Phoenix Group plc Investor Day 2013 Thursday 16 May 2013 Clive - - PDF document

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Phoenix Group plc – Investor Day 2013 Thursday 16 May 2013

Clive Bannister, Group Chief Executive Good afternoon ladies and gentlemen and welcome to the Phoenix Group Investor Day. Thank you all very much for joining us at this very special venue, the London Museum, for

• ur presentation on ‘Cash generation, management actions and opportunities for growth.’

I’m joined today on the podium by our Group Finance Director, Jim McConville, Mike Merrick, the CEO of our Life Division, and Fiona Clutterbuck, the Head of Strategy, Corporate Development and Communications. Several of our Phoenix Life colleagues are also in the audience, and will be presenting to you on their respective areas later on this afternoon. I don’t know about you, but in my household each of my three children are doing exams: A- level, GCSEs and entry into senior school, so there is not much that I don’t know about glacial erosion, rift valleys and exam practice. Today, the Phoenix Group has two exam questions to answer. First, how do we generate cashflow and its future sustainability? And second, where and how can we generate future capital growth? At the end of today, I trust we will have answered these exam questions. Without a doubt, the best way for the Phoenix Group to continue to generate value for its shareholders is to focus on management actions which accelerate cash from, and enhance the value of our existing embedded value. As a reminder, we set out here a summary of the Group, showing the various components of

• ur capital structure, and the way in which cash generated from the operating companies -

principally the Lifeco - flows up through the regulated group to the holding company or Holdco on top. Jim and Mike will address cash generation and management actions for the future, and Fiona will take you through our current thinking on the potential to grow our business through M&A. I would now like to hand you over to Jim. Jim. Jim McConville, Group Finance Director Thank you, Clive. Good afternoon everybody. The key metric which we use to measure performance, and which we think is the most useful for investors in understanding the business, is cash generation. This is cash which is distributed from the operating companies to the holding companies, which is used solely to pay for group operating expenses, pension scheme contributions, debt interest, amortisation, and shareholder dividends.

2 I’d like to spend the next 15 minutes or so talking you through the cash generation profile of the business, and giving you a sense of the shape of the cashflows and outflows over the longer term. I’ll also try and give you some colour around the sensitivity of the cash generation to various stresses at the end. In the last three and a quarter years, so between January 2010 and March this year, we have generated £2.6 billion of cash, through both the natural emerging surplus and unwind

• f capital, and through management actions.

Here we set out the £2.6 billion of cash generation over the period since 2010, and the various uses of that cash. The most significant uses of cash during that time have been debt interest and amortisation, which totalled £382 million and £908 billion respectively. This includes the external cost of the Tier 1 coupon of £26 million per annum. The £908 million of amortisation includes the £450 million prepayment made during the first quarter as part of the debt reterming. This was partly funded by the £211 million net proceeds of the capital raising. We started 2010 with just over £200 million of cash within the holding companies. Over the last three years, cash generation has been significantly greater than outflows at the holding

• companies. This has enabled us to increase holding company cash by £1 billion to £1.2

billion as at 31 March. Clearly, any distributions from the regulated group must take into account the capital position at that time. At 31 March, of the two group capital calculations, the IGD was the most onerous test and we had headroom above the group’s capital policy of £400 million. You may recall that in March last year, we talked about the £9 billion of cash expected to emerge from the existing book of business. This slide sets out how we expect the cash to emerge over the life of the book. We have a long term cash generation target of £3.5 billion from 2011 to 2016, of which £1.5 billion was delivered in 2011 and 2012. Over the course of the following six years, from 2017 to 2022, we expect a further £2 billion to be generated. The remaining £3.5 billion is expected to emerge in 2023 and beyond, and this is based on our internal models which look at the 30-year cash generation profile out to 2042. Importantly, although we have included the benefit of management actions within the target to 2016, there is no allowance in the cash generation profile beyond 2016 for the benefit of management actions. This is simply a function of our focus of accelerating cash and enhancing the profile over the period to 2016, and we have not yet turned our attention to actions which we can undertake to enhance the profile beyond that. Now turning to look in slightly more detail at the cash generation profile. The strong organic cash generation we’ve seen in the past is expected to continue for many years. We have set a target for 2013 of £650 to £750 million, and so show the midpoint of this range on the chart

• here. And then for illustrative purposes, show the remaining £1.3 billion split over the

remaining three years of the target period from 2014 to 2016. We have talked in the past about current organic cash generation being in the region of £400 million per annum, and this is expected to trend down to around £350 million per annum between 2017 and 2019, and is expected to be around £300 million per annum between 2020 and 2022. This represents the natural rate of emerging surplus and capital

3 unwind expected from the business over that time, and in the absence of management actions. You will hear from Mike and his Phoenix Life colleagues, shortly about the various management actions we have undertaken in the past, and can look to undertake in the future to enhance this cash generation profile. One of the current uses of cash generation is amortisation of the senior debt facilities, which are one component of the Group’s gearing calculation. On this slide, we set out the

• utstanding balance of senior facilities at the end each year, taking into account the £450

million prepayment made in Q1, and assuming we meet the mandatory and target amortisation only. This is of course purely illustrative to show the potential profile of senior bank debt. To the extent we are able to, and choose to make additional debt repayments, this will reduce the bank debt and gearing more quickly. The Pearl facility of £375 million has annual amortisation of £25 million and a £300 million bullet in 2016, which we expect to repay from existing cash resources at that time. Following the reterming and the £450 million prepayment in the first quarter, the remaining Impala facility totals £1.4 billion, and we have target amortisation of £120 billion per annum. Based on this illustrative amortisation profile, at the end of 2016 we would expect to have

• utstanding senior debt of around £900 million. We have set a target to achieve a gearing

ratio of 40% or below by 2016, which we expect to achieve from the organic cash generation from the existing business. The target was set because we believe, at this level, we would be able to seek an investment grade rating and gain access to debt capital markets, providing more flexibility for

• ur capital structure. Clearly, this is just one option. We actively consider all financing

available to us, and there may be alternatives: raising debt in the high-yield markets prior to getting an investment grade rating, for example, or achieving investment grades sooner than 2016, which we could also pursue if we felt it made sense in the context of our overall capital structure. So turning now to look at the other uses of cash at the holding companies. This is a slide which we presented at the time of the 2012 results in March. We show the average cash generation between 2013 and 2016 of £500 million, based on the long-term target, including management actions of £3.5 billion between 2011 and 2016. And we then show the various uses of that average cash generation each year, leaving an average of £135 million available for additional debt repayments, dividends and

• reinvestment. The £827 million of holding company cash reflects the proforma year-end
• position. That is adjusting the year-end position for the debt reterming and capital raising.

