Earnings Call: H2 2018

Mar 5, 2019

Good morning, ladies and gentlemen, and welcome to Phoenix Group's 2018 results presentation. I am joined on the podium today by Clive Bannister, our Group CEO; Jim McConville, our CFO and Group Director, Scotland; Andy Moss, CEO of Phoenix Life and the Group Director of our Heritage business; and Susan McInnes, CEO of Standard Life Assurance Limited and the Group Director of our Open business. The acquisition of Standard Life Assurance Limited in 2018 was quite simply transformational for Phoenix. It allowed us to evolve from being a U.K. closed life consolidator into the largest life and pensions consolidator in Europe, with Heritage and Open businesses spanning the U.K., Germany, and Ireland. 2018 was a year marked by outstanding strategic delivery and strong financial performance, which has enabled the board to recommend a final dividend of 23.4p per share as planned, a 3.5% increase over the final 2017 dividend. Clive and his team will take you through Phoenix's 2018 results and the new targets we have set for the business moving forward. From the 18th of March, Phoenix shares will be included in the FTSE 100, a measure of our growth story and our achievements to date, and we look forward to the future with great optimism. Clive. Chairman, thank you. Good morning and welcome to everybody. Phoenix had a strong 2018. At our Capital Markets Day, we announced GBP 664 million of cash generation in the year, exceeding the upper end of our 2017, 2018 target range, delivering a total of GBP 1.3 billion. The Group has, in parallel, improved its capital resilience with Solvency II surplus of GBP 3.2 billion. This is up by GBP 700 million from the full year 2017 pro forma, resulting in a shareholder capital coverage ratio of 167%. Fitch confirmed the strong financial position of the Group by their affirmation of our A+ rating. Our leverage ratio at the end of the year was only 22%, its lowest ever. To improve our customer service, particularly digital engagement, we are moving 2 million policies to the Diligenta outsource platform. For us, this is more of the same, since Diligenta has been a preferred strategic partner for over a decade. Turning to our strategic priorities, the transition of Standard Life Assurance is well on track. We were successful in the bulk purchase annuity, or BPA market, putting GBP 100 million of capital to work across three value-accretive deals. The integrations of AXA Wealth and Abbey Life are now in our rear view mirror, and we have released GBP 1 billion from these businesses, circa 75% of the original acquisition price paid, and we have done that in just 24 months. This is Phoenix at its best. Phoenix looks to the future with confidence and announces new, increased targets for the Group. Our 2019 cash generation target is GBP 600 million-GBP 700 million. Our new long-term cash generation target for the 5 years 2019 to 2023 is GBP 3.8 billion. Beyond 2024, we anticipate a further GBP 8.2 billion of cash generation from the existing in-force book, demonstrating the Group's strong long-term cash flow profile. The Group continues to have a stable and sustainable dividend policy. Acquisitions have allowed us to increase the dividend three times in the last three years. Our 2019 dividend per share of 46.8p per share is circa 12% higher than our 2016 full-year dividend. Already in 2019, we have injected GBP 250 million of capital into our Irish subsidiary in preparation of Brexit. Absent this, our cash generation for 2019 would have been circa GBP 850 million to GBP 950 million. As the chart on the right-hand side of this slide demonstrates, we are able to fund our dividend comfortably from just our organic cash generation. Turning to our acquisition of Standard Life Assurance, upon announcement in February 2018, we set a total cost and capital synergy target of GBP 720 million. Since completion in August, we have successfully worked with our new colleagues from Standard Life to design an operating model for our combined businesses. It is clear to me as Chief Executive that Phoenix will be forever strengthened by the breadth of skills that our new colleagues bring. I am extremely grateful for the hard work across all of our group entities that has ensured that our transition program has and will deliver the best of both. In November, at our Capital Markets Day, Jim talked confidently about us being able to meet or exceed our original synergy targets. Today, I am pleased to announce an increase of GBP 500 million, or a 70% increase to a new total synergy target of GBP 1.22 billion. Total capital synergies rise to GBP 720 million, the largest single contributor, with the total cost synergies of a further GBP 650 million. In 2018, we rapidly delivered GBP 500 million of those capital synergies. Andy will talk more about that in a few minutes' time. We now target reducing our annual running cost from around GBP 600 million to GBP 525 million. This is an increase in our cost synergy target from GBP 50 million to GBP 75 million, and reflects our growing certainty over the savings that we will deliver over the next of the three phases. The GBP 14 million delivered in 2018 has primarily been achieved by removing duplication in our structures across the U.K. and Europe, and the combination of group functions. The one-off cost synergy target of GBP 30 million relates to savings on projects that were in the operating plans of both entities at the time of due diligence. For example, IFRS 17, where the groups will now have just one single project moving forward. To deliver these increased synergies, we will invest GBP 150 million, an increase of GBP 15 million compared with the original transition cost of GBP 135 million. We still expect to deliver all of the material synergies within a three-year basis. Get used to this slide. It will become very familiar as we use it to track and announce our progress going forward. This brings me neatly to what we are calling affectionately or otherwise The Wedge. Sounds like a sort of Hollywood movie, doesn't it? The Wedge. We used this exhibit at our Capital Markets Day to set out the truly transformational nature of the Standard Life acquisition by illustrating the potential shape and sources of our future cash generation. We put forward the hypothesis that the growth of our open business may, in time, entirely offset the runoff of our heritage business. Jim will talk you through the maths of The Wedge so that you can understand why we believe that this is possible in the future. Phoenix is not yet there. We continue to set all our cash generation targets based on the policies we have in force today, not anticipating business in the future. Only time will tell whether the rate of growth in our open business is sufficient to offset the runoff of our heritage business. However, even if the offset is not fully realized, our runoff will be significantly dampened. This will give Phoenix a more sustainable cash generation profile into the future. I will now hand you over to Jim. Jim. Thank you. Thank you, Clive, and good morning everyone. 