Earnings Call: H1 2016

Aug 9, 2016

Good morning, and thank you for coming along today. I hope you'll do what I've just done. And remember to switch off your mobile phone or BlackBerry or whatever. I'm joined on the platform today by my fellow Executive Directors, Luke Savage, our CFO Paul Matthews, the CEO of UKEurope Pensions and Savings and Colin Clarke, Head of our Global Client Group. We're also joined in the audience by some of our executive team, including Rod Paris, our CIO Barry O'Dwyer, who's Head of Workplace and Retail and Raj Singh, our Chief Risk Officer. There is much to be pleased with in these interim results. We delivered good and well diversified growth in what can only be described as a challenging environment. Growth in assets and inflows from a broad range of customer and clients. We continued to grow our global network, increased our stake in HDFC Life. We're building out our presence in the advice and intermediary markets in The UK through twenty eighteen-twenty five and the acquisition of the Elevate platform. Importantly, we also maintained our financial discipline to deliver growth in fee based revenue, profits and cash flows. All of this allows us to continue our unbroken record of delivering a progressive dividend whilst maintaining a strong capital position. In my view, the first half demonstrates that our strategy to build a world class investment company is delivering. I'll return to talk about markets and what we're doing to accelerate our pace of strategic delivery, which will then be followed by Q and A. But first, I'll hand over to Luke, who's going to lead us through our results for the 2016. Luke? Thank you, Keith, and good morning, ladies and gentlemen. I'm going to start this morning by a quick look at performance against simple and hopefully to many of you by now familiar business model. As you can see, we delivered continued growth in assets under administration, up from $3.00 £7,000,000,000 at the year end to £328,000,000,000 at the half year. As Keith mentioned, that includes good net flows in changing markets and it's helped by the diversity of the book, both in terms of asset mix and also FX gains at the end of the period. Moving across, can see fee income, which is of course based on average assets under administration, not period end, was up 4% to nearly GBP 800,000,000 and at the same time, we continue to reduce our cost to income ratio down 1% to 62%. In combination, we increased underlying performance by over £40,000,000 some 14%, earnings per share by 16% and cash generation by 10%. That has allowed us to increase our dividend by 7.5% to 6.47p per share, continuing our unbroken progressive dividend track record, and we've done this whilst maintaining a strong Solvency II surplus. Here are those figures in tabular form. In the top couple of rows, you can see that we've continued to drive our fee based revenues, which contribute well over 90% of total income. A reminder that the core component of our business model with little of our revenues coming from traditional spread risk based insurance activities. If we turn for a moment to non operating items, we guided at the end of the year towards a significant reduction in 2016 with a number of one offs falling away and recurring non operating expenses trending down. And you can see we've delivered on that guidance here with the figure down by nearly £100,000,000 In terms of a couple of particular line items, we closed our DB pension scheme to all further contributions with effect from April. And you can see the last of the associated charges coming through there. And as a reminder, we did that from a position of strength with the DB scheme having a surplus up from the year end and now in excess of £1,000,000,000 You can see that restructuring is continuing to trend down. Notable within the figures are two items. The integration of Ignis is now substantially complete with a full first year of the £50,000,000 of synergies coming through in 2017. And it also includes restructuring costs in Germany, where post closure to new guarantee business last year, we've been reshaping the business and will, by 2017, have reduced total costs by over 25% versus the run rate prior to the changes. So overall, much reduced on last year and I'd guide you towards a similar level of restructuring costs in the second half. Let's now drill into the first pillar of our model in a little more detail, asset for some flows. Here you can see over £4,000,000,000 of net inflows via our growth channels. Reduced outflows on our mature books, which are in natural runoff down to £2,900,000,000 this year from £3,600,000,000 last, and towards the right hand side the market movements, which have benefited from the diversity of our AUM both in terms of asset class and currency mix. Overall, we've increased AUA across all four growth channels. That said, the operating environment across our four channels is different, so let me walk you through each of those in a little more detail. You can see here the flow figures for our institutional and wholesale channels. Starting with wholesale, you can see our flows turned negative. Now to give context, the PRIDM survey for the first quarter stated that this has been the worst period for this wholesale markets in twenty years. They're markets where investment decisions are typically made at short notice and are largely sentiment driven. So it's perhaps not surprising given the economic uncertainty and political uncertainty we've seen that investors have been taking risk off the table. That was in contrast to our institutional flows, where mandates reward is a function of long term investment goals, performance and capabilities. Here, flows were strong and particularly into real estate in terms of asset class and in terms of client diversification, we saw good flows from DB schemes including into ILPS, our integrated liability plus solution. And as we look forward in institutional that pipeline remains strong. When it comes to workplace and retail channels, we've continued to drive strong and resilient net flows of £2,800,000,000 Now the retail flows are indicative of the strength of our proposition, where our platform continues to attract favor with IFAs and we signed up nearly 50 more firms year to date, as well as seeing existing IFAs continue to consolidate assets onto our platform. It already has the largest share of flows in the advised platform market and with the acquisition of the AXA Elevate business, based on current activity flows would be approximately twice the size of our nearest competitor. Not only does it give us increased flow, but it also enables us to expand our capability from the high end advisory market into the more generalist market. To give some perspective on that acquisition, the Elevate platform has got around £10,000,000,000 of assets under administration on it and has been losing close to £20,000,000 a year. But once we've integrated it, we expect it to contribute profits close to £20,000,000 a year, in part from increasing the SOI content on the platform. We expect to complete on the transaction in the coming months and to spend a little under £100,000,000 in total on the acquisition, the integration and restructuring, which should take around twenty four months to complete. In