2013 Interim Results

PHOENIX GROUP HOLDINGS:

INTERIM RESULTS FOR THE HALF YEAR ENDED 30 JUNE 2013

22 AUGUST 2013

Phoenix Group, the UK's largest specialist closed life fund consolidator, today announces strong results for the six months ended 30 June 2013 and reiterates all of its financial targets.

Financial highlights

− Interim dividend of 26.7p per share¹ a 27% increase vs. 2012 interim dividend and in line with 2012 final dividend

− £416 million of cash generation² in H1 2013 (HY12: £119 million). On track to achieve FY13 cash generation target
of £650 million - £750 million

− MCEV of £2.2 billion at 30 June 2013 (FY12 pro forma³: £2.3 billion), with £384 million of incremental MCEV enhancement now delivered towards £400 million target from 2011 to 2014

− Gearing⁴ reduced from 55% at 31 December 2012 to 48% at 30 June 2013, towards our target of 40% by the end of 2016

− IGD surplus of £1.1 billion and IGD headroom of £0.4 billion at 30 June 2013 (FY12 pro forma³: £1.2 billion and £0.4 billion respectively)⁵

− PLHL ICA surplus of £1.0 billion at 30 June 2013 (FY12 pro forma³: £0.8 billion)⁵

− Group IFRS operating profit of £186 million in H1 2013 including £24 million from management actions vs. HY12 of £217 million⁶, including £59 million from management actions

− Ignis IFRS operating profit of £19 million in H1 2013 (HY12: £19 million)

− £0.9 billion of net third party asset inflows generated by Ignis Asset Management (HY12: £0.9 billion)

− Total Group assets under management of £67.1 billion at 30 June 2013 (FY12: £68.6 billion).

Operational highlights

− Progressed preparation for Part VII transfer of £5 billion of annuity liabilities and related assets to Guardian Assurance Limited, with completion expected towards the middle of H2 2013

− Continued to build a better business for the future;

·   Completed migration of 3.2 million in-force policies administered by Diligenta onto the new administration platform, making policy administration more efficient and giving customers access to their policies online

·   Continued to streamline the Group's actuarial modelling systems, with the new model being run in parallel with existing models for FY13, simplifying modelling processes and allowing consistent capital management across the business

·   Progressed Phoenix Life and Ignis transformation with partner HSBC to consolidate investment back office, accounting and unit pricing, with completion expected in 2014

− Worked closely with our outsource partners to prevent transfers to pensions liberation fraud schemes

− Maintained investment outperformance at Ignis, with 73% of total assets performing above benchmark.

Preliminary discussions with Swiss Re Ltd

Phoenix Group's preliminary discussions with Swiss Re Ltd ('Swiss Re') in relation to a possible combination of Phoenix and Swiss Re's Admin Re Business Unit are ongoing. If successful, this would result in Swiss Re taking a minority shareholding in Phoenix in consideration. There is no certainty that these discussions will lead to any transaction or of the terms on which any such transaction might proceed. Further statements will be made as and when appropriate.

Clive Bannister, Group Chief Executive, commented:

"I am pleased to announce a strong set of results for the six months to 30 June 2013 and to reiterate all of our financial targets, comprising cash generation, de-gearing and incremental value.

The underlying strength of the business model and stable and predictable cash generation has enabled us to declare a 2013 interim dividend of 26.7p per share, which is in line with the 2012 final dividend and represents an increase of 27% compared to the 2012 interim dividend.

The first half of 2013 was transformational for Phoenix Group, with the capital raising and debt re-terming providing greater financial flexibility and putting in place a longer-term capital structure which has strengthened the Group financially and strategically. We are now able to consider opportunities for growing the business."

Notes

1.  The interim dividend of 26.7p per share is subject to the terms of the Group's main credit facilities. A scrip dividend option
is not available.

Ex-dividend date on LSE   4 September 2013

Record date                                       6 September 2013

Dividend payment date                     3 October 2013

2.  Operating companies' cash generation is a measure of cash and cash equivalents, remitted by the Group's operating subsidiaries to the holding companies and is available to cover dividends, bank interest and repayments and other items.

3.  Pro forma position at FY12 adjusted for the £250 million capital raising and debt prepayment of £450 million in February 2013.

