2012 Interim Results

RNS Number : 6065K
Phoenix Group Holdings
23 August 2012
 



Phoenix Group Holdings:

INTERIM RESULTS FOR THE
HALF YEAR ENDED 30 JUNE 2012

23 AUGUST 2012

Phoenix Group, the UK's largest specialist closed life fund consolidator, today announces strong results for the six months ending 30 June 2012 and an increase in its 2012 cash generation target to £600 million - £700 million.

Financial highlights

o  £119 million of cash generation1 in H1 2012

o  Increase in target range for operating companies' cash generation for 2012 of £100 million to £600 million - £700 million and increase in 2011-2016 cash generation target of £0.1 billion to £3.3 billion

o  Stable MCEV of £2.1 billion at 30 June 2012 (FY11: £2.1 billion), with £107 million incremental MCEV enhancement delivered in H1 2012

o  Gearing2 of 46% at 30 June 2012, on target to meet full year gearing ratio of 43% or below

o  Robust IGD surplus of £1.2 billion at 30 June 2012 (FY11: £1.3 billion). Estimated IGD headroom remained stable at £0.4 billion as at 30 June 2012 (FY11: £0.4 billion) 3

o  Group IFRS operating profit increased to £207 million in H1 2012 (HY11: £136 million)

o  Ignis IFRS operating profit increased to £19 million in H1 2012 (HY11: £18 million)

o  £927 million of net third party asset inflows generated by Ignis. Total Group Assets Under Management of £71.6  billion at 30 June 2012 (FY11: £72.1 billion)

o  Proposed interim dividend of 21 pence per share 4

Operational highlights

o  Transfer of approximately £5 billion of annuity in‑payment liabilities announced in June

o  Completion of transfer of business of NPI Limited to Phoenix Life Limited

o  Ignis back office administration functions and Phoenix Life fund accounting outsourced to HSBC

o  Further 230,000 policies transferred from legacy systems to modern policy administration platform

Clive Bannister, Group Chief Executive, commented:

"Phoenix's financial performance in the first half demonstrates the Group's resilience in these continuing difficult markets. Despite our on-going caution over the near term outlook, the strength of the business is highlighted by our announcement today of a £100 million  increase in both our 2012 cash generation target to £600 million - £700 million and our long term cash generation target to £3.3 billion from 2011-2016. We continue to take steps to strengthen the balance sheet and I was pleased to announce the transfer of a significant block of annuity liabilities to Guardian during the period. We continue to explore with our lenders options regarding the reterming of our banking facilities and remain confident that, in due course, we will be able to agree terms."

 

Notes

1. Operating companies' cash generation is a measure of cash and cash equivalents, remitted by the Group's operating subsidiaries to the Holding Companies and is available to cover dividends, bank interest and repayments and other items.

2. Gearing is calculated as net shareholder debt as a percentage of the sum of Group MCEV, net shareholder debt and the present value of future profits of Ignis. Net shareholder debt is shareholder debt (including hybrid debt) less Holding Companies cash and cash equivalents.

3. Any references to IGD relate to the calculation for Phoenix Life Holdings Limited, the ultimate EEA insurance parent undertaking.

4. The proposed interim dividend of 21 pence per share is subject to compliance with the processes set out in the Group's main credit facilities. The dividend represents 50 per cent of our stated annual dividend policy. The scrip dividend option has now been removed. The dividend is expected to be paid on 4 October 2012. The ordinary shares will be quoted ex-dividend on the London Stock Exchange as of 5 September 2012.  The record date for eligibility of payment will be 7 September 2012.

 

Enquiries

Investors:

Katherine Jones, Head of Investor Relations, Phoenix Group
+44 (0) 20 7489 4879

Media:

Neil Bennett, Maitland
Peter Ogden, Maitland
+ 44 (0) 20 7379 5151

Further information

o  There will be a presentation for analysts and investors today at 9.30 am (GMT) at:

      Deutsche Bank, Winchester House, 1 Great Winchester Street, London, EC2N 2DB.

   A link to a live webcast of the presentation, with the facility to raise questions, and a copy of the presentation will be
available at www.thephoenixgroup.com. A replay of the presentation will also be available through the website.

      Participants may also dial in as follows:

UK

   020 3059 8125

International

+ 44 20 3059 8125

Participant password: Phoenix

  

 

Forward looking statements

This announcement in relation to Phoenix Group Holdings and its subsidiaries (the 'Group') contains, and we may make other statements (verbal or otherwise) containing, forward‑looking statements about the Group's current plans, goals and expectations relating to future financial conditions, performance, results, strategy and/or objectives.

Statements containing the words: 'believes', 'intends', 'expects', 'plans', 'seeks', 'targets', 'continues' and 'anticipates' or other words of similar meaning are forward‑looking (although their absence does not mean that a statement is not forward-looking). Forward‑looking statements involve risk and uncertainty because they relate to future events and circumstances that are beyond the Group's control. For example, certain insurance risk disclosures are dependent on the Group's choices about assumptions and models, which by their nature are estimates. As such, actual future gains and losses could differ materially from those that we have estimated.

Other factors which could cause actual results to differ materially from those estimated by forward‑looking statements include but are not limited to: domestic and global economic and business conditions; asset prices; market related risks such as fluctuations in interest rates and exchange rates, and the performance of financial markets generally; the policies and actions of governmental and/or regulatory authorities, including, for example, new government initiatives related to the financial crisis and the effect of the European Union's "Solvency II" requirements on the Group's capital maintenance requirements; the impact of inflation and deflation; market competition; changes in assumptions in pricing and reserving for insurance business (particularly with regard to mortality and morbidity trends, gender pricing and lapse rates); the timing, impact and other uncertainties of future acquisitions or combinations within relevant industries; risks associated with arrangements with third parties, including joint ventures; inability of reinsurers to meet obligations or unavailability of reinsurance coverage; the impact of changes in capital, solvency or accounting standards, and tax and other legislation and regulations in the jurisdictions in which members of the Group operate.

As a result, the Group's actual future financial condition, performance and results may differ materially from the plans, goals and expectations set out in the forward‑looking statements within this announcement. The Group undertakes no obligation to update any of the forward‑looking statements contained within this announcement or any other forward‑looking statements it may make. Nothing in this announcement should be construed as a profit forecast.


Contents

Group Chief Executive's report

02

Business review

05

06

Key performance indicators

 

08

Cash generation

 

10

Group MCEV

 

12

Group IFRS operating profit

 

15

Group assets under management

 

16

Capital management

 

19

Risk management

 

IFRS condensed consolidated interim financial statements

21

22

Statement of Directors' responsibilities

 

23

Auditor's review report

 

24

Condensed consolidated interim financial statements and notes

 

50

Additional life company asset disclosures

 

MCEV supplementary information

55

56

Statement of Directors' responsibilities

 

57

Auditor's review report

 

58

MCEV interim financial statements and notes

 

Additional information

72

73

Shareholder information

 

74

Forward-looking statements

 


Group Chief Executive's report

Introduction

The first half of 2012 was a period of strong performance, despite tough economic conditions.

After a relatively calm start to the year, markets again turned volatile during April with the continued uncertainty facing the Eurozone having an impact across all asset classes. Political uncertainty and continued low economic growth across the region has led to severe sovereign debt funding issues for certain Eurozone countries. Although Phoenix continues to have a very low direct exposure to Peripheral Eurozone sovereign debt, the uncertainty has indirectly impacted the Group through the wider financial markets.

Despite these external economic headwinds, I am pleased to report Phoenix has continued with its programme of management actions to accelerate cashflow, enhance MCEV and improve the Group's capital position, resulting in an agreement, announced on 27 June, to transfer approximately £5 billion of annuity in-payment liabilities to Guardian Financial Services ('Guardian'). This transaction accelerated the release of £252 million of capital and added to the Group's IGD surplus.

We continue to explore with our lenders options regarding the reterming of our banking facilities and remain confident that, in due course, we will be able to agree terms.

The Board has declared an interim dividend for the first 6 months of 2012 of 21p per share which will be paid on 4 October 2012. The dividend represents 50% of our stated annual dividend policy. We have now removed the scrip dividend option to avoid the dilutive impact on shareholders.

Performance highlights

The Group set itself stretching targets at the time of our Annual Results announcement in March and I am pleased to be able to report significant progress.

Against a full year cash generation target of £500 million to £600 million, £119 million was delivered in the first half of the year. As we stated in March, the cash generation in 2012 will be weighted towards the second half of the year. However, we now expect the Group to exceed its previously forecast range and I am delighted to set a new, revised target of £600 million to £700 million. This target is supported by the £566 million of free surplus in the Group's life companies as at 30 June 2012 and further management actions that are planned to accelerate cash flows during the remainder of the year. I am also pleased to set an increased long-term cash generation target for the period from 2011 to 2016 of £3.3 billion. To be in a position to outperform the challenging targets set at the beginning of the year is clear demonstration of the strength of Phoenix's business model, even in these times of continued market stress which have caused us to take a prudent view as to the quantum of cash generation that may be achieved in the full year.

Group MCEV was £2,135 million as at 30 June 2012, compared to £2,118 million as at the end of December 2011. We continue to target an average of £100 million per annum of incremental embedded value growth from management actions between 2011 to 2014. The Group generated £107 million of incremental MCEV during the first half of 2012 from management actions, as part of our ongoing programme of system and modelling improvements; and we have delivered a total of £272 million since the start of 2011. We are therefore confident that we are on track to meet our £400 million target over the four year period to 2014.

Our gearing ratio as at 30 June 2012 remains unchanged at 46% (46% as at 31 December 2011). We set a full year target of lowering our gearing ratio to 43% or below, and I am pleased to say that we are on track to meet this target. The ratio is expected to improve through cash generation and embedded value management actions in the second half, and we expect to meet our target by year end.

Our financial strength remains robust with IGD surplus estimated at £1.2 billion at 30 June 2012, compared to £1.3 billion at the end of December 2011. Headroom above our IGD capital policy remained stable at £0.4 billion.

As a result of the evolving regulatory environment, which is becoming increasingly risk-focused across the industry, the Group now undertakes a further group solvency calculation, the 'PLHL ICA', calculated at PLHL, the same level at which we perform our IGD calculation. This is an assessment on a Pillar 2 basis of the capital resources and requirements arising from the obligations and risks which exist outside the life companies. At 30 June 2012, our PLHL ICA surplus was estimated to be £0.4 billion. We aim to ensure that PLHL maintains an ICA surplus of at least £150 million.

Group assets under management were £71.6 billion as at 30 June 2012, compared to £72.1 billion as at 31 December 2011. The decline of less than 1% was due to the natural run-off of the life company assets, partly offset by market movements and a strong net inflow of £927 million of third party assets.

 

Finally, the Group achieved IFRS operating profits of £207 million in the first half of 2012, compared to a result of £136 million in the first half of 2011. The increase primarily relates to one-off benefits generated from modelling and policy harmonisations across the business as part of our ongoing programme of system and modelling improvements. These enhanced the Phoenix Life operating profit by £59 million.

Phoenix Life review

Phoenix Life contributed IFRS operating profit of £205 million in the first half of 2012, compared to £152 million for the same period in 2011. The increase primarily relates to one-off benefits generated from modelling and policy harmonisations which enhanced the Phoenix Life operating profit by £59 million.

One of the key successes for Phoenix Life during the first six months of the year was the reinsurance of approximately £5 billion of annuity in-payment liabilities to Guardian. This has increased the free surplus within the Group's life companies by £252 million, improved the Group IGD surplus by £25 million and increased MCEV by £36 million. The reinsurance agreement is expected to be replaced by a formal Part VII transfer of the annuity in-payment liabilities to Guardian in 2013 which is also expected to bring further benefits for the Group's IGD surplus.

In addition to this important transaction, Phoenix Life has made strong progress across several other areas in the first half of 2012. The Part VII transfer of the business of NPI Limited into Phoenix Life Limited ('PLL') was completed in the first half, strengthening the Group's IGD position and consolidating all the UK life business in the Impala silo within PLL. In addition, work is well advanced to effect a business transfer of London Life Limited into Pearl Assurance Limited during the second half of the year. Following this funds merger the Group will only have three operating UK life companies, with the enlarged Pearl Assurance Limited being renamed Phoenix Life Assurance Limited post completion of the business transfer.

Customers are at the heart of what we do and as such we are always aiming to improve the service we provide. The Group migrated an additional 230,000 policies onto the BaNCS policy adminstration platform during the first half of 2012, with a further 700,000 planned for migration during the second half of the year. We have been working to speed up claim payments and improving customer service. Nearly 90% of maturities are now being paid on or before due date across the Group (a 7% increase) and average end to end payment times for surrenders have been reduced by 6.7 days (a 20% improvement).

We also launched a new website for a number of our life funds to enhance the online customer experience, which includes a new Customer Centre Area with 'how to' guides and on-line forms. Furthermore, we continue to seek initiatives that may be of benefit to our customers and, in 2012, we have identified a number of small, externally-managed unit linked funds for closure where it is in the customers' interest so to do. This programme is near completion, with those customers switching into internally managed funds benefiting from lower fees.

In March 2012, in response to the Government's consultation on improving pension transfers and dealing with small pension pots, Phoenix called for the Government to exclude legacy business from any revisions to pension transfer legislation, in order both to protect policyholder interests and avoid an unnecessary administrative burden on the industry. The Government published the results of this consultation exercise in July and confirmed that only new, auto-enrolled business would be included in the legislation, thereby avoiding policyholder detriment and administrative costs to the Group.

Preparations for Solvency II are a high priority working towards the implementation date of 1 January 2014. The Group's Actuarial Systems Transformation is developing alongside the Solvency II work, with the Group being able to look forward to operating a single, modern actuarial system by the time Solvency II is introduced.

Ignis review

Despite the difficult market conditions, Ignis has continued to make progress in its development, building on its investment in new business development and infrastructure. Ignis' IFRS operating profits for the first half of 2012 were £19 million compared to £18 million in the first half of 2011. Ignis' assets under management, oversight, advice and administration as at 30 June 2012, excluding stock lending collateral of £10.4 billion (31 December 2011: £10.8 billion), amounted to £70.3 billion compared to £70.7 billion at 31 December 2011.

 

This financial performance has been supported by continued investment outperformance, with 13 out of the 15 main group life funds meeting or exceeding their benchmark targets. The historically strong performance in rates, credit and liquidity asset classes has continued over the first six months of the year and there has also been much improved performance in the Equities and Advisors business units, with UK equities in particular seeing a strong turnaround. With regard to our third party funds, rolling performance over one year and three years has remained good in both our main Property funds and the Ignis Sterling Liquidity fund (which is now over £14 billion in size), whilst performance in the Absolute Return Government Bond Fund ('ARGBF') has been very strong, with absolute performance in excess of 9% since inception on 31 March 2011.

New third party business in the first half has been very pleasing, with £927 million of net inflows driven by strong sales of Liquidity, ARGBF and Real Estate products. This strong performance demonstrates Ignis' development as a third party manager and the success of innovative products such as ARGBF positions the business well for the future. In addition, in conjunction with the reinsurance of part of the Group's annuity portfolio, Ignis will continue to provide investment management services in respect of assets backing the in-payment annuity liabilities transferred to Guardian. These assets will transfer into Ignis' third party business on a phased basis concluding by the end of 2012.

This financial performance has been achieved in parallel with a transformation of Ignis' operations. Ignis is partnering with HSBC Securities Services ('HSBC') to deliver investment administration and other related activities, and a variety of Ignis and Phoenix Life back office and operational functions have transferred to HSBC along with around 140 Ignis employees.

Ignis' ability to transform its operational platform whilst continuing to deliver strong investment performance and attract net new third party assets is a testament to its strengths as a business and I remain confident that it will continue to build on these achievements in the coming years.

Outlook

We have made good progress in the first half of the year and I am delighted to be able to increase our cash flow targets, albeit recognising the sensitivity of such targets to the impact of market conditions, which we seek to mitigate through the effective and careful management of risk and market exposure within our business. As well as the revised 2012 cash generation target of £600 million to £700 million, we have also increased our longer term cash generation target for the six year period between 2011 to 2016 from £3.2 billion to £3.3 billion, of which £929 million had been achieved by 30 June 2012.

I am pleased to announce that Sir Howard Davies will be joining us as Chairman, succeeding Ron Sandler with effect from 1 October 2012. Howard has a deep understanding of public company corporate governance and risk management and a breadth of experience within the financial services industry. I look forward to working with him in the coming months. I would also like to thank Ron, on behalf of the Board, for his exceptional contribution to the Group over the last three years and wish him well for the future.

Whilst market volatility continues to generate uncertainty, the Group's cash flow, MCEV and IGD positions have remained resilient.

I would like to thank my colleagues for their hard work during this challenging period. We remain committed to delivering value to all our stakeholders, by being preeminent in the administration of our closed life business, and through the delivery of strong investment performance by Ignis.

