Standard Life plc (SDLF) Earnings Call Transcript & Summary

Good afternoon, and welcome to the Phoenix Group 2020 Interim Results Presentation. My name is Claire Hawkins, and I'm the Corporate Affairs Investor Relations Director here at Phoenix. We're all adapting to new ways of working in a COVID-19 world, and we thank you for joining our virtual presentation. My colleagues and I are joined today by our sell side covering analysts. [Operator Instructions] But before we get to Q&A, let me hand over to Andy Briggs, our group CEO; and Rakesh Thakrar, our group CFO, who will take you through our interim results presentation.

Good afternoon, everyone, and welcome to the Phoenix Group half year results. It's been a busy and successful half year for Phoenix, as we completed the ReAssure deal and became the UK's largest long-term savings and retirement business. Our strategy remains clear, simple and unchanged. We do 3 things, which in turn drive delivery of The Wedge. First, Heritage, where we're the market leader in providing a safe home for customers in product lines, which are no longer actively marketed. It delivers a steady flow of cash for shareholders at bedrock of The Wedge. It is also the major driver of one of our key growth areas within The Wedge management actions. Second, we're the market leader in M&A and successfully integrating those businesses. And third, we're 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've run a broad range of savings and retirement businesses, all to deliver cash, resilience and growth. 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 the Phoenix business model. Financially, we are very resilient. We paid our dividend as planned and reconfirmed our cash generation targets, more from Rakesh on this later. Alongside this, we championed ordinary savers and pensioners, many of whom are our customers by making the case strongly why dividend should be paid when they can be afforded. And we took no form of government support and furloughed no staff. What I'm most proud of is how our colleagues have pulled together to deliver for our customers. We got 99% of our people working from home within 10 days of lockdown. Impressive -- what's even more impressive is that throughout that period, we kept our phone lines open. Our call answer rates were over 93% and just close to pre-COVID levels, and we maintained customer satisfaction above 90%. Our people were determined to be there when our customers needed them most. We implemented a range of other customer initiatives, including waving the moratorium on COVID-related claims and our SunLife business, helping customers who originally took checks to get banks' payments and provided the dedicated contact line for frontline careworkers. Alongside this, we have a strong focus on the health and well-being of our colleagues and our contribution to our broader communities. As a result, both colleague pride and [ efficacy ] in Phoenix grew by 20 percentage points to 73%. 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 GBP 433 million. We remain as resilient as ever with a GBP 4 billion Solvency II surplus at a coverage ratio of 169%. And in particular, all the economic volatility in the first half only had a GBP 200 million impact on this GBP 4 billion surplus. In terms of growth, as ever, our focus is value, not volume and is all about cash, so the long-term cash we expect from new business. This was up 41% to GBP 358 million. A strong set of first half results. As well as new business, M&A is another key growth driver for us as we completed on the ReAssure transaction 2 weeks ago, with ReAssure, we are now the U.K.'s largest long-term savings and retirement business. ReAssure adds GBP 76 billion to our assets under administration, taking the total to GBP 324 billion. And it adds 3.9 million policies, taking our total to circa 14 million. ReAssure also adds GBP 7 billion to our total long-term cash generation, including GBP 800 million of cost and capital synergies. On a pro forma basis, the first half cash generation is GBP 1.1 billion, Solvency II surplus is GBP 4.4 billion and the shareholder capital coverage ratio at 150%. And all of this enables us to increase our cash generation target for this year to GBP 1.50 billion to GBP 1.6 billion, demonstrating what a highly cash-generative business the enlarged Phoenix group is. Our focus on cash, resilience and growth turns into dividends for you, our shareholders. With a GPB 4 billion impound capital surplus on top of the GBP 5.8 billion of capital requirements that we maintain above our best estimate liabilities, we are well capitalized. And with our resilience and liquidity, we will be paying our interim dividend of GBP 234 million. With Phoenix, you get real visibility of cash generation, with the gross cash coverage of the dividend this year expected to be 3.2 to 3.4x. 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 GBP 1.1 billion cash generation, and is also key to resilience, where some excellent work was done around hedging and active credit management. We've also done a first-class job for our customers here. In terms of M&A and integration, again, a busy first half, and I'm delighted to be able to confirm, we've already banked GBP 227 million of our GBP 800 million synergy target from the ReAssure deal. But what I'm even more pleased about is how well Day 1 went and how great it is to have our new colleagues from ReAssure as a part of the Phoenix family. Alongside this, we're on track with the Standard Life tradition program. And then in the open business, long-term new business cash is up 41% at GBP 358 million in spite of the challenging markets. Key to this has been our investment in our proposition in both open business and in BPA, alongside strong asset origination. Finally, we made good progress building our people capability. Matt Cuhls and Mike Eakins have joined the ExCo from ReAssure, Mike in the exciting new role of group CIO. Following Susan's retirement plans, Andy Curran joins us to run the Open business, and we're appointing some of our excellent internal talent around the key business units in our Open business supplemented by hiring Tom Ground externally to run annuities and equity release. And then Sara Thompson has joined as Group HR Director; and Claire Hawkins were promoted to the ExCo, adding corporate affairs and brand to our Investor Relations remit as we increase our external presence. I'll be back shortly to talk about the outlook. But first, I'll hand over to Rakesh to talk through the numbers in more detail. Rakesh?

