Earnings Call: H2 2016

Mar 20, 2017

Good morning, ladies and gentlemen, and welcome to the group's 2016 results presentation. I am joined on the podium by Clive Bannister, our Group CEO, Jim McConville, our CFO, and Andy Moss, who is the CEO of the Life company. 2016 has been an extremely busy and successful year for the group. The acquisitions of AXA Wealth and Abbey over the past year have significantly increased the scale of the group. Assets, policyholders, and future cash generation have all increased by around 40% since the start of 2016. We have also strengthened the Solvency II surplus of the group despite the fall in interest rates. This provides Phoenix with greater resilience to future market volatility and supports the 5% increase in the dividend per share, which we announce today. With over 6 million policyholders, Phoenix has the platform and expertise to manage the additional closed funds and enhance returns for both policyholders and shareholders. This greater scale and strength provides the group with an opportunity to make further acquisitions as the U.K. life market continues to consolidate in response to regulatory and competitive pressures. Finally, I would like to take this opportunity to thank our employees for their hard work and dedication. It has been a very busy year, and without them, none of the achievements of 2016 would have been possible. Now I would like to cross you over to Clive and the team to take you through the results in more detail. Thank you, Henry, and good morning, everyone. As Henry has just mentioned, the major events for the group in 2016 were the acquisitions of AXA Wealth and Abbey Life. We have already delivered significant cash flows from AXA acquisition. Of the GBP 486 million of cash generated in 2016, GBP 117 million was from AXA. In addition, following the PRA's approval to bring the AXA business onto the group's internal model, we have delivered a further GBP 165 million of cash in 2017. Total cash generation to date from the AXA business is therefore GBP 282 million, exceeding the target of GBP 250 million of cash from the acquisition within just six months of its completion. We are well advanced with the integration of the acquisitions and are on target to deliver additional cost savings to those which we announced last year. The acquisitions, together with the recent Tier 3 bond issue, have increased the group's capital position. This allows us to progress our onshoring plans, as well as providing the group with additional resilience against future market volatility. Both acquisitions were completed before the end of 2016, with Abbey Life change of control approval taking just 93 days. The AXA integration will be completed by the end of this calendar year. The Abbey Life integration is on course for completion by June 2018, with the next material step being the application for the internal model. Because the integration is going well, the group remains active in looking for further consolidation opportunities in the market. I summarize on this slide the key metrics that we should be judged upon with regards to the integration of the acquisitions. As I have said, we have made a strong start in delivering GBP 282 million of cash from AXA, and we now expect cost synergies in the range of GBP 13 million-GBP 15 million per annum, up from the previous expectation of GBP 10 million. A key part of the integration process is to move the acquired businesses to our target operating model, consolidating the finance and actuarial systems, and basing the core life company functions at our main office in Wythall. Finally, the indemnity agreed with Deutsche Bank provides protection against outcomes from the ongoing investigation into Abbey Life. This is at an early stage, but preliminary assessments of the risk-sharing are within the tolerances expected. We have today updated our long-term cash generation target between 2016 and 2020 to a new level of GBP 2.8 billion. Given the integration work that needs to be carried out, there will be a significant level of management actions within the cash generation over the next two years. We have therefore set a two-year target of between GBP 1 billion and GBP 1.2 billion of cash generation in 2017 and 2018. Beyond 2020, we anticipate a further GBP 4.4 billion of cash generation, demonstrating once again that the group's long-term cash flow profile remains a key strength. One of our key criteria for any acquisition is that the level of dividend per share should be at least sustained. The cash generation from the acquisitions has allowed us to announce a 5% equivalent interest in the final 2016 dividend per share. In addition, we intend to raise the 2017 interim dividend by a further 5%, as announced at the time of the Abbey Life acquisition. Therefore, the total dividend uplift from 2015 will amount to over 10%. This is in line with the public statements we made at the time of the two acquisitions last year. Following these step-ups in dividend, the dividend policy remains stable and sustainable. I will now pass you over to Jim, who will take you through the numbers in greater detail. Jim? Thank you, Clive, and good morning, everyone. Phoenix had a strong set of financial results in 2016, despite the market volatility during the year. I will take you through each of the key metrics in more detail shortly, but let me set out in summary the key results. Cash generation of GBP 486 million during the year, with an additional GBP 165 million achieved from AXA in the first quarter of this year. Holding company cash as at the end of 2016 of GBP 570 million, a Solvency II surplus of GBP 1.9 billion, and a shareholder capital coverage ratio of 170%. Both of these allow for the pro forma impact of the recent Tier 3 bond and the approval to move the AXA business onto the group's internal model. Operating profit of GBP 351 million and a final dividend for 2016 of GBP 0.239 per share. As we described last year, the 2015 cash generation was impacted by the transition to Solvency II, with the life companies retaining capital during the year rather than releasing it up to the holding companies. 