Earnings Call: H2 2017

Mar 15, 2018

Good morning, ladies and gentlemen, and welcome to the Group's 2017 results presentation. I am joined on the podium by Clive Bannister, our Group CEO, Jim McConville, our CFO, and Andy Moss, CEO of Phoenix Life. 2017 was another successful year for the Group, in which we delivered strong financial performance and substantially completed the integration of the businesses acquired during 2016. This demonstrates the strength of Phoenix's specialist operating model. 2018 will be a transformational year for Phoenix. on February 23, we announced our plans to acquire Standard Life Assurance and enter into a strategic partnership with Standard Life Aberdeen. This transaction is fully aligned to Phoenix's strategy and will make us the largest closed life consolidator in Europe. These acquisitions have enabled us to increase our dividend from an annualized amount of about GBP 120 million in 2015 to an expected GBP 338 million in 2019. I will now pass you over to Clive, who will provide you with a detailed business update. Good morning, everybody, and thank you, Henry. 2017 has been a successful year for the Group, with strong financial performance across each of our key metrics. We have already updated you on our 2017 cash generation of GBP 653 million, which included significant contributions from the acquired businesses of both AXA and Abbey Life. We have improved our capital resilience through the restructuring of our debt, increasing our Group solvency to surplus. In July 2017, Fitch upgraded the Group's lead company's rating to A+, and this rating has been reaffirmed by Fitch following announcement of the Standard Life transaction. As Henry mentioned, we have substantially completed the integration of AXA and Abbey Life, and the expected synergies from these acquisitions are ahead of our original targets. The final 2017 dividend has been increased to 25.1 pence per share. This amounts to an annual level of 50.2 pence per share, a stable and sustainable level. We have announced our commitment to increase this dividend further following the successful completion of the Standard Life transaction. During 2017, Phoenix focused on the integration of the businesses we acquired during 2016. As I speak today, these integrations are substantially complete and have delivered synergies ahead of target. Andy will talk in more detail about the work we have undertaken to integrate both businesses, but I wanted to recognize the achievements made against our key metrics. We have already delivered GBP 518 million of cash generation from the AXA and Abbey Life businesses, and cost synergies of GBP 27 million, against our original expected synergy target of only GBP 17 million. The move to our target operating model will be completed at the end of the first quarter of 2018, ahead of plan. On Friday, February 23, we updated the market on our expectations for future cash generation, signaling that we expect to be at the upper end of our two-year target of between GBP 1 billion and GBP 1.2 billion. We also announced a new five-year cash generation target of GBP 2.5 billion. Beyond 2023, we anticipate a further GBP 3.8 billion of cash generation from a runoff of the Phoenix alone book. The acquisition of Standard Life Assurance is expected to bring further cash generation of GBP 5.5 billion, which will provide increased sustainability to the long-term cash profile of the Group. Jim will talk more about this cash profile in a few minutes time. in June 2017, we described our plans to move into the BPA market, and on February 23, I was delighted to announce that we were currently in exclusive discussions on our first BPA transaction. We expect this transaction to be completed shortly. We only look at BPA transactions through an accretive lens, and any transaction will be proportionate, selected carefully, and funded through our own existing resources. I will now pass you on to Jim, who will take you through in greater detail our numbers. Jim. Thank you, Clive, and good morning, everyone. 2017 has been a successful year for Phoenix, and this is highlighted 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 key results. Strong cash generation of GBP 653 million during the year, including GBP 401 million from the acquired AXA and Abbey Life businesses. Holding company cash as at the end of 2017 of GBP 535 million. PGH Group Solvency II surplus of GBP 1.8 billion and a shareholder capital coverage ratio of 164%. IFRS operating profits of GBP 368 million, life company assets under management of GBP 74 billion and a final dividend for 2017 of GBP 0.251 per share, which is reflected in the reported solvency positions. The cash generation from Phoenix Life for 2017 was GBP 653 million. This includes GBP 165 million from the ex-AXA businesses, GBP 236 million from Abbey Life, and GBP 252 million from the other operating companies. The AXA cash release largely resulted from the inclusion of the ex-AXA wealth business onto our internal model in the first quarter of 2017. During the fourth quarter of 2017, we completed the Part 7 transfer of this business to Phoenix Life Limited. As a result, we will no longer separately report cash generation from this business. in December 2017, we reinsured the majority of the Abbey Life business into Phoenix Life Limited. This supported a cash release of GBP 162 million, which took total cash generation from the Abbey Life business during 2017 to GBP 236 million. With regards to the uses of cash, the increase in pension scheme contributions during the year is driven primarily by a one-off contribution of GBP 25 million made to the Abbey Life staff pension scheme. In addition, the move from annual to monthly contributions to the Pearl pension scheme has resulted in an additional GBP 10 million of contributions during the calendar year, representing an acceleration of our agreed payments. Non-recurring outflows consist of project costs associated with acquisition, integration expenses, and costs associated with hedging. Debt interest is slightly higher than the previous year, reflecting the higher coupon payable on hybrid debt issued during the year, which has more than offset the impact of lower debt principal balances following repayments. The Tier 3 and Tier 2 bond issues completed