Standard Life plc (SDLF) Earnings Call Transcript

Good morning, and welcome to Phoenix Group Half Year 2024 Results Presentation. I will now hand over to Andy Briggs, Group Chief Executive Officer, to introduce the session. Andy, over to you.

Thank you, Claire, and good morning to those in the room and to those joining on the webcast, and welcome to Phoenix Group's 2024 Half Year Results Presentation. I'm delighted to have Stephanie Bruce joining me on stage today, who started in June as our interim Chief Financial Officer, and we'll talk through our first half financial results later. But starting first with the strategic progress we've made in the first half. Back in March, we set out that we are on a 3-year journey to build the U.K.'s leading retirement savings and income business and fulfill our purpose of helping people secure a life of possibilities. We said we would deliver our ambition by executing our strategy as we invest in our business to grow, optimize and enhance, building on the strong foundations we've put in place over the previous 3 years. This means combining our Heritage and Open divisions together and restructuring them into Pensions and Savings and Retirement Solutions businesses, which are very focused on meeting customer needs as they say for transition to and secure income in retirement with innovative retirement income solutions at our core. To win in this market, we need to offer a compelling customer experience. That means offering the full range of retirement savings and income solutions through a slick digital interface with a range of simple fund investment options supported by excellent customer service, and which is sold at a competitive price that is enabled by a single group-wide operating model. The outcome of that will be a sustainable growing business, delivering growing cash, capital and earnings, which supports our progressive and sustainable dividend. Now we're only, of course, 3 months -- 6 months, sorry, into a 3-year strategy, but I'm pleased with our progress to date. Back in March, we introduced an evolved financial framework of cash, capital and earnings against which we set very clear 3-year targets. And our first half financial performance demonstrates that we are on track to deliver all of those targets. We have delivered a 19% year-on-year increase in operating cash generation to GBP 647 million. This, in turn, supported strong total cash generation of GBP 950 million in the period. It means we are now confident in delivering at the top end of our GBP 1.4 billion to GBP 1.5 billion target range for the year. And we're also on track for our 2026 cash targets here, too. Our shareholder capital coverage ratio is comfortably in the top half of our operating range, while reducing as expected, to 168%. There are two drivers here. I'm particularly pleased with the strong performance from our underlying business, which delivered recurring capital generation of 3 percentage points and growth in recurring own funds. This was more than offset by the impact of our planned debt repayments and our planned investment into the business. We're targeting a Solvency II leverage ratio of 30% by the end of 2026 and intend to repay at least GBP 500 million of debt over this period. I'm delighted that only 6 months into this 3-year period, we've already repaid GBP 250 million of our existing debt. Now the headwind of higher interest rates in the first half on owned funds has dampened the benefit that this debt repayment has had on our leverage ratio, which is sitting at 35% at the end of June. With long-term rates have reduced since then, we've already seen some of this headwind reverse. We remain focused on achieving our target of 30% by the end of 2026 which we will deliver through a combination of further debt repayment, accelerating our organic growth and delivering our cost savings to drive stronger growth in own funds. Finally, it was pleasing to see 15% year-on-year growth in IFRS adjusted operating profit as both our Pensions and Savings and Retirement Solutions businesses delivered strong profitable growth. I'm therefore confident we are on track to deliver our 2026 operating profit target of GBP 900 million. And over the longer term, we are focused on driving operating profit higher still, so that it more than covers our recurring users on an IFRS earnings basis, which, of course, across the other parts of our financial framework on cash and capital we already do today. However, we have seen further adverse accounting volatility in shareholder equity in the first half. This is a consequence of our hedging approach, which protects our surplus capital and makes our dividend very secure. Stephanie will cover this in detail later, including the fact that some of the accounting volatility will have reversed with the reduction in rates since June and will continue to reverse as rates reduce further. Finally, consistent with prior years, the Board has declared an interim dividend of 26.65 per share, which is equal to our 2023 final dividend and a 2.5% year-on-year increase. In March, we set out our capital allocation framework to deliver our 3-year targets. This has two key underpins. The first is that we will operate a progressive and sustainable ordinary dividend policy. And the second is that we'll maintain our strong and resilient balance sheet with a 140% to 180% operating range for our shareholder capital coverage ratio. We've also been very clear in explaining how we will balance the investment of our capital across our strategic priorities in order to deliver the next phase of our journey as outlined on the slide. The investment we're making to our business is significant and will enable us to deliver our ambition of building the U.K.'s leading retirement savings and income business as well as delivering strong shareholder returns. Our first strategic priority is to grow. And here, we will develop a range of innovative retail propositions and further develop our established Workplace and Annuities businesses, which will deliver strong growth in operating cash generation over the long term. Our second strategic priority is optimized. Here, we will deliver our balance sheet as planned, and further develop our strong existing capabilities in asset and liability optimization to deliver sustainable recurring management actions over the long term. Our third strategic priority is Enhance. Here, our focus is on delivering our remaining migration and transformation programs as well as integrating our businesses into a single group-wide operating model, all of which will deliver GBP 250 million of annual run rate cost savings by the end of 2026. Turning now to the progress we've made in the first half. We've invested GBP 164 million of the planned GBP 700 million, to grow, optimize and enhance our business. Repaid GBP 250 million of debt, and are on track to invest around GBP 200 million of capital into annuities this year. This combined investment has enabled us to make good initial progress on our three strategic priorities. Firstly, we continue to invest in growing our business in the first half, where we've launched innovative new retirement income products and enhanced our annuity market propositions. We're also taking action to retain our existing customers for longer to offering our Workplace customers, our Retail consolidation offering and our Pensions and Savings customers our annuity offering. Secondly, we remain laser-focused on optimizing our balance sheet. As I've already outlined, our first half debt repayment has supported progress towards our 30% Solvency II leverage ratio target. Mike Eakins, our Group CIO, and his team have been investing into our asset and liability optimization capabilities over the past few years. And I