Phoenix Group Holdings plc

Good morning and welcome to Phoenix Group Half Year Results 2023. Please welcome Andy Briggs. Andy, over to you.

Well, good morning everybody and welcome to Phoenix Group's 2023 Half Year Results presentation. Now, as you know, we have always run our business focused on cash and capital, as that's what underpins our sustainable and growing dividend. But we recognise the industry has transitioned to IFRS 17. So the plan today is that Rakesh and I will walk you through our excellent half-year results as usual, including a summary of the key IFRS 17 transition impacts. We'll go straight into a Q&A on the main results. We'll then take a short break and follow up with a further education session for analysts on the technical accounting transition to IFRS 17. As you're probably aware, our half-year IFRS 17 results will not be published until Thursday the 28th of September. Sorry, I'll just let people come in and settle down. So sorry, our half year IFRS results will not be published until Thursday the 28th of September. I understand this may be frustrating for some of you, for which we apologise. It reflects a short delay in our process, in part due to the complexity of the project. But let me reassure you, there are no concerns with the numbers themselves. So, starting with our first half performance. At Phoenix, we have a clear and focused strategy, and I'm delighted with how well our team are executing on that strategy, delivering strong growth and resilient cash generation. We have more than doubled new business long-term cash year on year to £885 million, thanks to a strong performance in the first half in both workplace and BPA. And this means that we've already more than offset the runoff of our in-force business of £800 million per annum in just the first half. Our new business net fund flows increased 72% year on year to £3.1 billion. This is particularly pleasing given that across the wider market, net fund flows are down. As ever, we've delivered strong cash generation with around £900 million remitted. We're therefore on track to deliver at the top end of our target range of 1.3 to 1.4 billion pounds for the year. Our balance sheet remains resilient, with a shareholder capital coverage ratio of 180% at the top end of our target range, supporting our investment into growth. Phoenix has a single strategic focus, which is helping customers journey to and through retirement. This is important because we're seeking to meet a huge societal need. With only around 10% of people currently getting advice on their journey and only one in seven defined contribution savers on track for a decent retirement income that maintains their current standard of living. So there's a clear need for more propositions and support which we at Phoenix are well placed to provide. Which is why we're building a business that can support customers across every point of their savings lifecycle, through offering them the long-term savings and retirement propositions and the education and advice that they need. As they accumulate wealth through the savings phase, then transition through to securing income in retirement. And yet, in spite of these unmet needs, the market is already huge today with an estimated three trillion pounds of stock. and is growing strongly with around 150 to 200 billion of annual flows that we can access. So, a significant organic growth opportunity. Now, many are saying that the UK economic environment is challenging, and it is for most industries. But for us, the structural growth opportunities in the market are only being accelerated by the current economic environment. So we're seeing strong growth in workplace, fuelled by the high levels of salary inflation and full employment in the UK economy. The retail market has slowed down in this economic environment with less switching of flows between providers. But for Phoenix this is helpful given our scale in force book as it helps us to improve our customer retention. And the BPA market is seeing record levels of demand due to higher interest rates making buy-ins and buy-outs more affordable. Finally, we believe there will be more M&A opportunities coming to market over time, as high inflation means it's harder to deliver the necessary cost reductions every year in unhedged closed books, so their cash generation will reduce. It's counterintuitive, I know, but the challenging UK economic environment is positive for our sector. Now, a bit more colour on where we play in the market. Phoenix is the UK's largest long-term savings and retirement business. We have a diversified and balanced business mix across the savings lifecycle, and two-thirds of our business is capital-light, fee-based products. Our strategy is designed to maintain a balanced mix as we leverage our existing scale in capital-light, fee-based products to grow our pensions and savings business. And we are disciplined in our annuity growth as we keep this to a small proportion of our business mix and hence limit the credit risk we retain on our balance sheet. Our strategy is already delivering strong new business net fund flows which are exceeding our expectations. This excellent execution of our strategy, together with the positive tailwinds of the UK economic environment, is why we are now confident of delivering positive group net fund flows from 2024, which means that our new business inflows will more than offset our legacy runoff outflows. This is a pivotal moment for Phoenix, which Rakesh will cover in more detail later. Having trusted brands is critical to engaging