REG - Phoenix Grp Hldgs - Phoenix Group Holdings - 2016 Annual Results <Origin Href="QuoteRef">PHNX.L</Origin> - Part 2
20/03/2017 07:07
- Part 2: For the preceding part double click ID:nRST8776Za
Investment management services are provided to the life companies by a number of external asset management companies.
Management Services Companies
The Group's management services companies are charged with the efficient provision of financial and risk management
services, sourcing strategies and delivering all administrative services required by the Group's life companies. By using
management services companies, the life companies benefit from price certainty and a transfer of some operational risks.
In addition to the services above, one of the management service companies, AXA Wealth Services Limited, also provides
distribution services for SunLife, the over 50s protection business.
Outsource Partners
A key role of the management service companies is the management of relationships with the outsource partners on behalf of
the life companies. In the absence of further acquisitions, the number of policies held by the Group gradually decline over
time and the fixed cost base of our operations as a proportion of policies will increase. Our management services team
manages this risk by putting in place long-term arrangements for third party policy administration. By paying a fixed price
per policy to our outsource partners, we reduce this fixed cost element of our operations and convert to a variable cost
structure. This allows our management services companies to generate profits by managing costs efficiently.
These outsource partners have scale and common processes, often across multiple clients, which provide several benefits for
the Group, including reducing investment requirements, improving the technology used within our administrative capability
and reducing our operational risk.
Specialist roles such as finance, actuarial, information technology, risk and compliance and oversight of the outsource
partners are retained in-house, ensuring that Phoenix Life retains full control over the core capabilities necessary to
manage and integrate closed life funds.
"The Phoenix Way" is a consistent framework applied across the Group for the efficient and effective structuring,
integration and management of closed life funds. This framework reduces risk, complexity and cost, improves investment
performance, enhances customer service through efficient cooperation with the Group's outsourced partners and underpins
achievement of our strategic priorities.
"The Phoenix Way" comprises of four key areas:
OPERATIONAL MANAGEMENT
Standardising, streamlining and innovating the key processes and platforms across the Group improves efficiency and
generates value.
RISK MANAGEMENT
Managing and mitigating risk within appetite and exercising robust governance supports policyholder security and delivers
the Group's strategy.
RESTRUCTURING
Simplifying the Group's operating structure through life company consolidation and fund mergers reduces complexity and
releases capital.
EFFECTIVE PARTNERSHIPS
Utilising external outsource partners and fund managers with proven track records provides access to expert knowledge and
delivers a scalable cost base, maximising returns.
OUR STRATEGY AND KPIS
We have four areas of strategic focus which support the fulfilment of our mission and the realisation of our vision. Our
initiatives and key performance indicators demonstrate how we have delivered against these strategic areas.
Improving customer outcomes is central to our vision of being the saver-friendly 'industry solution' for closed life
funds.
IMPROVE CUSTOMER OUTCOMES
We have six key areas of focus related to our customer offering:
- Security: ensuring all policy promises and guarantees are delivered.
- Improving value and effective with-profit fund run-off: through accelerating estate distribution where possible and
providing appropriate investment exposure.
- Effective service delivery: using our outsourced model to leverage expertise and ensure costs run-off in line with
policy volumes.
- Clear and effective communication: recognising the importance of clarity and simplicity for what can be complex
products.
- Product governance: including a rolling review of our products to ensure they continue to deliver appropriate
outcomes for our customers.
- Customer journey: improving customer experience wherever possible.
KEY INITIATIVES AND PROGRESS IN 2016
- We have implemented a full upgrade of the Phoenix Life website in order to deliver a fully responsive and engaging
platform. Our changes ensure that our website adapts, resizing and rearranging itself to a customer-friendly format based
on the size of the device being used.
- We have also digitised parts of the customer journey which enables those customers with funds under £10,000 to
encash their small pots online.
- We have created a forum for a group of our customers to provide us direct feedback on a range of topics. This has
led to improving the clarity of our communications, including input into the changes we have made to our digital offering.
- We have joined the ABI's pension dashboard initiative. We believe this important industry initiative will help both
existing and new customers keep track of their policies and be better prepared for their retirement as a result.
- Our strong customer-focused culture is further supported by decisions made by the independent complaints
adjudicator, the Financial Ombudsman Service ('FOS'). For FOS decisions in the year, the overturn rate of 18% is
significantly below the industry average rate of 30%.
- We have again achieved a positive customer satisfaction score based on the results of the satisfaction survey
managed by Ipsos MORI (an external research firm). Customers surveyed were asked to give a satisfaction rating of between 1
and 5 to a number of questions asked (with a rating of 4 or 5 regarded as satisfied) and 91.2% of all questions scored a
rating of 4 or above.
PRIORITIES FOR 2017
- Making ongoing improvements to ensure that we are continuing to provide an effective service for all our
policyholders, including the delivery of digital journeys in key areas.
- Despite many of our products being long term in nature, we will continue to look for options for customers who may
no longer have a need for their product.
- Continue to ensure that our products deliver appropriate outcomes for our customers.
- Further improvements of customer communications with focus on ensuring that customers are provided with more
information to help them in making fully informed choices.
- For the minority of customers who complain, we will continue to ensure that the process of complaining remains a
straightforward, transparent and fair process, with particular focus on the speed of resolution and the quality of our
responses.
How we measure delivery (KPIs exclude the acquired AXA and Abbey Life businesses)
CUSTOMER SATISFACTION SCORE
91.2%2015: 91.1%*
2014 91.3%*
2015 91.1%*
2016 91.2%
91.2%
Why is it important?
