Standard Life's (SLFPF) CEO Keith Skeoch on Q2 2016 Results - Earnings Call Transcript

| About: STANDARD LIFE (SLFPF)

Standard Life Plc. (OTC:SLFPF) Q2 2016 Earnings Conference Call August 9, 2016 3:30 AM ET

Executives

Keith Skeoch - Chief Executive Officer

Luke Savage - Chief Financial Officer

Paul Matthews - Chief Executive Officer, UK and Europe

Colin Clark - Head of our Global Client Group

Rod Paris - Chief Investment Officer

Analysts

Oliver Steel - Deutsche Bank

Jon Hocking - Morgan Stanley

Andy Hughes - Macquarie

Andrew Sinclair - Bank of America Merrill Lynch

Ravi Tanna - Goldman Sachs

Lance Burbidge - Autonomous Research

Ashik Musaddi - JP Morgan

Keith Skeoch

Good morning and thank you for coming along today. I hope you’ll do what I’ve just done, remember to switch off your mobile phone or Blackberry or whatever. I’m joined on the platform today by my fellow executive directors Luke Savage, our CFO, Paul Matthews, the CEO of U.K., Europe Pensions & Savings, and Colin Clark, Head of our Global Client Group. We’re also joined on the audience by some of our executive team including Rod Paris, our CIO, Barry O'Dwyer, who is Head of Workplace and Retail, and Raj Singh, our Chief Risk Officer.

There is much to be pleased with these interim results. We delivered good and well diversified growth in what can only be described as a challenging environment.

Growth in assets and inflows from a broad range of customer and clients. We continued to grow our global network, increased our stake in HDFC Life. We’re building out our presence in the advice and intermediary markets in the U.K. through 1825 and the Acquisition of the Elevate platform.

Importantly, we also maintained our financial discipline to deliver growth in fee-based revenue, profits and cash flows. All of this allows us to continue our unbroken record of delivering a progressive dividend whilst maintaining a strong capital position.

In my view, the first half demonstrates that our strategy to build a world-class investment company is delivering. I’ll return to talk about markets and what we’re doing to accelerate our pace of strategic delivery which will then be followed by Q&A. But first I’ll hand over to Luke who is going to lead us through our results for the first half of 2016. Luke?

Luke Savage

Thank you, Keith, and good morning ladies and gentlemen. I’m going to start this morning by a quick look at performance, so a simple, and hopefully to many of you by now familiar business model.

As you can see, we delivered continued growth in assets under administration, up from £307 billion at the year-end to £328 billion at the half-year. As Keith mentioned that includes good net flows in changing markets and it’s helped by the diversity of the book both in terms of asset mix and also FX gains at the end of the period.

Moving across, you can see fee-income, which is of course based on average assets under administration of period. And it was up 4% to nearly £100 million. And at the same time, we continued to reduce our cost income ratio down 1% to 62%.

In combination, we increased underlying performance by over £40 million, some 14%, earnings per share by 16% and cash generation by 10%. That has allowed us to increase our dividend by 7.5% to £0.0647 per share continuing our unbroken progressive dividend track record and we’ve done this whilst maintaining a strong IGD surplus.

Here are those figures in tabular form. In the top couple of rows you can see that we’ve continued to drive our fee-based revenues which contribute well over 90% of total income. A reminder, there is a core component of our business model with little of our revenues coming from traditional spread risk-based insurance activities.

If we turn to non-operating items we guided at the end of the year towards a significant reduction in 2016 with a number of one-offs falling away and recurring non-operating expenses trending down. And you can see we’ve delivered on that guidance here with a figure down by nearly £100 million.

In terms of couple of particular line items, we closed out the B pension scheme to all further contributions with effect from April this year and you can see the loss of the associated charges coming through there. And as a reminder, we did that from a position of strength with the DB scheme having a surplus up from year-end and now in excess of £1 billion.