2018 has been a successful year for Phoenix, with a strong set of financial results. I will take you through each of the key metrics in more detail shortly, but let me set out in summary the financial highlights. Strong cash generation of GBP 664 million. Group operating profit of GBP 708 million. A leverage ratio of 22%, below our target range of 25%-30%. PGH Group Solvency II surplus of GBP 3.2 billion, and a shareholder capital coverage ratio of 167%. A pro forma full-year new business contribution from our U.K. Open and European business of GBP 154 million, and this will be explained later. Assets under administration of GBP 226 billion, and a final dividend for 2018 of 23.4 pence per share. We have a long track record of either meeting or exceeding our cash generation targets. By delivering GBP 664 million of cash generation in 2018, we took our total cash generation over 2017 and 2018 to just over GBP 1.3 billion, exceeding the upper end of the target range. In this period, management actions accounted for nearly 50% of cash generation, reflecting the high level of actions delivered on the back of the AXA Wealth and Abbey Life acquisitions. Going forward, we expect management actions to contribute approximately one third of annual cash generation. Today, we have set new five-year cash generation target of GBP 3.8 billion, and guided to a total of GBP 12 billion of cash generation over the life of the book. Last year, we also talked to total cash generation of GBP 12 billion in 2018 and beyond. But having delivered GBP 0.7 billion of cash during 2018, we would expect total cash generation in 2019 and beyond to reduce to GBP 11.3 billion. The increase in our new guidance is driven by our revised cost synergy targets, together with the future cash generation from new business written in 2018, and the inclusion of 2013 management actions. Our cash generation guidance of GBP 1.2 billion continues to exclude the incremental premiums on in-force policies, new business arising on our U.K. and European open business, management actions post 2023, and any inorganic growth from either BPA or M&A. We therefore hope to do much better. This slide shows the sources or uses of cash for the combined group over the next five years, and reflects the new target for this period announced today. As you can see, the uses of cash at the group level remain small in number and include the cost of maintaining our head office functions, making pension scheme contributions to the Pearl and Abbey Life pension schemes, servicing the interest on our debt outstanding, and paying a dividend of GBP 338 million per annum. After these uses of cash, we are left with an illustrative GBP 1.3 billion of cash at the holding companies as at 2023. Over the coming years, this accumulation of cash balances will be used to support new BPA deals and future acquisitions that meet our acquisition criteria. To demonstrate the resilience of our five-year cash generation target, we have set out the sensitivity of this target to various stress events. As you will be aware, Phoenix has a low appetite to market risks and uses hedging to mitigate the majority of its exposure to equity, currency, and interest rate risk. This translates into the low sensitivity to these risks we present today. Phoenix's main exposure continues to be to longevity risk on its annuity business. Here we model the impact of every annuitant living six months longer, and even in this unlikely scenario, the group will be able to service its debt obligations and continue to pay a dividend of GBP 338 million per annum. This resilience in our cash generation brings increased certainty to our dividend. This slide follows on from the earlier one, showing the position for the combined group beyond 2023. The nature of the Standard Life business means that the cash emergence from this business is more back-end loaded, significantly extending the profile of the group's long-term cash generation, and therefore the sustainability of our dividends. The solvency position of the group has been significantly strengthened from the 2017 pro forma surplus of GBP 2.5 billion to a 31st December 2018 actual group surplus of GBP 3.2 billion. This increase in surplus translates to a 20% increase in the shareholder capital coverage ratio to 167%, and demonstrates the increased resilience of the group. Integral to this increase in surplus are GBP 0.5 billion of Standard Life capital synergies and GBP 0.6 billion of management actions delivered on our legacy Phoenix business. We have also seen the benefit in our solvency position of issuing more capital qualifying debt instruments in the period than was anticipated in our pro forma figures. The strain of GBP 0.2 billion from new business during the year primarily relates to the cost of writing BPA and vesting annuities. New business written within the U.K. Open and Europe segments is capital light. The group recognized a circa GBP 150 million benefit from changes to longevity assumptions, which included moving to the CMI 2017 mortality tables in Phoenix Life. This benefit was more than offset by the impact of strengthening expense risk capital for the Standard Life business and the cost of customer proposition developments and other projects. Despite turbulent equity markets during 2018, we report a small economic variance of GBP 2 billion. This is driven by the group's hedging strategy for equity currency and interest rate risk, which brings resilience to the group's solvency position written each year in the U.K. Open and European businesses. New business contribution is the increase in Solvency II own funds arising from new business written, adjusted to exclude risk margin, and to remove the contract boundary restrictions of Solvency II. It represents the discounted value of expected future cash flows from new business written, and we can therefore use it to explain future cash generation. In the full year 2018, acquisition costs of GBP 126 million net of tax were incurred of new business. GBP 280 million of cash generation will therefore emerge from this new business in the future, and we expect 75% of this future cash generation to arise over the first 15 years of the contract life. Therefore, the 2018 new business contribution will emerge at an average of GBP 14 million over cash generation per annum from 2019 to 2034. As Clive mentioned earlier, we used an exhibit called The Wedge at our Capital Markets Day, which put forward a hypothesis that the growth of our open business will offset the runoff of our heritage business and bring sustainability to our organic cash generation. I wanted to take some time today to share a simple model and assumptions that illustrate this hypothesis. It is important to note that The Wedge model is a subset of organic cash generation and not assets under administration. There is therefore no need to be distracted by a discussion around the relevant. Our model does not factor in cash generation from the in-force open business, but simply assumes that this offsets the acquisition costs associated with writing new business. As cash generation from the in-force open business exceeds acquisition costs, then this is a prudent assumption. We have used 2018 actual results with circa GBP 400 million of organic cash generation from the heritage business and GBP 154 million of new business contribution from the Open and European businesses. The model builds up the growth in open business cash generation from new business contribution, assuming that this will grow at 4% per annum through a combination of volume growth and margin management. It also assumes that the heritage business cash generation runs off at 5% per annum. You can see that the cash emerging from successive years of growing open business offsets the decline in heritage business cash generation. This model is clearly very simple and serves to illustrate our hypothesis only. Our actual five-year cash generation