2016 cash generation has seen a return to a more normalized level of cash generation, although the impact of lower interest rates has meant that management actions have been particularly important in driving cash flows this year. Non-recurring costs have also been significant this year, driven by the significant project and transaction costs for the acquisitions, together with the costs of putting in place hedging to protect the capital position of the acquired businesses up to completion. Non-recurring costs also include a payment of GBP 68 million to PA (GI) Limited, a subsidiary of the group that formerly transacted general insurance business. The payment relates to a provision of GBP 33 million and an additional GBP 35 million of risk capital associated with redress costs of creditor insurance written before 2006. Andy will provide further detail on the background to this shortly. Debt interest payments decreased during the period. The 2015 interest cost was impacted by the Tier 1 bond exchange undertaken in that year, and there has also been a positive impact from the debt repayments made in 2015 and the reduced margin on the group's senior bank debt. We have reduced debt during the year through the repayment of GBP 239 million over the year, including the entirety of the AXA acquisition facility. Finally, after taking into account the costs and financing of acquisitions, we ended 2016 with GBP 570 million of cash at the holding company level. We have set out here an updated version of what is now a familiar slide to you all, showing the illustrative sources and uses of cash over the period to the end of 2020, based on a new GBP 2.8 billion cash target. We begin with our cash at the holding company level of GBP 4.6 billion. The green bar to the right of this of GBP 2.3 billion represents the remaining cash generation expected to emerge over the period. The free surplus within the life companies was GBP 0.7 billion as at the end of 2016, giving us confidence in meeting this long-term cash flow target. Details of how the free surplus has built up over the year is included as an appendix. Continuing to the right, we show the various uses of cash over the period to 2020. As can be seen, we have assumed that the remaining GBP 550 million of the bank facility is fully repaid. Given our recent Tier 3 bond issue, we have the ability to refinance additional bank debt into longer term subordinated debt, and I will return to this point later in the presentation. There is also GBP 0.8 billion to fund an illustrative stable level of dividends after taking into account the further expected increase at the time of the 2017 interim dividend. After these uses of cash, we are left with an illustrative GBP 1 billion of cash at the holding companies. This buildup of cash balances over the coming years offers the group the potential to deploy more of its own resources for future acquisitions. Looking forward and starting with GBP 1 billion from the previous slide, we have shown on this slide the future GBP 4.4 billion of cash emergence over the longer term. As you expect, cash generation will decline over time as the current book runs off. However, it is important to remember that the amount shown here after 2020 do not include any benefit from management actions. As we have always stated, the key strength of the group is to continuously find ways to add value to stakeholders, and this will continue well into the future. Moving on to the PLHL Solvency II position. The position assumes a recalculation of transitionals as at December 31, 2016. We have also included the pro forma impact of the recent Tier 3 bond and the approval of the AXA Wealth business onto the group's internal model within our year-end numbers. Abbey Life's position is calculated on a standard formula basis as of the end of 2016, but we are aiming to make an application in the second half of this year to bring the Abbey Life business onto the group's internal model. As we discussed last year, there are an additional GBP 4.4 billion of unrecognized surpluses within the group's strong with-profit funds and the PGL pension scheme. These surpluses are not included in the overall Solvency II surplus that do provide the group with additional resilience in a stress scenario. Our shareholder capital calculation therefore excludes the own funds and SCR of the group's strong with-profit funds and the PGL pension scheme. This provides a clearer view of the shareholder position and is similar to the approach taken by many of our peers. The shareholder capital coverage ratio is 170% as of the end of 2016, a 16% increase on last year. This slide provides more detail of how the surplus has changed over the course of 2016. The increase in the PLHL surplus has been driven by positive benefits of the runoff of the book, management actions, and the impact of the acquisitions completed in 2016. These effects have been partly offset by the negative impact of assumption changes and the recognition of a provision and associated risk capital in respect of creditor insurance redress costs. In particular, we have strengthened some of the persistency assumptions on guaranteed products within certain life funds due to the low interest rate environment. We constantly review the appropriateness of our actuarial assumptions, and the persistency impact was partly offset by positive changes on our longevity assumptions. The fall in long-term interest rates has also had a negative economic impact on the capital position, although we have seen a small recovery in rates during the second half of the year. Finally, the pro forma adjustments add an additional GBP 2 billion to the surplus. 