Thank you, Andy, and good afternoon, everyone. 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're also focused on growth through new business. Turning first to cash. In the first 6 months of 2020, Phoenix's insurance entities remitted GBP 433 million to group this is after the provision of GBP 50 million of capital injected into our Irish domicile subsidiary to strengthen its capital position following the falling yields. Alongside that, the newly acquired ReAssure business also delivered strong cash generation, remitting a further GBP 690 million. As a reminder, our acquisition of ReAssure was made as if the transaction happened on September 30, 2019. And as such, the GBP 690 million reflects cash generation since then including GBP 290 million from the Old Mutual Wealth businesses acquired from Quilter. Together, therefore, the Combined Group delivered GBP 1.1 billion 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 GBP 800 million, GBP 900 million to reflect the GBP 690 million of cash generation delivered by ReAssure. Historically, ReAssure businesses remitted cash only once a year at the start of each year. So we aren't reflecting any further reassured cash flows in 2020 target at this stage. Our new target range is, therefore, GBP 1.5 billion to GBP 1.6 billion, and we are firmly on track to meet this. As a reminder, we expect the Combined Group to deliver GBP 19 billion of cash generation over the long term, with GBP 5.9 billion of this emerging over the next 4 years. These cash generation targets reflect the business that is already in course. They therefore exclude any new business written after 31 December, 2019, whether this new business arises through BPA also the Standard Life brand in the Open business. They also exclude any future M&A and exclude management actions after 2023. 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 market risks and uses hedges to mitigate the majority of the exposure to equity and interest rates. We also have a lower exposure to credit risk than our peers due to the relative size of our shareholder business and maintain a high-quality credit portfolio, which we actively manage. This translates into the low sensitivities to market risks we present today and demonstrates that we would be able to continue to pay our dividend under all these scenarios. Before we move on to talk about resilience, I will walk you through our IFRS results. We delivered operating profit of GBP 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 U.K. Open business segments, which have seen higher new business profits for BPA and SunLife, respectively. The impact of demographic assumption changes and experience variances has been small, with positive longevity experience variances on our annuity business having been offset by negative mortality variances on our protection business. The net positive investment return variances and economic assumption changes primarily arise as a result of gains on the equity hedges held by the life bonds 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 nonoperating items include GBP 48 million of costs incurred on the SLAL transition program. 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 surplus ratios. Therefore, whilst we have a target range for our shareholder capital coverage ratio, all of our hedging actions are taken to protect the overall quantum of surplus. As at June 30, 2020, the stand-alone Phoenix Group had an estimated Solvency II surplus of GBP 4 billion and a shareholder capital coverage ratio of 169%. This position is stated after recognition of the 2020 interim dividend of GBP 234 million and excludes GBP 2 billion of unrecognized surplus in the unsupported with-profit funds and staff pension schemes. 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 shareholder share of our with-profits estate. Adjusting for these items provides a proxy for shareholder value at June 30, 2020 of GBP 6.1 billion, which equates to GBP 8.45 per ordinary share. This value proxy is effectively ex dividend. It places no value on future new business from vesting annuities, a BPA and open channels or management actions. It excludes ReAssure. During the year, we saw the PGH group surplus increased from GBP 3.1 billion to GBP 4 billion. The main driver of this increase was the raising of GBP 1.4 billion of private capital net of costs. This was largely undertaken to fund the acquisition of ReAssure, but we also took the opportunity to access the debt capital markets in May when they were particularly strong with the proceeds providing additional flexibility for the refinancing of existing Phoenix borrowings. As I mentioned, my priority in the period has been to preserve the resilience of the group's capital position. Whilst we are not immune to the economic volatility, our approach to risk management has provided significant protection to our financial strength as equities and rates fell and credit spreads widened. The GBP 0.2 billion Solvency strain resulting from economics reflects the impact of this volatility post hedging, together with falls in property pricing 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 underpin our GBP 3.1 billion equity release mortgage portfolio, where we have strengthened our assumptions on future inflation, prepayments and dilapidations. We have also strengthened our persistency