was, therefore, delighted to see this deliver GBP 264 million of recurring management actions in just 6 months. This is made up of a large number of BAU actions that we, and all of our peers undertake week-in, week-out to optimize our portfolios while ensuring our risk profile remains unchanged. Given the strong first half performance, we are now confident of delivering GBP 400 million of recurring management actions this year, ahead of plan. And to be able to sustain this level going forward every year. I was also pleased that we've launched Future Growth Capital. This is the first private markets investment manager to be established in the U.K. to promote the objectives of the Mansion House Compact. As we target high returns from customers from a broader range of assets. Finally, we've made good progress in simplifying our business to deliver cost efficiency through collapsing our former Heritage and Open divisions into a single group-wide structure. Which means, for instance, we now have a single Pensions and Savings business that's focused both on attracting new Workplace and Retail customers and retaining the legacy retail outflows. And we also continue to migrate our customers to the modern, digitally enabled TCS Diligenta platform with initial 550,000 ReAssure customers scheduled to migrate by the end of this month. All of which means we expect to deliver around GBP 50 million of run rate cost savings by the end of this year and are on track for our 2026 target. And the investment we're making to grow, optimize and enhance our business is supporting strong trading performance in our business units. At capital-light, fee-based, Pensions and Savings propositions, help customers journey to and through retirement. The markets we operate in, under the Standard Life brand, are huge and growing. With GBP 40 million to GBP 50 million of annual flows in the Workplace market and GBP 80 million to GBP 100 billion of annual flows in the retail market. And the opportunity is even greater than this, with only one in seven people saving enough and only 10% getting advice. As an established scale player with GBP 184 billion of assets and 12 million existing customers, we are well positioned to access these markets. Our strategy is clear. We are customer-centric and purpose-led in retaining our existing customers and attracting new customers by meeting more of their needs over time. I'm therefore delighted to see the good progress we've made in enhancing our customer propositions, with the launch of the Standard Life Smoothed Return Pension Fund, and a Standard Life Guaranteed Fixed Term Income products, this year. And we continue to be relentless in advocating for the changes that will help our customers. Where we are working with the government to secure increases in auto-enrollment contributions and the introduction of targeted support. Our focus on customer needs is translating into strong trading performance. In Workplace, we continue to retain our existing schemes and win new schemes in the market, thanks to our continually improving proposition. And this has supported strong net fund flows of GBP 3.3 billion in the first half, up 83% year-on-year, which included the transfer of GBP 900 million of customer assets from a large technology company. Another example of the strength of our proposition with corporates. We also remain focused on improving our cost efficiency to enhance our margin and drive increased profitability. This is a simple business. We make money by firstly growing our assets, to improving our net fund flows and then secondly, by enhancing our margin through improving our cost efficiency. Andy Curran and his team have delivered both in the first half, with average assets under administration, up 9% and our operating margin increasing from 14 bps to 17 bps. This has enabled us to increase our Pensions and Savings IFRS operating profit to GBP 149 million, up 31% compared to the second half of 2023. Now importantly, we've delivered this excellent performance while still being in net fund outflow. So, as we execute on our strategy to retain our legacy retail outflows over time by retaining more of our customers, this will drive even stronger performance in the future. Our Retirement Solutions business is focused on helping people secure income in retirement. We have an annuity portfolio of GBP 39 billion, which represents 14% of our total assets and reflects our strategic decision to limit our shareholder credit risk we retain on our balance sheet. We operate in both the BPA and individual annuity markets, with our strategies designed to leverage the strong demand from corporates and individuals. And I'm really pleased with our first half performance and the enhancements we've made to our customer proposition. In the annuity market, we wrote GBP 1.7 billion of premiums in the first half, reflecting the slower BPA market demand in the period. But we've already transacted a further GBP 400 million since June, and have an additional GBP 2.2 billion of exclusive transactions we're working on. And with a GBP 15 billion pipeline of deals for the remainder of 2024, we are confident of delivering a strong second half of BPA premiums. In the individual annuity market, we've been seeking to expand our range of propositions and it's therefore great to see the strong initial trading from our Standard Life Pension Annuity. We also know that when our customers make the decision to secure, to seek income security and retirement, they want to move quickly, which is why we recently launched our new digital individual annuity quote capability, where over 90% of our quotations are underwritten and returned within seconds. These are clear examples of where we're investing to leverage our capabilities and balance sheet to meet a clear customer need under the trusted Standard Life brand. Now key to ever stronger financial performance in this market is to write new business in a capital-efficient way. So I'm particularly pleased that we're now able to write more premiums to less capital due to the step change we've made in reducing our annuity capital stream to around 3%, reflecting the full benefit of the Part VII funds merger we completed last year and demonstrating the benefits of our diversified balance sheet. With our GBP 200 million of capital enabling us to write around GBP 6 billion of annuity premiums annually, which in turn will be the key driver of strong future CSM growth over time. And I'm pleased with the 10% CSM growth delivered in the first half. So in summary, when you look at the first 6 months of our 3-year strategy, there's a lot to like. Excellent growth in our capital-light Pensions and Savings business through growing our assets with improved net fund flows and enhancing our margin by reducing cost. This has been a huge area of focus for me since I joined. And so it's great to see the momentum we are now building. And then disciplined deployment of capital into annuities with excellent progress in reducing strain, reducing our new business strain to optimize our returns and deliver strong CSM growth. We're also deleveraging our balance sheet and delivering recurring management actions that create value by growing own funds. And we're making clear progress on delivering our migrations and implementing the changes needed to simplify our business to reduce costs. Phoenix is now an attractive organically growing business, that delivers growing cash, capital and earnings, with strong growth in our operating cash generation, our recurring capital generation and own funds and our operating profit and CSM. All of which underpin our progressive and sustainable dividend. With that, I'll now hand you over to Stephanie, who will explain our first half financial results in more detail. Stephanie?