During Q1 we generated £410 million of cash, and therefore the holding company cash position at the end of March had increased to £1.2 billion. And when considering the amount

• f cash which can leave the Group, we must also bear in mind the Group capital position

and ensure we continue to meet our capital requirements under both the IGD and PLHL ICA calculations. Now moving on to look at the period beyond 2016. Here we set out holding company cashflows between 2017 and 2022. Clearly this is purely illustrative to give some indication

• f the direction of travel. It obviously comes with the caveat that this is a number of years

away and is based on a set of assumptions which may or may not be borne out.

4 In green, we have shown £325 million of annual cash generation, being the average of the £2 billion of cash generation I mentioned earlier, which does not include the benefit of any management actions. We show operating expenses of around £30 million per annum, and then annual pension scheme contributions into the Pearl Scheme of around £35 million on average over the six- year-period. Both are shown here as lower than the period from 2013 to 2016. These cashflows are based on the existing book of business, and as this reduces over time, and for illustrative purposes, assuming no acquisitions were made, we would expect to be able to reduce holding company operating expenses to reflect the smaller business. Pension scheme contributions reflect the average expected contributions into the Pearl Scheme under the new funding plan of £40 million per annum from 2017 until 2021, and assume no contributions during this period to the PGL scheme. A few moments ago I talked through the debt profile and our trajectory towards gearing of 40% by 2016, such that we are able to replace senior bank debt with long dated capital market debt, which is more appropriate for a group with a predictable long-term cashflow profile like ours. We have assumed here that the £900 million of senior bank debt, which is outstanding at the end of 2016, based on the illustrated amortisation profile, is refinanced with long dated capital market debt, with a coupon of 8%, resulting in annual interest costs of around £72 million, plus the current coupon on the Tier 1 bonds. After deducting those outflows from the annual average cash generation of £325 million, £160 million of cash remains available for additional debt repayments, dividends and reinvestment, excluding the benefit of management actions. At the end of 2023, on the basis of this illustrative profile, we would expect to have £3.5 billion of undiscounted cash left in the business. We believe that it is reasonable to assume that the value remaining in the group at that time would be sufficient to support a refinancing

• f the illustrative £900 million of capital market debt.

Furthermore, to the extent we are able to undertake management actions to accelerate the £3.5 billion of cash from beyond 2023, we would be able to build up cash buffers, as we have done in the past, which would support calling the long dated debt when it fell due, with the residual value of the Group still being sufficient to refinance the remainder. The important point is that although average cash generation falls from around £500 million between 2013 and 2016 to around £325 million per annum between 2017 and 2022, excluding management actions, the cash available for debt repayments, dividends and reinvestment actually increases by £25 million, even without management actions, because the cash outflows are lower. To give you a sense of the potential impact of various market stresses on the cash generation, we set out here the sensitivity of the £3.5 billion target to various market

• conditions. These scenarios assume the stress takes place on 1 January 2013, and that

there is no recovery in the market conditions following the stress. In the context of the overall £3.5 billion target, the impact of the market stresses are relatively low. This is because, in general, the cash generation is only really impacted by movements in the non-profit funds and the supported with-profit funds, where the change flows through to the shareholder. For the equity stress, due to hedging we see relatively small impact on overall cash

• generation. Credit spreads widening has the largest impact, but any movement in credit

5 spreads is substantially offset by an increase in the liquidity premium, so the impact remains relatively limited. I’d now like to hand you over to Mike, who will talk to you about management actions. Mike Merrick, Chief Executive, Phoenix Life Thank you, Jim. Good afternoon. I’m here to today with three of my Phoenix Life colleagues to give you the background to why Phoenix Life does what it does, what our aims are, and the key outcomes we are seeking to achieve. This slide describes the basic business model. The key focus of the Phoenix Life management team is on management actions. These management actions either drive added value or contribute towards improving the business. Many actions will achieve both. Added value can either be for policyholders or for shareholders, and again many of those actions will impact both. Adding value can include the release of cash. Shareholders have seen this through the cashflow management actions, and for policyholders we have also been increasing bonuses to reflect the release of policyholder cash. Building a better business means ensuring that the cost profile is a positive one, simplifying the business to make it more efficient in the long run. This is also for the benefit of both policyholders and shareholders. This slide illustrates how the portfolio of management actions which has been undertaken has fed through into the key shareholder financials over the last three years. The same portfolio of actions has also significantly simplified and strengthened the Phoenix Life

• business. We will talk you through several examples of such management actions and

illustrate how value has been added and the business improved. The Phoenix Way is our solution to the challenge of increasing value and generating cashflow for shareholders and policyholders. It is our methodology for delivering this within a complex operating environment. The four pieces of the jigsaw represent the categories in which we place all of our activity, and over the course of the next half an hour or so we will take you through various case studies of how we have generated value and accelerated cash in the past. I’d now like to hand you over to Pete Mayes, the Phoenix Life Chief Actuary, to talk to you about restructuring and risk management activities. Pete Mayes, Chief Actuary, Phoenix Life Thanks Mike, and good afternoon. I’m Pete Mayes, Chief Actuary of Phoenix Life. In this section I will focus upon the types of capital management benefit that we have achieved in the past, which we continue to focus upon and which may arise upon an acquisition. Funds merger benefits which can be material and I will give two very different examples as I talk through my slides. Intra-fund restructuring, examples of which include the introduction of hypothecation in many with profits funds. That is where we achieve the ability to allocate different blocks of assets to different blocks of liabilities depending on the nature of those

• liabilities. And also the move to set up all new annuities out of the with profit funds into non-

profit funds. Asset-liability matching will involve consideration of the market risks within a fund and ensuring that these are managed in an optimal manner from both a capital and a MCEV

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• perspective. This will entail consideration of hedging using suitable market instruments, and
• ptimising the illiquidity premium on assets backing illiquid liabilities such as annuities.

