REG - Phoenix Grp Hldgs - Phoenix Group Holdings - 2016 Annual Results <Origin Href="QuoteRef">PHNX.L</Origin> - Part 9
20/03/2017 07:07
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the Group, industry standards and regulatory and financial reporting requirements; - assessed the results of management's experience analysis, which supports the adopted
assumptions and methodology, and checked that the assumptions used are consistent with this experience analysis;- evaluated the choice of the industry standard
Continuous Mortality Investigation ('CMI') model and the parameters used to ensure that it was appropriate given the demographics of policyholders;- benchmarked the
demographic and economic assumptions against those of other industry participants, and- reviewed that disclosures have been made in the financial statements regarding
the sensitivity of the valuation of insurance contract liabilities to changes in the key assumptions.
Actuarial modelling There has been no change in our assessment of this risk from the prior year. We consider the integrity and appropriateness of models to be critical to the overall valuation of insurance contract liabilities. Over £43.1 billion of the £46.7 billion of insurance contract liabilities are modelled using the actuarial modelling systems with the residual balance modelled outside these systems to cater for ancillary business. The key risk is therefore associated with the modelling systems but risks also exist in the calculation of amounts outside these systems. To obtain sufficient audit evidence to conclude on actuarial models, including those models outside the core system, we:- having confirmed in prior periods that the core We determined that the models used are appropriate and that changes to the models were implemented as intended.
system is appropriately valuing liabilities, tested the design, implementation and operating effectiveness of key controls over management's process for model changes
during the year;- evaluated the methodology, inputs and assumptions used for a sample of model changes based on our knowledge of the Group, industry standards and
regulatory and financial reporting requirements;- assessed the results of the analysis of movements in insurance contract liabilities in order to confirm the
completeness of model changes;- tested the design, implementation and operating effectiveness of key controls over management's process for modelling insurance contract
liabilities outside the actuarial modelling systems; and- assessed, on a sample basis, the rationale for modelling certain insurance contract liabilities outside the
actuarial modelling systems, including evaluating the underlying methodology and accuracy of the calculations for valuations modelled outside the actuarial modelling
systems
DataThere has been no change in assessment of this risk from the prior year.The actuarial data is a key input into the valuation process. The valuation of insurance contract liabilities is therefore conditional upon the accuracy and completeness of the data used. To obtain sufficient audit evidence to assess the integrity of actuarial data we:- tested the adequacy of Outsourced Service Provider ('OSP') controls regarding the We determined based on our audit work that the data used for the actuarial model inputs are materially complete and accurate.
maintenance of policyholder data, and where applicable reviewed the Service Organisation Controls ('SOC1') reports produced by the OSPs; - confirmed that the actuarial
model data extracts provided by the OSPs were those used as an input to the actuarial model;- tested the design and operating effectiveness of key controls including
information technology general controls over management's data collection, extraction and validation process; - assessed the appropriateness of management's grouping of
data for input into the actuarial model; and- tested the reconciliations of premiums and claims information from the actuarial data extract to the general ledger, where
applicable.
Valuation of complex and illiquid financial investments ('Level 3 assets') (£1.8 billion; 2015: £1.4 billion)There has been no change in assessment of this risk from the prior year.Refer to the Audit Committee Report (page 53); Critical accounting estimates (page 107); Accounting policies and notes E1 and E2 of the consolidated financial statements (pages 122 to 131).The extent of judgement applied by management in valuing the Group's financial investments varies with the nature of securities held, the markets in which they are traded and the valuation methodology applied. We focused our audit procedures on the financial investments which require judgement to be applied and for which quoted market prices are not readily available and consequently where management use models and other inputs to estimate their value. These investments are referred to as Level 3 assets in the financial statements. To obtain sufficient audit evidence to conclude on the valuation of complex and illiquid financial investments, we:- tested the design and operating effectiveness of key Based on our procedures performed on the marked to model assets and manually priced investments we are satisfied that the valuation of these complex and illiquid assets
controls over management's process in respect of the valuation of investments, including those operated by OSPs via the relevant SOC1 reports;- evaluated the is reasonable.
