Phoenix Group Holdings plc

And good morning to those in the room and to those joining on the webcast, and welcome to Phoenix Group's 2024 Half Year Results presentation. I'm delighted to have Stephanie Bruce joining me on stage today, who started in June as our Interim Chief Financial Officer, and we'll talk through our first half financial results later. But starting first with the strategic progress we've made in the first half. Back in March, we set out that we're on a three-year journey to build the UK's leading retirement savings and income business and fulfil our purpose of helping people secure a life of possibilities. We said we would deliver our ambition by executing our strategy as we invest in our business to grow, optimise and enhance, building on the strong foundations we've put in place over the previous three years. This means combining our heritage and open divisions together and restructuring them into pensions and savings and retirement solutions businesses. which are very focused on meeting customer needs as they save for, transition to, and secure income in retirement with innovative retirement income solutions at our core. To win in this market, we need to offer a compelling customer experience. That means offering the full range of retirement savings and income solutions through a slick digital interface with a range of simple fund investment options supported by excellent customer service, and which is sold at a competitive price that is enabled by a single group-wide operating model. The outcome of that will be a sustainable, growing business, delivering growing cash, capital, and earnings, which supports our progressive and sustainable dividend. Now, we're only, of course, six months into a three-year strategy, but I'm pleased with our progress to date. Back in March, we introduced an evolved financial framework of cash, capital, and earnings, against which we set very clear three-year targets. And our first half financial performance demonstrates that we're on track to deliver all of those targets. We have delivered a 19% year-on-year increase in operating cash generation to 647 million pounds. This in turn supported strong total cash generation of 950 million pounds in the period. A means we are now confident in delivering at the top end of our 1.4 to 1.5 billion pound target range for the year. And we're also on track for our 2026 cash targets here too. Our shareholder capital coverage ratio is comfortably in the top half of our operating range, while reducing as expected to 168%. There are two drivers here. I'm particularly pleased with the strong performance from our underlying business, which delivered recurring capital generation of three percentage points and growth in recurring owned funds. This was more than offset by the impact of our planned debt repayment and our planned investment into the business. We're targeting a Solvency II leverage ratio of 30% by the end of 2026 and intend to repay at least 500 million pounds of debt over this period. I'm delighted that only six months into this three-year period, we've already repaid 250 million pounds of our existing debt. Now the headwind of higher interest rates in the first half on owned funds has dampened the benefit that this debt repayment has had on our leverage ratio, which is sitting at 35% at the end of June. With long-term rates having reduced since then, we've already seen some of this headwind reverse. We remain focused on achieving our target of 30% by the end of 2026, which we will deliver through a combination of further debt repayment, accelerating our organic growth, and delivering our cost savings to drive stronger growth in owned funds. Finally, it was pleasing to see 15% year-on-year growth in IFRS adjusted operating profit, as both our pensions and savings and retirement solutions businesses delivered strong, profitable growth. I'm therefore confident we are on track to deliver our 2026 operating profit target of 900 million pounds. And over the longer term, we are focused on driving operating profit higher still so that it more than covers our recurring uses on an IFRS earnings basis, which of course, across the other parts of our financial framework on cash and capital, we already do today. However, we have seen further adverse accounting volatility in shareholder equity in the first half. This is a consequence of our hedging approach, which protects our surplus capital and makes our dividend very secure. Stephanie will cover this in detail later, including the fact that some of the accounting volatility will have reversed with the reduction in rates since June and will continue to reverse as rates reduce further. Finally, consistent with prior years, the Board has declared an interim dividend of 26.65 pence per share, which is equal to our 2023 final dividend and a 2.5% year-on-year increase. In March, we set out our capital allocation framework to deliver our three-year targets. This has two key underpins. The first is that we will operate a progressive and sustainable ordinary dividend policy. And the second is that we'll maintain our strong and resilient balance sheet with a 140 to 180% operating range for our shareholder capital coverage ratio. We've also been very clear in explaining how we will balance the investment of our capital across our strategic priorities in order to deliver the next phase of our journey as outlined on the slide. The investment we're making to our business is significant and will enable us to deliver our ambition of building the UK's leading retirement savings and income business as well as delivering strong shareholder returns. Our first strategic priority is to grow. And here we will develop a range of innovative retail propositions and further develop our established workplace and annuities businesses. which will deliver strong growth in operating cash generation over the long term. Our second strategic priority is optimize. Here, we will deliver our balance sheet as planned and further develop our strong existing capabilities in asset and liability optimization to deliver sustainable recurring management actions over the long term. Our third strategic priority is enhance. Here, our focus is on delivering our remaining migration and transformation programs, as well as integrating our businesses into a single group-wide operating model. All of which will deliver 250 million pounds of annual run rate cost savings by the end of 2026. Turning now to the progress we've made in the first half. We've invested 164 million pounds of the planned 700 million pounds to grow, optimize, and enhance our business. We paid 250 million pounds of debt and are on track to invest around 200 million pounds of capital into annuities this year. This combined investment has enabled us to make good initial progress on our three strategic priorities. Firstly, we continue to invest in growing our business in the first half, where we've launched innovative new retirement income products and enhanced our annuity market propositions. We're also taking action to retain our existing customers for longer, through offering our workplace customers our retail consolidation offering and our pensions and savings customers our annuity offering. Secondly, we remain laser-focused on optimising our balance sheet. As I've already outlined, our first half debt repayment has supported progress towards our 30% Solvency II leverage ratio target. Mike Eakins, our Group CIO, and his team have been investing into our asset and liability optimisation capabilities over the past few years. And I was therefore delighted to see this deliver £264 million of recurring management actions in just six months. This is made up of a large number of BAU actions that we and all of our peers undertake week in, week out to optimise our portfolios while ensuring our risk profile remains unchanged. Given this strong first half performance, we are now confident of delivering 400 million pounds of recurring management actions this year ahead of plan, and to be able to sustain this level going forward every year. I was also pleased that we've launched Future Growth Capital. This is the first private markets investment manager to be established in the UK to promote the objectives of the Mansion House Compact. as we target higher returns from customers from a broader range of assets. Finally, we've made good progress in simplifying our business to deliver cost efficiency through collapsing our former heritage and open divisions into a single group-wide structure, which means, for instance, we now have a single pensions and savings business that's focused both on attracting new workplace and retail customers and retaining the legacy retail outflows. And we also continue to migrate our customers to the modern, digitally enabled TCS Diligente platform, with initial 550,000 Reassure customers scheduled to migrate by the end of this month. All of which means we expect to deliver around 50 million pounds of run rate cost savings by the end of this year, and are on track for our 2026 target. And the investment we're making to grow, optimize and enhance our business is supporting strong trading performance in our business units. At Capital Light, fee-based pensions and savings propositions help customers journey to and through retirement. The markets we operate in under the Standard Life brand are huge and growing, with 40 to 50 billion of annual flows in the workplace market and 80 to 100 billion of annual flows in the retail market. And the opportunity is even greater than this, with only one in seven people saving enough and only 10% getting advice. As an established scale player with 184 billion pounds of assets and 12 million existing customers, we are well positioned to access these markets. Our strategy is clear. We are customer centric and purpose led in retaining our existing customers and attracting new customers by meeting more of their needs over time. I'm therefore delighted to see the good progress we've made in enhancing our customer propositions, with the launch of the Standard Life Smooth Return Pension Fund and the Standard Life Guaranteed Fixed-Term Income products this year. And we continue to be relentless in advocating for the changes that will help our customers, where we are working with government to secure increases in auto-enrolment contributions and the introduction of targeted support. Our focus on customer needs is translating into strong trading performance. In workplace, we continue to retain our existing schemes and win new schemes in the market thanks to our continually improving proposition. And this has supported strong net fund flows of 3.3 billion pounds in the first half, up 83% year on year. which included the transfer of 900 million pounds of customer assets from a large technology company. Another example of the strength of our proposition with corporates. We also remain focused on improving our cost efficiency to enhance our margin and drive increased profitability. This is a simple business. We make money by firstly growing our assets through improving our net fund flows and then secondly by enhancing our margin through improving our cost efficiency. Andy Curran and his team have delivered both in the first half with average assets under administration up 9% and our operating margin increasing from 14 bps to 17 bps. This has enabled us to increase our pensions and savings IFRS operating profit to 149 million pounds, up 31% compared to the second half of 2023. Now importantly, we've delivered this excellent performance while still being in net fund outflow. So as we execute on our strategy to retain our legacy retail outflows over time by retaining more of our customers, this will drive even stronger performance in future. Our retirement solutions business is focused on helping people secure income in retirement. We have an annuity portfolio of 39 billion pounds which represents 14% of our total assets and reflects our strategic decision to limit our shareholder credit risk we retain on our balance sheet. We operate in both the BPA and individual annuity markets with our strategies designed to leverage the strong demand from corporates and individuals. And I'm really pleased with our first half performance and the enhancements we've made to our customer proposition. In the annuity market, we wrote 1.7 billion pounds of premiums in the first half, reflecting the slower BPA market demand in the period. But we've already transacted a further 400 million pounds since June, and have an additional 2.2 billion pounds of exclusive transactions we're working on. And with a 15 billion pound pipeline of deals for the remainder of 2024, we are confident of delivering a strong second half of BPA premiums. In the individual annuity market, we've been seeking to expand our range of propositions, and it's therefore great to see the strong initial trading from our standard life pension annuity. We also know that when our customers make the decision to secure, to seek income security in retirement, they want to move quickly, which is why we recently launched our new digital individual annuity quote capability, where over 90% of our quotations are underwritten and returned within seconds. These are clear examples of where we're investing to leverage our capabilities and balance sheet to meet a clear customer need under the trusted Standard Life brand. Now, key to ever stronger financial performance in this market is to write new business in a capital efficient way. So I'm particularly pleased that we're now able to write more premiums for less capital due to the step change we've made in reducing our annuity capital strain to around 3%. Reflecting the full benefit of the part seven funds merger we completed last year and demonstrating the benefits of our diversified balance sheet. with our 200 million pounds of capital enabling us to write around six billion of annuity premiums annually, which in turn will be the key driver of strong future CSM growth over time. And I'm pleased with the 10% CSM growth delivered in the first half. So in summary, when you look at the first six months of our three-year strategy, there's a lot to like. Excellent growth in our capital light pensions and savings business through growing our assets with improved net fund flows and enhancing our margin by reducing cost. This has been a huge area of focus for me since I joined and so it's great to see the momentum we are now building. And then disciplined deployment of capital into annuities with excellent progress in reducing strain, reducing our new business strain to optimize our returns and deliver strong CSM growth. We're also deleveraging our balance sheet and delivering recurring management actions that create value by growing own funds. And we're making clear progress on delivering our migrations and implementing the changes needed to simplify our business to reduce costs. Phoenix is now an attractive, organically growing business that delivers growing cash, capital, and earnings. with strong growth in our operating cash generation, our recurring capital generation and owned funds, and our operating profit and CSM, all of which underpin our progressive and sustainable dividend. With that, I'll now hand you over to Stephanie, who will explain our first half financial results in more detail. Stephanie, welcome.