This is an externally calculated measure of how satisfied customers are with Phoenix's servicing proposition.
ANALYSIS
The Group achieved a satisfaction score of 91.2% reflecting our commitment to ensuring customers are satisfied with our
products and services.
Target
To maintain a customer satisfaction score of 90%.
* 2014 and 2015 scores have been updated to reflect only customers scoring 4 or above.
FOS OVERTURN RATE
18%2015: 18%
2013 21%
2014 21%
2015 18%
2016 18%
18%
Why is it important?
This is an independent view of how firms are handling complaints. It provides us with an opportunity to review and adjust
our complaint handling proposition in line with best industry practice.
ANALYSIS
The FOS overturn rate of 18% is significantly below the industry average of 30%.
Target
To maintain a FOS overturn target of less than the industry average of 30%.
SPEED OF PENSION TRANSFER PAYOUTS - ORIGO
11.31 days2015: 10.97 days
2013 10.88
2014 9.83
2015 10.97
2016 11.31
11.31
Why is it important?
This is a recognised industry measure for the speed of processing Pension Transfers, Open Market Options and Immediate
Vesting Personal Pensions. It allows us to benchmark performance and our overall servicing and claims proposition against
our peers.
ANALYSIS
The Group's pension transfer times are better than the industry target.
Target
12 days in line with the industry stated target for Origo Pension Transfers.
In order to drive value, the Group looks to identify and undertake management actions, which increase and accelerate cash
flows or enhance value.
DRIVE VALUE
These actions are undertaken across four areas: operational management, risk management, restructuring and effective
partnerships. There are significant opportunities to increase and accelerate cash flows through the continued
implementation of "The Phoenix Way" which reduces complexity and cost and optimises risk, which in turn maximises the
potential for value creation.
With the exception of the SunLife business acquired during 2016, the life companies are closed and generally do not write
new business, although they accept additional policyholder contributions on in-force policies and allow pension savings
plans to be reinvested at maturity into annuities. The closed life funds provide predictable fund maturity and liability
profiles, creating stable long-term cash flows for distribution to shareholders and repayment of outstanding debt.
Additional value can be generated from further acquisitions of closed life books of business.
KEY INITIATIVES AND PROGRESS IN 2016
- In line with our growth and acquisition strategy, we completed the acquisition of AXA Wealth's pension and
protection businesses on 1 November 2016.
- As at the end of 2016, £117 million of cash flow was delivered from the acquired AXA businesses, reflecting the
benefits of offsetting effects of AXA's mortality exposure against Phoenix's existing longevity exposure on its annuity
business. To date, further cash flows of £165 million have been delivered in 2017.
- On 30 December 2016, we completed the acquisition of Abbey Life from Deustche Bank.
- Despite a challenging economic climate, the Group delivered £486 million in cash generation in the period against a
target of £350 million to £450 million. This includes £117 million from the acquired AXA business.
- The Group continued to explore investment opportunities which look to maximise value whilst remaining capital
efficient. During 2016, this has included investment in equity release mortgages as well as more innovative ways to attract
high yield assets such as total return swaps and local authority loans.
- In December 2016, the Group completed the pension buy-in under which Phoenix Life insured pensions in payment from
the PGL pension scheme. This transaction provides the Group with potential for further value creation through investing
assets in line with the Group's strategic asset allocation.
- We continued to streamline and simplify the Group's actuarial modelling, including the alignment of our IFRS and
Solvency II reserving methodologies, in order to improve efficiency and generate value.
PRIORITIES FOR 2017
Focus on the smooth transition and efficient integration of the acquired AXA and Abbey Life businesses to deliver planned
synergies whilst providing high quality of service to policyholders.
Deliver between £13 million and £15 million per year of cost savings from the acquired AXA businesses.
Explore further investment opportunities in higher yielding assets for example commercial real estate and additional
equity release mortgages.
Seek further closed life fund acquisitions.
How we measure delivery
OPERATING COMPANIES' CASH GENERATION
£486m2015: £225m
2012 690
2013 817
2014 567
2015 225
2016 486
486
Why is it important?
Operating companies cash generation represents cash remitted by the Group's operating companies to the holding companies.
Maintaining strong cash flow delivery underpins debt servicing and repayment as well as shareholder dividends.
ANALYSIS
Cash remitted reflects the generation of Free Surplus within the life companies and the benefit of management actions
implemented in the period.
Cash generation in 2016 was £486 million, of which £117 million arose from the AXA acquisition. The Group met its full year
cash generation target for 2016 of £350 million to £450 million.
Target
To generate cash flows of £2.8 billion between 2016 and 2020, of which £486 million has been generated in 2016.
A further £4.4 billion of cash generation, excluding the impact of management actions, is expected from 2021 onwards. More
details are included in the Business Review section.
OPERATING PROFIT
£351m2015: £324m
2012 429
2013 439
2014 483
2015 324
2016 351
351
Why is it important?
Operating profit is a non-GAAP measure used by management and is considered a more representative measure of performance
than IFRS profit or loss after tax as it provides long-term performance information unaffected by short-term economic
volatility.
A reconciliation of operating profit to the IFRS loss after tax of £(100) million (2015: £249 million, profit) is included
in the Business Review section.
ANALYSIS
Operating profit has increased by £27 million principally due to the impact of higher management actions compared to the
previous period, partly offset by the adverse impacts of actuarial assumption strengthening in light of the continued low
interest rate environment.
