Standard Life plc (SDLF) Earnings Call Transcript & Summary

Right. Well, a very good morning to all. I wonder if you could just shut those doors there at the back. Thank you very much. And a warm welcome to the Phoenix Group 2019 Full Year Results Presentation, somewhat of an auspicious day. 2019 was a year of significant achievement for Phoenix, in which the group delivered all of its strategic priorities and announced the acquisition of ReAssure Group plc. The growth achieved by Phoenix during its time listed on the London Stock Exchange is pretty remarkable and a testament to the outstanding leadership over this period and an exceptional team of talented colleagues. However, we remain incredibly ambitious and look forward to growing the business further in the future. Phoenix recognizes the importance of integrating environmental, social and governance considerations into our everyday operations. As a business, we're uniting behind the sustainability vision of committing to a sustainable future and have identified 4 areas of commitment: deliver for our customers, foster responsible investment, reduce our environmental impact, and be a good corporate citizen. These commitments are underpinned by working ethically with our supply chain and strong governance and good business practices. Our achievements to date, plans and aspirations are set out in our first sustainability report, which we published today and is available via our website, and I do encourage you to take a look. Moving forward, we'll be setting targets for each of these areas, and we look forward to talking to you about our progress in the future. Our results presentation today reflects a time of change at Phoenix. We announced in November that Clive would be retiring today and that he would be succeeded by Andy Briggs. With over 30 years of experience in the sector, Andy is the natural successor to Clive and joins Phoenix at a time of great opportunity. We are delighted to have him join our family. This morning, we announced that Jim will also be retiring this year and will be succeeded by Rakesh Thakrar. Rakesh has been with Phoenix for 18 years and has been integral to the success of the organization over that period. We're delighted to be able to promote internally into this role. The Board and I have great confidence in Andy and Rakesh as the future leaders of Phoenix. Clive and Jim will begin our presentation today by providing an update on Phoenix' achievements in 2019. They will then hand the baton to Rakesh and Andy, who will update you on our growth aspirations and outlook for 2020 and beyond. Clive?

Nick, thank you very much, and good morning, everyone. Phoenix delivered another strong year. We report results today that are either in line with or slightly ahead of consensus across all of our key financial performance indicators. This extends Phoenix' track record of meeting or exceeding all publicly stated financial targets. Our KPIs highlight Phoenix' ability to deliver dependable cash generation year after year and the ongoing resilience of our regulatory capital position. In March 2019, I set out Phoenix' strategic priorities for the year ahead. Phoenix has delivered on all of these. Jim will walk you through the financials in a moment. Meanwhile, our Standard Life Assurance transition program is on track to meet our GBP 1.2 billion synergy target. In November, we announced an enlarged strategic partnership with TCS to support the delivery of a differentiated and scalable customer services and IT operating model, which will be crucial in Phase 3 of our transition program. Improving customer outcomes is central to Phoenix' mission. We have made good progress on customer initiatives and maintained high levels of customer services throughout 2019. Phoenix now has a range of growth opportunities and is writing new business across both its Heritage and Open segments. New business written during 2019 delivered GBP 475 million of incremental long-term cash generation. Finally, we were delighted to announce the acquisition of ReAssure on the 6th of December, a transaction which will deliver value to shareholders over many years to come. Today, we set a new 1-year cash generation target for Phoenix of GBP 800 million to GBP 900 million. And we remain on track to deliver our 5-year target from 2019 to 2023, which has been upgraded for the impact of 2019's new business to GBP 3.9 billion. We, therefore, expect to deliver a further GBP 3.2 billion over the next 4 years, approximately GBP 800 million a year. Phoenix' cash generation guidance is based on in-force business only and therefore, excludes the impact of any new business to be written in the future. At the end of each year, we, therefore, have to roll forward our cash generation guidance to take account of new business written in the year and other known differences. Last March, we estimated that the business in-force as at the 31st of December 2018 would generate GBP 12 billion of cash over its lifetime. During 2019, we have added GBP 700 million to this guidance, primarily through the writing of new business and the overdelivery of management actions. This incremental cash generation has offset the GBP 707 million of cash remitted during the year. We, therefore, estimate that the long-term cash generation from business in-force as of the 31st of December 2019 will be GBP 12 billion. Our growth options are clearly bringing more sustainability to our cash generation. So based on the 2019 experience, The Wedge hypothesis is working. On the 6th of December 2019, we announced our intention to acquire ReAssure for GBP 3.2 billion. With GBP 84 billion of assets under administration across 4.1 million policies, ReAssure will bring GBP 7 billion of incremental cash to the group. It is our largest acquisition to date and confirms Phoenix as Europe's largest life and pension consolidator. This transaction is strategically compelling and meets all of our acquisition criteria. We expect to deliver GBP 800 million of cost and capital synergies by integrating the 2 businesses, making the transaction value-accretive to all of our investors. Not only does the GBP 7 billion of incremental cash generation support a proposed dividend increase of 3%, but because GBP 2.7 billion is generated by year-end 2023, this will provide funds to support additional growth opportunities. Finally, the deal was funded in an efficient manner, maintaining our investment-grade rating without the need to raise fresh equity from our institutional shareholders. In this context, we look forward to welcoming our new shareholders upon completion, Swiss Re and MS & AD, who will have circa 14% each in the enlarged Phoenix Group. We are focused on completion of the transaction, which we target for July, subject, of course, to regulatory approval. On the 31st of December, ReAssure completed the acquisition of the Old Mutual Wealth business from Quilter. Announcing this transaction would generate synergies of circa GBP 200 million. These synergies are in addition to the GBP 800 million target that Phoenix had set but were excluded from the pro forma own accounts figure disclosed at the announcement. Why? Because we had to comply with prospectus rules. Reflecting these anticipated synergies in the pro forma own funds would reduce the price to own funds ratio from the advertised 91% to 87%, further illustrating the value-accretive nature of this deal. Jim and his colleagues in treasury have made significant progress with our funding strategy. Following a revision by Fitch of our ratings outlook, which moved from stable to positive, we issued a USD 750 million restricted Tier 1 bond in January. With hindsight, this looks brilliant. Fitch categorized the RT1 as equity in their leverage calculation. And therefore, our pro forma leverage ratio has been reduced by 4% to 26%, bringing it comfortably within our target range of 25% to 30%. Since the announcement of 3 months ago, we have been working closely with our future colleagues at ReAssure to progress for change in control application. And I want to publicly thank Mark Hodges, the CEO of ReAssure, for their help with this work today. The pre-application was submitted at the end of January, and we are on track to make our final application at the end of March. And finally, I thank our shareholders for their support for this transaction with a 99.99% vote cast in favor at last month's EGM. Phoenix delivers value to investors through M&A by buying well and then delivering cost and capital synergies. We have a strong track record of integrating businesses and have been able to deliver higher cost synergies over time than those indicated when each deal was originally announced. This exhibit, the first time we've shown it, shows our overdelivery for AXA, Abbey and the Standard Life Assurance transactions. The GBP 40 million per annum cost synergy target announced for the acquisition of ReAssure excludes any savings associated with combining the customer service and IT operations of the 2 legacy businesses. Our priority in the short-term reflects our desire to protect enterprise stability in both groups. The group continues to have a stable and sustainable dividend policy. Our proposed 2019 final dividend is 23.4p per share, bringing the full year payout to 46.8p per share. Acquisitions have been a trigger to increase the dividend, and we announced a proposed 3% increase following the ReAssure transaction effective from 2020 final dividend. This increase, the fifth during my time as CEO, takes the cumulative dividend increase to 50% over 10 years, equivalent to a 4.1% CAGR. I will now pass you over to Jim. Jim, the floor is yours.

