Standard Life plc (SDLF) Earnings Call Transcript & Summary

Good morning, everybody, and welcome to Phoenix Group’s 2022 Half Year Results Presentation. It is great to be presenting here, at our new London head office building, for the first time. So thank you for coming, and welcome to those of you joining us on our live webcast. Phoenix has had a fantastic first half, despite the tough economic backdrop. We have, once again, delivered a record set of results, across our financial framework of cash, resilience and growth. This was underpinned by the strong progress we have made across our wider strategic priorities, which ensure we are delivering for our customers, colleagues and investors. And on our core social purpose, and wider role in society. We have continued to grow organically, delivering strongly for customers, with GBP 1.8 billion of net inflows across our Open business, and a very pleasing 42 new Workplace pension scheme wins, in just 6 months. And I am delighted that we have announced our first ever cash funded acquisition, of Sun Life of Canada UK, and can demonstrate the value creation available from smaller, cash funded M&A. This means our dividend is now growing both organically, and inorganically. We have therefore delivered on all of the key objectives I had set for the business at the start of the year, and I am proud of how well the team are delivering. So starting with the financials. Rakesh will cover this in more detail shortly, but in terms of the headlines. We have delivered GBP 950 million of cash generation in the first 6 months, and are now on track to be at the top-end of our target range for the year. Our balance sheet remains both strong, and highly resilient, with our Solvency II surplus at GBP 4.7 billion. While our shareholder capital coverage ratio of 186%, is above our target range, providing the capacity for us to invest into growth, such as the acquisition of Sun Life of Canada UK. Finally, we have reported GBP 430 million of new business long-term cash generation. This is more than double the first half of last year, on a like-for-like basis. As you can see from this slide, we have continued to make excellent progress across our 5 strategic priorities, as we deliver on our purpose and strategy. The strength of this delivery is down to the strong talent we have in our business. Engagement is high, as we prioritize our culture, and support our colleagues through the cost of living crisis through a range of measures. This includes the payment of a one-off GBP 1,000 net lump sum, to all employees, other than our Top 100 leaders. I am not going to go through everything on the slide, but I did want to highlight a few key achievements. Optimizing our in-force business is the bedrock of Phoenix. I am therefore pleased that we have delivered a further GBP 421 million of management actions, in the period. While we remain as super resilient as always, with both our long-term cash and Solvency surplus protected, despite the volatile markets. We have also continued to enhance our operating model. With the standout success being the migration of all 400,000 Standard Life annuities to the TCS platform, which is our first major migration off the legacy Standard Life mainframe. A great outcome for customers, and a key strategic milestone. And we have also delivered a further GBP 15 million per annum of cost synergies from ReAssure, which means that we have now exceeded our revised synergy target, with nearly GBP 1.1 billion of synergies in just 2 years. Our third strategic priority is to grow our business, to support both new and existing customers. Here we have continued to deliver organic growth in the first half, including another strong performance from BPA. But most pleasing for me, is the clear momentum we have in our capital-light, fee-based businesses, with a GBP 1.9 billion year-on-year increase in net fund flows. Our fourth strategic priority is to innovate, to provide our customers with better financial futures. On the slide you can see just some of the initiatives we have delivered in the first half, that go right to the heart of our purpose. We are here to help our customers on their journey to and through retirement, which is even more important, given the current economic backdrop. Finally, we have continued to invest in a sustainable future, as we respond to both the clear customer demand, and demonstrate leadership, as a purpose-led business. So in summary, a great start to the year. However, probably the biggest achievement in the first half, has been the announcement of our first ever cash funded acquisition, which I am confident will allow us to demonstrate the significant value for shareholders, available from smaller-sized, cash funded M&A. We very much look forward to welcoming the Sun Life of Canada UK customers and colleagues to the Group. It will be a simplified integration, as the vast majority of the business is already with TCS Diligenta, who are, of course, our strategic partner here. As responsible stewards of shareholder capital, we have remained disciplined in our transaction pricing. With the GBP 248 million consideration, representing an attractive price-to-own-funds of 83%, the lowest multiple for any deal we have ever done. We expect to generate GBP 470 million of incremental long-term cash generation, from this acquisition, with around 30% of that to emerge in the first 3 years. And we are targeting GBP 125 million of net synergies. As a result of the value creation expected from this transaction, I am delighted that the Board has been able to propose a 2.5% inorganic dividend increase that, subject to completion, will be effective from the 2022 final dividend. This is proof of concept, that smaller, cash funded M&A can add significant shareholder value. And we expect further opportunities to emerge over time. So, what does our success in the first half mean for our dividend trajectory? As you can see, we have a consistent track record of dividend growth over the past 10 years, having delivered a compound annual growth rate of 4%, primarily driven by M&A. Last year, as you know, we delivered our first ever organic dividend increase, from the growth of our Open business. This year, our Interim Dividend is, as ever, equal to last year's Final dividend. Which is a 3 percent increase year-on-year, reflecting last year's organic growth. Looking forward to the second half, we have the opportunity to prove our unique business model, by delivering both organic and inorganic dividend growth, with the 2.5% increase already announced for our recent acquisition, and the potential for an organic increase as well. Phoenix is therefore well positioned to deliver on our policy of paying a dividend that is sustainable and grows over time. And with that, I will now hand you over to Rakesh, who will cover the financials in more detail. Rakesh.