We continue to focus on the effective management of our risks and the efficient allocation of capital against those risks.
MANAGE CAPITAL
We focus on optimising our capital structure while addressing the diverse needs of various stakeholders, including
policyholders, shareholders, lending banks, bondholders and regulators.
We aim to ensure that unrewarded exposure to market volatility is minimised or the risks from market movements are managed
through hedging.
In addition, regular re-balancing of asset and liability positions is required to ensure that only those assets which
deliver appropriate risk-adjusted returns are held within life funds, taking into account any policyholder guarantees.
KEY INITIATIVES AND PROGRESS IN 2016
- We completed a Part VII transfer of a block of with-profit annuities to ReAssure Life Limited delivering Solvency II
surplus benefits from the release of expense reserves and a decrease in capital requirements for counterparty credit
default and expense risks.
- We entered into a £2.0 billion longevity swap on a portfolio of immediate annuities with an external reinsurer,
realising Solvency II surplus benefits as a result of a reduction in longevity risk capital required, thereby increasing
the financial resilience of the Group.
- We have continued to enhance the Group's capital position under Solvency II by further optimising our Matching
Adjustment portfolios delivering Solvency II surplus benefits.
- We have actively continued hedging our market risks in response to ongoing market turbulence, with the Group's
capital position remaining resilient despite the continued uncertainties.
- We agreed a revised £650 million unsecured revolving credit facility in March 2016, with no mandatory or target
amortisation payments, offering the Group greater flexibility to make acquisitions.
- The AXA and Abbey Life acquisitions were financed in a capital efficient manner, balancing the debt/equity structure
in line with the expected cash generation from the acquired businesses. The AXA acquisition was funded by a combination of
the net proceeds from an equity placing and a new short-term debt facility that was fully repaid within two months of
completion. The Abbey Life acquisition was funded through a fully underwritten rights issue and a new short-term bank
facility which has since been refinanced into the £650 million unsecured revolving credit facility to create an enlarged
revolving credit facility of £900 million.
PRIORITIES FOR 2017
Incorporation of the acquired businesses within the Group's Solvency II Internal Model, including the application of
Transitional Measures. We obtained the PRA's approval to incorporate the acquired AXA businesses into the Group's Internal
Model in March 2017. An application to include the acquired Abbey Life business in the Group's Internal Model will be made
during the second half of 2017.
Undertaking a Funds Merger of the acquired AXA businesses into Phoenix Life Limited.
Continued simplification of the Group's corporate structure, including the Group's intention to put in place a new
UK-registered holding company for the Group during 2018. This is expected to provide the Group with a streamlined and cost
efficient governance structure as well as greater clarity for the Group's stakeholders.
Implementation of new management actions to enhance the Group's capital position.
How we measure delivery
SOLVENCY II SURPLUS (Pro forma)
£1.9bn2015: £1.3bn (actual)
2015 1.3
2016 1.9
1.9
Why is it important?
The Solvency II surplus is the regulatory assessment of capital adequacy at the PLHL level.
Cash generation is underpinned by the Phoenix Life Free Surplus, which represents the Life Companies' Solvency II surplus
in excess of the Board approved capital management policies.
ANALYSIS
Our pro forma PLHL Solvency II surplus of £1.9 billion has increased due to surplus emergence, management actions
undertaken during the period and the impact of the acquisitions, partly offset by the adverse impacts of assumptions and
methodology changes and economic movements.
SHAREHOLDER CAPITAL COVERAGE RATIO (Pro forma)
170%2015: 154% (actual)
2015 154
2016 170
170
Why is it important?
The Shareholder Capital Coverage Ratio demonstrates the extent to which shareholders' eligible Own Funds cover the Solvency
Capital Requirements.
It is defined as the ratio of the Group Own Funds to Group SCR, after adjusting to exclude amounts relating to unsupported
with-profit funds and Group pension schemes.
ANALYSIS
A pro forma coverage ratio of 170% represents a robust and resilient capital position and reflects the increase in the PLHL
Solvency II surplus in the period.
pro forma Solvency II capital position
The Group's Solvency II capital adequacy assessment is undertaken at the level of the highest EEA insurance group holding
company which is Phoenix Life Holdings Limited ('PLHL').
The PLHL sub group excludes holding companies above PLHL in the Group structure whose principal activity is the issue of
debt securities for the purposes of financing fellow Group undertakings.
Since the end of 2016, certain actions have been undertaken which are considered to have had a significant impact on the
Group's Solvency II position. These actions comprise:
- the issuance in January 2017, of a £300 million subordinated Tier 3 bond that qualifies as Solvency II capital, the
proceeds of which have been used to reduce the Group's outstanding senior bank debt; and
- receipt of the PRA's approval in March 2017 to include the acquired AXA businesses within the scope of the Group's
Solvency II Internal Model.
In order to illustrate the impacts of the above, pro forma adjustments have been made to the estimated Solvency II metrics
on a basis that assumes these actions took place on 31 December 2016. This pro forma position is considered to provide a
more meaningful analysis of the Group's capital position and its key sensitivities.
Both the estimated and the pro forma Solvency II metrics included in the Annual Report and Accounts reflect the impact of a
recalculation of the Transitional Measures on Technical Provisions ('TMTP') and the run-off of TMTP since 1 January 2016.
engage people
An engaged workforce, one that feels committed to the goals of the organisation, is fundamental to the success of the
Group. In 2016, we increased our focus on ensuring our people were challenged, motivated and rewarded through opportunities
for growth, both professionally and personally.
