This note gives further detail behind the ‘cash (utilised)/generated by operations’ figure in the statement of consolidated cash flows.
2014 £m
2013 Restated £m
Profit for the period before tax from continuing operations 465 241
Loss for the period before tax from discontinued operations (see note 4.1.1) (27) (51)
Profit for the period before tax 438 190
Non-cash movements in profit for the year before tax Fair value gains on:
Investment property (200) (72)
Financial assets (3,494) (281)
Change in fair value of borrowings 19 36
Depreciation of property, plant and equipment – 3
Amortisation of intangible assets 98 130
Change in present value of future profits 9 (9)
Change in unallocated surplus 11 77
Share-based payment charge 7 6
Interest expense on borrowings 156 230
Net interest (income)/expense on Group defined benefit pension scheme asset/liability (4) 1
Other expenses and losses on pension schemes 3 12
Gain on transfer of business (see note 4.3) – (42)
Gain on sale of BAGI (see note 4.4) (4) –
Gain on divestment of Ignis (see note 4.1.1) (107) –
Decrease in investment assets 5,556 7,192
Decrease in reinsurance assets 43 349
Increase/(decrease) in insurance contract and investment contract liabilities 37 (2,519)
Increase/(decrease) in deposits received from reinsurers 23 (69)
Decrease in obligation for repayment of collateral received (6,330) (3,174)
Net decrease/(increase) in working capital 23 (1,037)
Cash (utilised)/generated by operations (3,716) 1,023
Separate disclosure of the cash flows from operating activities generated by discontinued operations is provided in note 4.1.1. 39. CAPITAL STATEMENT
This note sets out the Group’s approach to managing capital, provides an analysis of available capital resources and explains the different regulatory capital requirements of the Group and its life companies.
CAPITAL MANAGEMENT FRAMEWORK
The Group’s Capital Management Framework is designed to achieve the following objectives:
– provide appropriate security for policyholders and meet all regulatory capital requirements whilst not retaining unnecessary excess capital; – ensure sufficient liquidity to meet obligations to policyholders and other creditors; and
– optimise the overall gearing to ensure an efficient capital base.
The framework comprises a suite of capital management policies that govern the allocation of capital throughout the Group to achieve the framework objectives under a range of stress conditions. The policy suite is defined with reference to policyholder security, creditor obligations, owner dividend policy and regulatory capital requirements.
The capital policy of each life company is set and monitored by each life company Board. These policies ensure there is sufficient capital within each life company to meet regulatory capital requirements under a range of stress conditions. The capital policy of each life company varies
according to the risk profile and financial strength of the company.
Regulatory capital adequacy at a Group level is calculated at the ultimate insurance parent undertaking which is PLHL. PLHL aims to maintain Group regulatory surplus at least equal to the capital buffers agreed with the PRA.
The capital policy of each Group holding company is designed to ensure that there is sufficient liquidity to meet creditor obligations through
the combination of cash buffers and cash flows from the Group’s operating companies.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
GROUP CAPITAL Capital resources
The primary sources of capital used by the Group comprise equity shareholder funds as measured on an MCEV basis, the Perpetual Reset Capital Securities and shareholder borrowings. This is analysed as follows:
Notes 2014 £m 2013 £m
Total IFRS equity attributable to owners of the parent1 2,365 1,909
Adjustments between IFRS equity attributable to owners of the parent and MCEV net worth2 (1,899) (1,788)
MCEV value of in-force business2 2,181 2,257
Group MCEV 2,647 2,378
Gross shareholder debt:
Perpetual Reset Capital Securities 20 408 408
Shareholder borrowings 23 1,275 1,857
Difference between IFRS and MCEV carrying values of shareholder borrowings 78 (4)
Gross MCEV 4,408 4,639
1 As shown in the consolidated statement of financial position.
2 As detailed in the reconciliation of Group IFRS equity to MCEV net worth in the MCEV financial statements. Leverage
In managing capital the Group seeks to optimise the level of debt on its balance sheet. The Group’s closed book business model allows it to operate with higher leverage than life companies that are still writing new business, as it does not need to fund upfront capital requirements
and new business acquisition expenses.
Further detail on the Group’s gearing calculation (unaudited) is provided in the business review on page 34. Regulatory capital requirements of the Group
Insurance Groups’ Directive (‘IGD’)
PRA regulated insurance groups (including their holding companies) are also required to assess capital adequacy on a Group wide basis to enable the PRA to assess both the level of insurance and financial risk within the Group and the capital resources available to cover that risk. The assessment is known as the IGD.
The Group’s IGD assessment is made at the ultimate insurance parent undertaking within the EEA, which is PLHL.
The capital statement shown below presents the total capital that the Group manages on a Pillar 1 basis in respect of its life insurance companies. It is different from the total capital available in the IGD calculation on the basis that the IGD is assessed at the PLHL level and is subject to different rules pertaining to its calculation. For example, due to the Group’s current corporate structure, certain of the Group’s subsidiaries are only included in the IGD calculation at 75% of their regulatory value, including capital requirements. The capital statement includes these subsidiaries in full. This difference and other adjustments amount to a reduction of £739 million (2013: £905 million) in Phoenix Life available capital resources of £6,317 million (estimated) (2013 (actual): £6,289 million) compared with PLHL Group Capital Resources of £5,582 million (estimated) (2013 (actual): £5,384 million). Further detail of the PLHL IGD position (unaudited) is provided in the business review