You can see that restructuring is continuing to trend down. Notably in the figures are two items. The integration of Ignis is now substantially complete with a full first-year of £15 million of synergies coming through in 2017. And it also includes restructuring costs in Germany where post closure to new guarantee business last year we’ve been reshaping the business and will by 2017 reduce total cost by over 25% versus the run rate prior to the changes.

So, overall much reduced on last year and I’d guide you towards a similar level of restructuring costs in the second half.

Let’s now drill into the first pillar of our model and look in more detail, assets inflows. Here you can see, over £4 billion of net inflows via our growth channels. Reduced outflows on our mature books which was, a natural one-off down to £2.9 billion this year from £3.6 billion last. And towards the right-hand side, the market movements which were benefited from the diversity from our ALM, both in terms of asset class and currency mix.

Overall, we’ve increased AUA across all four growth channels. That said the operating environment across our four channels is different, I’ll go through each of those in a little more detail.

You can see here the flow figures for our institutional and wholesale channels. And starting with wholesale, we can see our flows turn negative. Now to give context, the PRDM survey for the first quarter stated that this has been the worst period for these wholesale markets in 20 years. The markets where investment decisions are typically made short notice and are largely sentiment driven.

So, it’s perhaps not surprising given the economic uncertainty and political uncertainty we’ve seen that investors have been taking risk off the table.

That was in contrast to our institutional flows where mandates are orders are a function of long-term investment goals, performance and capabilities. Here flows were strong, an particularly into real-estate in terms of asset class and in terms of client diversification of good flows and DB schemes including into ILPS, our Integrated Liability Plus Solution. And as we look forward in institutional, that pipeline remains strong.

When it comes to workplace and retail channels, we’ve continued to drive strong and resilient net flows of £2.8 billion. Now the retail flows are indicative of the strength of our proposition where our platform continues to attract favor with IFAs and we signed up nearly 50 more firms, year-to-date as well as seeing existing IFAs, continue to consolidate assets onto our platform.

It already has the largest share of flows and device platform market. And with the acquisition of Elevate business based on current activity, flows would be approximately twice the size of our nearest competitor.

Not only does it give us increased flow but it also enables us to expand our capability from the high-end advisory market into more generous market.

To give some perspective on the acquisition. The Elevate platform has got around £10 billion of assets under administration on it. And it’s been losing close to £20 million a year. But once we’ve integrated it, we expect it to contribute profits close to £20 million, in part from increasing SLI content on the platform. We expect to complete on the transaction in the coming months and to spend little under £100 million in total on the acquisition, integration and restructuring which should take around 24 months to complete.

In workplace, we continue to auto-enroll over 200 schemes a month, largely through our good-to-go online capability. Now with those schemes that we are now small under the market but they will earn us an annual scheme admin fee of £1,200 per scheme. And over time we’ll grow assets on which we earn fees both within our pensions and savings business as well as around 70% of the assets then being managed by SLI and earnings fees there as well.

And that growth in auto-enrollment is contributing to the annualized £3 billion in regular premiums we’re now attracting to workplace.

If we turn now to how those asset movements translate into revenue. You can see here that we’ve grown fee revenues to our growth channels by 8% year-on-year. That 8% growth is despite the impact of the regulatory driven changes to our operating model in Hong Kong as a result of which reduced fee growth came down by about 2%. But overall, we grew fee revenues by an excess of £30 million.

As for our spread risk margin, we took advantage of volatility and credit spreads during the period to capture additional yield pick-up in the back book and you can see that coming through there at £10 million.

Now the timing comes from such opportunities are hard to predict. We would guide to refer the £5 million to £10 million over the course of the second half.

In addition to ALM activity, we benefited from an acceleration of cash flows inherited with profits book as a result of a change to the scheme of demutualization driven by the adoption of Solvency II and you can see £22 million coming through there in respect of that.

So, if you turn to the third pillar of our model, costs, the cost to income ratio has been reduced by 1% to 62%, and whilst absolute cost have increased in part that’s because we’re continuing to invest in growth initiatives.