Workplace, we continue to auto enroll over 200 schemes a month, largely through our good to go online capability. Now with those schemes, we are now at the small end of the market, but they will earn us an annual scheme admin fee of £1,200 per scheme. And over time, we'll grow assets in which we earn fees both within our pensions and savings business as well as around 70% of the assets then being managed by SLI and earnings fees there as well. And that growth in auto enrolment is contributing to the annualized £3,000,000,000 in regular premiums we now attract into workplace. If we turn now to how those asset movements translate into revenue, you can see here that we've grown fee revenues through our growth channels by 8% year on year. That 8% growth is despite the impact of the regulatory driven changes to our operating model in Hong Kong, as a result of which reduced fee growth came down by about 2%. But overall, we grew fee revenues by an excess of £30,000,000 As for our spread risk margin, we took advantage of volatility in credit spreads during the period to capture additional yield pickup in the management of the back book and you can see that coming through there at GBP £10,000,000 Now the timing and quantum of such opportunities are hard to predict, but it would guide to a further 5,000,000 to £10,000,000 over the course of the second half. In addition to ALM activity, we benefited from an acceleration of cash flows from the heritage with profits book as a result of a change to the scheme of demutualization driven by the adoption of Solvency II, and you can see £22,000,000 coming through there in respect of that. So if we turn to the third pillar of our model, costs. The cost to income ratio has been reduced by 1% to 62% and whilst absolute costs have increased, in part that's because we're continuing to invest in growth initiatives. Specifically, we've been making good progress in the build out of our in house advisory capability. Keith will come back to the strategic importance of this later, but you can see here £7,000,000 in expenses related to that build out. We're very pleased with the progress we're making there and we expect $1,825,000,000 pounds to reach breakeven during 2017. Remaining expenses have risen by £26,000,000 as a function in part of higher AUA together with continued investment elsewhere across the business. Now by its nature, that investment can be somewhat lumpy and I'll come back to that when I talk about the pensions and savings business in a moment. But I would stress that we see strong cost discipline as a key lever in us continuing to drive down the cost to income ratio. Now I've talked about most of the individual items on this slide up to now. So pulling all that together, all I would add is that our overall underlying fee based performance has grown by 7% year on year, just showing the strength of our diversified business model in the current difficult environment. How does that break down by business unit? You can see here that we've achieved an improvement across every business line item with the exception of Hong Kong where I touched on the changes there a moment ago. I'll come back to the major line items separately, but whilst we're on this side, let's touch briefly on Europe pensions and savings. For some time, we've guided that we expect the contribution from Europe to remain stable. The first half saw Europe benefit from £4,000,000 of the £22,000,000 solvency spread risk related gain that I touched on a moment ago. And allowing for that, you can see that Europe is very much on a par with last year and that our guidance in that respect remains unchanged. Return to standard life investments. We've grown fees by 7% in contrast to just a 3% increase in expenses. It is a business where costs can and have responded quickly to firm management action given the uncertain conditions we're operating in, and we will continue to maintain tight cost control going forward. Across the bottom in the yellow dots, you can see that at one year 29% of assets under management were ahead of benchmark compared to 8584% at the all important three and five year points. The performance of GARS has attracted some attention in recent months, so let's put that into context. Whilst performance has been below target, it has nonetheless continued to operate within its design risk envelope of around a third to the half the volatility of equities. Up to the mid year, we have seen net inflows into GARs of £300,000,000 There have been strong institutional net inflows throughout the period offset by outflows in wholesale for reasons I touched on earlier. That said, even within wholesale we attracted nearly £1,000,000,000 of net inflows into wholesale products other than GARS, including Myfolio, which is now broken through £9,000,000,000 and it's an excellent example of the power of combining distribution with manufacturing within an investment company to drive that resilient growth. Over to the right hand side, third box down, you can see that there's been no margin erosion with average revenue yield increasing slightly by one basis points to 53 basis points, whilst in the fourth box down you can see that we've increased EBITDA from 40% to 42%. Now, I've touched on diversity kind of by currency and by client type, but I think it's also worth looking at how product diversity impacts asset and P and L volatility. You can see here in the bars on the left that since the formation of SLI in 1999 through to demutualization in 2006 to the current time in 2016, you can see how over that period the asset volatility across the fund ranges we offer to our clients has come down as we've grown the range of asset solutions available. That's good for our clients and as you can see from our results it's good for our assets under management and our P and L. We are a well diversified business. Moving on to our pensions and savings business, The 8% revenue gain we've delivered from our growth channels has been offset by the phasing of investment spend both in our existing franchise and as I touched on earlier, the building out of our advisory capability. We are maintaining a strong cost discipline and elevating 1825 aside, expenses in this business will come back down in the second half to leave full year expenses in line with prior year levels. Looking to the right hand side, again the third box down, we've been saying for some time that average revenue yield compression was slowing and here you can see in the period the margins are unchanged at 59 basis points, although the addition of Elevate will give rise to a shift in mix that sees that number fall slightly going forward. Let's look now at our capital position. A busy slide, of which I apologize. I know many of you attended the Solvency II session we ran post our year end results presentation, at which I went to great lengths to point out a number of key messages, and I'm going to repeat three of them now. Firstly, the nature of our business means that Solvency II capital is not a constraint on us, although neither is our regulatory capital surplus a source of readily deployable capital given that it principally consists of VIF. Secondly, I don't believe that you can take comfort from reported regulatory solvency ratios. There are just too many anomalies that go into