Thank you very much, Clive, and good morning, everyone. So today, Rakesh and I will talk you through the group's progress against these 2019 strategic priorities, and I will begin by talking you through the group's performance against its financial targets. As Clive said, we have had a strong year financially, exceeding our cash generation target and exceeding the year comfortably within our target range for solvency and below our target range for leverage. We have also had a strong delivery across our financial performance metrics for new business and IFRS operating profit. These financial highlights demonstrate that we continue to manage our in-force business for resilience and cash generation and are also focused on growth through new business. At our Capital Markets Day in November, we announced 2019 cash generation of GBP 707 million, ahead of the GBP 600 million to GBP 700 million target range. Management actions contributed about 1/3 of gross cash generation and continued to supplement cash generated from the organic unwind of our in-force business and the distribution of free surplus. Gross cash generation in the year of GBP 957 million provides dividend cover of 2.8x and includes the first dividends from Standard Life Assurance since the acquisition. As you know, cash is king at Phoenix, and the cash generation remitted to group from our insurance companies remains our key metric. We expect the combined group post-ReAssure to generate GBP 19 billion of cash over the life of the in-force business. This guidance excludes incremental cash generation from new Open business, new BPA deals and any further M&A. Additionally, it only includes 4 years' worth of management actions and does not place any value on management actions beyond 2023. We will provide new cash generation targets for the combined group at our full year 2020 results in March of next year. The format of this slide will be very familiar to you. It states out the sources and uses of cash for Phoenix from now until the end of 2023 and overlays the impact of the ReAssure transaction. As you can see, the ReAssure transaction delivers significant cash over this period, reflecting the high level of cost and capital synergies we expect to deliver as we bring the 2 businesses together. Even after a potential GBP 1.2 billion repayment of debt, the group holding company is forecast to end 2023 with GBP 1.4 billion more cash than it had at 31st December 2019. This cash is available to support a range of growth options that Rakesh will outline later to bring further long-term stability to cash generation. Turning now to resilience. We present to you sensitivity of Phoenix' stand-alone GBP 3.2 billion cash generation target between 2020 and 2023 to various stress events. As you will be aware, Phoenix has a low appetite to market risks and uses hedging to mitigate the majority of its exposure to equity, currency and interest rate risk. This translates into the low sensitivity to these risks we present today. You will notice that Phoenix' sensitivity to a 20% fall in equities is actually positive. On 5th December 2019, we took out a GBP 700 million equity hedge against the residual shareholder equity risk exposure of the ReAssure business. In the period prior to completion, this means we are effectively overhedged on equities and therefore, would see an increase in our cash generation should equity markets fall. Phoenix' main exposure continues to be longevity risk on its annuity business. Here, we modeled the impact of every annuitant living 6 months longer. And even in this unlikely scenario, the group will be able to service its debt obligations and continue to pay its dividend. This resilience in our cash generation brings increased certainty to our dividend. This slide shows the combined group sources and uses of cash beyond 2023. The ReAssure transaction increases the illustrative holding company cash, following repayment of all outstanding shareholding borrowings by 50%, bringing increased sustainability to the annual dividend, which has increased by only 40%. Moving now to Solvency. Phoenix maintains a strong capital position with a Solvency II surplus of GBP 3.1 billion and a shareholder capital coverage ratio of 161%. This position is stated after the deduction of the 2019 final dividend. 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 or unit-linked business is restricted under Solvency II and the shareholders' share of our with-profit estate. Adjusting for these 2 items provides a proxy for shareholder value at 31st December 2019 of GBP 6.1 billion, which equates to GBP 8.45 per ordinary share. This value proxy is effectively ex div. It also places no value on future new business from vesting annuities, BPA and open channels or management actions. During the year, we saw the PGH group surplus decrease slightly from GBP 3.2 billion to GBP 3.1 billion. The main driver of this reduction was the capital dis-synergy arising from our Brexit preparations, where a loss of diversification and transitional benefits arose from the Part VII transfer of the group's European branch business to Standard Life International Limited because it is a standard formula company. The strain of GBP 200 million from new business during the period primarily relates to the cost of BPA and vesting annuities written in the Heritage segment, as new business written within the U.K. Open and Europe segments remains capital-light. Economic variances were a small negative, reflecting the group's hedging strategy for equity, currency and interest rate risk, which brings resilience to the group's solvency position. The group recognized a GBP 120 million benefit from changes to longevity assumptions, which included moving to the CMI 2018 mortality tables. This was largely offset by changes in the assumptions for house price inflation, dilapidations and property volatility used to value our equity release mortgage portfolio. We also saw small strains from a number of other assumption changes across the group, together with the expected corporate project costs. In the second half of 2019, management actions added a further GBP 300 million to our Solvency II surplus, taking the total benefit for the full year to GBP 650 million. This included GBP 145 million of capital synergies on the Standard Life Assurance business. Management actions included our ongoing investment in illiquid assets, completion of a further tranche of equity release mortgage securitization and matching adjustment fund optimization. The management actions we deliver each period contribute to free surplus available in the life companies, which will over time be remitted as cash generation to group. We, therefore, see a timing lag between the impact of management actions on the surplus and management actions within cash generation. One of our most material management actions continues to be the sourcing of illiquid assets to back annuity liabilities. The yield pickup associated with the illiquid nature of these investments more than outweighs the additional risk capital driving an overall benefit to Solvency II surplus. In 2019, we originated GBP 1.3 billion of illiquid assets across a broad range of maturities and spreads, including investments in social housing, student accommodation, health care and equity release mortgages. With an average deal size of GBP 30 million, 2019 origination was well diversified by type and had an average credit rating of A+. As at 31st December 2019, our illiquid asset portfolio was GBP 5.3 billion and represented 26% of assets backing annuities. With nearly 90% of our illiquid asset portfolio having a rating of A or above, we are comfortable that our credit rating remains within risk appetite. We target a 40% allocation to these asset classes. And whilst we continue to be driven by value rather than volume, we expect to originate about GBP 1 billion of illiquids this year. Phoenix' capital position remains resilient to risk events. Our target shareholder capital coverage ratio is 140% to 180%, and the sensitivities set out show that Phoenix remains well within this range under these scenarios. We are currently experiencing a period of market volatility generated by the uncertainty surrounding the potential impact of COVID-19. By end of February, we had observed a 13% fall in equity markets, a 17 bps widening in credit spreads and a 40 bps fall in interest rates. The sensitivities we disclose provide clear guidance on the impact that these changes will have on our group solvency. As a result, we estimate that this recent volatility has had a minimal impact on our solvency position. We, therefore, continue to demonstrate resilience to risk events and remain well within our stated solvency range. We have delivered a strong set of IFRS results with operating profit of GBP 810 million and profit after tax of GBP 116 million. The increase in operating profit year-on-year is primarily driven by the inclusion of a full 12 months of results of the Standard Life Assurance businesses, offset by lower year-on-year assumption changes, which included GBP 190 million release of longevity reserves following the move to CMI 2018. Investment return variances include losses on equity hedges held across the group to protect the group's Solvency II surplus position and deliver resilience to cash generation. These losses have been partially offset by the positive impact of moving the asset portfolio towards our strategic asset allocation. We have also reported within nonoperating items a loss of GBP 169 million. This is primarily driven by the provision of future costs associated with Phases 2 and 3 of the Standard Life Assurance transition program, which are only partially offset by the recognition of the resulting reduction in future expense assumptions. Our second strategic priority for 2019 is to deliver the transition of the Standard Life Assurance businesses. Last year, we increased the targets for cost and capital synergies arising from the transition to a combined GBP 1.2 billion. Having generated a further GBP 145 million of capital synergies in 2019, we have now delivered 90% of the total target of GBP 720 million. And we expect the majority of the remaining capital synergies to come from a Part VII transfer of our U.K. insurance companies. We have made good progress towards our cost synergy target, delivering over 40% of the target reduction in the combined cost base. And finally, we have now realized GBP 28 million of one-off cost synergies by removing duplication in projects of the 2 legacy businesses. In summary, we are on track to deliver the GBP 1.2 billion combined synergy target for the acquisition. Our transition program is delivered in 3 phases. Phase 1 is substantially complete and delivered the end state operating model for the head office functions. Phase 2 is on track to deliver a multi-site finance and actuarial operating model by the end of this year. And we continue to work closely with the PRA to harmonize the group's 2 Solvency II internal models and are targeting harmonization approval in the first quarter of 2021. Phase 3 will deliver our end state operating model for customer service and IT by the end of 2022. This will be a hybrid model delivered through the enlarged partnership that we announced with TCS back in November. Improving outcomes for our 10 million customers continues to be central to our mission. During the year, we exceeded all of our targets and saw improved performance across the majority of metrics from 2018. Customer service metrics comprise 25% of the performance measures within the corporate component of the group's annual incentive plan. This weighting evidence is the importance that Phoenix attaches to the delivery of high-quality services to our customers. We continue to expand our digital proposition and recorded over 12 million log-ins by customers and over 5.5 million Standard Life mobile app session. Customers are able to top up, increase regular payments and consolidate pots through the Standard Life app, and gross new business flows of GBP 560 million were generated using this functionality in the year. To be successful, we must continue to invest in our proposition, and the launch of the passive default fund within the Standard Life workplace proposition and a variant of the offshore bond featuring capital redemption are evidence of this. We have also progressed a broad range of customer initiatives to ensure we continue to improve customer outcomes. I will now hand you over to Rakesh.