For the fifth consecutive year, we were listed as one of the UK's Top Employers, an accreditation awarded to the best
companies to work for in the UK.
Our employee engagement index has increased to 81%, a 3% increase on the scores we achieved in 2014 and 2015. This index is
an aggregation of scores against a number of questions considered the most important for staff engagement and was completed
by 92% of employees.
KEY INITIATIVES AND PROGRESS IN 2016
We continued to grow our learning & development offering for all employees with an increased emphasis on management and
leadership development.
Following the success of our Open University Executive Education programme in 2015, we supported a second cohort of 16
people who successfully completed the programme in 2016. The delegates worked on current business challenges and presented
their findings and recommendations to the Executive Committee in October.
- We received and supported just over 1,000 learning requests that included professional qualifications, continuing
professional development, conferences, team building and coaching/mentoring.
- We continued to utilise our Corporate Responsibility agenda to provide opportunities for skills development and team
building.
- We launched a self-nominating Talent Programme within Phoenix Life. This unique self-nomination approach to talent
aims to identify and develop our own talent across middle management creating a transparent and robust process.
- Our new intranet, launched in 2016, provides employees with a modern communication and collaboration platform. Our
work on the intranet was rewarded with the Gold Award in the category 'Best Intranet' at the 2016 Digital Impact Awards.
- Our Corporate Responsibility agenda continued to play a central part in the engagement of our people and during 2016
the programme was re-launched with a specific focus on wellbeing. The financial, physical and mental wellbeing of our
employees is at the heart of our strategy to develop initiatives that benefit our staff, policyholders and our community
partners.
- Employees engaged in a large number of charitable and community initiatives this year, contributing a total of 2,840
volunteering hours, a 46% increase on 2015.
- Staff-led fund raising activities in 2016 raised over £212,000 for both our corporate partners and for other
charities. The Group chose to extend our corporate charity partnership with Midlands Air Ambulance Charity and London's Air
Ambulance for a further three years and, as we reach the half way mark in the six year partnership, we have so far raised
over £550,000.
- Participation figures for Flexit, the Phoenix Group Flexible Benefits scheme, have increased 3% to 89% from the
previous year. Our new initiative 'Pennies from Heaven', through which staff can donate their outstanding pence from
monthly net salary to our corporate charity has, already seen 35% participation.
- The Group signed the HM Treasury Women in Finance Charter and has publicly committed to the following targets:
- Minimum of 30% of our top 100 roles (as defined by base salary) to be occupied by women by end 2018.
- Minimum of 40% of successors to be women by end 2018.
- Group-wide gender pay gap to be less than, or equal to, 22% of the median and mean across all employees.
PRIORITIES FOR 2017
- Continue to attract and retain the very best talent by focusing on developing our people and strengthening our
internal succession pipeline through targeted management and leadership development interventions, with particular emphasis
on increasing the number of high potential female managers undertaking formal management and development activity. There is
a formal review of succession plans semi-annually which ensures a continual appraisal of readiness both for emergency
successors as well as longer-term strategic planning, this uses the disciplines of up to 6 months and 6-24 months readiness
for internal candidates. All identified successors receive targeted development to enable them to progress.
- Prioritise our learning and development by increasing managerial strength and breadth.
- Utilise the Apprenticeship Levy to recruit Actuarial and Accountancy apprentices. We intend to work in partnership
with local colleges to attract A-level individuals and graduates to Phoenix.
- Extend the Diversity and Inclusion programme, embedding changes to existing practices to deliver a diverse and
inclusive workforce.
- Maintain support to our communities through employee volunteering and fund raising and engagement with our community
projects.
- Support community activities through continued focus and development of our long-term partnerships with Ark Kings
Academy, Midlands Air Ambulance Charity and London's Air Ambulance.
How we measure delivery
EMPLOYEE ENGAGEMENT INDEX
81%2015: 78%
2012 73%
2013 76%
2014 78%
2015 78%
2016 81%
81%
Why is it important?
We aim to ensure employees understand the purpose of their role and feel that their contribution is valued. The index
provides an indicator of how well we are performing against these aims.
ANALYSIS
The Group has increased its employee engagement index by 3% to 81%.
Target
To maintain an employee engagement index above 72%.
2016 2015
Total workforce 1,3011 741
Male 708 (54%)1 433 (58%)
Female 593 (46%)1 308 (42%)
Directors (includes Non-Executive Directors) 11 10
Male 8 8
Female 3 2
Executive Commitee2 6 6
Male 5 5
Female 1 1
Workforce that is of Black, Asian or Minority Ethnic background 1183 115
1 Includes 524 staff (262 male, and 262 female) in connection with the acquired AXA and Abbey Life businesses.
2 The number of Executive Committee members excludes Executive Committee members who are also members of the Board of
Directors. The 2015 figures have been restated accordingly.
3 Does not include workforce from the acquired AXA and Abbey Life businesses.
Business review
"the achievement of management actions has driven a robust set of financial results in 2016."
JAMES McCONVILLE
GROUP FINANCE DIRECTOR
The Group has met its key financial targets during 2016.
Completion of the acquisitions of the AXA and Abbey Life businesses has strengthened the Group's capital position and
offers a significant increase in the Group's cash generation capability.
Our strategy has historically focused on holding companies cash flows and this remains the case under the new Solvency II
framework, with the Group's cash generation being driven by the Free Surplus generation of Phoenix Life.