the number to make peer to peer comparisons effective. Thirdly, what is important is the absolute quantum of the capital surplus and how stable that is under a range of scenarios. So with that in mind, we present here both a strict regulatory view on the left hand side as would appear on a regulatory return and then on the right hand side, we provide what we're calling an investor view, which we believe provides additional insight into how well protected our investors really are. It adjusts for gross ups, which do not represent risk to the shareholder and it adjusts for capital fully available to meet losses, but not recognized at the parent level. You'll see that the surplus has fallen by £300,000,000 since the year end. Of that, £200,000,000 represents the increase in our stake in our Indian associates, up from 26% to 35% and the subject of the merger that was disclosed yesterday. And the remaining GBP 100,000,000 is the impact of a number of small movements in both resources and requirements. But I think with just a £100,000,000 underlying movement, it demonstrates that not only in the 2016 has that regulatory surplus been stable, but we remain confident that the surplus is insensitive to wide range of market scenarios. But as I've repeatedly said, regulatory capital is not a constraint on us. So what do we measure ourselves against? It has been and it remains cash. It is cash that funds investments, be that organic or inorganic, and it's cash that underpins our ability to stand behind our progressive dividend policy. The fee based nature of our business provides a strong correlation between fees, IFRS profits and cash generation, which you can see here is up 10% year on year. And that is a conservative measure, We don't take credit for cash generation with our Indian and Chinese joint ventures and associates, but all we recognize from them is the cash dividend streams coming in from India. If you look to the right of the chart, the chart on the right hand side shows the amount of surplus liquid resources we hold at group level. These have dipped in the first half as a function of us investing in India, as I mentioned a moment ago, but they remain at a level which provides a strong buffer to underpin both our progressive dividend policy as well as giving us optionality to support growth. So, as you can see, we've continued to deliver for our customers, our clients, our business is performing well, growing assets, growing revenues, growing profits and increasing cash generation. That supports our progressive dividend policy whereby we're announcing a dividend of 6.47p per share for the half year, a growth of 7% year on year and maintaining our unbroken track record of a progressive dividend policy since demutualization. And on that positive note, I'll hand back to Keith. Thanks, Luke. We continue to make progress in building a world class investment company, a company with investments at its heart that focuses on the needs of customers and clients and earns their trust, a business that people aspire to work for and respect, A business with strong values, teamwork and excellence pointed at delivery. I and my colleagues in the management team have a very clear focus on delivering both growth and efficiency. Together, they drive profits and cash flow for shareholders. We continually monitor our progress. And after my first year as CEO, and I think a positive outcome in a challenging first half, it's very clear to me that a sharper strategic focus can also up the pace of delivery. To understand why, let me first say a few words about markets to provide context. I think it's important to note, clouds were already gathering over the global economic outlook before The UK's vote to leave the EU took place. It will take time for the full effects of the vote to be felt and understood. In my view, it would be rash to extrapolate from the economic and political noise of the last six weeks. What is clear is that the uncertainty that always accompanies economies, markets and public policy is likely to remain elevated. Volatility will continue. We'll hit air pockets. We'll have weeks and even months where markets rise quite strongly. That elevated volatility, some of which is directly attributable to The UK vote to leave, but also has more to do with political and economic developments around the rest of the world. What's even clearer is that the recent events reinforce the four big trends shaping the global savings and investment landscape that Standard Life strategy is explicitly designed to take advantage of. First, focus on fiscal policy, in my view, to support economic growth is going to increase. So public sector debt and deficits are not going away. That will put even more emphasis on individuals taking responsibility for their financial future. Whether we like it or not, trust in experts and elites is being increasingly challenged and the political debate around the world on inequality and inclusion is intensifying. A greater emphasis post vote on international trade will mean not only that UK businesses will need to be world class to sell abroad, they will also have to compete with world class firms in their own backyard. So utilizing technology and innovation to build efficient and scalable platforms more than ever is going to be a source of competitive advantage. Finally, the slow growth, low inflation, compressed return environment has been extended as markets and economies absorb the enhanced level of uncertainty and volatility. Thirty six years experience in financial markets has taught me that during periods of uncertainty and volatility, and there have been quite a few, that I need to remain focused and retain our strategic discipline. Our long run strategy is explicitly designed to take advantage of these four trends. And as they're intensifying, it's clear to me that our reaction should be to increase our pace of strategic delivery. What does that mean in practice? Well, it's actually very simple. We need to continue with our targeted investments in our diversification agenda to grow assets, while at the same time focusing and sharpening our focus on operational efficiency. This is what will create the headroom to invest while delivering improving returns for shareholders. So turning first to diversification. As Luke's pointed out, we're already benefiting from strong long term relationships with a broad range of clients and customers. In the first half of this year, we saw a very different mix of net flows compared with the 2015. We benefited from the fact that our diversified client and customer base reacted in different ways to the changing environment. Institutional appetite increased as large institutions sought to reduce volatility. Wholesale retreated. We saw very little impact in Workplace because people still need and are still contributing to their pensions. We also saw very little impact on intermediaries who continued to consolidate assets. The net result was good and well diversified growth. Net flows in our growth channels rose by 4% of starting assets with revenue, as Luke pointed out, up by nearly 8% on the 2015. We have a strong track record of commercializing innovation to drive diversification, and that's central to maintaining the positive momentum we have in asset growth. We spent some