Thank you, Andy. Good morning, everybody. So I've now been with Phoenix a couple of months, and I've been really struck by the focus of our colleagues on delivering the strategy right across the business. It is readily apparent that the wide range of capabilities and specialisms here at Phoenix is key to the momentum the team is achieving as we progress towards our ambition of being the UK's leading retirement savings and income business and create shareholder value through delivering strong performance across our financial framework of cash, capital and earnings. Now, for the first half of 24, we are reporting against these three key areas. In cash, total cash generation has increased to 950 million, and importantly, was delivered through strong growth in operating cash generation from our businesses. In capital terms, the balance sheet's resilience enabled both the repayment of debt and investment into the business, with the shareholder capital coverage ratio remaining in the upper half of the target operating range, and the solvency to leverage ratio reducing in the period to 35%. In earnings, adjusted operating profit increased by 15% to 360 million, reflecting the growth in both the pensions and savings and the retirement solutions businesses. However, we have reported a statutory loss after tax of 646 million, due principally to the consequences in this period of our solvency to hedging strategy in IFRS reporting. This has therefore reduced shareholder equity and adjusted shareholders' equity in the period, which I will cover in detail shortly. Finally, as Andy has outlined, the board has declared an interim dividend of 26.65 pence per share, which is a 2.5% year-on-year increase. The operating momentum in the business is driving strong performance across the key metrics that demonstrate growth. Operating cash generation is the primary metric and therefore 19% year-on-year growth in the first six months of a three-year strategy is encouraging. Similarly, improving recurring capital generation by three percentage points in the period is an important indicator that the underlying business before the non-recurring debt repayment and strategic investment is self-sustaining. Other key metrics are pensions and savings average assets, which grew 9%, as well as workplace net fund flows, which increased 83%. Both are good signs of the growth in the capital light business. CSM growth of 10% is a strong increase in the store of future value that will emerge in operating profit over time. And an annuity's capital strain of 3% is an important metric for enabling growth in the retirement solutions business. However, in this period, the known consequences of our hedging strategy have impacted the IFRS result in particular. Now, as a reminder, Phoenix hedges its Solvency II surplus, which was 3.5 billion at the end of June. This is because a stable surplus protects our cash generation from unrewarded market risks and therefore underpins our sustainable dividend. And this strategy works well. However, in an environment of higher interest rates and rising markets, there are consequences of the hedging strategy, particularly for IFRS shareholders' equity and, to a lesser extent, own funds, which in turn impacts the leverage ratio. Interest rates and equities markets were higher in the period to June, which therefore created an adverse impact in the first half. But we believe the end of June represented the peak for interest rates, with long-term rates having already fallen around 35 basis points by mid-September, with further reductions expected. We have therefore already seen improvements in all of these metrics since June and are positioned well to benefit further from lower interest rates going forward. So turning to the detail of our first half results, starting with cash. So at Phoenix, operating cash generation is the sustainable level of cash remitted from the life companies to group and comprises both the surplus emerging and the recurring management actions. It's therefore very pleasing to have delivered 19% growth to 647 million in the first half. The key components of growth are a 5% increase in surplus emerging to 383 million, reflecting particularly the growth of new business in pensions and savings, and a 48% increase in recurring management actions to 264 million, which reflects a large number of actions to optimize the Solvency II balance sheet. Given the strong start to the year, we are now confident of delivering 400 million of recurring management actions in 24 and maintaining that level. As Andy explained earlier, recurring management actions are simply the same day-to-day actions that others across the industry undertake to efficiently manage their balance sheets and which is normally embedded into the surplus emergence. This includes, for example, optimizing the shareholder credit portfolio. The separate reporting of these management actions made sense as Phoenix transitioned its reporting framework and could be simplified over time. Importantly, the operating cash generation period more than covered the recurring uses and the dividend, which demonstrates the stronger operating performance in the business. We've also delivered 303 million of non-operating cash generation. Now this includes one-off management actions and a free surplus release. So total cash generation is therefore 950 million and this strong first half performance increases our confidence in delivering at the top end of our cash generation target range of 1.4 to 1.5 billion this year. So turning to capital. Resilience of our Solvency II capital position provides the capacity to support both deleveraging and investment into the business. Our shareholder capital coverage ratio remained in the top half of the target operating range throughout the period and was 168% at the end of June. Now, there are a number of moving parts within the Solvency II walk, but I particularly wanted to draw your attention to the positive nature of the recurring Solvency II capital generation in the period. The three percentage points increase means that the operating surplus generation more than covers our operating costs, debt interest, dividend, and new business strain, and reflects the stronger operating performance from the business. The majority of economic movements were mitigated by the hedging strategy with only a limited 100 million adverse economic variance in the surplus during the period. And as Andy explained earlier, we also had a number of planned non-recurring uses of surplus capital, including 250 million of debt repayment and nearly 200 million of investment into the business. Our closing surplus was therefore 3.5 billion. Turning to leverage, we have repaid 250 million of debt in the first half of 24 and intend to repay at least another 250 million by the end of 26. This will contribute to achieving the target of a 30% solvency to leverage ratio by the end of 26, which we consider to be an appropriate level for the business. Now, as at June, the ratio had reduced to 35%, which reflected a two percentage points reduction from the debt repayment. This was partially offset by a one percentage point increase due to the impact on regulatory-owned funds from the hedging strategy, primarily as a result of higher interest rates. But this impact is now reversing as interest rates reduce. Now, importantly, we have a number of levers within our control that contribute to achieving the target of 30%. These include the planned repayment of at least 250 million of debt, which will reduce the ratio by around two percentage points, all else being equal. We're also focused on growing own funds through the delivery of our strategy and will accelerate this growth by writing profitable new business and retaining more of our existing customers, realizing our target savings and reducing investment spend, and through delivering recurring management actions. So turning to IFRS earnings. We're pleased to report a 15% year-on-year increase in IFRS adjusted operating profit to 360 million. Our pensions and savings business is primarily a capital light business with around 90% of its assets being investment contracts. Profitable growth in this business is delivered through growing assets and improving the net operating margin. And these half year results show further successful action on both, building on the past 18 months or so. Now, in the first half of 24, our average assets under administration increased by 9% compared to 23, driven by growing workplace assets as we improve our net fund flows and through positive market movements. Operating margin across pensions and savings has also increased to 17 basis points, an increase of three basis points compared to the second half of 23 as costs have reduced. These factors have helped to increase the operating profit of pensions and savings in the half year to June. And it's worth noting that the lower profit in the first half of 23 reflected some one-off adverse experience variances related to a small proportion of insurance contracts in the pensions and savings business, which has not repeated since. Now retirement solutions contributed 210 million of operating profit in the period with steady growth due to success in the annuity market and our ability to improve the investment return. This is continuing to build good momentum. The decrease in Europe and other primarily reflects positive one offs in the prior period for experience and assumption updates that have not been repeated. So looking forward, we expect to see our operating profit growth momentum continue with a stronger second half performance as we progress towards our target of 900 million by 26. Now the loss after tax I highlighted earlier has resulted in a further decline in shareholders' equity at the end of June. We are very focused on rectifying this over time. Our operating profit is growing strongly, and in the first half it broadly covered the key recurring expenditure of our dividend and debt interest. It does not yet cover the accounting impact from amortisation of intangibles, which is running off over time, or the non-operating expenses. Now, we are incurring higher non-operating expenses during our three-year investment phase as we invest to grow, optimize, and enhance our business, after which this level should reduce to a low level. We therefore are focused on growing operating profits to cover all expected uses over the long term. Now in this first half, we also had a one-off accounting impact in shareholders' equity of the buyout of our internal PGL pension scheme, although that is actually broadly offset in the CSM, and I will cover that shortly, so is neutral from an adjusted equity perspective. Now the main driver of our reduced shareholders' equity in the period is therefore the adverse economic variances from higher interest rates and equities due to the accounting mismatch related to our solvency hedging. Now looking forward, our shareholders' equity is positively geared to lower long-term interest rates with a 35 basis points reduction since June having already improved the position and further improvements to come as rates reduce further. Importantly, though, we are focused on driving increased shareholder equity through the factors which we can control. This includes our target to increase adjusted operating profit by 26 to 900 million through business growth and by delivering annual run rate cost savings of 250 million. In addition, Phoenix has long demonstrated its strong capabilities in optimizing its cash and capital position, and we are now looking to apply exactly the same discipline to optimizing the IFRS balance sheet. Adjusted shareholders equity was 4.2 billion as at the end of June, which we believe is a far better measure for life insurance companies as it includes the CSM, which represents a significant store of future value that will emerge over time into operating profit, creating value for shareholders. And the CSM grew in the period by 10% to 3.1 billion gross of tax. New business contributed 3% growth in the CSM in the first half, lower than in 23 due to a slower first half BPA market. Management actions of 73 million primarily reflect lower investment manager fees that we have negotiated. There was also a one-off 87 million increase from the buyout of our internal pension scheme that I explained on the prior slide, as well as an 81 million of one-off modeling refinements and adjustments. So strong growth for the CSM in the first half with the impact from some one-offs. But looking forward, we expect increased new business growth in the second half, given our aim to achieve 6 billion of annuity volumes with competitive pricing and less one-off impacts. So in conclusion, we are executing on our three year strategy as we invest to grow, optimize and enhance the business. We have a clear set of financial outcomes for shareholders across cash, capital and earnings as outlined on the slide. Now this includes the primary reporting metric of operating cash generation with a target of 1.4 billion and 26 and which is then expected to grow at mid single digit percentage growth rate over the longer term. We have made good progress in the first half and are on track to meet our financial targets. For 24, we are confident that we will deliver at the top end of our 24 total cash generation target range of 1.4 to 1.5 billion. So Andy, back to you for the summary. Thank you, Stephanie.