methodology, inputs and assumptions used for a sample of mark to model investments, by comparing yields, spreads, earnings, house prices and market rents to published
market benchmarks and other demographic and economic assumptions (such as voluntary early redemption and house price inflation) against those of other industry
participants, to confirm that key valuation inputs were consistent with industry norms and our understanding of the asset type; - recalculated a sample of modelled
valuations to assess their reasonableness; - obtained net asset valuation ('NAV') statements provided by third party administrators in respect of private equity and fund
of fund structures and compared them with management's valuations. We performed 'back-testing' of recent realisations to confirm that the NAV continues to be an
appropriate proxy for fair value; - used our real estate valuation specialists to assess the reasonableness of investment property valuations; - assessed the fair
value of the fixed and variable rate income securities valuations versus comparable bonds and, where applicable, broker quotes; and- reviewed that disclosures have been
made in the financial statements regarding the sensitivity of the valuation of certain illiquid and complex assets the changes in the key assumptions.
Acquisition of AXA Wealth Limited and Abbey Life Assurance Company LimitedThis is a new significant risk for the current year.Refer to the Audit Committee Report (page 53); Critical accounting estimates (page 107); Accounting policies and notes H1 and H2 of the consolidated financial statements (pages 175 to 177).On 1 November 2016, the Group acquired AXA Wealth Limited, AXA Wealth Services Limited, AXA Sun Life Direct Limited, Winterthur Life UK Holdings Limited and AXA Trustee Services Limited (collectively the 'AXA entities') for £373 million. AXA Wealth Limited is material to the Group.On 30 December 2016, the Group acquired Abbey Life Assurance Company Limited, Abbey Life Trustee Services Limited and Abbey Life Trust Securities To obtain sufficient audit evidence to assess the impact of the acquisition of AXA Wealth Limited and Abbey Life Assurance Company Limited we:- reviewed the work Based on our procedures performed on the acquisition of AXA Wealth Limited and Abbey Life Assurance Company Limited, we are satisfied that the valuation of the assets and liabilities acquired, including the identification and initial measurement of intangible assets is reasonable.
Limited (collectively the 'Abbey entities') for £933 million. Abbey Life Assurance Company Limited is material to the Group.We focused on this area as it involved significant judgements in respect of the identification of the intangible assets acquired and the valuation of the assets and liabilities acquired.The purchase price allocation exercise has been performed by management, assisted by an external expert. The primary elements of the valuation exercise assessed the fair value of the identifiable intangible assets in the form of acquired value of in-force business ('AVIF') (£218 million) and brands (£20 million). performed by the Phoenix Life Division component audit team on the AXA Wealth Limited statement of financial position as at the date of acquisition; - reviewed the work
performed by the Abbey Life Assurance Company Limited component audit team on the statement of financial position as at the date of acquisition;- assessed the
methodology and assumptions adopted by management and its appointed expert for calculating the fair values of intangible assets arising on acquisition; - ensured that
the acquisition accounting and disclosure of these acquisitions are in compliance with IFRS 3 Business Combinations; and- read relevant contracts, agreements and board
minutes which supported the final conclusions in respect of the acquisition accounting.
The scope of our audit
Tailoring the scope
Our assessment of audit risk, our evaluation of materiality and our allocation of performance materiality determine our
audit scope for each reporting unit ('component') within the Group. Taken together, this enables us to form an opinion on
the consolidated financial statements. We take into account size, risk profile, the organisation of the Group and
effectiveness of Group-wide controls, changes in the business environment and other factors when assessing the level of
work to be performed at each entity.