The Group has continued to meet financial targets against a backdrop of volatile market movements during 2016, reflecting
political uncertainties. Swap yields fell significantly across all durations with the 15-year swap rate decreasing by c.73
bps during the period. Credit spreads narrowed across ratings and implied future inflation rates increased during the year.
The FTSE All Share Index closed 16.8% ahead of the 31 December 2015 position. We continue to take management actions to
mitigate the effects of market volatility to ensure that the Group maintains a stable capital position. The falling
long-term interest rates in particular has meant that management actions have been important in driving cash generation
during the year.
The continued low interest rate environment has also triggered changes to the Group's expectations of persistency for
products with valuable guarantees and this has adversely impacted the Group's results in the period. This has been more
than offset by the delivery of management actions and the positive impact of amendments to IFRS actuarial reserving
estimates and assumptions to more closely align to the Solvency II requirements, leading to an increase in the Group's
operating profit.
The economic volatility experienced has adversely impacted the IFRS result for the year in response to certain market
factors where the Group's hedging programme is optimised to the Solvency II capital position. When combined with the
one-off costs associated with acquisition and integration activities, these factors have generated an IFRS loss after tax
for the year.
Cash generation
£486m
Operating companies' cash generation
Maintaining strong cash generation delivery underpins debt servicing and repayments as well as shareholder dividends.
With cash generation of £486 million, of which £117 million is from the acquired AXA business, the Group has achieved its
full year cash generation target of £350 million to £450 million.
HOLDING COMPANIES' CASH FLOWS
The statement of cash flows prepared in accordance with IFRS combines cash flows relating to shareholders and cash flows
relating to policyholders, but the practical management of cash within the Group maintains a distinction between the two.
For this reason, the following analysis of cash flows focuses on the holding companies' cash flows which reflect cash flows
relating only to shareholders and which are, therefore, more representative of the cash that could potentially be
distributed as dividends or used for the prepayment of debt, the payment of debt interest, Group expenses and pension
contributions (subject to the Group's liquidity policy, regulatory and other restrictions on the availability and
transferability of capital). This cash flow analysis reflects the cash paid by the operating companies to the holding
companies as well as the uses of those cash receipts.
Year ended Year ended
31 December 2016 31 December 2015
£m £m
Cash and cash equivalents at 1 January 706 988
Operating companies' cash generation:
Cash receipts from Phoenix Life 486 225
Total cash receipts1 486 225
Uses of cash:
Operating expenses (33) (26)
Pension scheme contributions (55) (55)
Debt interest (58) (91)
Total recurring outflows (146) (172)
Non-recurring outflows (141) (25)
Uses of cash before debt repayments and shareholder dividend (287) (197)
Debt repayments (239) (190)
Shareholder dividend (126) (120)
Total uses of cash (652) (507)
Equity issuance (net of fees) 908 -
Debt issuance (net of fees) 428 -
Cost of acquisitions (1,306) -
Cash and cash equivalents at 31 December2 570 706
1 Includes amounts received by the holding companies in respect of tax losses surrendered to the operating companies
of £84 million (2015: £71 million).
2 The required prudential cash buffer of £150 million at 31 December 2015 is no longer required.
CASH RECEIPTS
Cash remitted by the operating companies was £486 million (2015: £225 million) including £117 million generated from the
acquired AXA businesses.
Of the £486 million, management actions accounted for £265 million.
RECURRING CASH OUTFLOWS
The operating expenses of £33 million (2015: £26 million) principally comprise corporate office costs, net of income earned
on holding company cash and investment balances. The increase compared to prior year is due to lower interest earned on
bank balances and excess cash balances being used to repay debt.
Pension scheme contributions of £55 million (2015: £55 million) are in line with the latest triennial funding agreements
agreed during 2016.
Debt interest decreased to £58 million (2015: £91 million) reflecting lower principal balances following repayments made in
2015. The 2015 debt interest included payment of the £20 million coupon on the Tier 1 bonds prior to their exchange for the
PGH Capital subordinated notes.
NON-RECURRING CASH OUTFLOWS
Non-recurring cash outflows of £141 million are significantly higher compared to the prior period reflecting costs
associated with hedging and acquisition activity undertaken during 2016. Outflows also include £68 million of capital
support provided to a subsidiary of the Group, PA (GI) Limited, with regard to the cost of providing for potential claims
and associated capital requirements relating to creditor insurance underwritten prior to 2006.
DEBT REPAYMENTS AND SHAREHOLDER DIVIDEND
Total debt repayments of £239 million in 2016 were in respect of the repayment of the £182 million bank debt used to
finance the acquisition of the AXA business, together with £50 million of the Group's revolving credit facility. The
remaining £6 million of outstanding Tier 1 bonds were also redeemed in March 2016.
The shareholder dividend of £126 million comprises the payment of the 2015 final dividend of £60 million and the payment of
the 2016 interim dividend of £66 million, reflecting the impact of shares issued in May 2016 as part of the AXA
acquisition.
EQUITY issuance (NET OF FEES)
The £908 million is in relation to proceeds, net of fees of £22 million, from the equity placement and the rights issue
associated with the financing of the respective acquisitions of the AXA and Abbey Life businesses.
Debt issuance (net of fees)
£428 million of debt , net of fees of £4 million, was issued in 2016 comprising the £182 million short-term debt facility
in connection with the acquisition of the AXA business, which was fully repaid during the year, and the £250 million
short-term bank facility issued in connection with the Abbey Life acquisition. This facility has subsequently been
refinanced with the Group's lending banks into an enlarged revolving credit facility of £900 million.
cost of acquisitions
The £1,306 million comprise:
- £933 million in connection with the acquisition of Abbey Life; and
- £373 million for the acquisition of AXA Wealth's pensions and protection businesses.
