Standard Life Plc · LSE:SDLF
Standard Life — Phoenix Group Holdings — H1 2020 Earnings Presentation
71 slides from Standard Life's earnings presentation, Aug 6, 2020
Slide 1: Interim Results 2020
CASH RESILIENCE GROWTH Interim Results 2020 6 August 2020 PHOENIX GROUP
Slide 2: Welcome to the Phoenix Group half-year results
Good afternoon everyone and welcome to the Phoenix group half-year results
Slide 3: Busy half year; ReAssure completed; strategy unchanged
It’s been a busy and successful half year for Phoenix, as we completed the ReAssure deal, and became the U.K.’s largest long-term savings and retirement business. Our strategy remains clear, simple and unchanged. We do three things, which in turn drive delivery of the wedge. First, Heritage, where w
Slide 4: Open business growth and financial framework
And third, we are building a thriving and growing open business through our capital light workplace and retail pensions businesses, and through BPA. Together, these are the key drivers of growth within the wedge. Our financial framework is also clear, simple and unchanged. We run a broad range of sa
Slide 5: COVID-19 and resilience of the business model
2020 has been dominated by COVID-19. It is a horrific virus that has severely impacted many families and many businesses. These difficult times have demonstrated the resilience of Phoenix’s business model. Financially we are very resilient. We paid our dividend as planned and reconfirmed our cash ge
Slide 6: Delivering for customers and colleagues during lockdown
together to deliver for our customers. We got 99% of our people working from home within 10 days of lockdown. Impressive, but what’s even more impressive is that throughout that period we kept our phone lines open - our call answer rates were over 93%, which is close to pre-COVID levels, and we main
Slide 7: First half performance: cash, resilience, growth
So in a volatile COVID environment, how did we do in the first half against our financial framework of cash, resilience and growth. Cash generation is up 51% to £433 million. We remain as resilient as ever, with a £4.0 billion Solvency II surplus, and a coverage ratio of 169%. And in particular, all
Slide 8: ReAssure completion and combined group
As well as new business, M&A is another key growth driver for us, and we completed on the ReAssure transaction two weeks ago. With ReAssure, we are now the U.K.’s largest long-term savings and retirement business. ReAssure adds £76 billion to our assets under administration, taking the total to £324
Slide 9: Increased 2020 cash generation target
And all of this enables us to increase our cash generation target for this year to £1.5 to £1.6 billion, demonstrating what a highly cash generative business the enlarged Phoenix group is.
Slide 10: Interim dividend and cash coverage
Our focus on cash, resilience and growth turns into dividends for you, our shareholders. With a £4.0 billion capital surplus, on top of the £5.8 billion of capital requirements that we maintain above our best estimate liabilities, we are well capitalised. And with our resilience and liquidity we wil
Slide 11: Execution across Heritage, M&A and integration
Now the strength of our cash, resilience and growth is all down to the strength of our underlying businesses, and successful execution and delivery in those businesses. And it’s this I’m most pleased with in the first half of this year. Heritage is the engine of our £1.1 billion cash generation, and
Slide 12: Open business growth and leadership appointments
as a part of the Phoenix family. Alongside this we are on track with the Standard Life transition programme. And then in the open business, long-term new business cash is up by 41% at £358 million, in spite of the challenging markets. Key to this has been our investment in our proposition in both op
Slide 13: Thank you Andy and good afternoon
Thank you Andy and good afternoon
Slide 14: Financial highlights
As Andy said, we have had a strong first half of the year despite the financial volatility driven by the pandemic. These financial highlights demonstrate that we continue to manage our in-force business to ensure resilience, which leads to predictable cash generation and we are also focused on growt
Slide 15: Cash generation in first half 2020
Turning first to cash. In the first six months of 2020, Phoenix’s insurance entities remitted £433 million to Group. This is after the provision of £50 million of capital injected into our Irish domiciled subsidiary to strengthen its capital position following the fall in yields. Alongside that, the
Slide 16: Updated 2020 cash generation guidance
of pro-forma cash generation in the period. Today we have announced an update to our 2020 cash generation guidance, increasing the Phoenix only target of £800 - £900 million to reflect the £690 million of cash generation delivered by ReAssure. Historically, ReAssure businesses remitted cash only onc