In assessing the risk of material misstatement to the consolidated financial statements, and to ensure we had adequate
quantitative coverage of significant accounts in the financial statements, we selected all four reporting components of the
Group. The Group reporting components consists of Phoenix Life Division, Abbey Life Assurance Company Limited, Group
Function and Other Companies. In the Phoenix Life Division component the most significant insurance companies are Phoenix
Life Assurance Limited, Phoenix Life Limited, and in the current year includes the acquired AXA Wealth Limited. The Group
Function consists of Group entities that primarily hold external debt, PA(GI) Limited and certain pension schemes of the
Group. The Other Companies are the service companies and Opal Reassurance Limited.
Details of the four components which were audited by component teams are set out below:
Component Scope Auditor
Phoenix Life Division Full EY
Abbey Life Assurance Company Limited Full Non-EY
Group Function Full EY
Other Companies Specific EY
For the Other Companies component, we performed audit procedures on provisions and administrative expenses for the service
companies and on financial assets for Opal Reassurance Limited. The extent of audit work in respect of Other Companies
component was based on our assessment of the risks of material misstatement at a financial statement line level.
The reporting components where we performed audit procedures accounted for more than 99% of the Group equity and the
Group's operating profit. For the current year, the full scope components contributed 98% (2015: 97%) of the equity and 98%
(2015: 88%) of the Group's operating profit. The specific scope component contributed 1% (2015: 2%) of the Group's equity
and 7% (2015: 11%) of the Group's operating profit.
The charts below illustrate the coverage obtained from the work performed by our audit teams.
Equity
A Phoenix Life Division - full scope 69%
B Abbey Life - full scope 24%
C Group function - full scope 5%
D Other companies - specific scope 1%
E Out of scope less than 1%
Operating profit
A Phoenix Life Division - full scope 90%
B Abbey Life - full scope 0%
C Group function - full scope 0%
D Other companies - specific scope 7%
E Out of scope less than 1%
less than 1%
changes from the prior year
We have an additional component as a result of the acquisition of Abbey Life Assurance Company Limited. AXA Wealth Limited
was incorporated into the Phoenix Life Division during the year.
Involvement with component teams
In establishing our overall approach to the Group audit, we determined the type of work that needed to be undertaken at
each of the components by us, as the primary audit engagement team, or by the component auditors operating under our
instruction.
The Group audit team provided detailed audit instructions to the component teams which included guidance on areas of focus,
including the relevant risks of material misstatement detailed above, and set out the information required to be reported
to the Group team.
The Group audit team is responsible for the audit of the Group Function. The Group team visited the full scope component of
the Phoenix Life Division, and reviewed key work papers and participated in the planning and execution of the component
team's audit of the identified risks. The Group team attended the closing meetings with the management of the Phoenix Life
Division and attended key audit committee meetings. As Abbey Life Assurance Company Limited was acquired on 30 December
2016, audit planning by the non-EY component audit team was already complete at the acquisition date. The Group team then
reviewed and challenged their audit plan and approach, especially with a focus on the significant risk areas for the Group.
The Group team held weekly meetings with the Abbey Life Assurance Company Limited auditors and a specific meeting to
discuss the actuarial assumptions. The Group team then performed a detailed review of the execution audit procedures and
reporting performed by the non-EY component team. The Group team attended the closing meeting with the management of Abbey
Life Assurance Company Limited.
For the specific scope component, the Group team have reviewed the audit procedures performed by the component team on the
specific accounts.
The work performed on the components, together with the additional procedures performed at Group level, gave us appropriate
evidence for our opinion on the consolidated financial statements as a whole.
Our application of materiality
We apply the concept of materiality in planning and performing the audit, in evaluating the effect of identified
misstatements on the audit and in forming our audit opinion.
Materiality
The magnitude of an omission or misstatement that, individually or in the aggregate, could reasonably be expected to
influence the economic decisions of the users of the financial statements. Materiality provides a basis for determining the
nature and extent of our audit procedures.
We determined materiality for the Group to be £67 million (2015: £46 million), which is 2.0% (2015: 1.9%) of Group equity.