Thank you, Jim, and good morning, everyone. Our fourth strategic priority for 2019 was the delivery of new business. 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 2019, Phoenix saw gross inflows on new business across its 3 business segments of GBP 8.1 billion. We estimate that this new business will generate GBP 475 million of incremental long-term cash generation, circa 1.4x the 2019 dividend. Phoenix's Open business is capital-light and growing. In 2019, our Open businesses in the U.K. and Europe delivered gross inflows of GBP 7 billion. And this was from new business and GBP 240 million of incremental long-term cash generation. Both flows and cash generation are down year-on-year, primarily due to poorer performance across retail business, including Wrap SIPP. This performance reflects the tail-off in defined benefit to defined contribution pension scheme transfers and reduced inflows seen across the sector for market uncertainty. These challenges were partly offset in retail by strong flows into our drawdown product year-on-year. In contrast, it was a strong year for Workplace, which continues to be the engine for growth for our Open business, delivering over 60% of the 2019 incremental long-term cash generation. In 2019, auto enrollment increased from 5% to 8%, having increased from 2% to 5% in 2018. These increases have been the key drivers of incremental long-term cash generation, with circa GBP 50 million of the 2019 result coming from this rise. Excluding this one-off increase, incremental long-term cash generation from the new Open business would have been GBP 190 million. Our approach to BPA continues to be driven by value, not volume. We take a selective and proportionate approach, allocating about GBP 100 million of surplus capital per annum. In 2019, the BPA market was buoyant with an estimated GBP 40 billion of BPA completed. We were invited to price 72 deals, of which we priced 27 and completed 4. We also completed a GBP 1.1 billion buy-in from the PGL Pension Scheme, giving us around a 5% market share. The GBP 98 million of capital we put to work in the year on external BPA secured GBP 235 million of incremental long-term cash generation. The average payback period in 2019 was 6 to 7 years, 3 years shorter than the 2018, reflecting the underlying cash flow profile of the transactions completed. Phoenix is now an established participant in this marketplace and is committed to the further development of this franchise. Our final strategic priority for 2019 was growth. Clive has already talked about the growth that the acquisition of ReAssure will deliver. I will spend a few minutes explaining how we think about growth options at Phoenix and how growth will bring sustainability to our business. As Clive explained at the start of today's presentation, we provide guidance on the total amount of cash generation that our in-force business is expected to generate over its lifetime. At the start of 2019, we estimated this generation to be GBP 12 billion. Having delivered just over GBP 700 million of cash generation in the year, we would expect the remaining cash generation from our in-force business to have reduced to GBP 11.3 billion. However, as we have added to our long-term cash generation by writing new business and by overdelivering on management actions, today, we have restated our guidance for long-term cash generation, reflecting the business in-force at the end of 2019 to GBP 12 billion, demonstrating that growth brings sustainability to cash generation. We set out the hypothesis that new business could offset the runoff of our in-force business and bring sustainability to cash generation in an illustration we call The Wedge. Phoenix is now an established participant in the BPA market, and we have, therefore, updated our Wedge diagram to reflect our confidence that this is a dependable growth opportunity that we can fund from surplus capital. We continue to leave M&A as the top slice on our diagram. Whilst it remains the cornerstone of our strategy, the timing of deals are hard to predict, and the size of deals may require additional funding support. In 2019, the growth of our BPA and Open businesses has brought sustainability to cash generation. However, as we change as an organization, so will the relative size of each component of The Wedge. And as we deliver on our strategy, the overall sustainability of cash generation will continue to improve. As Jim explained earlier, the ReAssure transaction generates significant cash over the next 4 years due to the delivery of material cost and capital synergies over this period. We, therefore, expect to have GBP 1.4 billion of cash available to increase support to our range of growth options. These include selective and proportionate participation in the BPA market, funding of M&A that meets our acquisition criteria and investment in customer initiatives and proposition to support growth of our Open business and manage the runoff of our Heritage business. Delivering growth through these range of options brings more sustainability to long-term cash generation. I will now hand over to Andy.