So in summary, we have a clear vision here at Phoenix to be the UK's leading retirement savings and income business. And I'm really passionate about this. With the level of under-saving and the lack of advice for the majority of people, somebody needs to stand up for the ordinary customers and help them get a better, later life. And I believe that we at Phoenix are best placed in the industry to do that. This is also a huge commercial opportunity given the scale of the fund flows and the structural growth this societal need offers. So we're therefore executing our three year strategy, building a sustainably growing business. And I'm really pleased with the initial progress we've made in these first six months. As the turnaround of our workplace business delivers strong net fund inflows, the launch of our new retirement income products help to begin address our legacy outflows and our asset management capabilities now creating significant value. We're therefore delivering profitable growth through our capital light pensions and savings business as we grow our assets and reduce our costs. And we remain disciplined in our deployment of capital into annuities with our reduced capital strain, a key enabler of strong returns in our retirement solutions business. All of which is delivering the strong operating momentum we are seeing in the business. We're also committed to achieving our target leverage ratio, and I'm very focused on ensuring we grow our balance sheet over time through growing both own funds and shareholder equity. We're therefore on track to deliver all of our financial targets across our financial framework of cash, capital, and earnings, which will support strong shareholder returns enabled by our progressive and sustainable ordinary dividend policy. And with that, we will now move to questions. So we're gonna start with questions from the audience in the room. If you can raise your hand if you have a question and we'll get one of the roaming mics to you. Please can you start by introducing yourself and the institution you represent. For anyone watching the webcast, please use the Q&A facility and we'll come to your questions after we answer those in the room. So I'd like to be fair. I think Stephen's on the far left. You started last time. So we're going to start this side and we will kick off with Abid.