Slide 17: Long-term cash generation of £19 billion
As a reminder, we expect the Combined Group to deliver £19 billion of cash generation over the long-term with £5.9 billion of this emerging over the next 4 years. These cash generation targets reflect the business that is already in-force. They therefore exclude any new business written after 31 Dec
Slide 18: Cash generation sensitivities
To demonstrate the resilience of our 4 year cash generation target, we have set out the sensitivity of this target to various stress events. These sensitivities are presented for the Combined Group and therefore include the ReAssure business. As you will be aware, Phoenix has a low appetite to marke
Slide 19: IFRS operating profit
Before we move on to talk about Resilience, I will walk you through our IFRS results. We delivered operating profit of £361 million in the first half of 2020, 11% higher than the prior year. This increase is driven by strong performance in our Heritage and UK Open business segments which have seen h
Slide 20: IFRS profit drivers and non-operating items
equity hedges held by the life funds following equity market losses during the first half of the year, together with the impacts from falling fixed interest yields. These positive impacts have been partly offset by widening credit spreads. Finally, our non-operating items include £48 million of cost
Slide 21: Capital resilience and Solvency II surplus
Maintaining Phoenix’s capital resilience has been my key priority during this period of economic turbulence. Our primary focus continues to be the overall quantum of surplus. This is because cash generation is made from surplus capital rather than from surplus ratios. Therefore, whilst we have a tar
Slide 22: Shareholder value proxy
Shareholder Own Funds continues to be a good starting point for determining shareholder value but does not include a number of areas where value exists. These include contract boundaries, where the value of in-force on unit-linked business is restricted under Solvency II, and the shareholders share
Slide 23: Solvency II surplus movement
During the year we saw the PGH Group surplus increase from £3.1 billion to £4.0 billion. The main driver of this increase was the raising of £1.4 billion of hybrid capital net of costs. This was largely undertaken to fund the acquisition of ReAssure, but we also took the opportunity to access the de
Slide 24: Assumption changes and economic impact
together with falls in property prices and the impact of downgrades experienced year to date. This movement is broadly in line with our published sensitivities. The pandemic has also resulted in us making some changes to our underlying assumptions – particularly on the property assumptions that unde
Slide 25: Combined group pro-forma solvency position
On 22 July we completed the acquisition of ReAssure. As Andy outlined in his introduction, this is a deal that reinforces our key attributes of cash, resilience and growth. On a Combined Group basis, the pro-forma solvency II surplus was £4.4 billion at 30 June 2020 with a shareholder capital covera
Slide 26: Combined group solvency (continued)
position.
Slide 27: Combined group sensitivities
Here we present the sensitivities of the Combined Group. The sensitivities reflect the equity and interest rate hedging and the longevity reinsurance currently in place within the ReAssure business and illustrate that our enlarged group remains resilient to risk events. We have modelled the impact o
Slide 28: Resilience within target coverage range
shareholder capital coverage ratio range of 140-180% under all scenarios applied to this already strained solvency position is evidence of our ongoing resilience.
Slide 29: Diversified high quality shareholder asset portfolio
Phoenix has a diversified, high credit quality shareholder asset portfolio. 98% of our £21.6 billion shareholder debt portfolio is investment grade with only 16% held in BBB’s. We also have a low exposure to those sectors more at risk from the pandemic, with only 1.6% exposure to the oil and gas sec
Slide 30: Illiquid asset portfolio
Our illiquid asset portfolio continues to be well diversified across 5 main asset categories. For this portfolio, we are particularly focused on whether scheduled cashflows are met as this is a key indicator of the resilience of the underlying investment. As at 30 June, 100% of scheduled cashflows h
Slide 31: Illiquid assets: real estate and loans
of assets. And over 85% of our Commercial Real Estate portfolio has a loan to value lower than 50%. We continue to manage this portfolio very closely, and our focus on maintaining a high credit quality is reflected in the experience during the first half of the year.