Thank you, Andy, and good morning everybody. There are 3 key things I want you to take away from our financial results today. Firstly, we continue to deliver dependable cash generation, which underpins our reliable dividend. Secondly, we remain as resilient as ever and are well hedged against the challenging economic backdrop. And thirdly, we are on track to deliver both organic growth, and inorganic growth, which will support our dividend that is sustainable and grows over time. So turning to the slides. As Andy said, Phoenix has delivered a strong financial performance in the first half of 2022. We delivered cash generation of GBP 950 million in the period, maintained our strong Solvency balance sheet, and more than doubled our new business long-term cash generation to GBP 430 million. Our leverage ratio has also reduced to 27% following a GBP 450m debt repayment in July. Starting first with cash. Phoenix is unique in its ability to deliver dependable cash generation over the very long term. This enables us to set very clear 1-year and 3-year targets, and provide guidance for Lifetime cash generation. I want to talk to you about each one of those in turn. Starting with the 1-year target. We have delivered GBP 950 million of cash generation in the first half, and now expect to deliver at the top end of our target range of GBP 1.3 billion to GBP 1.4 billion for the full year. We have also set a 3-year cash generation target of GBP 4 billion, which I will take you through over the next 2 slides. We are often asked by investors who are not insurance specialists, how they can compare the performance of Phoenix, against companies in the wider market. We primarily run our business to generate cash, and this is easily comparable. Looking at the GBP 4 billion of cash we expect to generate over the next 3 years, and after deducting our operating costs and debt interest, we are left with around GBP 2.9 billion of free cash flow. This translates into an impressive 3-year average free cash flow yield of 15%, nearly double the FTSE100 average. This demonstrates just how cash generative our business is relative to companies in the wider market. This slide sets out the expected sources and uses of cash generation over the next 3 years as at 31 December, 2021. And shows that we expect to generate GBP 1.7 billion of surplus cash. We also have the capacity to raise up to a further GBP 1 billion in debt, while remaining within our leverage target ratio. This means we have a total of GBP 2.7 billion available for growth. This provides us with the capacity to cash fund the Sun Life of Canada UK acquisition, invest our target allocation of around GBP 300 million into BPA in 2022, and to continue investing into future growth opportunities over time. Finally on cash, we have provided guidance for Lifetime cash generation of GBP 17 billion. After servicing and redeeming all outstanding debt, and deducting committed integration costs, we expect GBP 11.8 billion of long-term free cash available to shareholders. And this long-term free cash number is prudent, because it is from our in-force business only, so does not include any new business or M&A, nor management actions past 2024. This means we can cover our GBP 500 million annual dividend cost over the very long term. Protecting the resilience of this long-term free cash is therefore key in ensuring the long-term sustainability of our dividend. We view the key market risks associated with equities, interest rates and inflation as unrewarded risks, as they could cause volatility to the value of this cash. Therefore we hedge these risks to mitigate the volatility and deliver dependable cash generation, which means there is no material impact on our long-term free cash from the key market risks, as you can see on the right hand side of this slide. We are therefore well positioned to continue delivering for our shareholders in this challenging economic environment. Our Solvency II capital position remains strong, with a resilient surplus of GBP 4.7 billion, which, as ever, reflects the accrual of our interim dividend. Our strong capital position enabled us to repay the GBP 450 million Tier 3 bond that matured in July, which was deducted from our June solvency position. Our economic variance was once again small, at just GBP 0.2 billion, despite the market volatility. This reflects our approach of hedging the majority of our market risks, which is designed to stabilize our Solvency II surplus and our long-term free cash. This in turn underpins the resilience of our dividend over the long term. However, our approach does result in temporary Own Funds volatility. This is a trade-off we accept, to deliver the sustainable and resilient dividend that Phoenix is known for, and which our shareholders value. And looking to the Full Year, I currently expect our surplus of GBP 4.7 billion to remain broadly stable. Meanwhile, our shareholder capital coverage ratio has increased to 186% and the recently announced acquisition of Sun Life of Canada UK is expected to reduce this to 179%, on a pro forma basis. With our solvency shareholder ratio at the top end of our target range of 140% to 180%, we have the capacity to invest into future growth opportunities. As I have explained, delivering resilience in our balance sheet is fundamental to Phoenix. We therefore have a low appetite for retaining equity, interest rate, inflation and currency risks, which we see as unrewarded, and hedge. This translates into the low sensitivities presented here. We also manage our longevity risk through reinsurance, retaining around half of the risk across our current in-force book, and reinsuring most of the risk on new business. We continue to see credit risk as rewarded and actively manage our portfolios to ensure they remain high quality and diversified. The key sensitivity we focus on here is a full letter downgrade of 20% of our credit portfolio, which is currently GBP 0.3 billion, after expected management actions, and small in the context of our GBP 4.7 billion Solvency II surplus. Given inflation is so topical at the moment, I thought it was worth reiterating that we have no material exposure to inflation. Inflation emerges in 2 principal areas within our business, both of which we have hedged. Firstly, we have the inflation linked annuities, which are hedged with index-linked gilts. And secondly we have the exposure on our policy administration and operating costs, which we also hedge. All of which means that the current inflationary environment will have no material financial impact on Phoenix. As I have shown many times before, as a consequence