Standard Life Plc · LSE:SDLF
Standard Life — Phoenix Group Holdings — Investor Day (May 2016)
45 slides from Standard Life's investor day presentation, May 12, 2016
Slide 1: Solvency II and future financial reporting
Solvency II and future financial reporting 12 May 2016 1
Slide 2: Agenda
Agenda Welcome Clive Bannister | Group Chief Executive Introduction Jim McConville | Group Finance Director Solvency II update Simon True | Group Chief Actuary Management actions Simon True | Group Chief Actuary Future financial reporting Rakesh Thakrar | Deputy Group Finance Director Conclusions an
Slide 3: Welcome
Welcome Clive Bannister 3
Slide 4: Introduction
Introduction Jim McConville 4
Slide 5: Phoenix Group now repositioned for future growth
Phoenix Group now repositioned for future growth Future aims Supported by Retirement Strategy and third party • Enhancing customer service, partnerships communication and outcomes Robust life company solvency • Additional management actions to Further options to simplify life and add value and
Slide 6: Regulation has been the key driver for industry change in the UK
Regulation has been the key driver for industry change in the UK • New Solvency II regime now in force • Internal Models vs Standard Formula Capital • Risk margin / transitionals • Matching Adjustment portfolios • Resilience of Solvency II capital to market movements • Pension freedoms have led to r
Slide 7: Solvency II will drive future management actions and financial reporting
Solvency II will drive future management actions and financial reporting Solvency II Management actions Future financial reporting • Solvency II position is • Focus on improving • MCEV no longer useful robust and resilient Solvency II surplus metric • Full Internal Model • Future management • Contin
Slide 8: Phoenix trading update
Phoenix trading update • Cash generation as at end April is £130 million • On target to meet 2016 cash generation target of £350 million Cash generation to £450 million • Ongoing management actions to optimise Solvency II position • Revised bank £650 million Revolving Credit facility agreed in Debt
Slide 9: Solvency II update
Solvency II update Simon True 9
Slide 10: Solvency II: overview of capital requirements
Solvency II: overview of capital requirements Summary of Solvency II capital regime Capital protection for policyholders Surplus “Buffers” that provide protection to policyholders under Solvency II: Own Funds Capital requirements • Risk margin (SCR) • Solvency Capital Requirement (SCR) Assets Risk m
Slide 11: Phoenix's Full Internal Model provides clarity over capital requirements
Phoenix’s Full Internal Model provides clarity over capital requirements Benefits of Internal Model 1 in 200 year stress events One of nine UK life companies to Standalone event receive approval for Internal Model Equities -47% Ownership of capital requirements Property -38% Change in long term
Slide 12: Capital management framework under Solvency II unchanged
Capital management framework under Solvency II unchanged Phoenix Group Debt interest and repayments Holdings Shareholder dividends Cash remittances Group solvency Phoenix Life Head office costs • Full Internal Model Holdings Limited Pension scheme contributions • Group capital position calculated at
Slide 13: Phoenix risk management is dependent on the product type
Phoenix risk management is dependent on the product type Product Shareholder exposure Principal shareholder risks • Typically the shareholder receives • Indirect Market / ALM risk Unsupported 10% of declared bonus (90:10 • Indirect Longevity risk with-profits structure) • Indirect Lapse risk • Share
Slide 14: Overview of Solvency II capital position at FY15
Overview of Solvency II capital position at FY15 Total Solvency II surplus (FY15) • Phoenix Group capital requirements calculated at PLHL using a Full Internal Model • Solvency Capital Requirements (“SCR”) – calibrated at a 1 in 200 Surplus £1.3bn year event • Surplus over SCR of £1.3 billion £5.7bn
Slide 15: Unrecognised additional surpluses within the Group
Unrecognised additional surpluses within the Group Basic Own Funds reconciliation (FY15) • Additional surplus over SCR within unsupported with profit funds and Group pension schemes are excluded from total surplus • £0.4 billion of unrecognised surplus in £0.4bn unsupported with profits funds £0.1bn
Slide 16: Shareholder Capital coverage ratio of 154%
Shareholder Capital coverage ratio of 154% Breakdown of Solvency II position (FY15) • Shareholder Capital ratio calculation excludes Own Funds and SCR of Solvency unsupported with profit funds and 154% ratio PGL Group pension scheme • Own Funds of unsupported with profit funds include £2.0 billion o
