values are disclosed
Borrowings at amortised cost - 748 1,131 1,879
Deposits received from reinsurers - 392 - 392
Total financial liabilities for which fair values are disclosed - 1,140 1,131 2,271
1,065 29,742 1,673 32,480
2015
Level 1 Level 2 Level 3 Total fair
£m £m £m value
£m
Financial assets measured at fair value
Derivatives 14 1,484 - 1,498
Financial assets designated at fair value through profit or loss upon initial recognition:
Loans and receivables - - 268 268
Equities 11,734 11 606 12,351
Investment in joint venture - - 149 149
Fixed and variable rate income securities 20,346 11,138 330 31,814
Collective investment schemes 3,098 646 82 3,826
35,178 11,795 1,435 48,408
Less amounts classified as held for sale (see note I1) - - (149) (149)
Total financial assets measured at fair value 35,192 13,279 1,286 49,757
Financial assets for which fair values are disclosed
Loans and receivables at amortised cost - 309 - 309
35,192 13,588 1,286 50,066
Level 1 Level 2 Level 3 Total fair
£m £m £m value
£m
Financial liabilities measured at fair value
Derivatives 33 1,327 - 1,360
Financial liabilities designated at fair value through profit or loss upon initial recognition:
Borrowings - - 194 194
Net asset value attributable to unitholders 5,120 - - 5,120
Investment contract liabilities - 7,905 - 7,905
5,120 7,905 194 13,219
Total financial liabilities measured at fair value 5,153 9,232 194 14,579
Financial liabilities for which fair values are disclosed
Borrowings at amortised cost - 970 937 1,907
Deposits received from reinsurers - 378 - 378
Total financial liabilities for which fair values are disclosed - 1,348 937 2,285
5,153 10,580 1,131 16,864
E2.3 Level 3 financial instrument sensitivities
Level 3 investments in indirect property, equities (including private equity) and collective investment schemes (including
hedge funds) are valued using net asset statements provided by independent third parties, and therefore no sensitivity
analysis has been prepared.
Fixed and variable rate income securities categorised as Level 3 investments, with the exception of a property investment
structure and certain local authority loans, are valued using broker quotes. Although such valuations are sensitive to
estimates, it is believed that changing one or more of the assumptions to reasonably possible alternative assumptions would
not change the fair value significantly.
Level 3 investments in equities and fixed and variable rate income securities include equity and debt holdings in a
property investment structure with a value of £22 million (2015: £22 million) and £22 million (2015: £14 million)
respectively.
The investment included within equities is valued based on its listed market price adjusted for a discount spread to
reflect reduced liquidity. The fair value of the debt in the structure is valued using a calculation model that takes a
comparable overseas bond issue and applies a credit spread to reflect reduced liquidity.
The valuation of the equity investment is sensitive to changes in the equity discount spread, whereby an increase of 5% in
the discount spread would decrease the value by £2 million (2015: £2 million) and a 5% reduction would increase the value
by £1 million (2015: £1 million). The valuation of the debt investment is sensitive to a change in the credit spread
whereby an increase of 100bps in the credit spread would decrease the value by £1 million (2015: £1 million) and a spread
reduction of 100bps would increase the value by £1 million (2015: £1 million).
Also included within fixed and variable rate income securities are investments in local authority loans. These investments
are valued using a calculation model that takes a comparable UK Treasury stock and applies a credit spread to reflect
reduced liquidity. The credit spread is derived from a sample broker quote. The valuations are sensitive to movements in
this spread, an increase of 25bps would decrease the value by £1 million (2015: £1 million) and a decrease of 25bps would
increase the value by £nil (2015: £1 million).
Included within loans and receivables are investments in equity release mortgages with a value of £433 million (2015: £268
million). The loans are valued using a discounted cash flow model, the key inputs to which include demographic assumptions,
economic assumptions (including house price index) and the use of a Black-Scholes model for valuation of the no-negative
equity guarantee. The no-negative equity guarantee caps the loan repayment in the event of death or entry into long-term
care to be no greater than the sales proceeds from the property. The significant sensitivities arise from movements in the
yield curve, inflation rate and house prices.