TARGET CASH FLOWS
The five-year cumulative target cash flow for 2016 to 2020 is £2.8 billion, of which £486 million has been generated in
2016.
The resilience of the cash generation target is demonstrated by the following illustrative stress testing1:
1 January 2016 to
31 December 2020
£bn
Base case five-year target 2.8
Following a 20% fall in equity markets 2.8
Following a 15% fall in property values 2.7
Following a 55bps interest rates rise2 3.0
Following a 80bps interest rates fall2 2.6
Following credit spread widening3 2.7
Following 6% decrease in annuitant mortality rates4 2.5
Following a 10% increase in assurance mortality rates 2.7
Following a 10% change in lapse rates5 2.7
1 Assumes stress occurs on 1 January 2017 and there is no market recovery during the cash generation target period.
2 Assumes recalculation of Transitionals (subject to PRA approval).
3 Credit stress equivalent to an average 150bps spread widening across ratings, 10% of which is due to
defaults/downgrades.
4 Equivalent of 6 months increase in longevity applied to the annuity portfolio.
5 Assumes most onerous impact of a 10% increase/decrease in lapse rates across different product groups.
expected cash flows after 2020
The expected cash generation post 2020 is expected to be £4.4 billion. This assumes no management actions after 2020 and
reflects the net impact arising from the run-off of the Risk Margin and Transitionals up to 2032 (see page 31).
Capital management
£1.9bn
PLHL Solvency II surplus (pro forma)
170%
PLHL Shareholder Capital Coverage Ratio (pro forma)
capital management framework
The Group's capital management framework is designed to achieve the following objectives:
- to provide appropriate security for policyholders and meet all regulatory capital requirements under the Solvency II
regime while not retaining unnecessary excess capital.
- to ensure sufficient liquidity to meet obligations to policyholders and other creditors.
- to optimise the Fitch Rating's financial leverage ratio to maintain an investment grade credit rating.
- to support the Group's progress in putting in place a new UK-registered holding company for the Group.
- to maintain a stable and sustainable dividend policy.
The framework comprises a suite of capital management policies that govern the allocation of capital throughout the Group
to achieve these objectives under a range of stress conditions. The policy suite is defined with reference to policyholder
security, creditor obligations, dividend policy and regulatory capital requirements.
PLHL SOLVENCY II capital position (pro forma)
In accordance with European Insurance and Occupational Pension Authority ('EIOPA') and PRA requirements, from 1 January
2016 the Group undertakes a Solvency II capital adequacy assessment at the level of the highest EEA insurance group holding
company, which is PLHL.
This involves a valuation in line with Solvency II principles of PLHL's Own Funds and a risk-based assessment of PLHL's
Solvency Capital Requirements ('SCR').
PLHL's Own Funds differ materially from the Group's IFRS equity for a number of reasons, including the exclusion of the
Group's bank debt and the senior bond held outside of the PLHL sub group, the recognition of future shareholder transfers
from the with-profit funds (but not the shareholder share of the estate), the treatment of certain subordinated debt
instruments as capital items, and a number of valuation differences, most notably with regard to insurance contract
liabilities and intangible assets.
The SCR is calibrated so that the likelihood of a loss exceeding the SCR is less than 0.5% over one year. This ensures that
capital is sufficient to withstand a broadly '1 in 200 year event'.
In December 2015, the Group was granted the PRA's approval for use of its Internal Model to assess capital requirements.
The capital assessment of the acquired AXA and Abbey Life businesses remained on a Standard Formula basis as at 31 December
2016. Therefore, the estimated Solvency II position of PLHL at that date is based partially on the Group's Internal Model
and partially on Standard Formula.
The PLHL Solvency II surplus position at 31 December 2016 is set out in the table below. As explained in detail on page 23,
a pro forma PLHL Solvency II surplus position has also been presented to illustrate the impacts of the issuance of a
Solvency II qualifying Tier 3 bond in January 2017 and the receipt of the PRA's approval in March 2017 to include the
acquired AXA businesses within the scope of the Group's Internal Model.
Own Funds1£bn SCR2 Surplus3
£bn £bn
Estimated position4 6.7 (5.0) 1.7
Adjustments:
Impact of the Tier 3 bond 0.1 - 0.1
Impact of incorporating the AXA businesses in the Group's Internal Model - 0.1 0.1
Pro forma position at 31 December 20164 6.8 (4.9) 1.9
1 Own Funds includes the net assets of the life and holding companies calculated under Solvency II rules, pension
scheme surpluses calculated on an IAS19 basis not exceeding the holding companies' contribution to the Group SCR and
qualifying subordinated liabilities. It is stated net of restrictions for assets which are non-transferable and fungible
between Group companies within a period of nine months.
2 The SCR reflects the risks and obligations to which the PLHL Group is exposed.
3 The pro forma surplus equates to a coverage ratio of 140% as at 31 December 2016.
4 The estimated and pro forma Solvency II positions include the adverse impact of an assumed recalculation of
Transitional Measures on Technical Provisions ('TMTP') and reflect the run-off of TMTP since 1 January 2016. See page 23
for more details.
5 The actual Solvency II position at 31 December 2015 comprised Own Funds of £5.7 billion and SCR of £4.4 billion
equating to a coverage ratio of 130%.