target assumes no future new business, and therefore includes only the heritage 2018 new business contribution figures from this model. Our targets also include cash generated from the in-force Open and European businesses, the distribution of free surplus, and management actions. To summarize, we see real upside potential in Phoenix in future from delivering growth across its open business. Our target shareholder capital coverage ratio is 140%-180%, and the sensitivities set out show that Phoenix remain well within this range under a range of scenarios. If the group's shareholder capital coverage ratio were to fall below this target range, we would consider appropriate rectification plans after allowing for surplus emerging and in train management actions. If the group's shareholder capital coverage ratio were to go above this target range, we would consider options for the deployment of capital, which could include a potential return of capital to investors. We have delivered a strong set of IFRS results and reported an operating profit of GBP 708 million. The increase compared to the prior year is primarily driven by the inclusion of the Standard Life Assurance business for the four-month period post-completion, together with net positive impacts of management actions and longevity assumption changes in 2018. Investment return variances, including net positive economic variances on hedging positions held across the group during the year to protect the group's Solvency II surplus position. This represented a reversal of the position reported at the half year 2018. Other non-operating items included a gain on acquisition of GBP 141 million, reflecting the excess of fair value of the net assets acquired of the Standard Life Assurance businesses over the consideration paid. Also included in this item are one-off costs from introducing pension caps on non-workplace pensions and acquisition costs. I will now pass you to Andy. Thank you, Jim, and good morning, everyone. Phoenix are specialists in the safe and efficient management of heritage business, with a strong track record of delivery. Our U.K. heritage business comprises products that are no longer actively marketed to customers and has GBP 118 billion of assets under administration. Our strategy for our heritage business is simple: to deliver value to shareholders and customers and to improve customer outcomes. Integral to this is ensuring that our cost base reduces more quickly than our policy count runs off. The heritage segment results presented here are prepared on a pro forma basis as if Standard Life Assurance businesses had been included for the full year, with the exception of operating profit, which includes only the post-acquisition results. Gross outflows of GBP 10.8 billion have been partially offset by inflows of GBP 3.7 billion, which included GBP 700 million of vesting annuities and GBP 800 million of BPA. On a purely flows basis, this indicates that our heritage assets under administration were running off at circa 5% in 2018. Delivery of management actions continues to be a key focus, and moving forwards, we will work to deliver these across both our heritage and our open books, i.e., our total in-force book. We have been clear in our approach to the BPA market. Our target for growth in this area is proportionate at around GBP 500 million to GBP 1 billion of liabilities per annum. In 2018, we completed three transactions with total contracted liabilities of GBP 800 million. This represents circa 4% of the BPA market, demonstrating that we are not chasing volumes and will be selective, progressing only value-accretive deals. We have invested around GBP 100 million of capital to facilitate these transactions. This represents the day one capital strain arising from the assets received and allowing for capital management policy. This investment increases our long-term cash generation by around GBP 300 million. The BPA market is growing. GBP 20 billion of BPA was completed in 2018, and we expect volumes in 2019 to be similar. Phoenix is well-positioned to benefit from this market growth and generate long-term cash flows to support the dividend into the future. Long-term illiquid assets return a higher yield for shareholders and better match the duration of long-dated annuity liabilities. We therefore have an active program of sourcing illiquid assets, including equity release mortgages, commercial real estate, and private placements. At the 31st of December 2018, 20% of our GBP 17 billion of shareholder assets backing annuities within our nonprofit funds were invested in illiquid assets. We continue to target an upper limit of 40% allocation to these asset classes by originating up to GBP 1 billion of illiquid assets per annum. 2018 was a successful year for Phoenix, with GBP 1.4 billion of illiquid assets sourced. This volume delivered circa GBP 130 million of solvency benefit to the Group. Our ability to compete in the BPA market is heavily influenced by our illiquid asset sourcing capabilities. We continue to see this as a key management action, which will also contribute to the Standard Life Assurance transition capital synergy target. Management actions broadly fall into two categories under Solvency II. Those that increase Solvency II own funds, and therefore increase the total quantum of cash flows emerging from the business, and those that reduce capital requirements, and hence allow an acceleration of cash that would otherwise have been expected to emerge over time. In total, management actions added GBP 570 million to our Solvency II surplus in 2018. A number of our management actions related to the Abbey Life business acquired in 2016. Approval for this business to be included within our internal model was followed in the year by notification from the FCA that they had concluded the enforcement action against Abbey, and in December, we completed the Part VII transfer into Phoenix Life Limited. Other actions include the benefit from investment fee reductions and savings arising from our joint investment with outsourcers in the digitalization of the customer journey. In 2018, we delivered GBP 500 million of capital synergies in respect to the Standard Life Assurance businesses. This principally consisted of the capital synergies from implementing the group's equity and currency hedging strategy, but also included benefits from transferring indemnities within the group. Today, we have increased our capital synergy target to GBP 720 million. This new target reflects the estimated benefit of moving towards Phoenix strategic asset allocation for annuity-backed assets and creating a single life company. It is worth noting that we continue to make no estimate of the capital impact of harmonizing the group's two internal models, which we expect to be capital neutral overall. Although this clearly remains subject to PRA approval. Across Phoenix, we continue to drive forward actions which seek to improve customer outcomes. We remain focused on improving outcomes for with-profit customers by removing uncertainty and risk from the with-profit funds and continually reviewing fees. We are investing in our online capabilities to connect digitally with as many customers as possible. 