An increase of 100bps in the yield curve would decrease the value by £42 million (2015: £22 million) and a decrease of
100bps would increase the value by £47 million (2015: £25 million). An increase of 1% in the inflation rate would increase
the value by £3 million (2015: £2 million) and a decrease of 1% would decrease the value by £4 million (2015: £3 million).
An increase of 10% in house prices would increase the value by £1 million (2015: £1 million) and a decrease of 10% would
decrease the value by £2 million (2015: £1 million).
Included within borrowings measured at fair value and categorised as Level 3 financial liabilities are property reversion
loans with a value of £183 million, measured using an internally developed model. The valuation is sensitive to key
assumptions of the discount rate and the house price inflation rate. An increase in the discount rate of 1% would decrease
the value by £5 million (2015: £5 million) and a decrease of 1% would increase the value by £5 million (2015: £5 million).
An increase of 1% in the house price inflation rate would increase the value by £6 million (2015: £6 million) and a
decrease of 1% would decrease the value by £6 million (2015: £6 million).
Included within financial assets and liabilities are related loans and receivables of £380 million, borrowings of £87
million and derivative liabilities of £255 million pertaining to a reinsurance and retrocession arrangement assumed
following the acquisition of Abbey Life (see note E3.2). These assets and liabilities are valued using a discounted cash
flow model that includes valuation adjustments in respect of liquidity and credit risk. At 31 December 2016, the net of
these balances was an asset of £38 million (2015: £nil). The valuation is sensitive to movements in the euro interest rate
swap curve.
An increase of 100bps in the swap curve would decrease the aggregate value by £4 million and a decrease of 100bps would
increase the aggregate value by £4 million.
Also included within derivative assets and derivative liabilities are longevity swap contracts with corporate pension
schemes assumed following the acquisition of Abbey Life with a fair value of £53 million and £17 million respectively (see
note E3.2). These derivatives are valued on a discounted cash flow basis, key inputs to which are the overnight interest
swap curve and RPI and CPI inflation rates.
An increase of 100bps in the swap curve would decrease the value by £10 million and a decrease of 100bps would increase the
value by £10 million.
An increase of 1% in the RPI and CPI inflation rates would increase the value by £5 million and a decrease of 1% would
decrease the value by £5 million.
E2.4 Transfers of financial instruments between Level 1 and Level 2
2016
From From
Level 1 to Level 2 to
Level 2 Level 1
£m £m
Financial assets measured at fair value
Financial assets designated at fair value through profit or loss upon initial recognition:
Fixed and variable rate income securities 155 153
2015
From From
Level 1 to Level 2 to
Level 2 Level 1
£m £m
Financial assets measured at fair value
Financial assets designated at fair value through profit or loss upon initial recognition:
Fixed and variable rate income securities 173 210
Consistent with the prior year, all the Group's Level 1 and Level 2 assets have been valued using standard market pricing
sources.
The application of the Group's fair value hierarchy classification methodology at an individual security level, in
particular observations with regard to measures of market depth and bid-ask spreads, resulted in an overall net movement of
financial assets from Level 1 to Level 2 in the current period and a net movement of financial assets from Level 2 to Level
1 in the comparative period.