time talking about this at the Capital Markets Day, and I don't intend to go through the detail today. But simply to point out that while for some uncertainty and change is a threat, there is no shortage of opportunities for Standard Life. Our targeted investment program, which is already in place, means we are well placed to take full advantage of them. As part of this program, we increased our stake in HDFC Life to 35. The proposed merger with MaxLife will create India's leading private sector life company. As a result, we will have valuable strategic stakes in the leading life insurance and let's not forget asset management companies in India, one of the fastest growing economies in the world. Driving asset growth and revenue growth across our growth channels, in my view, is the best strategic means of reducing unit costs. However, particularly in the current economic environment, we also need to focus on the second critical component of our strategy, financial discipline. In its recent past, Standard Life has a good track record of improving its operational efficiency. Our costincome ratio has fallen by seven percentage points since 2012. You're aware, we already have programs in place that will continue to lower unit costs and delivery is on track. The integration of Ignis, which has delivered over £50,000,000 of annual cost savings and the replatforming of some of our IT architecture are good examples. The dynamic approach to cost control that underpins financial discipline at Standard Life Investments delivered a further fall in the cost income ratio and a continued improvement in profitability despite weak markets and slower net flows. However, the build out of 1825 and the acquisition of Elevate in the near term could add more cost than income and slow the downward trajectory in the costincome ratio. My very strong view after my first year as CEO is that we need to sharpen our focus on costs. I am determined to deliver not just well diversified growth in assets, but also make sure it's accompanied by a world class costincome ratio. To this end, we've put in place three programs to ensure that the downward trajectory not only continues in the costincome ratio, but that it falls significantly below current levels. The first looks at some shorter operational efficiencies deliverable over the course of the next eighteen months by utilizing the more dynamic approach to cost control and budget planning that serves Standard Life investments so well over the last twelve years or so. And Luke is leading the delivery of that program. The second recognizes that as we see benefits from closer cooperation and collaboration across the growth channels, there is scope for significant strategic synergies as we remove areas of duplication. And I've asked Colin Clarke and Paul Matthews to accelerate the bringing together of the growth channels to make sure they cooperate and collaborate even closer. Third, parts of our business, particularly in the mature book, require a more focused and transparent management approach to fixed costs if we are continuing to drive that costincome ratio even lower. So I'm announcing an enhanced approach to the management of our mature insured books. In order to ensure a greater focus on operational efficiency, I'm appointing Barry O'Dwyer to lead a management team that will be tasked with not just delivering, but making transparent the considerable value in our Life Insurance businesses. The efficiency and the variability of the cost base needs to and will be improved. All three programs will report to me on a regular basis, and that's going to be coordinated through Lan Tu, our new Chief Strategy Officer. Taken together, these programs will improve the operational efficiency of the whole business and should allow us to drive our cost income ratio down to significantly below current levels and at the same time, allow us to continue to invest in our diversification agenda and strengthen the long term relationships we enjoy throughout our customer and client base. By doing this, we will ensure we continue to meet changing client and customer needs. We'll also ensure we grow our assets, our fee based revenues and our profits. Increasing our pace of strategic delivery will help us to accelerate shifting the shape of Standard Life to a well diversified, world class investment company, generating sustainable long term returns for shareholders. Thank you. Luke, Paul, Colin and I, with help from senior colleagues in the room, are now available to answer any questions you may have. Oliver? Oliver Steel, Deutsche Bank. So three questions on costs. So the first is, I don't think your cost to income ratio came down if you strip out the exceptional spread profits. Certainly, I compare costs to fee income, it went up. And actually, noticed even on your basis, it was 63% in both 2014 and 2015. So, I suppose the question one is really what sort of cost to income ratio are you targeting? Because you've talked about the targets, but you've actually given us no ability to judge you on that. Second question is, when you talk about improving the focus on the mature businesses, are you talking releasing more revenue out of that through management actions? Or are you actually talking about absolute reductions in costs? And then the third question, nice easy one, is you talked about Ignis cost savings being more than $50,000,000 by the time we get into 2017. What's the run rate at the moment? Okay. If a combination of Luke and I can deal with those questions. Let I absolutely agree that there are headwinds in the current cost income ratio, and that's why management is so focused on making sure we drive the cost income ratio lower over the medium term to make sure that the implicit operational leverage in this business is delivered. So that's a really big focus for me. Luke, do you want to? Yes. I guess the way I'd put it that think about that is to say that the cost to income ratio is a function of growing earnings, maintaining cost discipline while still being able to invest for the future. And if you think back to the past two or three years, we've had a number of challenges within that dynamic. So on the political front, we saw the ending of annuities, which took out 50,000,000 or £60,000,000 a year of revenue. So the good growth that we've achieved has been despite that. We've seen regulatory challenges. I touched on Hong Kong, where the change in the regulatory environment there meant we ended stopped writing recurring premium products. That provided a headwind on income. And we've seen economic challenges. So again, I touched on the ending of writing guarantee business in Germany, where the ultra low rates rendered the guarantee market unviable and we switched to Writing Unit Linked business. Despite those challenges, we still delivered good revenue growth. Despite those challenges, we still delivered good investment in the future. And despite those challenges, we still brought the headline rate down by 2% or 3% over the past two or three years. So you're absolutely right, in this particular period spread risk has happened has helped, but that is just one of a number of moving parts over the period. If you take that success that we've achieved in recent times, the two or 3% in two or three years and extrapolate