Finally, of course as part of operational efficiency, we endeavour to harmonise our valuation and capital requirements as far as possible. Clearly that can result in a capital strengthening as much as a capital release. Fund mergers have been a significant focus of management in recent years. This slide shows the UK entities within the Phoenix Group as at the end 2008, and its equivalent at end

• 2012. You will see that we have reduced the number of firms from nine to three UK life

companies over that time period. The right hand side of the chart shows the typical benefits that may arise on a funds merger, which I will go through in more detail now. To give you an indication of how capital requirements might change in a funds merger, this slide sets out a hypothetical funds merger and the relevant capital requirements. I’m sure you’re aware that in the UK each firm needs to hold capital to cover the higher of Pillar 1, which is the EU formulaic requirement, and Pillar 2 which is the UK individual capital adequacy assessment. In this example, Company A is a Pillar 1 company, and is required to hold £250 million of capital to cover its Pillar 1 capital requirement. And then below that, Company B’s most

• nerous Pillar is Pillar 2, and it is required to hold £250 million of capital to cover its Pillar 2

capital requirement. So between these two separate companies before the funds merger, £500 million of capital requirements is needed. Once the two companies are merged, the Pillar 1 and the Pillar 2 requirements of the combined companies are each £400 million, and therefore the combined entity must hold £400 million of capital, versus the £500 million of capital which was held across the two separate companies prior to the funds merger. There may also be better diversification of risk in the enlarged entity, which would enable the Pillar 2 ICA capital requirement to be reduced from the £400 million shown here. Often we see tax synergies arising when on a funds merger the profits within one company can be

• ffset against tax losses in another. In other cases, previous scheme restrictions which

prevent the release of capital can be removed through a new funds merger, which again further facilitates the release of capital. I’d like to take you through a couple of specific case studies of funds mergers which have derived significant capital benefits within Phoenix in the past. First, the merger of Scottish Mutual Assurance and Scottish Provident into Phoenix Life Limited at the beginning of 2009. This is a good example of the type of capital benefits that can arise on a merger. I’ll focus on the cash generation benefit. Prior to merger these firms had different biting pillars, Pillar 1 for Phoenix Life and Pillar 2 for Scottish Mutual and Scottish Provident. After combining these funds, Phoenix Life became Pillar 2 overall, which provided a capital release of £119 million. Second, the ICA itself was reduced by £65 million on merger as a result of more diversification of risks within the enlarged entity. And finally, in Phoenix Life we hold a capital buffer on top of the regulatory capital requirements, and these are assessed by considering a number of different stresses. Again by combining the funds a benefit arises by different biting stresses become limited to just one overall biting stress within the new entity, which in this case released a further £41 million; so overall £225 million of cash benefit generated. The funds merger also resulted in a £332 million improvement in the IGD surplus. This was largely due to the fact that post the fund merger and the valuation we were able to recognise surplus which was previously restricted. There was also benefit from the elimination of shareholder fund support which was no longer required.

7 Now moving onto the London Life into Phoenix Life Assurance funds merger. This is our most recent merger completed last year and has a similar profile of financial benefits to the previous example but for very different reasons. London Life had some restricted assets from a previous court scheme. The Part VII transfer allowed these restrictions to be released while retaining the security of policyholders within the enlarged Pearl business. This provided the capital release benefit shown here of £192 million. In addition the scheme also released some restricted assets in Pearl from a previous scheme which enabled these assets to be included in the IGD calculation. There’s more to be done in terms of restructuring the existing book. The aim remains to consolidate the remaining life companies into one UK life company in due course. We expect to do this around 2016, once the Pearl facility has been repaid and the two banking silo structure has been collapsed. The IGD benefit of this is expected to be in the region of £50

• million. We will also continue to examine intra-fund restructuring and identifying actions we

can take between funds within the life companies to accelerate cash. Another key area of management action focus is risk management, ensuring we are taking risks in the right place and being rewarded appropriately. This slide sets out a good example

• f a management action we undertook last year which managed risk within the group.

Annuities are the only new business we write. This is where our existing policyholders’ pension policies mature and they choose to take up an annuity with us. We write around £1 billion of annuities each year. In 2012, around half the annuities written had valuable guaranteed annuity rates, and the remainder were policies without guaranteed annuity rates but where policyholders chose to remain with Phoenix rather than taking their open market

• ption. Last year we retained about 75% of the business without guarantees, with the other

25% taking their open market option. At the start of 2012 we had an annuity book of around £11 billion, and last June we entered into an agreement to reinsure £5 billion of those annuities to Guardian. The full Part VII transfer process is expected to complete in the second half of this year, which we’d expect to improve our IGD position by over £200 million. The transfer reduced our sensitivity to longevity by about a third through the risk transference and accelerated the release of £252 million of capital. The annuity book will continue to grow each year as we write annuities from existing

• policyholders. Over time, as the book matures, annuities will comprise a growing proportion
• f the business, and therefore there may be an opportunity in future to consider further

annuity transfers which will accelerate cash and reduce the group’s longevity exposure. I’d now like to hand you over to Andy to take you through our actions within operational

• management. Andy.

Andy Moss, Finance Director, Phoenix Life Thanks Pete, and good afternoon everybody. I’m Andy Moss, I am the Finance Director of the Phoenix Life companies. This afternoon I wanted to talk through the opportunities for synergies that arise within the finance function as we manage the existing business more efficiently, and as companies are also acquired. And also about value add opportunities from an accounting point-of-view that arise from activities like harmonisation of policies and balance sheet reviews. Just to be clear, when I talk about the finance function in this context, I also include all of the actuarial modelling capability and all of the data preparation that goes with it.

8 Given the Phoenix model of outsourcing customer service, which we’ll talk about later on, finance and actuarial is the biggest function retained in-house within the group. Finance is absolutely key in terms of the financial management of the business and in delivering many

• f the management actions that add value and accelerate cash. Within an acquisition

situation the Finance Department provides opportunities for significant cost synergies, and

• ver the last few years we’ve developed our target operating model which provides a

framework into which other companies can be integrated and which we can manage the business today. So this is the Phoenix Way for finance. Opportunities arise from the integration of departments onto one site, providing savings in premises and infrastructure costs, which then also provides the platform to achieve management and supervisory changes and savings as we amalgamate structures. Opportunities also exist from an efficiency point-of-view as we bring systems together and consolidate them. Within the Life Finance Department there are usually three key systems: the general ledger; a data warehouse data preparation system; and importantly the actuarial valuation and modelling systems. In all of the consolidation activity we’ve done to date our attention has focused on the first two, the general ledger and data warehouse, and we have now moved to one general ledger and one data warehouse, and this has enabled us to achieve efficiencies and standardise approaches. On the actuarial modelling side, we have undertaken a project over the last two years to consolidate our actuarial modelling onto one platform. This will provide further opportunities in the future, and I’ll cover this in a bit more detail shortly. In addition to the organisational synergies in acquired books of business, there are usually legacy issues which may not have had sufficient attention for a number of years. Given our focus on closed books and the expertise we have gained from seeing a number of these situations in the past, opportunities exist to address these issues, improving control and risk management as we talked about earlier, and potentially leading to significant financial

• benefits. Again, I will refer shortly to some examples of where this has arisen.