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 have otherwise been expected to emerge over time. Management actions added a total of GBP 463 million to our Solvency II surplus in 2016, with a number of key actions taken over the course of the year as the group has adapted to the new capital regime and reacted to changes in markets. Those management actions that have increased own funds include the benefit from a Part VII transfer of an annuity portfolio to ReAssure Life Limited, formerly known as Guardian Assurance, and reduced expense charges to the life companies. The remaining GBP 213 million is from cash acceleration actions such as a longevity swap with an external reinsurer and hedging actions. The group's Solvency II position remains resilient, partly due to the additional surpluses within the strong with-profit funds and the PGL pension scheme. The group's material risk driver is to longevity on our annuity portfolio. However, this is a single stress and does not assume any offsetting diversification from our mortality book. It is important to note there are broadly similar impacts on our expected future cash flows. Any detrimental impact on our life company Solvency II position directly impacts 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. Transitionals are seen as a key part of Solvency II, smoothing its introduction from the previous Solvency I regime over a 16-year period. Within the product groups at the life company level that were written before 2016, transitional measures offset the changes to the calculation of transitional technical provisions under Solvency II. The introduction of the explicit risk margin is the most important of these changes. The recent interest rate volatility has shown how sensitive the explicit risk margin is to movements in the yield curve, and the transitionals can be recalculated in response to these moves, subject to regulatory approval. The chart on this slide shows how the risk margin and the recalculated transitional benefit has moved over the course of 2016. It is therefore important to think about these two metrics in parallel. A material shift in the risk margin will lead to a broadly similar move in the level of transitionals, and therefore the capital position of the group as a whole is less volatile. These transitional benefits will run off over 16 years and will reflect the run-off of the business over that period. However, the risk margin and other technical provisions will also run off with the business and therefore offset the impact of the loss of transitional benefits over the period. There will be a residual headwind as the risk margin will run off slightly slower than transitionals, and this effect has been factored into our cash flow targets and longer-term forecasts. The group's operating profit was GBP 351 million for the year, which includes GBP 157 million from management actions. The impact of management actions on IFRS profits can be lumpy and were higher than in the previous year. The key actions in 2016 relate to the optimization to matching adjustment portfolios and lower expense charges to the life companies. Below the line, negative economic impacts were driven by lower yields and also the equity put options. This equity market hedging protects the solvency capital position from equity exposure in the unit-linked funds and future shareholder transfers from the with-profit funds. In a rising market, the loss on the put option is recognized immediately under IFRS, whereas the higher future profits and the increased value of in-force are not recognized under IFRS until later periods. There were also some non-recurring items, including the project costs incurred during the year, a provision for the costs of integrating the AXA business, and the provision made for the PA (GI) redress costs. This has led to the overall IFRS loss after tax that you see at the bottom of the table. Fitch Ratings assigned investment-grade ratings to both our senior and subordinated debt in 2015. We were put on positive outlook for our credit rating at the time of the AXA acquisition, and this was reaffirmed on the announcement of the Abbey Life transaction. This has been important in allowing the group to access funding from our lending banks and the broader capital markets. We have also recently expanded our senior revolving credit facility to GBP 900 million, of which GBP 550 million is currently drawn down. This facility has no mandatory or target amortization payments and offers the group greater flexibility to make acquisitions. The group has also taken advantage of the wider investor universe in the debt capital markets with a successful issue of Tier 3 bonds completed a couple of months ago. In terms of the future, we continue to examine options with regards to replacing our bank debt with longer-term subordinated debt. As we discussed at the time of the 2016 interim results, the group continues to plan a further simplification of the group structure, ultimately replacing the current Cayman Islands registered topco with a UK PLC. This will provide greater clarity for the group stakeholders, including investors and regulators, and is a natural step for the group in terms of corporate simplification. The recent changes to our debt structure are supportive of these plans. The work to bring Phoenix Group Holdings onshore has progressed over the past 12 months. As we discussed in August, creating a UK PLC topco will mean that the Solvency II position will be calculated at the ultimate holding company level, currently PGH rather than at PLHL. The main impact of this is the recognition of the group's current senior debt at the Phoenix Group Holdings level. As can be seen from the graph on the left, the surplus at the PGH level at 31st December 2016 is strong, with an overall surplus of GBP 1.1 billion. This is the same quantum of surplus as the PLHL position at the time of the half year results, and the resilience is consistent with the PLHL surplus. The PGH surplus also recognizes the upcoming final 2016 dividend that will be paid in May. We will report the Solvency II capital position at the level of both PLHL and PGH from the half year 2017 results, and are currently targeting to put in place a new UK PLC topco during the course of next year. This will allow us to simplify both the group structure and our governance processes, as well as provide further clarity for our investors and stakeholders. Finally, as I mentioned on the previous slide, any further diversification from senior to subordinated debt would increase the Solvency II surplus at the PGH level. That brings me to the end of the financial section, and I will now pass you across to Andy. Thank you, Jim, and good morning everyone. 