Specifically, we’ve been making good progress in the build-out of our in-house advisory capability. And Keith will come back to the strategic points of this later. But you can see here, £7 million in expenses related to that build out. I’m very pleased with the progress we’re making there. And we expect taking £25 million to reach breakeven during 2017.

The main expenses have risen by £26 million, as a function part of higher AUA, together with continued investment elsewhere across the business.

Now, by its nature, that investment can be somewhat lumpy and I will come back to that when I talk about the pensions and savings business in a moment. But I would stress that we see strong cost discipline as a key lever in us continuing to drive down the cost to income ratio.

Now I talked about most of the individual items on this slide up to now. So, pulling all that together all I would add is that over an underlined fee-based performance is growing by 7% year-on-year, sharing the strength of our diversified business model in the current difficult environment.

How does that write-down by business unit. You can see here that we’ve achieved an improvement across every business line item with the exception of Hong Kong, where I touched on the changes a moment ago.

I’ll come back to the major line items separately but whilst we’re on this side, let’s touch briefly on Europe pensions and savings. For some time, we’ve guided that we expect the contribution from Europe to remain stable. The first half saw benefit from £4 million of the £22 million solvency spread risk related gain that I touched on a moment ago. And allowing for that you can see that Europe is very much on par with last year and then our guidance in that respect remains unchanged.

Return to Standard Life Investments, we’ve grown fees by 7% in contrast to just a 3% increase in expenses. It is a business where cost can and have responded quickly to firm management action, given the uncertain conditions we’re operating in. And we will continue to maintain tight cost control going forward.

Across the bottom in the yellow dots, you can see that one year 29% of assets under management were ahead of benchmark compared to 85% and 84% at the all-important through five-year points.

The performance of GARS has attracted some attention in recent months, so let’s put that into context. Whilst the performance has been below target, it has nonetheless continued to operate within its designed risk envelop of around a third to the half the volatility of equities.

Up to the mid-year we have seen net inflows into GARS of £0.3 billion. There have been strong institutional net inflows throughout the period offset by outflows in wholesale for reasons I touched on earlier. That said, even within wholesale, we attracted nearly £1 billion of net inflows into wholesale products other than GARS including MyFolio which is now broken to £9 billion. And it’s an excellent example of the power of combining distribution with manufacturing within the investment company to drive that resilient growth.

Over to the right-hand side, third box down, you can see that there has been no margin erosion without which revenue would increase slightly by 1 basis point to 53 basis points. Whilst in the fourth box down you can see that we’ve increased EBITDA from 40% to 42%.

Now, I’ve touched on diversity kind of by currency and by clients’ side. But I think it’s also worth looking at how product diversity impacts us in penal volatility. You can see here in the bars on the left that since the formation of SLI in 1999 due to demutualization in 2006 so the current time in 2016, you can see how over that period the asset volatility across the fund ranges we offer to our clients has come down as we’ve grown the range of asset solutions available. That’s good for our clients and as you can see from our results it’s good for our assets under managements and our P&L. We are a well-diversified business.

Moving on to our pensions and savings business, the 8% revenue gain we’ve delivered from our growth channels has been offset by the face of the investment spend both in our existing franchise and as I touched on earlier the building out of our advisory capability.

We are maintaining a strong cost discipline and elevate the 1825 aside expenses in this business will come back down in the second half to lead full-year expenses in-line with prior year levels. Looking to the right-hand side, again the third box down, we’ve been saying for some time the average revenue yield compression was slowing and here you can see in the period the margins were unchanged at 59 basis points. Although the addition of Elevate will give rise to a shift in mix and that sees number four slightly going forward.

Let’s look at our capital position. A busy slide, for which I apologize, I know many of you attended the Solvency II session we ran post IUN results presentation, at which are it’s a great lengths to point out a number of key messages, I’m going to repeat three of them now.

Firstly, the nature of our business means that Solvency II capital is not a constraint on us. Although neither is our regulatory capital surplus, a source of readily deployable capital even that it principally consists of WIF.

Secondly, I don’t believe you can take comfort from reported regulatory solvency ratios they’re just too many anomalies that go into the number to make peer-to-peer comparisons effective.