Thank you, Andy. Good morning, everybody. So I've now been with Phoenix a couple of months and have been really struck by the focus of our colleagues on delivering the strategy right across the business. It is readily apparent that the wide range of capabilities and specialisms here at Phoenix is key to the momentum the team is achieving as we progress towards our ambition of being the U.K.'s leading retirement savings and income business and create shareholder value through delivering strong performance across our financial framework of cash, capital and earnings. Now for the first half of '24, we are reporting against these three key areas. In cash, total cash generation has increased to GBP 950 million, and importantly, was delivered through strong growth in operating cash generation from our businesses. In capital terms, the balance sheet's resilience enabled both the repayment of debt and investment into the business, with the shareholder capital coverage ratio remaining in the upper half of the target operating range and the Solvency II leverage ratio reducing in the period to 35%. In earnings, adjusted operating profit increased by 15% to GBP 360 million, reflecting the growth in both the Pensions and Savings and the Retirement Solutions businesses. However, we have reported a statutory loss after tax of GBP 646 million due principally to the consequences in this period of our Solvency II hedging strategy in IFRS reporting. This has, therefore, reduced shareholder equity and adjusted shareholders' equity in the period, which I will cover in detail shortly. And finally, as Andy has outlined, the Board has declared an interim dividend of 26.65 per share, which is a 2.5% year-on-year increase. Now the operating momentum in the business is driving strong performance across the key metrics that demonstrate growth. Operating cash generation is the primary metric and therefore, 19% year-on-year growth in the first 6 months of the 3-month, 3-year strategy is encouraging. Similarly, improving recurring capital generation by 3 percentage points in the period is an important indicator that the underlying business before the non-recurring debt repayment and strategic investment is self-sustaining. Other key metrics are Pensions and Savings average assets, which grew 9% as well as Workplace net fund flows, which increased 83%. Both are good signs of the growth in the capital-light business. CSM growth of 10% is a strong increase in the store of future value that will emerge in operating profit over time, and an annuities capital strain of 3% is an important metric for enabling growth in the Retirement Solutions business. However, in this period, the known consequences of our hedging strategy have impacted the IFRS results in particular. Now as a reminder, Phoenix hedges its Solvency II surplus, which was GBP 3.5 billion at the end of June. This is because a stable surplus protects our cash generation from unrewarded market risks and therefore, underpins our sustainable dividend. And this strategy works well. However, in an environment of higher interest rates and rising markets, there are consequences of the hedging strategy, particularly for IFRS shareholders' equity and, to a lesser extent, Own Funds, which in turn impacts the leverage ratio. Interest rates and equities markets were higher in the period to June, which therefore, created an adverse impact in the first half. But we believe the end of June represented the peak for interest rates with long-term rates having already fallen around 35 basis points by mid-September with further reductions expected. We have, therefore, already seen improvements in all of these metrics since June and are positioned well to benefit further from lower interest rates going forward. So turning to the detail of our first half results, starting with cash. So at Phoenix, operating cash generation is the sustainable level of cash remitted from the life companies to group and comprises both the surplus emerging and the recurring management actions. It's therefore very pleasing to have delivered 19% growth to GBP 647 million in the first half. The key components of growth are a 5% increase in surplus emerging to GBP 383 million, reflecting particularly the growth of new business in Pensions and Savings, and a 48% increase in recurring management actions to GBP 264 million, which reflects a large number of actions to optimize the Solvency II balance sheet. Given the strong start to the year, we are now confident of delivering GBP 400 million of recurring management actions in '24 and maintaining that level. As Andy explained earlier, recurring management actions are simply the same day-to-day actions that others across the industry undertake to efficiently manage their balance sheets and which is normally embedded into the surplus emergence. This includes, for example, optimizing the shareholder credit portfolio. The separate reporting of these management actions made sense as Phoenix transitioned its reporting framework and could be simplified over time. Importantly, the operating cash generation in the period more than covered the recurring uses and the dividend, which demonstrates the stronger operating performance in the business. We've also delivered GBP 303 million of non-operating cash generation, and this includes one-off management actions and a free surplus release. So total cash generation is therefore GBP 950 million and the strong first half performance increases our confidence in delivering at the top end of our cash generation target range of GBP 1.4 billion to GBP 1.5 billion this year. So turning to capital. Resilience of our Solvency II capital position provides the capacity to support both deleveraging and investments into the business. Our shareholder capital coverage ratio remained in the top half of the target operating range throughout the period and was 168% at the end of June. Now there are a number of moving parts within the Solvency II walk, but I particularly wanted to draw your attention to the positive nature of the recurring Solvency II capital generation in the period. The 3 percentage points increase means that the operating surplus generation more than covers our operating costs, debt interest, dividend and new business stream and reflects the stronger operating performance from the business. The majority of economic movements were mitigated by the hedging strategy with only a limited GPB 100 million adverse economic variance in the surplus during the period. And as Andy explained earlier, we also had a number of planned non-recurring uses of surplus capital, including GBP 250 million of debt repayment and nearly GBP 200 million of investment into the business. Our closing surplus was therefore GBP 3.5 billion. Turning to leverage. We