2016 has been a busy year with a number of management actions achieved alongside commencing integration of the two acquisitions. These actions include the completion of the Part VII transfer of annuity portfolio, further optimization of the matching adjustment portfolios, in particular by further investment in equity release mortgages, and the implementation of a longevity swap. From the customer perspective, we have reviewed the detail from the FCA reviews into outcomes for legacy and annuity customers. We continue to make improvements to our customer service in line with our strategy, in particular around the transparency of information, including that delivered through our website. In addition, we seek to ensure customers get the best possible outcomes. For example, by providing product options and assisting them in understanding the full features of their products. Moving on to the integration of the acquired businesses. Over the last few years, we have invested in the Phoenix operating model to create the Phoenix Way, which adds value for both policy holders and shareholders. This has enabled us to integrate previous acquisitions, improve customer service, and manage our costs on a variable cost basis, making the model scalable both upwards to accommodate further acquisitions and downwards as business runs off. The key features of this model are to outsource core customer and related IT operations, retain in-house financial management activity where we can add value via management actions, and to operationally use one core actuarial valuation system, one core general ledger, and one core PRA reporting tool. Finally, to locate all of our core life operations at our center in Wythall. The strength of this model is now being deployed to the acquisitions, and this clarity of direction will enable cost synergies to be achieved and key metrics to monitor progress on its deployment to be set. The slide shows the key metrics we will manage over the next 18 months and the impact the deployment will have on the inherited costs of the organization. Moving on to progress of the integration of the acquired businesses, starting with AXA. As Clive mentioned, we now expect cost synergies relating to the back book to be in the range of GBP 30 million-GBP 50 million per annum, an increase on the previously announced target of GBP 10 million per annum. We have closed to new customers the majority of products within Embassy, eliminating an additional GBP 10 million of costs related to this new business. Whilst the SunLife business has been retained as a separate operating model targeting the over 50s market. The AXA business is being reassured into Phoenix Life Limited, creating capital synergies, and Phoenix's governance oversight and risk model is now in place over the entirety of the AXA business. The approval of the internal model application was received recently, and this has facilitated the further cash generation of GBP 165 million that we have seen so far this year, in addition to the GBP 117 million delivered in 2016. We are now focusing on the integration of the business into Phoenix's operating model, including a Part VII transfer into Phoenix Life Limited, the outsource of customer services operations, and the movement of finance and actuarial systems onto the Phoenix platforms. Ensuring customer services remains at a high level during the integration is of critical importance, and this covers both a smooth transfer of policy administration as well as strong support for IFAs. The Abbey Life integration is at an earlier stage, but the operating model of Abbey Life is already similar to Phoenix's. Phoenix governance and management is in place, and work has started on the application to move the business onto the group's internal model. We are expecting that this application will be made in the second half of the year. As you are aware, the acquired Abbey Life business remains under enforcement investigation. As part of the transaction, the group obtained indemnity protection against fines and costs of any action related to the legacy or annuity reviews. Risk sharing was also put in place for potential redress costs. We are at an early stage of the investigation, but to date, expectations of any residual costs remain in line with the acquisition announcement in September. The last year has seen the publishing of two key reviews by the FCA. The guidance from the reviews is aligned to the Phoenix Life focus, in particular, around clarity and transparency of communication and identifying ways of maximizing outcomes and options for customers. In addition, this year has seen clarity on the capping of exit charges on over 55 pension products. This will be implemented on March 31, 2017 and has a small financial impact on the group's business, which has already been recognized. As Jim referenced earlier, there is a provision against the legacy issue relating to creditor insurance policies that were written before 2006. We have established a claims handling capability through industry specialists who are experts in this field to manage this issue, and we will continue to carefully monitor this situation. Improving customer engagement with their products remains key to us, hence our continued investment in types and content of communication. 2016 has seen us invest in our digital capability to both provide enhanced information and to enable transactional capability via digital means. We have also widened product options for our customers via our partnership with Just Retirement Solutions. We have also continued to deliver on our customer service targets, including maximizing the distributable estate within the with-profit funds. Phoenix Group's focus remains on the efficient management and integration of closed life funds. However, there are two key sources of new business. First, the writing of annuities for existing policyholders, where we have seen a small increase in premiums since 2015. Second, the SunLife business is focused on protection products for the over 50s market with a recognized brand and a proven track record of direct marketing. These two products are complementary with offsetting exposures to longevity rates. Although a small part of the overall group's profits, the new business can be written without significant capital strain. The group will therefore continue to support this new business generation capability within a well-controlled customer environment. I will now pass you back to Clive to wrap up. Thank you, Andy. The group has a good track record of meeting its public targets, and I am confident that Phoenix will continue to do so in the future. Successfully integrating the AXA and Abbey Life businesses is clearly critical to meet our updated cash generation targets. We will continue to leverage our specialist operating model to identify