E2.5 Movement in Level 3 financial instruments measured at fair value
2016
At 1 January 2016 Net gains/ Effect of acquisitions/purchases Sales Transfers Transfers At Unrealised
£m (losses) in income £m £m from to 31 December 2016 gains on assets held at end of period
£m Level 1and Level 2 Level 1and Level 2 £m £m
£m £m
Financial assets
Derivatives - - 53 - - - 53 -
Financial assets designated at fair value through profit or loss upon initial recognition:
Loans and receivables 268 31 536 (23) - - 812 31
Equities 606 89 83 (106) 1 (2) 671 91
Investment in joint venture 149 - - (149) - - - -
Fixed and variable rate income securities 330 (2) 20 (209) 31 (24) 146 7
Collective investment schemes 82 11 8 (12) - - 89 7
1,435 129 647 (499) 32 (26) 1,718 136
Less amounts classified as held for sale (see note I1) (149) - - 149 - - - -
1,286 129 700 (349) 32 (26) 1,771 136
At 1 January 2016 Net Effect of acquisitions Repayments Transfers Transfers At Unrealised
£m losses in income £m £m from to 31 December 2016 losses on liabilities held at
£m Level 1and Level 2 Level 1and Level 2 £m end of period
£m £m £m
Financial liabilities
Derivatives - - 272 - - - 272 -
Financial liabilities designated at fair value through profit or loss upon initial recognition:
Borrowings 194 15 87 (26) - - 270 15
194 15 359 (26) - - 542 15
2015
At 1 January 2015 Net Purchases Sales Transfers Transfers At Unrealised
£m (losses)/ £m £m from to 31 December 2015 (losses)/gains
gains in income statement Level 1 Level 1and Level 2 £m on
£m and Level 2 £m assets held at end of period
£m £m
Financial assets
Financial assets designated at fair value through profit or loss upon initial recognition:
Loans and receivables - (15) 298 (15) - - 268 (12)
Equities 704 (26) 79 (152) 4 (3) 606 (9)
Investment in joint venture 133 16 - - - - 149 16
Fixed and variable rate income securities 735 (34) 378 (724) - (25) 330 (26)
Collective investment schemes 81 10 28 (37) - - 82 5
1,653 (49) 783 (928) 4 (28) 1,435 (26)
Less amounts classified as held for sale (see note I1) (133) (16) - - - - (149) -
1,520 (65) 783 (928) 4 (28) 1,286 (26)
At 1 January 2015 Netlosses in income statement Purchases Repayments Transfers Transfers At Unrealised
£m £m £m £m from to 31 December 2015 losses on liabilities held at end of
Level 1 Level 1 £m period
and Level 2 and Level 2 £m
£m £m
Financial liabilities
Derivatives 1 - - - - (1) - -
Financial liabilities designated at fair value through profit or loss upon initial recognition:
Borrowings 184 37 - (27) - - 194 37
Total financial liabilities 185 37 - (27) - (1) 194 37
Updates to the Group's observations with regard to measures of market depth, bid-ask spreads and the extent to which inputs
to the valuation of fixed and variable rate income securities are market observable resulted in a net transfer of financial
assets from Level 1 and 2 to Level 3 for the current period and a net transfer of financial assets from Level 3 to Level 1
and 2 in the comparative period.
Gains and losses on Level 3 financial instruments are included in net investment income in the consolidated income
statement. There were no gains or losses recognised in other comprehensive income in either the current or comparative
periods.
E3. Derivatives
The Group purchases derivative financial instruments principally in connection with the management of its insurance
contract and investment contract liabilities based on the principles of reduction of risk and efficient portfolio
management. The Group does not typically hold derivatives for the purpose of selling or repurchasing in the near term or
with the objective of generating a profit from short-term fluctuations in price or margin.
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.
E3.1 Summary
The fair values of derivative financial instruments are as follows:
Assets Liabilities 2016 Assets Liabilities
2016 £m 2015 2015
£m £m £m
Forward currency 24 83 35 94
Credit default options 4 9 3 8
Contract for differences 1 - 8 6
Interest rate swaps 2,437 1,160 1,046 1,197
Total return bond swaps 21 - - -
Swaptions 364 - 265 -
Inflation swaps 19 14 13 22
Equity options 64 3 115 -
Stock index futures 7 20 12 27
Fixed income futures 8 6 1 2
Retrocession contracts - 255 - -
Longevity swap contracts 53 17 - -
Currency futures 1 - - 4
3,003 1,567 1,498 1,360
E3.2 Corporate transactions
Abbey Life, a Group entity, has in place longevity swap arrangements with corporate pension schemes which do not meet the
definition of insurance contracts under the Group's accounting policies and are therefore recognised as derivative
financial instruments. Under these arrangements the majority of the longevity risk has been passed to third parties.
Derivative assets of £53 million and derivative liabilities of £17 million have been recognised as at 31 December 2016
(2015: both £nil).
In addition, Abbey Life has entered into a transaction under which it has accepted reinsurance on a portfolio of single and
regular premium life insurance policies and retroceded the majority of the insurance risk. Taken as a whole, this
transaction does not give rise to the transfer of significant insurance risk to the Group and therefore does not meet the
definition of an insurance contract under the Group's accounting policies. The fair value of amounts due from the cedant
are recognised within loans and receivables. The fair value of amounts due to the retrocessionaire are recognised as a
derivative liability and totalled £255 million at 31 December 2016 (2015: £nil). A loan liability has been recognised in
respect of financing obtained for the initial reinsurance premium (see note E5).