Good morning, everyone. Thanks, Andy, for taking the questions. I've got three questions. First on the total cash generation. Clearly strong delivery on the half year. Just wondering why you're not increasing the full year target. You said you're going to hit the top end at 1.5 billion, but it feels like you could exceed that. Or is there a timing issue? So just trying to sort of gauge the sense there. And the second one is on the IFRS earnings, clearly below the line, negative variances due to economic movements. I'm just trying to understand, is that sort of due to the contracts becoming more onerous under the IFRS 17 regime and you've got to take the pain up front immediately? And so is there some sort of asymmetry when the economic movements turn in the opposite direction? So just trying to judge if there's any asymmetry on the way down versus on the way up there. And then the final question is on the Sun Life sale process. Just trying to understand why you pulled out of that sale process and if that's likely to be resurrected or do you think you can basically generate more cash on your own balance sheet through that? Thank you.

Thanks, Abid. I will take the first and third, and I will briefly comment on the second, but then pass to Stephanie to give more color. In terms of the total cash generation, back in March, we set out a series of three-year targets. We feel very good about our progress against those, but six months into three-year targets, we're not going to start upgrading anything. We decided not to change any of the targets here. We're very, very pleased with the cash generation, and we're comfortable. We'll be comfortable at the top end of the range of the one-year cash target. No timing bits to be concerned about with that. In terms of Sun Life, so we've concluded there that a disposal would not maximise shareholder value, basically given the current protection market uncertainty. So you're probably aware the FCA are doing a review into pure protection. And we're not worried about the business ourselves. We offer excellent value for money for customers here. It seems as though the primary focus is around commission levels. So we are currently the manufacturer and the distributor in Sun Life. And therefore, if we need to shift commission levels, zero sum game for us, we don't mind. But looking at a potential disposal of the distribution arm and keeping the manufacturing arm, given that uncertainty, we concluded highest value way forward is to retain. It's a really good business. Mark Screeton and the team, our first class, the management team, they do an excellent job and the highest value will be retaining the business and growing the business within the group. In terms of the IFRS earnings, let me just give a quick initial comment on that and then pass to Stephanie. We have seen shareholder equity decline primarily as a result of the rise in interest rates. That's a consequence of our hedging strategy. The hedging strategy is protecting the capital surplus. That's basically protecting cash generation short and long term, which also therefore protects our dividend short and long term. That's our That's what we're looking to do. It's a consequence. We accept from that. Our current trajectory on this doesn't go negative in terms of shareholder equity, but it's an area we've got strong focus on. It's a strong area of focus for investors. And my primary focus, and Stephanie's as she said, is let's get that operating profit up to a level that covers all of the recurring uses so that every year, absent any economic variances, shareholder equity is growing. So that's our focus. We've got really strong operating momentum in the business, strong growth in the business. I want to drive that through, very determined to drive that through so operating profit gets to a level it covers all of the recurring uses. Stephanie, do you want to just add to that in terms of the-