PLHL SOLVENCY II SURPLUS (pro forma)
The pro forma Solvency II surplus at 31 December 2016 of £1.9 billion (2015: £1.3 billion, actual) has increased by £0.6
billion as a result of:
- £0.2 billion of surplus emerging from the life companies (excluding the acquired AXA and Abbey Life businesses) and
the expected run-off of capital requirements;
- achieved management actions of £0.5 billion including completion of a Part VII transfer of a portfolio of annuities,
the execution of a longevity swap with an external reinsurer, and the extension of Matching Adjustment benefits to new
asset classes;
- £0.3 billion impact of the acquisitions completed during the period;
- £0.1 billion pro forma benefits of including the acquired AXA businesses within the scope of the Group's Internal
Model; and
- issuance of the new Tier 3 bond which contributed £0.1 billion to the Solvency II surplus on a pro forma basis;
partly offset by,
- £(0.2) billion adverse impact of actuarial assumption strengthening, experience and modelling changes;
- dividend payments and financing costs of £(0.2) billion; and
- the adverse impact of market and other movements of £(0.2) billion, primarily falling yields which have had an
adverse impact on risk capital in the period.
The Solvency II surplus excludes the surpluses arising in the Group's unsupported with-profit funds and the PGL Pension
Scheme of £0.4 billion. In the calculation of the PLHL Solvency II surplus, the SCR of the with-profit funds and the PGL
Pension Scheme is included, but the related Own Funds are recognised only to a maximum of the SCR amount. Surpluses that
arise in with-profit funds and the PGL Pension Scheme, whilst not included in the PLHL Solvency II surplus, are available
to absorb economic shocks. This means that the headline surplus is resilient to economic stresses.
Unsupported with-profit funds and the PGL Pension Scheme consist of £2.4 billion of Own Funds and £2.0 billion of SCR. Of
the £2.4 billion of Own Funds, £1.8 billion consists of estate within the unsupported with-profit funds and £0.6 billion of
Own Funds within the PGL Pension Scheme.
shareholder capital coverage ratio (pro forma)
Excluding the SCR and Own Funds relating to the unsupported with-profit funds and the PGL Pension Scheme, the pro forma
Solvency II Shareholder Capital Coverage ratio is 170% as at 31 December 2016 (2015: 154%, actual). The Pearl Group Staff
Pension Scheme and the Abbey Life Staff Pension Schemes did not cover their SCR as at 31 December 2016 and the related Own
Funds and SCR are therefore included in the Shareholder Capital Coverage ratio calculation.
SHAREHOLDER CAPITAL COVERAGE RATIO
FY16 (pro forma) 170%
Own funds (£bn) 4.8
SCR (£bn) 2.9
Surplus (£bn) 1.9
FY15 (actual) 154%
Own funds (£bn) 3.8
SCR (£bn) 2.5
Surplus (£bn) 1.3
1.3
The pro forma shareholder capital position is further analysed between the contributions of the holding companies and the
life companies as follows:
BREAKDOWN OF SHAREHOLDER CAPITAL POSITION
Own funds
Phoenix Life 4.0
Holding company 0.8
SCR
Phoenix Life 2.6
Holding company 0.3
Surplus
Phoenix Life 1.4
Holding Company 0.5
0.5
Own funds within the holding companies of £0.8 billion (2015: £1.0 billion) principally comprises cash and other financial
assets held in the holding companies.
Own Funds within Phoenix Life of £4.0 billion (2015: £2.8 billion) comprise £1.1 billion (2015: £1.0 billion) in the
shareholders' funds, £1.8 billion (2015: £0.7 billion) in the non-profit funds, £0.6 billion (2015: £0.7 billion) in the
supported with-profit funds and future shareholder transfers of £0.5 billion (2015: £0.4 billion).
Phoenix life free surplus (Pro forma)
Phoenix Life Free Surplus represents the Solvency II surplus of the Life Companies that is in excess of their
Board-approved capital management policies.
As at 31 December 2016, the pro forma Phoenix Life Free Surplus is £0.7 billion (2015: £0.1 billion). The table below
analyses the movement during the period:
Year ended
31 December 2016
£bn
Opening Free Surplus (actual) 0.1
Surplus generation and expected run-off of capital requirements 0.2
Management actions 0.6
Impact of acquisitions 0.3
Assumptions, experience and modelling changes (0.1)
Impact of economic and other variances (0.2)
Free Surplus before cash remittances 0.9
Cash remittances to holding companies1 (0.4)
Closing Free Surplus (before pro forma adjustments) 0.5
Impact of incorporating the AXA businesses in the Group's Internal Model 0.2
Closing Free Surplus (pro forma) 0.7
1 The cash remittances to holding companies excludes cash receipts from Opal Re in the period of £85 million.
The pro forma Phoenix Life Free Surplus excludes £49 million of financial assets held in Opal Re as at 31 December 2016
(2015: £125 million).
SENSITIVITY AND SCENARIO ANALYSIS
As part of the Group's internal risk management processes, the regulatory capital requirements are tested against a number
of financial scenarios. The results of that stress testing1, are provided below and demonstrate the resilience of the pro
forma PLHL Solvency II surplus.