E3.3 Warrants over shares
Lenders' warrants
On 2 September 2009, the Company issued 5 million warrants over its shares to the Lenders. These warrants entitled the
holder to purchase one 'B' ordinary share at a price of £15 per share, subject to adjustment. Following the achievement of
the Company's Premium Listing on 5 July 2010, the lenders' warrants relate to ordinary shares rather than 'B' ordinary
shares. At 31 December 2016 the terms of lenders' warrants entitled the holders to purchase 1.027873 (2015: 1.027873)
ordinary shares per lenders' warrant for an exercise price of £14.59 (2015: £14.59).
The exercise period terminates on the first to occur of:
- 15th anniversary of the date issued;
- date fixed for the redemption of the warrants; and
- liquidation of the Company.
All outstanding lenders' warrants may be redeemed at the option of the Company at any time after they become exercisable
and prior to their expiration at a price of E0.01 per warrant provided that the last closing bid price of the ordinary
shares is equal to or exceeds £18.97 (2015: £18.97) on each of 20 consecutive trading days. The Company must give not less
than 30 days' notice of the redemption date. Each warrant may then be exercised by the warrant holder (in whole or any
part) at its option.
The holders are entitled to exercise their warrants for cash, assignment of an amount of outstanding principal/accrued
interest of any Global Debt (i.e. any debt owed to the registered holder by any Group company) or on a cashless basis where
the Company redeems the warrants. Any warrant either not exercised or tendered back to the Company by the redemption date
shall be cancelled on the books of the Company and have no further value except for the E0.01 redemption price.
These lenders' warrants are not traded in an active market and have therefore been valued using an extended Black-Scholes
valuation model to capture the embedded barrier feature. The key assumptions used to ascertain a value as at 31 December
2016 are:
- the share price as at 31 December 2016 of £7.35;
- volatility of 25%;
- the warrants are not adjusted for dividends; and
- the valuation incorporates the impact of amending some of the terms of the warrants on 8 May 2012.
The value of the warrants at the year end was £143,000 (2015: £100,000).
E4. Collateral arrangements
The Group receives and pledges collateral in the form of cash or non-cash assets in respect of stock lending transactions,
derivative contracts and reinsurance arrangements in order to reduce the credit risk of these transactions. The amount and
type of collateral required where the Group receives collateral depends on an assessment of the credit risk of the
counterparty.
Collateral received in the form of cash, where the Group has contractual rights to receive the cash flows generated, is
recognised as an asset in the statement of consolidated financial position with a corresponding liability for its
repayment. Non-cash collateral received is not recognised in the statement of consolidated financial position, unless the
counterparty defaults on its obligations under the relevant agreement.
Non-cash collateral pledged where the Group retains the contractual rights to receive the cash flows generated is not
derecognised from the statement of consolidated financial position, unless the Group defaults on its obligations under the
relevant agreement. Cash collateral pledged, where the counterparty has contractual rights to receive the cash flows
generated, is derecognised from the statement of consolidated financial position and a corresponding receivable is
recognised for its return.
E4.1 Financial instrument collateral arrangements
The Group has no financial assets and financial liabilities that have been offset in the statement of consolidated
financial position as at 31 December 2016 (2015: none).
The table below contains disclosures related to financial assets and financial liabilities recognised in the statement of
consolidated financial position that are subject to enforceable master netting arrangements or similar agreements. Such
agreements do not meet the criteria for offsetting in the statement of consolidated financial position as the Group has no
current legally enforceable right to offset recognised financial instruments. Furthermore, certain related assets received
as collateral under the netting arrangements will not be recognised in the statement of consolidated financial position as
the Group does not have permission to sell or re-pledge, except in the case of default. Details of the Group's collateral
arrangements in respect of these recognised assets and liabilities are provided below.