that forward, recognizing that there are there will no doubt be other challenges that we can't at this point predict. If we extrapolate that out two or three years' time, it means that in the medium term we end up falling below 60%, which we believe is a world class cost to income ratio. And the main point is making sure that if we benefit from strong asset growth, we maintain our financial discipline. We keep our hands on the lever of cost control to make sure that drops through to the bottom line. But those are those three things of revenues, investment and costs are dynamic and we need to work the three of them together. Yes. And Ignis, Luke? So on Ignis, it's over GBP 50,000,000. We're more or less complete on the integration. I don't know off the top of my head how much that implies in terms of the 2016 saving. What I do know is that 2017 will be the first full year of getting the full £50,000,000 a year, which is what we've committed to all along. But I don't have the 16,000,000 impact to hand in the top of my head, I'm afraid, sorry. John, there's one other bit about the mature books about whether it's around asset liability management or costs. From my perspective, I think it's both. I think we already do a good job on asset liability management and we will continue to do that. And as I touched on, we had some opportunities in the first half of the year that we perhaps hadn't expected back at the prelims. But a lot of this is around focus on cost and recognizing that if you run a pensions and savings business as one homogenous business, you end up working to the highest common denominator across the business rather than tailoring the way you support it for the different segments within the book. And we think a segmented approach should enable us to drive out further costs. Are you able to provide any guidance on the asset liability management actions then within that? We've given guidance for the remainder of this year. I think I said a further 5,000,000 to £10,000,000 We'll give you guidance at the end of the year as to what we see going forward. So much of that is a function of market conditions that I wouldn't want to be using my crystal ball at this point. John and Andy, I'll stay with the central and then we'll move out to the wings. Thank you. John Hocking from Morgan Stanley. I've got three questions please. Firstly on the costs, Could you give us some idea of the sort of cost to achieve with the new program? And then a little bit more color on the overlap you mentioned. I guess this is between the Life Company and SLI as one of the key areas. Second question, at the Investor Day, Keith, you gave a very good sort of run through of what was impacting GAR's performance. I think you specifically mentioned the sort of focus on fundamental factors, which didn't work during the spread widening in February, March time. And I guess sort of Brexit through a spanner in the works again. Just wondering if you could comment a little bit about how it's sort of tracking versus your expectations given the sort of market we're in at the moment. And then just finally on India, how should we think about this? Is this sort of a financial investment or strategic investment? Because the life company, appreciate you're in a larger entity, but you're down to 24%. How should we think about this going forward? Thank you. Let me try and take those in reverse order and end up with Luke back at cost. As far as India is concerned, I think what the events of the last couple of days will do is clearly increase in a very visible fashion the value of that very important strategic stake in India. It is strategic because from my perspective, India is one of the most attractive of the emerging markets. It's likely to be one of the fastest growing economies in the world over the next ten years. And as well as this very valuable strategic stake in life insurance. Don't forget, we own 40% of HDFC asset management. So we have a very valuable strategic stake today that I think over the next ten years is going to be an increasing source of shareholder value that will come through not just from the value of the businesses, but also the importance of the strategic partnership. So at the moment, if you look at the AMC, it mainly distributes surprise, surprise, because it's growing so fast, Indian mutual funds. There will be a point where Indians will want access to global funds and we have the ability to put our funds on their platform. HDFC Life is operationally efficient. They've got lots and lots of interesting bits of technology. There's a lot of stuff I think that Barry and his team can learn from the way in which they operate. So this is very much a strategic partnership and I think one of the most exciting bits of the world. As far as GARS is concerned, I made the point that actually in sentiment driven markets, we really don't always perform so well. I think the vote to leave was another driver for that sentiment. So performance at the first half of the year wasn't really that much changed. Rod, where do you think we are today? I think hello, sorry about that. I think it's fair to say that positioning for albeit a very slow growth environment didn't play well in this sort of heightened uncertainty we were facing. And I think the real challenge we had looking at the first half of this year is that we didn't anticipate nearly 40% of developed bond markets moving in further into negative territory and the amplified impact that had on a lot of asset prices across the board. That being said, we have shifted our positions. We've emphasized more value trades now in the portfolio. We've added some carry to the portfolio. But I think it's fair to say we're not finding many value arguments for most of the larger asset classes at this point in time. Terms of performance, although the returns are undoubtedly disappointing, we're happy with the total risk drawdown characteristics and the volatility of the fund. That's done exactly as we said it would on the tin with about one third of equity vol over the first half of this year. I think looking forward, going back to Keith's comment of a world of compressed returns, a world of small numbers, I think that will be a challenge for traditional asset class investing. I think it actually does speak what we're trying to achieve with our solutions and our multi asset categories. Brexit and other political risks, I would argue, make short term forecasting very, very difficult. And if anything, I think we believe taking this longer term view that we do in GARs actually is the right posture in this environment and ultimately I think will serve our investors very well. But it is a difficult environment, but Gaz is behaving as we would anticipate. It's an active fund, we sometimes get it wrong. And one of the things I think that's quite important implicit in what Rod is saying is don't forget the risk characteristics, Gaza is in the middle of the risk envelope. And I'd quite like to say to you, please think about this from the perspective as we do of clients. So institutional clients have a very different perspective and they like the risk characteristics and that's why we've seen net inflows into the funds. Wholesale clients tend to be a little bit more sentiment driven, a little bit more focused on short