4.  Gearing is calculated as gross shareholder debt as a percentage of gross MCEV.

5.  Any references to IGD or PLHL ICA relate to the calculation for Phoenix Life Holdings Limited, ('PLHL'), the ultimate EEA insurance parent undertaking.

6.  Restated to reflect revisions to IAS 19 Employee Benefits, resulting in a reduction in Group costs of £8 million for the six months ended 30 June 2012.

Enquiries

Investors:

Katherine Jones, Head of Investor Relations, Phoenix Group
+44 (0) 20 7489 4879

Media:

Neil Bennett, Maitland
Peter Ogden, Maitland
+ 44 (0) 20 7379 5151

Further information

There will be a presentation for analysts and investors today at 9.30am (BST) at:

Deutsche Bank, Winchester House, 1 Great Winchester Street, London, EC2N 2DB.

A link to a live webcast of the presentation, with the facility to raise questions, and a copy of the presentation will be available at www.thephoenixgroup.com. A replay of the presentation will also be available through the website.

Participants may also dial in as follows:

UK                                         020 3059 8125

International                             +44 20 3059 8125

   Participant password:          Phoenix

Forward‑looking statements

This announcement in relation to Phoenix Group Holdings and its subsidiaries (the 'Group') contains, and we may make other statements (verbal or otherwise) containing, forward‑looking statements about the Group's current plans, goals and expectations relating to future financial conditions, performance, results, strategy and/or objectives.

Statements containing the words: 'believes', 'intends', 'expects', 'plans', 'seeks', 'targets', 'continues' and 'anticipates' or other words of similar meaning are forward‑looking (although their absence does not mean that a statement is not forward-looking). Forward‑looking statements involve risk and uncertainty because they relate to future events and circumstances that are beyond
the Group's control. For example, certain insurance risk disclosures are dependent on the Group's choices about assumptions
and models, which by their nature are estimates. As such, actual future gains and losses could differ materially from those that we have estimated.

Other factors which could cause actual results to differ materially from those estimated by forward‑looking statements include but are not limited to: domestic and global economic and business conditions; asset prices; market related risks such as fluctuations in interest rates and exchange rates, and the performance of financial markets generally; the policies and actions of governmental and/or regulatory authorities, including, for example, new government initiatives related to the financial crisis and the effect of the planned 'ICA+' regime and ultimate transition to the European Union's 'Solvency II' on the Group's capital maintenance requirements; the impact of inflation and deflation; market competition; changes in assumptions in pricing and reserving for insurance business (particularly with regard to mortality and morbidity trends, gender pricing and lapse rates); the timing, impact and other uncertainties of future acquisitions or combinations within relevant industries; risks associated with arrangements with third parties; inability of reinsurers to meet obligations or unavailability of reinsurance coverage; the impact of changes in capital, solvency or accounting standards, and tax and other legislation and regulations in the jurisdictions in which members of the Group operate.

As a result, the Group's actual future financial condition, performance and results may differ materially from the plans, goals and expectations set out in the forward‑looking statements within this announcement. The Group undertakes no obligation to update any of the forward‑looking statements contained within this announcement or any other forward‑looking statements it may make. Nothing in this announcement should be construed as a profit forecast.

Contents

Group Chief Executive's report

Introduction

The first half of 2013 was transformational for Phoenix Group. In February, we completed the capital raising and debt re-terming, in which we raised £250 million of new equity, reduced the Group's gearing ratio through the early repayment of £450 million of bank debt, extended the maturity of the Impala bank debt facilities and put in place a more flexible amortisation schedule, which is more closely aligned to the cash generation profile of the Group. The greater financial flexibility and longer-term capital structure achieved through this transaction has strengthened the Group financially and strategically.

The Board has declared an interim dividend for the first six months of 2013 of 26.7p per share which will be paid on 3 October 2013. The dividend is in line with the 2012 final dividend and represents an increase of 27% compared to the 2012 interim dividend.

Performance highlights

The Group set itself targets at the time of our Annual Results announcement in March, against which I am pleased to be able to report significant progress.

Against a full year cash generation target of £650 million to £750 million, £416 million was delivered in the first half of the year, primarily reflecting the benefit of free surplus generated in the life companies through management actions during 2012. In particular, the £5 billion annuity transfer to Guardian Assurance Limited ('Guardian') accelerated the release of £252 million of capital in 2012, which was distributed to the holding companies during the first half of 2013.