during 2017 raised net proceeds of GBP 830 million. The proceeds from these debt issues, as well as funds from our existing resources, were used to repurchase GBP 178 million of our senior bonds and to repay in full the revolving credit facility so that at year-end it was completely undrawn. Finally, we ended 2017 with GBP 535 million of cash at the holding company level. We communicated the progress made on our debt strategy when announcing our half-year results. We now have a more appropriate funding structure for the group, and the maturity profile better matches the underlying cash generation of the business. Fitch upgraded its ratings for the group in July, with Phoenix's main life companies having a rating of A+. Fitch has also considered the impact of the proposed Standard Life transaction and reaffirmed all ratings with a stable outlook. The work completed to bring the group onshore has progressed well. The head office became U.K. tax resident on January 31, 2018, and the governance structure has been simplified. Solvency II reporting will now be completed only at the level of the PGH group. The final stage of the onshoring process will be the establishment of a new U.K. holding company. It remains our intention to complete this final stage as soon as possible after the completion of the acquisition of Standard Life Assurance. Moving on to the PGH Solvency II position. As of the start of 2017, the surplus at PGH was GBP 1.1 billion, which included the pro forma impact of the GBP 300 million Tier 3 issue in January and the incorporation of the AXA business into the group's internal model. The surplus at the end of the year has increased to GBP 1.8 billion, with a shareholder capital coverage ratio of 164%. The year-end position anticipates the final 2017 dividend of GBP 99 million payable in May. As we have discussed previously, there are an additional GBP 600 million of unrecognized surpluses relating to the group's strong with profit funds and the PGL pension schemes. These surpluses are not included in the overall Solvency II surplus but do provide the group with an additional resilience in a stress scenario. On March 1, we received approval from the PRA to bring Abbey Life Assurance Company Limited onto the group's internal model. This returns the group to a full internal model with no business remaining on the standard formula basis. The additional benefit of around GBP 40 million associated with this approval will be reported in the 2018 results. This slide provides more details on how the Solvency II surplus has changed over the course of 2017. The increase in the surplus has been driven by positive impacts from management actions and the subordinated bond issues. Andy will take you through the management actions shortly. These effects have been partly offset by negative impacts of economic and other variances, the costs of the senior bond tender, the workplace pensions management fee cap, and the dividend payments over the year. The group's Solvency II position remains resilient. This partly is a result of the additional surpluses within the strong with profit funds and PGL pension scheme, together with the hedging actions that we carry out designed to protect the group's solvency position and therefore our future cash generation. The group's most significant sensitivities are to increase longevity on our annuity portfolio and a widening of credit spreads. It is important to note that on our expected cash flows, there are broadly similar impacts. Any detrimental impact on our life company Solvency II position directly reduces the free surplus that is available to distribute up to the holding companies as cash. Therefore, there is a direct and immediate impact on the cash generation from these stress scenarios. As at the year-end, the group had limited sensitivity to equity markets. Following the announcement of the acquisition of Standard Life Assurance, hedging actions have been taken to mitigate the group's exposure of the acquired Standard Life value of in-force to equity risk. This slide shows the group's operating profit, which was GBP 368 million for the year, slightly up on 2016. The Phoenix Life operating profit of GBP 388 million has been enhanced by assumption changes. As reported at the half year, we have incorporated CMI 16 into our reserving assumptions. The resulting release, together with positive impacts from reduced life company expenses, have more than offset the negative impacts of persistency experience for products with guarantees. Group costs were higher in 2017, primarily as a result of increased pension scheme charges. As stated earlier, our hedging strategy is designed to protect our solvency position but introduces an element of volatility in our IFRS results. Losses on the equity put options and swaptions held to protect the solvency exposure of the group to equity and interest rate risk have led to a negative investment return overall. Non-operating items include a GBP 25 million impact from the tender for the senior bond and a GBP 27 million impact of the management fee cap relating to workplace pensions. Moving on to cash generation. I appreciate that many of you will be familiar with this slide, which I presented to you on 23rd February. Total cash flows of GBP 5.5 billion are expected to be generated from Standard Life Assurance's in-force book, which will increase the combined group cash generation to GBP 11.8 billion. As you will note, the cash generation profile of the Standard Life business is more long-dated than that of the legacy book. This is primarily driven by the fact that Standard Life Assurance book has continued to be open to business, whereas the legacy groups of Phoenix closed many years ago. As a result, the duration of the acquired cash flows is longer than that of Phoenix. In addition, the cost associated with moving the Irish and German business of Standard Life Assurance from branches to subsidiaries through a Part 7 transfer in readiness for Brexit is delaying an element of cash generation from earlier to later periods. This slide shows the sources and uses of cash for the combined group over the period to the end of 2022. As Clive mentioned, we have updated our long-term cash generation target between 2018 and 2022 to GBP 2.5 billion. We have