have repaid GBP 250 million of debt in the first half of '24 and intend to repay at least another GBP 250 million by the end of '26. This will contribute to achieving the target of a 30% Solvency II leverage ratio by the end of '26, which we consider to be an appropriate level for the business. Now as at June, the ratio had reduced to 35%, which reflected a 2 percentage points reduction from the debt repayment. This was partially offset by a 1 percentage point increase due to the impact on regulatory own funds from the hedging strategy, primarily as a result of higher interest rates. But this impact is now reversing as interest rates reduce. Now importantly, we have a number of levers within our control that contribute to achieving the target of 30%. These include the planned repayment of at least GBP 250 million of debt which will reduce the ratio by around 2 percentage points, all else being equal. We're also focused on growing own funds through the delivery of our strategy and will accelerate this growth by writing profitable new business and retaining more of our existing customers, realizing our target savings and reducing investment spend and through delivering recurring management actions. So turning to IFRS earnings. We're pleased to report a 15% year-on-year increase in IFRS adjusted operating profit to GBP 360 million. Our Pensions and Savings business is primarily a capital-light business with around 90% of its assets being investment contracts. Profitable growth in this business is delivered through growing assets and improving the net operating margin and these half year results show further successful action on both building on the past 18 months or so. Now in the first half of '24, our average assets under administration increased by 9% compared to 23%, driven by growing workplace assets as we improve our net fund flows and through positive market movements. Operating margin across Pensions and Savings has also increased to 17 basis points, an increase of 3 basis points compared to the second half of '23 as costs have reduced. These factors have helped to increase the operating profit of Pensions and Savings in the half year to June. And it's worth noting that the lower profit in the first half of '23 reflected some one-off adverse experience variances related to a small proportion of insurance contracts in the Pensions and Savings business, which has not repeated since. Now Retirement Solutions contributed GBP 210 million of operating profit in the period, with steady growth due to success in the annuity market and our ability to improve the investment return. This is continuing to build good momentum. The decrease in Europe and other primarily reflects positive one-offs in the prior period for experience and assumption updates that have not been repeated. So looking forward, we expect to see our operating profit growth momentum continue with a stronger second half performance as we progress towards our target of GBP 900 million by '26. Now the loss after tax I highlighted earlier, has resulted in a further decline in shareholders' equity at the end of June. We are very focused on rectifying this over time. Our operating profit is growing strongly. And in the first half, it broadly covered key recurring expenditure of our dividend and debt interest. It does not yet cover the accounting impact from amortization of intangibles, which is running off over time or the non-operating expenses. Now we are incurring higher non-operating expenses during our 3-year investment phase as we invest to grow, optimize and enhance our business, after which this level should reduce to a low level. We, therefore, are focused on growing operating profit to cover all expected uses over the long term. Now in this first half, we also had a one-off accounting impact on shareholders' equity of the buyout of our internal PGL Pension Scheme, although that is actually broadly offset in the CSM, and I will cover that shortly, so is neutral from an adjusted equity perspective. Now the main driver of our reduced shareholders' equity in the period is therefore the adverse economic variances from higher interest rates and equities due to the accounting mismatch related to our solvency hedging. Now looking forward, our shareholders' equity is positively geared to lower long-term interest rates with a 35 basis points reduction since June having already improved the position and further improvements to come as rates reduce further. Importantly, though, we are focused on driving increased shareholder equity through the factors which we can control. This includes our target to increase adjusted operating profit by '26 to GBP 900 million through business growth and by delivering annual run rate cost savings of GBP 250 million. In addition, Phoenix has long demonstrated its strong capabilities in optimizing its cash and capital position and we are now looking to apply exactly the same discipline to optimizing the IFRS balance sheet. Adjusted shareholders' equity was GBP 4.2 billion as at the end of June, which we believe is a far better measure for life insurance companies, as it includes the CSM, which represents a significant store of future value that will emerge over time into operating profit, creating value for shareholders. And the CSM grew in the period by 10% to GBP 3.1 billion gross of tax. New business contributed 3% growth in the CSM in the first half, lower than in '23 due to a slower first half BPA market. Management actions of GBP 73 million primarily reflects lower investment manager fees that we have negotiated. It was also a one-off GBP 87 million increase from the buyout of our internal pension scheme that I explained on the prior slide as well as an GBP 81 million of one-off modeling refinements and adjustments. So strong growth for the CSM in the first half with the impact from some one-offs. But looking forward, we expect increased new business growth in the second half, given our aim to achieve GBP 6 billion of annuity volumes with competitive pricing and less one-off impacts. So in conclusion, we are executing on our 3-year strategy we invest to grow, optimize and enhance the business. We have a clear set of financial outcomes for shareholders across cash, capital and earnings as outlined on the slide. Now this includes the primary reporting metric of operating cash generation with a target of GBP 1.4 billion in '26 and which is then expected to grow at mid-single-digit percentage growth rate over the longer term. We have made good progress in the first half and are on track to meet our financial targets. For '24, we are confident that we will deliver at the top end of our '24 total cash generation target range of GBP 1.4 billion to GBP 1.5 billion. So Andy, back to you for the summary.