of our comprehensive hedging approach, we continue to be far more resilient to the major market risks than our U.K. peers. This low sensitivity is especially important during times of market volatility, as we have at present. And it therefore remains a key differentiator for us. We manage around GBP 270 billion of assets on behalf of our customers and shareholders. Our assets reduced in the period by around GBP 38 billion, due to the significant market movements experienced by all. However, these market movements have a limited impact on the fees we earn, as we hedge the annual management charges against movements in equities and interest rates. We maintain a prudent, diversified GBP 34 billion shareholder credit portfolio, comprising both liquid and illiquid credit. With a BBB exposure of 19%, and our BBB minus exposure at just 3%. We also remain conservative in the sector positioning of our credit portfolio, and have sought to limit our exposure to highly cyclical sectors by further rotating out of these during the first half. As a result, we have only GBP 1.1 billion, or 3%, of our GBP 34 billion credit portfolio exposed to cyclical sectors. However, these are with high-quality counterparties as evidenced by an average credit rating of A minus. And we continue to have a circa GBP 1 billion credit default reserve. We therefore remain very comfortable with the quality of our credit portfolio. Our ability to deliver value-accretive management actions is a key differentiator for Phoenix, and optimizing our in-force business is one of our 5 key strategic priorities. We continue to demonstrate our capability here, with over GBP 400 million of management actions delivered in the first 6 months of the year. These were primarily from recurring business as usual actions, which are not reliant on integrations and will continue into the long term. This included our ongoing illiquid asset origination, where we delivered a 60 basis points illiquidity premium. We also invested over 50% of our illiquid assets, excluding ERM, into sustainable assets during the period. And we have proactively deployed into US liquid credit, to take advantage of relative spread widening, and delivered a host of other balance sheet optimization actions too. Moving now to growth and it is great to see that our investment here is paying off. I am delighted that we have more than doubled new business long-term cash generation to GBP 430 million, on a like-for-like basis. Retirement Solutions contributed GBP 282 million in the first half, delivering more than triple the volume in the first half of 2021 from external transactions. Elsewhere, it was pleasing to see our fee-based businesses report a 17 percent year-on-year increase to GBP 148 million. Noting that the new business long-term cash generation here is seasonally more weighted to the first half. Last year we delivered organic growth that more than offset the Heritage run-off for the first time, and given our performance in the first half of 2022, we are on track to achieve it again this year. 2021 was the year that Phoenix, through our newly acquired Standard Life brand, firmly established itself as a key player in the BPA market. We have built on this foundation with a strong start to 2022, having completed GBP 1.6 billion of premiums across 6 external transactions. Our capital strain has also reduced again, from 6.5% last year to 6.2% in the first half, which on a pre-capital management policy basis equates to 3.8% and we have improved both the cash multiple and payback, leading to improved IRRs in the period. Looking forward, we have a very strong pipeline for the second half. We have already completed 2 further transactions totaling GBP 1.1 billion, and are exclusive on another GBP 500 million transaction expected to complete in Q3. We will also complete the buy-in of the remaining GBP 600 million of the Pearl Pension Scheme liabilities in the second half too. As a result, we are confident of fully deploying our target level of capital into BPA this year, of around GBP 300 million, with the second half deal economics expected to be broadly similar to the first half. I was particularly pleased to see the strong turnaround in net flows from our capital-light fee-based business in the first half. We delivered a net inflow of GBP 1.4 billion in the period, compared to a GBP 0.5 billion outflow in the same period last year. An improvement of GBP 1.9 billion. This was driven by our Workplace business, where the investment we have made into our proposition and into our Standard Life brand, is enabling us to both retain our existing schemes and win new schemes in the market. As you can see, the momentum in scheme wins continues to accelerate, with 42 new scheme wins in the first half of 2022, which is more than the whole of 2021 already. The scheme wins this year do remain in the smaller scheme category, but we are now being invited to bid for the larger schemes, and we are confident we will be successful here too. Turning to our IFRS results. We delivered operating profit of GBP 507 million in the first half of 2022, marginally down on the prior year. This included increased BPA new business profits in our Open division, offset by a reduction in Heritage, primarily due to a lower expected return as the business runs-off. We also experienced adverse investment variances under IFRS from rising yields, due to our hedging approach of protecting the Solvency balance sheet and our long-term free cash. Other non-operating items include a provision for future project costs in relation to the re-phasing of our Standard Life IT migration, that we told you about at the full year. It also includes costs in relation to IFRS 17, and the planned investment into projects to support our Open growth strategy. So to conclude. We delivered strong financial results in the first half of 2022, across our financial framework of cash, resilience and growth. And we are on track to deliver across all of our targets for 2022. This includes delivering at the top end of the 2022 cash generation target range of GBP 1.3 billion to GBP 1.4 billion, and retaining our resilient balance sheet, by operating within our target ratio ranges for solvency and leverage. In terms of growth, we are confident of delivering more than GBP 800 million of long-term cash generation from new business this year. And we are aiming to complete the acquisition of Sun Life of Canada UK in Q1 2023. This will support us in delivering on our dividend policy, which is to pay a dividend that is sustainable and grows over time. With that, I will now hand you back to Andy for the outlook.