further management actions in years to come. The cash generation underpins the group's credit rating and supports our stable and sustainable dividend policy. As we continue to meet our cash flow targets, we will have a growing ability to use more of our own resources for future acquisitions. The U.K. closed life market has a wide number of life companies holding a range of legacy products. We have always had the ability to manage any type of policy. We will therefore seek to acquire with-profits, unit-linked, protection, or annuity portfolios. The key attraction of any specific closed fund is not the policy type or size of business, but the ability of the group to add value through realizing capital and expense synergies. We have updated our assessment of the overall market and believe there remain over GBP 300 billion of assets in closed funds. Therefore, there remains a significant opportunity for the group to make further acquisitions. In 2016, we have seen both AXA and Deutsche Bank both dispose of their U.K. life companies for differing reasons, and we see the regulatory cost and capital pressures continuing to motivate potential closed life vendors into the future. With long-standing outsource partners and a PRA-approved internal model, Phoenix has a specialized platform designed to deal with the pressures to which closed funds are currently exposed. Just as important are our obligations and our ability to add value to policyholders. This remains, in our opinion, a critical success factor as the U.K.'s leading industry consolidator. With the integration of the AXA and Abbey Life businesses already providing results, we will therefore continue to examine opportunities that meet our M&A criteria during the course of 2017. Phoenix has a clear set of priorities. The cash generation targets will be reliant on an efficient and well-managed integration of the acquired businesses. Continued delivery of cash will support the expected further 5% increase in the 2017 interim dividends, in addition to the 5% announced today. We continue to look to diversify our debt structure away from senior debt and towards subordinated debt, supported by our investment-grade credit rating. This will, in turn, support the simplification of the group structure as we seek to replace Phoenix Group Holdings with a new PLC topco and come onshore. Finally, we remain well-placed to examine further M&A opportunities that meet our stated criteria and believe that the group has the platform and financing flexibility to deliver additional value from future market consolidation. Thank you very much. That is the end of the formal presentation. Thank you for your engagement. Now I'd like to move on to the Q&A session. If you could wait for a microphone to be brought to you, give us your name and the institution you represent, that would be appreciated. After that, we will move on to questions on the phone and internet. If we could take the first question. Okay, no questions. Thank you. Over there. Thank you. Hi. It's Abhilash from HSBC. I've got two questions, please. On slide 27, you're showing the costs, which are running off around 20% over 2017-2019, but the policies are running off a bit slower. I was just wondering if you could clarify a bit more on those numbers there and what's assumed in the 2017 baseline level, which is in the best few hundred. The second question is on the three-year cash generation target for 2017-2018. Just wondering, how should we think about this on a year-on-year basis? In particular, I think at the end of 2017, you get to recalculate your transitional. I'm just wondering whether that would impact that number at that point. Also, if you're ahead of your runway at the end of the first year, would you be willing to reassess that target? Thanks. Okay. I'll perhaps ask you, Clive, to deal with that. I think we're only in the first year of a five-year cash target, so you wouldn't expect us to change that at this stage. I think we wouldn't necessarily give any commitment during the second year of a five-year cash target. But we'll think about that as the time arrives. Clive? Chairman, thank you. I'll answer the second question on the cost run-off on the slide, which we put up to Jim, page 27. It's fairly logical in our mind. We've given a five-year target of GBP 2.8 billion, and then we have chopped that for 2017 and 2018, and the first forecast is for GBP 1 billion-GBP 1.2 billion in 2017 and 2018. Jim used the wonderful Scottish phrase often associated with porridge, which was lumpiness in terms of our management action. That's just the practical nature of our business, of our ongoing cash flow. Somewhere between 35% and 40% of our cash flow will come from management actions. That is not unexpected, because when you've acquired businesses, you then have to put them on internal model and matching adjustments, et cetera. This requires regulatory approval. There is an inherent lumpiness, and then behind that, there is an 18-month and the formal transitional period within PRA, and the next one is on January 1, 2018. The component of noose around our proverbial neck is if we do well, and as obviously we will update the market on our cash delivery throughout this current year, then we realize that we have another obligation, which we may then have to amend in 2018. But as the chairman says, at this moment in time, we are very comfortable with the GBP 1 billion-GBP 1.2 billion analysis and projection going forward for 2017 and 2018. Jim, you got asked the question on this about the cost run-off. Yeah. I am going to pass it straight to Andrew, since it is his slide, and he is extremely proud of the historic track record of reducing costs faster than the policy run-off. Okay. The base into 100 is our cost base as at January 3 this year. So obviously our inherited costs from the acquisitions, plus our current Phoenix cost base. What you see there, as you quite rightly say, is a run-off of around 18% in terms of costs compared to about a 5% policy run-off. This is something that we have shown in the past, basing back to 2010 when we did a number of other integrations. As you would have seen in the past, basically our costs and policies are running off. Our costs are running off slightly faster than our policies. Obviously with the two acquisitions, we see that continuing. So effectively