term performance. And that's why we've seen outflows. Actually, what goes on will always be a balance of the two. Okay. So coming back to the point about the overlaps between the different business areas. I guess Keith inherited a structural model that was a function of where Standard Life had come from. When we demutualized, there was some like eight separate business units with a group function sitting above it. Keith inherited a business, which is effectively, as we refer to it, an investment company that sees us able to support clients and customers and advice on assets, administration of assets and the management of assets. Yet we still have or have had a structure which sees three distinct areas. So it means we've had three HR functions, we've had three finance functions, three technology functions, three comms functions and so on. The expectation is that by bringing those together and think of ourselves as one investment company, we ought to be able to deliver more with less. And certainly, that's the direction we're heading down there in terms of driving out synergies whilst recognizing that there are still separate parts to the business. So it's not about losing the identity of the bits of the business, it's about creating common infrastructure to support them. In terms of cost to achieve the new program, in terms of getting the program up and running, we're using some external support, which is immaterial in the grand scheme of things. We are resourcing it largely from internal resources. So for example, the announcement that Keith just made about Barry's role in looking at mature business. In terms of costs that might come out of the back of the program such as further restructuring costs, too early at this point to put a number on that. Andy? Then Andy. Thanks. I wasn't sure if you can hit me or give me the microphone. Hi, thanks. It's Andy Hughes from Macquarie. A couple of questions if I could. First one on India again. I mean, I've done the maths. It could be my maths is wrong. But if you take the MAX Financial Services current market cap and you pro rata it if you're holding in the 24%, you get to 94% per share or so for the Indian Life business. And understand your comments about being strategic, but is there a point at which you think, well, it's a nice asset, but maybe we can redeploy the capital somewhere else at a higher return? And I guess second question on SLI. Helpfully at the Investor Day, you gave us a mix of costs between the different kind of distribution costs, operations and management. Could you give us those now for the half year and kind of comment on how they've changed? In particular, the $50,000,000 kind of savings from Ignis, presumably they won't be distribution savings, they'll be in the other bits of the business. And third question, I guess, is about how things have changed in terms of those RFPs. So at the Investor Day, said, okay, we've had lots of requests for information on the non gas funds. I'm just wondering if that kind of really positive signal for the non gas flows going forward is still the same today, whether there's been any change as well to market conditions? Thank you. On India, it's a strategic stake. We have looked to make sure we've had long run exposure to what will be one of, I think, the fastest growing and most attractive of the emerging markets. So I actually see it as part of our long term diversification agenda and diversifying the way in which value is created for shareholders. On costs, we'll pass to Luke on SLI. But on RFPs, why don't we take that first? Colin, what are we seeing at the moment? I think it's a continuation of the pictures that I outlined in May. Activity levels, if you take them on a three year basis, considerably up on where we were. February '15 was a very active period. We're at or just below those sorts of levels going completing Q2 this year. What I do think is quite interesting is that we've seen a continuation of the change in mix. And I flagged the increased interest in MIIT outside of GARS. So I was talking there about GFS and ARBs, absolute return government bonds. We've certainly seen continued interest in that. And I think one of the other interesting areas that we've seen an increase in is in equity, our equity franchise. And in particular around the unconstrained area where we've scored some wins during the course of this year. So overall levels at or about just below 15 levels, substantially up on three or four years ago, but just now an interesting change in the mix, which I think is again is very consistent with that story about product diversification in SLI and I think supports some optimism about the way that's going to change shape over the next couple of years. The one that I would flag that I'm particularly interested in is the arrival on the scene of a good deal of prospecting activity conversations with clients who have an insurance background. And our whole asset liability approach if you like which we first started to talk to the market about at the time of the Ignis transaction both from the point of view of launching ILPPS, Integrated Liability Plus for the maturing DB plans or on the other side of the equation going to talk to insurance companies. Both of those two product areas are really showing very good signs during the course of 2016. So, I hope that's a very full answer. I hope it gives you an impression of the breadth of the capability and the fact we've got interest across the range. And then on the cost question, I don't have the breakdown in the same format that we showed on the Investor Day's hand. And I didn't quite pick up on whether your question was the Ignis savings and where they've come through or whether it was the year to date cost discipline that we've shown. So I'll answer both questions. In terms of the Ignis savings, it's pretty much across the board. Again, when you integrate Ignis into standard life investments, you can rationalize all of the enabling functions as well as, to an extent rationalize some of the fund management and so on as you combine funds. In terms of the 3% growth in SLIs cost this year versus much more significant revenue growth, I think that was right from the beginning of the year, the SLI management team recognizing that we had the potential to be a bumpy year, have just been very disciplined in their approach to growth. So perhaps doing things like slowing down hirings and so on in order to make sure that we've got a firm hand on that cost lever. And Keith, you're probably better placed to provide more granularity on Yes. Mean, basically happened in the first week of the year when it was clear where equity markets were and market revenue and the team there, which is used to making sure they manage their cost income ratio very effectively, started to phase hiring, started to think about the must dos where we needed to invest as opposed to nice to have to make sure we created space. And of course, the other thing is at the moment, we have also on the people front a pretty efficient remuneration ratio of about 38%. So it isn't just one thing, it really is the ability to make sure that within a given budget, you're pulling the lever and reacting to a combination of events and flows. And I think that just reinforces my points about managing that cost to