Thirdly, what is important is the absolute quantum of the capital surplus and how stable that is under a range of scenarios. So, with that in mind, we present here both a strict regulatory view on the left-hand side as would appear on a regulatory return. And then on the right-hand side, we provide what we’re calling an investor view which we believe provides additional insight into how well protected our investors really are.

It adjusts for gross-ups which do not represent risk to the shareholder and it adjusts for capital fully available to meet losses but not recognized at the parent level.

You’ll see that surplus has fallen by £300 million since the year-end. Of that around £200 million represents the increase in our stake in our Indian associates, up from 26% to 35% in the subject of the merger that was closed yesterday. And the remaining £100 million is the impact to the number of small movements in both resources and requirements.

But I think with just £100 million underlying movement it demonstrates that’s not only in the first half of 2016 has that regulatory surplus been stable but we remain confident that the surplus is insensitive to wide range of market scenarios.

As I’ve repeatedly said, regulatory capital is not a constraint on us, so what do we measure ourselves against. It has been, and it remains cash. It is cash that funds’ investments, be that organic or inorganic. And its cash that underpins our ability to stand behind our progressive dividend policy.

The fee-based nature of our business provides a strong correlation between fees, IFRS profits and cash generation which you can see here is 10% year-on-year. And that is a conservative measure. We don’t take credit for cash generation with our Indian and Chinese joint ventures and associates. All we recognize from them is the cash dividend streams coming in from India.

If you look to the right of the chart, the chart on the right-hand side shows the amounts of surplus liquid resources we hold at group level. These have dipped in the first half as a function of us investing in India, as I mentioned a moment ago. But they remain at a level which provides a strong buffer to underpin both that progressive dividend policy as well as giving us optionality to support growth.

So, as you can see, we’ve continued to deliver for our customers, our clients, our business is performing well and growing assets, growing revenues, growing profits and increasing cash generation.

That support to our progressive dividend policy whereby we’re announcing a dividend of £0.0647 per share for the half year, a growth of 7% year-on-year and maintaining unbroken track record progress in policies since demutualization.

And on that positive note, I’ll hand back to Keith.

Keith Skeoch

Thanks Luke. We continue to make progress in building a world-class investment company, a company with investments at its heart that focuses on the needs of customers and clients and earns their trust. A business that people aspire to work for, and respect, a business with strong values teamwork and excellence pointed at delivery. I and my colleagues in the management team have a very clear focus on delivering both growth and efficiency. Together they drive profits and cash flow for shareholders.

We continually monitor our progress. And after my first year here as CEO, and I think a positive outcome in the challenging first half, it’s very clear to me that a sharper strategic focus can also up the pace of delivery.

To understand why, let me first say a few words about markets to provide context. The thing that’s important to note, clouds were already gathering over the global economic outlook before the U.K.’s vote to leave the EU took place. It will take time for the full-effect of the vote to be felt and understood.

In my view, it would be rash to extrapolate from the economic and political noise of the last six weeks.

What is clear is that the uncertainty that always accompanies economies, markets and public policy is likely to remain elevated. Volatility will continue. It will hit air-pockets will have weeks and even months where markets rise quite strongly. That elevated volatility, some of which is directly attributable to the U.K. vote to leave but also has more to do with political and economic developments around the rest of the world.

What’s even clearer is that the recent events reinforce the full big trends shaping the global savings and investment landscape. The Standard Life strategy is explicitly designed to take advantage of.

First: focus on fiscal policy in my view to support economic growth is going to increase. So, public sector debt and deficits are not going away. That will put even more emphasis on individuals taking responsibility for their financial future.

Whether we like it or not, trust in experts and elites is being increasingly challenged and the political debate around the world on the quality and inclusion is intensifying.

A greater emphasis post vote on international trade will mean not only that the U.K. businesses will need to be world-class to sell abroad they will also have to compete with world-class firms in their own backyard. So utilizing technology and innovation to build efficient and scalable platforms, more than ever is going to be a source of competitive advantage.