Slide 17: Solvency II surplus is resilient to market movements
Solvency II surplus is resilient to market movements1 Sensitivities of PLHL Solvency II surplus • Surplus is relatively insensitive to market movements1 • £0.5 billion of surplus within FY15 Solvency II surplus £1.3bn unsupported with profit funds and Following a 20% fall in equity £1.3bn Group pens
Slide 18: Key capital requirements are longevity and credit
Key capital requirements are longevity and credit PLHL SCR by risk type • Majority of SCR relates to longevity and credit risk • Focus on group is to minimise unrewarded risk • Acquisition targets could provide 6% 13% capital synergies through increased 30% diversification of risks 5% 6% 8% 11% 21%
Slide 19: Phoenix uses its Internal Model to manage its risks under Solvency II
Phoenix uses its Internal Model to manage its risks under Solvency II Product Shareholder exposure Internal Model benefits • Typically the shareholder receives Unsupported with-profits 10% of declared bonus (90:10 structure) Ownership of capital requirements • Shareholder capital exposed to Suppor
Slide 20: Management actions
Management actions Simon True 20
Slide 21: How management actions add value under Solvency II
How management actions add value under Solvency II Increase overall cashflows Accelerate cashflows Increase Solvency II Own Funds Reduce Solvency II SCR • Investment in new asset classes • Matching Adjustment portfolios • Improved modelling/ risk management • Longevity reinsurance • Reduced expenses
Slide 22: 2015 Solvency II management actions – Reinsurance
2015 Solvency II management actions – Reinsurance Before • Opal Re was the Group’s unrated Bermudan reinsurer PGH • Under Solvency II the Group would have been required to hold additional PLHL capital within the UK life company • Recapturing liabilities and reinsuring Reinsured Opal Re annuities PLA
Slide 23: 2015 Solvency II management actions – Portfolio restructuring
2015 Solvency II management actions – Portfolio restructuring Annuity • Sold ineligible or inefficient assets Matching • Optimised Matching Adjustment eligible buy-and-maintain mandate Adjustment portfolios • Implemented asset liability matching process Credit • Sold credit assets to better align ri
Slide 24: Planned management actions for next three years
Planned management actions for next three years RESTRUCTURING OPERATIONAL MANAGEMENT Fund mergers Strategic asset allocation Part VII transfer of annuity portfolio Credit optimisation to Guardian Cost efficiency RISK MANAGEMENT EFFECTIVE PARTNERSHIPS Financial risk optimisation Investment in new ass
Slide 25: Future actions: Further Matching Adjustment portfolios
Future actions: Further Matching Adjustment portfolios Corporate bond market cash flows • Matching Adjustment (MA) portfolios consist of illiquid long term liabilities (eg annuities) matched by long term assets (eg corporate bonds) • Additional spread earned on credit portfolio increases the valuati
Slide 26: Future actions: Optimising credit portfolios
Future actions: Optimising credit portfolios Net Spread Duration under Phoenix Internal Model • The investment strategy is based on a return on capital basis • This approach favours short 10.00% to medium dated higher quality credit vs longer-dated 5.00% bonds 0.00% AAA • In particular, long-dated B
Slide 27: Future actions: Investing in new asset classes
Future actions: Investing in new asset classes • Potential benefit if high yielding alternative asset classes can be restructured within Matching Adjustment portfolios1 • There are a range of possible eligible assets, subject to internal rating frameworks and regulatory interaction – Accessing bank
Slide 28: Internal Model provides stable platform for assessing acquisitions
Internal Model provides stable platform for assessing acquisitions Internal Model enhances Phoenix’s ability to analyse M&A Enlarged Target Phoenix Group Synergies Internal Target’s Target’s Consolidated Cashflows Model position under Solvency II Solvency II Phoenix position Diversification position
Slide 29: Conclusions
Conclusions • Strong and resilient Solvency II position • No change to Phoenix’s focus on cash generation • Well understood capital requirements, with Internal Model providing clarity • Solvency II has opened up new opportunities for management actions, with Internal Model now key driver of manageme
Slide 30: Future financial reporting
Future financial reporting Rakesh Thakrar 30
Slide 31: Phoenix's focus will be on cashflows in future