assumptions of products with valuable guarantees in relation to late retirements. However, we have made no change to our longevity assumptions in the period, and will complete our annual review of this assumption across the Combined Group in the second half of the year. On 22nd 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 GBP 4.4 billion at 30th June, 2020, with a shareholder capital coverage ratio of 150%. This ratio is well within our target range of 140% to 180%. The pro forma includes an estimated Solvency II surplus of GBP 1.7 billion for the ReAssure business on a standard formula basis and reflects GBP 120 million of capital synergies from equity hedging actions completed by day 1. Moving forward, delivery of management actions and integration synergies will further strengthen this Solvency position. Here, we present the sensitivities of the Combined Group. The sensitivities reflect the equity and interest rate hedging and longevity and reinsurance currently in place within the ReAssure business and illustrate that our large group remains resilient to risk events. We have modeled the impact of our usual range of scenarios on both our Solvency II surplus and ratio and added a separate credit downgrade sensitivity in response to investor feedback. I must stress that these scenarios are being applied to a capital position, which already reflects the economic environment as at 30th June, 2020, which saw 15-year swap rates sitting at 44 basis points, 5- to 10-year swap margins at around 130 basis points and the FTSE 100 at circa 6,200. The fact that the Combined Group remains within our target shareholder capital coverage ratio -- range of 140% to 108% and all scenarios applied to this already strain Solvency position is evidence of our ongoing resilience. Phoenix has a diversified high credit quality shareholder asset portfolio. 98% of our GBP 21.6 billion shareholder debt portfolio is investment grade, with only 16% held in BBBs. 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 sector and 2.2% exposure to airlines, hotel, leisure and traditional retail. As at 30th June, our portfolio of illiquid shareholder assets were GBP 6.1 billion. The credit quality of this illiquid asset portfolio mirrors that of our debt portfolio, with 98% investment grade. Our illiquid asset portfolio continues to be well diversified across 5 main asset categories. For this portfolio, we are particularly focused on where the scheduled cash flows are met as this is a key indicator of the resilience of the underlying investment. As at 30th June, 100% of scheduled cash flows had been paid. The largest category is equity release mortgages where we have an average loan-to-value of 34% and an average age of 77 years. In our 30th June, 2020 valuation of this asset class, we have applied a one-off 2.2% reduction to the quarterly house price index to reflect the lower volume of property transactions in May and June. Our GBP 1.9 billion portfolio of private placement loans has an average credit rating of A- and is diversified across 41 exposures with over 64% of the portfolio secured on a variety 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. 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 GBP 0.5 billion of sterling corporate credit by market value on the ASI hit list with U.S. dollar-denominated corporate credit. 75% of this trade related to moving BBB sterling credit to single A U.S. dollar credit. This trade avoided a GBP 60 million Solvency strain, which would have crystallized had the bonds downgraded and generated a GBP 30 million Solvency benefit recognized within management actions. It's also increased diversity by individual issuer and sector allocation and geographic region. Despite this active management, we are still experiencing some downgrades during the period with GBP 860 million or 6.5% of bonds in the matching adjustment portfolio being subject to a letter downgrade. However, only GBP 16 million or 0.1% of the bonds have downgraded to sub-investment grade, and there have been no defaults. The maintenance of the credit quality of our debt portfolio is evidenced by the lack of average rating migration that we have experienced over the first 6 months of 2020 with only the industrial and utilities sector seeing a decrease in average rating over the period. ReAssure also has a well-diversified credit portfolio and made significant progress during 2019 to improve the quality of this portfolio, trading out of U.K. BBB bonds and into U.S. dollar single A credit. It is pleasing to see this credit quality maintained year-to-date, reflecting the active approach to credit management taken by the ReAssure team despite the downgrades experienced in these volatile markets. The downgrade experience across the ReAssure portfolio is similar to our own, with GBP 575 million or 5.5% of bonds in the matching adjustment portfolio subject to a letter rating downgrade and GBP 22 million or 0.2% of bonds downgraded to sub-investment grade. There have also been no defaults. Turning now to growth. Phoenix has 3 key growth options, M&A, BPA and Open business. First, let me deal with M&A and integration. With a combined synergy target of GBP 2 billion across Standard Life and ReAssure, our market-leading integration activities continue to be a real driver of shareholder value. As you are aware, the nature of the