We show here the savings we achieved from the integration of the Glasgow operations – that’s the ex-Scottish Mutual and the Scottish Provident books of business – and the Peterborough operations – the ex-Pearl books of business – into Wythall, our life company

• site. To give you a sense of the savings achieved, our retained cost base for group functions

and Phoenix Life is around £100 million per annum. Around £40 million of that relates to group functions, with the remainder in Phoenix Life. Finance and actuarial functions represents a significant proportion of this, and through the consolidations into Wythall we reduced the previous cost prior to the consolidation from around £27 million per annum to around £18 million per annum. So in the context of our controllable retained costs this is a significant saving. This is an obvious saving in any acquisition, but there is also the potential to achieve more finance function savings within the existing business as we consolidate systems, and in particular as we move to our standardised actuarial systems’ platform. So moving on to the actuarial modelling, as I mentioned the actuarial modelling platform was a major area where there was no standardised approach or single model. Whilst peripheral processes were standardised as we moved activities to Wythall, the core models were lifted from their current sites and dropped as is into Wythall and operated on that basis. Thus we ended up with a modelling stock which was different, with each model requiring bespoke knowledge and running them all together was very unwieldy and resource intensive.

9 As a result significant risk capital was held to cover the risk of model operation and there really was no standardised acquisition platform. Over the last two years we have invested in

• ne model platform – a system called MG Alpha, in partnership with Millimans. Within this

system there are four key models, one for our with profit business, one for our non-profit business, one for our unit linked business, and one for our annuities. These are as standardised as far as possible and use heavily parameterised inputs. We are now reaching full implementation for all the funds, which should be complete in the first half of 2014. This will provide us with simplification, improved capital management capability with more frequent ability to run actual numbers, and a platform capable of consolidating future acquisitions, giving another source of potential cost synergy. As we embarked on the transformation programme it was anticipated that as we reviewed models created from many disparate sources in the past, and which had come from smaller individual companies, that we would find issues with the current models in terms of over- prudence, and areas where things had just now moved on in terms of methodologies. And this has indeed been the case. And as a result the project has delivered reserve releases generating EV and enhancing cash generation. In addition operational risk capital has been reduced as we have gained more confidence in the overall modelling environment. In 2012 the transformation programme delivered £50 million of incremental EV and accelerated the release of £60 million of cash, and there is potential for further benefits to come through as we implement the system over the next 12 months or so. Now, moving onto some examples of where we have enhanced value and accelerated the release of cash by resolving legacy issues. Phoenix has a large number of annuities; many

• f these are from acquired books, and they have been continually added to as pensions

have vested. Within these books there were a number of different policies for actions when a payment was returned. In particular from a financial point of view if a payment was returned and not able to be reinstituted for a period of time a number of the books of the business were continuing to carry the liability well into the future, until it was formally confirmed that a death had occurred. However, as we looked into this in more detail evidence suggested that after a period of time, unless contact had actually been received from the annuitant, it was highly likely that they were deceased. As such we’ve implemented a number of harmonised policies which resulted in £23 million of incremental MCEV and £29 million of cash generation in 2012. The final case study relates to suspense accounts. This example is a relatively old one, but we have seen a number of similar issues on a smaller scale within other funds of acquired

• businesses. And it is a good example of how addressing control issues can accelerate cash

and generate incremental EV. In one of our acquired businesses where administration had been outsourced we identified a number of weaknesses in controls over the completion of accounting for premiums and claims. This had led to significant unmatched items on the balance sheet. So basically we had outstanding claims with unmatched cash on the other side of the balance sheet. We set up a project in late 2007 to address this issue, the objective being to clear the balances and improve the controls for the future. The project ran through 2008 and 2009 and we cleared the vast majority of the items with no customer detriment. This led to the release

• f £117 million of capital and a £75 million increase in our EV.

Since this review controls have operated to ensure that the issue does not reoccur and importantly we have standardised these controls across our outsources, realising other

• value. Again, the Phoenix Way of doing things.

10 As you can see from the two case studies, our focus on legacy and inherited issues can generate significant value, both within our existing business as we continue to manage our current balance sheet more efficiently, and with future acquisitions. I’d now like to hand you over to Tony, who’ll talk you through the benefits of our outsource model. Tony Kassimiotis, MD of Operations for Phoenix Life Thank you Andy, good afternoon everyone. I’m the MD of Operations for Phoenix Life and I’m accountable for our outsource programmes, our IT, our change programmes, and transformation within the business. In integrating the businesses over the past few years we have put in place the Phoenix Way. The Phoenix Way is a framework that allows us to leverage past investments for future business opportunities. Put simply, our model operates on a build once and use many times

• principle. The annuity transfer and the actuarial systems transformation programmes, which

you have already heard about today, are good examples of these. Let me step you through outsourcing with a specific emphasis for today. In Phoenix we look for operational efficiencies in everything we do, both internally and through our outsource

• partners. We do this first by containing and reducing inherent risks, through effective
• perational risk management. Second, by simplifying our technology and underlying
• processes. In this area, for example, we have completed a technology transformation

programme over the last two years to capture the benefits from the existing book and to ensure technology platforms are scalable. Third, we have site consolidation which speaks for

• itself. And, finally, the outsourcing of services to leverage scale, the right skill sets and

preferential pricing. All these come together via our know-how to deliver our operating platform in the most efficient and effective manner. I will be expanding on number one, operational risk management, and outsourcing in the coming slides. Let us take a look at operational risk management. You will see on this slide three separate

• areas. The Life Companies, the Service Companies, and our Outsource Partners. We have

contractual relationships between these three areas to ensure that risk is contained and that the risks are borne by the entities that are best able to deal with them. Let’s take each in turn. The Life Companies. At the end of 2008 we had nine life companies with multiple processes, varying degrees of scale in their own right, and numerous legacy issues. However this is exactly what we’re good at sorting through. This inevitably led us to create the Service

• Companies. In these service companies we bring together our collective expertise, individual

life company requirements, management know-how, and scale under one structure, allowing us to consolidate operating platforms and processes whilst ensuring we retain the necessary scale to negotiate favourable terms for the services that we choose to procure. Enter our Outsources at right of stage. In this area we have established industry leading contracts with long term protection, both operational and commercial, ensuring customer servicing is future proofed and all backed by contractual transformation objectives. This is what we call our delayering approach. In addition to this all these three areas are underpinned by a risk management methodology which ensures risk strategy, risk appetite, governance, policies, business performance, and risk capital assessments come together in an effective and repeatable way with strong management focus.