Thanks, Rakesh. As I have said before, I passionately believe that the best businesses have a core social purpose, which is why ours is helping people secure a Life of possibilities. Helping a broad range of people in the U.K. to journey to and through retirement, and enjoy a better later Life. As a purpose-led organization, we look to have the best people, who are focused on our purpose, to then deliver better outcomes for our customers and wider society, and in turn, produce stronger returns for all of our investors. The virtuous circle you see on this slide. And sustainability is embedded throughout this. From engaging customers with their financial futures, to being a model employer, to investing our GBP 270 billion of assets to support net-zero and levelling up. This purpose-led approach underpins everything we do at Phoenix, and I am confident it will enable us to execute on the clear growth opportunities ahead of us. Standing in the shoes of our customers, there are a number of sources of retirement income available to them. And these underpin the 4 major trends in the U.K. long-term savings and retirement market, which offer us multiple growth opportunities. The first is the huge stock of legacy pensions and savings products. Where we can improve customer outcomes, by moving them from outdated legacy systems, to more modern platforms. There are GBP 480 billion of Heritage assets, much of which we believe will come to market over time. The next key customer income source is from the GBP 2 trillion of defined benefit liabilities in the U.K. This underpins what is a thriving BPA market, of around GBP 40 billion per annum, where we are performing strongly. And finally, we have the capital-light, fee-based, defined contribution pensions, offered through the Workplace, and direct to individuals. In the Workplace market, which we believe will see around GBP 40 billion of flows per annum, we have been building strong momentum. While in the individual pensions and savings market, which is another GBP 40 billion of flows, we have been working on developing innovative retirement income solutions. The right-hand side of this slide sets out the impact, on these market growth trends, of the current economic environment. We believe it accelerates both the M&A market, due to cost inflation pressures for vendors, and the BPA market, where rising rates make BPA transactions more affordable for corporates. Clearly many people are facing significant challenges from the cost of living crisis, and this is impacting spending habits and bank deposits. So far, we have seen limited change in pension contributions, and do not currently envisage a material impact on our fee-based businesses. But importantly, as we did in our response to COVID, we will continue supporting our customers in every way we can. We have a clear and differentiated strategy, which creates shareholder value, through leveraging all 4 of the major market trends I have just covered. It is simpler and more focused than our peers. Heritage is the bedrock of our business, which delivers high levels of predictable cash, that covers our dividend into the very long term. And it also generates surplus cash, that we can re-invest into both our Open business, to support organic growth, and into M&A, to deliver inorganic growth. Both of which can underpin future dividend increases. But what really differentiates Phoenix, is how the whole is greater than the sum of the parts, with our Heritage business creating clear competitive advantages in both Open and M&A. For our Open business, diversification with our large Heritage book means we will be more capital efficient than peers, particularly in Retirement Solutions, including BPAs. Where we are already at a 3.8% capital strain, on a more comparable, pre capital management policy basis. While our strategic partnership with TCS, provides us with a market-leading, cost-per-policy, administration platform, that will give us a meaningful cost advantage, for our fee-based businesses over time. Now to be clear, we are not fully leveraging these advantages for our Open business today. But if you think about the progress we are making, and the structural competitive advantage we will have in time, I think this is really exciting. And exactly the same logic applies when we do M&A. Which enables us to generate significant cost and capital synergies, to underpin our ongoing track record of shareholder value creation in M&A. As evidenced by the Sun Life of Canada UK transaction, where our synergy target is a 50% uplift on the price paid. So a simple, clear strategy. 2021 was a pivotal year for Phoenix, as we delivered organic growth from our Open business, which more than offset the Heritage run-off, for the first time, which we accelerated through the acquisition of the Standard Life brand, and the investment into our Standard Life business. We are now confident of delivering this on an ongoing basis, and therefore expect to continue growing our in-force cash generation, over time. I covered the 4 market trends earlier. 3 of these are organic, and we will leverage all 3 of these. We initially turned our focus onto BPA and have already become an established player in this market. We are now turning our attention to the fee-based businesses, with our momentum in Workplace building, and a big opportunity in Individual Pensions & Savings to go at too. Over time we expect to balance our growth between BPA, and the capital-light fee-based businesses. We have scheduled a Capital Markets Day on 6th December, where we plan to do a deep dive into our Open business. M&A remains a core part of our ongoing growth strategy, both large and small, with the remaining GBP 470 billion of U.K. Heritage assets potentially available over time. I continue to have cups of tea with my fellow insurance CEOs, and the message from the majority of them remains very much one of, when, not if. We stand ready to consider our next deal, enabled by our scalable platforms, and our GBP 1 billion of remaining firepower. With Sun Life of Canada UK being our first ever cash funded acquisition, it was important that we clearly demonstrate the benefit for shareholders, from smaller-sized cash funded M&A. And we did this by announcing our proposed inorganic dividend increase, with the transaction announcement. However, going forward, given the Board's confidence that we can now deliver both organic and inorganic growth, on an ongoing basis, we intend to simplify our dividend communications. We will do this by announcing any potential annual dividend increase, at our full year results, and which will combine both organic, and inorganic growth. In summary. Phoenix is unique in the insurance sector. With the cash from our in-force business funding our attractive dividend, over the very long term. While our business is highly resilient, owing to our strong capital position, and our hedging, which protects both the capital position, and our long-term cash generation, particularly important in these uncertain times. And we are growing both organically, and inorganically. This supports us in continuing to deliver cash, resilience and growth. Phoenix is a growing business, with a defensive balance sheet, and offers a uniquely reliable dividend, that is sustainable and grows over time. We believe this is hugely valuable. And particularly so, in an uncertain economic environment. And with that, we will move to questions. So we're going to start with questions from the audience in the room. If you can raise your hand if you have a question. Lots and lots by the looks of that. And we will direct one of our roaming microphones to you. If you can please can you start by introducing yourself and the institution you represent. For anyone dialed into the conference call, please let the operator know you have a question. And for anyone watching on the webcast, please use the Q&A facility and we will come to your questions after we've answered those in the room and on the call.