also announced that we expect Standard Life Assurance to generate cash flows of GBP 1 billion over this period. This cash generation is shown in the green bars on the chart and is additive to the opening holding company cash position at the end of 2017 of GBP 0.5 billion. Moving along to the right, we show the various uses of that cash. Pension scheme contributions, including our funding commitments to the Pearl and Abbey Life pension scheme periods over the period. The PGL scheme is now fully funded. The analysis assumes that the dividend is increased from the time of the 2018 final dividend to an annualized amount of GBP 338 million. After these uses, the cash we are left with was an illustrated GBP 1.3 billion of cash at the holding companies as at 2022. Over the coming years, this accumulation of cash balance positions the group to potentially deploy more of its own resources for future acquisitions or to support BPA transactions. This slide follows on from the previous one, showing the position for the combined group from 2023. There is a significant expected cash flow over the longer term, with the acquisition adding GBP 4.5 billion to Phoenix's existing expectations of GBP 3.8 billion. These longer-term cash flows do not assume any management actions, nor do they assume any value from the new business generated through the strategic partnership with Standard Life Aberdeen. Holding company cash of GBP 7 billion will be used to meet interest and head office costs and to service the dividend. The acquisition therefore provides significant additional durability to the dividend and supports our stated stable and sustainable dividend policy. I will now pass you on to Andy, who will talk more about the achievements of Phoenix Life in 2017. Thank you, Jim, and good morning, everyone. 2017 was a very busy year for Phoenix Life, in which we have substantially completed the integration of both AXA and Abbey Life, delivering cost synergies and cash flows ahead of target. We have also delivered a number of management actions which have added GBP 553 million to Solvency II surplus and supported our ability to meet our cash generation targets in 2017 and in future years. From a customer perspective, we continue to invest in digitalization to improve customer communication and engagement and reduce conduct risk and cost. In addition, all of our service levels across both internal and external metrics remain within target. Our integration plans for AXA and Abbey are focused on moving the acquired businesses onto Phoenix's target operating model and harmonizing the approach to capital and risk management. These integration activities underpin the delivery of both the cash generation and cost synergy targets. For AXA, our integration activity is now substantially complete, generating cost synergies of GBP 17 million per annum, well ahead of our original target of GBP 10 million per annum, and enabling us to deliver GBP 282 million of cash from the acquisition to date. Integral to this integration has been the establishment of SunLife as an independent distributor based in Bristol. I will talk more about this business model shortly. The migration of all core functions to Wythall was completed during the year, and the outsourcing of policy administration for the AXA business became fully operational with Diligenta and FNZ on January 1, 2018. On the capital side, we have accessed significant diversification benefits with the mortality exposure of the SunLife business, offering the group's existing longevity exposure from its annuity liabilities. In March, the acquired business was incorporated into the group Solvency II internal model, and the policies were legally transferred to Phoenix Life Limited via a Part 7 transfer during the fourth quarter of 2017. in 2017, we have completed our work to establish SunLife as a distribution business, which continues to be based in Bristol and has 121 employees. The SunLife operation is responsible for the advertising and direct sales of over-50s products, for which it has a 45% market share. These are manufactured and administered by Phoenix Life. While smaller in scale, this operating model is similar to the one that we intend to use under the strategic partnership with Standard Life Aberdeen. Under this arrangement, Phoenix Life will provide white label manufacturing and policy administration for workplace pensions, Self Invested Personal Pensions, and drawdown products branded by Standard Life. Moving on to the Abbey Life transaction. This integration is also substantially complete and will deliver cost synergies of GBP 10 million per annum, ahead of the original GBP 7 million per annum target. GBP 236 million of cash was generated from the business in the year towards the GBP 2.5 billion target to the end of 2020. The operating model of Abbey Life was already closely aligned to Phoenix target operating model with an existing outsource agreement in place with Capita. Our initial focus was to put in place governance and management quickly, ensuring the oversight of the business and its outsourcing arrangements were enhanced. The migration of all functions to Wythall were complete by the end of April. The Abbey Life business was reinsured into Phoenix Life Limited in December 2017. This reinsurance allowed the group to access transitional benefits on the Abbey Life business. It also provided efficiencies from the annuity portfolio by extending the matching adjustment approvals of Phoenix Life to all of Abbey Life's qualifying annuity liabilities. In the fourth quarter of 2017, we submitted our application to move Abbey Life onto the group's internal model. This application was approved on March 1. Management actions broadly fall into two categories under Solvency II. Those that increase Solvency II own funds, and hence increase the total quantum of cash flows emerging from the business, and those that reduce the SCR, and hence allow an acceleration of cash that would otherwise have been expected to emerge over time. Management actions added a total of GBP 553 million to our Solvency II surplus in 2017. Those management actions that have increased own funds by 321 million include the benefit of investing in illiquid assets, low expenses for the life companies, which has been possible due to