Slide 32: Active credit management with ASI
We have worked extremely closely with Aberdeen Standard Investments during the period to actively manage the credit quality of our debt portfolio, and rotate out of assets at risk of downgrading where possible. Integral to this active management was a block trade which replaced £0.5 billion of sterl
Slide 33: Credit downgrades and rating migration
some downgrades during the period, with £860 million, or 6.5% of bonds in the matching adjustment portfolio being subject to a letter downgrade. However, only £16 million, or 0.1% of bonds have downgraded to sub-investment grade and there have been no defaults. The maintenance of the credit quality
Slide 34: ReAssure credit portfolio
ReAssure also has a well diversified credit portfolio and made significant progress during 2019 to improve the quality of this portfolio, trading out of UK BBB bonds and into US Dollar A credit. It is pleasing to see this credit quality maintained year to date, reflecting the active approach to cred
Slide 35: Growth options and synergy targets
Turning now to growth. Phoenix has three key growth options: M&A, BPA and Open business. First let me deal with M&A and integration. With a combined synergy target of £2 billion across Standard Life and ReAssure, our market leading integration activities continue to be a real driver of shareholder v
Slide 36: Synergy delivery
synergies of £120 million. Alongside this we are on track to deliver our synergy targets for the Standard Life transition programme.
Slide 37: Standard Life transition programme progress
Our focus during the pandemic has been to prioritise the protection of our customers, colleagues and the communities in which we operate. It is therefore not surprising that we have seen some strain on our transition activity. However, we were able to limit this strain to a 3-4 week delay in plans a
Slide 38: ReAssure integration approach
Integration of the ReAssure business will follow Standard Life transition activity, as we continue to promote enterprise stability. No decision has been taken on the end state customer and IT operating model of the ReAssure business and we have therefore made no estimate of potential savings in our
Slide 39: New business cash generation
Phoenix does not include new business in its long-term cash generation guidance. New business, whether through BPA or through the sale of Open products is therefore incremental to cash generation and brings further sustainability to our dividend. In first half 2020, Phoenix saw gross inflows on new
Slide 40: Open business inflows
Phoenix’s Open business is capital light and growing, despite the challenges of COVID-19. In first half of 2020, our Open business in the UK and Europe delivered gross inflows of £3.1 billion from new business and £122 million of incremental long-term cash generation. Workplace continues to be our e
Slide 41: Open business second half outlook
people began to deal with the uncertainties resulting from the pandemic. Looking forward, it is clear that the second half of 2020 will continue to be challenging. As you heard from Andy, we have made significant progress in our Workplace proposition and will continue to do so as we look forward to
Slide 42: BPA business deals
Our BPA business has had a very successful start to the year, putting £90 million of surplus capital to work across 3 deals which will generate incremental long-term cash generation of £236 million. The largest of these deals was an £800 million buy-in with the LV= pension scheme. This was a complex
Slide 43: Selective approach to BPA capital allocation
surplus capital per annum to BPA. The success of the team in the first half of the year means that we have the opportunity to do more – especially as the pipeline of opportunities continues to be strong. However, we will only allocate additional capital if deals present attractive economics. We will
Slide 44: Illiquid asset origination
Management actions also deliver growth. Our success in the BPA market is underpinned by strong illiquid asset origination. During the first six months of 2020 we originated £789 million of illiquid assets across a range of asset classes, a 47% increase on the same period in 2019. We continue to prio
Slide 45: Management actions and second half plans
management actions and together with the benefits arising from active management of our credit portfolio, increased our solvency II surplus by £0.1 billion during the period. This increase comprises a £0.2 billion increase in own funds which is a direct increase in shareholder value. Whilst our firs
Slide 46: Andy Briggs, Group Chief Executive Officer
Andy Briggs Group Chief Executive Officer PHOENIX GROUP
Slide 47: Outlook: cash generation
Thank you Rakesh. I will now focus on Outlook, before we move to Q&A. We’ve already talked about resilience, and it’s more of the same going forward. So I will cover the outlook for cash and growth. Starting with Cash. As Rakesh said, we expect our in-force business to deliver £5.9 billion of cash g
Slide 48: Dividend coverage
business. This means that the dividend is very safe, with a gross coverage ratio of 3.1 times, and that we can fund the range of growth options we now have.