80% of Diligenta pension customers can now log on to our digital platform and self-serve. And during 2018, we saw over 40% of eligible customers taking advantage of our online encashment functionality. In the first half of 2018, we announced the introduction of fee caps on our Phoenix Life non-workplace pensions products. The change will benefit circa 250,000 policies and reduce the average Phoenix Life ongoing charge for non-unitized workplace pension policies to 1.1%. As we can see from the previous slide, not only do our management actions focus on delivering value to shareholders, they also look to deliver value to customers and improve customer outcomes. At Phoenix Life, we recognize the importance of a sustainable outsourcing model for customer administration that delivers a digitally enhanced offering to customers and can adapt to change in a fast and cost-efficient manner. At our Capital Markets Day in November, we announced that we have selected Diligenta to partner Phoenix for this journey, and as a result, will be transferring circa 2 million legacy Phoenix policies to Diligenta by the end of 2021. It will lead to a reduction in per-policy administration costs across the legacy Phoenix book, and the GBP 100 million solvency benefit of this management action was recognized in the first half of 2018. Following this transfer, Diligenta will administer circa 5.5 million Phoenix policies from a single administration platform. This will deliver an end-to-end digital journey to 75% of our Phoenix Life customers. I will now pass you to Susan. Thank you. Thank you, Andy, and good morning. Our capital-light U.K. Open business is important to Phoenix, as it brings additional scale to our operations and dampens the runoff of our Heritage books, therefore extending our dividend-paying capabilities. We define Open to be products that are actively marketed to new and existing customers, and we have GBP 85 billion of assets under administration in this segment. It is important to note that these are primary unitized products which have no guarantees and where the investment risk sits with the customer. Our U.K. Open business therefore comprises only capital-light products. In the main, our Open business relates to those products being sold as part of our strategic partnership with Standard Life Aberdeen under the Standard Life brand. While this is part of the Phoenix Group, you will hear me refer to the business using its brand name today. U.K. Open also includes products aimed at the over-50s market distributed by Sun Life. In terms of strategy, there is very much a shared vision with our Heritage book in that we aim to deliver value to shareholders and customers alike. Our strategic partnership, which leverages the skills of both organizations, is important in supporting that strategy. The U.K. Open segment results presented here are prepared on a pro forma basis, as if the Standard Life Assurance businesses had been included for the full year, with the exception of operating profit, which includes only the post-acquisition results. We will not be disclosing the margin we charge on our Open business, but do provide disclosure of the operating margin achieved in the appendices to this presentation. Gross inflows of GBP 10.7 billion includes GBP 7.4 billion of inflows on new business. By new business, we mean either new or increased premiums on existing policies or new policies entered into during the year. This new business made a contribution of GBP 137 million in the year. As Jim explained earlier, we view this new business contribution as a proxy to future cash generation. Net inflows during the year were GBP 3.7 billion and illustrate that on a purely flows basis, our U.K. Open business assets under administration were growing at around 4% in 2018. The Standard Life proposition is strong and has competed well in the workplace auto-enrolment market, with 15,000 active schemes serving around 1.9 million customers. New business gross inflows of GBP 1.6 billion during the year were driven by auto-enrolment increases, new schemes, and new customers joining existing schemes. Net inflows in 2018 of GBP 1.8 billion reflects a strong performance for this product, which continues to be the engine for customer acquisition to the U.K. Open business. When customers change employer, we work hard to retain their business. In 2018, we saw GBP 2.2 billion of assets under administration associated with workplace leavers retained by the Standard Life brand, and transfer either to our retail pensions business within the Open segment or to the Heritage business. Looking forward, we expect the majority of new flows to come from existing schemes. In 2018, over 280,000 new policies were generated by joiners to existing employer schemes, and the increase in auto-enrolment minimum contribution levels from 5% to 8% in 2019 will further support our growth. Critical to success in the workplace market is scheme retention. We will continue to invest in the overall proposition to ensure it remains competitive and differentiated. We expect to win new mandates and believe the ongoing market shift towards master trust arrangements makes us well-placed to win new opportunities. The retail pensions book is in part built up by the strategic partnership with Standard Life Aberdeen, where they are selling retail pension products via independent advisors. During 2018, we saw gross inflows of circa GBP 2 billion, despite the industry-wide slowdown in DB to DC transfers after the high levels experienced in 2017. We also saw a steady flow of customers moving from workplace schemes to retail pensions when they change employer. Our aim is for customers to consolidate their other pension pots with us and stay with our products as they enter the decumulation phase of their life. This means we are retaining assets and administration within the group for the long term. The products themselves have a strong digital and service offering, which is critically important in this marketplace. We expect strong gross inflows in 2019 as our product range makes us well-placed to offer solutions for both accumulation and decumulation. Wrap has historically been one of the largest growth areas for Standard Life branded products, and 2017 saw historic levels of DB to DC transfers. In 2018, Wrap delivered GBP 4 billion of gross inflows on new business during the year. Clearly, this is a very competitive market, but the Standard Life Aberdeen platform remains number one in the market based on both advised gross and net volumes, and it is well-placed to grow in the future. Our European business contains both Open and Heritage products split across Germany and Ireland, and we have GBP 23 billion of assets under administration in this segment. The 2018 results illustrate a self-sustaining nature of this business, which provides us with optionality to grow inorganically through both Open and closed European Life consolidation in the future. Our Brexit preparations are complete. The group has already injected GBP 250 million of capital into the Standard Life International in readiness for a Part VII transfer of the German and Irish U.K. branch businesses. The court hearing for this transfer is scheduled for March 19. We are therefore ready for any Brexit scenario. Across Phoenix, we continue to invest in our digital proposition to increase the number of customers who can access their data and transact online. With more than 3 million logins last year, our mobile app is now the easiest way for customers to interact with us when they want. In 2018, we had over 6,000 customers moved into drawdown through our digital platform. We had over 8,000 customers who used our telephony guidance service to support them with their retirement options, and 2,000 customers and guests attended our highly rated