the economies of scale from the enlarged business, and also from the Part 7 transfer of AXA policies to Phoenix Life Limited. Long term, illiquid assets return a higher yield for shareholders and better match the duration of long-dated annuity liabilities. During the year, we have increased our shareholder asset allocation to illiquid assets from around 6% to circa 15%. This has primarily been driven through an increased holding of equity release mortgages obtained through both back book acquisitions and ongoing sourcing. Finally, the 232 million of management actions accelerated cash flows, including the AXA internal model approval, hedging actions, and credit optimization. We continue to be committed to delivering a high level of service and engagement to our customers. We are currently investing in online capabilities to connect digitally with as many customers as possible. Not only will this improve customer communication, but it will ease processing for customers and reduce costs. Our digital offering has been developed in cooperation with our outsource partners and will enable customers to better understand their Phoenix policies and make more informed decisions. Central to this digital vision in 2017 has been the offer of online encashment for smaller pension pots to over 55s. This offering has been well-received, with 23% of eligible customers completing the transaction online. Another area of focus for us in 2017 has been the development of a dedicated advisory unit to support the IFA business within AXA Wealth. Regular feedback has been sought from advisors throughout the process of migration to Phoenix. This feedback from advisors has been positive and has translated into persistency experience, which is better than expected. Maintaining these strong service levels for IFAs and for employers for workplace pensions business will be a key area of focus for the acquired Standard Life Assurance business. We continue to innovate so that we can deliver wider options to our customers. During 2017, we launched an initiative to buy out customers with small annuities in payment. This offers customers real optionality in their retirement journey. By the end of April, we expect to have contacted 16,000 customers and are anticipating an eventual take-up rate of around 70%. The table on the right-hand side of the slide sets out our key customer metrics, which are a combination of internal and industry metrics. I am happy to report that we met all of these targets in 2017, and our FOS overturn rate is our best ever. Phoenix has continued to be active in progressing the work required in response to the Abbey Life Annuities review and legacy enforcement action. The indemnity with Deutsche Bank provides protection against outcomes from these ongoing reviews, and our current assessment of the associated settlement and restitution costs are within original expectations. We continue to process PPI creditor insurance claims with the deadline for claims set by the FCA for August 2019. The provision for claims has been increased to GBP 40 million, but has been offset by the recognition of a corresponding reimbursement asset of GBP 32 million. This asset represents recoveries due from third parties under contractual arrangements and limits the group's downside exposure to this risk. Finally, the regulatory landscape remains fast-paced, with a number of FCA publications and consultations under consideration. We continue to actively review customer outcomes, and as a result, we believe Phoenix is well-placed to respond to regulatory change. I will now pass you back to Clive. Thank you, Andy. On the 23rd of February, we announced our plans to acquire Standard Life Assurance, and that was their U.K. and European life businesses, and enter into a new strategic partnership with Standard Life Aberdeen. This deal is both a transaction and a marriage. The strategic rationale for the proposed transaction is simple. It allows both of us to focus on what we do best. Phoenix will become the preeminent closed life consolidator in Europe, and Standard Life Aberdeen will focus on its world-class investment management business. The Standard Life Aberdeen transaction is fully aligned to the Phoenix strategy, and it is financially compelling. It is value accretive, giving us GBP 5.5 billion of cash generation, which will not only enable us to increase our dividend, but will also significantly enhance the sustainability of these dividends. It delivers scale with a capital S in an industry that rewards scale, and we believe this scale will enable us to deliver cost and capital synergies of around GBP 720 million. We have future opportunities, first in the form of asset growth generated from the strategic partnership. Second, as the transaction provides us with a base in Europe, which we can leverage in taking forward a European growth strategy. Finally, it is a strategic partnership between two companies whose objectives are aligned, and it is embedded through a 19.99% strategic stake by them in us. Phoenix has long seen the potential in Europe. The acquisition provides an existing European base in both Germany and Ireland. The European closed life market is still very nascent, but it offers an additional avenue to create value for Phoenix shareholders in the future. We believe that there remains a market opportunity of around GBP 380 billion in the U.K. That is up GBP 80 billion from our original estimate of GBP 300 billion, and Germany and Ireland add an additional GBP 160 billion of assets to an overall total market potential of GBP 540 billion. Looking to the future, Phoenix remains focused on its strategy of delivering value from closed books. The bifurcation of our industry that we are seeing today, particularly yesterday, supports this strategy. We will continue to seek selective transactions in the bulk annuity market. We will continue to write annuities for our own policy holders as well as over 50s potential through products delivered by SunLife. These are complementary capital-light products providing a natural longevity hedge for the group. In addition to the new business written by the existing German and Irish businesses, our new strategic partnership offers the opportunity to generate future assets and cash flows on a white label