Thank you, Rakesh, and good morning, everyone. I want to start by paying tribute to Clive and Jim. When you think back to the position that Phoenix was in when they both started nearly a decade ago, I think it's hard to think of a CEO and CFO of a U.K. financial services business that have done a better job over this period. They've also created a remarkable platform for the business going forward, so I do feel very fortunate to be taking over as CEO. I want to cover 3 areas today: first, why I joined Phoenix? Why do I think it's a great business? Second, what do I see as the key market trends? Why am I excited about Phoenix's future potential. And third, our key priorities for 2020. So first, what attracted me to Phoenix? I've worked in insurance for over 30 years, and I believe successful insurance businesses have 2 key characteristics: they have a clear strategy and a simple financial framework. Phoenix has both of these, which is why it's successful. Our strategy is to focus on just 3 things: first, we are a leader in running Heritage businesses. We're a safe home for customers in closed product lines, and we run this in a way that generates a reliable flow of cash to shareholders. Second, we have a strong track record in completing value-accretive M&A and successfully integrating businesses, delivering cost and capital synergies. And third, we're building a thriving and growing Open business. A simple, clear strategy and very much evolution, not revolution, from my perspective. I also really like the simplicity of our financial framework. Insurance can be a complex business, so it's really important to focus on the basics. First and foremost, cash is king, and the sustainability of the dividend is paramount, underpinned by a strong, diversified, resilient balance sheet. And then having delivered both of those, we focus on long-term cash generation, the GBP 12 billion soon to become GBP 19 billion and sustaining and growing that into the future, so that we can firstly sustain and in due course, aspire to grow the dividend. Again, as the financial framework is concerned, it's evolution, not revolution from me. The second reason I joined Phoenix is because I think the business is extremely well placed to take advantage of the key drivers of change in the industry. Given that post the ReAssure deal, we'll be the U.K.'s largest life and pensions provider with over GBP 300 million of U.K. assets -- sorry, GBP 300 billion of U.K. assets and 14 million customers. I see 3 key market drivers, and these are shown on the slide. So first, insurers are choosing to sell closed books to take advantage of the opportunity to release trapped capital and because they struggle with cost and efficiency due to legacy systems and regulatory change. Business models are bifurcating. And in my view, there's plenty more to come. We've already indicated there's around a GBP 400 billion opportunity in the U.K. with a further GBP 200 billion in Germany and Ireland. Now it's one thing to have a view on key trends. But to win, a business needs distinctive competitive advantage. Phoenix is clearly well placed in this market with differentiated capability in Heritage management and in M&A and integration delivery. And hence, this remains our biggest value driver today. The second key trend is that corporates are derisking. I have yet to meet the finance director of a manufacturing business who is pleased to have a large defined benefit pension scheme attached. What's interesting is that derisking strategies are well advanced, and buy-ins and buyouts are increasingly affordable for more and more schemes. Hence, the market is growing rapidly. What is Phoenix' advantage here? It seems to me that annuities are one of the largest and most attractive profit pools of business. But the concern becomes when a balance sheet is heavily weighted to annuities and the consequent risks. At Phoenix, only around 10% of our U.K. balance sheet is annuities. For others, it's 30% to 50% for the multi-line players and obviously 100% for the mono-line players. I think the fact that we are only at 10% is a real advantage for Phoenix because we can grow annuities and it will still be a low proportion of our balance sheet. And given it's a lower proportion, we should get better diversification against our existing Heritage business and therefore, be more capital-efficient as we grow our annuity business. Given this is a space where demand is outstripping supply, and given we will take and will continue to take a selective and proportionate approach, I'm confident we can create good value for shareholders here. The third trend is the rapid growth in defined contribution pensions from auto enrollments, the shift from defined benefits, the aging population and pension freedoms. This creates 2 main opportunities. In Workplace Pensions, the margins are thin, and hence, scale is critical. We're a top 3 player. And cost efficiency is also key. This is where our business model gets exciting. Our TCS partnership, which historically has been focused on Heritage, would enable us to achieve market-leading cost efficiency as we enhance and extend it to our Open business, attractive, competitive advantages. The other opportunity is helping the increasing number of over 50s as the population ages to consolidate and manage their journey to and through retirement. At the moment, only the small proportion who pay for advice are getting this help. And we participate here through our partnership with Standard Life Aberdeen. But the majority also need help. And the advantage Phoenix has is our scale of existing customers as the U.K.'s largest life and pensions provider. We want these customers to turn to us first for that help. Three major market trends. Phoenix is well placed for all 3, and so we have a range of attractive options going forward. Hence, why I'm excited to be joining. Now a bit of excitement is a good thing, but execution and delivery will always trump everything else. So let me come on to my final area, our priorities for 2020. Clive and the Phoenix team have a faultless track record of delivery that I fully intend to continue. And our strategic priorities follow on from our strategy in the same order. So first, we will seek to deliver our GBP 800 million to GBP 900 million cash generation targets while maintaining our strong balance sheet. Then we'll continue to successfully transition the Standard Life Assurance business to deliver the GBP 1.2 billion cost and capital synergy targets and complete the ReAssure deal and start the integration and delivery of the GBP 800 million synergy target. Then we will continue to profitably grow the Open Business and selectively participate in BPA. I put a fifth priority on here because I strongly believe the best businesses have not just good but the very best talent. I've been hugely impressed by the caliber of the people here at Phoenix. Rakesh's succession to CFO is a great example. So a key priority for me is continuing to build in-house talent and where appropriate, supplementing externally because always striving to continually build our people capability will underpin our future success. We clearly have other priorities we focus on. Nick mentioned earlier sustainability. But these are the key focus areas to ensure we deliver short-term financial performance. So in summary, we have a clear strategy and a simple financial framework. We're well placed for the key market trends, and we have a clear set of priorities for 2020. And now I'll hand you back to Nick. Thank you.