ReAssure business being acquired has enabled us to deliver significant synergies on Day 1. From a cost perspective, GBP 11 million per annum of cost synergies come from removing duplication from head office functions, most notably the costs associated with running Reassure group plc. And from a capital perspective, the implementation of hedging, which protects 85% of the shareholders' exposure to equity risk has delivered capital synergies of GBP 120 million. Alongside this, we are on track to deliver our synergy targets for the standard life transition program. Our focus during the pandemic has been to prioritize 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- to 4-week delay in plans, and we remain on track to deliver our synergy targets on time. We have talked before of the complexity associated with bringing together the Standard Life and Phoenix internal models. Submission of our pre-application in June was a significant milestone in this program, and we are on track to make our final application by the end of the year. Any capital benefits that emerge from this harmonization will therefore emerge in our half year 2021 results, although we have not anticipated any such benefits in our capital synergy targets. 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 cost synergy target. 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 the first half of 2020, Phoenix saw gross inflows on new business across its 3 business segments of GBP 4.2 billion. We estimate that this new business will generate GBP 358 million of incremental long-term cash generation, circa 1.5x the 2020 interim dividend. Phoenix's Open business is capital-light and growing, despite the challenged of COVID-19. In the first half of 2020, our Open business in the U.K. and Europe delivered gross inflows of GBP 3.1 billion from new business and GBP 122 million of incremental long-term cash generation. Workplace continues to be our engine for growth, and gross inflows in line with first half 2019 demonstrate the resilience of this business. Our Open business has also benefited from reduced outflows compared to last year as both employers and customers delay making financial decisions. Overall, it was a tale of 2 quarters with strong performance across all product lines during Q1, falling back during Q2 as 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 the launch of our ESG passive default fund later this year. We continue to promote the use of digital, building on the significant progress made in this space so far this year and will continue to build out our retirement service seeking to generate flows into our retail product lines. Our BPA business had a very successful start to the year, putting GBP 90 million of surplus capital to work across 3 deals, which will generate incremental long-term cash generation of GBP 236 million. The largest of these deals was an GBP 800 million buy-in with Liverpool Victoria pension scheme. This was a complex transaction that included the conversion of an existing longevity swap and illustrates our ability to undertake increasingly complex opportunities in the future. Our deal economics are also continuing to improve, with the capital strain reduced from 9% in 2019 to 8% in 2020, and thereby reducing the average payback from 6 to 7 years in 2019 to 5 years in 2020. We have previously guided allocating circa GBP 100 million of 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 opportunities continues to be strong. However, we'll only allocate additional capital if deals present attractive economics. We will, therefore, continue to participate on a selective and proportionate basis in this marketplace, seeking to deliver value and not volume. Management actions also deliver growth. Our success in the BPA market is underpinned by strong illiquid asset origination. During the first 6 months of 2020, we originated GBP 789 million of illiquid assets across a range of asset classes, a 47% increase on the same period in 2019. We continue to prioritize credit quality in our portfolio. And first half 2020 origination had an average credit rating of A+. Just under half of this origination was into ESG investments, including social housing, renewable energy and sustainable development. With illiquid assets now comprising 27% of assets backing annuity liabilities, we continue to make good progress towards our target allocation of 40%. Illiquid asset origination continues to be one of our key management actions and together with the benefits arising from active management of our credit portfolio, increased our Solvency II surplus by GBP 0.1 billion during the period. This increase comprises a GBP 0.2 billion increase in Own Funds, which is a direct increase in shareholder value. Whilst our first half management actions have been focused on asset origination, we are on track to deliver a broad range of management actions in the second half of the year. These include the Part VII transfer of the L&G mature savings business to ReAssure, scheduled to complete during Q3, the transfer of circa 1.2 million legacy Phoenix policies to Diligenta and the securitization of a further circa GBP 600 million of our ERM portfolio. Together, these management actions will increase the Group's Solvency II surplus and improve the shareholder capital coverage ratio. I will now hand you back over to Andy.