customers and having the credibility to support them with some of the most important financial decisions they make. We are therefore very proud to have a family of brands to successfully engage and support customers through their savings lifecycle and therefore support our growth both organically and through M&A. I want to highlight Standard Life, our primary organic growth brand. It's a brand that people trust with a deep history and heritage going back nearly 200 years, and it is therefore well known to both advisors and customers. But all of our brands have a role to play. In total, our brands service 12 million customers, and they come together in our passion to deliver Phoenix Group's purpose of helping people secure a life of possibilities. We deliver that purpose and our strategy by focusing on our three strategic priorities, growing organically and through M&A, optimizing our in-force business, and enhancing our operating model and culture, all of which are informed by and in support of our key ESG themes across both planet and people. Executing on these strategic priorities will strengthen our competitive advantages of capital efficiency, customer access and cost efficiency. Phoenix is well known for leveraging these competitive advantages to deliver strong financial outcomes on our in-force business. And we have a long track record of successfully leveraging them on M&A and creating shareholder value. Now we're also growing organically by leveraging those same competitive advantages. All of which supports us in delivering increased cash, better returns and a dividend that grows over time. So looking at our first half performance against each strategic priority in turn. Starting first with our organic growth. I'm delighted with the further progress we've made this year on our capital light fee based business with new business long term cash up almost 50% year on year. This growth has been driven by our workplace business and reflects our success in leveraging our key competitive advantages in this market of customer access and cost efficiency. Workplace is different to most other markets in that majority of the growth comes from your existing customers, with regular new joiners to existing schemes and increased member contributions through higher salary inflation. So it's critical to retain your existing customers, which is what we are now doing very successfully. And that is why 95% of our new business cash in the first half has come from our existing clients. Given there's virtually no acquisition cost on these incremental flows, and our customer administration platform is already highly cost efficient, this embedded growth generates highly profitable long-term cash. In addition, by winning new schemes in the market, we can turbocharge our future growth too. It's therefore great to see that our new scheme wins continue to accelerate. And we're now winning the bigger schemes too, which has enabled us to attract around £3bn of new scheme asset wins over the past 12 months. We expect these assets to transfer across to us in 2024 and 2025 and so will drive future net fund flows and new business crash. We're also currently quoting on a significant pipeline of new workplace schemes and are confident of winning further new schemes over time. Finally, we're now turning our attention to the retail opportunity. Here, we have a huge in-built growth opportunity to better support the one in five UK adults who are already customers of Phoenix Group, with the development of our advice proposition, a key enabler. I'm hugely excited by the opportunities we have available to us in both the workplace and retail markets, and I'm confident in our ability to achieve the ambitious targets we have set for our business. We also continue to deliver sustainable growth in our retirement solutions business, where we are winning in a competitive BPA market with our strong proposition and the Standard Life brand. This market is large and growing ever more strongly due to higher interest rates. Our participation is consciously disciplined to limit our exposure to credit risk and maintain our balanced business mix. We therefore continue to take a selective approach up to deals, focused on value over volume. With 3.2 billion pounds of premiums written in the first half, driving strong year-on-year growth in new business cash. However, given the size and attractiveness of the BPA market, we are exploring innovative ways of leveraging our expertise to participate in a capital efficient way through our recently established Bermudan entity, Phoenix Re. Our initial focus is on improving our capital efficiency through internal reinsurance. Future plans could see us leverage third party capital in time. Finally, we continue to see increased demand from customers for annuities, and this month launched our first open market individual annuity product. This product is available to both new and existing customers under the Standard Life brand and is another example of us filling in the remaining gaps to complete our full service customer proposition. Turning now to M&A. We have a long and successful track record of delivering strong returns from M&A. By buying at an attractive price and delivering significant cost and capital synergies, we deliver cash generation over the life of the business which far exceeds the purchase price. What is particularly pleasing is the speed of that cash emergence. For example, we bought Reassure for 3.2 billion pounds and have already remitted 3.7 billion pounds in cash generation to achieve a three-year