Andy Sinclair from Bank of America. Three please. Firstly, it was just on the Workplace pensions business on the 42 schemes you've won, and frankly, on the 41 you won last year. Just if you can give us an idea of how many of those have transitioned in H1 this year? And just, so we can get an idea of what that means for what's going to be transitioning over the next 6, 12, 18 months? Secondly, just on bolt-ons. Congrats on the first organically funded bolt-on, great to see, and a dividend increase. But at full year results, I'm obviously already looking for more. At full year results, you said that you saw a good chance of M&A deal this year. You're clearly right. What is your outlook for the coming 12 months? Do you still feel similar levels of confidence? And thirdly with just on the non-operating cash flows line, just fairly punchy cost again in H1 this year. Just if you can remind us what's coming through that line and perhaps give some guidance on it?

Okay. Thanks, Andy. So I'll let Rakesh take the third of those. So in terms of the Workplace schemes, the schemes we're winning at this stage are smaller schemes. So don't expect them to have a, kind of, transformational impact to the numbers overnight. But what's pleasing is we're now getting invited to tender for much larger schemes, which clearly would have a more transformational impact. Typically, the lead-time from winning a scheme, you tend to get the regular premiums come in within, say, 6 to 9 months. But quite often, you wait over a year to see the lumpsum assets come across. So just, sort of, summarizing our numbers in the first half. What we saw was that a big shift in the net fund flows from a small outflow to GBP 1.7 billion positive inflow from the Workplace pensions business. And that was basically a 28% increase in the gross inflows. And that 28% increase in the gross inflows led to a 60% increase in the new business long-term cash generation from Workplace. So you can see the kind of benefits as you grow that, kind of, leveraged effect on the business. But we also saw a 44% reduction in our outflows. So what's basically going on here is we've invested heavily in the proposition. We're now attractive in the market. So we're stemming the outflows we had historically in terms of losing the existing schemes, and we're now starting to win the new schemes. So good positive momentum there. This is a flywheel business. So you work hard to get the flywheel going. It takes a while to get going, but when it does it self sustains and it's obviously capital-light. And we're very determined and confident that we can balance the growth between the fee-based capital light and the BPA going forward. In terms of the M&A question, as I say, think about the market as GBP 470 billion of assets. Just under half of that is a small number of larger deals. It's hard to know the when or if, but if ever anything in that space was available, we'd obviously be very enthusiastic. But then you have over half the market is a much larger number of smaller deals. And basically, what the CEOs say to me when I talk to them is that they like the cash flow coming off that closed book business. But then they recognize that typically, a Heritage book runs off at about 6% a year. So every year, they have to cut their costs by 6% in order to stand still. And if they don't cut the cost by 6%, effectively, there's an increased expense reserve, and I don't get the cash flow out. And that's why people say it's a question of when, not if, because they're struggling with legacy platforms, fixed cost of regulatory change. So it's hard for us to predict the exact timing of when deals will come about. But we are confident there will be deals going forward for those very market dynamics I've just set out. And as I say, this Sun Life of Canada UK is a fairly straightforward integration for us. We'll remain keen and enthusiastic and ready to do the next deal as soon as anything is available in the market. We have GBP 1 billion of remaining cash firepower. Rakesh, do you want to pick up on the non-operating items?

Yes. So I think the question was in relation to cash uses within non-operating. So these really are in 2 areas, I'll probably want -- like you think about it. One is, just generally the fact that we hedge a lot of the currency risk at the group level in relation to the debt, and that will have collateral movements and close out of position. So that will be one aspect of it. And the second aspect, which I already touched on, probably more in the context of the IFRS results is the fact that we have integration, we're still going through. This Standard Life IT migration, the ReAssure in integration, that will have cash associated with it and that will come through that line as well.

It's Andrew Crean, Autonomous. Again, 3 questions, if I can. On Europe, I mean, you failed to sell the package of European businesses last year. Would you consider -- I assume that the Irish business will be a lot easier to sell than your German. Would you consider -- is that something which is on the table? Secondly, you're still dual running platforms, the ALPHA platform and the TCS platform. Would you consider shutting one of them? And what would be the cost benefits of doing that? I'm assuming the ALPHA platform. And then thirdly, Andy, you talked about how many cups -- well you talked about your cups of tea outside of the large deals, which, I think, we know how many cups of tea are actually there? I mean, how many companies are actually likely to consider because there is a bottom end to this where it's just not worth the bother of you actually going out and doing something?

Okay. So let me take each of those in turn. We did a strategic review of Europe last year, having had a number of unsolicited expressions of interest. What we basically concluded was that the highest value way forward on Europe was to sell the Ark Life business, which we did for 91% of own funds. But then there was real value to be had by both putting in place a partial internal model for Standard Life International, which we got approval for much quicker than actually others have done from the CBI in Ireland. But then also to -- as part of the Standard Life transition to migrate to a much more modern technology. So that's what we're focused on in Europe. That would then -- that's the right thing to do to optimize the value of the European business, which is performing strongly and is making a good contribution in terms of flows going forward, but it also would create the right base for us to consider inorganic expansion into Europe in due course. In terms of the dual, ALPHA, 2 platforms and so on. So you're absolutely right. When we did the ReAssure acquisition, we've now exceeded our revised target of synergies. We're up at nearly GBP 1.1 billion, but there's nothing in there for Phase 3 integration. That's just the head office Phase 1 integration, and Phase 2 for finance and actuarial. The reason we haven't looked at that is that our priority has been migrating off the old Standard Life mainframe across to the TCS BaNCS platform and delighted in the first half that we moved our first 400,000 customers across in terms of all the Standard Life annuity customers went across really smoothly without any hitches. The team did a fantastic job of that. So that is our priority there. But in time, we could well consider whether there's a more efficient way of looking at the operations in terms of ALPHA and the ReAssure side. And I would say that historically, when we've done Phase 3 integrations, there's been material benefits attaching to those. So I'm not going to give any specific numbers, but there have historically been material benefits attaching to those. Finally, in terms of the cups of tea, I mean, I think the -- one of the things I was quite keen to demonstrate were the Sun Life of Canada UK acquisition, it's only GBP 10 billion of that GBP 480 billion, so it's what, 2% of it, yes. And yet, that led to a 2.5% inorganic dividend increase. I'm really trying to demonstrate that actually doing smaller deals can be really quite accretive and valuable from a shareholder perspective. So the way to, kind of, think about this is as we had on the slide, there's GBP 245 billion of assets in these smaller deals that we could, kind of, cash fund. So they'd be up to GBP 1 billion of purchase price. So there's -- I'm not going to put specific numbers around it, but there are a significant number. If you think the GBP 10 billion on Sun Life of Canada acquisition, those books from that size up to, say, GBP 30 million or GBP 40-odd billion that would fit into that GBP 1 billion purchase price, I mean, there's GBP 255 billion of assets there, you can kind of get a sense of working through the number or numbers. Different organizations or different places on their journeys, but there's a significant number of potential opportunities out there.

