Introduction
I am delighted to present the first interim report for Phoenix Group Holdings since its acquisition of the Pearl businesses in September 2009. Our results position us well to achieve our targets for the remainder of 2010 and demonstrate the continued strength of our business model.
The Group has made considerable progress in implementing its strategies over the last six months. During that period, we have maintained a robust capital position, with an IGD surplus of £1.3 billion, and continued with our prudent approach to risk management, ensuring the Group remains highly cash generative and profitable whilst also protecting policyholder returns.
Furthermore, we are well advanced with plans to achieve the management actions that will enhance the Group’s embedded value and accelerate our cash flows.
Key achievements
The first half of 2010 has seen excellent progress across a range of Group initiatives, culminating with our successful Premium Listing on the LSE in July 2010. These achievements have been the result of the continued hard work and great commitment of our employees across all areas of our business and I thank them for the effort and energy they have shown.
I would particularly like to draw attention to the following achievements:
- Produced an excellent performance in the first half of 2010, generating £335 million of Holding Companies' cash inflows, IFRS operating profit of £176 million and a Group MCEV of £1,962 million, despite market conditions. This puts us firmly on track to achieve towards the top end of our annual target of £400 to £500 million recurring cash generation. We are also on track to accelerate £225 million additional cash inflows and deliver £145 million of incremental embedded value through management actions during 2010
- Achieved a Premium Listing of the Company’s shares on the LSE. We expect inclusion in the FTSE 250 index in September 2010 and this, together with the Premium Listing, is an important stepping stone to attract a broader shareholder base supportive of the Group’s strategy as the leading specialist consolidator of UK closed life funds
- Reduced our dilutive instruments from over 75 percent of the issued share capital at 2 September 2009 to below 20 percent, effective 5 July 2010, in order to qualify for a Premium Listing. We delivered this by successfully exchanging approximately three quarters of the public warrants, all the insider warrants and the majority of contingent rights for new shares
- Concluded negotiations with our Tier 1 bondholders, endorsed by 99.9 percent of votes cast in favour of the proposed amendments to the Tier 1 Notes (“the Notes”, also referred to in this document as Perpetual Reset Capital Securities). We have also now resumed payment of coupons, with the remaining deferred coupon scheduled for payment by the end of 2010
- Completed the National Provident Life Limited restructure in the first quarter of 2010, an important step in the movement towards a single life company structure
- Consolidated the operations of our asset management business, providing a platform for future growth.
Group performance
The operating performance of our two core segments is as follows:
Phoenix Life
Phoenix Life manages the closed life business of the Group and has produced an excellent first half performance, generating MCEV operating earnings of £219 million after tax, an increase of £235 million on the pro forma comparative period (an increase of £176 million on a consistent basis, using a longer-term rate of return in both half year periods). The business is also progressing well with its planned site consolidation and funds merger activities.
Mike Merrick, Chief Executive of Phoenix Life, and his management team are also well advanced in achieving their operational targets, including working with the wider Group in preparation for the regulatory changes required as a result of Solvency II.
Ignis Asset Management
Ignis provides asset management services to the Group’s life companies as well as third party clients. Ignis has continued to build upon its performance in 2009, generating an IFRS operating profit of £22 million, a 38 percent increase on the pro forma comparative period. Assets under management increased to £69 billion, including
£0.8 billion of net new third party business and £2.8 billion of assets that have been brought in-house from a third party asset manager.
During the first quarter, Ignis concluded the corporate integration of the two asset management companies, Axial and Ignis under the Ignis brand, including a streamlining of the executive and the management structure to support a single business offering. Following the successful integration, Chris Samuel, Chief Executive of Ignis Asset Management, has further strengthened his management team with the appointments of a new Chief Investment Officer, Chris Fellingham and Chief Operating Officer, Tim Roberts. Ignis also remains focussed on growing its third party franchise business with positive net inflows demonstrating progress on this front.