11 Now, there is no doubt that as funds run off fixed costs have an ever increasing impact. Here we show that through our outsourcing programme we have ensured costs reduce in line with the run off profile. So how do we do this? Our outsources have the scale, the common processes, multiple clients, and the necessary platforms to make this difference. Our contracts are written on a long term perpetual basis, thereby allowing for long term investments from these partners. We, in turn, have the expertise to procure the right services at the right time with the effective management

• versight to reduce risk. Lastly, we have years of transformation experience that we use to

help our partners deliver. The net result: improved customer service with the removal of hidden legacy costs where regulatory change and incident costs are included in the price per policy. This leads to predictability and certainty, both for existing and future business. In this case study we discuss our policy migration activity. We have two main outsource contracts, Diligenta and Capita. Over the last couple of years we have been migrating the policies managed by Diligenta onto the new BANCS administration platform. This allows us long term sustainability and operational efficiencies. Through the migration process we have been able to cleanse the data being transferred, resulting in a £49 million MCEV benefit and £8 million capital release benefit. In the future it may be possible to migrate further policies

• nto BANCS and identify additional opportunities to deliver incremental MCEV and cash

releases. So in summary, we have an experienced management team with the operational know-how to create value. Effective risk management is core to our operating model, as I’ve explained. We have outsource agreements based on long term relationships that are pre-priced to create certainty and are scalable. And finally we have the operating platforms and processes that are effective, efficient, scalable and future proof. I’d now like to hand you back to Mike. Mike Merrrick, Chief Executive, Phoenix Life Thanks, Tony. So at Phoenix Life we have delivered over £600 million of incremental MCEV and £810 million of cash generation through management actions over the last three years, and there is still lots to be done within the existing book of business. As Pete mentioned, the aim remains to simplify the group structure further to leave just one UK life company in due course, and within the three remaining life companies there are many funds, and

• pportunities exist to undertake restructuring between those funds, which will add value and

accelerate cash. Other areas of management actions focus include: further annuity transfers as the annuity book continues to grow, further data cleansing, which will accelerate capital releases, further benefits from the full implementation of the new actuarial modelling system, and further risk management as we rationalise and harmonise asset liability management practices across the Group. We remain convinced that there is still a significant opportunity to generate value and accelerate cash from this business for the benefit of both policyholders and shareholders, and we expect to be able to replicate this with future acquisitions.

12 I’d now like to hand you over to Fiona to take you through our current thinking on our

• pportunities for growth. Fiona.

Fiona Clutterbuck, Head of Strategies, Corporate Development and Communications Thanks Mike. Good afternoon everyone. My name is Fiona Clutterbuck and I’m head of Strategy for the Group. I’d like today to share with you our view of the potential targets and the issues we need to address in order to contemplate transactions. We have estimated that the total UK market

• pportunity for Phoenix is around 200 billion sterling. To derive this number we have taken

the net mathematical reserves of all proprietary closed and quasi-closed life companies in the UK and added all those with profit funds owned by proprietary companies that are not writing significant levels of new with profits business. Of the three groupings the greatest proportion is to be found in the UK life companies, and this is represented in the pie chart on the left, by the magenta slice, a sort of dark purple

• slice. Just under one third is owned by banks, and just under one fifth by foreign life

assurance companies. As you can see from the slide on the right, in terms of products the split is broadly 50/50 between with profits and unit linked, with a small proportion of non-profit. Our management actions, as you’ve been hearing, in the past have derived value across all these product types. This next slide highlights our capacity and appetite to look both at entire businesses and at funds within businesses. This means that there is a wide spectrum of opportunities available to Phoenix. The financial sector is evolving, as we all know, and we believe the changing regulatory environment may result in vendors looking to dispose of various portions of their

• business. We are able to be flexible about the size and structure of any acquisition, which

should provide us with many, and we hope varied, opportunities. My final slide shows how we will create value through acquisitions. At the time of the refinancing we identified the criteria we will have to satisfy to make an acquisition, and these are set out in the top left hand box of the slide. We said that any acquisition will be in the closed life fund sector within the UK and Ireland. We said it had to be value accretive, and we said it needs to reduce gearing. And to pre-empt your questions as to what we mean by value accretive, our shareholders have made it very clear that two metrics are important to them: the sustainability of dividends and the ability to increase our MCEV per share. We are very conscious that we need to deliver on both of these in order to win shareholder support for acquisitions. As you know, if we acquire at a discount additional value is realised over time as the discount unwinds and capital is released. This is represented on the slide by the first magenta coloured block. The first green block represents the acquired EV. I would suggest caution when looking at EVs as embedded value calculations and their underlying assumptions vary across companies, as you know. And it’s therefore too simplistic to consider the discount to reported embedded value alone in assessing the potential value of any acquisition. Clearly synergies and our ability to add value to any acquired book are fundamental drivers

• f shareholder value, as you’ve been hearing. The process of extracting synergies is one

which we have been undertaking with great success from our existing book in recent years,

13 as you’ve just heard from Mike, Tony, Andy and Pete, and we are very well positioned to be able to replicate this in future. In terms of gearing we need to achieve a gearing ratio of between 35% and 40% post any acquisition, i.e. for the combined entity, versus the current 48%. Clearly the financing and structure for any acquisition will depend on the specific transaction, but it is likely that any sizeable acquisition we might make will involve an element of equity, since we are not prepared to increase our gearing level in order to achieve acquisitions. On the subject of timing, these transactions, as you know, take time. They are incredibly complex, require huge amounts of due diligence and involve a lengthy regulatory and court approval process. Therefore this is not something which is likely to happen imminently. I’d now like to hand you over to Clive. Clive Bannister Fiona, thank you. And so to close. Today has allowed us to take a longer and deeper look at Phoenix than is possible when we give our quarterly results, and it makes a very good story. I end with a reminder of our financial targets for 2013 and beyond. Now, right at the beginning I said that we set out to answer two exam questions. The first was the sustainability of cash generation. And crucially I hope we have shown how, despite cash generation gradually reducing over time as the book runs off, the cash available, the cash available for dividends, debt repayments and reinvestments in fact increases due to the lower holdco company outflows in the later years. This is a paradox which is as profound as it is true. And the second question is that we are certain that we possess the ability to accelerate cash and enhance value through management actions both from our existing book and with plausible potential acquisitions in the future. We have a proven track record of delivery and an experienced management team within Phoenix Life capable of doing both, and thereby continuing to add value for shareholders. So it is with considerable confidence that I look forward to the future of the Phoenix Group. Thank you very much indeed. Now that ends the formal session. We are now going to Q&A. We are remarkably on time; indeed running three minutes early. What I would like you to do, if you stick your hand up a microphone will be brought to you, if you could give us your name and the institution you represent, I’m going to sit down over there again and then we’ll allocate the questions as they come in. Thank you very much. Any questions? Question and Answer Session Question 1 Ashik Musaddi – JP Morgan Thanks a lot for this. A couple of questions. You give this leverage number, 35% to 40%; any specific reason for that related to rating agencies or anything else? And then secondly in