Thank you, Rakesh. I want 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'll cover the outlook for cash and growth. Starting with cash. As Rakesh said, we expect our in-force business to deliver GBP 5.9 billion of cash generation between now and the end of 2023. If we take off operating costs interest and dividends, the excess is GBP 2.6 billion. So if we use GBP 0.8 billion of that to reduce debt, where there are maturities and core dates, that leaves a further GBP 1.8 billion of surplus available for growth which we will use for the highest value option at the time. This clearly shows that Phoenix is a highly cash-generative business. This means that the dividend is very safe with a gross coverage ratio of 3.1x and that we can fund the range of growth options we now have. If we then look longer term, we get a balance of our GBP 19 billion of cash generation from existing business, so after the GBP 5.9 billion to 2023, a further GBP 13.1 billion from 2024 onwards. After debt and interest, that leaves an GBP 8 billion excess enough to cover the dividend for a further 16 years out to 2040. But we expect to do much better than this. We will add to our cash generation through new Open business, further BPA, additional M&A and management actions, which can be funded through the GBP 1.8 billion of surplus cash generation merging over the next 4 years. This will enable us to enhance the sustainability of the dividend and will, over time, allow us to grow the dividend. 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 U.K. savings and retirement. And we see 3 of them. As shown on the slide. First, insurers are consolidating to release trapped capital and to deal with cost and efficiencies due to legacy systems and regulatory change. And I would argue that in a post-COVID-19 world where some companies are struggling with their balance sheets, their valuations and struggling to pay dividends, the pace of consolidation will increase. The combined Phoenix and ReAssure group is clearly the unrivaled market leader in both running Heritage businesses and in delivering M&A and integration. And it remains an important part of our strategy going forward. The second driver is strong defined contribution pension growth. There are 2 key elements to this. The first is auto enrollment, coupled with a shift from defined benefit to defined contribution. This has tripled contributions since 2012. At Phoenix, we're a top 3 player in Workplace pensions through our Standard Life branded business. This is a market where scale and cost efficiency are critical. And this is a good example of where the whole across the group is more than the sum of the parts. We have a market-leading partnership with TCS built originally around the Heritage business, and as a result of our scale, we're able to secure an excellent digital customer experience and also a market-leading cost efficiency as we migrate from the Standard Life mainframe platform to the TCS BaNCS platform. The other driver of strong DC pension growth is the aging population and pension freedoms. As the UK's largest long-term savings and retirement business with over GBP 300 billion of assets and 14 million customers, we have more of these 50-plus year old customers than anyone else. And they need help and support to think about consolidating and journeying to and through retirement. This is a further benefit of having both Heritage and Open businesses together. And in terms of the impact of COVID-19 here, through previous recessions, we've tended to see the savings rate increase, and people have a greater focus on their finances. The third key driver of change is that corporates are derisking. I've often said that I'm yet to meet the finance director of a manufacturing business who is pleased to have a large pension scheme attached. So imagine if you were the finance director of that manufacturing business during COVID-19. And you're worried about socially distanced manufacturing and how you retail in a very different world of COVID-19. And imagine that you then get the e-mail from your pension scheme actuary, saying you need to worry about credit risk within your pension fund. You're going to want more than ever to derisk and offload that pension scheme and focus on your manufacturing. So again, I see COVID-19 accelerating this driver of change. At Phoenix, we will continue to take a selective and proportionate approach to BPA. And one of our key advantages here is that shareholder credit and annuities only make up about 10% of our U.K. balance sheet compared to a much higher proportion of most of our competitors. We can, therefore, afford to grow our annuity business in a selective and proportionate way and benefit from better diversification in doing so while keeping this through a similar low proportion of our total balance sheet. In summary, I believe Phoenix is very well placed to benefit from the strategic drivers of change in U.K. savings and retirement, while maintaining the financial discipline that has served Phoenix so well in the past. 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 our customers. For M&A and integration, the agenda is clear. On Open business, the BPA focus is asset origination and further improving the capital efficiency, where we've made some progress, but there's much more to be done. And then for our 14 million customers, expanding our digital retirement service is another priority. In Workplace, it's the launch of our ESG passive default fund. I also want to emphasize 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 center of that. Championing sustainability in the way we run our business as we invest [ 1/3 of a trillion pounds ] on behalf of our 14 million customers. And finally, our future calendar. The only point I'll draw out here is that we're planning at 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 color on our plans. So this isn't some big strategic review. It continues very much as evolution, not revolution. And with that, we will move to questions.