2016
Related amounts not offset
Financial assets Gross and net amounts of Financial instruments received Cash collateral received Derivative liabilities Net
recognised £m £m £m amount
financial assets £m
£m
OTC derivatives 2,927 820 1,628 683 (204)
Exchange traded derivatives 76 - - 4 72
Stock lending 446 474 - - (28)
Total 3,449 1,294 1,628 687 (160)
Related amounts not offset
Financial liabilities Gross and net amounts of recognised Financial instruments pledged Cash collateral pledged Derivative assets Net
financial liabilities £m £m £m amount
£m £m
OTC derivatives 1,543 420 205 683 235
Exchange traded derivatives 24 - 16 4 4
Total 1,567 420 221 687 239
2015
Related amounts not offset
Financial assets Gross and net amounts of recognised Financial instruments received Cash collateral received Derivative liabilities Net
financial assets £m £m £m amount
£m £m
OTC derivatives 1,483 259 725 447 52
Exchange traded derivatives 15 - - 4 11
Stock lending 254 272 - - (18)
Total 1,752 531 725 451 45
Related amounts not offset
Financial liabilities Gross and net amounts of recognised Financial instruments pledged Cash collateral pledged Derivative assets Net
financial liabilities £m £m £m amount
£m £m
OTC derivatives 1,325 455 283 447 140
Exchange traded derivatives 35 - 19 4 12
Total 1,360 455 302 451 152
E4.2 Derivative collateral arrangements
Assets accepted
It is the Group's practice to obtain collateral to mitigate the counterparty risk related to over-the-counter ('OTC')
derivatives usually in the form of cash or marketable financial instruments.
The fair value of financial assets accepted as collateral for OTC derivatives but not recognised in the statement of
consolidated financial position amounts to £820 million (2015: £259 million).
The amounts recognised as financial assets and liabilities from cash collateral received at 31 December 2016 are set out
below.
OTC derivatives
2016 2015
£m £m
Financial assets 1,628 725
Financial liability (1,628) (725)
The maximum exposure to credit risk in respect of OTC derivative assets is £2,927 million (2015: £1,483 million) of which
credit risk of £2,733 million (2015: £1,408 million) is mitigated by use of collateral arrangements (which are settled net
after taking account of any OTC derivative liabilities owed to the counterparty).
Credit risk on exchange traded derivative assets of £76 million (2015: £15 million) is mitigated through regular margining
and the protection offered by the exchange.
Assets pledged
The Group pledges collateral in respect of its OTC derivative liabilities. The value of assets pledged at 31 December 2016
in respect of OTC derivative liabilities of £1,543 million (2015: £1,325 million) amounted to £625 million (2015: £738
million).
E4.3 Stock lending collateral arrangements
Abbey Life, a Group company, and certain of the Group's consolidated collective investment schemes lend financial assets
held in their investment portfolios to other institutions.
The Group conducts stock lending with only well-established, reputable institutions in accordance with established market
conventions. The financial assets do not qualify for derecognition as the Group retains all the risks and rewards of the
transferred assets except for the voting rights.
It is the Group's practice to obtain collateral in stock lending transactions, usually in the form of cash or marketable
financial instruments.
The fair value of financial assets accepted as such collateral but not recognised in the statement of consolidated
financial position amounts to £474 million (2015: £272 million).
The maximum exposure to credit risk in respect of stock lending transactions is £446 million (2015: £254 million) of which
credit risk of £446 million (2015: £254 million) is mitigated through the use of collateral arrangements.
E4.4 Other collateral arrangements
Collateral has also been pledged and charges granted in respect of certain of the Group's borrowings. The details of these
arrangements are set out in note E5.
E5. Borrowings
The Group classifies the majority of its interest bearing borrowings as financial liabilities carried at amortised cost and
these are recognised initially at fair value less any attributable transaction costs. The difference between initial cost
and the redemption value is amortised through the consolidated income statement over the period of the borrowing using the
effective interest method.
Certain borrowings are designated upon initial recognition at fair value through profit or loss and measured at fair value
where doing so provides more meaningful information due to the reasons stated in the financial liabilities accounting
policy (see note E1). Transaction costs relating to borrowings designated upon initial recognition at fair value through
profit or loss are expensed as incurred.