Finally, the slow growth, low inflation, compressed return-environment is being extended as markets and economies absorb the enhanced level of uncertainty and volatility.

36 years’ experience in financial markets has taught me that during periods of uncertainty and volatility, and there have been quite a few, that I need to remain focused and retain our strategic discipline. Our long-run strategy is explicitly designed to take advantage of these four trends. And as they’re intensifying, it’s clear to me that our reaction should be to increase our pace of strategic delivery.

What does that mean in practice, well it’s actually very simple. We need to continue with our targeted investments and our diversification agenda to grow assets while at the same time focusing and sharpening our focus on operational efficiency. This is what will create the headroom to invest while delivering improving returns for shareholders.

So, turning first to diversification, as Luke pointed out, we’re already benefitting from strong long-term relationships with a broad range of clients and customers. In the first half of this year, we saw very different mix of net flows compared with the first half of 2015. We benefited from the fact that our diversified clients and customer base reacted in different ways to the changing environment.

Institutional appetite increased as large institutions sought to reduce volatility. Wholesale retreated. We saw very little impact in workplace because people still need and are still contributing to their pensions. We also saw very little impact on intermediaries who continue to consolidate assets.

The net result was good and a well-diversified growth. Net flows in our growth channels rose by 4% of starting assets with revenue as Luke pointed out, up by nearly 8% on the first half of 2015.

We have a strong track record of commercializing innovation to drive diversification. And that’s central to maintaining the positive momentum we have in asset growth.

We spent some time talking about this, the Capital Markets Day, and I don’t intend to go through the detail today. But simply to point out, but while for some uncertainty and changes a threat, there is no shortage of opportunities for Standard Life. Our targeted investment program, which is already in place, means we are well-placed to take full advantage of them.

As part of this program, we increased our stake in HDFC Life to 35%. The proposed merger with Max Life will create India’s leading private sector Life Company. As a result we will have valuable strategic stakes in the leading Life Insurance and let’s not forget asset management companies in India, one of the fastest growing economies in the world.

Driving asset growth and revenue growth across our growth channels in my view is the best strategic means of reducing unit costs. However, particularly in the current economic environment, we also need to focus on the second critical component of our strategy, financial discipline.

In this recent past, Standard Life has a good track record of improving its operational efficiency. Our cost income ratio has fallen by 7 percentage points since 2012. You’re aware, we already have programs in place that will continue to lower unit costs and delivery is on track.

The integration of Indigenous which has delivered over £50 million of annual cost savings and the replatforming of some of our IT architecture are good examples. The dynamic approach to cost control that underpins financial discipline at Standard Life Investments, delivered a further fall in the cost income ratio and a continued improvement in profitability despite weak markets and slower net flows.

However, the build-out of 1825 and the acquisition of Elevate in the near term could add more cost than income and slow the downward trajectory in the cost income ratio. My very strong view after my first year as CEO is that we need to sharpen our focus on costs.

I am determined to deliver not just well-diversified growth in assets but also make sure it’s accompanied by a world-class cost income ratio.

So, at this end we’ve put in place three programs to ensure that the downward trajectory not only continues in the cost income ratio but that it falls significantly below current levels. The first looks at some shorter operational efficiencies deliverable over the course of the next 18 months by utilizing the more dynamic approach to cost control and budget planning that serves Standard Life investments so well over the last 12 years or so. And Luke is leading the delivery of that program.

The second recognizes that as we see benefits from closer cooperation and collaboration across the growth channels, there is scope for significant strategic synergies as we remove areas of duplication. And I’ve asked Colin Clark and Paul Matthews to accelerate the bringing together of the growth channels to make sure they cooperate and collaborate even closer.

Third, parts of our business, particularly on mature book, require a more focused and transparent management approach to fixed costs if we are continued to drive that cost income ratio even lower.