Thank you, Stephanie. So in summary, we have a clear vision here at Phoenix to be the U.K.'s leading retirement savings and income business. And I'm really passionate about this. With the level of under saving and the lack of advice for the majority of people, somebody needs to stand up for the ordinary customers and help them get a better later life. And I believe that we, at Phoenix are best placed in the industry to do that. And this is also a huge commercial opportunity given the scale of the fund flows and the structural growth that societal need offers. So we're, therefore, executing our 3-year strategy, building a sustainably growing business, and I'm really pleased with the initial progress we've made in these first 6 months. As the turnaround of our Workplace business delivered strong net fund inflows, the launch of our new retirement income products helped to begin address -- help to begin to address our legacy outflows. And our asset management capabilities now creating significant value. We're therefore delivering profitable growth through our capital-light Pensions and Savings business as we grow our assets and reduce our costs. And we remain disciplined in our deployment of capital into annuities, with our reduced capital strain, a key enabler of strong returns in our Retirement Solutions business, all of which is delivering the strong operating momentum we are seeing in the business. We're also committed to achieving our target leverage ratio, and I'm very focused on ensuring we grow our balance sheet over time through growing both Own Funds and shareholders' equity. We're therefore on track to deliver all of our financial targets across our financial framework of cash, capital and earnings, which will support strong shareholder returns enabled by our progressive and sustainable ordinary dividend policy. And with that, we will now 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, and we'll get one of the roaming mics to you. Please, can you start by introducing yourself and the institution you represent. For anyone watching the webcast, please use the Q&A facility, and we'll come to your questions after we answered those in the room. So I'd like to be fair. I think Steven's on the far left, you started last time. We're going to start this side, and we will kick off with Abid.