 

Clive Bannister

Group Chief Executive

22 August 2012


 

Business review

06

Key performance indicators

08

Cash generation

10

Group MCEV

12

Group IFRS operating profit

15

Group assets under management

16

Capital management

19

Risk management

 

 


Business review

Key performance indicators

Operating companies' cash generation

£119m

(HY11: £496 million)

Cash generation is £119 million in the period in line with our previously announced expectation that 2012 cash remittances would be weighted towards the second half of the year. Management actions have generated cash flows of £32 million in the period.

The cumulative cash flow target for 2011 to 2016 has now been increased from £3.2 billion to £3.3 billion and the full year cash generation target for 2012 has been increased from a range of £500 million to £600 million to a range of £600 million to £700 million. The Group is on track to meet its revised full year cash generation target for 2012.

The Phoenix Life free surplus was £566 million at 30 June 2012 due to free surplus generation of £568 million in the period.

Group MCEV

£2,135m

(31 December 2011: £2,118 million)

Group MCEV increased by £17 million to £2,135 million at 30 June 2012, benefiting from management actions of £107 million principally through harmonising methodologies and policies across Phoenix Life.

The Group's target is an average of £100 million per annum of incremental embedded value growth from management actions between 2011 and 2014 and it is on track to achieve this.

Group IFRS operating profit

£207m

(HY11: £136 million)

Group IFRS operating profit increased by £71 million to £207 million, of which £59 million relates to management actions.

Ignis Asset Management IFRS operating profit

£19m

(HY11: £18 million)

Ignis' IFRS operating profit increased by £1 million on the comparative period to £19 million.

Group assets under management

£71.6bn

(31 December 2011: £72.1 billion)

Group assets under management decreased by £0.5 billion in the period as net third party sales of £0.9 billion partly offset the run-off of the closed life funds.

Of the Group assets under management, Ignis manages or administers £54.2 billion of internal funds (31 December 2011: £54.9 billion), and £9.0 billion of external funds (31 December 2011: £8.6 billion) and provides oversight and advisory services on £7.1 billion of internal funds (31 December 2011: £7.2 billion).

IGD surplus (estimated)

£1.2bn

(31 December 2011: £1.3 billion)

The estimated IGD surplus remained resilient at £1.2 billion with capital generation of £0.1 billion offset by dividend, debt financing costs and repayments of £0.2 billion. Headroom over the Group's capital policy has remained stable at £0.4 billion (31 December 2011: £0.4 billion).

PLHL ICA surplus (estimated)

£0.4bn

 

In accordance with FSA requirements, the Group now undertakes an Individual Capital Assessment ('ICA') at the level of the highest EEA insurance group holding company, which is Phoenix Life Holdings Limited ('PLHL'). This involves an assessment, on a Pillar 2 basis, of the capital resources and requirements arising from the obligations and risks which exist outside the life companies. As agreed with the FSA, the Group aims to ensure that PLHL maintains an ICA surplus of at least £150 million.

Gearing ratio

46%

(31 December 2011: 46%)

Gearing maintained at 46% at 30 June 2012. The ratio is expected to reduce to 43% or below by the end of 2012 through cash generation and embedded value management actions.

Interim dividend per share

21p per share

(HY11: 21p per share)

Proposed interim dividend per share of 21p*. The scrip dividend option has been removed.

*     Subject to compliance with the processes set out in the Group's main credit facilities.

Cash generation

Holding Companies' cash flows

The Group's closed life funds provide predictable fund maturity and liability profiles, creating stable long-term cash flows for distribution to shareholders and for repayment of outstanding debt. Although investment returns are less predictable, some of this risk is borne by policyholders.

The following analysis of cash flows reflects the cash paid by the operating companies to the Group's Holding Companies, as well as the uses of these cash receipts:

Holding Companies' cash flows

Half year ended
30 June 2012
£m

Half year ended
30 June 2011
£m

Cash and cash equivalents at start of period

837

486

Cash receipts1

119

496

Uses of cash:



Other operating expenses

(22)

(28)

Pension scheme contributions

(10)

(5)

Debt interest

(70)

(77)

Total recurring cash outflows

(102)

(110)

Non-recurring cash outflows

(5)

(15)

Uses of cash before debt repayments and shareholder dividend

(107)

(125)

Debt repayments

(103)

(108)

Shareholder dividend

(36)

(29)

Cash and cash equivalents at end of period2

710

720

1     Includes amounts received by the Holding Companies in respect of tax losses surrendered to the operating companies.

2     Closing balance at 30 June 2012 includes required prudential cash buffer of £150 million (30 June 2011: £150 million).

Cash receipts

Cash remitted by Phoenix Life was £95 million (HY11: £481 million) in line with our previously announced expectation that 2012 cash remittances would be weighted towards the second half of the year. Ignis remitted cash of £24 million, up from £15 million in the first half of 2011. Of the £119 million cash received, £32 million has been generated through management actions, including the transfer of the business of NPI Limited into Phoenix Life Limited.

Phoenix Life free surplus

The generation of free surplus, net of movements in required capital, underpins the cash remittances from Phoenix Life. The table below analyses the movement in free surplus of Phoenix Life which represents the life companies' free surplus3 plus the IFRS net assets of the management service companies, these being available for distribution to the Holding Companies:

Phoenix Life free surplus movement

Half year ended
30 June 2012
£m

Half year ended
30 June 2011
£m

Opening free surplus

93

750

Cash distributed to Holding Companies

(95)

(481)

IFRS operating profit (net of tax)

184

141

IFRS economic variances and non-recurring items

(116)

54

Movements in capital requirements and policy

448

79

Valuation differences and other4

52

(75)

Closing free surplus

566

468

 

 

 

3     The life companies' free surplus is the excess of the net worth over the required capital reflected in the MCEV and represents capital in excess of what is required under the life companies' capital policies.

4     Includes differences between IFRS valuation of assets and liabilities and valuation for capital purposes.

Movements in capital requirements and policy in the period includes the net capital benefits of the annuity transfer transaction of £252 million.

Uses of cash

Recurring cash outflows

Recurring cash outflows were broadly in line with the 2011 half year results. Pension scheme contributions under existing agreements are mainly paid in the second half of the year.

Non-recurring cash outflows

Non-recurring cash outflows of £5 million were lower than the first half of 2011 as the Group's transformation programmes with its outsourcers near completion (HY11: £15 million).

Debt repayments and shareholder dividend

A £15 million voluntary debt prepayment and scheduled repayments of £88 million1 in respect of the Group's main credit facilities were made in the first half of 2012.

Shareholder dividends paid in the first half of 2012, net of scrip of £1 million, were £36 million.

1     This includes £1 million paid to Pearl Assurance Limited, a subsidiary undertaking. Pearl Assurance Limited is a lender under the Pearl facility.

 



Risk management

Risk management lies at the heart of what we do and is a source of value creation, making it a key component of the Group's strategic agenda. The Board seeks to ensure that the Group identifies and manages all risks accordingly, either to create additional value for its stakeholders or to mitigate any potentially adverse effects. A summary of the principal risks and uncertainties facing the Group is found below.

The principal risks and uncertainties facing the Group remain as described on pages 42 and 43 in the 2011 Annual Report and Accounts and are detailed below. To ensure the Group manages its risk it operates a Risk Management Framework ('RMF') which seeks to establish a coherent and interactive set of arrangements and processes to support the effective management of risk throughout the Group. The outputs of the RMF provide assurance that risks are being appropriately identified and managed and that an independent assessment of management's approach to risk management is being performed.

During the year, the Group has continued to strengthen the components of the RMF to ensure that they are aligned with the requirements of Solvency II and external best practice.

Risk

Impact

Mitigation

In times of market turbulence, the Group may not have sufficient liquid assets to meet its payment obligations or may suffer a loss in value.

The Group has ongoing obligations to meet payments to creditors which are funded by the release of capital and profits from its business units. The emerging cash flows of the Group may be impacted during periods of market turbulence by the need to maintain appropriate levels of regulatory capital. The impact of market turbulence may also result in a material adverse impact on the Group's embedded value, financial condition and prospects.

The Group undertakes regular monitoring activities in relation to market risk exposure, including the monitoring of asset mixes, cash flow forecasting and stress and scenario testing. In response to this, the Group may implement de-risking strategies to mitigate against unwanted outcomes. The Group also maintains cash buffers in its Holding Companies to reduce reliance on emerging cash flows.

The Group could be adversely affected by the level of its indebtedness and its financing structure.

The total principal amount outstanding under the Groups main credit facilities as at 30 June 2012 was £2,369 million. These main credit facilities require that a significant portion of the principal amount outstanding is repaid in the years 2014 to 2016. The Group may need to refinance the outstanding principal amounts on terms which are not as favourable as the existing terms or it may be unable to refinance those obligations at all.

The Group undertakes regular meetings and reviews with the lending banks to ensure open dialogue is maintained and that all relevant parties are aware of the current position.

The potential limitation on distributions from the Group's FSA regulated companies may impair the ability of the Group to service its existing debt commitments.

The Group has ongoing principal repayment and interest obligations to its lending syndicates. In the event that transfers from the Group's insurance and investment management subsidiaries are limited by any law, regulatory action or change in established approach, this may impair the Group's ability to service these obligations. The implementation of directives and other legislative changes such as Solvency II could have this effect and may therefore have a material adverse effect on the Group's results, financial condition and cash flows.

The Group puts considerable effort into managing relationships with its regulators so that it is able to maintain a forward view regarding potential changes in the regulatory landscape. The Group assesses the risks of regulatory change and their impact on our operations and lobbies where appropriate.


 

Risk

Impact

Mitigation

Significant counterparty failure.

Assets held to meet obligations to policyholders include debt securities. Phoenix Life is exposed to deterioration in the actual or perceived creditworthiness or default of issuers of relevant debt securities or from trading counterparties failing to meet all or part of their obligations; such as reinsurers failing to meet obligations assumed under reinsurance arrangements or derivative counterparties or stock-borrowers failing to pay as required. An increase in credit spreads on such securities, particularly if it is accompanied by a higher level of actual or expected issuer defaults, could have a material adverse impact on the Group's financial condition.

The Group regularly monitors its counterparty exposure and has specific limits relating to counterparty credit rating. Where possible, exposures are diversified through the use of a range of counterparty providers. All reinsurance and derivative positions are appropriately collateralised and guaranteed.

Adverse changes in experience versus actuarial assumptions.

The Group has liabilities under annuities and other policies that are sensitive to future longevity and mortality rates. Changes in assumptions may lead to changes in the assessed level of liabilities to policyholders. The amount of additional capital required to meet those liabilities could have a material adverse impact on the Group's embedded value, results, financial condition and prospects.

The Group undertakes regular reviews of experience and annuitant survival checks to identify any variances in assumptions.

 

 


 

IFRS condensed consolidated interim financial statements

22

Statement of Directors' responsibilities

23

Auditor's review report

24

Condensed consolidated interim financial statements and notes

50

Additional life company asset disclosures

 

 


Statement of Directors' responsibilities

Board Responsibility Statement pursuant to section 5:25d(2)(c) of the Dutch Financial Markets Supervision Act.

The Board of Directors of Phoenix Group Holdings hereby declares that, to the best of its knowledge:

1.   the condensed consolidated financial statements for the half year ended 30 June 2012, which have been prepared in accordance with IAS 34 Interim Financial Reporting, as adopted by the European Union, give a true and fair view of the assets, liabilities, financial position and results of Phoenix Group Holdings and its consolidated subsidiaries taken as a whole;

2.   the Interim Report includes a fair review of the state of affairs of Phoenix Group Holdings and its consolidated subsidiaries as at 30 June 2012 and for the financial half year to which the Interim Report relates. This includes a description of the important events that occurred during the first half of the year and refers to the principal risks and uncertainties facing Phoenix Group Holdings and its consolidated subsidiaries for the remaining six months of the year; and

3.   the Interim Report includes a fair review of the information required on material transactions with related parties.

     

Clive Bannister                                          James McConville

Group Chief Executive                                  Group Finance Director

St Helier, Jersey
22 August 2012

 


Auditor's review report

To: The Board of Directors of Phoenix Group Holdings

Introduction

We have reviewed the accompanying condensed consolidated interim financial information for the six month period ended 30 June 2012, of Phoenix Group Holdings, Cayman Islands, as set out on the pages 24 to 31, which comprises the condensed consolidated income statement, the condensed statement of consolidated comprehensive income, the pro forma reconciliation of Group operating profit to profit attributable to owners, the condensed statement of consolidated financial position, the condensed statement of consolidated cash flows, the condensed statement of consolidated changes in equity and the related notes on pages 32 to 49 for the half year period then ended. The directors are responsible for the preparation and presentation of this condensed consolidated interim financial information in accordance with IAS 34 Interim Financial Reporting, as adopted by the European Union. Our responsibility is to express a conclusion on this interim financial information based on our review.

Scope

We conducted our review in accordance with Dutch law including standard 2410, "Review of Interim Financial Information Performed by the Independent Auditor of the Entity". A review of interim financial information consists of making inquiries, primarily of persons responsible for financial and accounting matters, and applying analytical and other review procedures. A review is substantially less in scope than an audit conducted in accordance with Dutch auditing standards and consequently does not enable us to obtain assurance that we would become aware of all significant matters that might be identified in an audit. Accordingly, we do not express an audit opinion.

Conclusion

Based on our review, nothing has come to our attention that causes us to believe that the accompanying condensed consolidated interim financial information for the six month period ended 30 June 2012 is not prepared, in all material respects, in accordance with IAS 34, as adopted by the European Union.

The Hague, 22 August 2012

 

Ernst & Young Accountants LLP

was signed by
S.B. Spiessens

 


Condensed consolidated interim financial statements and notes

Condensed consolidated income statement

For the half year ended 30 June 2012

 

Notes

Half year
ended
30 Jun 2012
£m

Half year
ended
30 Jun 2011
£m

Year
ended
31 Dec 2011
£m

Gross premiums written


808

710

1,473

Less: premiums ceded to reinsurers


(37)

(42)

(85)

Net premiums written


771

668

1,388

 


 

 

 

Fees


74

86

170

Net investment income


1,885

1,519

4,920

Total revenue, net of reinsurance payable


2,730

2,273

6,478

 


 

 

 

Other operating income


4

6

12

Net income


2,734

2,279

6,490

 


 

 

 

Policyholder claims


(2,475)

(2,514)

(4,968)

Less: reinsurance recoveries


110

104

224

Change in insurance contract liabilities


343

997

(1,338)

Change in reinsurers' share of insurance contract liabilities


56

(57)

222

Transfer (to)/from unallocated surplus


-

(29)

16

Net policyholder claims and benefits incurred


(1,966)

(1,499)

(5,844)

 


 

 

 

Change in investment contract liabilities


(254)

(144)

260

Acquisition costs


(2)

(7)

(13)

Change in present value of future profits


-

(6)

(19)

Amortisation of acquired in-force business


(64)

(67)

(134)

Amortisation of customer relationships


(9)

(9)

(18)

Administrative expenses


(292)

(323)

(606)

Net (income)/expense attributable to unit holders


(42)

1

131

Total operating expenses


(2,629)

(2,054)

(6,243)

 


 

 

 

Profit before finance costs and tax


105

225

247

 


 

 

 

Finance costs


(118)

(131)

(251)

(Loss)/profit for the period before tax


(13)

94

(4)

 


 

 

 

Tax attributable to policyholders' returns


(16)

(25)

(173)

(Loss)/profit before the tax attributable to owners


(29)

69

(177)

 

 

 

 

 

Tax credit/(charge)

4

22

14

(94)

Add: tax attributable to policyholders' returns


16

25

173

Tax credit attributable to owners


38

39

79

Profit/(loss) for the period attributable to owners


9

108

(98)

 


 

 

 

Attributable to


 

 

 

Owners of the parent


2

90

(131)

Non-controlling interests


7

18

33

 


9

108

(98)

 

 

 

 

 

Earnings per share

 

 

 

 

Basic and diluted earnings per share

5

1.1p

52.3p

(76.2)p

 

 

 

 

 






 


Condensed statement of consolidated comprehensive income

For the half year ended 30 June 2012

 

Notes

Half year
ended
30 Jun 2012
£m

Half year
ended
30 Jun 2011
£m

Year
ended
31 Dec 2011
£m

Profit/(loss) for the period

 

9

108

(98)

 

 

 

 

 

Other comprehensive (expense)/income:

 

 

 

 

Actuarial (losses)/gains of defined benefit pension schemes

 

(68)

17

251

 

 

 

 

 

Tax credit on defined benefit pension schemes

4.2

3

9

1

 

 

(65)

26

252

Total comprehensive (expense)/income for the period

 

(56)

134

154

 

 

 

 

 

Attributable to:

 

 

 

 

Owners of the parent

 

(63)

116

121

Non-controlling interests

8

7

18

33

 