So, I’m announcing an enhanced approach to the management of our mature insured books, in order to ensure a greater focus on operational efficiency, I’m appointing Barry O'Dwyer to lead a management team that will be tasked with not just delivering but making transparent, the considerable value in our Life Insurance businesses. The efficiency and the variability of the cost base needs to and will be improved.

All three programs will report to me on a regular basis and that’s going to be coordinated through Lan Tu, our new Chief Strategy Officer. Taken together these programs will improve the operational efficiency of the whole business and should allow us to drive our cost income ratio down to significantly below current levels and at the same time allow us to continue to invest in our diversification agenda and strengthen the long-term relationships we enjoy throughout our customer and client base.

By doing this, we will ensure we continue to meet changing client and customer needs. We’ll also ensure we grow our assets, our fee-based revenues and our profits. Increasing our pace to strategic deliver will help us to accelerate shifting the shape of Standard Life to a well-diversified world-class investment company generating sustainable long-term returns for shareholders. Thank you.

Luke, Paul, Colin and I, with help from senior colleagues in the room, are now available to answer any questions you may have. Oliver?

Question-and-Answer Session

Q - Oliver Steel

Oliver Steel from Deutsche Bank. So, three questions on costs. So, the first is, I don’t think your cost to income ratio came down if you strip out the exceptional spread profits. Certainly if I can back-off fee income, it went up. And at the end it’s just even on your basis, it was 63% in both 2014 and ‘15. So, I suppose the question one is, really what sort of cost to income ratio are you targeting because you’ve talked about the targets but you’ve actually given us no ability to judge you on that?

Second question is when you talk about improving the focus on the mature businesses, are you talking releasing more revenue that through management actions, so are you actually talking about absolute reductions in costs?

And then the third question, an easy one is you talked about Ignis cost savings being more than £50 million by the time we get into 2017. What’s the run rate at the moment?

Keith Skeoch

Okay. It’s a combination of Luke and I can deal with those questions. Let I absolutely agree there are headwinds in the current cost to income ratio. And that’s why management is so focused on making sure we drive the cost income ratio lower over the medium term to make sure that the implicit operational leverage in this business is delivered. So, that’s a really big focus for me. Luke, do you want to?

Luke Savage

Yes, I guess around think about that is to say, the cost to income ratio is a function of growing earnings, maintaining cost discipline while stocking out invest in the future. And if you think back to the past two or three years, we’ve had a number of challenges within that dynamic.

So, on the political front we saw the ending of annuities which took out £50 million or £60 million a year of revenue. So the good growth that we’ve achieved is despite that. We’ve seen regulatory challenges, I touched on Hong Kong, where the change in the regulatory environment there, and then we ended, stopped writing recurring premium product. That provided a headwind on income.

And we’ve seen economic challenges. So, again I touched on the ending of writing guarantee business in Germany, where the ultra-low rates rendered the guarantee market unviable and we switched to I think a nil in business. And despite those challenges, we stood in with good revenue growth. Despite those changes, we still delivered good investment for the future. And despite those challenges we still brought the headline rate down by, 2% or 3% over the past two or three years.

So, you’re absolutely right. In this particular period, spread risk has happened, that has helped. But that is just one of a number of moving parts over the period.

If you take that success that we’ve achieved in recent times, 2% or 3% in two or three years, and extrapolate that forward, recognizing that there are, there would no doubt be other challenges that we can’t at this point predict. If we extrapolate that out in two or three years’ time, it means that in the medium term we end up falling below 60% which we believe is, a world-class cost to income ratio.

Keith Skeoch

The main point is making sure that if we benefit from strong asset growth, we maintain our financial discipline, we keep our hands on the lever of cost control to make sure that drops through to the bottom line.

Luke Savage

But those three things of revenues investment and cost and dynamic; and need to work the three of them together.

Keith Skeoch

And Ignis Luke.

Luke Savage

So, and Ignis is over £15 million, we’re more or less complete on the integration. I don’t know off the top of my head, how much that implies in terms of the 2016 savings. But what I do know is that ‘17 would be the first full year of getting the full £50 million a year, which is what we’ve committed to all along. But I don’t have the ‘16 impact on the top of my head I’m afraid, sorry.