It's Abid Hussain from Panmure Liberum. I've got three questions. First, on the total cash generation. So clearly, strong delivery on the half year. Just wondering why you're not increasing the full year target. You said you're going to hit the top end at GBP 1.5 billion, but it feels like you could exceed that? Or is there a timing issue? Just trying to sort of gauge the sense there. And then the second one is on the IFRS earnings, clearly below the line, negative variances on -- due to economic movements. I'm just trying to understand, is that sort of due to the contracts becoming more orders under the IFRS 17 regime and you got to take the pain upfront immediately? And so is there some sort of asymmetry when the variance -- when the economic movements turn in the opposite direction? So just trying to judge if there's an asymmetry on the way down versus on the way up there? And then the final question is on the Sun Life sale process. Just trying to understand why you pulled out of that sale process? And if that's likely to be resurrected? Or do you think you can basically generate more cash on your own balance sheet for that?

Okay. Thanks, Abid. So I will take the first and third, and I will briefly comment on the second, but then pass to Stephanie to give more color. So in terms of the total cash generation, so back in March, we set out a series of 3-year targets. We feel very good about our progress against those. But 6 months into 3-year targets. We're not going to start upgrading anything. So we decided not to change any of the targets here. We're very, very pleased with the cash generation, and we're comfortable we'll be -- come to a bit at the top end of the range of the 1-year cash target, no sort of timing bits to be concerned about with that. In terms of Sun Life, so we've concluded there that a disposal would not maximize shareholder value, basically given the current protection market uncertainty. So you're probably aware, the FCA are doing a review into pure protection. And we're not worried about the business ourselves. We offer excellent value for money for customers here. It seems as though the primary focus is around commission levels. So we are currently the manufacturer and the distributor in Sun Life. And therefore, if we need to shift commission levels, zero some gain for us, we don't mind. But looking at a potential disposal of the distribution arm and keeping the manufacturing arm given that uncertainty we concluded highest-value way forward is to retain. So a really good business. [ Mike Eakins ] and the team, are first class, the management team. They do an excellent job and the highest value will be retaining the business with and growing the business within the group. In terms of the IFRS earnings, so let me just give a kind of quick initial comment on that and then pass to Stephanie. So look, we have seen shareholder equity decline primarily as a result of the rise in interest rates. That's a consequence of our hedging strategy. So the hedging strategy is protecting the capital surplus. So that's basically protecting cash generation short and long term, which also, therefore, protects our dividend short and long term. So that's what we're looking to do. It's a consequence we accept from that. Our current trajectory on this doesn't go negative in terms of shareholder equity. But it's an area we've got strong focus on. It's a strong area of focus for investors. And my primary focus and Stephanie, as she said, is let's get that operating profit up to a level that covers all of the recurring uses so that every year, absent any economic variances, shareholder equity is growing. So that's our focus. We've got really strong operating momentum in the business, strong growth in the business. I want to drive that through, very determined to drive that through. So operating profit gets to the level it covers all of the recurring uses. Stephanie, do you want to just add to that in terms of the...