pretty good answer but in terms of the only thing I would add in terms of you asked is around onerous contracts etc and no that's not the case it is really to do as Andy says we hedge our surplus and therefore that is obviously tied to in terms of obviously the own funds the SCR and the surplus and a number of those components actually are not in IFRS so therefore it's just a consequence of there being items that you're hedging in terms of as they move around in a solvency world it's just really the accounting that then comes through when you look at it in IFRS.

So we'll go to Dom and then Andy.

Thanks very much. Three questions for me. Thank you. Two on the recurring management actions, if that's all right. I wonder if you could just give us a little bit more detail on the very strong print there. Where did it come from? And then secondly, on the recurring management actions, should these have a symmetrical impact on the IFRS as well, if the IFRS discount rates move with yields? If you could just explain the IFRS impact of those, that would also be very helpful. And then lastly, very exciting to see some of the new product launches on the retail side. For instance, the individual annuities and the smoothed fund. Could you just give us a little bit of colour on the performance of those products since launch? Thank you.

Okay, so I will kick off with the first one and then get Stephanie to pick up the second one. And then Andy Curran's in the front row here, so I'll give him due notice. He's getting the third one on the new product launches. So in terms of the recurring management actions, this is a very large number of week-by-week, day-by-day actions that Mike and the team take within the business. And we're not... increasing the the risk by doing so it's keeping the risk the same a larger number we're doing week in week out I think the big difference here is because of our history of doing M&A and then doing management actions from M&A as we transitioned our financial framework to much sort of more normalized in line with peers we felt it would be clearer to call this out as recurring management actions what our peers do exactly the same thing they basically embed it in operating surplus. They don't call it out as recurring management actions. They just embed it. But what we're doing here is just the same as peers do. And we probably should think over time as we evolve our financial framework, we should reflect further on that. It's just the same as peers, no different, sensible optimization of the annuity portfolio. Stephanie, do you want to just pick up on the IFRS impacts?

The management actions are particularly designed in terms of, again, managing very much our longer-term cash generation. Again, our focus very much to influence both the owned funds and or the SCR. There is a different impact for IFRS and it doesn't actually break down in an easy way. It's a reduced impact for IFRS because the focus is actually on the solvency basis. Actually, within IFRS, it would come through a number of different lines, so we don't actually split it out in that way.

Actually, you said new product launches, so I'll get Andy to cover the smooth managed fund and the fixed-term annuities, but Mike's also here as well. He was instrumental on future growth capital, the new JV with Schroeder, so I'll get Mike to comment on that as well. Andy, do you want to go first?

Yeah, just... Very quickly. Thank you for the question. On the Smooth Manage Fund, we've launched that very recently. It takes time as the advisor goes through the process of getting the product panelled, then identifying the appropriate clients and making the recommendation to those clients and so on and so forth. So we've gone through a lot of work with advisor firms. At the moment, I think we have about 70 advisor firms, between 70 and 80 advisor firms, who are paneling this product. We've already written some investment monies in already, so it's just short of £2 million, which... seems very small, but the opportunity there is over the long run, and the key is getting the product panelled, and that's just part of the process. So it's kind of time-locked, but I'm very, very encouraged by what we've seen so far. On individual annuities and fixed-term annuities, again, the opportunity for us is really big. The start has been really positive. I think Andy mentioned in his remarks that our servicing of that annuity business is really really sharp we think it's market leading and we see no reason why we can't grow that business significantly so in all sort of three fixed term individual annuity and smooth fund really encouraged and I think we'll have even more things to come over the coming months as well so encouraging start

Thanks, Andy. Mike? Yeah, so on future growth capital, we were delighted to announce that JV with Schroders. We signed up to the Mansion House Compact in July of last year, where we said we would invest 5% of our defined contribution assets in productive assets. We had a look around the market to see which asset manager could help facilitate this. And we quickly came to the conclusion that there was no real offering. So in conjunction with our partners at Schroders, we developed future growth capital. We were delighted to announce that earlier in the summer and are really excited about the prospects that that delivers for our most important stakeholder, our customers. So really getting our customers access to those private markets where they don't have it right now and we can deliver those returns will flow through to our customers.

Andy?

Thanks, Andy. Andy Sinclair from Bank of America. First was on BPA and great volume guidance and low strain looks great, but can you tell us a little bit more about the margins? We've not got a new business long-term cash disclosure, but should I just look at CSM new business generation divided by premiums if I do that I think we've dropped from about 4.8% in 2023 to 4.1% in half year 24 just if you can tell us a little bit more about the margins is that the right way to look at it or something else next was just on the hedging and just really trying to understand what happens when rates move if short term rates come down if base rates come down but the 10-year stays at similar levels. If that doesn't come down, how much of a benefit do we get to shareholders' equity? Just to understand, depending on the shape of the curve as well as just base rate cuts, how much of a benefit do we actually get to shareholders' equity? And then third was just on the other non-operating item within IFRS. So £302 million negative in H1, including the pension fund stuff, which is about a third of that. How much should we be thinking over the rest of the plan to be coming through in that line? Is that £400 left of the £700? Is it £500? How broadly should we think of that line over the remainder of the plan?