Slide 49: Longer-term cash generation and dividend
If we then look longer term, we get the balance of our £19 billion cash generation from existing business, so after the £5.9 billion to 2023, a further £13.1 billion from 2024 onwards. After debt and interest that leaves an £8 billion excess, enough to cover the dividend for a further 16 years, out
Slide 50: Outlook for growth: consolidation driver
So let’s move on to look at the outlook for growth, aligning this to the wedge. As the U.K.’s largest long-term savings and retirement business, we need to understand the major drivers of change in UK savings and retirement. And we see three of them, as shown on the slide. First, insurers are consol
Slide 51: Defined contribution pensions growth
The second driver is strong defined contribution pensions growth. There are two key elements to this. The first is auto enrolment, coupled with a shift from defined benefit to defined contributions. This has tripled contributions since 2012. At Phoenix, we are a top three player in workplace pension
Slide 52: Bulk purchase annuity market driver
worried about socially distanced manufacturing, and how you retail in the very different world of COVID-19. And imagine that you then get the email, from your pension scheme actuary, saying you need to worry about credit risk within your pension fund. You are going to want, more than ever, to de-ris
Slide 53: Second half priorities
So what are our priorities for the second half of this year, to turn those strategic opportunities into reality? For Heritage, the priority is delivering the cash and the management actions, which are weighted to the second half of this year, with continued strong focus on customers. For M&A and int
Slide 54: Sustainability
I also want to emphasise the importance of sustainability. With our scale now, we are much more than just a financial engineering consolidator. We have a much broader core social purpose. And I see sustainability at the centre of that. Championing sustainability, in the way that we run our business,
Slide 55: Future calendar and capital markets day
And finally, our future calendar. The only point I’ll draw out here is that we are planning a capital markets day, on the 3rd of December. This will be very much as we usually do, a working session, where we will deep dive into each business area, and give you more colour on our plans. So this isn’t
Slide 56: Q&A
Slide 57: Appendices
Appendices Leverage ratios ll Movement in assets under administration il UK Open — movement in AUA by product type !V Movements in holding company cash and cash equivalents Vv Change in Life Company Free Surplus VI — Estimated PGH Solvency II surplus and coverage ratios Vil Operating profit analysis
Slide 58: Appendix I: Leverage ratios
Appendix |: Leverage ratios Fitch leverage ratio HY20 leverage ratios 33 4 Fitch basis) 27% ) 30 29% 29% IFRS basis®@ 44% (4) eae 27% SIl leverage) 33% 27 range: 25-30% . Pa y + _ IFRS leverage ratio classifies RT1 as debt 24 ; n Funding capacity at + Our funding capacity is driven by a combination
Slide 59: Appendix II: Movement in assets under administration
Appendix II: Movement in assets under administration £248.3bn £24.7bn £(0.8)bn £(3.3)bn £(4.3)bn £(8.4)bn £(1.8)bn £1.2bn £0.1bn £97.5bn Net flows UK Heritage UK Open Europe £126.1bn FY19 AUA Gross inflows £0.5bn £1.4bn £3.7bn £248.3bn £(4.6)bn £26.2bn £94.1bn £128.0bn Gross outflows WM UKHeritage M
Slide 60: Appendix III: UK Open movement in AUA by product type
Appendix III: UK Open — movement in AVA by product type Workplace Petal Wrap SIPP Gross inflows -new Gross inflows - existing Outflows Market movements Reclassified HY20 AUA FY19 AUA Gross inflows -new Gross inflows - existing Outflows Market movements Reclassified HY20 AUA =o - £0.1bn : £(1.3)bn FY
Slide 61: Appendix IV: Movements in holding company cash