Welcome back. Today's Q&A panel will be hosted by Andy, and he will be joined by Rakesh, Andy Moss, who is the CEO of our Heritage business; Susan McInnes, who is the CEO of our Open business. [Operator Instructions] Andy, over to you.

Thanks so much, Claire. And operator, can we get our first question, please?

Our first question is from Louise Miles.

So we noticed on the appendices at the back that your half -- the half year '20 pro forma Fitch ratio is 29%. And obviously, this included the positive investment return variance that we saw at the half year. And that [ leaves them ] shareholders' equity. And that -- we would expect that to unwind as we see markets improve. So how can you help us to gain comfort that the Fitch ratio isn't going to go above 30%, which is a requirement to maintain that A rating from Fitch? That's my first question. My second question is you kind of gave some commentary in the release that you had some favorable longevity experience, but that was then offset by negative mortality and this is based around COVID. It'd be great if you can quantify this on either side? And also, should we be expecting any longevity releases in the second half of 2020. And then my final question is regarding the phasing of cash generation from both the ReAssure, Phoenix and the SLA entities. So throughout the year, what -- how should we think about the phasing for the Phase III entities in the first and the second half?

Okay. Thanks so much, Louise. So I'll take the third of those, and then I'll get Rakesh to answer the first and second. So in terms of the phasing, we haven't tended to have a particular policy around phasing between first and second half for the Phoenix or the SLAL legal entities. But obviously, we have guided to -- and increased our target cash generation to GBP 1.5 billion to GBP 1.6 billion.

And should we do it now?

Sorry. Can you hear me okay, yes?

Sorry, go ahead, Andy, yes, please.

Sorry, I had some background talking now. Apologies. So we've increased our target to GBP 1.5 billion to GBP 1.6 billion cash generation. We've had a pro forma of GBP 1.1 billion in the first half. So that gives you a sense of what we expect in the second half. As far as the ReAssure legal entity is concerned, historically, ReAssure have always done their cash generation in the first half of the year, just once a year in the first half. And hence, that's why with the GBP 690 million of cash generation there, we've added the GBP 700 million additional cash generation to the target for the year as a whole. Rakesh, do you want to pick up the first and second questions, please?

Yes. Thank you, Andy. And hopefully, you can hear me. And then Louise, just to your first question about the Fitch leverage calculation. So you're absolutely right. On Slide 37, you can see the half year '20 pro forma of the Fitch calculation, and it's at 29%. Now I mean, this is the pro forma clearly as at 30th June, and I see a number of areas where this will reduce over time. So first would be just normal operating profits as they emerge over time. Second is that the L&G Part VII, which is due in September, will help across a number of our metrics. And one of them will also help is on the Fitch calculation for the ratio. So I should -- I would expect that to reduce. Third is just the ongoing delivery of our synergies, our cost synergies, which will improve both profits within the life companies and the group and therefore, allow us to reduce that leverage. And as you would have seen in one of the -- Andy's slides where we are expecting all of the things being equal, the repayment of debt maturities and on their core date, subject to maintaining balance sheet resilience of GBP 0.8 billion, altogether, that will reduce the leverage ratio. Now out of that GBP 0.8 billion, half of that, probably half of our -- just on half of that is actually due early next year. In relation to your second question about the favorable longevity mortality experience. So within our IFRS results, we have seen positive longevity being partially offset by mortality experience. I mean these numbers are quite small, about GBP 20 million in longevity favorable variance, offset by about GBP 10 million on the mortality experience. Now looking forward, clearly, it's too early to tell. CMI '19 table is out. And currently, as you'll be aware, Phoenix is on the CMI '18 table and ReAssure are on the CMI '17 table. So we need to look ahead see what the experience is telling us and then make a review at the appropriate time, which would be the second half of this year. Back to you, Andy.