Our aim is that materiality should not exceed 2.0% of year-end Group equity. Whilst profit before tax or operating profit
are common bases used across the life insurance industry, we believe that the use of equity as the basis for assessing
materiality is more appropriate given that the Group is a closed life assurance consolidator and as such equity provides a
more stable, long-term measure of value. We note also that equity more closely correlates with key Group performance
metrics such as Solvency II capital requirements and Own Funds. However, as these measures are non-GAAP measures, we
consider equity to be most appropriate.
During the course of our audit, we reassessed initial materiality and concluded that materiality assessed at planning
stages of our audit remained appropriate.
Performance materiality
The application of materiality at the individual account or balance level. It is set at an amount to reduce to an
appropriately low level the probability that the aggregate of uncorrected and undetected misstatements exceeds
materiality.
On the basis of our risk assessments, together with our assessment of the Group's overall control environment, our
judgement was that performance materiality was 50% (2015: 50%) of our planning materiality, namely £34 million (2015: £23
million).
Audit work at component locations for the purpose of obtaining audit coverage over significant financial statement accounts
is undertaken based on a percentage of total performance materiality. The performance materiality set for each component is
based on the relative scale and risk of the component to the Group as a whole and our assessment of the risk of
misstatement at that component. In the current year, the range of performance materiality allocated to components was £7
million to £25 million (2015: £4.6 million to £18.4 million).
Reporting threshold
An amount below which identified misstatements are considered as being clearly trivial.
We agreed with the Audit Committee that we would report all uncorrected audit differences in excess of £3.0 million (2015:
£2.3 million), which is set at 5% of planning materiality, as well as differences below that threshold that, in our view,
warranted reporting on qualitative grounds.
We evaluate any uncorrected misstatements against both the quantitative measures of materiality discussed above and in
light of other relevant qualitative considerations in forming our opinion.
Scope of the audit of the financial statements
An audit involves obtaining evidence about the amounts and disclosures in the financial statements sufficient to give
reasonable assurance that the financial statements are free from material misstatement, whether caused by fraud or error.
This includes an assessment of: whether the accounting policies are appropriate to the Group's and the parent company's
circumstances and have been consistently applied and adequately disclosed; the reasonableness of significant accounting
estimates made by the Directors; and the overall presentation of the financial statements. In addition, we read all the
financial and non-financial information in the Annual Report and Accounts to identify material inconsistencies with the
audited financial statements and to identify any information that is apparently materially incorrect based on, or
materially inconsistent with, the knowledge acquired by us in the course of performing the audit. If we become aware of any
apparent material misstatements or inconsistencies we consider the implications for our report.
Respective responsibilities of directors and auditor
As explained more fully in the Statement of Directors' Responsibilities set out on page 90, the Directors are responsible
for the preparation of the financial statements and for being satisfied that they give a true and fair view. Our
responsibility is to audit and express an opinion on the financial statements in accordance with applicable law and
International Standards on Auditing (UK and Ireland). Those standards require us to comply with
the Auditing Practices Board's Ethical Standards for Auditors.
Phoenix Group Holdings is a non-UK company and as such is not required to comply with the UK Companies Act 2006. As the
Group is listed on the UK Stock Exchange, the Directors have voluntarily chosen to comply with the Companies Act 2006 and
listing rules that apply to UK Companies and have engaged us to provide an opinion as if they were. Accordingly, we have
been engaged to:
- report as to whether the Strategic Report and Directors' Report for the financial year for which the financial
statements are prepared is consistent with the financial statements;
- report as to whether the information given in the Corporate Governance Statement with respect to internal control
and risk management systems in relation to financial reporting processes is consistent with the financial statements;
- report as to whether the section in the Directors' remuneration report that is described as audited has been
properly prepared in accordance with the basis of preparation described therein; and
- report if we are not satisfied that:
- adequate accounting records have been kept (including returns from those branches which have not been visited); or
- the financial statements are in agreement with the records and returns; or
- we have obtained all the information and explanations which we consider necessary for the purposes of the audit.
This report is made solely to the Company's members, as a body, in
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