retirement roadshows which ran nationwide. We also monitor our customer service metrics very closely to enable us to drive forward improvements and use a variety of tools to track customer satisfaction. The increase in the scores year-on-year is evidence that our levels of customer service continue to improve. I will now pass you back to Clive. Thank you, Susan. I am going to wrap up. The chairman described and opened this presentation by saying that 2018 was a year marked by outstanding strategic delivery and strong financial performance. With this, I entirely agree. Therefore, it is with optimism that I now turn to Phoenix's future. Phoenix is at an inflection point as we test whether we can entirely offset the natural runoff of our heritage business with the growth of our open business, as described by Susan. We believe we are likely to be able to do this for three reasons. First, we must retain our existing clients and assets. We will do this by enriching our product offering and by improving the outcomes and experiences of our clients. Second, we will attract new customers, bringing new assets. This will be achieved through our strategic partnership with Standard Life Aberdeen. Finally, we intend to improve our operating profitability. We must have a lean and agile operating model that uses our scale to leverage its buying power with our partners. The prospect of our open business growth offsetting the runoff of our heritage business represents a fundamental change for Phoenix, as I said in my introduction. Proof of this hypothesis will deliver longer term sustainability to our cash flow. But the future does not stop there. Standard Life was an important milestone on our consolidation journey, but it is not the final destination. Acquisitions, including BPA, will enable Phoenix to grow cash generation further. We believe that the drivers of consolidation remain compelling. We believe that firms will divest themselves of their capital-heavy businesses to consolidators such as Phoenix. The market is clearly in flux, and we see a range of future opportunities, and the Phoenix team is eager to get the next transaction across the line. I don't believe funding is an issue. What I've referred to before, much to Jim's regret, as Jim's war chest, is circa GBP 1 billion, and I have confidence that we have the management bandwidth, augmented by our Scottish colleagues, to do another deal, if necessary, immediately. Phoenix has a clear set of priorities for 2019. Cash generation is our key metric. We are focused on delivering the GBP 600 million to GBP 700 million target for 2019 announced today. Our transition program is challenging. We have set ourselves clear management objectives and will deliver against these, because that is what Phoenix does. Across the group, we will drive forward customer initiatives that support new business growth. Finally, as I said a moment ago, we are open for business and will examine further M&A and BPA opportunities that meet our stated criteria of being value accretive. To conclude, cash remains king at Phoenix, and we estimate at least GBP 12 billion of future cash generation from our business in force today. The resilience of Phoenix is evident with our GBP 3.2 billion Solvency II surplus and a shareholder ratio of 167%. The continued growth of our open business will offset the heritage business runoff, and there will be growth in BPA and M&A as the U.K. and European insurance industry consolidates. We are clearly building a more sustainable Phoenix. Thank you very much indeed. Ladies and gentlemen, that brings to an end the formal presentation. Thank you very much for your engagement. I'd like to now move on to Q&A, which will be chaired by our Chairman. If you could wait for the microphone to come to you and then announce your name and the institution for whom you work, that would be great. I'm also conscious that some of you will be moving on to another results announcement after this. So if you could be a little bit restrained and limit yourself to just two questions. I know how you like to get a barrage in. Can we start over here? Thank you. Good morning. Jon Hocking from Morgan Stanley. I've got two questions, please. So firstly, on the new business strain, can you talk a little bit about how you are going to balance new business strain given the cash targets you set out? I think Jim alluded to the fact that you see that large has been covered off by the existing new business from the back book. But if you had opportunities, for example, to write a greater volume of bulk annuity, for example, would you choose the sort of trade-off between long-term cash flow and short-term cash flow? That's the first question. The second question, just in terms of the longevity risk, the sensitivities you have given, I wonder if you could elaborate a little bit in terms of what your risk appetite is for longevity, and going forward, whether you see a role for more reassurance on that point. Thank you. Okay. I think they are both for me. Well, first of all, turning to slide 20, which is up on the screen here. You will see the new business strain on this slide, which is a negative GBP 0.2 billion. Just a reminder what we said, that comprises GBP 101 million from the BPA business that we wrote during the year, which includes the capital management policy amounts related to that business. Roughly GBP 60 billion relating to our vesting annuity businesses, and the GBP 40 million balance relates to the Standard Life business, which we have described previously as capital light. I think in the Capital Markets Day, we had said we believe that strain to be slightly positive. But once we have run the year-end numbers, it has turned out to be marginally negative. But fundamentally, it is capital light business. In terms of thinking forward in terms of our use of capital, you will have seen from one of the other slides that our cash builds up over the five-year period from GBP 0.3 billion to GBP 1.3 billion. We will be accumulating additional amounts of surplus through which we will continue to invest that in BPA business and in the Standard Life business, and in supporting future M&A. Now, the key thing about thinking about the bulk annuities business is we have used the phrase in the past that we will enter that market on a selective and proportionate basis, and that remains the position. We are always going to fund this BPA business from our own resources, and we have given guidance that we would expect between GBP 500 million and GBP 1 billion of liabilities over the course of a year. The strain from that BPA business will be around the GBP 100 million mark on average. We continue to see the Standard Life business will have a very minimal capital strain. We are very comfortable that those new business opportunities, that the capital costs are well manageable within the ongoing business as we go forward. Your second question was around longevity risk and our risk appetite. Roughly about 55% of our longevity risk is reinsured as at the present time. When we are thinking about BPA deals, we are reinsuring a larger proportion of that business, so up to 90% or so on average for the new business to do with BPAs. We continue to keep the overall longevity risk appetite under review, and if it was necessary, we would take action to keep it well within our risk appetite. We don't have any particular issues with our risk appetite at present and are very comfortable with the overall position. Good. Okay. Julianne? Gordon. Thanks. It's