Group MCEV was £2,247 million as at 30 June 2013, compared to £2,333 million as at the end of December 2012, on a pro forma basis taking into account the capital raising and debt re-terming. The reduction since year end primarily reflects the £72 million increase in the value of our Tier 1 and Tier 2 Notes during the period, which are deducted from our MCEV at market value.

We continue to target £400 million of cumulative incremental embedded value from management actions between 2011 to 2014.  The Group generated £332 million of incremental MCEV during 2011 and 2012 towards this target, and a further £52 million of incremental value during the first half of 2013 through a series of actions including the release of legacy provisions and asset/liability matching activity.

Our gearing ratio reduced from 55% as at 31 December 2012 to 48% as at 30 June 2013, towards our 40% target by end of 2016,  primarily as a result of the capital raising and debt re-terming.

Our capital position remains robust with IGD surplus and headroom over our capital policy estimated at £1.1 billion and £0.4 billion respectively at 30 June 2013, compared to IGD surplus of £1.2 billion and headroom of £0.4 billion at the end of December 2012, pro forma for the capital raising and debt re-terming. The £0.1 billion reduction in the surplus since year end reflects the payment of shareholder dividends, the coupon on our Tier 1 Notes and bank debt repayments during the period. The legal transfer of the annuity liabilities and assets to Guardian is well progressed and is expected to enhance IGD headroom by £0.2 billion.

At 30 June 2013, our PLHL ICA surplus was estimated to be £1.0 billion, with headroom over our £150 million capital policy of £0.8 billion. This compares with the PLHL ICA surplus of £0.8 billion and headroom of £0.7 billion at 31 December 2012, pro forma for the capital raising and debt re-terming.

Group assets under management were £67.1 billion as at 30 June 2013, compared to £68.6 billion as at 31 December 2012, reflecting the natural run-off of the life company assets, partly offset by net inflows of £0.9 billion from third parties and a net £0.2 billion repatriation of Guardian assets relating to the annuity transfer.

Finally, the Group achieved IFRS operating profits of £186 million in the first half of 2013 including £24 million from management actions and £19 million from positive experience and assumption changes, compared to £217 million in the first half of 2012 (restated for revisions to IAS 19 Employee Benefits), which benefited from £59 million of management actions.

Phoenix Life review

Phoenix Life contributed IFRS operating profit of £178 million in the first half of 2013, compared to £205 million for the same period in 2012. Management actions included within operating profit totalled £24 million in the first half of 2013, whereas the previous year's management actions totalled £59 million.

Preparations for the Part VII transfer of £5 billion of annuity liabilities and related assets to Guardian are progressing well, with completion expected towards the middle of the second half of 2013. In addition to this important management action, Phoenix Life has made strong progress across several other areas in the first half of 2013.

In conjunction with our outsource partner, Diligenta, we completed the migration of in-force policies to the BaNCS administration platform, with the transfer of a further 180,000 policies, making policy administration more efficient and giving customers access to their policies online. This brings the total number of in-force policies migrated to BaNCS to 3.2 million.

Phoenix Life continues to make progress, together with Ignis Asset Management, in consolidating the investment back office, accounting and unit pricing with a single outsource provider, HSBC, streamlining the operations and increasing efficiency.

The Group has continued with its preparations for the implementation of Solvency II. During 2013, activities have been focused primarily on preparations for moving towards an 'ICA+' regime, as well as monitoring the progress of the development of the Solvency II regulations.

The Group's Actuarial Systems Transformation project ('AST'), which has developed a single actuarial modelling platform designed to transform the Group's modelling capability and efficiency, has progressed and the new model will be run in parallel with existing models for the 2013 year end.

Customers are at the heart of what we do, and ensuring their money is protected against fraud is one of our key focuses.  This year, we have stopped 495 cases of pension liberation fraud. Through our intelligence model, and by building new processes with our outsource partners, we identified and withheld £10 million of transfers which cold callers had convinced policyholders to make by promising to release cash early from their pensions. Had these cases proceeded, policyholders in all probability would have been left with substantial tax charges, excessive administration fees, and potentially no pension at all when they reached retirement. As well as communicating directly with customers, we also undertook a major programme to raise awareness of the issue.