basis. While we have placed no value on this business in the cash flows that Jim has just presented, asset growth through this arrangement will act as a natural dampener to the runoff of our closed life book. In summary, some transactions make you bigger, some transactions make you better. This is one of those very unusual transactions that makes us both bigger and better. I close today by setting out our strategic priorities for 2018. Cash generation continues to be our key metric as it underpins our stable and sustainable dividend. We are clearly on track to be at the top end of our GBP 1 billion to GBP 1.2 billion target for 2017 and 2018. We will obviously be working closely with our colleagues at Standard Life Assurance to progress the change in control application process and expect to complete the transaction in the third quarter of 2018. Customers will always remain a key priority for the group, and in 2018, we will further develop our digital proposition, as Andy talked about, which will improve our customer communication. The work to simplify our group structure, as Jim described, is largely complete, and the final stage of our onshoring work will be undertaken as soon as practicable following the completion of the Standard Life transaction. While our primary focus in 2018 will naturally be upon the completion of the Standard Life assets, Standard Life Assurance transaction, we will continue to examine That sounds extraordinarily- Attention please. We are investigating an alarm. It may be necessary to evacuate the building. Please wait further announcements. I have heard the-- Saved by the Bell. I had one sentence to go saying, but while we are naturally focused on making sure that we land safely change of control and transitioning of the Standard Life Assurance transaction, we are of course, focused on other opportunities, in the M&A environment. That is the end of a formal presentation. Ladies and gentlemen, we move on to the Q&A. This is where wait for a microphone. I am looking at the back. We are just carrying on. So, wait for a microphone to be brought to you. Give us the name, or your name and the name of the institution you represent, and then the chairman will give all the difficult questions to Jim and the impossible questions to Andy. Ladies and gentlemen on the phone lines, if you would like to ask a question, please start followed by one. Gordon. Gordon Aitken from RBC. I have three questions, please. First, Prudential yesterday upped its retail and UC redress provision, GBP 175 million, doubled it to more than GBP 400 million. You talked about the Abbey Life provision. Standard Life also had a GBP 175 million provision. If the provision has to be increased, who picks up the tab for that? Second, there's obviously been a mortality or a slowdown in life expectancy in the U.K., so there will be gains coming. I'm just wondering, on part of the Standard Life acquisition, who gets the gains? And really, what table was used when you priced the Standard Life book? Because if it was CMI 15, and obviously know what CMI 16 and 17 looks like, we've got a pretty good insight into what CMI 18 will look like. Does that mean the price you paid was effectively a good chunk, or will be a good chunk lower than that stated? Finally, on workplace pensions and the SIPP business, I was surprised when these were included in that Standard Life transaction. If you did want to sell those, could you? Right. Thanks, Gordon. Just while you're thinking about it, just to say in terms of Standard Life provisions, you're quite right, they were GBP 175 million. They were increased by GBP 100 million, and it's in the numbers, and the use of about GBP 25 million, which means there's a net GBP 75 million increase. And we do have indemnities in that area as we did with Abbey Life, as you know. Do you want to pick up anything you'd like to say? I'll do indemnities. Will you take, please, the CMI issue, and then you know about the workplace pensions and how we're dealing with that going forward. Of course, we're well aware there were two players in terms of the annuities. One was Standard Life and one was the Pru. This is territory that we understand well, and you can imagine that it was a focus of the due diligence that we completed, and therefore, we have made appropriate considerations both in terms of the price paid and the indemnities sought. On the use of the CMI tables. Just to confirm, Phoenix use the CMI 16 table, so we are up to date with the tables that have been published. Standard Life use their own data primarily to establish their annuity provisions, but their latest position reflects their latest experience. So you can consider that as also up to date. On workplace and SIPP, I think we see this as a key part of the strategic partnership. We will have an arrangement in place with Aberdeen Standard for the exclusive manufacture of those products. So we see this as continuing and being a key part of our offering going forward. Right. Thanks. Ashik Mathur from JP Morgan. Just two, three questions. First of all, how should we think about movement of your assets? I mean, liquid assets into illiquid asset. How does that create strain, capital strain? Can you give us some clarity if you shift 1 billion to illiquid asset, what does it do? Secondly, you still have north of 55% of your shareholder assets in gilts, cash, supranational bonds. I doubt that there is a lot of U.K. companies have that much in gilts. I mean, low risk assets. So what is the potential you see in your book to keep on shifting these assets into illiquid or say, a bit more high yielding assets? So that would be the second one. And third one, SunLife is still generating some new business. Can you give us some color about what volumes, in terms of premiums, profits, anything that is coming on top of your guided numbers already? Thank you. Andy, what did you- Yeah. I will. Let me do the SunLife one first. We sold just over 100,000 whole life plans within SunLife last year. We also distribute third-party products to the over 50s market as well. On the whole life product, we have a sort of annual premium equivalent of about GBP 25 million. That is currently producing around about GBP 5 million of bottom line profit for us at the moment. In terms of the illiquid