we are maintaining or reducing our average cost per policy of our administration. Obviously it is the Phoenix Way and the operating model I referred to that enables us to do that with having a reasonably variable cost model. I think the cost reductions that we've achieved were in excess of what we anticipated at the time of the deal, and it reflects the excellent deal we have with our outsources primarily, which of course is a great competitive advantage for us as a company. Oliver Steel, Richmond. So three questions. First is, can you clarify the pro forma nature of the solvency calculations? I think you've taken up front the expected transfer from AXA in the first quarter of this year. What I really just want clarification on is the extra GBP 100-plus million that you're expecting from AXA in the first quarter or first half of 2017. Are we still expecting that in the cash number? But obviously, it's already in the solvency number. And also, just sort of clarifying that, you only seem to be counting GBP 100 million benefit from the debt issue, but that was a GBP 300 million debt issue, so I know that model developed. Secondly, sticking with solvency. At the group level, what is the sort of minimum target solvency that you'd be looking for? Because I mean, that should grow pretty strongly over the next couple of years, particularly if you issue more sub-debt, which in turn I would imagine gives you quite a lot of potential to use that as well for bolt-on acquisitions. And then thirdly, I'm a bit disconcerted by the amount of sort of actuarial reserve strengthening and the credit insurance provision that you've taken. I wonder if you could just talk a little bit more about that and why suddenly they seem to have sort of developed, having not seen any adverse experience for some years. Do you want to start? I'll take this. Yes. Firstly, the pro forma nature of the solvency in terms of the capital. There are two adjustments which we've reflected in the pro formas. The first is the impact of the Tier 3 debt issue, which at PLHL level had a benefit of GBP 150 million, but at the Phoenix Group Holdings level had a benefit of GBP 300 million, and the difference related to the internal loan structure within the group and how that unfolded. The second was related to the impact of the AXA internal model. The benefit in capital terms is around GBP 115 million, GBP 120 million, which came through in quarter one this year, and is reflected in the pro forma. In cash terms, the benefit of putting it onto the internal model was the ability to release GBP 165 million of cash, which was also taken in the first quarter of this year, but is in addition to the 486 that we reported for 2017. In terms of group solvency, as you rightly say, although we expect that surplus to improve as we go forward, indeed if we were to do a further subordinated debt issue, that would increase the surplus at the PGH level. We have not given any details of our PLHL minimum requirements that we hold within the company, and we don't intend to do so from an after PGH level. The key thing for us, as we've always said, is the absolute level of the surplus and the resilience to various stresses, which you can see from the sensitivity slide, remains a robust position. Finally, on PA (GI), that relates to an old GI business which was sold by the group in 2006, so a long time ago. That business underwrote credit insurance, and the reason it's just come up recently is the liability that Phoenix has for any claims was only established in 2015 following a court process. We have based our year-end provision of GBP 33 million based on the experience that we've seen in 2016, which is the bulk of the experience that we have seen, and obviously looking forward, in terms of run rates, to the end of the claims period in August 2019. So it's based on the best information that we have and takes into account the FCA's time bar. We'll obviously keep the position under review as we go forward and update you accordingly. Next question. Nothing? Excellent. Sorry, sir. Good morning. Andrew Crean with Autonomous. Just a couple of questions. One technical question. You recalculated your transitionals, I think, in the second half, if that's right, dynamically. Could you give us the impact of that? Secondly, more broadly, could you talk a bit more in depth on the acquisition environment, the GBP 300 billion available? I mean, what do you think is most likely or the most sensitive areas? Do you think it's mutual? Do you think it's overseas holders? Are you likely to be more doing deals where you're buying out from one company a part of their business, or buying the whole of a business from a company? Thanks, Andrew. I will deal with the transitionals question. As at the end of the year, Andrew, we have assumed in our calculations that we will recalculate the transitionals, and that has had an effect of reducing the number otherwise by GBP 0.3 billion. So it results in a lower declared solvency position. Of that, we have had approval from the PRA for GBP 200 million of that, and that was related to the AXA internal model process, which has been approved. And Clive, perhaps you could look into a crystal ball and give us your view soon? I was about to say, Andrew, thank you for asking the question about the crystal ball. I am just trying to find the slide, which is right here. I think it is a really exciting time to be in our industry. I would make four observations about the macro part of where we see ourselves. The first is that we are clearly at a point of cyclical change, and that can be driven by low interest rates, Brexit, changes in price of capital via Solvency II, or, as we have seen in the last six months of this year, half of our industry, the asset management industry, finding itself challenged to offset decline in fees, 60% of funds going into passive, and how they respond as an industry. So the first observation is there are a set of cyclical things driving change in our industry. That challenges the old vertical triptych of our industry, collected the premiums, you provided underwritten protection, and you did asset management. That whole vertical of three layers, I think, is being stripped apart. It means that the industry finds itself at a crossroads. That crossroad says, are you in the protection business or are you in a