14 your cashflow slides that Jim presented it is expected that you will do a refinancing in 2016 for that £900 million. Now, you do have a lot of cash in hand at the moment, and probably by 2016 your capital requirement would be a bit lower number; but any thoughts around that refinancing? Why do you need refinancing then? Thank you. Answer: Jim McConville First of all turning to the question of the leverage and the 35% to 40%. As I’m sure you’re aware, the rating agencies look at a wide range of measures, both quantitative and qualitative, in making an assessment of a rating. And it is our judgment that we need to get to a level around 40% to be in the range which the rating agencies would consider acceptable for a suitable investment grade rating. Now, clearly that is only, as I say, one of the many factors they look at and it’s a judgement at the end of the day based on an overall condition of the Group. But clearly the board feel that we want to reduce the gearing, and it makes sense to do so in the context of a longer-term aim to get an investment grade rating. And having done so then it seems that we don’t want to push that gearing back up again just

• n doing an acquisition. So, by implication the financing structure of the acquisition and

indeed the financing structure of the company that would be acquired, when put together with Phoenix, we’re looking for that range of between 35% and 40%, so it aids and furthers the longer-term gearing target. On the cashflows, yes, I mean you will see from the slide we put up on the cashflows to 2016 that the cash generated from our underlying activities flowing up into the holding company’s structure is more than sufficient to meet the outgoings. And we do start with a substantial proportion of cash. So clearly an assumption could be that a proportion of the £900 million refinancing assumption could be met from the existing cash resources at that

• time. We just tried to keep the assumptions simple, because it’s quite a complex story to tell;

and simply assumed that the holding company cash would remain and we would refinance that senior bank debt. But that is clearly just an assumption, and we will take a view at the time. Question 2 Andrew Freestone – GLG Looking at the merger of the three existing life companies aiming for 2016, I was just wondering what sort of value uplift you’d see from bringing that forward. Answer: Mike Merrick I think we’ve talked before that the cashflow benefit of such a fund merger would be tens of

• millions. But I think your question was more: what’s the value in bringing it forward to 2016

from say 2014. Simply it would accelerate that cashflow benefit and the other IGD benefits that go with it. Answer: Jim McConville The amount is around 50 million we’ve estimated. The reason we’ve assumed these assumptions 2016 is that up until then we have two different banking silos. And clearly if we were to put the two companies together we would have to take action to deal with the fact that we have these two silos. And therefore it would be much simpler once the Pearl debt is repaid that we can deal with that transaction. So that drives the timing assumption.

15 Question 3 James Turner – USS Fiona’s slide number 42 I think misses a couple of bars. You’ve got to issue your paper at currently the discount EV, so you need bars on the right which are negative; and that

• bviously is not quite as easy as that slide would make out because issuing paper, the

currency paper at discount, would dilute your EV. So it obviously depends on the ratio of… Answer: Fiona Clutterbuck You’re absolutely right, of course you are. But I think what you have to be careful about – which is what I alluded to in the presentation – is you can’t take a straight read across in terms of published EVs and make a comparison. So, for example, say we’re trading at 65% and then look at somebody else trading at 80% of EV and say that’s the gap you have to

• bridge. It isn’t necessarily, because as you know the assumptions behind the EV calculations

vary significantly from one group to the next. That’s number one. And number two, obviously the way that we plan to bridge that gap is through synergy benefits. And this is what the discussion here today is all about, and it’s what we’re really good at. So, that’s my response. Question 4 Kevin Ryan – Investec Could I just ask do you have in your mind’s eye an inflection point in the market? You’ve identified 200 billion of assets ripe for plucking by Phoenix or somebody else. They’ve been around forever. What is going to tempt those assets your way and at an affordable price, following on from the last question, at a decent discount to what anybody might assume embedded value to be? Answer: Clive Bannister Well, Kevin, thank you for your question. Ripe for plucking: there’s a concept. Certainly there have been very few deals, indeed only one in the last two years virtually: the Guardian deal to Cinven. But Fiona, why is it we think the time is more propitious and more likely for assets, as Kevin has suggested, that have been stuck for a long time, why do we think that they may be more likely to be available? Answer: Fiona Clutterbuck First of all I think implications of Basel III on bank and life insurance companies, so it does become much more expensive for banks to hold insurance companies post Basel III. So, I think that’s one potential catalyst. Second, I think is we have an increasingly interventionist regulatory regime. And for those who are in the UK and in the UK for the foreseeable future that’s something that we will all have to contend with. But for those foreign owned life insurance companies who don’t necessarily need to retain an interest in the UK that might prompt them to think about whether or not that’s something they want to do.

16 I think costs in relation to specific with profits business where there is very little new business being written it’s probably increasingly likely that they will focus on the fixed cost base in relation to that business, and they’re not writing very much new business, and therefore that might make them think about whether or not they want to dispose of these businesses. And I think the other factor is one which Mike and his colleagues have been talking about, which is that for the management of these assets, to extract value in the way that we have done, you do need a specific skills base; which actually in many life companies is less

• prevalent. There’s a focus on the skills around the generation of new business and product
• development. And often some with profits expertise is one that is seeping out of the old life

companies, is what we have to a large degree within Wythall. So we think we’re in a better position to manage those assets than many existing life companies. So those are the four reasons why I’d say it’s going to happen sooner rather than later. I’m not sure I’ve got very much to add to how we’re going to achieve to get them at the right

• price. It will depend on the assets. It will depend on the vendor and how willing, desperate or
• therwise they are to sell those assets. But we suspect there will be competition; albeit not

significant competition for those assets. Question 5 Oliver Steel – Deutsche Bank You’ve got 400 million of IGD headroom at the moment. You hope to generate more management actions. The current run rate of cashflow is actually greater than the dividend

• cost. So what capacity have you got to make acquisitions out of your own cash as opposed

to issuing new equity? Answer: Jim McConville Yes, I think clearly as you identify, Oliver, there is surplus cash coming up. But clearly I think in considering any acquisition opportunities we would inevitably seek to finance these with a proportion of equity raising and perhaps, depending on the debt structure of the company to be acquired, a proportion of debt. So I would see that as having a larger proportion of any sizable acquisition price than the use of our internal resources. Question 6 James Pearce – UBS A couple of things. Could you talk a bit more about this issue of annuitants? What investigations have you done to make sure you’re not being defrauded by presumably families of deceased annuitants? And is there scope for reserve releases or claw backs on that? Secondly, on M&A it seems to me you’re still dealing with the consequences of the last big deal that was done by the previous management team, and haven’t integrated the Resolution acquisition. Is it premature to be talking about further M&A when the last one is still being sorted out? Answer: Mike Merrick Could I just have clarity about the issue again? I’ve just lost the words.