 

(56)

134

154

 

 

 

 

 

Pro forma reconciliation of Group operating profit to profit attributable to owners

For the half year ended 30 June 2012

 

Notes

Half year
ended
30 Jun 2012
£m

Half year
ended
30 Jun 2011
£m

Year
ended
31 Dec 2011
£m

Operating profit

 

 

 

 

Phoenix Life

 

205

152

395

Ignis Asset Management

 

19

18

46


 

224

170

441

Group costs

 

(17)

(34)

(54)

Total operating profit before adjusting items

 

207

136

387


 

 

 

 

Investment return variances and economic assumption changes on long‑term business

3.3

(82)

47

(338)

Variance on owners' funds

3.3

(2)

(3)

9

Amortisation of acquired in-force business

 

(58)

(60)

(121)

Amortisation of customer relationships

 

(9)

(9)

(18)

Non-recurring items

 

(29)

13

14

Profit/(loss) before finance costs attributable to owners

 

27

124

(67)


 

 

 

 

Finance costs attributable to owners

 

(56)

(55)

(110)

(Loss)/profit before the tax attributable to owners

 

(29)

69

(177)


 

 

 

 

Tax credit attributable to owners

4

38

39

79

Profit/(loss) for the period attributable to owners

 

9

108

(98)


 

 

 

 


Condensed statement of consolidated financial position

As at 30 June 2012

 

Notes

30 Jun 2012
£m

30 Jun 2011
£m

31 Dec 2011
£m

EQUITY AND LIABILITIES

 

 

 

 


 

 

 

 

Equity attributable to owners of the parent

 

 

 

 

Share capital

6

-

-

-

Share premium

 

1,018

1,080

1,054

Other reserves

 

5

5

5

Shares held by employee trust and Group entities

 

(11)

(12)

(11)

Foreign currency translation reserve

 

93

93

93

Retained earnings

 

448

504

511

Total equity attributable to owners of the parent

 

1,553

1,670

1,652


 

 

 

 

Non-controlling interests

8

726

711

714


 

 

 

 

Total equity

 

2,279

2,381

2,366


 

 

 

 

Liabilities

 

 

 

 

Pension scheme deficit

9

-

62

-


 

 

 

 

Insurance contract liabilities

 

 

 

 

Liabilities under insurance contracts

10

51,439

49,524

51,800

Unallocated surplus

 

848

893

848

 

 

 

 

 


 

52,287

50,417

52,648

Financial liabilities


 

 

 

Investment contracts

12.1

7,933

8,701

7,978

Borrowings

11

3,110

3,204

3,152

Deposits received from reinsurers


467

408

472

Derivatives

12.1

3,958

2,194

4,292

Net asset value attributable to unit holders

12.1

4,334

2,197

3,209

Obligations for repayment of collateral received

 

12,402

10,152

13,005

 


 

 

 



32,204

26,856

32,108



 

 

 

Provisions


57

65

59



 

 

 

Deferred tax


613

612

673



 

 

 

Reinsurance payables


30

37

33

Payables related to direct insurance contracts


484

768

707

Current tax


61

44

105

Accruals and deferred income


176

208

175

Other payables


1,524

1,209

627



 

 

 

Total liabilities


87,436

80,278

87,135



 

 

 

Total equity and liabilities


89,715

82,659

89,501



 

 

 

 

Condensed statement of consolidated financial position

As at 30 June 2012

 

Notes

30 Jun 2012
£m

30 Jun 2011
£m

31 Dec 2011
£m

ASSETS

 

 

 

 

 

 

 

 

 

Pension scheme surplus

9

257

80

314

 

 

 

 

 

Intangible assets

 

 

 

 

Goodwill

 

115

115

115

Acquired in-force business

 

1,818

1,949

1,882

Customer relationships

 

393

411

402

Present value of future profits

 

23

36

23

 

 

 

 

 

 

 

2,349

2,511

2,422

 

 

 

 

 

Property, plant and equipment

 

24

32

28

 

 

 

 

 

Investment property

 

1,826

1,837

1,816

 

 

 

 

 

Financial assets

 

 

 

 

Loans and receivables

 

2,723

2,365

3,529

Derivatives

12.1

5,098

2,709

6,099

Equities

12.1

10,640

11,991

11,078

Fixed and variable rate income securities

12.1

43,469

40,292

42,010

Collective investment schemes

12.1

5,931

6,628

6,251

 

 

 

 

 

 

 

67,861

63,985

68,967

Insurance assets

 

 

 

 

Reinsurers' share of insurance contract liabilities

 

3,204

2,892

3,153

Reinsurance receivables

 

64

270

257

Insurance contract receivables

 

14

20

14

 

 

 

 

 

 

 

3,282

3,182

3,424

 

 

 

 

 

Current tax

 

6

4

8

Prepayments and accrued income

 

520

548

599

Other receivables

 

1,181

1,135

200

Cash and cash equivalents

 

12,409

9,345

11,723

 

 

 

 

 

Total assets

 

89,715

82,659

89,501

 

 

 

 

 

 

 

Condensed statement of consolidated cash flows

For the half year ended 30 June 2012

 

Notes

Half year
ended
30 Jun 2012
£m

Half year
ended
30 Jun 2011
£m

Year
ended
31 Dec 2011
£m

Cash flows from operating activities

 

 

 

 

Cash generated by operations

13

915

1,185

3,692

Taxation paid

 

(70)

(20)

(16)

 

 

 

 

 

Net cash flows from operating activities

 

845

1,165

3,676

 

 

 

 

 

Cash flows from investing activities

 

 

 

 

Purchase of property, plant and equipment

 

(1)

(3)

(7)

 

 

 

 

 

Net cash flows from investing activities

 

(1)

(3)

(7)

 

 

 

 

 

Cash flows from financing activities

 

 

 

 

Proceeds from selling shares in subsidiaries
to non-controlling interests

 

33

3

1

Proceeds of new policyholder borrowings

11

60

63

98

Ordinary share dividends paid

7

(36)

(29)

(55)

Coupon on Perpetual Reset Capital Securities paid

 

(26)

(26)

(26)

Dividends paid to non-controlling interests

8

(11)

(11)

(21)

Repayment of policyholder borrowings

 

(11)

(797)

(825)

Repayment of shareholder borrowings

 

(104)

(110)

(174)

Interest paid on policyholder borrowings

 

(4)

(6)

(21)

Interest paid on shareholder borrowings

 

(59)

(92)

(111)

 

 

 

 

 

Net cash flows from financing activities

 

(158)

(1,005)

(1,134)

 

 

 

 

 

Net increase in cash and cash equivalents

 

686

157

2,535

 

 

 

 

 

Cash and cash equivalents at the beginning of the period

 

11,723

9,188

9,188

 

 

 

 

 

Cash and cash equivalents at the end of the period

 

12,409

9,345

11,723

 

 

 

 

 

 

Condensed statement of consolidated changes in equity

For the half year ended 30 June 2012

 

Share capital
 (note 6)
£m

Share premium
£m

Other reserves
£m

Shares
held by employee trust and Group entities
£m

Foreign currency translation reserve
£m

Retained earnings
£m

Total
£m

Non-controlling interests (note 8)
£m

Total
£m

At 1 January 2012

-

1,054

5

(11)

93

511

1,652

714

2,366

 

 

 

 

 

 

 

 

 

 

Profit for the period

-

-

-

-

-

2

2

7

9

Other comprehensive expense for the period

-

-

-

-

-

(65)

(65)

-

(65)

Total comprehensive (expense)/income for the period

-

-

-

-

-

(63)

(63)

7

 (56)

 

 

 

 

 

 

 

 

 

 

Dividends paid on ordinary shares (note 7)

-

(37)

-

-

-

-

(37)

-

(37)

Dividends paid to non-controlling interests

-

-

-

-

-

-

-

(11)

(11)

Coupon paid to non-controlling interests, net of tax relief

-

-

-

-

-

-

-

(19)

(19)

Shares issued in lieu of cash dividends

-

1

-

-

-

-

1

-

1

Shares in subsidiaries purchased by non-controlling interests

-

-

-

-

-

-

-

35

35

At 30 June 2012

-

1,018

5

(11)

93

448

1,553

726

2,279

 

Condensed statement of consolidated changes in equity

For the half year ended 30 June 2011

 

Share
capital
 (note 6)
£m

Share premium
£m

Other reserves
£m

Shares
held by employee trust and Group entities
£m

Foreign currency translation reserve
£m

Retained earnings
£m

Total
£m

Non-controlling interests (note 8)
£m

Total
£m

At 1 January 2011

-

1,109

5

(13)

93

386

1,580

720

2,300

 

 

 

 

 

 

 

 

 

 

Profit for the period

-

-

-

-

-

90

90

18

108

Other comprehensive income for the period

-

-

-

-

-

26

26

-

26

Total comprehensive income for the period

-

-

-

-

-

116

116

18

134

 

 

 

 

 

 

 

 

 

 

Dividends paid on ordinary shares (note 7)

-

(36)

-

-

-

-

(36)

-

(36)

Dividends paid to non-controlling interests

-

-

-

-

-

-

-

(11)

(11)

Coupon paid to non-controlling interests, net of tax relief

-

-

-

-

-

-

-

(19)

(19)

Shares issued in lieu of dividends

-

7

-

-

-

-

7

-

7

Credit to equity for equity-settled share-based payments

-

-

-

-

-

3

3

-

3

Shares in subsidiaries subscribed for by non-controlling interests

-

-

-

-

-

-

-

3

3

Shares distributed by employee trust

-

-

-

1

-

(1)

-

-

-

At 30 June 2011

-

1,080

5

(12)

93

504

1,670

711

2,381

 

 

 

Condensed statement of consolidated changes in equity

For the year ended 31 December 2011

 

Share
capital
(note 6)
£m

Share premium
£m

Other reserves
£m

Shares
held by employee trust and Group entities
£m

Foreign currency translation reserve
£m

Retained earnings
£m

Total
£m

Non-controlling interests (note 8)
£m

Total
£m

At 1 January 2011

-

1,109

5

(13)

93

386

1,580

720

2,300

 

 

 

 

 

 

 

 

 

 

(Loss)/profit for the period

-

-

-

-

-

(131)

(131)

33

(98)

Other comprehensive income for the period

-

-

-

-

-

252

252

-

252

Total comprehensive income for the period

-

-

-

-

-

121

121

33

154

 

 

 

 

 

 

 

 

 

 

Dividends paid on ordinary shares (note 7)

-

(72)

-

-

-

-

(72)

-

(72)

Dividends paid to non-controlling interests

-

-

-

-

-

-

-

(21)

(21)

Coupon paid to non-controlling interests, net of tax relief

-

-

-

-

-

-

-

(19)

(19)

Shares issued in lieu of dividends

-

17

-

-

-

-

17

-

17

Credit to equity for equity-settled share-based payments

-

-

-

-

-

6

6

-

6

Shares in subsidiaries subscribed for by non-controlling interests

-

-

-

-

-

-

-

1

1

Shares distributed by employee trust

-

-

-

2

-

(2)

-

-

-

At 31 December 2011

-

1,054

5

(11)

93

511

1,652

714

2,366

 

 

 

 

 

 

 

 

 

 

 

 


Notes to the condensed consolidated interim financial statements

1. Basis of preparation

The interim financial statements for the half year ended 30 June 2012 comprise the interim financial statements of Phoenix Group Holdings ('the Company') and its subsidiaries (together referred to as 'the Group') as set out on pages 24 to 49 and were authorised by the Board of Directors for issue on 22 August 2012. The interim financial statements are unaudited but have been reviewed by the auditors, Ernst & Young Accountants LLP and their review report appears on page 23.

The interim financial statements have been prepared in accordance with IAS 34 Interim Financial Reporting and in accordance with the accounting policies set out in the 2011 financial statements which were prepared in accordance with International Financial Reporting Standards ('IFRSs') adopted for use in the European Union, except for the amendments referred to below.

In preparing the interim financial statements the Group has adopted the following standards, amendments and interpretations:

·      Deferred tax - Recovery of underlying assets (Amendments to IAS 12) (2012). This provides a practical approach to the measurement of deferred tax liabilities and assets when investment property is measured at fair value, according to whether the entity expects to recover an asset by using or selling it; and

·      Disclosure - Transfer of financial assets (Amendments to IFRS 7) (2012). This revises the required disclosures to help users of financial statements evaluate the risk exposures relating to transfers of financial assets and the effect of those risks on an entity's financial position.

Adoption of these standards has not led to any measurement or presentational changes to the results of any period presented in these interim financial statements.

After making enquiries, the Directors have a reasonable expectation that the Company and the Group as a whole have adequate resources to continue in operational existence for the foreseeable future. For this reason, they continue to adopt the going concern basis in preparing the interim financial statements.

2. Changes in accounting policies

There have been no changes in accounting policies in the current reporting period except as noted above, and the comparatives for the year ended 31 December 2011 and the half year ended 30 June 2011 included in these interim financial statements are as presented in the most recent annual and interim financial statements.

3. Segmental analysis

The Group defines and presents operating segments based on the information which is provided to the Board.

An operating segment is a component of the Group that engages in business activities from which it may earn revenues and incur expenses, including revenues and expenses relating to transactions with other components of the Group.

For management purposes, the Group is organised into business units based on their products and services and has two operating segments as follows:

·      Phoenix Life - this segment manages a range of whole life, term assurance and pension products; and

·      Ignis Asset Management - this segment provides investment management services to the life companies within the Group and to third parties, covering both retail and institutional investors.

Segment performance is evaluated based on profit or loss which, in certain respects, is presented differently from profit or loss in the consolidated financial statements. Group financing (including finance costs) and owners' taxes are managed on a Group basis and are not allocated to individual operating segments.

Inter-segment transactions are set on an arm's length basis in a manner similar to transactions with third parties. Segment results include those transfers between business segments which are then eliminated on consolidation.

 


3.1 Segmental result

Half year ended 30 June 2012

 

Phoenix Life
£m

Ignis Asset Management
£m

Unallocated
group
£m

Eliminations
£m

Total
£m

Net premiums written from:

 

 

 

 

 

External customers

771

-

-

-

771

 

771

-

-

-

771

Fees from:

 

 

 

 

 

External customers

43

31

-

-

74

Other segment

-

33

-

(33)

-

 

43

64

-

(33)

74

Net investment income:

 

 

 

 

 

Recurring

1,887

1

(3)

-

1,885

 

 

 

 

 

 

Other operating income:

 

 

 

 

 

Recurring

4

1

-

(1)

4

Net income

2,705

66

(3)

(34)

2,734

 

 

 

 

 

 

Net policyholder claims and benefits incurred

(1,966)

-

-

-

(1,966)

 

 

 

 

 

 

Depreciation and amortisation:

 

 

 

 

 

Depreciation of property, plant and equipment

-

 (1)

-

-

(1)

Impairment losses on property, plant and equipment

(4)

-

-

-

(4)

Amortisation of acquired in-force business

(64)

-

-

-

(64)

Amortisation of customer relationships

(6)

(3)

-

-

(9)

 

(74)

(4)

-

-

(78)

Other operating expenses:

 

 

 

 

 

Recurring

(540)

(46)

(4)

34

(556)

Non-recurring

(22)

(3)

(4)

-

(29)

 

(562)

(49)

(8)

34

(585)

 

 

 

 

 

 

Total operating expenses

(2,602)

(53)

(8)

34

(2,629)

 

 

 

 

 

 

Profit/(loss) before finance costs and tax

103

13

(11)

-

105

 

 

 

 

 

 

Finance costs

(62)

-

(56)

-

(118)

 

 

 

 

 

 

Profit/(loss) before tax

41

13

(67)

-

(13)

 

 

 

 

 

 

Tax attributable to policyholders' returns

(16)

-

-

-

(16)

Segmental result before the tax attributable to owners

25

13

(67)

-

(29)


 

Half year ended 30 June 2011

 

Phoenix Life
£m

Ignis Asset Management
£m

Unallocated
group
£m

Eliminations
£m

Total
£m

Net premiums written from:

 

 

 

 

 

External customers

668

-

-

-

668

Other segment

-

-

-

-

-

 

668

-

-

-

668

Fees from:

 

 

 

 

 

External customers

45

41

-

-

86

Other segment

-

26

-

(26)

-

 

45

67

-

(26)

86

Net investment income:

 

 

 

 

 

Recurring

1,506

-

13

-

1,519

Offset interest income on interest swaps
against interest expenses

-

-

(19)

-

(19)

 

1,506

-

(6)

-

1,500

Other operating income:

 

 

 

 

 

Recurring

6

-

-

-

6

Net income

2,225

67

(6)

(26)

2,260

 

 

 

 

 

 

Net policyholder claims and benefits incurred:

 

 

 

 

 

Recurring

(1,534)

-

-

-

(1,534)

Non-recurring

35

-

-

-

35

 

(1,499)