Sure, okay, so I'll take the first and a quick comment on the second and then pass to Stephanie for the second and third. So on the BPA side, so our primary focus here is actually driving strong returns on capital. So looking to optimize the capital we deploy and drive strong returns. We say we aim for mid-teens returns. We obviously are doing very well against that. Looking at the CSM growth is also a good way to look at it, Andy, but it does depend on the duration. Sometimes you get relatively shorter term business that will give you a lot of cash fairly quickly, but a shorter tail than other cases. I'd look at that more generally over time. In summary, overall, I'm delighted with what Tom and the guys are doing on the BPA side. Getting that strain down to 3% is fantastic for us. It was 4.7 last year, it was 6 the year before, around 6% the year before. And it means that our disciplined capital allocation of 200 million can go a lot further. We expect to be able to write, you know, 6 billion of premiums. And I think that's very attractive while keeping the diversified balance sheet, which is important to us. Just on the hedging part, I'll get Stephanie to respond to that. But I think the key thing I would say is just to reiterate that what we need to do here is grow that operating profit. We've got a very strong... momentum building in in in our business our business is growing strongly that needs to drive through to operating profit so operating profit exceeds the recurring uses we can't rely on whether markets move or not to whether we have growing shareholder equity we need to focus on the stuff that we can control and that's about driving up operating profit profit which we're very determined to do but uh yeah pick up from there i think that's exactly right that is the absolute key driver in terms of the movement of the of all of the rates in terms of obviously team

I've just been monitoring that. But in terms of what's happened since June and right across the patch on the average, the 35 basis points we referred to, we would expect around about a couple hundred million to come back in in economic variance already since June. So that's how that would flow through. And then into your third question in terms of non-op, you're absolutely right. There was an additional pension movement in this period, but behind that, obviously, there was also the investment in the business of just around about 0.2. Now, if you refer back to the guidance in terms of the overall experience of the 700, which you referred to there, which was set out in March, and we will still expect that to come through over the next two years, the remaining balance to come through.

So is that about 500 more to come through that line? And sorry, just jumping back to my previous question about the shape of the yield curve. I mean, we've got an inverted yield curve at the moment. If that yield curve normalises, so we go down at the short end, but let's say that the long end doesn't change, do we get any material benefit to shareholders' equity or do we need the long end to come down as well?

So again, Andy, we're not going to try to do all the movements here at the moment. As I say, what we can say is we've definitely improved already from the rates having come down to get to that impact as we would look at it as a couple of hundred million since the year end. Sorry, year end, half year end.

Farouk. Sorry, Ria, I didn't see you there. I'll come to you next, Ria. And Andrew, you've not had any questions, Andrew. This is worrying me.

He's very near my microphone. Hi, Farouk Hani from JP Morgan. Firstly, the excellent margin development in pensions and savings, how much more can be squeezed out of that? I guess at some point, we should stop modelling that improving. If you could talk about that side of it, especially as the retail products start to go on, and presumably they have higher margins in the workplace, I'm guessing. So that's question area one. Question area two is, could you give us a... a sort of a angle on where the solvency ratio might be now. And in light of that, the PRA stress tests are not as far away as, I mean, they're obviously looming. And it feels to me like some of the credit stress tests that you'll have to do are pretty um onerous I mean how comfortable are you that you will remain within that 140 to 180 range on solvency um I know it's early days but can you just comment on on your views on your solvency position um And then last, very quickly, on the private growth fund, what's the business model in terms of how you share the economics with Schroders? Because I'm guessing you can divert a lot of your own assets into that JV. I mean, how are you sharing the economics? Thank you very much.

Sure, okay, so I'll take the first and third and get Stephanie to take the second. So in terms of pensions and savings, we absolutely would expect that net margin to continue to grow. And that's because we've got a 250 million cost reduction target. Now, pensions and savings is... 184 billion of our 289 billion assets. So it's kind of two thirds of the assets in the business is the fee-based capital light side. And therefore it's got a large proportion of that 250 million of cost reduction will feed through to pensions and savings. So what you'd expect overall is there would be a slight, small reduction in revenue margin over time, but then a significant reduction in the cost margin and hence the net operating margin will continue to expand particularly, as I say, from the cost reduction programme we've got. And you're right, propositions like the Standard Life Smooth Fund will be higher revenue margin in the workplace, for example. So we're really optimistic that this is going to be a big driver of growth for us going forward, particularly given the flows coming into that sector overall. In terms of the business model around future growth capital, so what I'll do is I'll answer that talking a bit more broadly about our approach to asset management. So our approach to asset management is to have a team of highly skilled investment professionals that basically determine the optimal asset allocation for each of our funds, shareholder funds with profit funds, policyholder funds. and then have the capability to partner with the best asset manager in each asset class that we want to operate across there. Obviously Aberdeen are our core asset management partner. In areas where they're strong, we will automatically give the business to them, but we are free to go elsewhere in areas that Aberdeen don't have And then the next step on from that is we then, having got that strategic asset allocation, where is there value in us running the money ourselves versus using third-party partners? What we've concluded is that the shareholder fixed income, the shareholder credit backing annuities, both liquid and illiquid, there's merit in us doing that in-house, so we're moving in that direction. And then when it came to the private equity side, we also think there's value in that. We didn't think we wanted to try and do it in-house up front. We felt the right answer was to partner, but it does mean that we'll have a participation in the value creation from the asset management side through future growth capital and the 50-50 joint venture that we have with Schroeder's there.

Yes, and in terms of the solvency ratio, you said in terms of where are we. Obviously, we're halfway through the second half, but we're very much in exactly where we would expect to be in a normal path of the ratios through to the end of the year, and very similar to where we were as at the half year. So nothing new to highlight to you there. And in terms of the broader territory, in terms of are we confident of the range of 140% to 180%, yes, we are.

So I'll go to Ria. Ria?

Thanks. Ria Shah, Deutsche Bank. Three questions. So the first one, just going back to the recurring management actions, what gives you the comfort in increasing them to 400 million this year, but also into 2025 as well, because that is also an increase in guidance for next year? The second one on the cost savings, if you could just give us some colour on what you've achieved so far and what's going to drive the cost savings under a 50 million run rate for the full year? And then the third one on fund flows, if you could give some colour and guidance on the flows for the second half of the year and into next year as well. Where are the flows going to come from across the business? And when do you think the total group net flows will reverse and become positive? Yeah.