Ming Zhu from Credit Suisse. My first question is on your BPA. You've mentioned, you've reiterated your GBP 300 million capital commitment. Is there scope for this to go up? And when would you reach the self-sustainability level? And my second question is on the group cost base. Would you be able to disclose on a clean set, what's a steady state on the cost base going forward if we exclude those one-off projects and assuming Andy's cup of tea are not material? And my third question is actually on M&A. What, sort of, M&A and pricing landscape are you seeing? Because the deal you've just done, the Sun Life one, it's a 17% discount where your shares were trading slightly a bit more discount than that -- than the deal. So why didn't you just do the share buyback?

Okay. So if I take the first and third of those. So it is our intention to spend GBP 300 million of capital on BPA. We think that's a sensible allocation. Think about BPA as an attractive profitable market, but I, sort of, tend to think about Phoenix as a 3-legged store. We've got Heritage, Open -- the Standard Life Open business and M&A. And within that, kind of, Open leg, we want to be balanced between BPA and the fee-based capital-light business. Now that's not to rule out that we might not spend a bit more. What happened last year in practice is we secured 2 large cases -- 2 cases over GBP 1.5 billion in December. And ultimately, you're bidding for these cases. We were seem did fantastic job, so we won both of them, and it meant we spent a bit more capital. But all other things being equal, we'd expect to spend around that GBP 300 million level, and that kind of, keeps things balanced. In terms of the M&A pricing landscape, so -- and I'll maybe get Rakesh to add a comment to this in a moment. But, I mean, the 83% of own funds is the lowest price of any of the deals we've ever done. I think own funds is a reasonable metric to look at closed book businesses. I think it's a pretty poor metric to look at Open businesses. There's a lot of conservatism built in to risk margins and fundamental spread and so on and so forth. So the way we go about valuing deals that we do, is we actually look at the cash flows and then we look at the synergies we can generate in the case of Sun Life of Canada, the synergy -- net synergy number we're targeting is 50% of the price paid. So we can basically -- our cost and capital efficiency, our structural competitive advantage, means we can run it 50% more efficiently than the previous owners. And that then delivers an attractive return on capital on those cash flows. So we're not valuing it by looking at own funds. We don't think it's a particularly good measure. We're focused on cash -- predictable cash over time. And that's how we think about the value created. Rakesh you want to add anything to that and then talk about the cost base?

Yes. Thanks, Andy. So I think this Capital Markets Day probably 2 years ago, we talked about how we looked at acquisitions. And as Andy pointed out, we actually look at those cash flows and then effectively determine an IRR and then consider that in the context of other opportunities. And certainly, for these transactions, that's -- in my view, the right way to look at it. And that would include if there was a buyback opportunity, you look at it in that context. But in terms of buyback anyway, we have a capital framework that's out there. And we operate within that framework. And then currently, we're at the top end in terms of our shareholder coverage ratio. But we now post the acquisition of Sun Life Canada U.K. we'll be just on the cusp -- on the border. But when looking at those cash flows, it was certainly in our view, it's value -- it's better to do this transaction that then consider any alternatives such as share buyback. But we'd also consider how quickly the cash comes back and the potential for reinvestment of that cash for other growth opportunities. So we think there's some sort of compounding effect happening there, especially if we also over-deliver on synergies as well. And then there'll be a question on the cost base within the group. Certainly, if I put those into 2 categories. One is just the normal operating expenses that we would expect. And that would be somewhere around GBP 75 million, GBP 80 million a year on an ongoing basis. And then you'd have the -- what we call the one-off cost. And as I mentioned earlier in my response, effectively made up of 2 areas. One is movements in our hedging that will come through and now it's difficult to predict what that will be, depends how on the currency movements, how that will change. But in terms of projects, probably fair to say we're probably -- we are seeing higher level of these projects because of the integration that we're doing. We've got the Standard Life, we've got the ReAssure, we've got the IT migration that we spoke about. We've also got some payments we're making in relation to IFRS 17. So these are one-off multiyear programs that -- it's just meaning that at the moment, they're quite high. But all other things being equal, you would expect those to normalize.

Sorry, Ming, I didn't answer about the competitive landscape. So, up until a couple of years ago, obviously, there were 2 players that were, kind of, bidding for these types of businesses, Phoenix and ReAssure, we're now together as one -- and so we're undoubtedly seen as a very credible counterparty by anyone looking to sell a business. We know that we'll be the best home for their customers and for their people that we've got a strong track record of successfully executing on these deals through regulatory approvals and so on and so forth. And so, we're never complacent. There's a lot of private equity money looking to get into this space. But I'd say, generally, that private equity money is more focused on Continental Europe and the U.S. than it is on the U.K. because it is a challenging regulatory environment for private equity to come into the Life insurance space and you've only got to look at what happened with the LV deal with Bain to see some of the potential challenges within that. So we think we're well placed in a competitive landscape. And, I think, because of the scale of our Heritage business, we will generate higher levels of cost and capital synergies.

Sorry, I think there's one question missed was on the BPA. What, sort of, level of AUM or which year, you think you will achieve the self-sustainability.

I mean, I think, I'm going to say we don't -- BPA is actually quite -- we've got GBP 38 billion of annuities and BPA would be less than GBP 10 billion of that, so we're -- because we're far more diversified than others across our fee-based capital-light businesses, annuities and then the Heritage business, we tend to look at the financials of the business, and in the round we're generating lots of excess cash from Heritage, and it's attractive to redeploy that at attractive returns on both M&A and on BPA.

Congratulations on very strong cash generation, and I have 3 questions on that, if you don't mind. The first one, it was a major beat relative to expectation consensus and ask. Can you help us understand a little bit better about the moving parts and why you're so confident that the level is sustainable? Second, in light of the strong generation in the first half is the second half target too modest? And third, you mentioned the contribution from illiquids and that it added to the cash generation. Can you help us understand what's changed in the illiquids and how we should think about that going forward, please?