-

-

-

(1,499)

Depreciation and amortisation:

 

 

 

 

 

Depreciation of property, plant and equipment

(5)

(2)

-

-

(7)

Amortisation of acquired in-force business

(67)

-

-

-

(67)

Amortisation of customer relationships

(6)

(3)

-

-

(9)

 

(78)

(5)

-

-

(83)

Other operating expenses:

 

 

 

 

 

Recurring

(396)

(47)

 (33)

26

(450)

Non-recurring

(30)

-

8

-

(22)

 

(426)

(47)

(25)

26

(472)

 

 

 

 

 

 

Total operating expenses

(2,003)

(52)

(25)

26

(2,054)

 

 

 

 

 

 

Profit/(loss) before finance costs and tax

222

15

(31)

-

206

 

 

 

 

 

 

Finance costs

(57)

-

(74)

-

(131)

Offset interest income on interest swaps against interest expense

-

-

19

-

19

 

(57)

-

(55)

-

(112)

 

 

 

 

 

 

Profit before tax

165

15

(86)

-

94

 

Tax attributable to policyholders' returns

(25)

-

-

-

(25)

Segmental result before the tax attributable to owners

140

15

(86)

-

69

 

 

 

 

 

 

 

 

 

 

 

 


 

Year ended 31 December 2011

 

Phoenix Life
£m

Ignis Asset Management
£m

Unallocated
group
£m

Eliminations
£m

Total
£m

Net premiums written from:

 

 

 

 

 

External customers

1,388

-

-

-

1,388

Other segment

-

-

-

-

-

 

1,388

-

-

-

1,388

Fees from:

 

 

 

 

 

External customers

94

76

-

-

170

Other segment

-

69

-

(69)

-

 

94

145

-

(69)

170

Net investment income:

 

 

 

 

 

Recurring

4,911

1

8

-

4,920

Offset interest income on interest swaps against interest expenses

-

-

(19)

-

(19)

 

4,911

1

(11)

-

4,901

Other operating income:

 

 

 

 

 

Recurring

12

-

-

-

12

Net income

6,405

146

(11)

(69)

6,471

 

 

 

 

 

 

Net policyholder claims and benefits incurred:

 

 

 

 

 

Recurring

(5,879)

-

-

-

(5,879)

Non-recurring

35

-

-

-

35

 

(5,844)

-

-

-

(5,844)

Depreciation, impairment and amortisation:

 

 

 

 

 

Depreciation of property, plant and equipment

-

(3)

-

-

(3)

Impairment losses on property, plant and equipment

(8)

-

-

-

(8)

Amortisation of acquired in-force business

(134)

-

-

-

(134)

Amortisation of customer relationships

(13)

(5)

-

-

(18)

 

(155)

(8)

-

-

(163)

Other operating expenses:

 

 

 

 

 

Recurring

(136)

(97)

(51)

69

(215)

Non-recurring

(50)

(2)

31

-

(21)

 

(186)

(99)

(20)

69

(236)

 

 

 

 

 

 

Total operating expenses

(6,185)

(107)

(20)

69

(6,243)

 

 

 

 

 

 

Profit/(loss) before finance costs and tax

220

39

(31)

-

228

 

 

 

 

 

 

Finance costs

(122)

-

(129)

-

(251)

Offset interest income on interest swaps against interest expenses

-

-

19

-

19

 

(122)

-

(110)

-

(232)

 

 

 

 

 

 

Profit/(loss) before tax

98

39

(141)

-

(4)

 

Tax attributable to policyholders' returns

(173)

-

-

-

(173)

Segmental result before the tax attributable to owners

(75)

39

(141)

-

(177)

 

 

 

 

 

 


 

3.2 Reconciliation of operating profit/(loss) before adjusting items to the segmental result

Half year ended 30 June 2012

 

Phoenix
 Life
£m

Ignis Asset Management
£m

Unallocated
 group
£m

Total
£m

Operating profit/(loss) before adjusting items

205

19

(17)

207

Investment return variances and economic assumption changes on long-term business

(82)

-

-

(82)

Variance on owners' funds

(12)

-

10

(2)

Amortisation of acquired in-force business

(58)

-

-

(58)

Amortisation of customer relationships

(6)

(3)

-

(9)

Non-recurring items

(22)

(3)

(4)

(29)

Finance costs attributable to owners

-

-

(56)

(56)

Segment result before the tax attributable to owners

25

13

(67)

(29)

Non-recurring items include:

·      restructuring costs of £8 million; and

·      regulatory change and systems transformation costs of £21 million.

Half year ended 30 June 2011

 

Phoenix
Life
£m

Ignis Asset Management
£m

Unallocated
group
£m

Total
£m

Operating profit/(loss) before adjusting items

152

18

(34)

136

Investment return variances and economic assumption changes on long-term business

47

-

-

47

Variance on owners' funds

2

-

(5)

(3)

Amortisation of acquired in-force business

(60)

-

-

(60)

Amortisation of customer relationships

(6)

(3)

-

(9)

Non-recurring items

5

-

8

13

Finance costs attributable to owners

-

-

(55)

(55)

Segment result before the tax attributable to owners

140

15

(86)

69

Non-recurring items include:

·      costs associated with the Phoenix Life site rationalisation, associated staff reductions and other restructuring of £21 million;

·      regulatory change and systems transformation costs of £7 million;

·      a gain of £10 million arising from closing the Group's pension schemes to future accrual; and

·      a gain of £35 million following the recovery of historic costs under the management services agreements with the life division.

 

Year ended 31 December 2011

 

Phoenix
Life
£m

Ignis Asset Management
£m

Unallocated
group
£m

Total
£m

Operating profit/(loss) before adjusting items

395

46

(54)

387

Investment return variances and economic assumption changes on long-term business

(338)

-

-

(338)

Variance on owners' funds

17

-

(8)

9

Amortisation of acquired in-force business

(121)

-

-

(121)

Amortisation of customer relationships

(13)

(5)

-

(18)

Non-recurring items

(15)

(2)

31

14

Finance costs attributable to owners

-

-

(110)

(110)

Segment result before the tax attributable to owners

(75)

39

(141)

(177)

 

 

 

 

 

Non-recurring items include:

·      restructuring costs of £37 million;

·      regulatory change and systems transformation costs of £21 million;

·      a gain of £37 million arising from closing the Group's pension schemes to future accrual and implementing a pension increase exchange programme; and

·      a £35 million recovery of historic costs under the management services agreements with the life division.

3.3 Investment return variances and economic assumption changes

The long-term nature of much of the Group's operations means that, for internal performance management, the effects of short-term economic volatility are treated as non-operating items. The Group focuses instead on an operating profit measure that incorporates an expected return on investments supporting its long-term business. This note explains the methodology behind this.

Life assurance business

Operating profit for life assurance business is based on expected investment returns on financial investments backing owners' and policyholder funds over the reporting period, with consistent allowance for the corresponding expected movements in liabilities. Operating profit includes the effect of variance in experience for non-economic items, for example mortality, persistency and expenses, and the effect of changes in non-economic assumptions. Changes due to economic items, for example market value movements and interest rate changes, which give rise to variances between actual and expected investment returns, and the impact of changes in economic assumptions on liabilities, are disclosed separately outside operating profit.

The movement in liabilities included in operating profit reflects both the change in liabilities due to the expected return on investments and the impact of experience variances and assumption changes for non-economic items.

The effect of differences between actual and expected economic experience on liabilities, and changes to economic assumptions used to value liabilities, are taken outside operating profit. For many types of long-term business, including unit-linked and with-profit funds, movements in asset values are offset by corresponding changes in liabilities, limiting the net impact on profit. For other long-term business the profit impact of economic volatility depends on the degree of matching of assets and liabilities, and exposure to financial options and guarantees.

The investment variances and economic assumption changes excluded from the long-term business operating profit in the current year reflects the impact of movements in equities, property and yields partly offset by narrowing credit spreads on corporate bonds.

 

Owners' funds

For non long-term business including owners' funds, the total investment income, including fair value gains, is analysed between a calculated longer-term return and short-term fluctuations.

The variances excluded from operating profit in relation to owners' funds are as follows:

 

Half year
ended
30 Jun 2012
£m

Half year
ended
30 Jun 2011
£m

Year
ended
31 Dec 2011
£m

Variance on owners' funds of:

 

 

 

      Subsidiary undertakings

(3)

(4)

7

      The Company

1

1

2

 

(2)

(3)

9

 


 

The variances on owners' funds of the Company comprise fair value gains arising from movements in the fair value of warrants in issue over the Company's shares.

Calculation of the long-term investment return

The expected return on investments for both owner and policyholder funds is based on opening economic assumptions applied to the funds under management at the beginning of the reporting period. Expected investment return assumptions are derived actively, based on market yields on risk-free fixed interest assets at the start of each financial year. The same margins are applied on a consistent basis across the Group to gross risk-free yields (being the 15 year gilt rate plus 10 basis points), to obtain investment return assumptions for equities and properties.

The principal assumptions underlying the calculation of the longer term investment return are:

 

Half year
ended
30 Jun 2012
%

Half year
ended
30 Jun 2011
%

Year
ended
31 Dec 2011
%

Equities

5.6

7.1

7.1

Properties

4.6

6.1

6.1

Other fixed interest

3.6

4.6

4.6

Gilts

2.6

4.0

4.0

 

 

 

 

 

4. Tax (credit)/charge

4.1 Current period tax (credit)/charge

 

Half year
ended
30 Jun 2012
£m

Half year
ended
30 Jun 2011
£m

Year
ended
31 Dec 2011
£m

Current tax:

 

 

 

UK Corporation tax

17

16

68

Overseas tax

11

3

16

 

28

19

84

Adjustment in respect of prior years

6

(48)

(57)

 

34

(29)

27

 

 

 

 

Deferred tax:

 

 

 

Reversal/origination of temporary differences:

 

 

 

On non-profit surpluses

(2)

10

(9)

On amortisation of acquired in-force business

(19)

(23)

(44)

On amortisation of customer relationships intangible

(2)

(3)

(5)

On unrealised gains

-

3

-

Capital allowances in excess of depreciation

-

-

6

Other temporary differences

(2)

-

3

On accrued interest

(16)

-

7

Tax losses arising in the current year carried forward

(11)

-

-

Pension scheme movements

4

8

30

On provisions for future expenditure

(1)

2

2

Utilisation of tax losses

35

40

131

Change in rate of Corporation tax

(20)

(20)

(41)

Valuation of previously unrecognised deferred tax assets

(22)

(2)

(13)

 

(56)

15

67

 


 

 

Total tax (credit)/charge

(22)

(14)

94

 

 

 

 

Attributable to:

 

 

 

Policyholders

16

25

173

Owners

(38)

(39)

(79)

 

(22)

(14)

94

The Group, as a proxy for policyholders in the UK, is required to pay taxes on policyholder investment income and gains each year. Accordingly, the tax benefit or expense attributable to UK life assurance policyholder earnings is included in income tax. The tax charge attributable to policyholder earnings was £16 million (half year ended 30 June 2011: £25 million; year ended 31 December 2011: £173 million).

 

4.2 Tax (credited)/charged to other comprehensive income

 

Half year
ended
30 Jun 2012
£m

Half year
ended
30 Jun 2011
£m

Year
ended
31 Dec 2011
£m

Deferred tax credit on defined benefit schemes

(3)

(9)

(1)

 

 

 

 

4.3 Reconciliation of tax (credit)/charge

 

Half year
ended
30 Jun 2012
£m

Half year
ended
30 Jun 2011
£m

Year
ended
31 Dec 2011
£m

(Loss)/profit before tax

(13)

94

(4)

Policyholder tax charge

(16)

(25)

(173)

(Loss)/profit before the tax attributable to owners

(29)

69

(177)

Tax (credit)/charge at standard UK1 rate of 24.5% (2011: 26.5%)

(7)

18

(47)

Untaxed income and gains

-

(18)

(7)

Disallowable expenses

-

1

3

Adjustment to tax charge in respect of prior years

16

(48)

(57)

Movement on acquired in-force amortisation at less than 24.5% (2011: 26.5%)

1

-

3

Movement in non-profit surplus taxed at less than 24.5% (2011: 26.5%)

-

14

13

Profits taxed at rates other than 24.5% (2011: 26.5%)

(11)

2

19

Tax on losses not previously valued

(22)

(13)

(11)

Prior year deferred tax

1

8

20

Deferred tax rate change

(20)

(20)

(41)

Current year losses not valued

2

28

3

Temporary differences not valued

4

(7)

27

Other

(2)

(4)

(4)

Owners' tax credit

(38)

(39)

(79)

Policyholder tax charge

16

25

173

Total tax (credit)/charge for the period

(22)

(14)

94

 

 

 

 

1     The Group's two operating segments operate predominately in the UK. The reconciliation of the tax credit has, therefore, been completed by reference to the standard rate of UK tax rather than by reference to the Jersey income tax rate of 0% which is applicable to Phoenix Group Holdings.

A gradual reduction in the UK corporation tax rate from 28% to 24% over four years was announced in the Emergency Budget of 22 June 2010 with further 1% reductions being announced in each of the Budgets of 23 March 2011 and 21 March 2012. The first 4% of the reductions had been substantively enacted by the half year. Consequently a rate of 24% has been used for the purposes of providing for deferred tax in this interim report. Further reductions are to be introduced by future legislation. The benefit to the Group's IFRS net assets arising from the further 2% reduction in the tax rate is estimated as £38 million in total and will be recognised as the legislation is substantively enacted.

Following an initial announcement by HMRC in March 2011, the Finance Act 2012 introduced new rules for the taxation of insurance companies, with effect from 1 January 2013. The Group has conducted an assessment of the likely impact of the new rules based on 2011 year end information, which suggests that the effect of the transition to the new regime will not have a material impact on the Group's overall tax position. However, the final impact of the transition will depend on the Group life companies' position as at 31 December 2012.

5. Earnings per share

The profit attributable to owners for the purposes of computing earnings per share has been calculated as set out below. This is after adjusting for profits attributable to non-controlling interests.

 

Half year
ended
30 Jun 2012
£m

Half year
ended
30 Jun 2011
£m

Year
ended
31 Dec 2011
£m

Profit/(loss) for the period

9

108

(98)

Share of result attributable to non-controlling interests

(7)

(18)

(33)

Profit/(loss) attributable to owners

2

90

(131)

 

 

 

 

The basic earnings per share of 1.1p (half year ended 30 June 2011: 52.3p; year ended 31 December 2011: (76.2)p) has been based on the profit of £2 million (half year ended 30 June 2011: profit of £90 million; year ended 31 December 2011: loss of £131 million) and a weighted average number of ordinary shares outstanding during the period of 174 million (half year ended 30 June 2011: 172 million; year ended 31 December 2011: 172 million), calculated as follows:

 

Half year
ended
30 Jun 2012
No.
million

Half year
ended
30 Jun 2011
No.
million

Year
ended
31 Dec 2011
No.
million

Issued ordinary shares at beginning of the period

174

171

171

Effect of ordinary shares issued

-

1

1

Weighted average number of ordinary shares

174

172

172

 

 

 

 

The diluted earnings per share of 1.1p (half year ended 30 June 2011: 52.3p; year ended 31 December 2011: (76.2)p) has been based on the profit of £2 million (half year ended 30 June 2011: profit of £90 million; year ended 31 December 2011: loss of £131 million) and a diluted weighted average number of ordinary shares outstanding during the period of 174 million (half year ended 30 June 2011: 172 million; year ended 31 December 2011: 172 million), calculated as follows:

 

Half year
ended
30 Jun 2012
No.
million

Half year
ended
30 Jun 2011
No.
million

Year
ended
31 Dec 2011
No.
million

Weighted average number of ordinary shares

174

172

172

Effect of warrants in issue

-

-

-

Weighted average number of ordinary shares (diluted)

174

172

172

 

 

 

 

The following instruments could potentially dilute basic earnings per share in the future but have not been included in the diluted earnings per share figure because they did not have a dilutive effect for the periods presented due to the exercise price of the warrants being significantly higher than the share price of the Company:

·      5 million warrants issued to the Lenders on 2 September 2009;

·      12.36 million warrants issued to Royal London on 2 September 2009; and

·      IPO warrants, the exercise price of which was increased from €7 to €11 on 2 September 2009.