Thank you, Andy. So 2019 was an exceptional year for Phoenix, in which we delivered cash, resilience and growth. The proposed acquisition of ReAssure marks another major milestone in our growth journey and confirms Phoenix as Europe's largest life and pensions consolidator. We remain focused on delivering significant value from our in-force business over many years and are excited at the prospect of growing a thriving Open business on top of Phoenix' stable Heritage foundations. We are not a sentimental organization, but it is only appropriate that my final words should be about Jim and Clive, who have been such wonderful stewards of this business. Jim has brought an immense amount to Phoenix since joining us in 2012. He's a classic finance director, immovable, utterly determined and focused. He treats our money as if it were his own, and he has a real drive to get things done. It is typical of him that he has invested so much of his own technical skill in grooming Rakesh as his successor. I've always admired the way he resolutely defended the performance of the Scottish rugby team, a faith so seldom rewarded but gloriously so this weekend. Clive is an institution. It is not just that he leaves exceptionally big shoes to fill. They are uniquely shaped, too, an analogy perhaps more appropriate given his -- who his father was. While it's hard to believe that this really is his last day with us, Clive, you leave behind you so many friends and admirers, not just for what you have achieved but the way in which you have done so energetically, eloquently, intelligently and compassionately. The 2 of you have built the strongest of foundations for Phoenix. And now we will look forward to the next phase under Andy and Rakesh. Congratulations, and thank you both for a job well done. Thank you for your time today. The formal presentation is now over, and we will move on to Q&A. Please wait for the microphone to be brought to you and give us your name and the institution for whom you work. And then we will allocate the questions accordingly.