17 James Pearce You were talking about paying annuities to deceased former customers; is that something you’ve investigated fully and are now confident that that’s bottomed out as an issue? Answer: Mike Merrick Yes, that’s exactly what we’ve done. We’ve gone through and investigated all the processes that we’ve got in place to make sure – it’s obviously a very sensitive area – to make sure we treat our customers appropriately, but that we do cease paying annuities when it’s right to do

• so. So, yes, that’s been dealt with.

Clive Bannister The second question was: is it premature for us, in the context of the past, to be contemplating acquisitions now? So I draw a line in the sand because the past is a platform not a prison, and there is an entirely different board structure, senior management team dealing with, and I would say harvesting, ably harvesting, platforms that came from past

• transactions. We have been entirely silent for the last three years, because of course it

would have been naïve to consider doing transactions when our primary obligation was to restore the balance sheet and capital efficiency. What we announced on January 30 ensured that we dealt with that issue, which was the nature of the restructuring of our debt or the re- terming of our debt, effectively and completely. That means that it would be wrong of us not to consider on behalf of our shareholders, given the two criteria that we’ve set ourselves in terms of being very conscious of our dividend obligations and also our ability to add to the economic worth, the MCEV value, being two of the criteria that we intend to meet, for us not to think of finding ways of capital growth through acquisitions. I have said several times that the well is deep and there’s much more water in the current

• well. But at a juncture, as described by Jim in his presentation, the well gets drier. And it is in

all of our stakeholders’ interest that we replenish that water. Fiona was very careful in the way in which she said at the end of her presentation that there is a period of thinking and consideration; transactions, should they emerge, are inherently complex and take time, and you can be absolutely certain that our board and indeed other key stakeholders would have to be entirely satisfied that they’re right and proper. But not to do that thinking now I think would be missing an opportunity which we can avail ourselves of in the years '14 and beyond. Fiona, that’s how I would answer the question. Fiona Clutterbuck Yes, absolutely. Answer: Mike Merrick I think it’s important to realise that, you talked about the previous acquisition, I think I would say that Phoenix Life is now at a position where it is significantly more robust in what it does than either of those two entities were at the time of that acquisition. So it’s done more than just integrate those two businesses. It has done a lot of the integration of the prior acquisitions that wasn’t tackled by those businesses. Clive Bannister

18 Any further questions? Please. Sorry, microphone just in front. Sorry. Question 7 Chris Reid – Majedie Asset Management Just two for you: so with this 400 million management actions, could you maybe just split that down a little bit more, or give a sense of how it’s shifting? Because I can see the four ways that it’s done, but obviously just to get a bit more detail, and broadly how much comes from each of… And then the second question was: I guess in the sector you guys have not had this problem, but I would have thought the regulator might be a little bit twitchy about knocking funds together and reducing capital requirements etc., so could you talk a bit about why that isn’t the case for yourselves? Thanks. Clive Bannister Mike, management actions I’ve put back the sort of course guide. Or the four buckets when we think about doing management actions. Answer: Mike Merrick It might help if I go back over 2010, '11, '12. So in terms of cash, in terms of 2010, from 242

• f management actions, 122 came from risk management. And most of the rest came from
• perational management. In 2011, 173 out of 359 came from restructuring, 104 from risk

management and 82 from operational. And in 2012, you got 142 from operational, 43 from risk management and 24 from restructuring, giving you a total of 209. So I think when you see it across those three years it’s actually quite a different profile, depending on where the relevant management actions arise at a particular point in time. Answer: Clive Bannister At any one time our exco in the main board looks through a long list of possible management actions that fall into those four categories. Each one is hair cut according to probability, plausibility and over a time frame, and at any matter in time or over a period of time they rise

• r lower according to the cadence of the moment. I use that phrase depending on where we

find ourselves. Your second question was whether we should expect, as Phoenix, different treatment, or how our regulator would feel about the merger of funds and the cash acceleration or cash

• release. I don’t think we’re looking for or would expect any dispensation from our regulator
• whatsoever. In an ICA Plus environment they will expect us to adhere to the highest
• standards. Their primary concern naturally and appropriately is policyholder protection, and

those capital standards will hold true and it’s through that lens or that filter that they would, in any change of control environment, be expected to exercise judgement. Jim, would you agree with that on the regulator? Answer: Jim McConville

• Absolutely. Yes. There is nothing more to add, I think, to what you’ve said.

Chris Reid

19 Yeah, maybe I didn’t say it quite right the first time. So I suppose the risk is that if the regulator is saying to the bank and the people who you would buy off to raise their capital requirements, which were probably too low to begin with, why is it not likely that they will say to you we would like you to raise yours a bit just to make everyone a bit safer etc., in the next few years? Clive Bannister I’m looking at Fiona. In terms of deal structure. So why would the banks be allowed to sell something which might… your question would diminish their capital? Chris Reid

• No. The issue being if the banks are told…if they want to keep in your business, they have to

hold more capital, to make them safer, which I can understand because we all know what the banks’ balance sheets are like. So why will they not over time raise requirements on you to make you safer? Even though obviously you’re pretty safe to begin with. Answer: Fiona Clutterbuck Okay, so the banks issue is in the context of Basel III, so that’s a very specific bank as

• pposed to insurance problem. I mean, I think I’d probably look to Mike on this, but I think

that what our regulator has done is taken great comfort with the level of experience we have in combining funds, and I think they’ve been assured by the quite conservative assumptions that we’ve made in that context. So I think our experience in this area probably makes us better qualified than many other purchasers to extract value and indeed potentially reduce capital requirements of the businesses. I don’t know, is that fair, Mike? In the context of the regulator? Answer: Mike Merrick Well it’s always dangerous to speak on behalf of the regulators, but I think that there’s a degree of comfort with the regulatory regime that has been operating in the UK. The Pillar 2 regime in particular worked very well through the credit crunch in 2008, and I don’t really see any great initiative to drive those capital requirements any higher. Question 8 Rupert Harcus – Guy Butler The 200 billion of opportunities that you talk about, it might seem an odd question, but are you offered life companies currently? I mean, are there businesses that are for sale and this is a timing issue? You feel that you’ve got to get your gearing down sub-40% before you could consider an acquisition? As we approach Basel III are banks actually looking to, you know, offload life companies at the moment and you don’t feel you can buy them? Or is it just that you’ve identified assets which would interest you but it’s not that there are active sellers of these assets? Answer: Fiona Clutterbuck Okay, just to be very clear, what we’ve said is that we would like to see our gearing between 35 and 40% post any acquisition, so that would inevitably include referencing the gearing level of any acquired entity that we may wish to acquire. So just to be very clear on that one.