payback. with a further £3.3 billion of cash generation still to emerge over time. While on Sun Life for Canada UK, we completed the acquisition in April and have already received nearly 20% of the purchase price back within three months. Looking forward, we are optimistic on the outlook for further M&A over time, with an estimated £435 billion of Heritage UK assets potentially available. Now I can't predict exactly which books of business will come to the market or when, but as you know I have regular conversations with my peers across the industry and these suggest that the challenging economic environment makes M&A both large and small more likely. As ever, we stand ready to do our next deal through our ability to integrate efficiently and swiftly and to manage multiple migrations concurrently. And we also have the financial capacity to fund deals with our surplus cash and capital ready to deploy. And we have debt funding capacity too, if required, with a fixed leverage ratio that was 25% at the end of 2022. Our second and third strategic priorities are optimizing our enforced business and enhancing our operating model and culture. These are the core capabilities that drive management actions with £412 million of benefit delivered in the first half. And these are the same capabilities that also help us to generate better returns from both organic growth and M&A. The slide covers the specifics of what we've delivered in the first half against the key actions I outlined at the full year results back in March. Our first half performance extends our recent track record of delivering high levels of management actions and reflects the fact that we continue to optimise and enhance our business. However, we do not expect our pipeline of management actions to ever dry up. Instead, we are confident that the capabilities we've now built in-house across asset management and capital optimisation will enable us to leverage evolving market dynamics on an ongoing basis and hence deliver a repeatable pipeline of management actions over the very long term. So in summary, we are executing on our strategy to deliver a dividend that is sustainable and grows over time. Our organic growth is compelling. We've more than doubled our new business long-term cash in the first half. We are comfortably on track to deliver our target of £1.5 billion per annum by 2025 and now expect to deliver positive group net fund flows from 2024. We're also growing through M&A, delivering strong returns with an accelerated payback. We are optimistic of further acquisition opportunities emerging over time and are confident in our ability to both fund and execute transactions successfully. Finally, we continue to optimise and enhance our business, which has supported the delivery of a further £412 million of management actions in the period. And we believe that our enhanced in-house capabilities will enable us to deliver a sustainable level of repeatable management actions over the very long term. So, a strong first half and an exciting future ahead. And with that, I'll now hand you over to Rakesh, who will cover our first half financials in more detail. Rakesh.

Thank you, Andy. And good morning, everybody. Phoenix has a clear financial framework, which is designed to support growth and deliver enhanced shareholder returns over time. We are investing in our growth, which is accelerating as we maintain our balanced business mix. And our high levels of predictable cash generation provide the financial flexibility to invest into the significant growth opportunities available to us. all of which is underpinned by our resilient balance sheet, which we will not compromise. Phoenix has delivered a strong financial performance in the first six months of the year. Our dependable cash generation continues to emerge as expected, and we have more than doubled incremental new business long-term cash generation, while our long-term free cash has also increased. And our balance sheet remains resilient as ever. As a result, the Board has declared a 26 pence per share interim dividend in line with our final 2022 dividend, which is a 5% year-on-year increase. So turning to the detail, starting with cash. We have delivered 898 million pounds of cash generation in the first half and now expect to deliver at the top end of our target range of 1.3 to 1.4 billion pounds for the full year with a long track record of meeting or exceeding our targets. Our group holding company cash balance is around 700 million pounds and means we have surplus cash available This is because I would generally look to hold a minimum buffer of around 300 to 400 million pounds. This is sufficient to cover six months of costs and dividends. And it is appropriate given the cash remittances from our life companies are typically paid up twice a year. In addition, the free surplus in our life companies is significant at 1.7 billion pounds and provides further financial flexibility should we need it. Group-enforced long-term free cash is a measure of the cash that will be available to our shareholders over time from our existing business. It is calculated net of the cash needed to service and redeem all outstanding debt and after deducting committed integration costs. During the first half, it increased by around £400 million, primarily driven by a net £700 million increase through organic growth and £200 million through the M&A growth. This equates to a long-term free cash growth of 7% in just six months. which more than offsets our uses of cash in the period. At £12.5 billion, we have a huge amount