6. Share capital

 

30 Jun 2012
£

30 Jun 2011
£

31 Dec 2011
£

Authorised:

 

 

 

410 million (30 June 2011: 410 million; 31 December 2011: 410 million) ordinary shares of €0.0001 each

31,750

31,750

31,750

 

 

 

 

 

 

 

 

Issued and fully paid:

 

 

 

174.6 million (30 June 2011: 172.6 million; 31 December 2011: 174.5 million) ordinary shares of €0.0001 each

14,174

14,001

14,165

 

Movements in share capital during the period:

 

Number

£

Shares in issue at 1 January 2012

174,472,815

14,165

Ordinary shares issued for scrip dividend (note 7)

114,333

9

Shares in issue at 30 June 2012

174,587,148

14,174

 

 

Number

£

Shares in issue at 1 January 2011

171,455,610

13,904

Ordinary shares issued for scrip dividend

1,086,927

96

Other ordinary shares issued in the period

11,178

1

Shares in issue at 30 June 2011

172,553,715

14,001

Ordinary shares issued for scrip dividend

1,918,166

164

Other ordinary shares issued in the period

934

-

Shares in issue at 31 December 2011

174,472,815

14,165

 

 

 


7. Dividends on ordinary shares

 

Half year
ended
30 Jun 2012
£m

Half year
ended
30 Jun 2011
£m

Year
ended
31 Dec 2011
£m

Dividend paid in 2012 at 21p per share (half year ended 30 June 2011: 21p; year ended 31 December 2011: 42p)

37

36

72

 

 

 

 

On 22 March 2012, the Board recommended a dividend of 21p per share in respect of the year ended 31 December 2011. The dividend was approved at the Company's Annual General Meeting, which was held on 3 May 2012. A scrip dividend option was available to shareholders and the dividend was settled on 8 May 2012. The value of the dividend that was settled via the scrip dividend option was £1 million.

8. Non-controlling interests

 

Perpetual Reset Capital Securities
£m

UK Commercial Property Trust Limited
£m

Total
£m

At 1 January 2012

407

307

714

Profit/(loss) for the period

10

(3)

7

Dividends paid

-

(11)

(11)

Coupons paid, net of tax relief

(19)

-

(19)

Shares purchased by non-controlling interest

-

35

35

At 30 June 2012

398

328

726

 

 

 

 

 

 

Perpetual Reset Capital Securities
£m

UK Commercial Property Trust Limited
£m

Total
£m

At 1 January 2011

411

309

720

Profit for the period

7

11

18

Dividends paid

-

(11)

(11)

Coupons paid, net of tax relief

(19)

-

(19)

Effect of share transactions

-

3

3

At 30 June 2011

399

312

711

Profit for the period

8

7

15

Dividends paid

-

(10)

(10)

Effect of share transactions

-

(2)

(2)

At 31 December 2011

407

307

714

 

 

 

 

 

 

8.1 Perpetual Reset Capital Securities

On 1 January 2012, Pearl Group Holdings (No.1) Limited ('PGH1') had in issue £425 million Perpetual Reset Capital Securities ('the Notes'). Following amendments made to the Notes during 2010, the aggregate amount payable on redemption of the Notes is £425 million. On 26 April 2012, the 2012 coupon that was due on the Notes was settled in full by PGH1, other than to two companies within the Group which waived their right to receive that coupon.

8.2 UK Commercial Property Trust Limited

UK Commercial Property Trust Limited is a property investment subsidiary which is domiciled in Guernsey and is admitted to the Official List of the UK Listing Authority and to trading on the London Stock Exchange.

Following a bookbuilding process, the Group disposed of an aggregate of 47,826,087 shares in UKCPT (amounting to 4% of the issued share capital of UKCPT) at a price of 69p per share on 21 March 2012. Following completion of the sale the Group now holds 62% of the issued share capital of UKCPT.

9. Pension schemes

The condensed statement of consolidated financial position incorporates the reported surplus of the PGL Pension Scheme and the Pearl Group Staff Pension Scheme at 30 June 2012 respectively. The reported surplus of the PGL Pension Scheme amounted to £237 million (30 June 2011: £80 million, 31 December 2011: £277 million); this has been adjusted by £92 million (30 June 2011: £74 million, 31 December 2011: £94 million) to eliminate on consolidation the carrying value of insurance policies effected by the PGL Pension Scheme with the Group. The reported surplus of the Pearl Group Staff Pension Scheme amounted to £20 million (30 June 2011: deficit £62 million, 31 December 2011: surplus £37 million). The reported surplus is equivalent to the net surplus less 35% tax payable on the winding up of the schemes.

In November 2011, following formal consultation, the Group carried out a pension increase exchange ('PIE') exercise where existing in-scope pensioners were offered the option to exchange future non-statutory pension increases for benefits accrued before 6 April 1997 for higher, non-increasing pensions, thereby reducing longevity and inflation risk for the Group. The Pearl Group Staff Pension Scheme and the PGL Pension Scheme PIE exercises formally closed in February 2012. The financial effect of all acceptances in the period, and any reversals of acceptances received at 31 December 2011, has been recognised in the consolidated financial statements. A reduction in scheme liabilities of £3 million for the Pearl Group Staff Scheme (31 December 2011: £16 million) and £2 million for the PGL Pension Scheme (31 December 2011: £11 million) is shown as a negative past service cost in the income statement.

In November 2011, the Group commenced an Enhanced Transfer Value ('ETV') exercise which offered in-scope deferred members of the PGL Pension Scheme the option to take an Equivalent Cash Transfer Value to exit the Scheme, thereby extinguishing any future liability and risk for the Group with respect to these members. The financial effect of all completed transfers up to 30 June 2012 has been recognised in the consolidated financial statements. As at 30 June 2012, ETVs of £33 million had been paid out, reducing scheme assets, and there was a resulting reduction in the scheme liabilities of £27 million. The net settlement cost of £6 million has been recognised in the income statement.

10. Liabilities under insurance contracts - assumptions

Valuation of participating insurance and investment contracts

For participating business, which is with-profit business (insurance and investment contracts), the insurance contract liability is calculated in accordance with the FSA's realistic capital regime, adjusted to exclude the shareholders' share of future bonuses and the associated tax liability as required by FRS 27 Life Assurance. This is a market consistent valuation, which involves placing a value on liabilities similar to the market value of assets with similar cash flow patterns.

Valuation of non-participating insurance contracts

The non-participating insurance contract liabilities are determined using either a net premium or gross premium valuation method.

 

Process used to determine assumptions

For participating business in realistic basis companies the assumptions about future demographic trends are intended to be 'best estimates'. They are determined after considering the companies' recent experience and/or relevant industry data. Economic assumptions are market consistent.

For other business, demographic assumptions are derived by adding a prudent margin to best estimate assumptions. Economic assumptions are prudent estimates of the returns expected to be achieved on the assets backing the liabilities.

During the period, no material changes were made to assumptions (half year ended 30 June 2011: no material changes). The impacts of material changes during the year ended 31 December 2011 were as follows:

 

 

 

(Decrease)/ increase in insurance liabilities
31 Dec 2011
£m

Change in longevity assumptions

 

 

(72)

Change in persistency assumptions

 

 

18

Change in expense assumptions


(25)

 


 

 

11. Borrowings

 

30 Jun 2012
£m

30 Jun 2011
£m

31 Dec 2011
£m

Carrying value

 

 

 

Limited recourse bonds 2012 7.39%

11

28

11

Limited recourse bonds 2022 7.59%

90

94

90

Property reversions loan

211

226

217

£80 million facility agreement

80

80

80

£150 million term facility

120

25

60

Total policyholder borrowings

512

453

458

 



 

£200 million 7.25% unsecured subordinated loan

139

131

135

Unsecured loan notes

5

9

7

£2,260 million syndicated loan

1,915

2,055

1,993

£100 million PIK notes and facility

114

109

111

£75 million secured loan note

74

72

73

£425 million loan facility

351

375

375

Total shareholder borrowings

2,598

2,751

2,694

 

 


 

Total borrowings

3,110

3,204

3,152

 


 

During the period, UK Commercial Property Trust Limited ('UKCPT') drew down a further £60 million of its £150 million term facility agreement in order to increase its property portfolio. The £150 million investment term loan facility agreement accrues interest at LIBOR plus a variable margin of 1.60% to 2.00% per annum. The lender holds security over the assets of UK Commercial Property Estates Holdings Limited and UK Commercial Property Estates Limited, both of which are subsidiaries of UKCPT. The repayment date for this facility is 19 May 2018. As at 30 June 2012 the amount drawn down was £120 million.

On 30 January 2012, a prepayment of £15 million was made on the £2,260 million syndicated loan and on 27 April 2012 a scheduled repayment of £63 million was also made on the same facility.

On 30 June 2012, a scheduled repayment of £24 million was made on the £425 million syndicated loan.

 

12. Fair value hierarchy

12.1 Fair value hierarchy of financial instruments measured at fair value

At 30 June 2012

Level 1
£m

Level 2
£m

Level 3
£m

Total fair
value
£m

Financial assets

 

 

 

 

Derivative assets

-

5,072

26

5,098

Financial assets designated at fair value through profit or loss upon initial recognition

 

 

 

 

Equities

9,751

52

837

10,640

Fixed and variable rate income securities

32,041

10,549

879

43,469

Collective investment schemes

4,724

1,000

207

5,931

 

46,516

11,601

1,923

60,040

Total financial assets

46,516

16,673

1,949

65,138

 

 

 

 

 

Financial liabilities

 

 

 

 

Derivative liabilities

-

3,953

5

3,958

Financial liabilities designated at fair value through profit or loss upon initial recognition

 

 

 

 

Investment contract liabilities

-

7,933

-

7,933

Borrowings

-

211

-

211

Net asset value attributable to unitholders

4,161

-

173

4,334

 

4,161

8,144

173

12,478

Total financial liabilities

4,161

12,097

178

16,436

 

 

 

 

 

 

At 30 June 2011

Level 1
£m

Level 2
£m

Level 3
£m

Total fair
value
£m

Financial assets

 

 

 

 

Derivative assets

-

2,623

86

2,709

Financial assets designated at fair value through profit or loss upon initial recognition

 

 

 

 

Equities

11,153

29

809

11,991

Fixed and variable rate income securities

34,369

5,350

573

40,292

Collective investment schemes

5,338

1,026

264

6,628

 

50,860

6,405

1,646

58,911

Total financial assets

50,860

9,028

1,732

61,620

 

 

 

 

 

Financial liabilities

 

 

 

 

Derivative liabilities

-

2,183

11

2,194

Financial liabilities designated at fair value through profit or loss upon initial recognition

 

 

 

 

Investment contract liabilities

-

8,701

-

8,701

Borrowings

-

226

-

226

Net asset value attributable to unitholders

2,030

-

167

2,197

 

2,030

8,927

167

11,124

Total financial liabilities

2,030

11,110

178

13,318

 

 

 

 

 

 

 

 

At 31 December 2011

Level 1
£m

Level 2
£m

Level 3
£m

Total fair
value
£m

Financial assets

 

 

 

 

Derivative assets

-

6,038

61

6,099

Financial assets designated at fair value through profit or loss upon initial recognition

 

 

 

 

Equities

10,222

42

814

11,078

Fixed and variable rate income securities

31,592

9,556

862

42,010

Collective investment schemes

4,976

1,043

232

6,251

 

46,790

10,641

1,908

59,339

 

 

 

 

 

Total financial assets

46,790

16,679

1,969

65,438

 





Financial liabilities

 

 

 

 

Derivative liabilities

-

4,292

-

4,292

Financial assets designated at fair value through profit or loss upon initial recognition





Investment contract liabilities

-

7,978

-

7,978

Borrowings

-

217

-

217

Net asset value attributable to unitholders

3,040

-

169

3,209

 

3,040

8,195

169

11,404

Total financial liabilities

3,040

12,487

169

15,696

 

 

 

 

 

12.2 Movement in Level 3 financial instruments measured at fair value

At 30 June 2012

At
1 Jan
 2012
£m

Total (losses)/gains
in income statement
£m

Purchases
and
sales
£m

Transfers from/(to)
Level 1 and
Level 2
£m

At
30 Jun
 2012
£m

Financial assets

 

 

 

 

 

Derivative assets

61

(18)

(17)

-

26

Financial assets designated at fair value through profit or loss upon initial recognition

 

 

 

 

 

Equities

814

16

-

7

837

Fixed and variable rate income securities

862

(29)

-

46

879

Collective investment schemes

232

(30)

5

-

207

 

1,908

(43)

5

53

1,923

Total financial assets

1,969

(61)

(12)

53

1,949

 

At 30 June 2012

At
1 Jan
2012
£m

Total losses/(gains)
in income statement
£m

Purchases
and
sales
£m

Transfers from/(to)
Level 1 and
Level 2
£m

At
30 Jun
2012
£m

Financial liabilities

 

 

 

 

 

Derivative liabilities

-

7

(2)

-

5

Financial liabilities designated at fair value through profit or loss upon initial recognition

 

 

 

 

 

Net asset value attributable to unitholders

169

4

-

-

173

Total financial liabilities

169

11

(2)

-

178


 

 

At 30 June 2011

At
1 Jan
2011
£m

Total gains/
(losses)
in income statement
£m

Purchases
and
sales
£m

Transfers from/(to)
Level 1 and
Level 2
£m

At
30 Jun
2011
£m

Financial assets

 

 

 

 

 

Derivative assets

89

(3)

-

-

86

Financial assets designated at fair value through profit or loss upon initial recognition

 

 

 

 

 

Equities

793

32

(16)

-

809

Fixed and variable rate income securities

747

70

(75)

(169)

573

Collective investment schemes

316

1

(54)

1

264

 

1,856

103

(145)

(168)

1,646

Total financial assets

1,945

100

(145)

(168)

1,732

 

At 30 June 2011

At
1 Jan
2011
£m

Total (gains)/
losses
in income statement
£m

Purchases
and
sales
£m

Transfers from/(to)
Level 1 and
Level 2
£m

At
30 Jun
2011
£m

Financial liabilities

 

 

 

 

 

Derivative liabilities

11

-

-

-

11

Financial liabilities designated at fair value through profit or loss upon initial recognition

 

 

 

 

 

Net asset value attributable to unitholders

168

(1)

-

-

167

Total financial liabilities

179

(1)

-

-

178

 

At 31 December 2011

At
1 Jan
2011
£m

Total gains/
(losses)
in income statement
£m

Purchases
and
sales
£m

Transfers from/(to)
Level 1 and
Level 2
£m

At
31 Dec
2011
£m

Financial assets

 

 

 

 

 

Derivative assets

89

(17)

(11)

-

61

Financial assets designated at fair value through profit or loss upon initial recognition

 

 

 

 

 

Equities

793

29

(10)

2

814

Fixed and variable rate income securities

747

9

(3)

109

862

Collective investment schemes

316

(2)

(82)

-

232

 

1,856

36

(95)

111

1,908

Total financial assets

1,945

19

(106)

111

1,969

 

At 31 December 2011

At
1 Jan
2011
£m

Total (gains)/
losses
in income statement
£m

Purchases
and
sales
£m

Transfers from/(to)
Level 1 and
Level 2
£m

At
31 Dec
2011
£m

Financial liabilities

 

 

 

 

 

Derivative liabilities

11

(11)

-

-

-

Financial liabilities designated at fair value through profit or loss upon initial recognition

 

 

 

 

 

Net asset value attributable to unitholders

168

1

-

-

169

Total financial liabilities

179

(10)

-

-

169

Gains and losses on Level 3 financial instruments are included in net investment income in the condensed consolidated income statement. There were no gains or losses recognised in other comprehensive income.

13. Cash flows from operating activities

 

Half year
ended
30 Jun 2012
£m

Half year
ended
30 Jun 2011
£m

Year
ended
31 Dec 2011
£m

(Loss)/profit for the period before tax

(13)

94

(4)

Non-cash movements in (loss)/profit for the period before tax




Fair value losses/(gains) on:




Investment property

40

(16)

(4)

Financial assets

(226)

203

(1,572)

Change in fair value of borrowings

10

18

20

Depreciation of property, plant and equipment

1

7

3

Impairment of owner occupied property

4

-

8

Amortisation of intangible assets

73

76

152

Change in present value of future profit

-

6

19

Change in unallocated surplus

-

29

(16)

Share-based payment charge

-

-

4

Interest expense on borrowings

118

131

251

Net expected return on pension schemes

4

6

11

Other gains on pension schemes

1

-

(37)

Decrease in investment assets

2,063

1,687

1,400

Decrease/(increase) in reinsurance assets

139

52

(201)

(Decrease)/increase in insurance contract and investment contract liabilities

(629)

(1,055)

450

(Decrease)/increase in deposits received from reinsurers

(5)

(11)

53

(Decrease)/increase in obligation for repayment of collateral received

(603)

(9)

2,845

Net (increase)/decrease in working capital

(62)

(33)

310

Cash generated by operations

915

1,185

3,692


 

 

 

14. Related party transactions

The nature of the related party transactions of the Group has not changed from those referred to in the Group's consolidated financial statements for the year ended 31 December 2011.

There were no transactions with related parties during the six months ended 30 June 2012 which have had a material effect on the results or financial position of the Group.

15. Contingent liabilities

In the normal course of business the Group is exposed to certain legal issues, which involve litigation and arbitration, and as at the period end, the Group has no material contingent liabilities in this regard.