Greig Paterson, KBW. Three quick questions. One is the GBP 800 million to GBP 900 million target. If you complete the ReAssure deal in July, is there a potential for a divi from ReAssure to come up towards the end of the year? And second question is in terms of downgrades and the risk thereof. I think, on Slide 26, you have a spread sensitivity that includes a downgrade assumption. Could you just remind us again what that is? And then maybe speak about your asset base, if there's any potential downgrade risk there? And finally, in terms of the internal deal that you did with your own pension fund, I was wondering if you could just illuminate how the strain there was financed, if it added to cash? And most importantly, whether there's some further opportunities in your 3 pension funds for further deals?

I think the first one was on dividend, the second one on the downgrade and our sensitivity and then the strain on financing. So why don't I deal with the first one, dividend? There's going to be no change in dividend. So it's imaginative, and thank you for leading the witness. But we're very straightforward. Our policy is stable and sustainable, not defined by management but by the Board. And we have been clear about that policy. And we are proud of the 3% already announced of the dividend related to the ReAssure deal, and there will be no change between now and the closing thereof.

The GBP 800 million to GBP 900 million is just from the Phoenix and SLAL legal entities. So where there is the potential of dividends from the ReAssure legal entity, and that would be in addition to the GBP 800 million to GBP 900 million.

So let me deal with the downgrade question. And so on Slide 26, I think it is, you see the sensitivities. And under our sensitivity to credit is an average of 120 bps, and that range is depending on the rating. So it ranges from 37 bps to 267 bps and applied across the different ratings. And we assume a 10% allowance for defaults and downgrades. So as we reflect those stresses, we assume that 10% of the amounts would be -- come through as other defaults or downgrades. So I think it's an appropriate stress with due loans for downgrades and defaults.

Sorry, is there any risk in the balance sheet now currently downgrades...

No, I mean, the thing I would say, Greig, is the book is well diversified by both industry and by name, as you would expect. In terms of those industries which are topical in today's climate, for example, airlines, we have no exposure to airlines within Phoenix. Similarly, in the travel sector, we have no exposure. And we have an absolute de minimis exposure to oil and gas of less than 1% of the book. And similarly, in ReAssure, my understanding is there is no exposure to airlines either. So I think in terms of the topical subjects for today, I don't think there is any concern.