Ignis Asset Management review

Ignis Asset Management continued to grow its third party franchise in the first half of 2013, despite volatile global economic conditions, winning £0.9 billion of net third party inflows (HY12: £0.9 billion).  An acceleration of sales in the Absolute Return Government Bond Fund ('ARGBF') including higher international inflows offset a slight fall in liquidity net inflows.

In addition, net £0.2 billion of assets associated with the Group's annuity transaction with Guardian also returned to Ignis during the first half of the year, with the remaining £1.1 billion of Guardian assets expected to transition back to Ignis during the second half of 2013.

Ignis' IFRS operating profits were flat compared to the first half of 2012 at £19 million, the impact of lower revenues caused by the run-off of life company assets and restructuring of the former joint ventures being offset by increased third party revenues and reduced expenses.

Ignis' assets under management totalled £64.9 billion at 30 June 2013 compared to £66.0 billion at 31 December 2012, reflecting the run-off of life company assets offset by third party asset inflows. Sales strength has been supported by continued investment outperformance, with 73% of total assets performing above benchmark.This has been led by strong performance in Ignis' key funds, with ARGBF delivering a 5.50% return over the last year (against a SONIA (Sterling Overnight Interbank Average benchmark) return of 0.43%) and the Ignis UK Property Fund's long-term returns reflecting top performance over the five year period compared to a peer group of comparable funds.

Ignis has also been working to broaden its product offerings. The Ignis absolute return suite of products is expected to be complemented by a hedge fund version this year, targeted primarily at more sophisticated institutional investors. Emerging Market Debt and Tactical Asset Allocation funds were launched internally, with the former expected to be launched to third parties in due course.

Ignis has recorded notable progress on its operational priorities. The joint ventures transition has been completed, with all of the businesses now continuing on a standalone basis. The transformation partnership with HSBC is ongoing, with completion of the back office outsourcing programme expected in 2014.

The results of the first six months of 2013, against the backdrop of volatile market conditions, indicate continued momentum in the business' development into a leading asset manager.

Outlook

The first half of 2013 has been pivotal in terms of putting in place a capital structure for the long-term and increasing the financial and strategic flexibility of the Group.  We are now in a position where we can consider potential opportunities to grow the business through acquisitions, strengthening our existing position as the UK's largest specialist consolidator of closed life funds.

Our preliminary discussions with Swiss Re Ltd ('Swiss Re') in relation to a possible combination of Phoenix and Swiss Re's Admin Re business unit are ongoing. If successful, this would result in Swiss Re taking a minority shareholding in Phoenix in consideration. There is no certainty that these discussions will lead to any transaction or of the terms on which any such transaction might proceed. We will update the market in this regard as and when appropriate.

Irrespective of these discussions, our focus remains on the continued delivery of strong performance across all of our key financial metrics and targets. 

I would like to thank my colleagues for their hard work during this transformational period for the Group. We remain committed to delivering value to all our stakeholders.

Clive Bannister

Group Chief Executive

21 August 2013

Business review

Key Performance Indicators

Operating companies' cash generation

£416m

(HY12: £119 million)

With cash generation of £416 million in the period the Group is on track to meet its full year cash generation target for 2013 of £650 million to £750 million. Management actions have generated cash flows of £252 million in the period.

The cumulative cash flow target for 2011 to 2016 is £3.5 billion, against which £1.9 billion had been achieved by 30 June 2013.

The Phoenix Life free surplus decreased to £406 million at 30 June 2013 (YE12: £514 million) reflecting cash distributions to the holding companies of £411 million partly offset by capital generation in the period of £303 million.

Group MCEV

£2,247m

(31 December 2012: £2,122 million)

Group MCEV increased by £125 million to £2,247 million at 30 June 2013, benefiting from the equity raise of £232 million (net of associated fees and commission) and management actions of £52 million principally through the release of legacy provisions and asset/liability matching activity.

The Group's target is an average of £100 million per annum of incremental embedded value growth from management actions between 2011 and 2014 of which £384 million has now already been delivered.

Group IFRS operating profit

£186m

 (HY12: £217 million restated)

Group IFRS operating profit decreased by £31 million to £186 million principally reflecting the greater benefit derived from management actions in the prior period relative to the current period.