I think, that was a pretty good answer. But in terms of -- the only thing I would add in terms of, you asked is, around onerous contracts, et cetera. No, that's not the case. It is really to do as Andy says, we hedge our surplus and therefore, that is obviously tied to in terms of, obviously, the Own Funds, the SCR and the surplus. And a number of those components actually are not in IFRS. So therefore, it's just a consequence of there being items that you're hedging in terms of as they move around in a solvency world, it's just really the accounting that then comes through when you look at it in IFRS.

So we'll go to Dom and then Andy.

Dominic O'Mahony, BNP Paribas Exane. Three questions from me. Two on the recurring management actions, if that's all right. I wonder if you could just give us a little bit more detail on the very strong print there? Where did it come from? And then secondly, on the recurring management actions, should these have a symmetrical impact on the IFRS as well, if the IFRS discount rates move with yields? If you could just explain the IFRS impact of those, that would also be very helpful. And then lastly, very exciting to see some of the new product launches on the retail side, for instance, the Individual annuities and the Smoothed Fund. Could you just give us a little bit of color on the performance of those products since launch?

Okay. So I will kick off with the first one and then get Stephanie to pick up the second one, and then Andy Curran's in the front row here, so I'll give him a due notice. He's getting the third one on the new product launches. So in terms of the recurring management actions, this is a very large number of week-by-week, day-by-day actions that Mike and the team take within the business. And we're not increasing the risk by doing so. It's keeping the risk the same. A larger number we're doing week-in, week-out. I think the big difference here is, because of our history of doing M&A and then doing management actions from M&A, as we transitioned our financial framework to much more normalized in line with peers, we felt it will be clearer to call this out as recurring management actions. What our peers -- our peers do exactly the same thing. They basically embed it in operating surplus. They don't call it out as recurring management actions. They just embed it. But what we're doing here is just the same as peers do. And we probably should think over time as we evolve our financial framework, we should reflect further on that. It's just the same as peers, no different sensible optimization of the annuity portfolio. Stephanie, do you want to just pick up on the IFRS impact?

So the management actions are particularly designed in terms of, again, managing very much our longer-term cash generation. So again, a focus very much to influence both the Own Funds and/or the SCR. There is a different impact for IFRS and we do -- it breaks -- it doesn't actually break out in an easy way. It's a reduced impact for IFRS, because the focus is actually on the Solvency basis. And actually, within IFRS, it would come through a number of different lines. So we don't actually split it out in that way.

Actually, when you said new product launches, I'll get Andy to cover the Smooth Managed Fund and the fixed term annuities. But Mike is also here as well. He was instrumental on future growth capital. The new JV was showed us. So I'll get Mike to comment on that as well. But Andy, do you want to go first?

Yes. Just very quickly. Yes, sure. Thank you for the question. On the Smooth Managed Fund, we've launched that very recently. It takes time as the adviser goes through the process of getting the product panel, then identifying the appropriate clients and making the recommendation to those clients and so on and so forth. So we've gone through a lot of work with adviser firms at the moment. I think, we have about 70 adviser firms -- between 70 and 80 adviser firms who are paneling this product. We've already written some investment money is in already. So it's just short of GBP 2 million, which seems very small, but the opportunity there is over the long run, and the key is getting the product panel. And that's just part of the process. So it's kind of time lock, but I'm very, very encouraged by what we've seen so far. On individual annuities and fixed term annuities, again, the opportunity for us is really big. The start has been really positive. I think Andy mentioned in his remarks that our servicing of that annuity business is really, really sharp. We think it's market leading. And we see no reason why we can't grow that business significantly. So in all sort of three: Fixed Term, Individual Annuity and Smoothed Fund really encouraged, and I think we'll have even more things to come over the coming months as well. So encouraging start.

Thanks, Andy. Mike?