Those 3 are all for you.

So let us start with the first one. So this was done on the GBP 950 million cash generation in the first half. I mean, what you see there, we delivered our normal organic surplus, which was about GBP 0.4 billion. We also had a strong, if you recall, management actions during 2021. And again, as -- we had GBP 1.5 billion last year, and we had over GBP 400 million in the first half of this year. That, together with the fact that, I was also cognizant of the fact that we had the Tier 3 repayment of GBP 150 million due in July, which is why that has been slightly probably higher than you were probably expecting. But it's taking all of those items in the round and coming to that. So the second point, is the cash generation in the second half too modest. I mean, clearly, I did reiterate or albeit there's not a change in the target that we will be at the top end of the target range. And we do think that it's fairly pretty good for the full year. Do we think that will -- that, kind of, sustainable? I mean you've seen from what we've done previously, and I'll leave it at that. And then finally, on the illiquids, right? So illiquid, this is -- we were currently at 32% in terms of our illiquid allocation. Our aim is to get to about 40% across annuities in the medium term, and then we'll consider further thereafter. But what we get from illiquids? We still focus on value over volume. And -- but we haven't gone probably as much as people would have thought this year in illiquid because we've seen opportunities in liquid credit. So we diverted a lot of funds to U.S. because we saw the relative spread widening, and we took that opportunity, which I think is absolutely the right thing to do. And -- but despite that in the illiquid space, we still got 60 basis points premium on that. And as you know, the liquid assets are a really good match for our BPA annuity liabilities. And therefore, we're in a good space in that regard.

And I'll just quickly add, Larissa, one of the things -- many things are impress me at Phoenix, one of the things that impresses me most is this core capability in the organization to optimize the in-force business. So the fact that we had GBP 421 million of management actions in the first half just from BAUs, that's not integration related, that's just BAU, really does demonstrate the ability of creating value from our in-force business over the long term. And that's one of the key drivers behind cash generation, is the ability to drive those management actions. It's impressive stuff.

It's Farooq Hanif from JPMorgan. Just on the Workplace pensions, I mean, that was a really impressive growth. And the new business contribution from that is not completely comparable on a full year basis, but it's getting chunky. Can you talk about the outlook here? You talked about larger schemes, what have you done that's different and do you think you can maintain that level of new business profit generation? Secondly, can we go back to the whole question of air traffic control of deals. So obviously, the Sun Life of Canada and Diligenta are ready. But if it wasn't, what would be the constraint and the, sort of, number of deals you can do? And therefore, how many teas you need to, sort of, forgo because there's no point? And then last question is on the commercial real estate portfolio. Can you remind us about your exposure there? There's been -- obviously been heightened concerns about refinancing risk? And how do you feel about the safety of that portfolio? Is it a big deal for you?

Okay. So I'll take the first 2 and ask Rakesh to cover the third. So we are pleased with the progress in Workplace and Andy Curran set the front here, will be for saying this, but we haven't scratched the surface of what we can do in this market yet. And there's 3 reasons why there's a lot more to come here. The first is, as we migrate this across on to the bank's platform, we've negotiated by far a market-leading cost rate there. In the past, we've got a fantastic rate for the Heritage business. But because it's declining each year, cost per policy, TCS, kind of, thinking, okay, I've got to manage that reduction every year. We said to them, well, this is growing. So we need a much, much lower rate if we're going to give this to you, which they've agreed to. So we've got that margin benefit still to come through, is the first. The second is the new schemes we've been winning have all been smaller schemes. -- advisers are going to try you out with their smaller clients before they get you going on the bigger clients. We've got a couple of inquiries on the go at the moment, for example, where we're well advanced with inquiries. We haven't won them yet, but we're well advanced and progressing well over GBP 1 billion of assets. So we're starting to play in that space, which will accelerate as well. And then the third is, I sort of think about the 3 main drivers of the Open business going back to the market trends, BPA Workplace and then the individual pensions and savings. So we, sort of, started out on BPA 2018, we're now established. We're #2 in market share last year. Workplace will get real momentum going. The third area we're starting to turn our attention to is the individual pensions and savings market where basically customers need to consolidate their different pension pots together and plan a journey through into retirement income. And only 10% of the U.K. population get advice on that journey to and through retirement, 90% currently flounder around largely in the dark. So we're building our capability. We're dealing in the adviser market as well. We're drilling capability to play in the 10% of customers that are advised. But the 90%, we've got more of those customers than anyone else, 13 million customers, and a lot of them in the Workplace. So the ability to talk to Workplace members, get them to consolidate other pots in and stay with us to journey into retirement income would be another driver. So in time, and this will take time, but in time, we want the fee-based capital-light businesses to give us a similar, kind of, value creation each year as we get from BPA. Air traffic control of deals. I think the key point I'd make here is that we can buy businesses and run them separately on the side for a period of time. So it's unlikely that there will be a constraint for us around doing the deals. What will be a constraint, just as we -- to Andrew's question on ReAssure, we're full at the moment in terms of migrating to banks -- so we've not planned that part of the ReAssure business at this stage. It hasn't stopped us diving GBP 1.1 billion of synergies from ReAssure in 2 years. So we can still do the deals. I think the even, kind of, constraints around the finance and actuarial side, the Phase 2. We need to be mindful of those. But to date, we've never knocked back an M&A opportunity for bandwidth within the business. We gear up and create the bandwidth and we'll look to take advantage of the opportunities as they present themselves.