Ignis Asset Management IFRS operating profit

£19m

(HY12: £19 million)

Ignis' IFRS operating profit of £19 million was in line with the comparative period reflecting lower income from the life companies, offset by increased third party revenues and expense savings.

Group assets under management

£67.1bn

(31 December 2012: £68.6 billion)

Group assets under management decreased by £1.5 billion in the period as net third party sales of £0.9 billion only partly offset the run‑off of the closed life funds.

Of the Group assets under management, Ignis manages or administers £45.2 billion of internal funds (31 December 2012: £47.1 billion), and £13.0 billion of external funds (31 December 2012: £11.9 billion) and provides oversight and advisory services on £6.7 billion of internal funds (31 December 2012: £7.0 billion).

IGD surplus (estimated)

£1.1bn

(31 December 2012: £1.4 billion)

The estimated IGD surplus has decreased by £0.3 billion to £1.1 billion. The key drivers of the reduction in the IGD surplus were dividend payments and debt financing and repayments; including a £0.2 billion reduction in relation to the re-terming of the Impala facility net of proceeds from the equity raise. Headroom over the Group's capital policy has also reduced as a result of these factors to £0.4 billion (31 December 2012: £0.6 billion).

PLHL ICA surplus (estimated)

£1.0bn

(31 December 2012: £1.0 billion)

The estimated PLHL ICA surplus remained resilient at £1.0 billion despite the £0.2 billion reduction reflecting the impact of the Impala loan facility prepayment net of the equity raise proceeds.

The Group aims to ensure that PLHL maintains an ICA surplus of at least £150 million.

Gearing ratio

48%

(31 December 2012: 55%)

Gearing reduced to 48% at 30 June 2013 reflecting the equity raise of £232 million (net of associated fees and commission) and debt repayments of £535 million made in the period.

The ratio is targeted to reduce to 40% by the end of 2016.

Interim dividend per share

26.7p per share

(HY12: 21p per share)

Interim dividend per share of 26.7p*.

The dividend is in line with the 2012 final dividend and represents an increase of 27% compared to the 2012 interim dividend.

* Subject to compliance with the terms of the Group's main credit facilities.

Cash generation

Holding companies' cash flows

The Group's closed life funds provide predictable fund maturity and liability profiles, creating stable long-term cash flows for distribution to shareholders and for repayment of outstanding debt. Although investment returns are less predictable, some of this risk is borne by policyholders.

The following analysis of cash flows reflects the cash paid by the operating companies to the Group's holding companies, as well as the uses of these cash receipts:

1   Includes amounts received by the holding companies in respect of tax losses surrendered to the operating companies of £15 million (HY12: £25 million).

2   Proceeds of the equity raise of £232 million net of associated fees and commission, and after the deduction of £21 million of fees associated with the re-terming of the Impala loan facility.

3   Closing balance at 30 June 2013 includes required prudential cash buffer of £150 million (30 June 2012: £150 million).

Cash receipts

Cash remitted by the operating companies was £416 million (HY12: £119 million) driven largely by the opening free surplus within the life companies.  £252 million of these cash flows arose from free surplus generated by the life companies in 2012 following the Guardian Assurance Limited annuity transfer transaction.

In January 2013 the Group announced the re-terming of the Impala facility and an equity raising of £250 million. The equity raising comprised equity placings with certain Och-Ziff funds and an open offer to raise aggregate gross proceeds of £250 million through the issuance on 21 February 2013 of 50 million ordinary shares. The proceeds of the equity raising net of associated fees and commission of £18 million, and after the deduction of £21 million of fees associated with the re-terming of the Impala loan facility were £211 million.

Phoenix Life free surplus

The generation of free surplus, net of movements in required capital, underpins the cash remittances from Phoenix Life. The table below analyses the movement in free surplus of Phoenix Life:

4   The life companies' free surplus is the excess of the net worth over the required capital reflected in the MCEV and represents capital in excess of what is required under the life companies' capital policies.

5   Includes differences between IFRS valuation of assets and liabilities and valuation for capital purposes.

Movements in capital requirements and policy in the period of £150 million (HY12: £448 million) reflects the inherent release of capital requirements from the run-off of the life funds, together with the positive impact of increasing yields on capital requirements and policy.  The prior year comparative included the net capital benefits of the annuity transfer transaction of £252 million.