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.