Appendix IV: Movements in holding company cash and cash equivalents £m Opening cash and cash equivalents Total cash receipts Uses of cash Operating expenses Pension scheme contributions Non-operating cash inflows/(outflows) Debt interest Shareholder dividend Total cash outflows Equity and debt raisi
Slide 62: Appendix V: Change in Life Company Free Surplus
Appendix V: Change in Life Company Free Surplus ange in Life Company Free Surplus in 1H 2020 £(0.4)bn £(0.4)bn mmf£o.ibn am Opening free Surplus generation | Management New business Economic, Free surplus before Cash Cash Closing free surplus) and expected run- actions strain financing and cash remi
Slide 63: Appendix VI: Estimated PGH Solvency II surplus and coverage ratios
Appendix VI: Estimated PGH Solvency II surplus and coverage ratios PGH Solvency Il coverage ratio PGH Shareholder capital coverage ratio —— £4.4bn Surplus fea% Surplus £4.4bn Surplus £4,0bn ea £3.1bn £16.3bn £10.8bn £11.9bn FY19°) Phoenix HY20(2) Combined HY20°7*) FY192) Phoenix HY20(12) Combined HY
Slide 64: Appendix VII: Operating profit analysis
Appendix VII: Operating profit analysis 1H 2020 operating profit drivers New business profits driven by 1H B£(12)ma] £361m 2020 BPA deals and higher volumes £142m £272m in SunLife business Favourable longevity experience more than offset by negative mortality and expense experience £201m Assumption
Slide 65: Appendix VIII: Asset mix of life companies
Appendix VIII: Asset mix of life companies Total shareholder, non- At 30 June 2020 profit and supported with- Total assets() £m profits!) Cash deposits 5,898 5,766 8,012 13,778 19,676 Debt securities Debt securities — gilts 4,907 13,981 5,344 19,325 24,232 Debt securities — other bonds 14,065 24,032
Slide 66: Appendix IX: Credit quality by sector for shareholder debt portfolio
Appendix IX: Credit quality by sector for shareholder debt portfolio At 30 June 2020 £m Industrials?) Consumer, Cyclical’23) Tech and Telecoms Consumer, Non-cyclical Banks Financial Services Utilities Gilts/Sovereign/Supra/sub-sov Real Estate!) Insurance Oil and Gas Financing Loans Infrastructure Ot
Slide 67: Appendix X: Debt maturity profile
Appendix X: Outline of debt maturity profile as at 6 August 2020 £500m £250m Hi oH2 H1 H2 H1 #H2 Hi H2 H1 H2 Hi H2 Hi 4H2 4H1 4H2 4H1 4H2 4H1 4H2 Ht H2 2021 2022 2023 2024 2025 2026 2027 2028 2029 2030 2031 Ml Phoenix Unsecured Senior Bond ll Phoenix Tier 3 bond Tier 2 bond (ex-ReAssure) Mill Tier 2
Slide 68: Appendix XI: Corporate structure
Appendix XI: Corporate structure as at 6 August 2020 [$750m Restricted Tier 1 bond (2025)? [ £500m Tier 2 bond (2031) ] [ $500m Tier 2 bond (2026) ] [ £250m Tier 2 bond (2024) ] [ ] [ ] = [ €500m Tier 2 bond (2029) ] = [ £428m Tier 2 bond (2025) ] Phoenix Group em ([ “2as0n Teer bond 202) 7) Holding
Slide 69: Appendix XII: Footnotes
Appendix XII: Footnotes (1) (2) (3) (4) (5) (6) (7) (8) (9) (10) (11) (12) (13) (14) (15) (16) (17) (18) (19) (20) The HY20 Solvency II capital position is an estimated position and reflects a dynamic recalculation of transitionals for the Group's Life companies. Had the dynamic recalculation not be
Slide 70: Appendix XII: Footnotes (continued)
Appendix XII: Footnotes (continued) (21) (22) (23) (24) (25) (26) (27) (28) (29) The HY20 Solvency II capital position for ReAssure is an estimated position and reflects a dynamic recalculation of transitionals for the ReAssure Life companies. It also reflects a change in methodology in the transiti
Slide 71: Disclaimer and other information
Disclaimer and other information + This presentation in relation to Phoenix Group Holdings plc and its subsidiaries (the ‘Group’) contains, and we may make other statements (verbal or otherwise) containing, forward-looking statements and other financial and/or statistical data about the Group's curr
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