assets, I think as I said in the presentation, we have moved up from around about 6% to 15%. We do have a longer-term target on our annuity assets to get between 30% and 40%. Obviously, that for us, gives us overall a high yield, but also from diversifying our overall portfolio, it is actually quite capital efficient for us as well. You had a third part of the question, Ashik, was there any appetite to change our bond and credit in going to higher yielding and taking on commensurated, either rewarded or unrewarded risk? I think we've thought about that hard in the strategic asset allocation process. The doubling takes us from about 3 billion to about 5 billion, and we're doing it in measured ways. So it's ERM, it's local authority loans, it's commercial real estate, and touching at the edge of infrastructure. That's where our appetite stops. That is principally involving our own shareholder funds and with the life companies and your funds. The risk profile we've taken is appropriate for the nature of the assets and the policyholders that we wish to serve at the time. So there's not going to be a change in our risk appetite for the assets you've made reference to. Good morning. It's Andrew Crean speaking. Could I ask three questions as well? Firstly, you said that by 2022, the holdco cash would be about GBP 1.3 billion. How much holdco cash do you need to hold as a group? What's the policy around that and liquidity? Secondly, I suppose this is something of a winner's curse. I mean, winning Standard Life means that you're so large that Large in what criteria, Andrew? Well, in terms of assets and in possibility, the number of further consolidation deals to be done in the U.K. must have shrunk just purely because they wouldn't make a difference. Could you give us some idea as to how many targets now are relevantly on your radar screen? Then thirdly, cost synergies. I think not in this presentation, but the one in late February, I think you capitalized the cost synergies benefits to about GBP 50 million pre-tax, GBP 40 million net of tax, and you capitalized them over 10 years at GBP 415 million or something. I was just wondering how that worked as to whether you could go into more detail as to where the cost synergies are coming, what you're not assuming, because this is quite a substantial target, which you could yield quite a lot of cost synergies out of. Why don't you talk about the cost synergies and then come back to the strategic issues on the acquisitions side of things? Well, I'll do the cost synergies first. Yeah. What we mentioned on the 23rd was cost synergies of GBP 415 million, which was a capitalized number over 10 years. That represented the equivalent of GBP 50 million pre-tax, and that was out of a combined cost base of in excess of GBP 600 million. Now, once you strip out the European businesses, because they are standalone with no equivalent Phoenix business, the shareable cost base is around about over GBP 500 million. So the savings represented some 8% of the relevant combined cost base. And where these come from is really doing what you would expect us to do. First of all, putting the management of the life companies together. Secondly, looking at the support functions for the two life company operations and harmonizing these where appropriate. Finally, in terms of opportunity, we need to look at whether we make more use of our outsource model or make more use indeed of Standard Life's insource model. In the numbers that we have presented, we have not built in any significant savings for that opportunity. Jim, would you answer the first question, which was about the nature of your war chest? Just how much money do you need lying around? That is what Andrew is asking. Yes. I think that goes back to the slide where we talked about your sources and apps. Yeah. It goes from about GBP 535 million holdco cash today, building up to GBP 1.3 billion, and then thereafter to 2023, a much larger number. Yeah. If you remember past presentations, Andrew, we've spoken about having a war chest of around GBP 500 million available to support further acquisitions. We will obviously be utilizing some of that war chest to support the Standard Life acquisition, as we've previously described. But thereafter, as the business progresses, it will start to build up again. Indeed, you will see at the end of the 5 years, we see the amount building up to GBP 1.3 billion. Phoenix as a standalone business, we have GBP 950 million undrawn RCF, and we have the 500 million of cash. We have more than sufficient liquidity for our needs. The minimum liquidity requirement we need is a fraction of that total amount. There is no shortage of liquidity, and a substantial proportion of that 1.3 billion at the end of the 5 years could be available to support BPA or further M&A deals. Then you asked an impossible question, Andrew, about what is the market remaining. I don't have a crystal ball, but I am robust in my belief that there's a cyclical change. The events of yesterday just confirm it. The tectonic plates of our industry are changing. You think that the overall size of that in the closed life, let's just talk closed life in the U.K., before we talk about BPA and before we talk about Europe, is GBP 380 billion. We've taken that up, and outside this meeting, we can go through the component parts of it. What is intriguing for me is 3 years ago, we put up a pie chart, and we said that half of the owners of these legacy historic closed books were U.K. insurance companies. About 30% were foreign insurance companies in the U.K., and then about 10%-20% were banks. If you look at the 3 deals we've done since 2016, they've come out of each of those pots. We started with a foreign insurer saying they wanted to direct their assets towards the GI market. That is AXA. They haven't left the U.K. They just repositioned it. A deal we paid 375 for. We've got 283 already out from that transaction. The next one was a bank. Deutsche Bank decided that they didn't want to have capital committed to a legacy business. Then here we have a U.K. insurance company redeploying it. I don't have a crystal ball for when and how much, but I am absolutely certain that there are boardrooms that are thinking hard about which way their capital is facing. The seminal event that