Phoenix’s focus will be on cashflows in future • Solvency II implementation has removed the need for an Solvency II alternative valuation measure that recognises the value of impact on MCEV future cash flows • Cashflows remitted from Phoenix Life driven by Free Surplus Focus on future generation cas
Slide 32: Breakdown of Solvency II Shareholder Capital position
Breakdown of Solvency II Shareholder Capital position Breakdown of Shareholder Capital SII position • Shareholder Capital position can be further broken down into Phoenix Life and Holding £3.8bn Company positions £0.6bn • The Holding Companies £1.0bn Surplus £1.3bn contribution to the PLHL surplus £
Slide 33: Own Funds within Phoenix Life consist of a variety of products
Own Funds within Phoenix Life consist of a variety of products Breakdown of Phoenix Life SII position • Own Funds consist of value from a range of products within the life companies and £2.8bn Free Surplus surplus assets in the service companies £0.1bn Supported Phoenix • Free Surplus represents the
Slide 34: Run-off of transitional measures partially mitigated by reduction in risk margin
Run-off of transitional measures partially mitigated by the reduction in the risk margin and other provisions Illustrative Solvency II evolution of liabilities Solvency II technical provisions (before transitionals) Other technical Solvency II technical provisions provisions Other technical Transiti
Slide 35: Solvency II Free Surplus drives cash generation
Solvency II Free Surplus drives cash generation Key drivers of Free Surplus under Solvency II(1) Opening free Expected WPF estate Mgmt actions Risk margin Transitionals Run-off of Mgmt actions Service Experience Free surplus Cash Closing free surplus return distribution to increase unwind run-off ca
Slide 36: Key drivers of Free Surplus generation
Key drivers of Free Surplus generation Metric Basis of calculation Risk free rate plus risk premium on Shareholder Own Funds Expected return Includes new business from vesting annuities Unsupported With Profit Fund Approximate 10% share of future estate distributions from estate distribution strong
Slide 37: Expected £5.2 billion of cashflow from the existing business
There is an expected £5.2 billion of cashflow from the existing business from 2016 onwards Illustrative future cash generation(1) £2.0 billion target £3.2bn £20m £350-450m £205m target 2015 2016 2017 2018 2019 2020 2021+ Organic cash generation Management actions Illustrative future cash generation
Slide 38: Long term cash generation supports the Group dividend policy
Long term cash generation supports the Group dividend policy Illustrative uses of cash from 2016 to 2020 (£bn) 0.2 0.2 0.3 2.0 0.7 0.6 0.7 0.8 FY15 holding Cash generation Operating Pension costs Debt interest Debt Dividends over Illustrative company cash over 2016-2020 expenses over over 2016-2020
Slide 39: Cashflows will emerge over an extended period
Cashflows will emerge over an extended period Breakdown of £3.2bn of illustrative cashflows emerging after 2020 Assumes no management actions after 2020 0.8 0.9 0.7 0.8 3.0 0.9 0.8 Illustrative holding 2021-2025 2026-2030 2031-2035 2036+ Outstanding Illustrative holding company cash at shareholder c
Slide 40: Solvency II implementation results in refocused financial KPIs
Solvency II implementation results in refocused financial KPIs KPI FY15 HY16 • Focus on a smaller number of financial KPIs going forward Free Surplus generation (including management actions) • Solvency II disclosures offer a Operating companies cash generation clearer link to cash (including ma
Slide 41: Conclusions
Conclusions Jim McConville 41
Slide 42: "Meaning of Life" report raised specific challenges in the coming years
“Meaning of Life” report raised specific challenges in the coming years • Rapid expansion of DC workplace schemes but assets to be dominated by 5-7 major providers • Traditional life assurance business model under threat from new entrants (eg master trusts) • Future changes to pensions tax regime li
Slide 43: Summary
Summary • Strong and resilient Solvency II position • Phoenix’s Full Internal Model is PRA approved, with a robust governance structure • The Internal Model provides a stable platform for analysis of future management actions • Also facilitates pricing of M&A transactions, including synergy benefits
Slide 44: Q&A
Q&A 44
Slide 45: Disclaimer and other information
Disclaimer and other information • This presentation in relation to Phoenix Group Holdings and its subsidiaries (the ‘Group’) contains, and we may make other statements (verbal or otherwise) containing, forward-looking statements and other financial and/or statistical data about the Group’s current