Gordon Aitken from RBC. Couple of questions, please. You mentioned that the balance sheet is most sensitive to longevity. Just wondering what your thoughts are for the 2018 mortality table, which should be published soon. Secondly, also thoughts on super funds, which some are pitching as a threat to bulk annuity writers like yourself. Shall I pick up the longevity? You pick up the first one. I will pick up the first one, and then Andy or Susan can pick up super funds question. Where we have moved to today, for the Phoenix Life book, we have reflected the CMI 2017 tables. Therefore, we are up to date with these, and we will review the position in relation to the 2018 tables in the second half of this year in accordance with our normal practice. We certainly saw positive experience variances come through in 2017 relative to the assumptions at that time. If that trend were to continue, it is possible we could see further changes. I think at this stage it is too early to say. Standard Life have a slightly different basis where they use their own bespoke model to cap as well. Both businesses, in broad terms, are consistent with the 2017 tables, and time will tell whether the 2018 brings a further opportunity for a release. I think on super funds, I think you are right. There is a potential new competitor there in the BPA market. It is still relatively early days, and I think there is quite a lot of water still to pass under the bridge in terms of really looking at the capital treatment. I know there is a lot of work going on across the ABI to ensure that we have got comparable capital treatment around super funds. I would say as a competitor, I think there are benefits from the capital strength of our life insurance companies to give to those pensioners. I think there are benefits which we have over them. I think it is a competitive landscape which we will absolutely have to keep under review. Good. Thank you. Greg, do you want to Mm-hmm. Greg Bass at KBW. One technical question. In terms of your credit risk on slide 17, in terms of the element for default, previously you said there was a 10% allowance for default, and there's no comment there now. Wondering what the allowance for default is under the new sensitivity. The second question is to Clive. At the Capital Markets Day, if I remember correctly, you said you speak often to all the potential acquisitions, and you think that possibly a deal will happen earlier than later versus what people expect. I wonder if the probability of a deal since the Capital Markets Day from your conversations has improved or deteriorated. Okay, I deal first of all with the credit spread widening on slide 17. The credit stress here is equivalent to an average 120 basis points spread across the ratings. But clearly, we apply a different percentage depending on the rating. It comes out an average of 120%, and we allow 10% of that for defaults, which is consistent with the approach we've taken in previous years. Greg, it's a good question. I'm going to dodge it a little bit, so forgive me right now. There are three big tides which are moving forward, which we've referred to before. I think I changed the order of those tides. The first was A Day, giving people pensions freedom in 2014 and 2015. Changed the way clients bought, and therefore that changed the maths of big back books. The second was clearly the repricing of capital due to Solvency II in 2016. They're in the rearview mirror. The third tide, which is happening, and it is clearer today than ever before, is the pricing that investors are attaching to different businesses. So you do that. That's not us. That's your industry. But your industry attaches a PE to welcoming, highlighted in the spotlight if you're managing businesses that combine those two opportunities. So your industry is driving change. I think that has become a greater force of emphasis than either the A Day changes of pension freedoms and indeed the repricing of capital and Solvency II. So that is a systemic change, and I say that has been growing since the investor day, the clarity of that. The third is clearly we have a European capability, in Ireland and in Germany, which means the breadth of the opportunities geographically is more. And clearly, I'm not learning foreign languages yet, but I am certainly seeing opportunities which are continental. And then finally, because we are a biped in terms of our open capabilities and the Heritage business, that gives us a broader breadth as well. So there's a depth to the conversation. And as I've said before, to just irritate you, it's a bit like London buses. I never predict when anything may or may not occur. Yes. Thank you. Dom O'Mahony, Exane BNP Paribas. Two questions. You mentioned auto-enrolment as a force driving flows. On my crude understanding of solvency, when an individual increases the proportion of their income going into their pension, that creates a one-off increase in capital generation, but actually because you bake in the assumption over the lifetime, that then falls away. When you think about the growth of the capital generation and cash release from the new business, does that mean that there is any chance that there has been a spike in this year? Sorry. A spike in 2018, maybe a spike in 2019, but that then falls away. Or are you very comfortable with something like the 4% that you showed us in the helpful model? The second is just on the operating model. We talk about the integration of Phoenix Heritage and Standard Life Aberdeen business. You did not mention outsourcing in any way. In the past, you have always described the partnerships with Diligenta and Capita as being a real source of advantage. Is there a shift in the operating model here that actually you are looking to sustainably manage more of the business internally? Thank you. Susan, do you want to deal with that first question? Sure. Yeah. You are absolutely right. We expect the flows to increase in 2019 as we see the 5% to 8%, just as we saw the 3% to 5% last year. We think that accounts for about another GBP 200 million of income. Our expectation is that that will continue. We have made an assumption that we will see a slight increase in drop-off with the change from 5% to 8% over that 3% to 5%, but we do expect that to persist. Clive, do you want to pick up the second? Happy to answer the second question. I do not think there is any change. We have announced GBP 1.22 billion of synergies, two halves. We always thought the biggest synergies would be generated by capital synergies at GBP 720 million. That is what you expect. It is unique to our industry. This is not a manufacturing business, so it is not just about cost, it is about capital synergies. That is what a consolidator brings to bear, and the internal model, et cetera. But of those cost synergies, which add up to GBP 650 million, we have introduced a new category, GBP 30 million of single one-offs. This is one of the advantages, if, again, if you bring two large businesses together. I mentioned IFRS 17. This is an expensive process for two companies, and we bring it together and we have a single process. So there is a separate category of one-off. You are then left with GBP 620 odd million coming from improved costs management. That is bringing our cost base down from GBP 600 million to GBP 525. That is a GBP 75 million target, up from GBP 50. This is easily doable. I say easily over a three-year basis. It is about 12.5%. You do it in multiple ways. You do it by changing processes. Has believed