Borrowings are classified as either policyholder or shareholder borrowings. Policyholder borrowings are those borrowings
where there is either no or limited shareholder exposure, for example, borrowings attributable to the Group's with-profit
operations.
Carrying value Fair value
2016 2015 2016 2015
£m £m £m £m
Limited recourse bonds 2022 7.59% (note a) 65 66 74 74
Property Reversions loan (note b) 183 194 183 194
£150 million term facility (note c) - 148 - 148
£100 million facility agreement (note c) - 99 - 99
Retrocession contracts (note d) 87 - 87 -
Total policyholder borrowings 335 507 344 515
£200 million 7.25% unsecured subordinated loan (note e) 167 158 207 212
£300 million senior unsecured bond (note f) 298 298 332 324
£450 million revolving credit facility (note g) - 443 - 450
£450 million amortising term loan (note g) - 199 - 200
£900 million unsecured revolving credit facility (note g) 843 - 850 -
£428 million subordinated loans (note h) 393 393 416 400
Total shareholder borrowings 1,701 1,491 1,805 1,586
Total borrowings 2,036 1,998 2,149 2,101
Amount due for settlement after 12 months 2,005 1,966
a. In 1998, Mutual Securitisation plc raised £260 million of capital through the securitisation of embedded value on a
block of existing unit-linked and unitised with-profit life and pension policies. The bonds were split between two classes,
which ranked pari passu and were listed on the Irish Stock Exchange. The £140 million 7.39% class A1 limited recourse bonds
matured in 2012 with no remaining outstanding principal. The £120 million 7.59% class A2 limited recourse bonds with an
outstanding principal of £72 million (2015: £83 million) have an average remaining life of 3 years and mature in 2022.
Phoenix life Assurance Limited ('PLAL') has provided collateral of £29 million (2015: £34 million) to provide security to
the holders of the recourse bonds in issue. During 2016, repayments totalling £11 million were made (2015: £11 million).
b. The Property Reversions loan from Santander UK plc ('Santander') was recognised in the consolidated financial
statements at fair value. It relates to the sale of Extra-Income Plan policies that Santander finances to the value of the
associated property reversions. As part of the arrangement Santander receives an amount calculated by reference to the
movement in the Halifax House Price Index and the Group is required to indemnify Santander against profits or losses
arising from mortality or surrender experience which differs from the basis used to calculate the reversion amount.
Repayment will be on a policy-by-policy basis and is expected to occur over the next 10 to 20 years. During 2016,
repayments totalling £27 million were made (2015: £27 million). Note G9 contains details of the assets that support this
loan.
c. In February 2016 the Group assessed that it no longer controlled UKCPT and consequently deconsolidated this group of
subsidiaries effective from this date (see note H3). As a result the UKCPT £150 million and £100 million policyholder
borrowings are no longer included within Group borrowings.
d. In July 2012, AXIA Insurance Limited ('AXIA') provided financing to Abbey Life, a Group company, for Abbey Life to in
turn provide the financing for the securitisation of the future surplus arising on a block of 1.7 million life insurance
policies originating from the wholly owned Spanish and Portuguese insurance subsidiaries of Banco Santander, S.A. (the
'Cedants'). This transaction was executed in the form of a reinsurance and retrocession arrangement that, taken as a whole,
does not meet the definition of an insurance contract under the Group's accounting policies (see note E3.2). Abbey Life
received an upfront reinsurance commission from AXIA and makes monthly repayments based on the surplus emerging from the
securitised policies as defined in the contracts. The repayments comprise a minimum guaranteed surplus amount and a share
of any excess surplus, net of certain other amounts. Any excess amount serves to accelerate the repayment of the principal.
Repayments are contingent on the receipt of payments due from the Cedants. Repayment of the loan principal is expected to
occur by 2021. The contracts are recognised in the consolidated financial statements at fair value.
e. Scottish Mutual Assurance Limited issued £200 million 7.25% undated, unsecured subordinated loan notes on 23 July 2001
('PLL subordinated debt'). The earliest repayment date of the notes is 25 March 2021 and thereafter on each fifth
anniversary so long as the notes are outstanding. With effect from 1 January 2009, following a Part VII transfer, these
loan notes were transferred into the shareholder fund of Phoenix Life Limited ('PLL'). In the event of the
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