16. Events after the reporting period

On 22 August 2012, the Board declared an interim dividend per share of 21p for the half year ended 30 June 2012. The cost of this dividend has not been recognised as a liability in the interim financial statements for the period to 30 June 2012 and will be charged to the statement of consolidated changes in equity when paid.

On 27 June 2012 the Group announced that it had entered into a reinsurance agreement, effective 1 July 2012, to transfer approximately £5 billion of annuity in-payment liabilities, around 40% of the Group's annuity portfolio, to Guardian Financial Services ('Guardian'). On 5 July 2012, the Group made an associated transfer of £4.9 billion of assets to Guardian as the related reinsurance premium for the transferred annuity liabilities.

It is expected that the reinsurance agreement will be replaced by a formal Part VII transfer of the annuity liabilities to Guardian in 2013.

Phoenix Group and Guardian have agreed terms for Ignis Asset Management to continue to provide investment management services to Guardian in respect of assets backing the transferred annuity in-payment liabilities.

As the effective date of the reinsurance agreement is 1 July 2012, the transaction is a non-adjusting post balance sheet event and is not reflected in the half year IFRS financial statements. The reinsurance agreement is not expected to have a material impact on the full year 2012 recurring IFRS operating profit. As the annuity liabilities include prudential margins under IFRS a non-recurring positive impact (net of any write down of associated intangible assets) is expected in the second half of the year which will be reported outside of operating profit. The exact amount of the impact is subject to the progress of the expected Part VII transfer which is expected to take place in the second half of 2013.


Additional life company asset disclosures

The analysis of the asset portfolio provided below comprises the assets held by the Group's life companies including stock lending collateral. It excludes other Group assets such as cash held in the holding and service companies and Ignis; the assets held by the non-controlling interest in collective investment schemes and UKCPT; and is net of derivative liabilities.

The following table provides an overview of the exposure by asset category of the Group's life companies' shareholder and policyholder funds:

30 June 2012

Carrying value

Shareholder
and non-profit

 funds1

£m

Participating1

supported
£m

Participating2

non-supported
£m

Unit-linked2

£m

Total3

£m

Cash and cash equivalents

2,731

993

9,531

1,032

14,287

Debt securities - gilts

3,221

1,809

11,582

878

17,490

Debt securities - bonds

7,528

2,221

10,143

926

20,818

Equity securities

360

14

6,326

7,234

13,934

Property investments

143

148

648

294

1,233

Other investments4

1,341

(106)

3,334

26

4,595

As at 30 June 2012

15,324

5,079

41,564

10,390

72,357

 

 

 

 

 

 

1     Includes assets where shareholders of the life companies bear the investment risk.

2     Includes assets where policyholders bear most of the investment risk.

3     This information is presented on a look through basis to underlying funds where available.

4     Includes repurchase loans of £2,277 million, other loans of £217 million, net derivatives of £1,132 million and other investments of £969 million.

31 December 2011

Carrying value

Shareholder and
 non-profit
 funds
£m

Participating
supported
£m

Participating
non-supported
£m

Unit-linked
£m

Total
£m

Cash and cash equivalents

3,280

965

7,493

1,035

12,773

Debt securities - gilts

3,202

1,883

12,093

886

18,064

Debt securities - bonds

7,570

2,279

10,099

870

20,818

Equity securities

390

17

6,631

7,436

14,474

Property investments

153

184

759

306

1,402

Other investments1

1,687

(79)

4,173

35

5,816

As at 31 December 2011

16,282

5,249

41,248

10,568

73,347

 

 

 

 

 

 

1     Includes repurchase loans of £3,003 million, policy loans of £15 million, other loans of £41 million, net derivatives of £1,797 million and other investments of £960 million.

 


The following table analyses by type the debt securities of the life companies:

30 June 2012

Analysis by type of debt securities

Shareholder and non-profit funds
£m

Participating
supported
£m

Participating
non-supported
£m

Unit-linked
£m

Total
£m

Gilts

3,221

1,809

11,582

878

17,490

Other government and supranational1

1,367

657

1,858

154

4,036

Corporate - financial institutions

2,293

671

3,758

204

6,926

Corporate - other

3,580

520

3,559

553

8,212

Asset backed securities ('ABS')

288

373

968

15

1,644

As at 30 June 2012

10,749

4,030

21,725

1,804

38,308

 

 

 

 

 

 

1     Includes debt issued by governments; public and statutory bodies; government backed institutions and supranationals.

31 December 2011

Analysis by type of debt securities

Shareholder and non-profit funds
£m

Participating
supported
£m

Participating
non-supported
£m

Unit-linked
£m

Total
£m

Gilts

3,202

1,883

12,093

886

18,064

Other government and supranational

1,460

670

2,151

169

4,450

Corporate - financial institutions

2,230

666

3,603

206

6,705

Corporate - other

3,547

481

3,112

480

7,620

Asset backed securities ('ABS')

333

462

1,233

15

2,043

As at 31 December 2011

10,772

4,162

22,192

1,756

38,882

 

 

 

 

 

 

The following table sets out a breakdown of the life companies' sovereign and supranational debt security holdings by country:

30 June 2012

Analysis of sovereign and supranational debt security holdings
by country

Shareholder and non-profit funds
£m

Participating supported
£m

Participating non-supported
£m

Unit-linked
£m

Total
£m

UK

3,237

1,810

11,681

880

17,608

European Investment Bank

508

366

621

53

1,548

USA

35

17

34

35

121

Germany

707

233

869

20

1,829

France

9

-

21

2

32

Netherlands

60

-

51

4

115

Portugal

-

-

-

-

-

Italy

-

-

-

3

3

Ireland

-

-

-

-

-

Greece

-

-

-

-

-

Spain

-

5

12

1

18

Other - non-Eurozone

11

25

114

31

181

Other - Eurozone

21

10

37

3

71

As at 30 June 2012

4,588

2,466

13,440

1,032

21,526

 

 

 

 

 

 

 

31 December 2011

Analysis of sovereign and supranational debt security holdings
by country

Shareholder and non-profit funds
£m

Participating supported
£m

Participating
non-supported
£m

Unit-linked
£m

Total
£m

UK

3,211

1,884

12,112

887

18,094

European Investment Bank

525

365

862

57

1,809

USA

35

16

34

30

115

Germany

673

245

936

29

1,883

France

119

-

72

5

196

Netherlands

27

-

24

3

54

Portugal

-

-

-

-

-

Italy

1

-

93

6

100

Ireland

-

-

2

-

2

Greece

-

-

-

-

-

Spain

-

8

36

2

46

Other - non-Eurozone

10

25

34

30

99

Other - Eurozone

61

10

39

6

116

As at 31 December 2011

4,662

2,553

14,244

1,055

22,514

 

 

 

 

 

 

The following table sets out a breakdown of the life companies' financial institution corporate debt security holdings by country:

30 June 2012

Analysis of financial institution corporate debt security holdings
by country

Shareholder and non-profit funds
£m

Participating supported
£m

Participating non-supported
£m

Unit-linked
£m

Total
£m

UK

1,326

525

2,097

146

4,094

USA

360

67

538

19

984

Germany

33

3

78

-

114

France

70

9

101

4

184

Netherlands

287

49

682

35

1,053

Portugal

-

-

-

-

-

Italy

2

3

10

-

15

Ireland

72

1

9

-

82

Greece

-

-

-

-

-

Spain

8

2

17

-

27

Other - non-Eurozone

77

9

125

-

211

Other - Eurozone

58

3

101

-

162

As at 30 June 2012

2,293

671

3,758

204

6,926

 

 

 

 

 

 

31 December 2011

Analysis of financial institution corporate debt security holdings by country

Shareholder and non-profit funds
£m

Participating supported
£m

Participating
non-supported
£m

Unit-linked
£m

Total
£m

UK

1,171

504

1,962

126

3,763

USA

326

73

447

18

864

Germany

46

1

58

-

105

France

143

20

287

12

462

Netherlands

313

46

559

40

958

Portugal

-

-

-

-

-

Italy

5

3

16

-

24

Ireland

68

1

9

-

78

Greece

-

-

-

-

-

Spain

10

1

23

1

35

Other - non-Eurozone

90

14

147

5

256

Other - Eurozone

58

3

95

4

160

As at 31 December 2011

2,230

666

3,603

206

6,705

 

 

 

 

 

 

 

 

The following table sets out a breakdown of the life companies' corporate - other debt security holdings by country:

30 June 2012

Analysis of corporate - other debt security holdings by country

Shareholder and non-profit funds
£m

Participating supported
£m

Participating non-supported
£m

Unit-linked
£m

Total
£m

UK

1,486

266

1,793

444

3,989

USA

733

70

399

17

1,219

Germany

60

10

142

8

220

France

409

79

323

15

826

Netherlands

387

67

393

19

866

Portugal

-

-

2

-

2

Italy

64

2

76

7

149

Ireland

9

-

11

-

20

Greece

6

-

2

-

8

Spain

54

-

59

5

118

Other - non-Eurozone

124

20

159

15

318

Other - Eurozone

248

6

200

23

477

As at 30 June 2012

3,580

520

3,559

553

8,212

 

 

 

 

 

 

31 December 2011

Analysis of corporate - other debt security holdings by country

Shareholder and non-profit funds
£m

Participating supported
£m

Participating
non-supported
£m

Unit-linked
£m

Total
£m

UK

1,391

244

1,556

381

3,572

USA

787

70

357

15

1,229

Germany

56

2

65

6

129

France

408

82

342

18

850

Netherlands

403

56

374

24

857

Portugal

-

-

-

-

-

Italy

67

3

71

6

147

Ireland

10

-

9

-

19

Greece

8

-

2

-

10

Spain

105

3

80

6

194

Other - non-Eurozone

95

19

129

10

253

Other - Eurozone

217

2

127

14

360

As at 31 December 2011

3,547

481

3,112

480

7,620

 

 

 

 

 

 

The following table sets out a breakdown of the life companies' ABS holdings by country:

30 June 2012

Analysis of ABS holdings by country

Shareholder and non-profit funds
£m

Participating supported
£m

Participating non-supported
£m

Unit-linked
£m

Total
£m

UK

250

275

646

15

1,186

USA

31

-

28

-

59

Germany

1

16

70

-

87

France

-

1

4

-

5

Netherlands

6

52

135

-

193

Portugal

-

-

-

-

-

Italy

-

10

31

-

41

Ireland

-

6

16

-

22

Greece

-

-

-

-

-

Spain

-

7

20

-

27

Other - non-Eurozone

-

6

18

-

24

Other - Eurozone

-

-

-

-

-

As at 30 June 2012

288

373

968

15

1,644

 

 

 

 

 

 


 

31 December 2011

Analysis of ABS holdings by country

Shareholder and non-profit funds
£m

Participating supported
£m

Participating
non-supported
£m

Unit-linked
£m

Total
£m

UK

273

321

802

15

1,411

USA

29

-

35

-

64

Germany

5

44

139

-

188

France

-

10

25

-

35

Netherlands

3

36

98

-

137

Portugal

-

-

2

-

2

Italy

-

10

31

-

41

Ireland

18

19

48

-

85

Greece

-

-

-

-

-

Spain

5

18

33

-

56

Other - non-Eurozone

-

4

20

-

24

Other - Eurozone

-

-

-

-

-

As at 31 December 2011

333

462

1,233

15

2,043

 

 

 

 

 

 

The following table sets out the credit rating analysis of the debt portfolio:

30 June 2012

Credit rating analysis of debt portfolio

Shareholder and non-profit funds
£m

Participating supported
£m

Participating non-supported
£m

Unit-linked
£m

Total
£m

AAA

4,852

2,853

13,780

731

22,216

AA

725

301

1,482

80

2,588

A

1,977

601

2,436

157

5,171

BBB

1,885

240

2,448

208

4,781

BB

128

27

251

13

419

B and below

522

1

71

-

594

Non-rated

660

7

1,257

615

2,539

As at 30 June 2012

10,749

4,030

21,725

1,804

38,308

 

 

 

 

 

 

31 December 2011

Credit rating analysis of debt portfolio

Shareholder and non-profit funds
£m

Participating supported
£m

Participating
non-supported
£m

Unit-linked
£m

Total
£m

AAA

5,067

2,977

15,190

768

24,002

AA

701

264

1,005

89

2,059

A

1,997

638

2,612

148

5,395

BBB

1,615

211

2,236

197

4,259

BB

127

29

230

17

403

B and below

544

1

77

1

623

Non-rated

721

42

842

536

2,141

As at 31 December 2011

10,772

4,162

22,192

1,756

38,882

 

 

 

 

 

 


 

MCEV supplementary information

56

Statement of Directors' responsibilities

57

Auditor's review report

58

MCEV interim financial statements and notes

 


Statement of Directors' responsibilities

When compliance with the CFO Forum MCEV principles published in October 2009 is stated those principles require the Directors to prepare supplementary information in accordance with the MCEV principles and to disclose and provide reasons for any non-compliance with the principles.

The MCEV methodology adopted by the Group is in accordance with these MCEV principles with the exception of:

·      risk-free rates have been defined as the annually compounded UK Government bond nominal spot curve plus 10 basis points rather than as the swap rate curve;

·      the value of asset management and the management service companies has been included on an IFRS basis; and

·      no allowance for the costs of residual non-hedgeable risk has been made.

Further detail on these exceptions is included in note 1, Basis of preparation.

Specifically, the Directors have:

·      determined assumptions on a realistic basis, having regard to past, current and expected future experience and to relevant external data, and then applied them consistently;

·      made estimates that are reasonable and consistent; and

·      provided additional disclosures when compliance with the specific requirements of the MCEV principles is insufficient to enable users to understand the impact of particular transactions, other events and conditions and the Group's financial position and financial performance.

     

Clive Bannister                                          James McConville

Group Chief Executive                                  Group Finance Director

St Helier, Jersey
22 August 2012

 

 


Auditor's review report

Independent review report to the Directors of Phoenix Group Holdings on the Consolidated Phoenix Group Market Consistent Embedded Value ('MCEV')

We have been engaged by the Company to review the Consolidated Phoenix Group Holdings MCEV ('Phoenix Group Holdings MCEV') in the Interim Report for the half year ended 30 June 2012 which comprises the Summarised consolidated income statement - Group MCEV basis, MCEV earnings per ordinary share, Statement of consolidated comprehensive income - Group MCEV basis, Reconciliation of movement in equity - Group MCEV basis, Group MCEV analysis of earnings, Reconciliation of Group IFRS equity to MCEV net worth and the related notes on pages 58 to 71. We have read the other information contained in the Interim Report and considered whether it contains any apparent misstatements or material inconsistencies with the information in the Phoenix Group Holdings MCEV.

Ernst & Young Accountants LLP have reported separately on the condensed consolidated financial statements of Phoenix Group Holdings prepared on an IFRS basis for the half year ended 30 June 2012. The information contained in the Phoenix Group Holdings MCEV should be read in conjunction with the condensed consolidated financial statements prepared on an IFRS basis.

This report is made solely to the Company in accordance with guidance contained in International Standard on Review Engagements (UK and Ireland) 2410 "Review of Interim Financial Information Performed by the Independent Auditor of the Entity" issued by the Auditing Practices Board for use in the United Kingdom. To the fullest extent permitted by law, we do not accept or assume responsibility to anyone other than the Company and the Company's Directors, for our work, for this report, or for the conclusions we have formed.

Directors' responsibilities

The Phoenix Group Holdings MCEV in the Interim Report is the responsibility of, and has been approved by, the Directors. The Directors are responsible for preparing the Phoenix Group MCEV in accordance with the basis of preparation set out on pages 62 to 65.

Our responsibility

Our responsibilities for the Phoenix Group Holdings MCEV are set out in our engagement letter with you dated 15 June 2011. We report to you our opinion as to whether the Phoenix Group Holdings MCEV in the Interim Report has been properly prepared, in all material respects, in accordance with the Basis of preparation set out on pages 62 to 65.

Scope of review

We conducted our review in accordance with International Standard on Review Engagements (UK and Ireland) 2410. A review of interim financial information consists of making enquiries, primarily of persons responsible for financial and accounting matters, and applying analytical and other review procedures. A review is substantially less in scope than an audit conducted in accordance with International Standards on Auditing (UK and Ireland) and consequently does not enable us to obtain assurance that we would become aware of all significant matters that might be identified in an audit. Accordingly, we do not express an audit opinion.

Conclusion

Based on our review, nothing has come to our attention that causes us to believe that the Phoenix Group Holdings MCEV in the Interim Report for the half year ended 30 June 2012 has not been prepared, in all material respects, in accordance with the basis of preparation set out on pages 62 to 65.