in a bifurcated. Some of the things we manufacture in-house and some of the things we outsource to a variety of outsourcers, of whom Diligenta is our preferred strategic provider. We think that that is not going to change anytime soon. So we will carry on having this bifurcated in-source and outsource capability. But as we have demonstrated, not just last year, but in the years before, and Andy was very fluent, Diligenta, the relationship we have with them yields very good value to us as shareholders, but more importantly, delivers better outcomes in terms of customer service by way of a digital journey going forward. Thank you, Clive. Andrew, you had your hand up earlier. It is Andrew Crean with Autonomous. One question, one ask, if I may. On Europe, you have only got 23 billion of assets split between three different businesses. There is an awful lot of private equity sharks out there trying to get into that business as well. What is your timeline, do you think, to be likely to be doing deals? Have you considered actually selling back to the private equity and just folding your tent there? Then the request, in terms of the movement in the Solvency Capital position, there was quite a drop in the SCR and I was wondering whether you could give us the movement in your surplus, separated between the available funds and the SCR in the same way that you have to report that to the PRA. Clive, do you want to take the- Yes, certainly. European question? Europe. There is no consideration of divestment. These businesses are accretive. We have a German business which is not risk-bearing. It is a unit link business and has a heritage book. There is an offshore, that is about 13 billion of that 23. There is about 6 billion in offshore, and then the remaining 6 is unit linked, related to R, what you have commented on. Germany, as Mark Twain would say, as slow as molasses in winter. The Generali deal, which you may be alluding to, has taken a long time to get off the block. I think what we are witnessing, Ireland has seen more consolidation, so has the Netherlands. Really, it is just starting in Germany, and we wish to be a player. Now, of course, it does come down to value. There is a point when an asset is more valuable to somebody else than it is to us or from whatever we can do with it. Far too early to reach that conclusion, and therefore I say categorically these are not businesses available for divestment. Jim, do you want to pick up the capital? Yes, certainly the SFCR, Andrew, will give you a breakdown of the movement in the Solvency Capital Requirement. It is a reflection largely of a lot of the management action activity that has taken place during the course of the year. Oliver. Oliver Steel, Deutsche. Thank you for The Wedge modeling page. Very useful. Just trying to consider what is in it and what is not in it. I am afraid my questions are going to have a slightly negative slant, but I do recognize that you are missing out the bulk annuities and all the rest of it in that. One thing that is missing is the runoff of the open book. You are showing the gross cash flow coming off the new business, but you are not showing the loss of cash flow of the old business that is running off. I wonder how it would look if you included the open book in there as well. The second question is, the second thing it excludes is management actions. You have given guidance, I think, that management actions will be a third of the total cash flow over the next five years out to 2023. Given the size of your business now and the linkage of those management actions to acquisitions, how confident do you feel about sustaining a third of cash flow from management actions beyond 2023? I think these are for me. I was wondering when we would get round to The Wedge, Oliver. Thank you very much. Let us be very clear. This is slide 22, what this excludes. The numbers shown here for the new business contribution are the new business contribution associated with the Standard Life deal and exclude therefore BPA, exclude any future M&A and exclude management actions. They are absolutely excluded. What I also said in my talk was that we have assumed, for the purposes of this model, that the in-force runoff from the open that you would do if you modeled the entire thing. What we are simply trying to demonstrate in this very simple model is that the runoff from the heritage book is offset largely by the growth in the new business contribution, if you believe those assumptions that are set out here. I think that chart demonstrates that. If I gave you the whole answer, I would just be making your life far too easy. Very good. Cash flows. You were asked. Oh, sorry. Yes. On the confidence in terms of the management actions. We have described in the past the hopper approach. We are now incorporating the Standard Life business into that same process. As we stand today, we see a very healthy pipeline of management actions. If you recall, we went as the old Phoenix for many, many years without a deal, but were still able to deliver a very substantial proportion of management actions over that period. We certainly see today the same confidence going forward into the future of being able to deliver a constant stream of management actions. Hi, Simon, chair. May I just say to help Oliver, I look at the GBP 3.8 billion. In the last eight years, we have never said a number which we have not met or exceeded. If you build the sandwich of the 3.8, you start with GBP 800 million of free life surplus, which emerges GBP 1.8 billion of cash, which will come out of heritage, and then it is GBP 1.2 billion. I think you said GBP 1.8 billion of management actions. Do we believe over the next five years we can do GBP 1.2 billion of management actions, of either acceleration or adding to Solvency II own funds? Absolutely. Good time. In this. Secondly, your GBP 250 million Brexit capital injection, can this be released if a soft Brexit occurs? Thank you. Jim, do you want to take that? That is me again. The Brexit, the capital injection has gone into the Irish subsidiary. If Brexit were not to happen, therefore, we did not need to go forward with the Part VII and so on, we would have the ability to take that capital back out of the Irish subsidiary. It would involve a capital reduction process, and we have done lots of those types of processes. So they are familiar to us, but it would require that process. In terms of the returns, they are based on the risk-free rates. Andrew. Thanks. It is Andy Sinclair from BofA Merrill Lynch. Can I say, I wish more companies I cover could report negative goodwill on their acquisitions. So two from me. Firstly, just wondering if you could remind me a bit more about your equity hedging strategies. What instruments do you use? What would the impact be on equity market increases on your cash generation guidance? Secondly, just on the free surplus in the Life company that had increased pretty nicely up to GBP 1 billion, I think increased by GBP 0.2 billion pro forma in the year. Just wondered on ability to upstream that. Does that give you any potential upside risk to the war chest? Thanks. Okay. Well, thank you for your comments about the negative goodwill. On the equity hedging, we have commented in the past about our approach to equity hedging, in that we do not fundamentally see that as a risk that is rewarded to us. So we have historically hedged a very significant proportion of the annual management charges that come out of the book, and that continues to be the