savings and investment business? And if you are in the protection business, which dollar do you put behind open businesses versus which dollar do you put behind a heritage business? And we see the motivation for vendors that we talk to, potential vendors, are how to deploy trapped capital. So we found in both AXA and in Abbey Life, we could do things because we were already IMAP, one of only nine life companies to be IMAP. When we onboarded their standard formula firms and then took them through the internal model process, that is something we could do that others would find more difficult. The other motivation about stranded and trapped costs on one of the slides that Andy showed, we are going down from 9 actuarial systems down to a number which is closer to 3. We are moving from 4 physical locations for the closed life business down to just one, and that allows us to realize cost synergies with our outsource model, which are not possible for many others. Managing the regulatory environment gets no easier. You saw that there was a slide that says, with regards to the annuities review, with regards to our in-force business, no significant requirements are changed. We are on course, having come through the 2 largest industry reviews that we have had, at least in a decade, treatment of longstanding clients, legacy industry review, and the annuities review, and Phoenix has come through relatively unscathed. Then you pose the question, Andrew, well, with us, and you will see on this slide that we show on the top right-hand side, market opportunities by owner of funds, bank-owned businesses. So we bought from a bank last year. Foreign-owned businesses we bought from AXA, and then U.K. life companies, and then by product type. We are next to indifferent to product type because we do all annuities with profits, unit linked, and protection. We are relatively indifferent to scale. Obviously, we would prefer larger deals, but the most important thing is where we can realize cost or capital synergies. And in that respect, I think there will be both books of business coming out of larger firms and businesses in their entirety. It was interesting if I step back and look at AXA. AXA decided that it wanted to retreat, and that was a sales platform, Elevate an Isle of Man business, and SunLife Direct and what we call Embassy, the closed life business. They wanted to retreat and then reposition and focus on their GI business. And in that respect, I think it is a model of some of the things that are taking place in the minds of potential vendor, and you can overlay that with the stresses created by low interest rates. This time a year ago, 10-year gilts were at 200 basis points. The nadir, the low point, was 67 basis points in late July. We are back at 120. That is a persistent sort of background radiation in the spread business. And finally, it is that ability to deal with costs. So I am afraid I cannot look at the crystal ball. We engage in conversations with a wide range of potential vendors, as you might imagine, because we never know what might happen. Indeed, when we announced the Abbey Life deal on the 28th of September, we said, you never know when red London buses come, and sometimes they can clump together, and sometimes there is quite an interval between them. What is important, and Jim has said this on many occasions, is that the cash flow we anticipate for this year, next year, of GBP 1 billion to GBP 1.2 billion plus the GBP 2.8 billion is not dependent upon doing another deal. Over there. Yeah. Yeah, Marcus Barnard from Numis Securities. Just on the AXA SunLife business or the SunLife business you have now, can I ask where you anticipate new business levels will go, whether you will increase them or maintain them at this level? Is that a business you are looking to grow? Linked to that, Keith mentioned on slide 33 that you have established a marketing and distribution business. Is that linked to bringing down the new business cost in terms of cost of acquisition? Andy can maybe comment on that one. On the new business side, there are two aspects to the SunLife business, guaranteed over 50 whole of life protection, which is the biggest seller for SunLife, and which we have a 40% plus market share. We anticipate that we will maintain that market share. That is a significant market share, and SunLife is the clear leader in that market. What we are also looking to do is to grow the offering to the over 50s market, and that is likely to be via partner products. We are currently exploring partner products, so we will not necessarily take on the risks within Phoenix itself. As a sales and distribution business, it gives the option to use our direct marketing expertise with third-party products to give an offering to the wider over 50s market. For our customer base, that works very well because we have an aging customer base who are approaching that sort of age. We believe that in the wider U.K. market, the over 50s market is not widely served. To be very clear, I mean, thank you. We run a closed life business, and that is our focus. SunLife Direct is a business we are immensely proud of, highly branded, very competent management, significant market share, natural offset to our longevity. It gives us mortality. Indeed, in the resilience slide that Jim showed, it is the first time we have been able to show the effects of that offset. Our main meal as a business is not to sort of, by mistake, wake up one day and be open. Our absolute focus is remaining a closed life business. But this SunLife capability gives us the ability to engage in better conversations with our policy holders as they age and go through the journey of retirement. Just to amplify that, exactly why we have set it up as a separate sales and distribution business with an experienced management team. Is there a question there? Thanks. It is Andrew Kerr from DB Merrill Lynch. I am going to ask a completely unfair question, but I am going to go for it anyway. There is clearly one large book in the U.K. life sector that is up for grabs at the moment, which is the approved UK annuity book. You said you are ambivalent about scale, but would you be interested in doing a transaction that is as large as that, or would you only be looking for something smaller? Could you be looking for a genuine transformational deal that is