There is one other bit about to the mature books, about whether it’s around asset liability management or costs. From my perspective I think it’s both. I think we already do a good job on asset liability management and we’ll continue to do that. And as I touched on, we had some opportunities in the first half of the year that we perhaps hadn’t expected back at the prelims.

But a lot of this is around focus on cost and recognizing that if you run pensions and savings business, its one [indiscernible] business. You end up working to the highest denominator across the business rather than tailoring the way you support for the different segments within the book. And we think a segmented approach should enable us to drive out further costs.

Oliver Steel

Are you able to provide any guidance on the asset liability management actions then within that matter?

Luke Savage

We’ve given guidance for the remainder of this year I think I said a further £5 million to £10 million. But we’ll give you guidance at the end of the year as talk we see going forward. So much of that is a function of market conditions. So I wouldn’t want to be using my crystal ball at this point.

Keith Skeoch

Jon and Andy, I’ll stay with the center and then we’ll move out to the wings.

Jon Hocking

Thank you, Jon Hocking from Morgan Stanley, I’ve got three questions please. First on the costs, could you give us some idea of this sort of cost to achieve with the new program and then a little bit more color on the overlap you mentioned, I guess this is between the Life Company and SLI is one of the key areas?

Second question, at the Investor Day, Keith you gave a very good sort of run through of what was impacting GARS performance. I think you specifically mentioned these effects on fundamental factors which didn’t work during the spread widening in February/March time. And I guess sort of Brexit through spanner of the works again. Just wondering if you could comment a little bit about how it’s sort of tracking versus your expectations given that sort of the market we’re in at the moment?

And just finally on India, how should we think about this? Is this sort of a financial investment or strategic investment using Life Company, I’d appreciate in a larger entity that you had 24%. How should we think about this going forward? Thank you.

Keith Skeoch

Let me try and take those in reverse order and help with Luke back of course. As far as India is concerned, I think what the events of the last couple of days will do is clearly increase in a very visible fashion the value of that very important strategic stake in India.

It is strategic because from my perspective India is one of the most attractive of the emerging markets it’s likely to be one of the fastest economies in the world over the next 10 years. And well as this very valuable strategic stake in Life Insurance, don’t forget we own 40% of HDFC Asset Management.

So we have a very valuable strategic stake today that I think over the next 10 years is going to be an increasing source of shareholder value that will come through not just from the value of the businesses but also the importance of the strategic partnership. So at the moment if you look at the AMC, it mainly distributes surprise-surprise because it’s growing so fast Indian mutual funds.

There will be a point where Indians will want access to global funds and we have the ability to put our funds on their platform. HDFC Life is operationally efficient. They’ve got lots and lots of interesting bits of technology. There is a lot of stuff I think that Barry and his team can learn from the way in which they operate. So this is very much a strategic partnership, and I think one of the most exciting bits of the world.

As far as GARS is concerned, I made the point that actually well, in sentiment driven markets, we really don’t always perform so well. I think the right to leave was another driver for that sentiment, so performance over the first half of the year wasn’t really that much changed. Rod, where do you think we are today?

Rod Paris

I think it’s fair to say that positioning [indiscernible] a very slow growth environment didn’t play well in this sort of heightened uncertainty we were facing. And I think the real challenge we had looking into the first half of this year, is that we didn’t anticipate nearly 40% of developable markets moving further into negative territory and the amplified impact that had on a lot of asset prices across the board.

That being said, we have shifted our positions, we’ve emphasized more on the value creates now in the portfolio. We’ve added some carry to the portfolio. So I think it’s fair to say we’re not finding any value argument for most of the larger asset classes at this point in time.

In terms of performance, so there are returns are undoubtedly disappointing, we’re happy with the total risk fall down characteristics and the volatility of the fund. That’s done exactly as we said it would on the 10, with about one third of equity vote over the first half of this year.