On the commercial real estate, probably just were put into context first. We have a total of just over GBP 11 billion of illiquid assets and commercial real estate is probably just over GBP 1 billion to GBP 1.5 billion in that region. So it's not material in our overall context. And clearly, with our asset management team, they are in a regular interaction with the people on the commercial real estate investments. Clearly, a lot of these are -- have relatively lower loan to value. They're about 60%, 65%, and they're also secured on the underlying property. So certainly, what we see is that we're absolutely happy with the credit portfolio and our exposure to commercial real estate. And then we keep close eye on all our investments, not just commercial and real estate.

Steven Haywood from HSBC. 3 questions, please. In one of your slides -- inflation going high has no impact on your long-term free cash flow -- can you explain the dynamics on this, please? And secondly, in your sensitivities, the credit downgrade sensitivity it now includes management actions, whereas previously excluded management actions. I mean the difference between the 2 sensitivities is very low. But if you can explain why the change, that would be great? And finally, on the BPA and the Workplace, what rate of IRRs are you achieving here? And what capital strain margin can you come down to on the BPA?

Okay. So I'll take the third of those and ask Rakesh to take the first 2. Because I'm a good CEO, I'll do the third one first and you think about the first 2. So I'm good like that. So we don't disclose specific IRRs, but that's exactly how we think about it. We think about all the excess capital we have. We're very determined stewards of that capital to allocate against the highest value opportunities. And so the IRRs are comfortably double digits on what we do, but we don't disclose them explicitly. In terms of capital strain, we did think it will be helpful because we think about capital strain with the capital management policy because we, like every other insurer, have a capital management policy and that's the capital you deploy. And that's the, kind of, clean way to think about what you're actually tying up in terms of capital. But most of our peers quote a pre-capital management policy number. So at 6.2% in the first half would be 3.8% on a pre-capital management policy basis, which is more comparable with others and in a similar ballpark to others. Now what we've said is our ambition is to get the strain, including capital management policy down to 5%. So that will be more like 3% on a pre-capital management policy basis on a, kind of, like-for-like with others. And the reason why that is lower than many others achieve is basically the point I made about the diversification with Heritage. So others don't have a big Heritage business of different risks. And therefore, we will be more capital efficient because we get the opportunity to diversify against that. The levers to get there are basically a broader range of reinsurance partners Solvency II internal model is not fully optimized for -- yet in the way some of our peers are and also broadening the breadth of illiquid assets that we can invest into. So all of those are actually a well-trodden path. We know what we need to do. We've got plans in place to do it. We'll do it and we'll get the strain lower still and will then be a structural competitive advantage over others.

Thanks, Andy. Let me start with the second question, which was around the credit downgrade and the management action. So I mean, certainly from our perspective, it was important that we showed a realistic position of what would actually happen in practice, if that stress actually emerged and also for -- to allow you to actually compare against our peers in this regard. So what we've done for that particular sensitivities, assume that we would take what we call reasonable management actions to adjust for it now. The impact of it with those management actions is a strain to surplus of GBP 0.3 billion without any management actions, the strain will only be GBP 0.5 billion. So it's not talking big numbers here. So even without the strain, we're only at GBP 0.5 billion with the stresses at GBP 0.3 billion. And again, the kind of, actions we would do is what certainly, I consider is reasonable. So we wouldn't do anything on -- clearly on the liquid space because that will be what it will be. And then there's not much we can do there. But on the illiquid, we just aim to get back to the overall portfolio average, and there will be a cost of change in doing that. And that's what's reflected. And those are the reasons why. On first one, on inflation. So what we do the inflation, as I mentioned in my presentation, come from 2 areas. One is from annuities, where effectively you get those annuities going up with inflation. So we use indexing gilts to match them. So we actually really well matched on that basis. So then the other area comes through a policy administration and through our costs. So what we do is effectively, we look to hedge long-term inflation by stressing our capital balance sheet and looking how that would move with inflation and then putting a hedge in place that effectively covered us across all our products, et cetera, and our MSA charges against those costs. And that's why the inflation sensitivity is virtually nil, because we do that on a regular dynamic basis.

This is Ashik Musaddi from Morgan Stanley. Just a couple of questions I have is, first of all, if I look at -- I mean, this thing about integration keeps on coming, especially on Standard Life. I mean, if I remember correctly, this deal was done about 5, 6 years back. So when do you think that Standard Life and ReAssure deal will be completely integrated and there will not be any extra cost? Or would you say that the cost you're incurring at the moment is in line with when you announced a deal? So that would be the first question. The second one would be about management actions. I mean it was a phenomenal first half, GBP 421 million of management action, which is, kind of, equal to the organic capital generation of GBP 400 million. If I remember correctly, historically, your guidance has been like whatever capital you generate, I mean 1/3 would be roughly management action. So is there any upgrade on that? Or would you say that longer term, it should still be 1/3, it is that first half was strong? And thirdly, just on management action, again, I mean, there is a big item called balance sheet efficiencies, removing inefficiencies and it's a big one, GBP 280 million or something. Any color on that would be good.

Okay. I'm happy to take the first of those, and Rakesh you take the second. So the way we think about the integrations is we set clear targets. So if you take Standard Life, we set a target originally of GBP 0.7 billion. We then upped that to GBP 1.2 billion. At the full year, we delivered GBP 1.6 billion. So we've spent GBP 2.9 billion to buy the business. We did GBP 1.6 billion of synergies. So what we basically said is, look, you're right, it's a few years down the track, we're going to stop reporting Standard Life synergies because we've already busted the target by some margin. The other point I would add is that what we're doing is, kind of, more than the base migration. So what Andy and the team are doing, yes, they are migrating all formally and Standard Life customers across on to banks, but they're doing it in a way that we then have this really attractive advantaged platform for the Open business growth going forward. And so -- but and that's basically, kind of, reflected through the numbers. If I take ReAssure, the original target was GBP 0.8 billion. We upped that to GBP 1.05 billion, and we're now just under GBP 1.1 billion after 2 years. But we'll keep reporting on the ReAssure side as well going forward.