Yes. So on future growth capital, we were delighted to announce that JV with Schroders. We signed up to the Mansion House Compact in July of last year, where we said we would invest 5% of our defined contribution assets in productive assets. We have to look around the market to see which asset manager could help facilitate this. And we quickly came to the conclusion that there was no real offering. So in conjunction with our partners at Schroders, we developed future growth capital. We were delighted to announce that earlier in the summer and are really excited about the prospects that, that delivers for our most important stakeholder or customers. So really getting our customers access to those private markets where they don't have it right now, and we can deliver those returns will flow through to our customers. Andy?

Andy Sinclair from Bank of America. First was on BPA and great volume guidance and low strain looks great. But can you tell us a little bit more about the margins. We've not got a new business long-term cash disclosure, but should I just look at CSM new business generation divided by premiums? If I do that, I think we've dropped from about 4.8% in 2023 to 4.1% in half year '24. Just if you can tell us a little bit more about the margins, is that the right way to look at or something else? Next was just on the hedging. And just really trying to understand what happens when rates move. If short-term rates come down, if base rates come down, but the 10-year stays at similar levels. So that doesn't come down, how much of a benefit do we get to shareholders' equity? Just to understand kind of depending on the shape of the curve as well as just base rate cuts, how much of a benefit do we actually get to shareholders' equity? And then third was just on the other non-operating item within IFRS. So GBP 302 million negative in H1, including the Pension Fund stuff, which is about 1/3 of that. How much should we be thinking over the rest of the plan to be coming through in that line? Is that GBP 400 million left of the GBP 700 million? Is it GBP 500 million? How broadly should we think of that line over the remainder of the plan?

Sure. Okay. So I'll take the first and a quick comment on the second and then pass to Stephanie for the second and third. So on the BPA side, so our primary focus here is actually driving strong returns on capital. So looking to optimize the capital we deploy and drive strong returns. We say we aim for mid-teens returns. We're obviously doing very well against that. Looking at the CSM growth is also a good way to look at it, Andy, but it does depend on the duration. So sometimes you get a relatively shorter-term business that will give you a lot of cash fairly quickly, but a shorter tail than other cases. So I'd look at that more generally over time. In summary, overall, I'm delighted with what some of the guys are doing on the BPA side, getting that strain down to 3% is fantastic for us. It was 4.7% last year. It was 6% the year before, around 6% the year before. And it means that our disciplined capital allocation of GBP 200 million can go a lot further. We expect to be the right GBP 6 billion of premiums. And I think that's very attractive while keeping the diversified balance sheet, which is important to us. Just on the hedging point, I'll get Stephanie to respond to that, but I think the key thing I would say is just to reiterate that -- what we need to do here is grow that operating profit. We've got a very strong momentum building in our business. Our business is growing strongly. That needs to drive through to operating profit. So operating profit exceeds the recurring uses. We can't rely on where the markets move on, not to whether we have growing shareholder equity. We need to focus on the stuff that we can control, and that's driving up operating profit, which we're very determined to do. But, pick up from there, Stephanie.

Yes, I think, that's exactly right. That is the absolute key driver. In terms of the movement of all of the rates in terms of, obviously, the team, I've just been monitoring that. But in terms of what's happened since June and right across the patch on the average, the 35 basis points we referred to, we would expect around about a couple of hundred million to come back in an economic variance already since June. So that's how that would flow through. And then into your third question, in terms of non-op, you're absolutely right, there was an additional pension movement in this period. But behind that, obviously, there was also the investment in the business of just around about 0.2. Now if you refer back to the guidance in terms of the overall experience of the GBP 700 million, which you referred to there, which was set out in March, and we will still expect that to come through over the next 2 years, the remaining balance to come through.

Come through that line? And sorry, just jumping back to my previous question about the shape of the yield curve. I mean, look, we've got an inverted yield curve at the moment. If that yield curve normalizes, so we go down at the short end, but let's say the long end doesn't change. Do we get any material benefit to shareholders' equity or do we need the long end component as well?

So again, and we're not going to trying to do all the movements here at the moment. As I say, what we can say is we've definitely improved already from the rates having come down to get to that impact as we would look at it as a couple of hundred million since the year-end. Sorry, sorry, year-end, half year-end.

Sorry, I didn't see you there. I'll come to you next Rhea. And Andrew, you've not had any questions, Andrew. This is worrying me.