Our goals and progress
Our 2009 Annual Report and Accounts outlined our business goals and as a Group we have remained focused on executing strategies to achieve them. We have made significant progress over the last six months and we are confident in our ability to achieve our financial and operational targets for 2010.
- Maximise business performance and value
Progress: Our Holding Companies' cash inflows demonstrate the predictable nature of our long-term cash flows and we have continued to take action to accelerate cash flows from Phoenix Life, including further fund mergers. Ignis has seen profit growth and will continue to focus on internalising assets under management as well as building its third party customer base.
- Improve customer outcomes
Progress: Improvements to processing times for customers wishing to take an open market option are being delivered as a result of our subscription to the industry led ‘Origo’ initiative and customer research supports general satisfaction in relation to telephone contact. In the latter part of 2010 we will also be working to provide an opportunity for certain customers to bring forward the payment of benefits whilst enabling us to reduce costs, the benefit of which will flow through to the with-profits fund. A standard approach to estate distribution for the life companies is being developed this year which may provide additional benefits to policyholders.
- Sustain a robust and scaleable business model
Progress: We have simplified the Group’s capital structure through our agreements with the contingent right holders immediately prior to our Premium Listing on the LSE, and we believe this positions us well to, in due course, secure new sources of funding. We will continue to work with our lending banks during the second half of 2010 to simplify our financing structure. Operationally, our Phoenix Life consolidation programme continues on track and our business outsource partners are also progressing well with their respective transformation programmes. In addition, the Group has significantly progressed its financial and operational risk management framework. The asset management business has also completed its integration and now operates under the Ignis brand. Integrated reporting and management information systems have been implemented by Ignis in the first half of the year.
- Be a place where people want to work
Progress: Our mid year checkpoint for employee engagement has demonstrated a significant improvement in our overall engagement score and we are well on track to achieve our full year target of 70 percent. As well as achieving a significant uptake in our staff relocation programmes, we have also welcomed a number of new employees into the Group across Phoenix Life, Ignis Asset Management and the Corporate Office, demonstrating our ability to both attract and retain talent.
- Build an industry-wide reputation
Progress: We are building trust by consistently delivering on the commitments we have made. We have significantly enhanced our investor relations and media relations capabilities, and together with the Premium Listing on the LSE and corporate re-branding initiatives, we have the foundations in place from which to further develop our reputation.
- Pursue value-adding acquisitions
Progress: As the largest specialist closed life fund consolidator we are well placed to realise value from acquisitions and I believe we have all the necessary expertise within the Group to execute transactions and successfully integrate new funds.
Solvency II
Our Solvency II programme continues to develop and we achieved a key milestone in July when we completed
our template containing qualifying criteria, setting out our readiness to join the FSA’s pre-application process for Solvency II internal model approval. I am also encouraged by the fact that the assumptions used in the latest quantitative impact study (QIS5) are much closer than those previously suggested by QIS4 to those adopted in our existing internal models. We continue to recognise the benefits that Solvency II will bring to the insurance industry and believe that Phoenix Group will be well placed to take advantage of any changes in the marketplace that arise from the final framework.
Interim dividend
The Board has declared an interim dividend for the first 6 months of 2010 of 21 pence per share which will be paid on 15 October 2010, subject to compliance with the processes set out in Group’s main credit facilities. The dividend represents 50 per cent of our stated annual dividend policy. We expect to revisit this policy should our dividend restriction be removed. The Group is pleased to provide this payment in Sterling as opposed to Euros, and we are also offering a scrip dividend option to our investors.
Outlook
This has been a pivotal period for us, completing many key corporate objectives and delivering a strong operational performance. Looking ahead, we are well placed to deliver on our full year financial targets in terms of cash flow, embedded value and capital. In addition we shall continue to focus on simplifying our banking facilities and additional fund restructuring. This will provide a sound foundation for pursuit of the Group’s closed life fund consolidation strategy.
Jonathan Moss
Group Chief Executive
26 August 2010