 

Ernst & Young LLP

London

22 August 2012

 


MCEV interim financial statements and notes

Summarised consolidated income statement - Group MCEV basis

For the half year ended 30 June 2012

Half year ended
30 Jun 2012
£m

Half year ended
30 Jun 2011
£m

Year ended
31 Dec 2011
£m

Life MCEV operating earnings

205

229

556

Management services operating profit

10

10

17

Ignis Asset Management operating profit

19

18

46

Group costs

(29)

(48)

(84)

Group MCEV operating earnings before tax

205

209

535

Economic variances on life business

(61)

(5)

(426)

Economic variances on non-life business

19

(5)

38

Other non-operating variances on life business

27

(1)

(12)

Non-recurring items on non-life business

(18)

18

(9)

Finance costs attributable to owners

(75)

(75)

(123)

Group MCEV earnings before tax

97

141

3

Tax on operating earnings

(50)

(56)

(141)

Tax on non-operating earnings

6

27

169

Total tax

(44)

(29)

28

Group MCEV earnings after tax

53

112

31

 

 

 

 

MCEV earnings per ordinary share

For the half year ended 30 June 2012

Half year ended
30 Jun 2012

Half year ended
30 Jun 2011

Year ended
31 Dec 2011

Group MCEV operating earnings after tax

 



Basic1

89.1p

89.0p

229.1p

Diluted2

89.1p

89.0p

229.1p

Group MCEV earnings after tax

 

 


Basic1

30.5p

65.1p

18.0p

Diluted2

30.5p

65.1p

18.0p

 

 

 

 

1     Based on 174 million shares (half year ended 30 June 2011: 172 million; year ended 31 December 2011: 172 million) as set out in note 5 of the IFRS condensed consolidated interim financial statements.

2     Based on 174 million shares (half year ended 30 June 2011: 172 million; year ended 31 December 2011: 172 million), allowing for warrants in issue as set out in note 5 of the IFRS condensed consolidated interim financial statements.

The earnings on life business are calculated on a post-tax basis and are grossed up at the effective rate of shareholder tax for presentation in the income statement. The tax rate used is the average UK corporate tax rate of 24.5% (half year ended 30 June 2011: 26.5%; year ended 31 December 2011: 26.5%).

 


Statement of consolidated comprehensive income - Group MCEV basis

For the half year ended 30 June 2012

Half year ended
30 Jun 2012
£m

Half year ended
30 Jun 2011
£m

Year ended
31 Dec 2011
£m

Group MCEV earnings after tax

53

112

31

Other comprehensive income

 

 

 

      Actuarial gains on defined benefit pension scheme (net of tax)

-

13

32

Total comprehensive income

53

125

63

 

 

 

 

Reconciliation of movement in equity - Group MCEV basis

For the half year ended 30 June 2012

Half year ended
30 Jun 2012
£m

Half year ended
30 Jun 2011
£m

Year ended
31 Dec 2011
£m

Opening Group MCEV equity

2,118

2,104

2,104

Total comprehensive income

53

125

63

Movement in equity for equity-settled share-based payments

-

3

6

Dividends paid on ordinary shares

(37)

(36)

(72)

Shares issued in lieu of dividends

1

7

17

Total capital and dividend flows - external

(36)

(26)

(49)

Closing Group MCEV equity

2,135

2,203

2,118

 

 

 

 


Group MCEV analysis of earnings

For the half year ended 30 June 2012

 

 

Non-covered business

 

 

Covered
business
MCEV
£m

Management
services
IFRS
£m

Asset
Management
IFRS
£m

Other Group

companies¹

IFRS
£m

Group
MCEV
£m

Group MCEV at 1 January 2012

3,804

82

68

(1,836)

2,118

Operating MCEV earnings (after tax)

155

8

14

(22)

155

Non-operating MCEV earnings (after tax)

(25)

(7)

(2)

(68)

(102)

Total MCEV earnings

130

1

12

(90)

53

Other comprehensive income

-

-

-

-

-

Capital and dividend flows - internal

(97)

6

(17)

108

-

Capital and dividend flows - external

-

-

-

(36)

(36)

Closing value at 30 June 2012

3,837

89

63

(1,854)

2,135

 

 

 

 

 

 

1     Comprises the Group holding companies that do not form part of the Phoenix Life and Ignis Asset Management divisions.

For the half year ended 30 June 2011

 

 

Non-covered business

 

 

Covered
business
MCEV
£m

Management
services
IFRS
£m

Asset
Management
IFRS
£m

Other Group
companies
IFRS
£m

Group
MCEV
£m

Group MCEV at 1 January 2011

4,517

80

54

(2,547)

2,104

Operating MCEV earnings (after tax)

168

7

13

(35)

153

Non-operating MCEV earnings (after tax)

(5)

26

-

(62)

(41)

Total MCEV earnings

163

33

13

(97)

112

Other comprehensive income

-

-

-

13

13

Capital and dividend flows - internal

(476)

(28)

(7)

511

-

Capital and dividend flows - external

-

-

-

(26)

(26)

Closing value at 30 June 2011

4,204

85

60

 (2,146)

2,203

 

 

 

 

 

 


Group MCEV analysis of earnings

For the year ended 31 December 2011

 

 

Non-covered business

 

 

Covered
business
MCEV
£m

Management
services
IFRS
£m

Asset
Management
IFRS
£m

Other Group
companies
IFRS
£m

Group
MCEV
£m

Group MCEV at 1 January 2011

4,517

80

54

(2,547)

2,104

Operating MCEV earnings (after tax)

409

13

34

(62)

394

Non-operating MCEV earnings (after tax)

(322)

15

(1)

(55)

(363)

Total MCEV earnings

87

28

33

(117)

31

Other comprehensive income

-

-

-

32

32

Capital and dividend flows - internal

(800)

(26)

(19)

845

-

Capital and dividend flows - external

-

-

-

(49)

(49)

Closing value at 31 December 2011

3,804

82

68

(1,836)

2,118

 

 

 

 

 

 

Reconciliation of Group IFRS equity to MCEV net worth

 

30 Jun 2012
£m

30 Jun 2011
£m

31 Dec 2011
£m

Group net assets attributable to owners of the parent as reported under IFRS

1,553

 1,670

1,652

Goodwill and other intangibles in accordance with IFRS removed (net of tax)

(436)

(425)

(440)

Value of in-force business in accordance with IFRS removed (net of tax)

(1,108)

 (1,316)

(1,289)

Adjustments to IFRS reserving

(43)

 (157)

(47)

Tax adjustments

(18)

 (63)

8

Revalue listed debt to market value

167

 82

161

Eliminate value of contingent loan asset1

(160)

 (218)

(160)

Fair value adjustments2

1

 28

(43)

Eliminate pension scheme surpluses3 (net of tax)

(312)

 (142)

(380)

Other adjustments

23

 18

27

MCEV net worth attributable to owners of the parent

(333)

 (523)

(511)

MCEV value of in-force business included (net of tax) as set out in note 2

2,468

2,726

2,629

Closing Group MCEV

2,135

2,203

2,118

 

 

 

 

1     Removal of value attributed to contingent loans issued by holding companies to long-term funds as their expected repayments are captured within the MCEV VIF calculations.

2     Investments carried at amortised cost under IFRS are revalued at market value.

3     The pension scheme surpluses removed are the economic surpluses of the Pearl Group Staff Pension Scheme and PGL Pension scheme net of tax as described in note 9 of the IFRS condensed consolidated interim financial statements.

 

 

1. Basis of preparation

Overview

The supplementary information on pages 58 to 71 has been prepared on a Market Consistent Embedded Value ('MCEV') basis except for the items described further below.

The MCEV methodology adopted by the Group is in accordance with the MCEV principles and guidance published by the CFO Forum in October 2009, except that:

·      risk-free rates have been defined as the annually compounded UK Government nominal spot curve plus 10 basis points rather than as a swap rate curve;

·      no allowance for the cost of residual non-hedgeable risk ('CNHR') has been made because, in the opinion of the Directors, the Group operates a robust outsourcer model in terms of operational risk, does not write new business, is focused entirely on the back book, and has succeeded in closing out significant legacy risks. The theoretical value of CNHR is disclosed separately in note 1 (b); and

·      the asset management and management service companies' values are calculated on an IFRS basis. Under CFO Forum principles and guidance productivity gains should not be recognised until achieved. This treatment is inconsistent with the cost profile of a closed fund where continual cost reductions are expected to maintain unit costs as the business runs off. In the opinion of the Directors, if the MCEV principles and guidance were to be applied to the asset management and the management service companies, it would not provide a fair reflection of the Group's financial position. These companies are therefore reported alongside the Group's other non-life holding companies at their IFRS net asset value.

On 27 June 2012 the Group announced that it had entered into a reinsurance agreement, effective 1 July 2012, to transfer approximately £5 billion of annuity in-payment liabilities, around 40% of the Group's annuity portfolio, to Guardian Financial Services ('Guardian'). It is expected that the reinsurance agreement will be replaced by a formal Part VII transfer of the annuity liabilities to Guardian in 2013. The 30 June 2012 Group MCEV allows for the negative impact of the reinsurance agreement of £36 million and the expense savings of £72 million expected following the Part VII transfer of the annuity liabilities to Guardian.

A gradual reduction in the UK corporation tax rate from 28% to 24% over four years was announced in the Emergency Budget of 22 June 2010 with further 1% reductions being announced in each of the Budgets of 23 March 2011 and 21 March 2012. The first 4% of the reductions had been substantively enacted by the half year. Consequently a rate of 24% has been used for the purposes of providing for deferred tax in this interim report. Further reductions are to be introduced by future legislation. The impact on the Group's MCEV arising from the further 2% reduction is not expected to be material and will be recognised as the legislation is substantively enacted.

Following an initial announcement by HMRC in March 2011, the Finance Act 2012 introduced new rules for the taxation of insurance companies, with effect from 1 January 2013. The Group has conducted an assessment of the likely impact of the new rules based on 2011 year end information, which suggests that the effect of the transition to the new regime will not have a material impact on the Group's overall tax position. However the final impact of the transition will depend on the Group life companies' position as at 31 December 2012.

Covered business

The MCEV calculations cover all long-term insurance business written by the Group, but exclude Ignis Asset Management and the management service companies.

Opal Re is included within covered business and is valued on a basis consistent with the annuity business within the life companies.

 

MCEV methodology

The embedded value of covered business is based on a market-consistent methodology. Under this methodology, assets and liabilities are valued in line with market prices and consistently with each other.

The key components of MCEV are net worth plus the value of in-force covered business.

a) Net worth

For the Group's life companies, net worth is defined as the market value of shareholder funds plus the shareholders' interest in surplus assets held in long-term business funds less the market value of any outstanding debt of the life companies.

Loans from the life companies to holding companies have been consolidated out such that they do not appear as an asset in the life company or as a liability in the holding company. This presentation has no impact on the overall MCEV but does affect the allocation of net assets between covered and non-covered business.

b) Value of in-force business ('VIF')

The market consistent VIF represents the present value of profits attributable to shareholders arising from the in-force business, less an allowance for the time value of financial options and guarantees embedded within life insurance contracts and frictional costs of required capital.

The approach adopted to calculate VIF combines deterministic and stochastic techniques (each of which is discussed in more detail below):

·      deterministic techniques have been used to value cash flows whose values vary in a linear fashion with market movements. These cash flows are valued using discount rates that reflect the risk inherent in each cash flow. In practice, it is not necessary to discount each cash flow at a different discount rate, as the same result is achieved by projecting and discounting all cash flows at risk-free rates. This is known as the 'certainty equivalent approach'; and

·      stochastic techniques have been used to value cash flows that have an asymmetric effect on cash flows to shareholders. Here, the calculation involves the use of stochastic models developed for the purposes of realistic balance sheet reporting.

Present value of future profits ('PVFP')

The present value of future profits represents the present value of profits attributable to shareholders arising from the
in-force business. The PVFP is calculated by projecting and discounting using risk-free rates, with an allowance for liquidity premiums where appropriate.

The projection is based on actively reviewed best estimate non-economic assumptions. Best estimate assumptions make appropriate allowance for expected future experience where there is sufficient evidence to justify; for example in allowing for future mortality improvements on annuity business.

 

 

Time value of financial options and guarantees ('TVFOGs')

The Group's embedded value includes an explicit allowance for the time value of financial options and guarantees embedded within insurance contracts, including investment performance guarantees on participating business and guaranteed vesting annuity rates. The cost of these options and guarantees to shareholders is calculated using market-consistent stochastic models calibrated to the market prices of financial instruments as at the period end.

The TVFOGs allow for the impact of management actions, consistent with those permitted by the Principles and Practices of Financial Management. The modelling of management actions vary for each of the funds but typically include management of bonus rates and policy enhancements, charges to asset share to cover increases to the cost of guarantees and alterations to investment strategy.

Frictional cost of capital ('COC')

Cost of capital is defined as the difference between the market value of shareholder-owned assets backing required capital and the present value of future releases of those assets allowing for future investment returns on that capital, investment expenses and taxes.

Required capital is defined as the minimum regulatory capital requirement, which is the greater of Pillar 1 and Pillar 2 capital requirements, plus the capital required under the Group's capital management policy.

This equates to 129% (30 June 2011: 117%; 31 December 2011: 128%) of the minimum regulatory capital requirement.

Solvency II will introduce a new capital regime for insurers from the end of 2013. These disclosures do not take account of the impact of the change in regime as this is still under development.

Cost of residual non-hedgeable risks ('CNHR')

The CNHR should allow for risks that can have an asymmetric impact on shareholder value to the extent these risks have not already been reflected in the PVFP or TVFOGs. The majority of such risks within the Group are operational and tax risks.

No allowance for the CNHR has been made, as in the opinion of the Directors, the CNHR calculated in accordance with CFO Forum principles and guidance does not anticipate further risk management actions and therefore does not provide a fair reflection of the Group's ongoing risk.

However, the CNHR calculated in accordance with the CFO Forum principles and guidance, and therefore without anticipating further risk management actions, has been disclosed below.

For with-profits business the CNHR would increase the TVFOGs by £56 million (30 June 2011: £68 million; 31 December 2011: £46 million).

For other business the cost would be £121 million (30 June 2011: £135 million; 31 December 2011: £130 million). This equates to an equivalent average cost of capital charge of 0.9% (30 June 2011: 1.2%; 31 December 2011: 1.2%). The level of capital assumed in this calculation is determined based on a 99.5% confidence level over a 1-year time horizon, consistent with the ICA methodology. Allowance is made for diversification benefits between non-hedgeable risks, but not between hedgeable and non-hedgeable risks.

c) Valuation of debt

Listed debt issued by the Group is valued at the market value quoted at the reporting date which is consistent with MCEV principles.

The National Provident Life limited recourse bonds are backed by surpluses that are expected to emerge on blocks of its unit‑linked and unitised with-profits business. This securitisation has been valued on a cash flow basis, allowing for payments expected to be due based on the projected level of securitised surpluses emerging. The full VIF of the securitised unit-linked and unitised with-profits business is expected to be payable to bondholders; therefore, no additional value accrues to the embedded value.

Unlisted bank debt owed by the holding companies is included at face value.

 

d) Taxation

Full allowance has been made for the value of tax that would become payable on the transfer of surplus assets out of non-profit funds. This allowance reflects the projected pace of releases of surplus from non-profit funds that is not required to support with-profits funds.

Allowance has also been made for the tax relief arising from interest payments made on the debt of the holding companies. The value of the tax relief is determined by offsetting the tax payable on profits emerging from covered business against the tax relief afforded by interest payments on the debt. Interest payments are projected assuming that current levels of debt are reduced and then refinanced to maintain a long-term level of debt that the Directors consider to be supported by the projected embedded value of the Group's businesses.

e) New business

The MCEV places a value on the profits expected to be earned on annuities arising from policies vesting with guaranteed annuity terms. These policies are excluded from the definition of new business on the basis that the annuity being provided is an obligation under an existing policy and the life companies are already reserving for the cost of these guarantees.

New business includes all other annuities written by the life insurance companies.

f) Participating business

Allowance is made for future bonus rates on a basis consistent with the projection assumptions and established company practice.

The time value of options and guarantees used in the calculation of MCEV also allows for expected management action and policyholder response to the varying external economic conditions simulated by the economic scenario generators. Policyholder response has been modelled based on historical experience. Management actions have been set in accordance with each life companies' Principles and Practices of Financial Management.

g) Pension schemes

The MCEV allows for pension scheme deficits as calculated on an IFRS basis, but no benefit is taken for pension scheme surpluses.

2. Components of the MCEV of covered business

 

Half year ended
30 Jun 2012
£m

Half year ended
30 Jun 2011
£m

Year ended
 31 Dec 2011
£m

Net worth

1,369

1,478

1,175

PVFP

2,594

2,935

2,846

TVFOG

(78)

(73)

(108)

COC

(48)

(136)

(109)

Total VIF

2,468

2,726

2,629

 

3,837

4,204

3,804


 

 

 

The net worth of covered business of £1,369 million at 30 June 2012 consists of £477million of free surplus in excess of required capital (30 June 2011: £383 million; 31 December 2011: £11 million). This does not include the IFRS net assets of management services of £89 million (30 June 2011: £85 million; 31 December 2011: £82 million) as shown in the free surplus reconciliation for Phoenix Life on page 8.