took place and the two big drivers to the change of our industry. One, the starting gun was set off by George Osborne. He gave clients choice. So the capital that was mandatorily fixed behind paying for annuities can now be put against a DC rather than some DB environment. That is not stopping anytime soon, and especially with auto-enrollment and the freedoms that come with that. It is a DC. It is a fee-based, fee-rich environment, which is why our strategic partnership is so seminal, because we still get the opportunity of benefiting from Standard Life Aberdeen's success in that area. The second one was the repricing of capital in 2016, which was made reference to in yesterday's presentation by probably two, and that is not going away anytime soon. So I think this is inexorable. Part of your question was, well, are you going to run out of road of any big ones versus little ones? I had a wise Irish grandmother, and she said, "Never ignore the pennies at your feet looking at the sixpences and the stars." So I am completely convinced that there are going to be Plethora is the wrong word, but there will be sufficient small and medium-sized deals, and there may be whales out there yet to come that I cannot identify, but that gives us a very sustainable future as a growing business in the U.K. Then I am going to answer the question, finish the question there quickly. We then look to a place called BPA. Many people give you statistics, GBP 550 billion of assets to be transferred in the next 15 years. It is enormous. There is the very big bulk end, and there is the vesting annuities. It is a spectrum. We do on average, we did GBP 529 million vesting annuities last year, GBP 540 million the year before that, GBP 500 million or GBP 486 million the year before that. We think that our business with Standard Life will be another GBP 200 million. So we are in the annuity business. That is a great business and builds our ability to pay, extend our dividend paying capability. Then we can acquire annuities by buying deals as we did with Abbey Life, one-third of that. GBP 3.5 billion of that was an annuity. Then in the BPA space, as we have advertised, we are looking at that. We looked at seven transactions last year. We did one immensely selective, proportionate, which means small in my category, using Jim's war chest. So we are never going to come to shareholders for it, and it has to meet the criteria of being accretive, sustaining the dividend and our investment grade rating. So there is some portion of that GBP 550 billion which is available, and then there is a new environment called Ireland, and I have Ireland and Germany in terms of closed life. We have priced that, or we see the market at about EUR 160 billion. Who knows? So we do not think we are running out of time, road anytime soon, and actually, we see the tide coming towards us in the fact that boards are now contemplating which way their capital is facing. It is not, in my opinion, correctly aligned in many of the businesses against the strategic objectives of getting into the wealth management business and capital-light business. Apologies. Long answer. Oliver. Thank you. Oliver Steel, Deutsche Bank. Two questions. The first is, I suppose, building on Andrew's question. There are a number of smaller deals potentially out there over the next 12 months, let's say. Ignoring the cash, do you actually have the management capacity to take on those deals in the next, say, 12 months? Actually, I am going to make it three questions. Why break the habits of a morning? Let's say everybody has asked for three. The second question linked to that is, if there are a plentiful number of small deals available in the future, do you have the management capacity to do, say, more than one a year of those smaller deals? Because I suppose getting around Andrew's question about relevance, you just have to do them more frequently. The third question is about the German and Irish cost. Is that in the GBP 135 million, or is that deducted off the cash flow that you are expecting from Standard Life over the next four, five years? Shall I just touch on the management one to start with? Firstly, we did do two deals in 2016 in AXA and Abbey, and the management team succeeded in doing that. We have got with Standard Life in Scotland, we have got huge expertise and talent there that is now part of our group and part of our management team. When you talk about things like BPA, have you got the management to do it? We already do 11 billion. Have 11 billion of annuity liabilities. So we are in that business already, so it is not a new business and new management that is required. Do you think we have got the management team who is best to do it? I think we have. That is very generous, my Chairman, to say that. I echo his comments, having done two deals. But I think there is a more subtle point to Oliver's question as to whether we increase the frequency on the smaller deals, so you fly at two different altitudes. Yes. The gating item, Oliver, in doing deals are management bandwidth. Do we have the money? How does our regulator feel about it? I am robustly confident, particularly at the prospect of getting more talent in Scotland, that we have the management talent to do these deals. When it comes to financing, Jim has a lot of money, and the markets have been very supportive. He has an unspent RCF of GBP 950 million. I think you get into more interesting territory with our regulator. They are navigating Solvency II. There is a plethora of Part 7s, literally. We have a lot of model changes and matching adjustments. I think it is not unfair of our regulator to say, "Listen, you focus on the things that really have to be done before you start dashing off elsewhere." Therefore, I am going to use the word bifurcated approach, where there are smaller deals, where it is more administration and fee-oriented rather than capital related. There was a transaction last year, which had a capital component, but it was a lot about administration and taking on a book and how to manage it. So I am interested in, it is not so much the scale issue and the frequency, which I think is a good way of looking at it, but it is whether it involves me having to create burdens for my regulator and of course, burdens for ourselves. As