20 As far as do we think we’re missing out on opportunities now; we do get rung up, actually, what a surprise, by aggressive investment banks telling us that there are businesses for

• sale. I wouldn’t say that that happens very regularly. It has happened thankfully more post

the refinancing than it did prior to the refinancing. But I think we aren’t in any desperate rush. I think one of the messages that we wanted to deliver to you today is that we want to take

• ur time about assessing what the market has to offer and making sure that when we do

make an acquisition it’s the right one and that we can deliver value for our shareholders. So there will be opportunities, I am sure. I don’t think they’re all going to come to the market in a

• rush. I think it will happen over the course of the next year to two years. There will be an

increase in activity. We are aware of one or two opportunities at the moment, but we’re not in discussions with any vendors right now. Question 9 Trevor Moss – Berenberg Bank I guess, Fiona, I’d be interested in your thoughts on the competitive landscape that you see. You did mention that you thought that there might be some competition for assets. I think my assessment would be that probably there is nobody else out there as a competitor who has your skill set in their company. But there are probably competitors who might have some more financial flexibility than you do trying to build up a skill set. So I wonder whether perhaps if this more of a long-term competitive landscape, that some of your competitors will come up on the outside and be in a position to do more things in a few years’ time. So perhaps the window of opportunity is very much more short to medium-term than medium to long-term. Answer: Fiona Clutterbuck I think I would say we’re looking to a medium-term horizon, whatever that may mean, but just sort of walking through who we think are potentially interested in acquiring businesses we’ve got Chesnara, which is very small. I think we’re unlikely to be competing for the same assets as Chesnara. We’ve got Admin Re, and obviously Swiss Re disposed of the US part of the Admin Re business last year to Jackson. I think there’s some debate about whether or not they’re actually a seller or a buyer of businesses right now. We’ve obviously got Resolution. But I think the management of Resolution, certainly for 2013, have made it clear that they’re focusing on sticking to their knitting and putting the business in good order and delivering dividends for their shareholders. So I think Resolution will probably be back in the market, I think you’re right, June 2014. And we’ve also got Guardian, which obviously was acquired by Cinven, and to whom we sold our annuities business last year. Again they’re rather smaller in size than we are, but I think there may be some overlap in terms of the assets that we would be looking at. But the reality is that we quite like to have a bit of competition, because without it vendors may be unwilling to put their businesses on the market, and we know of at least one sale last year that didn’t go through because there wasn’t sufficient buyer interest and the vendors were concerned that they weren’t going to generate the right level of consideration for the

• asset. So a little bit of competition is no bad thing in our view.

We do believe we have specialist skills that nobody else has, and they sit with Mike and his team, and I don’t think anybody else has got the skills we’ve got, and we also recognise that we don’t have the same financing flexibility. So it will be a question of us trying to be a little bit more ingenious, perhaps, in our structuring approach to potential acquisitions, which might allow us to unlock those opportunities.

21 Question 10 James Pierce – UBS Can I make a request for a bit more information in future on the operating performance of the businesses? Because it’s great that you’ve given us very explicit forecasts on cashflow and to some extent profit, but it’s quite hard to work out where the source of those profits are and how much the cash, for example, is capital release rather than operating and so forth. So is that something perhaps you could look to do in future? Answer: Jim McConville Yeah, I think that’s something we could consider, James. Clive Bannister Well known to us, James. Question 11 Andrew Freestone – GLG Jim, given the combination of your comments on acquisitions before 2016 and using high yield, before you have IG access do you think you have access to credit markets at the moment and, if not, then what actions do you have in place to be able to enable that? Answer: Jim McConville Yeah, well I think obviously the high yield market is quite fruity at the present moment. I think you’ve got to consider where we’ve got to post our reterming of our debts. So first of all we have the Pearl facility of over 300 million, which is very, very competitively priced, at 1.25%. And the Impala facility, so the facility that we retermed, we retermed that out for a further six and a half years, to June 2019, and again I think that was competitively priced at 4.75%, and if we are indeed successful in accelerating our debt repayment profile, we can bring that cost down further. So I think we’ve got our existing debt structure with an acceptable term and a very cheap coupon. So any thoughts of looking into the high yield market at the present moment needs to bear in mind that we’ve got a fairly tough benchmark to beat in terms of cost and term. But clearly it’s something we consider on a regular basis and we keep our eye on developments and if we believed that accessing that market brought opportunities of benefit from a shareholder perspective, and that it was an acceptable path towards a longer term capital structure once we get to investment grade, then it’s something we would consider, but at this stage our aim is to work towards that investment grade rating. Question 12 Oliver Steel – Deutsche Bank I’m getting muddled, actually, now. Because in the presentation on the first lot of questions it all seemed to be about acquisitions funded by new equity and new debt, and Jim’s just talked about if we can accelerate debt repayment, which of course has the extra dividend kicker attached to it. So what is your thinking between the attractions of acquisitions versus

22 accelerated debt repayment? Or do you need the acquisitions to deliver the accelerated debt repayment? Answer: Jim McConville Well, I mean, as you say, it’s a balance to be struck, Oliver, in terms of the amount of cash we wish to hold in the holding company over and above our minimum capital requirements and internal capital policies, and the outlook at the time, and whether we should retain that cash for future uses either through acquisition or elsewhere, or accelerate debt repayments. I was simply pointing out that we have the opportunity within the debt arrangements to make additional payments, which would reduce the coupon, were we to choose to do so. At this stage and based on the cashflow examples that I went through earlier, we have not made that assumption at all. It’s clearly in reviewing the amount of cash we need to hold and the uses of that cash we would take the appropriate decision at the time. Question 13 Otto Dichtl – Knight Capital I was just wondering, you were addressing senior debt in your presentation, but of course you also have some subordinated debt and hybrids, and I think coming from the debt market there’s plenty of investors that still feel a little bit sore about the haircut they had to accept on a Tier 1. Do you have any sort of emerging plans for the subordinated debt in your capital structure? Or is that sort of too far in the future for now? Answer: Jim McConville

• No. I think that’s something we will consider as we move towards getting our investment

grade rating what is the appropriate funding structure which suits the longer term nature of the business going forward? Concluding comments: Clive Bannister If that’s the final question, Katherine, I believe we have drinks on the other side? Quite hard to start drinking at 3.30 in the afternoon. I think that would make our regulator very worried, but drinks are available. You are more than welcome. And I think we have some things to

• eat. And it gives you an opportunity to speak directly to all my colleagues who’ve made

presentations today. Thank you very much indeed.