case. At Phoenix, the level was about 90% of the risk was hedged. Within Standard Life, we have got about 75% of that risk hedged as we stand today. We have used a combination of options and futures which tend to roll forward on a 2-year basis. And we have recognized in setting our targets going forward into the future and in our plans that we would have a certain amount of costs related to the options. And in terms of the free surplus, if you were to run, that free surplus is available for distribution today. So technically, you could run that down to a pound if we chose to do so. Technically own that distribution. Okay. Ming Zhu from Panmure Gordon. Two questions, please. First is from slide 8. You gave that GBP 850 million to GBP 950 million cash generation for 2019. Is that a sort of standard annual number? Because if I times that figure by 5 and deduct off the GBP 250 million Brexit cost, I will be looking at the minimum GBP 4 billion to GBP 4.5 billion cash generation for next 5 years. And how does that tie back to the GBP 3.8 billion you have indicated, or have you been conservative as usual? And my second question is on dividend. And you have only increased dividend when you have done deals and debt returning. When would you review your— You have talked about growth and how resilient your cash is, your confidence in management action. When would you review your dividend policy to a progressive dividend policy? Because you are now in FTSE 100. Realistically, people really buy into your shares if you got no dividend growth outlook. Or are you only going to increase dividend when you do an M&A? Let me take that one. Slide five. Sorry, slide eight. What you see there, 850-950. That assumes that we hadn't put any money into Standard Life International, and clearly that 250 is a one-off. If you then strip that out, you get down to the range we're talking about for 2019, which is obviously after the Standard Life deal. The average over the five years I think is about GBP 775 million. Because of the timing of management actions, it can be lumpy. It doesn't come necessarily in even streams. I think all you're seeing is in 2019, we are predicting more management actions than we are in the later years. That is usually quite normal because you have more sight, obviously, of the nearer term actions as you go forward. But overall, it's an average of that 7.5. I don't think it's for me to comment on the dividend. I think it's one of these. I think it's above my pay grade. I think it's the chairman, and it's the board. Our dividend policy remains absolutely stable and sustainable. It says what it does on the tin. We have raised our dividend three times in the last three years, so +12% since 2016. We have, on each occasion, already described on another slide when we were to get north of 180% SCR, then we might consider a distribution. As I think he also said very clearly, we believe that there are ways we can deploy the capital very effectively on behalf of our shareholders, and that's where we stand at the moment. Hi, good morning. Ashik Musaddi from JP Morgan. Just a couple of questions. One is clarification and one is a question on M&A. If I think about your war chest, you're flagging about a billion at the moment. But is it fair to say that this billion would be, say, a couple of billion in five years' time because you're accumulating cash from 0.3 to 1.3 billion over the next five years? So billion is the number today, and every year it goes up because you're accumulating cash in case there is no deal in between. That's my first clarification I'm looking for. The second one is, Clive, you remember you always had a clear M&A criteria that dividend has to go up, leverage has to come down, cash flows has to go up. Any thoughts on that? Are there any strict criteria, rules at the moment? Because one thing is that if you do a deal now, probably it will be a bit more levered deal compared to what you put in from the business. Any thoughts on those criteria would be great. Thank you. Okay, let me pick up the war chest question first. Jim's war chest, I don't think it's quite mine to spend. Not for you personally. I'll have a word with the remuneration committee shortly. The war chest is quite simply recognizing the fact that at the present time, we have leverage at 22% on a Fitch basis. As you know, we have a target range of 25%-30%. If we took that leverage up to 30%, we would have funds available of around about GBP 1 billion without going back to equity shareholders for funding for a deal. We do see accumulating cash over that five-year period, as you say, from GBP 0.3 billion to GBP 1.3 billion. That will be reflected in improving surplus. But out of that, we would be paying the capital for future BPA deals, which we've guided you to up to about GBP 100 million per annum, plus the small strain on the Standard Life new business. Not all of it would translate itself necessarily into an addition of the war chest, but there would be a reasonable proportion of it. Ashik, you asked the question whether we would change the criteria by which we were those cash accretive. Can we show that day one? You can do that in two ways. We showed that with the SLAL deal, it brought GBP 5.5 billion of cash. We could raise the dividend, and we paid as on UTI basis, 84%. That was accretive. The second one is does it support the dividend so that we understand that if we raise equity, we have to repay those who give us their money. We are stewards of their money, and we deploy that, and that's what we did by the dividend increases. Then finally, it's to protect our investment grade rating. We're trading on a Fitch rating of between 25% and 30%. We're currently below that at 22%. That is one of the key components that gives us the capacity for Jim's war chest of GBP 1 billion on the current size of our balance sheet. That would take us back to the top end of 30%. I think that's very clear guidance. It is a sober way of approaching deals. I think the deals are always different in shape. You say going forward, they may look, it's not an unfair comment to make. Each deal has been a different shape and size. AXA was very front-end loaded in terms of cash release. SLAL is much more back-end loaded. If you look in the German or Dutch or Irish market, again, they are very different. To answer your question, no, we're not changing them because I think they've served us well to date. Any other questions? From the website. On the wire. Okay. Yeah. Yes. Ibrahim Said. Can you hold the microphone up, Juliet? Ibrahim Said from Deutsche Bank is asking about our debt issuance plans for the year, and whether we would need to issue debt to meet our GBP 500 million to GBP 1 billion BPA target. It is a very simple answer. We never discuss debt issuance, period. To answer the question, would we have to do something, as Jim said, our BPA and our target is somewhere around GBP 750 million to GBP 1 billion of liabilities, circa 3%-4% of the current market size, proportionate, selective, and as we have said before, funded from our own resources. Thus, as we showed on the slide, GBP 100 million capital strain and exactly the same will pertain this year. Anything else from the internet or the phone or anything else in the room? If not, I would just thank you again for your interest and your support and your time. Very, very much appreciated. We are going to get back to work to deliver what we have promised. Thank you. Thank you very much indeed, Jim. Thank you. This presentation has now ended.