the chairman said, we've already done more than two deals in 2016. They take a long time to gestate as businesses, and we're always attentive to prospects in the market. Jim, do you want to talk about the- Yeah. So your final question, Oliver, was about the treatment of the integration costs and the German and Irish Brexit related costs. On slide 19, the integration costs, which we expect to amount to GBP 135 million after tax, are included within the operating and pension cost line of GBP 0.5 billion shown on that chart. The costs of capitalizing the subsidiaries following Brexit for the German and Irish businesses are deducted from the cash generation line in the green box. So within the GBP 1 billion, that is after the capitalization of those businesses. So what it does is it depresses the cash we expect to get out over the first five years. That is a number of several hundred million pounds. Hi. Angel Kansagra at HSBC. My first question is on the illiquid assets. So you said you have a target of increasing it from 15% to 30%-40%. You have a range of assets you would be investing in. Do you have preference for specifically equity release mortgages? Because that's what you did in H2 2017. When you acquire the equity release mortgage back books, can you maybe share the risk profile of the back books in terms of what's the loan-to-value you get from the business? The third one is actually on longevity reinsurance simplification. That was one of the points you mentioned as management action. Can you give some more details on that? A quick one, actually. The answer would be yes or no. Did the GBP 160 billion Standard Life assets, were they part of your GBP 300 billion market size estimate previously? Or was it something out of that? Why don't you start with the- Yeah, I can start at this point, Andy. We do have a preference for equity release mortgages. We have an ongoing flow of equity release mortgages through various funding arrangements which we have in place. The margins which we can earn above swaps are quite attractive on equity release mortgages at the moment. In terms of back books, I think we've acquired two or three over time. At the point in time of acquisition of back books, we do extensive due diligence. The features of all of them vary significantly across the base. Particularly, we are looking, as you said, at loan-to-values, no negative equity guarantees, SHIP certificates. This is where the Equity Release Council is basically issuing certificates around it, particularly to make sure they've been legally drawn up properly, that families have been involved in all of those. We do quite a lot of due diligence around the risk of that, and then obviously continue to monitor that as we take on the administration of those back books as well. On the Standard Life and the amounts of books available for sale. On the announcement on February 23, we updated our estimates for the market size in the U.K. at GBP 380 billion, and that excludes the Standard Life groups. One more. Thanks. It is Andy Sinclair from BofA Merrill Lynch. Three from me as well. Firstly, given the step up in the cash generation from the Standard Life deal and where your holdco cash goes over the next few years, will you not tend to increase the dividend a little bit further in the step up? Secondly, actually on the results today, believe it or not, another significant IFRS loss on the supported with profits book. Just any color that you can give us there? Thirdly, just thinking about bulks. How should we think about the cash generation step up from bulks? I know you have typically said that the dividend only really steps up when you do an acquisition. If you are doing a decent number of bulks, how should we think about that? Thanks. How do you Jim. Jim on the dividend, Andy on our with profits IFRS, and I will deal with bulks. Yeah. As we explained on the 23rd, Andy, our dividend policy remains stable and sustainable, and we review it at every period on a transaction. We've taken the decision to increase the dividend by 3% this time, compared to the 5% that we declared at the time of the AXA deal, and again at the time of the Abbey deal. I think I used the phrase that getting to the appropriate amount is art, not science. We were very mindful of the phasing of the cash flows, and in particular, the Brexit-related cost that I've just spoken about in the previous question. There was a longer-term back-ended nature to the cash flows from the Standard Life group compared to, say, the AXA group. We came to the view that looking at the dividend, the yield where it currently sits, that 3% was the right answer. On the IFRS loss, what we're generally seeing across all of our books of business is that people are retiring later. We have a couple of particular products in our supported with profit funds, which have guarantees in terms of rollover. What we're seeing is those people are staying in those products longer, and hence, I think Jim referenced the negative impact from overall persistency experience. That effectively is that particular one. We are seeing on the positive side in our unit-linked book, the same trend. That obviously gives us a benefit, which partly offsets the total persistency experience. I think your final question was on the impact of bulk transactions. We have said that bulk transactions will be selective and proportionate. We've talked in the past about doing deals roughly equivalent to GBP 500 million of liabilities per annum. The annual impact of the cash flows of that business will clearly build up over time as we do deals going into the future, but initially will not be significant. We still said selective and accretive. That's important. Accretive. I think it won't be material. It's interesting because we're only in that business, but it won't be a material impact. It will build up. Yeah, it will build up. Our focus is going to be on closed books. That's the key message. Dividends is an art, not a science is all I will say. Shall we say thank you very much? That is it. Okay. Thank you very much indeed. It was a strong year financially for the Phoenix Group, and that gave us the confidence to increase our dividend based off strong cash flow and strong solvency. Thank you very much indeed. Thank you. Thanks for coming.