as large or larger than itself? That's a politically risky question, isn't it? It's not something I heard Mike Wells say or Nic Nicandrou. The word transformational, when being attached to the word M&A, is always dangerous. We never made any comment on any specific firm in the U.K. But then let's come to the heart of your question. What can we afford, and where are our ambitions? I refer to Jim's treasure chest, and that is not a remake of the "Pirates of Caribbean," but Jim's acquisition treasure chest has an advert part and a real-world part. The advertisement part takes three layers of the treasure chest and totals GBP 1.6 billion. The first component is our holdco cash at GBP 570 million, to which you would then add the life company free surplus, which is significantly up at GBP 700 million. You would end that with the undrawn portion of the revolving credit facility, which is at GBP 350 million. That is how you get to the advertisement of 1.6 billion, which is, like many advertisements, an unreal number. Let me give you the dose of reality, and the dose of reality goes that we have holdco cash for the purposes of meeting all of the costs that we identify. We have to have it for solvency and liquidity purposes. Of course, being a conservative, prudent company, that's why you have holdco cash. The vast majority of that life co surplus is associated with the capital surplus inside Abbey Life. We have to go through a whole series of hoops, including getting it on our internal model, matching adjustments, and other things for it to be releasable. We will do that in time, but that's not hot cash in our pockets. Then finally, I'm sure Jim would absolutely love to spend that GBP 350 million on behalf of the banking community in the RCF, which he has so well engineered for this firm. What that does mean, let me put it in the real-world math, is if we were to do a similar size deal, 400 odd million pounds like AXA, that it would have to look the same in terms of the attributes of being able to release cash very quickly. There is the prospect of us not having to have recourse to the equity markets. For the first time in this company's history, we have the financial wherewithal and strength to contemplate fairly sizable transactions without an automatic call upon our shareholders. It does, of course, depend on the size, the shape, and the nature of that transaction. We were very clear about how rare AXA was as a deal, and we're extremely proud to have been able to deliver the GBP 282 million rather than the 250. But you can't bank on these things, but I want to put something in your mind as an indication of what we're now capable of doing. Then the question is the nature of our ambition. Two years ago, we were involved in a transaction. This was the Guardian transaction that went to Swiss Re. That was at a final price point at 1.6 billion. We are clearly financially far more secure and far more capable of financing transactions of that scale and above. The really important thing in the deal, in any deal, as I said, is less its type or size, but our ability to realize synergies. We look forward to playing an extremely full role in an industry that, without doubt, is going to consolidate. So in summary, Clive would look at most things, I think is what that means. Going back to Andrew's questions when we saw that bar chart, I think last year I may have indicated that U.K. Life companies would be the most likely to come up first because of their focus on asset management companies, their focus on specialist products, their focus on their overseas subsidiaries, and the impact of Solvency II generally. As it happens, it's gone to the blue chart, where the overseas companies are so far, which actually I think has been quite fortuitous to us because they mean the smaller deals, which allow us to get to a size where inevitably some of these U.K. companies will be larger deals for us. The way it's come out in terms of the order of it has been quite helpful. Any more questions from the floor? If not, I think we can move on to any questions on the phone. Is that right? Yes. Or the internet. Or the internet. Internet. May I please read out two questions for Mr. Colin Fagan, private investor, via live webcast in regards to management actions. First question, the cash receipts for GBP 486 million for 2016 includes GBP 265 million for management actions. The CEO indicates in his report that the cash generation target of GBP 2.3 billion for 2017 to 2020 includes future management actions. Could you indicate the proportion of the cash generation target for 2017 to 2020 represented by future management actions? The second question, the cash of GBP 4.4 billion expected to be generated from 2021 onwards does not include any future management actions. How much extra do you think management actions could contribute to that total? Jim Dillon. Yes, thank you. I will deal with these. Last year, we generated cash of GBP 486 million, of which GBP 265 million was a result of management actions. That, compared with historic periods, was slightly higher in percentage terms and was a direct reflection of the AXA acquisition and what we were able to do there. Looking forward to the 2020 long-term target period, we do see management actions between 35% and 40% overall. Again, that is just a tad higher than we probably averaged over the last few years, and reflects the fact that we have had lower interest rates impacting the cash generation, which have been factored into our future forecasts. As we stand today, I have described many times before about the dynamic nature of our management actions process. We have a hopper which is full of potential opportunities and keeping us very busy in terms of delivery of those management actions. You are right to reflect that the GBP 4.4 billion cash that comes out after 2020 does not include management actions. We have not put a figure in percentage terms of what we think that could come through, although clearly as the group matures, the potential for management actions will reduce. Hopefully long before then, other acquisitions will give us more opportunities. Any other questions on the phone or the internet? No. Any last questions to come? Well, that concludes the proceedings. Thank you very much for coming, and we look forward to seeing you soon. Thank you. Thank you.