Okay, so again, I'll take the first and third, and Stephanie will take the second. So in terms of the recurring management actions, we've basically been investing in systems, processes, and people capability in asset management to be able to do this. And Mike and the team have done an outstanding job and have kind of got there. you know, quicker than I hoped, and so the 264 million in the first half, really pleasing, and that's what's given us the confidence to say, you know, we set a target, we will get to 400, and we'll get there this year, and we'll be there in future years as well, so we're not trying to up the guidance on anything here, we set the target at 400, we'll get there this year, we'll be there in future years, and that's the capabilities we've built. In terms of the fund flows, so It is a focus for us to get to net positive overall. What I would say is that the net outflow we have is the minimus. So it's kind of less than 1% of our total AUM is the net outflow. And obviously that was impacted by the fact that BPA premiums were generally lower in the market in the first half. I'd expect to continue to make good progress in growing workplace net fund flows going forward. Now, there will be a lumpiness to that. So we had a 900 million in the first half from a large tech scheme that they transferred to us. We had the 1.6 billion pound scheme in the second half of last year. So the direction of travel on workplace net fund flows will continue to be positively and strongly forward, but there will be some lumps with the one-offs, which will happen from time to time. BPA, as we've said, we'd expect to be writing circa six billion of annuity premiums a year for our 200 million of capital at the new lower strain we're now getting to. With profit outflows, don't expect to change materially. The other big upside opportunity is on the retail side. So at the moment, we have circa 10 billion of pensions and savings retail outflows each year, order of magnitude. And ultimately, one in five adults in the UK are customers of Phoenix Group. For each pound they have with us, they have three pounds elsewhere. So as we execute on our retail strategy, I want to be driving that much, much more strongly going forward. The way we approached the organic growth was to kick off with BPA, made good progress quickly, then revitalize, reinvigorate our workplace business. Again, delighted with the progress there. We're now turning our attention to the retail side and the new propositions we're launching there would be examples of that. And that's the real opportunity. But I think the final point I'd make on that is just that we reflected long and hard after last September and the market feedback, and we listened acutely to that market feedback, and we came up with our evolved financial framework of cash, capital, and earnings. which is much more aligned and comparable with our peers, which is what we were hearing people wanted to see. And we've set three-year targets on those. And those are value-orientated targets rather than volume-orientated targets. And those are our primary focus. But ultimately, growing net fund flows is an outcome of a strongly organically growing business and will be a key driver of growing those value-based outcomes as well. So it is a key focus for us.

And Andy, one thing I would add as well in terms of workplace, as we said, which is a very strong part of the P&S business for us, is the fact, if you look at it now, we've got the net fund flows in the half year have actually been 6% of opening AUA, which is clearly a very good story for a growing business, which of course is great to see. Your other question was in terms of costs. So in terms of the activity, so there's been an awful lot of activity obviously going on in the business. to identify where those cost savings will come through. The current ones really that we are able to highlight as forming part of that 50 million primarily relate to areas around procurement and some supplier management. We obviously referenced doing further negotiation on investment fees, for example, but more broadly in terms of procurement, and supplier management together with changing the operating model because as we referenced in Andy's part on the screen, we've obviously moved from the heritage and open divisions into a much more single model across the business and that allows us to obviously to make changes there.

Andrew.

It's Andrew Green at Autonomous. Three questions can I have? Firstly, is the level of solvency strain sustainable at this level, the 3% having come down from 6%? And if so, are you essentially, as you launch into individual annuities, are you basically saying that you're still going to be ceilinged by 6 billion? So it's a question really of whether you write more individuals and less BPAs over time. Second, now that Consumer Duty on Closed Books is live, are you still confident that there are no questions for Phoenix to answer, which might disturb shareholders? On the debt leverage figure, targeting 30%, on the regulatory sum C2 equity, and that's still up around 45%, 50% on the shareholder basis, and the rest of the sector is at 30% or less. Why should Phoenix feel that it can operate with so much more debt leverage than anyone else in the insurance sector?

Okay, so I'll take all of those. So in terms of the strain on BPA, so what's happened here is we basically merged the Phoenix Life and Standard Life legal entities together through a part seven fund merger towards the back end of last year, and we're now getting the full benefit of that diversification. So we have a very diversified balance sheet, annuities are a smaller proportion, but we're getting that full diversification. So that is permanent, and therefore, we would expect a 3% strain going forward. The only observation I'd make, Andrew, is that our returns on capital at that level are very, very attractive, and therefore, if the market did become tighter on pricing, it would still make economic sense to deploy capital at a higher strain than 3%. So I'm not saying never, but the structural changes that have taken us down to 3% are permanent, and therefore I'd expect to remain at that level going forward. And we now have an individual annuity in the market. Our view is we are, Tom and the team are gonna optimize the value creation across the piece. So we view it as annuities as a whole, whether it's a bulk annuity or an individual annuity, we're deploying the 200 million pounds of capital with a low strain that enables us to write the six billion. View that as a holistic figure across all of annuities. Of course, in the situation where we outperform, which we have a long track record of doing, our capital allocation framework would explore how we would deploy excess capital we generate one of the options would be further deleveraging, one of the options would be further investment into growth, bolt on M&A, share buybacks, and so we wouldn't rule that out with excess capital as well. In terms of new consumer duty, So yeah, we met all the regulatory deadlines at the end of July. We're confident we're in a good place and no concerns. In terms of debt, so the reason we operate on a regulatory basis is that's basically what our debt holders want. That's what they look at. That's what they focus on. So we're focusing on the leverage rate ratio that they focus on. That's why we use that basis. 30% on a regulatory basis is not out of line with peers. And at that level, our view is that's the appropriate level for us. So we still have six times debt interest cover at that level, which we think is a strong level of cash coverage of debt interest. And ultimately, the cost of debt is cheaper than the cost of equity. So the way we are optimising returns for our shareholders is by having the right balance of debt and equity in our capital structure, and that's our view of what's the right balance, particularly given we have six times interest cover on debt. Steven.

Good morning. Steven Hayward from HSBC. Just two questions from me. Everyone else has taken my other ones. The debt leverage, just following on from the previous question, can you describe or sort of quantify the owned funds growth benefit that will come through on your debt leverage ratio over the next couple of years to get you to that 30% level? And then secondly, on the hedging side of things, obviously there's a lot of things going on here, hedging on a solvency to surplus basis. Can you give us a sort of a view of whether this hedging program is kind of dynamic and fully adaptable? Can you make changes to it going forwards? And ultimately, when might you not need this hedging program?