3. Analysis of covered business MCEV earnings (after tax)

 

Half year ended 30 Jun 2012

 

Net worth
£m

VIF
£m

Total Life
MCEV
£m

Life MCEV at 1 January 2012

1,175

2,629

3,804

New business value

4

5

9

Expected existing business contribution (reference rate)1

18

34

52

Expected existing business contribution (in excess of reference rate)2

18

22

40

Transfer from VIF to net worth

99

(99)

-

Experience variances

(9)

(3)

(12)

Assumption changes

(2)

8

6

Other operating variances

48

12

60

Life MCEV operating earnings

176

(21)

155

Economic variances

(23)

(23)

(46)

Other non-operating variances

123

(102)

21

Total Life MCEV earnings

276

(146)

130

Capital and dividend flows

(82)

(15)

(97)

Life MCEV at 30 June 2012

1,369

2,468

3,837

 

 

 

 

1     Expected existing business contribution (reference rate) represents the expected return on the opening MCEV at the long-term risk-free rate.

2     Expected existing business contribution (in excess of reference rate) represents the additional expected return above the risk-free rate arising from long-term risk premiums on equities, property and corporate bonds.

 

 

 

Half year ended 30 Jun 2011

 

Net worth
£m

VIF
£m

Total Life
 MCEV
£m

Life MCEV at 1 January 2011

 1,770

 2,747

 4,517

New business value

 3

 5

 8

Expected existing business contribution (reference rate)

 36

 56

 92

Expected existing business contribution (in excess of reference rate)

 16

 21

 37

Transfer from VIF to net worth

 96

 (96)

 -

Experience variances

 9

 15

 24

Assumption changes

 (5)

 5

 -

Other operating variances

 (7)

 14

 7

Life MCEV operating earnings

 148

 20

 168

Economic variances

 6

 (10)

 (4)

Other non-operating variances

 (3)

 2

 (1)

Total Life MCEV earnings

 151

 12

 163

Capital and dividend flows

 (443)

 (33)

 (476)

Life MCEV at 30 June 2011

 1,478

 2,726

 4,204

 

 

 

 

 

 

Year ended 31 Dec 2011

 

Net worth
£m

VIF
£m

Total Life
 MCEV
£m

Life MCEV at 1 January 2011

1,770

2,747

4,517

New business value

7

6

13

Expected existing business contribution (reference rate)

65

115

180

Expected existing business contribution (in excess of reference rate)

33

41

74

Transfer from VIF to net worth

212

(212)

-

Experience variances

122

59

181

Assumption changes

(28)

10

(18)

Other operating variances

8

(29)

(21)

Life MCEV operating earnings

419

(10)

409

Economic variances

(272)

(41)

(313)

Other non-operating variances

(4)

(5)

(9)

Total Life MCEV earnings

143

(56)

87

Capital and dividend flows

(738)

(62)

(800)

Life MCEV at 31 December 2011

1,175

2,629

3,804

 

 

 

 

4. New business

The value generated by new business written during the period is calculated as the present value of the projected stream of after-tax distributable profits from that business. This contribution has been valued using economic and non-economic assumptions at the point of sale. The value of new business is shown after the effect of frictional costs of holding required capital on the same basis as for the in-force covered business.

Premium
£m

MCEV
£m

MCEV/
Premium
%

Half year ended 30 Jun 2012

161

9

6%

Half year ended 30 Jun 2011

148

8

5%

Year ended 31 Dec 2011

274

13

5%

 

 

 

 


5. Maturity profile of business

This note sets out how the PVFP is expected to emerge into net worth over future years. Surpluses are projected on a certainty equivalent basis with allowance for liquidity premiums as appropriate and are discounted at risk-free rates.

 

Years

Present value of future profits (PVFP)

1-5
£m

6-10
£m

11-15
£m

16-20
£m

20+
£m

Total

30 Jun 2012

1,039

638

407

257

253

2,594

30 Jun 2011

1,136

778

510

253

258

2,935

31 Dec 2011

1,135

683

455

291

282

2,846

 

 

 

 

 

 

 

6. Assumptions

Reference rates

(a) Risk-free rates

Risk-free rates are based on the annually compounded UK Government bond nominal spot curve plus 10 basis points, extrapolated as necessary to meet the term of the liabilities. Recognising that this is a departure from MCEV principles, a sensitivity based on swap yields is disclosed.

The risk-free rates assumed for a sample of terms were as follows:

30 Jun 2012

30 Jun 2011

31 Dec 2011

Term

Gilt Yield
+10 bps

Swap Yield

Gilt Yield
+10 bps

Swap Yield

Gilt Yield
+10 bps

Swap Yield

1 year

0.34%

0.79%

0.82%

0.93%

0.32%

1.09%

5 years

0.95%

1.28%

2.37%

2.57%

1.14%

1.61%

10 years

1.98%

2.15%

3.77%

3.71%

2.20%

2.32%

15 years

2.68%

2.69%

4.46%

4.18%

2.85%

2.79%

20 years

3.13%

2.97%

4.70%

4.32%

3.21%

3.02%

 

 

 

 

 

 

 

The swaps rates above are only applicable to sensitivity (16) as disclosed in note 7.

(b) Liquidity premiums

In October 2009, the CFO Forum published an amendment to MCEV principles to reflect the inclusion of a liquidity premium. The changes affirm that the reference rate may include a liquidity premium over and above the risk-free yield curve for liabilities which are not liquid, given that the matching assets are able to be held to maturity.

The liabilities to which a liquidity premium is applied include immediate annuities, pensions policies with benefits defined as an annuity or in-the-money guaranteed annuity options. The liquidity premium is determined by reference to the yield on the bond portfolios held after allowing for credit risk by deducting margins for best estimate defaults and unexpected default risk premiums. The additional yield above risk-free rates implied by the calculated liquidity premium is as follows:

 

30 Jun 2012

30 Jun 2011

31 Dec 2011

Additional yield over risk-free rates

1.03%

0.50%

0.90%

 

 

 

 

Inflation

For purposes of the MCEV calculation, the rate of increase in the UK Retail Price Index ('RPI') as at 30 June 2012 was taken from the implied inflation curve at a term appropriate to the liabilities. The rate of increase in UK National Average Earnings inflation is assumed to be RPI + 100 basis points as at 31 December 2011 (2011: RPI + 100 basis points).

 

Stochastic economic assumptions

The time value of options and guarantees is calculated using an economic scenario generator. The model is calibrated to market conditions as at 31 December 2011. The scenario generator and calibration are consistent with that used for realistic balance sheet reporting.

A LIBOR Market Model is used to generate risk-free rates over a complete yield curve, calibrated to the UK nominal spot curve plus 10 basis points, consistent with the deterministic projections. Interest rate volatility is calibrated to swaption implied volatilities, as per the sample below.

 

Option term (years)

Interest rate volatility

5

10

15

20

25

30

30 Jun 2012 Swap term (years)

 

 

 

 

 

 

5

25.9%

18.8%

16.5%

15.9%

16.3%

15.0%

10

22.4%

17.7%

16.0%

15.5%

15.2%

14.5%

20

19.4%

16.2%

14.5%

13.6%

13.5%

13.3%

30

18.2%

15.1%

13.4%

12.7%

12.6%

12.3%

 

 

 

 

 

 

 

 

 

Option term (years)

Interest rate volatility

5

10

15

20

25

30

30 Jun 2011 Swap term (years)

 

 

 

 

 

 

5

17.4%

13.5%

13.7%

13.5%

13.6%

14.2%

10

15.5%

13.3%

13.3%

13.0%

13.4%

13.3%

20

14.3%

12.5%

12.3%

11.8%

11.6%

11.7%

30

13.5%

11.7%

11.3%

10.6%

10.5%

10.3%

 

 

 

 

 

 

 

 

 

Option term (years)

Interest rate volatility

5

10

15

20

25

30

31 Dec 2011 Swap term (years)

 

 

 

 

 

 

5

28.1%

19.5%

17.6%

16.1%

16.4%

16.2%

10

24.1%

18.0%

16.2%

15.3%

15.4%

14.9%

20

21.2%

16.1%

14.8%

13.8%

13.5%

13.0%

30

20.0%

15.0%

13.4%

12.3%

12.0%

11.5%

 

 

 

 

 

 

 

Real interest rates have been modelled using the two-factor Vasicek model, calibrated to index-linked gilts.

Equity volatility is calibrated to replicate the prices on a range of FTSE equity options, and extrapolated beyond terms available in the market. The equity volatility model used allows volatility to vary with both term and the level of the equity index.

 

Term (years)

Equity implied volatility (ATM)

5

10

15

20

25

30

30 Jun 2012

25.8%

27.2%

27.8%

28.0%

28.2%

28.3%

30 Jun 2011

22.7%

23.9%

24.2%

24.4%

24.5%

24.6%

31 Dec 2011

25.8%

27.2%

27.5%

27.7%

27.8%

27.9%

 

 

 

 

 

 

 

Best estimate levels of volatility are assumed for directly held property. The model implied volatility for 30 June 2012 is 15% (31 December 2011: 15%).

The modelling of corporate bonds allows for credit transitions and defaults, calibrated to historic data, with an additional allowance for the credit risk premium, derived from current markets.

 

Operating earnings

The Group uses normalised investment returns in calculating the expected existing business contribution. The Group considers that an average return over the remaining term of our in-force business is more appropriate than using a short-term rate and is more consistent with the Group's expectation of longer term rates of return. Therefore the Group calculates the expected contribution on existing business using a 15-year gilt rate at the beginning of the reporting period plus 10 basis points and long-term expectations of excess investment returns.

The table below sets outs the asset risk premiums used:

 

Half year ended
30 Jun 2012

Half year ended
30 Jun 2011

Year ended
31 Dec 2011

Equities

3.0%

3.0%

3.0%

Property

2.0%

2.0%

2.0%

Gilts

0.0%

0.0%

0.0%

 

 

 

 

The return assumed on corporate bond portfolios is the redemption yield for the portfolio less an allowance for credit risk.

Expenses

Each life company's projected per policy expenses are based on existing management services agreements with the Group's service companies, adjusted to allow for additional costs incurred directly by the life companies, including, for example, regulatory fees and one-time expenses.

The life companies' projected investment expenses are based on the fees agreed with Ignis Asset Management, (or external fund managers, where appropriate), allowing for current and projected future asset mixes.

Valuation of debt and non-controlling interests

The Group's consolidated balance sheet as at 30 June 2012 includes Perpetual Reset Capital Securities with a principal outstanding of £425 million (2011: £425 million) and subordinated debt with a face value of £200 million (2011: £200 million) in relation to Phoenix Life Limited. These listed securities have been included within the MCEV at their market value quoted at the reporting date.

The table below summarises the value of these debt obligations.

 

Half year ended
30 Jun 2012

Half year ended
30 Jun 2011

Year ended
31 Dec 2011

 

Face value
(including accrued
interest)
£m

Market
value
£m

Face value
(including
accrued
interest)
£m

Market
value
£m

Face value
(including
accrued
interest)
£m

Market
value
£m

Listed debt and
non-controlling interests

 

 

 

 

 

 

Perpetual Reset Capital Securities

429

247

430

304

444

256

Subordinated debt

202

144

204

166

211

139

 

 

 

 

 

 

 

Unlisted debt has been included at face value.

Half year ended 30 Jun 2011
Face value
£m

Half year ended
30 Jun 2011
Face value
£m

Year ended
31 Dec 2011
Face value
£m

Unlisted debt

 

 

 

Pearl and Impala facilities

2,369

2,532

2,471

Royal London PIK notes and facility

114

109

111

 

 

 

 


7. Sensitivity to assumptions

The table below summarises the key sensitivities of the MCEV of covered business at 30 June 2012.

 

30 Jun 2012
 Life MCEV
 £m

31 Dec 2011
Life MCEV
£m

(1) Base

3,837

3,804

(2) 1% decrease in risk-free rates

106

153

(3) 1% increase in risk-free rates

(79)

(157)

(4) 10% decrease in equity market values

(62)

(75)

(5) 10% increase in equity market values

59

71

(6) 10% decrease in property market values

(58)

(72)

(7) 10% increase in property market values

57

72

(8) 100 bps increase in credit spreads1

(174)

(241)

(9) 100 bps decrease in credit spreads1

186

277

(10) 25% increase in equity/property implied volatilities

(21)

(20)

(11) 25% increase in swaption implied volatilities

(16)

(11)

(12) 25% decrease in lapse rates and paid-up rates

(41)

(43)

(13) 5% decrease in annuitant mortality

(142)

(203)

(14) 5% decrease in non-annuitant mortality

28

27

(15) Required capital equal to the minimum regulatory capital²

34

32

(16) Swap curve as reference rate, retaining appropriate liquidity premiums

(30)

(50)

 

 

 

1     44 bps is assumed to relate to default risk.

2     Minimum regulatory capital is defined as the greater of Pillar 1 and Pillar 2 capital requirements without any allowance for the Group's capital management policy.

No expense sensitivity has been shown as maintenance costs incurred by the covered business are largely fixed under the terms of agreements with the management services companies.


 

 

Additional information

73

Shareholder information

74

Forward-looking statements

 

 


Shareholder information

Annual General Meeting

Our Annual General Meeting was held on 3 May 2012.

The voting results for our 2012 AGM are available on our website at www.thephoenixgroup.com.

Shareholder Services

Our registrar, Computershare, maintains the Company's register of members. Shareholders may request a hard copy of this Interim Report from our registrar and if you have any further queries in respect of your shareholding, please contact them directly using the contact details set out below:

Computershare Investor Services (Jersey) Limited
Queensway House
Hilgrove Street
St Helier
Jersey, JE1 1ES

Shareholder helpline number                   0870 707 4040
Fax number                                           0870 873 5851
Shareholder helpline email address          info@computershare.co.je

Share Price

You can access the current share price of Phoenix Group Holdings at www.thephoenixgroup.com.

Group Financial Calendar for 2012

Announcement of unaudited six months' interim results

23 August 2012

Announcement of third quarter interim management statement

31 October 2012

2012 Interim Dividend

Ex-dividend date

5 September 2012

Record date

7 September 2012

Interim 2012 dividend payment date

4 October 2012

2012 Annual Results

Our financial results for the year ended 31 December 2012 will be announced on 22 March 2013.


Forward-looking statements

The Interim 2012 Report contains, and we may make other statements (verbal or otherwise) containing, forward-looking statements about the Group's current plans, goals and expectations relating to future financial conditions, performance, results, strategy and/or objectives.

Statements containing the words: 'believes', 'intends', 'expects', 'plans', 'seeks', 'targets', 'continues' and 'anticipates' or other words of similar meaning are forward-looking (although their absence does not mean that a statement is not forward-looking). Forward-looking statements involve risk and uncertainty because they relate to future events and circumstances that are beyond the Group's control. For example, certain insurance risk disclosures are dependent on the Group's choices about assumptions and models, which by their nature are estimates. As such, actual future gains and losses could differ materially from those that we have estimated. Other factors which could cause actual results to differ materially from those estimated by forward-looking statements include but are not limited to:

·      Domestic and global economic and business conditions

·      Asset prices

·      Market related risks such as fluctuations in interest rates and exchange rates, and the performance of financial markets generally

·      The policies and actions of governmental and/or regulatory authorities, including, for example, new government initiatives related to the financial crisis and the effect of the European Union's 'Solvency II' requirements on the Group's capital maintenance requirements

·      The impact of inflation and deflation

·      Market competition

·      Changes in assumptions in pricing and reserving for insurance business (particularly with regard to mortality and morbidity trends, gender pricing and lapse rates)

·      The timing, impact and other uncertainties of future acquisitions or combinations within relevant industries

·      Risks associated with arrangements with third parties, including joint ventures

·      Inability of reinsurers to meet obligations or unavailability of reinsurance coverage

·      The impact of changes in capital, solvency or accounting standards, and tax and other legislation and regulations in the jurisdictions in which members of the Group operate

As a result, the Group's actual future financial condition, performance and results may differ materially from the plans, goals and expectations set out in the forward-looking statements within the Interim Report 2012 for the half year ended 30 June 2012.

The Group undertakes no obligation to update any of the forward-looking statements contained within the Interim Report 2012 for the Half Year ended 30 June 2012 or any other forward-looking statements it may make.

The Interim Report 2012 for the half year ended 30 June 2012 has been prepared for the members of the Company and no one else. The Company, its Directors or agents do not accept or assume responsibility to any other person in connection with this document and any such responsibility or liability is expressly disclaimed. Nothing in the Interim Report 2012 for the Half Year ended 30 June 2012 is, or should be construed as a profit forecast.

 

 

 

 

 

 

 


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