of in-force cash to emerge over time. And this means that we can sustainably fund our dividend over the very long term. And as it continues to grow, it will support us in delivering on our policy of paying a dividend that is sustainable and grows over time. Turning next to resilience. Our resilient SOMC2 capital position is enabling us to invest surplus capital into growth opportunities, with our shareholder capital coverage ratio of 180% remaining at the top end of our target range even after this investment. Our surplus prior to investment was broadly flat, with the high levels of predictable surplus and management actions funding our ongoing uses. Our closing surplus of £3.9 billion therefore reflects our active decision to invest around £400 million of surplus capital into growth, which has increased our group in-force long-term free cash and will drive future cash and capital generation. And as ever, our reported surplus also reflects the accrual of our interim dividend. Looking forward, I expect our end of year surplus to be slightly lower as we continue to invest into growth. Our ability to deliver management actions is a key differentiator for Phoenix and we continue to demonstrate our capability here with £412 million of management actions delivered in the first half. This is significant ongoing level management actions reflects our focus on optimising and enhancing our business. During the first half, the majority of these were business as usual actions. They included £151 million of asset management actions, primarily driven by the dynamic optimisation of our liquid credit portfolio, and £157 million of ongoing cost and capital actions. It is also pleasing to see that we continue to deliver integration synergies from our previous acquisitions, such as Reassure, with 104 million pounds realized in the period. We have invested into enhancing our in-house asset management capability. We have built an expert team of investment professionals who set the strategic asset allocation and oversee the performance of our assets. This capability enables us to operate our differentiated strategic partnership model and partner with the best asset managers in each asset class and geography. Aberdeen, who manage around half of our customer assets, continue to be a key strategic asset management partner and playing a significant role in supporting the asset deployment from our new business growth. We are also complementing our partnership approach by developing our own in-house capabilities, and we remain very focused on integrating ESG into our wider investment decision-making, with our recent addition as a signatory to the UK Stewardship Code a clear statement of intent. As you can see on the right-hand side of the slide, we are seeing the benefits of our investment. We are confident that our capabilities will enable us to leverage evolving market dynamics on an ongoing basis and deliver a repeatable pipeline of management actions over the very long term. Looking next in detail at our credit portfolio. As Andy outlined earlier, our strategy is designed to maintain a balanced business mix with credit risk making up a small proportion of our balance sheet. We therefore maintain a prudent and diversified £34 billion shareholder credit portfolio which is currently around 13% of our total £269 billion of assets. We are conservative in our sector positioning with only 2% of our credit portfolio exposed to cyclical sectors and our portfolio is 99% investment grade. During the first half of the year, we have seen more credit rating upgrades than downgrades and have suffered no defaults, testament to the proactive approach taken by our in-house asset management team. Looking forward, we will continue to manage our portfolio to optimize our risk-adjusted returns. Moving now to growth. Phoenix is now delivering sustainable organic growth year in, year out. The growth in our new business net fund flows is accelerating through our success in workplace and BPA. And we now expect group net fund flows to be positive in 2024, for the first time in Phoenix's history, as new business inflows offset the legacy outflows due to our improved proposition and higher customer retention. Our progress is also delivering increased incremental new business long-term cash generation and we are very much on track to deliver on our target of £1.5 billion per annum by 2025. I am delighted therefore that we can more than double incremental new business long-term cash generation to £885 million in the first half. The contribution from our fee-based businesses increased nearly 50% year-on-year to £220 million, primarily due to a strong performance in workplace. Retirement Solutions remains the largest contributor at £665 million, with an impressive first half in BPA. And whilst I do expect 2023 to be another record year for new business, you shouldn't expect this first-half performance to simply be annualised when looking at the full year. A lower second-half contribution is expected from BPA, reflecting our disciplined approach to capital allocation, in line with our annual investment of around £300 million. Building on the momentum we saw in 2022, our workplace business has continued to grow strongly in the first half through the Standard Life brand. This is due to the investment we have made into our enhanced workplace proposition, which is helping us to both retain our existing schemes and win new schemes in the market. Our strong retention is enabling us to reduce our outflows and stabilize the inflows from our existing business. We will continue