Okay, so I'll do the first and I'll kick off on the second and Stephanie will correct me and add some color I'm sure to the second as well. So think about it this way, the 35% solvency to leverage ratio were absolutely committed to 30% by the end of 2026. The further 250 million of debt repayment will take about two percentage points off, so that takes 35 down to 33. Basically, we need about a billion of owned funds growth then to get to the 30%. So in the first half, our recurring owned funds generation was 0.1. So if you kind of take that and think, right, well, times six, that gives you 0.6. But we want to accelerate the pace of growth in the business. We've got very strong trading momentum. We want to get that own funds growth to be faster than that going forward. The one-off management actions are covering the one-off costs as far as an own funds perspective is concerned. So if we get the recurring up, then that gets us where we want to get to. But what you also got, Stephen, is the 250 million of cost reduction will also feed through here. And it should feed through to more than 250 million of benefit to own funds because some of that cost reduction will be maintenance cost, which then gets capitalized. So this is all about driving a really strong organically growing franchise here that drives that own funds growth. Certainly the strong sense I get from buy-side investors that I talk to is if that denominator is growing strongly, the owned funds, and therefore the leverage ratio is kind of coming down a bit each year, that's the real key focus. Get that owned funds growing up is what's most important.

Andy, just before you move on, the other aspect to add on top of the 250 cost savings is also exactly the point we talked about earlier on. Our non-operating costs are also coming down at the same time. So actually that is another part that actually helps us really make that difference in terms of the overall benefit into own funds.

And then on the hedging strategy, so the headline here, as I say, is what we're doing is we are basically protecting the surplus, which protects the cash generation short and long term, and hence protects the dividend and debt interest, ability-based debt interest, both short and long term. And we think that, we believe that is the economically rational thing to do In particular, because ultimately, we're able to run the business at the 168% solvency capital coverage ratio, which is lower than peers, but still be absolutely super secure on our balance sheet. If we kept the equity risk, for example, we'd have to hold more capital, and the additional return isn't worth it relative to the additional capital, so it's not economically rational. So that's why we believe that's the right thing for us to do. What I would say, we recognize it has consequences in volatility, accounting volatility in shareholder equity. So we're very, very focused on that and focused on managing that overall IFRS shareholder equity balance sheet. And then this is something that the board do look at and review from time to time, as you would expect. I think with where we are in the current rate cycle, any change is unlikely in short term, but it's something that the board does keep under review. Any final questions in the room? Andy.

Sorry, just a follow-up for me. Andy Sinclair, Bank of America again. Amortisation of intangibles was actually a bit lower than I expected. It seems to have taken a bit of a decent step down in H1. Anything to be aware of there just to understand the profile? ground rents and and water utilities companies just can you give us a little bit of color on on exposure within the asset portfolio there uh and one that doesn't get much attention but europe and other um profit dropped quite a lot in h1 but but csm i think almost tripled due due to an adjustment just if you can give any color on what's going on with europe thanks okay so um uh on the um

Remind me of the first question. I didn't write it down. I've been quite diligent here writing down.

Amortisation of intangibles. That's you. I'll take that, shall I? So, no, nothing. It's just simply starting to come down on the normal sort of glide path, Andrew, so nothing unusual there.

In terms of ground rents and water utilities, so we don't have any material exposure to ground rents. We have a very diversified credit portfolio, very low exposure, for example, to BBBs. I think it's about 17%, 18% at the half year. And so no undue abnormal exposures to utilities either, very conservatively managed and operated. Europe

In terms of the CSM of Europe, if you actually look at it in terms of it creates a significant new business add-on and it also creates a significant release relative to the size of the business, and that's really to do with the type of business it is. So there's obviously the majority of that is to do with the Sun Life in terms of that annual renewal of the assurance product that sits within there.

because it is Europe and other, so there's other bits in there. Right, the very last question in the room will be Farouk, and then we'll check in on the webcast.

Thanks for taking my question. Farouk from JP Morgan. Just going back to the future growth fund, what's the mechanism for getting that percentage of AUM up? I mean, will that be a default option in pension schemes, or will individuals sitting at their desks have to sort of make a decision to actively go in to that allocation?

Yes, so it's a great question. So what we've decided is that on those of our funds, such as our with-profit funds and some of our managed funds, we've made the call where it's our decision on behalf of customers that this is the right thing to do, that the overall net returns will be higher. If you look at... Just to give some sort of specific examples of this, UK's got about 14% of its pensions assets invested into productive assets, private assets. The other seven largest pensions nations globally have got 20% compared to our 14. If you look over the last decade, real returns for UK DC pension savers have been 4%. Their Canadian counterparts have got 5.2%, Australian counterparts 5.5%. That's about a third more income in retirement if that sustains over a lifetime. And that's basically because they have a broader range of investments, particularly into the private asset side. So we believe strongly that this is right for customers and the right outcomes. What's interesting Farouk is the whole UK market has historically sort of culturally been obsessed by low charges. The employee benefit consultants, the corporates have been obsessed by low charges. What's interesting is the amount of incoming that Andy and Colin and the team are getting from corporates saying, can we get hold of this, please? So we thought we'd have quite a job to do to persuade the employee benefit consultants and the corporates that don't be obsessed solely by charges. Focus on getting the optimal outcome for the customer. which is obviously the return net of charges. We've actually been pleasantly surprised by the level of incoming. So we've got significant money that we've already lined up to allocate into this. We've committed those numbers externally, but the potential obviously with well over 200 billion of assets in this space, 5% of that would be an even bigger number. But also I think it'd be interesting, what's really critical for a customer here is that the customer gets exposure to a very, very diversified range of investments across multiple sectors, multiple vintages, and there was nothing out there that did that, which is why we decided to set this up. So what would be interesting to see whether large, unbundled DC schemes say, okay, we want some of that, and actually we're going to go to future growth capital to get it. So it would be interesting to see how that progresses as well. Are there any questions online?

that we haven't already covered.

Okay, fantastic. Well, thanks very much indeed, everyone, for coming along today. Stephanie and I, Andy, Mike, Nick, our chairman, and others were all around afterwards. So by all means, we've actually, with our new, simpler financial framework slimmed down, we normally think under two hours, and we're an hour and 43 in. So that's, in fact, an hour and a quarter in. Hour and a quarter in. So we've got time to stay on any further questions anyone's got. But thank you very much for coming along. We'll catch up soon. Thank you.