income ratio is a dynamic activity between revenue growth investment and tight financial discipline. So, does that mean that cost ratio for SLI might tick up in the second half as you invest more given you said you slowed down in the first half? Or is that is it kind of peaking out the cost in SLI? I wish that I had such fine control over the levers that I could control the cost income ratio from week to week, from month to month, from quarter to quarter. So the honest answer Andy is, it is a combination of what goes on, on the markets. I think what I would like you to believe is that you can trust management to make sure we pull the right levers to make sure that that trajectory continues to fall. Whether that comes through in the second half of the year, I think is a moot point, something difficult to forecast. What I can tell you is it will fall in 2017 and 2018 from current levels. Thanks. It's Andy Sinclair from BofA Merrill Lynch. I'll just keep it to two questions on a busy morning. Firstly, just on your other line of your P and L, which has improved from negative 32,000,000 last year to negative 23,000,000 this year. A pretty marked improvement. I mean, how much of this is due to some of these group improvements and reducing costs that you've talked about? And really where does this improvement come from? I think with my cost management hat on, the answer would be not enough. There's activities in there like capital management and things like that, so better returns on the surplus funds that we hold at group. There's a number of small bits and bobs in there that there's no significant single item. So nothing that would change in underlying run rate? No. And second question, you've talked a few times about sharpening focus. Would that possibly include disposal of the annuities business where scale is perhaps not what it is in the other parts of the group? Thanks. I've been very, very clear about that. At this if we were ever going to do anything, that's got to be for the benefit of shareholders. At this very, very low level of interest rates, there isn't much value, I think, in moving an annuity book on for shareholders. We have the benefit that our annuity book runs off at the same rate as our transitionals. So actually, we can be very, very patient about optionality and how we create value for shareholders. So in the short run-in this low interest rate environment, we'll be heavily focused through Barry on improving operational efficiency. And that comes back to the point I made earlier about regulatory capital neither being a constraint on us because of the amount of risk we have nor is it a source of deployable capital. And then we can move on to Ravi. Good morning. Thank you. Ravi Tanner, Goldman Sachs. I have three questions please. The first one is in relation to India. I suppose I'll try a different way, I was just wondering the decision to take the stake up to 35% as opposed to the 49% ceiling value. I was just wondering how that sits in the context of the new MaxLife deal and whether they're subject for change or whether that's kind of set in stone? The second one was on gas flows. And obviously, you've outlined the fact that wholesale flows were particularly challenging. I just wonder whether given the volatility of wholesale flows over time, do you have a sense of where the 300,000,000 to £400,000,000 per month cars run rate sits in the context of that change year to date and whether we should continue to expect that going forward? And then thirdly, you've talked about the cost income kind of excluding 1825 and Elevate and I was just wondering whether we should anticipate quite a lot more investment in either of those going forward. I know you've given some guidance on Elevate, but on 1825 what should we expect please? As far as India is concerned, I'm not sure I quite understood the point Ravi about the 49% and the 35%. We made an explicit decision to increase our stake to 35% and we executed that. Once that decision had been made that was a trigger to deliver an IPO of HDFC Life. What happened in the intervening period is this transaction came along, which is a quicker and potentially more valuable route to the listing of HDFC Life in the Indian market and therefore was a quicker route to delivering shareholder value or making the value that's available in that life insurance business transparent to the market marketplace. So I think that's in essence, I think the mechanism. Can I just add one thing on to that if I may, which is, yes, in theory, we had the ability to go to 49%? In practice, we could never have got there because there's a certain percentage of the stock that would have been out there as share options for employees and so on. So, we never could have got as far as 49% in exchange for giving up the difference between a theoretical 46%, 47% and the 35% we did take, that was reflected in the price at which we increased our stake to begin with. Okay. Thank you. On gas flows in terms of guidance, if I knew what was going to happen to equity markets, to sentiment, the nature of the autumn statements and the reaction of the wholesale market, I could give you strong guidance. I think given the volatility in the markets and the sentiment that's actually quite difficult to do. What I would ask you to note is the difference between the attitude of institutional investors and wholesale investors. So a lot will depend on the kind of volatility out there in the marketplace. Things, as Colin pointed out, in July and August so far have been calmer in markets. Then just on the 1825, we announced four acquisitions this year. Those deals are in the process of going through the works. Terms of looking forward to 2017, we'd expect revenues and expenses from 2018, 2025 to be in single digit millions with the business breaking even towards the 2017. Thank you. Yes, morning. It's Lance Burbidge from Autonomous. I got a few questions. Firstly, one for Paul. He'll be glad to say something, I suspect. On Workplace, the redemptions seem to tick up in the first half. So I just wanted to check there was nothing going on in terms of movement of schemes or something like that. Secondly, on the multi asset outflows, were £400,000,000 in Q2, I wonder if, Colin, you could split those between GARs and non GARs in terms of perhaps showing us some momentum in the others in numeric terms. And then on the mature cost savings, the mature business and Barry's project, are there any long term outsourcing contracts that need to come up for renewal that prevent you from getting savings early? Shall I go first? Yes, of course. So there's nothing until going on with workplace. And workplace predominantly is regular premium, 70% of our inflows are regulars, 1,500,000,000.0 first half, second half will about similar. We've had some customers leaving from Pensions Freedom with one scheme also transfer away. We didn't also see some of the tick up in single premium transfers that we saw in the 2015. So we had two schemes coming on 02/15. But I would expect to see some lumps come through in the next twelve months in addition to this regular premiums, which are ticking up quite nicely actually with the auto enrollment as well. Colin? Short answer on the multi asset flow is that on other in that Q2 we did see positive flows of about £200,000,000 something like that. And you've got negative on GARs as you mentioned. The picture as a whole for the year I think you also know we are seeing as I mentioned earlier in the answer to the other question quite a lot of interest in GFS. We've just out of interest managed to register for GFS the Global Focused Solutions Fund in North America, a Cayman Fund. And we've also just put it on the John Hancock platform as well. So I think you're continuing to see a broadening of that multi asset franchise as well as the additional interest that we're seeing in the current market environment from absolute return of government bonds. Luke, outsourcing contracts? Yes. There's none of significance that I can think of. And we were just having a quick sort of conflag there as to what we've got out there. One the things we have been doing and we'll continue to do as part of this work is to try and move more of the cost base from fixed to variable, so that as the mature book runs down, we're not saddled with fixed costs. An example of that might be we run a lot of our systems on mainframe. Mainframes come with significant license fees. We've already talked to you about the work that we're doing within The UK business to transform the IT off of legacy platforms onto technologies that no longer lead the mainframe and would therefore enable us to help take those costs down over time. Barry, I'll just check-in that I don't think there are any outsourcing contracts up for review. Ashik? Yeah, hi. Good morning everyone. Just three questions. This is Ashik Musli from JPMorgan. First question to your last point about what Luke you flagged move away from fixed to variable cost for the mature books. So are we looking at the indirect cost as well or are we just looking at the cost which is already allocated to the mature book, the way you split the profitability, there's another different way. So what I'm trying to get here is can indirect costs come down as the mature book goes down? So that's one thing. Second thing is, can you share some thoughts on risk from Scottish referendum? I mean, how should we think about that scenario? What are your options? Can we get some sense about that? And third thing is for Colin, can you give us some sense about this cross selling? It looks like you mentioned that 85% of your flows in MyFolio is coming from this life and pensions and you're trying to do a bit more cross selling between products because you are looking this as an investment company. So what are the real risks you are worried about? I mean, are you really transparent enough so that FCA will not create a problem in future or how should we think about that risk? Thank you. Shall I kick off the Yes. Cost It's an excellent question. One of the supplementary slides in the deck, there is a line item which we call indirect expenses and capital management, which shows that a large part of the expense base of our pensions and savings business has historically been thought of as a common expense base that spans all of the activity. Part of the focus on thinking about the book separately is just that, trying to pull apart that expense base and saying rather than it being a homogenous amount that we spread across everywhere, if we start to pull it apart, can we identify ways of chipping away at that as the mature book runs down? So that's a very good question. And the answer is yes. So it's still possible that the indirect expenses can run down a bit and it may not And that is part of the focus of looking at the mature book, yes. On the Scottish referendum, mean, there's obviously going to be a lot of noise. I'm not going to get involved in the politics at all. What I would say is look at it through the lens of our clients that drive asset flows. So on the institutional side, there is no evidence that our clients see it as an issue. And I can tell you in the week following the vote, we had a large mandate fund from an institutional North American client base. So that I think was a strong sense of discipline. And if you look at those wholesale outflows, there is no evidence whatsoever that Scottishness is coming into it. In fact, I would argue our wholesale outflows given that we had such a large market share were subdued. So I think we're going to get an awful lot of noise. That's inevitable. But actually, that's noise that our clients look through to the strength of the relationship and actually what we deliver for them. And on that front, I'd ask you to look back to the Scottish referendum and remember there was a lot of noise. There was no disruption to flows either at Standard Life Investments or indeed to the retail and wholesale side of Standard Life. Colin? Yes. I should stress thanks for the question on the Mike Folio 85% of distribution going through the pensions and savings business. The FCA has got no issues or questions about the closeness or nature of that relationship. It's not vertically integrated. And I think there are two or three elements as to why and how we need to keep it that way. The first and most important one is that customers are given choice through the MyFolio range in two important respects. As you're probably familiar with the range, there is choice between active management and passive management when SLI doesn't manufacture any passive management. And secondly, there's choice as to whether it's the customer wants to choose whole of market involving other funds from other fund management groups or just from SLI. So there's choice in there. The other important element is of course the role of the IFA who's providing advice in many instances. So I think we're happy on that. I think the other thing that I would flag 85 seems like a high number. We are during this final quarter of this year starting to launch the CCAP version of myFolio and specifically targeting the German market. And that's an area where we think similar characteristics have changed. So I suspect you could actually see that 85 number come down quite considerably anyway through growth elsewhere. I And had the opportunity to get on a plane and go and talk to our colleagues in India about it, I would also be very interested. Unless there's another burning question, I'm aware that you probably need to be elsewhere. Okay. A very quick question on annuities. Obviously, Aviva put through CMI15. 15. I imagine that's not very big for you. But I guess, given you've got the deferred annuity stuff with profit fund, if you reduce the minimum rate of improvement, that would be more significant at the year end. Have you got any idea about obviously, get the minimum rate improvement is 2%, and there's a chance people might drop that at the year end given the last five years we've had sort of zero improvements? As you're asking the question, I'm looking to my learning colleagues in the audience who are kind of shaking their head. So, I don't know, they don't have that number to hand, but we can take that offline if you want to. Can we get back to you? Okay. Look, can I say thank you very much for coming along? I'm aware it's a busy day. I hope what you've seen in the first half is continued delivery of strategy that really is focused on building a world class investment company at Standard Life Investments. Thank you very much, and please enjoy the rest of your