Thanks, Rakesh. Operator, next question, please.

Our next question is from Ming Zhu.

Just 3 questions, please. My first question is, could you please provide some color on your interest rate hedging? And how does that work if we enter a negative interest rate environment? And second question, second question is on The Wedge diagram. Since you've completed the ReAssure deal, which your cash generation tend to be, that's quite a lot towards the early years. And could you just please provide some color in terms of your new business plan and the timeline when you will actually start to move into the shape of The Wedge, sort of going upwards overall cash generation. And my third question is, could you talk about in terms of -- we're still having quite a lot of uncertainties from COVID-19. When you commit to the dividend and payment and the increase going forward at 3%. How confident are you in terms of -- have you looked at scenarios where you assumed further lockdown? Or L-shaped recession.

Thanks so much, Ming. So let me take the second and third of those, and I'll ask Rakesh to cover the first. So in terms of COVID and dividend and so on and so forth. That's exactly what we do. We run a broad range of scenarios, including some very severe scenarios. And as a board, satisfy ourselves that the dividend is affordable across those different scenarios. And the critical thing with Phoenix is that we hedge off most of the -- hedge out, most of the equity risk and most of the interest rate risk. And then in terms of the kind of shareholder credit, we keep shareholder credit annuities to circa 10% of the balance sheet, and therefore, it's a much lower proportion than others. And hence, what you saw in the dislocation in the first half of this year, the total economic variance from the strain of the first half of the year was only GBP 0.2 billion in the context of a GBP 4 billion surplus. So obviously, we're very, very resilient, indeed as a balance sheet, given the way we run the business. In terms of The Wedge, the point I would make is that that we need to split the cash generation, which we do at sort of year-end, we need to split the cash generation between the kind of organic underlying and then the management actions and the management actions is to be the higher bit of The Wedge. And what we're focused on is what's going on in terms of the runoff of the organic cash generation, and how is the new business replacing that? But probably one of the best ways to think about this is that our total kind of outgoings each year ordinary outgoings, so if you take the cost of dividend, the cost of debt interest and the group costs, so what the cash generation needs to meet, the group costs -- some ordinary ongoing group costs is circa GBP 750 million a year, roughly. So if you think that the long-term new business cash in the first half of GBP 358 million, obviously, if we can keep it going at that rate, we're not far off the GBP 750 million already. And then we also have the opportunity to outperform what we had assumed in terms of management actions, which last year was about 1/3 of GBP 0.2 billion of additional cash generation beyond that, which we've assumed. So we have that available to us as well. And therefore, we remain as confident as ever that we -- even including ReAssure, we can do more than enough with our Open business to offset the runoff of the Heritage business. Rakesh, do you want to pick up the interest rate hedging question from me?

Thank you, Andy. So just to the first question on interest rate hedging. So currently, our hedging strategy is to hedge the there pretty much the surplus position. So we look to focus and protect the surplus of our capital position rather than hedging the ratio itself. Clearly, interest rates are currently low. And as you probably remember, we discussed partly at the Capital Markets Day, where we actually changed our interest rate hegding strategy. So we did move from having swaps when we -- when interest rates were falling during the latter part of 2019, and we switched that to using swaptions. And the benefit that gives is that if those swaptions are in the money clearly, if interest rates continue to fall and reduce, we're effectively offsetting our economic cost and getting all that upside, all that benefit from interest rates falling. So that's what we look to do, and that's what we are doing, especially in this low environment. A lot of our swaptions are in the money protecting our Solvency II balance sheet. Over to you, Andy.

Thanks, Rakesh. Operator, next question please.

Our next call is from Andrew Sinclair.

Three for me as usual, if that's okay. Andy, just wondered if you could firstly talk a little bit about Tom Ground's recruitment from Aviva and what that signals for the bulk annuity? So could we see that GBP 100 million per annum starting to increase as long as the economics remain attractive? And just sticking on the annuities, just wondered if you could comment on what it would take for that capital strain, which is reduced to 8%, to go more towards the sort of 4% we've seen elsewhere. Secondly, was just on the L&G transaction. Just really wondered if you could give us an update on guidance for what you're expecting from that transaction in terms of cash and Solvency. And thirdly, I was just -- there have been some headlines in the industry press about some disagreements between yourselves and SLA about some of the agreements that are taking place between the 2 firms. Just wondered if you could give us any color on that.