It's Jon Hocking from Morgan Stanley. I've got 3 questions, please. Firstly, on the ReAssure transaction, is there any similar effect when they complete L&G mature savings, as there was with Old Mutual Wealth, in terms of having an uplift on the synergies? That's the first question. And secondly, just to look back on the sort of credit book of ReAssure. I can see that, if I understand correctly, you pre-hedged the equity exposure within ReAssure, presuming there's no hedge on the credit. Is that correct? And how can we be comfortable about their BBB book? And just finally, in terms of the general credit environment. Is that an opportunity for you to accelerate the GBP 1 billion of allocation to illiquids? Or how are you thinking about that?

Okay. So I'll pick up on the credit questions, also the hedging. Within our book, we don't hedge. Basically, the credit within our book, we think that is rewarded risk. In terms of the ReAssure position and the numbers at June '19, which were the last disclosed numbers, I showed that their exposure to BBB was 32% of the credit book. That has substantially reduced and today stands around the mid-20s. And they've rotated that book into higher-yielding assets with active management of the portfolio. So I think, again, we're well placed there. In terms of the ReAssure and the completion of the transaction, the GBP 800 million of synergies that we've guided to you includes some GBP 400 million or so from capital-related initiatives which are unique to Phoenix completing that transaction. And anything that they get from the inclusion of the Old Mutual Wealth will be over on top of that.

Then I think, your third question, in terms of current credit markets and illiquid assets, I think there is the potential for us to look more at illiquid assets over time. But this is an area where, again, you need a very selective and proportionate approach. And we'd need to be confident we've built the capabilities and the systems and processes to manage carefully. And I think it is something we will be looking at on an ongoing basis. I'm also conscious, Greig, it's probably -- it's about 5 years since I was sat at the front of a results presentation. So I've done a lot with investors over the interim period but not sat on the front. I'm glad things -- some things never change. And it's always first, Greig Paterson, 3 questions. So that's reassuring. But we didn't answer your third question around the internal BPA. I don't know, Rakesh, you want to...

Yes. So we -- as you are aware, Greig, we did a GBP 1.1 billion PGL Pension Scheme buy-in. This was a second buy-in. So we've already done one previously a couple of years ago. And this was funded out of own resources, that the cash generation in relation to that buy-in was already included within our forecast for cash generation. It was part of our management actions. Now I think that second part of your question, Greig, related to other future opportunities for other pension schemes, and you may be aware that we do have 2 other pension schemes within the group. But clearly, that is a discussion between ourselves and the trustees and then the optionality that the trustees may wish to undertake in the future. But clearly, from our perspective, and as you know, we do carry out BPA transaction and would be an option for us should the trustees be willing to engage in that area.

Gordon Aitken from RBC. I've got a couple of questions on mortality and on corporate bonds. And the first one on mortality. Can you just split the gain between the base table and the improvements? And secondly, on the improvements, I mean, you know that CMI '18 is a 6-month reduction. 3 months of that was due to basic deaths in '18, and 3 months was due to the smoothing factor changing. Just -- can you tell us what smoothing factor you're using as -- are you still on 7.5 or have you moved to 7? And third, on corporate bond spreads pushing out. Just -- I mean, we often hear in businesses such as yours that on periods like last couple of weeks, this morning when spreads push out that ironically, of course, stocks -- your stock gets whacked. But in a business, you love it. And you just go out, take the opportunity to go out and pick up yield. And just talk about what you have been doing over the last couple of weeks?

Okay. So your questions in terms of mortality, we'll have to come -- I'll have to come back to you on the smoothing factor because I don't know whether it was 7 or 7.5.

Yes. I can pick up the smooting factor, Jim.

Yes. Why don't you do it.

So the smoothing factor. So as you're aware, the thing with CMI '18, there was a 6 months general change from that '18 table, and I think half of it related -- it's about 3 months related to change in smoothing factor from reduction from moving to 7, I think the CMI '18 had quoted. And the balance was just general experience coming through. And so in relation to the smoothing factor, Phoenix currently use 8. So we have to apply it to our business. And for those who probably not -- may not be aware that the lower the smoothing factor, the more emphasis is on the more recent data. So we've left it at 8 because we think that's a better fit to our model. And we haven't changed that. And therefore, our focus was primarily on the experience.

And in terms of corporate bonds over the last couple of weeks, we have not done anything specifically out of the norm, though we are obviously closely monitoring market movements.

It's Andy Sinclair from BofA Securities. Three from me as well. First, I just wonder if you could remind us how much exposure you still have to Capita after having done the expand TCS deal? Secondly, it was just on the overhedged position to equities at the moment. Is that effectively comparing -- effectively the hedging is looking effectively across both Phoenix and ReAssure versus effectively the denominator just being Phoenix? What would it be if you kind of look at the combined entity? Would that be close to 0? And third, Andy, I just wonder if you could tell us a little bit more. You were saying that Phoenix can look to support customers kind of through that -- through retirement journey. Where are the capabilities today? And what do you need that's not there today?