Pro forma PLHL Solvency II surplus
£bn
Base: 1 January 2017 1.9
Following a 20% fall in equity markets 1.9
Following a 15% fall in property values 1.8
Following a 55bps interest rates rise2 2.0
Following a 80bps interest rates fall2 1.8
Following credit spread widening3 1.8
Following 6% decrease in annuitant mortality rates4 1.6
Following 10% increase in assurance mortality rates 1.8
Following a 10% change in lapse rates5 1.8
1 Assumes stress occurs on 1 January 2017.
2 Assumes recalculation of transitionals (subject to PRA approval).
3 Credit stress equivalent to an average 150bps spread widening across ratings, 10% of which is due to
defaults/downgrades.
4 Equivalent of 6 months increase in longevity applied to the annuity portfolio.
5 Assumes most onerous impact of a 10% increase/decrease in lapse rates across different product groups.
pGH solvency II surplus (pro forma)
As previously noted, the Solvency II capital assessment and Group's regulatory supervision is performed at the PLHL level
as this is the highest EEA insurance holding company. A waiver is currently in place which permits Group supervision to
take place at the level of the ultimate parent, PGH, via other methods, as opposed to full Group supervision. This waiver
is due to expire on 30 June 2017.
As part of the on going simplification of the Group structure, Phoenix intends to put in place a new UK-registered holding
company for the Group. The new company will be the ultimate parent company and the highest EEA insurance Group holding
company. When complete, the Solvency II capital assessment and Group supervision will only be performed at this level.
From 1 July 2017 and pending the completion of the simplification of the Group structure, regulatory supervision and the
Solvency II capital adequacy assessment is expected to be performed at the PLHL and PGH level.
The key difference between the pro forma capital position of PLHL and the pro forma position at the PGH level is the
inclusion of the Group's current senior debt and the revolving credit facility within the Own Funds calculation.
The table below illustrates the pro forma Solvency II position at the PGH level at 31 December 2016.
Own funds SCR Surplus
£bn £bn £bn
PLHL pro forma position1 6.8 (4.9) 1.9
Revolving credit facility (0.5) - (0.5)
Senior secured bond (0.3) - (0.3)
Net other items2 0.1 - 0.1
2016 final dividend (0.1) - (0.1)
PGH pro forma position3 6.0 (4.9) 1.1
1 Details of the PLHL pro forma are set out on page 23.
2 Net other items reflect the impact of intragroup eliminations together with the recognition of cash and other assets
held in companies above the PLHL sub group
3 The PGH pro forma position assumes the substitution of the issuer of the Group's shareholder borrowings from PGH
Capital plc to PGH effective from 20 March 2017, as if it occurred on 31 December 2016. See note I9 to the IFRS financial
statements for further details.
transitional measures oN technical provisions and risk margin
The Group has obtained the PRA's approval to apply Transitional Measures on Technical Provisions ('TMTP'). This allows for
a transitional deduction on technical provisions which is the difference between the net technical provisions calculated in
accordance with the Solvency II rules and the net technical provisions calculated in accordance with the previous regime.
The transitional deduction is expected to decrease over 16 years from 1 January 2016 to 1 January 2032 in line with
business run-off.
The Solvency II technical provisions include a Risk Margin which is highly sensitive to interest rates. As a consequence, a
sustained change in interest rates has a direct impact on the Risk Margin. The Solvency II rules allows for recalculation
of the transitional deduction under certain circumstances, one of these being a change in the operating conditions due to
external market-wide events such as changes in the risk free rate. Such a recalculation requires PRA approval.
At 31 December 2016, PLHL's Solvency II surplus includes the effects of an assumed recalculation of the transitional
deduction as at that date and reflects amortisation since 1 January 2016. Accordingly the year end position includes a
transitional deduction of £1.9 billion (excluding the unsupported with-profit funds), which offset £1.3 billion of Risk
Margin and £0.6 billion of other technical provisions recognised in the life companies. As the acquired Abbey Life business
has not recognised a transitional deduction, it is excluded from the analysis above. The run-off of the transitional
deduction over time will be substantially offset by the reduction of the Risk Margin therefore mitigating any resulting
impact on the Solvency II surplus.
IFRS results
£351m
Operating profit
£(100)m
IFRS loss after tax
The operating profit has increased to £351 million (2015: £324 million), primarily driven by the impact of £157 million of
management actions during 2016 (2015: £68 million) and the impact of updates made to the IFRS reserving methodology to more
closely align to the Solvency II requirements, partly offset by strengthening of actuarial assumptions to reflect
anticipated policyholder behaviour in the continued low interest environment.
The loss after tax attributable to owners is £100 million (2015: £249 million, profit) reflecting adverse economic
variances, principally yields and losses on equity hedging positions, together with the one-off impact associated with
acquisition and integration activities.
Year ended Year ended
31 December 2016 31 December 2015
£m £m
Phoenix Life 357 336
Group costs (6) (12)
Operating profit 351 324
Investment return variances and economic assumption changes on long-term business (207) 13
Variance on owners' funds (5) (12)
Amortisation of acquired in-force business, customer relationships and other intangibles (82) (90)
Other non-operating items (95) 49
Profit before finance costs attributable to owners (38) 284
Finance costs attributable to owners (90) (99)
(Loss)/profit before the tax attributable to owners: (128) 185
Tax credit attributable to owners 28 64
(Loss)/profit for the period attributable to owners (100) 249
PHOENIX LIFE operating profit
Operating profit for Phoenix Life is based on expected investment returns on financial investments backing shareholder and
policyholder funds over the reporting period, with consistent allowance for the corresponding expected movements in
liabilities (being the release of prudential margins and the interest cost of unwinding the discount on the liabilities).
The principal assumptions underlying the calculation of the long-term investment return are set out in note B2 to the
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