Sure. Okay. So I'll start off on the last one of those. I'll get Rakesh to talk about the L&G expectations. I'll talk about BPA, but I'll also get Susan McInnes to give a bit more color, more broadly, on SLA in a moment as well. So the position there is basically nothing to worry about, Andy. So we have a transitional services agreement in place as you do in all of these types of transaction, quite a complex involved transitional services agreement. And there are some areas, which is very common in this type of situation, where we're not quite fully aligned yet around the costs and the services within that transitional services agreement. And -- but very, very common, both parties working collaboratively to work it through. But obviously, having issued a prospectus, we have to cover every single possible eventuality and putting in perspectives together as we did earlier this year. And hence, it was included in there. But it is very much the sort of short-term transitional service agreement that doesn't impact on the investment management side, the client service proposition agreement where we work together or that kind of shareholder in the group. And I'll get Susan to comment at a moment in a moment just on a broader relationship strategically with SLA. In terms of the annuity side, so we will continue to take a selective and proportionate approach to BPA. But what you saw in the first half is our capital strain got down to 8%. So we spent about GBP 90 million of capital writing GBP 1.1 billion. And you would have seen in L&G's results yesterday, for example, they quoted a new business strain of 4% on their annuity business. So what we're keen to do is to improve our capital efficiency. We've got quite a lot further to go. We've made some good progress already, but a lot further to go. Some of the capital we're using goes further for us. And then we would consider of allocating a bit more than GBP 100 million a year, not massively more, but we would consider allocating it a bit more but very much taking a selective and proportionate approach. And I mean, specifically, in terms of hiring, Tom, we've got some fantastic people throughout the Phoenix group, really impressed with the talent, the capability of people, but I'm also very ambitious about where we can go as a group going forward. And so -- and we've got strong capability in BPA already through Justin Grainger in the team. We're adding to that with Tom. I mean, Tom ran the annuity next release business for me at Aviva. And I think when he joined, Aviva was doing about GBP 600 million a year. Last year, I think it was more like $4 billion, but that was probably on even lower than a 4% strain in doing so. But the key point to make is that we'll keep selective and proportionate on the BPA business, and we don't want total shareholder credit and annuities to be materially more than circa 10% of the balance sheet because we keep that strong focus on cash generation and resilience alongside the growth. So Rakesh, do you want to comment on the L&G transaction and then pass the Susan to comment more broadly on the SLA relationship?

Thank you, Andy. So on the LNG transaction itself. So just generally on the process. So that is all progressing, and the court dates are set for later this month and subject to getting all the approvals we expect, the effective date will be early September. Now in terms of financials, I'll start with Solvency first, and I'll move on to cash. So first on Solvency, we are expecting that this will deliver a reduction in our SCR of about a GBP 0.1 billion, which broadly equates to about 2% on our shareholder ratio. So in terms of cash, clearly, we've increased our guidance from the GBP 690 million that ReAssure remitted to their group company during the course of this first half. And as a consequence, they only usually increase their -- they only remit their cash once a year. And that's been the usual process going forward. Now we've increased our cash generation guidance for this year as a consequence of what's been already paid up. We will look later this year, if anything is possible. We're not ruling it out. But certainly, if it's not going to be this year, it will be next year in terms of the cash generation. So now over to Susan.

Thanks, Rakesh. So Andrew, let me just pick up the point about the relationship on the ground. So Andy mentioned the client services and proposition agreement, which is the agreement that governs the relationship between ourselves at Phoenix and SME. And it manages the services that flow between the 2 organizations, and that is working very strongly on the ground. The purpose of that relationship is in part to see how we maximize our offering for our customer base. And we're really pleased to see that we've had some good successes between us this year, we have managed expand the Open products. Rakesh mentioned the active money personal pension or AMPP product, which has now been expanded to our Heritage base, and that allows those customers to benefit from drawdown retirement within the Phoenix family. And secondly, we're working with this all on how we weave the SLA advice proposition into our overall retirement proposition to make sure that all of our customers can benefit from information, guidance and advice at the point of retirement. So the relationship is working very well on the ground, and we're seeing more opportunities to jointly collaborate, which is strong. I hope that answers your question, Andrew.

Very helpful.