to benefit from the workplace compounding flywheel effect, with new business growth coming from our joiners to our existing schemes and increased member contributions, including salary inflation. On top of that, we are winning new schemes in the market which will both increase the stock of existing assets and accelerate new inflows. That is why I am delighted with the success we are having in attracting new clients of all sizes. Last year, our largest scheme win covered £2 billion of assets and is expected to transfer in 2024. with a further £1 billion scheme won this year that is expected to transfer in 2025. And neither of these schemes are in our numbers today, so they will benefit future net fund flows and cash generation. We are also quoting on a strong pipeline of opportunities, totalling £3.5 billion of assets, and are confident of winning further new schemes over time. The strength of the Standard Life brand is also helping us to win new business in a competitive BPA market. With £3.2 billion of premiums written in the first half, driving £665 million of new business long-term cash generation, with an improved cash multiple of 3.4 times achieved. Our capital strain in the first half was 6% on a post-CMP basis, with our target of 5% remaining very much on track. And this target equates to a 3% on a pre-CMP basis and positions as well in a competitive market. Looking forward, we are quoting on a significant pipeline of opportunities and expect a total market in excess of £40 billion this year. Turning next to IFRS 17. IFRS 17 is a new accounting standard that became effective on 1 January 2023. However, I want to emphasise that this accounting change does not alter the underlying economics of our business. It therefore has no impact on our strategy or dividend and we will continue to remain focused on delivering cash and capital. I do, though, want to provide a short update on the impact of IFRS 17 transition for Phoenix. And I will also host an IFRS 17 transition education session for the analysts following this main presentation to answer any of the more technical questions. It is important to note that the impact of IFRS 17 is different for Phoenix due to our history of M&A. As a result of the value accretive transactions we have completed, around 95% of our business has been recognised using the fair value approach. And this results in lower CSM at transition and increased volatility in our shareholders' equity. So looking first at our adjusted shareholders' equity, this was £5.2 billion at the end of 2022, which is 24% higher than under IFRS 4. This is inclusive of a £2 billion CSM net of tax, which is a significant store of future profits. And importantly, on a gross of tax basis, this grew year on year by 7% in 2022. Unadjusted shareholders' equity is lower under IFRS 17, primarily due to the transfer of items to the CSM and increased accounting volatility related to our hedging approach and the loss of some prudence that existed under IFRS 4. IFRS 17 re-baselines the level of operating profit we will report. In 2022, our adjusted operating profit has reduced to around £600 million. This is principally due to the well understood transfers of annuity new business profits, assumption changes and management actions to the CSM. There is also a small reduction from items not recognised in operating profit under IFRS 17. Looking to the full year of 2023, I would expect a broadly similar level of annual operating profit. So turning now to our leverage position. Our restated Fitch leverage ratio at the end of 2022 was 25%. This includes the impact of the transition to IFRS 17, which had only a small adverse impact on the ratio. There is a material reduction in the ratio due to the consistent application of the Fitch ratio calculation with others in the industry. This update to our calculation was made in agreement with Fitch and follows our most recent annual review with them. As you can see on the slide, we now include the policy holder's share of the with-profits estate due to its loss absorbency in a stress. Any burn-through risk is covered by that estate first before it impacts shareholders. This is the same approach used by our peers, and so updating it alongside the other IFRS 17 methodology changes now brings us on a market-consistent basis. At the end of 2022, we were at the bottom of our target ratio range of 25 to 30%, which is a key factor for maintaining our investment grade credit rating. We have also been proactively delevering our balance sheet over the past few years, with £772 million of debt repaid since the end of 2020. And importantly, we have increased our group-enforced long-term free cash to £12.5 billion, which is after the redemption of all our outstanding debt and the servicing of interest to maturity. We do not see leverage as a constraint to future M&A. To put into context, £200 million of additional debt is around a one percentage point increase in the Fitch leverage ratio as at the end of 2022. I remain comfortable with our leverage position and the wider financial flexibility we have available to support our strategy. So to conclude, we are executing on our strategy and delivering on our financial framework of cash, resilience and growth. we have delivered a strong first half financial performance across our core reporting metrics. And we have clear targets for this year and beyond. All of which support us in delivering on our dividend policy, which is to pay a dividend that is sustainable and grows over time. With that, I'll now hand you back to Andy for the summary.