Clive, do you want to touch on the Capita one?

Yes. So Capita -- so we 10 million policyholders in total. And residual, we are migrating away from Capita. That is a 2-year plan, and that migration comprised 1.8 million policyholders. And that will be completed by the end of 2020 -- 2021, spring of 2021. So it was a 2-year plan. So we have residual exposure for less than 20%, and those plans are well underway. And Capita continues to be an extremely good business partner and serving our clients well.

So on the hedging, you're right, Andy. There is a positive that comes through on the sensitivities from the equity hedging, if we see downfalls in the equity markets, and that is because on the 7th of December, immediately following the announcement of the ReAssure transaction, we took out hedges at Phoenix Group level to protect our position. We took out some GBP 700 million of hedges, which, together with the existing ReAssure hedges that are in their books, protects us for well over 90% of the equity risk within the ReAssure structure. And that leads us to, obviously, in the period prior to completion, to an overhedged position for Phoenix as a total. But within Phoenix, as you know, we always try to take out the majority of our equity risk as well, and that continues.

And then the third question, Andy, so focus to and through retirement. I mean, the way I tend to look at this is roughly 10% of the population that will own up to half of the assets will pay fees for advice and will be well served by wealth advisers and IFAs. And obviously, we participate in that in our support of the products into the Standard Life Aberdeen, Wrap SIPP and their advice capability there. The other 90% of the population, just over half of the assets, basically, they're not really getting much at all today. And I think the real opportunity for us, as I say, post the ReAssure deal, 14 million customers, over GBP 300 billion of U.K. assets, we're the U.K.'s largest Life and Pensions provider, our opportunity is to help those customers that -- most of whom probably don't need full advice, they just need a bit of a helping hand, but a guidance and support to understand how they consolidate the journey to and through retirement. And it's an area we've already started investing in. So Susan and the team have done a great job over the last year in building an online guided journey for customers, just Standard Life-branded customers. It's been available online. We've not particularly promoted it yet actively. So it's on a reactive basis. And we've had over GBP 500 million of positive net fund flows as a result of customers self-discovering this and going through that journey online themselves. So we think the opportunity to start to think about how we optimize that journey, promote it more strongly to Standard Life-branded customers and then think about how we would take it to Phoenix-branded and in due course, ReAssure-branded customers is an exciting opportunity. It's also kind of at the core of the purpose of what we're here for. We're here to help people enjoy a secure, healthy and prosperous retirement, and that's part of what we should be offering as part of that.

Andrew?

It's Andrew Crean from Autonomous. Three questions, if I can. Firstly, on Slide 22, you've given us the embedded value, essentially GBP 8.45. What is that including ReAssure? Secondly, could you give us a new business profit, either on embedded value Solvency II basis for the new business, the sort of discounted value? And thirdly, if we add back the GBP 250 million, which capitalization of your European operations, I think your cash generation in 2019 was over GBP 950 million and you're targeting a lower figure of GBP 800 million to GBP 900 million for this year. Why has that fallen?

So I'll pick up that last question, and I'll let you pick up the new business profit question. The GBP 250 million, you're quite right, was the cost that we incurred in terms of the Brexit preparations for the European business. That was deducted from this 7 -- to get to the GBP 707 million cash generation that we see. And really, the reason is just slightly different this year, it is to do with timing of management actions. So we've -- roughly 1/3 of that cash generation results from management actions. The recognition of these can be slightly lumpy depending on which side of the line we lie in terms of the year-end. And it is no more a reflection of that.

Who's going to tackle...

Okay. So on the new business, so just looking at it on a Solvency II basis and what's reflected on the analysis of change. Within Jim's slides, he spoke about, and in terms of new businesses, it's in 3 components. So one is the small -- a very small capital strain on the open business, and that's circa GBP 30-odd million, GBP 31 million. And then the second component will be our BPA transaction. The fact that we've invested capital, which has caused a strain on the overall group, which is just under GBP 100 million. And the third element of that will be our ongoing vesting annuities, which will also cause a strain on that new business. So those 3 components aggregate to GBP 0.2 billion strain on new business.

And I think your final question was on the shareholder value per share of GBP 8.45. It does not include the ReAssure number, and we'd have to update that in due course.

Sorry, Andrew, I think you were asking about the new business contribution. And we quote that for the open business at GBP 168 million.

GBP 158 million.

GBP 158 million.

GBP 158 million for the U.K. and Europe Open business. The new business contribution is basically the present value of future profits on the new business we've written.

Andrew, is that -- okay.

Dominic O'Mahony, Exane BNP Paribas. Just 2 questions, if that's all right, both on ReAssure. So you've got the RT1 out at a brilliant time. There's a bit left to do, as I understand it, to finance that transaction. I'm sure it will go well. But could you just talk us through the backup plan? If the bond markets do close in the next few months, can you use the revolver? How comfortable are you with that as a bridge? The second question is just on thinking about the solvency position of the combined entity postclose. You very helpfully gave us some pro formas previously, but that was Q3 '19. Could you give us your sort of best guess, if you're allowed to, on what the solvency position of the combined group would look like immediately after close, assuming markets stay where they are, which is a brave assumption?