I think looking forward, going back to Keith’s comments of the world of compressed returns, the world of small numbers, I think that will be a challenge for traditional asset class investment, I think it actually does speak to what we’re trying to achieve with our solutions and our multi-asset categories.

Brexit is another political risk I would argue makes short-term forecasting very, very difficult. And if anything I think we believe taking this longer-term view that we do in GARS actually is the right posture in this environment and ultimately I think will serve our investors very well. But it is a difficult environment. But GARS is behaving as we would anticipate. It’s an act of thumb, we sometimes get it wrong.

Keith Skeoch

And one of the things I think is quite important implicit in what Rod is saying is don’t forget the risk characteristics, GARS is in the middle of the risk envelop. And I quite like to say to you please think about this from the perspective as we do of clients. So, institutional clients have a very different perspective.

And they like the risk characteristics and that’s why we’ve seen net inflows into the funds, wholesale clients and to be a little bit more sentiment driven, a little bit more focused on short-term performance. And that’s why we’ve seen outflows actually, what goes on will always be a balance of the two.

Rod Paris

Okay, so coming back to the point about the overlap between the different business areas. I guess Keith inherited a structural model that was a function of where Standard Life would come from, when we demutualize there are some 8 separate business units with a group function sitting above it.

Keith inherited a business which is effectively as we refer to an investment company that sees a subtle role to support clients and customers, and advice on assets, the administration of assets and the management of assets.

Yet we still have had a structure which sees three distinct areas. Certainly we’ve had three HR functions, we had three finance functions, three technology functions, three accounts functions and so on. The expectation is that by bringing those together and thinking ourselves as one investment Company we look to be out to delivering more with less, and certainly that’s the touch we’re heading down there in terms of driving out synergies.

Whilst recognizing that there are still separate parts to the business. So, it’s not about losing the identity of the business, it’s about creating common infrastructure support.

And in terms of costs to achieve the new program, in terms of getting the program up and running, we’re using some external support which is immaterial in the grand scheme of things. We’re resourcing it largely from internal resources so for example the announcement Keith just made about Barry’s role in mature business.

In terms of costs that might come out of the back of the programs such as further restructuring cost too early at this point to put a number on that.

Keith Skeoch

Andy.

Andy Hughes

Thanks. I wasn’t sure she was going to hit me with the microphone. Hi, thanks, its Andy Hughes from Macquarie. Couple of questions for Keith. First one on India again, it’s on the math, it could be my math is wrong. But if you take the Max financial services’ current market cap and you put a few holding in the 24% you get to £0.94 a share for the Indian Life business.

And I understand you commented about being strategic, but is there a point at which you think well, it’s a nice asset but maybe we can redeploy the capital somewhere else at a higher return?

And I guess second question on SLI, hopefully at the Investor Day you gave the mix of cost between the different kind of distribution cost operations and management. Could you give those now for the half year and kind of comment of how they’ve changed, in particular the £50 million kind of savings from Ignis presumably they won’t be distribution savings they’ll be near the base of the business?

My third question I guess is about how things have changed in terms of RFP. So at the Investor Day you said okay, you’ve had lots of requests for information on the non-GARS front. I’m just wondering if that already posted signal for the non-GARS slides going forward is still the same today or whether there has been any change as a result of the market conditions. Thank you.

Keith Skeoch

On India, it’s a strategic stake. We have looked to make sure we’ve had long-run exposure to what will be one of I think the fastest growing and most attractive of the emerging markets. So I actually see it as part of our long-term diversification agenda and diversifying the way in which value is created for shareholders.

On costs, I will pass to Luke on SLI. But on RFPs, why don’t you take that first Colin, will be reasoning in a moment.

Colin Clark

I think it’s a continuation of the pictures I outlined in May, activity levels, if you take it on a three-year basis considerably up from where we were. For 2015, first half of 2015 was a very active period where I saw just below those sorts of levels completing Q2 this year.

What I do think is quite interesting is that we’ve seen a continuation of the change in mix. And I flanked the increased interest in MIIT outside of GARS. So I was talking there about GFS and ABS, absolute return government bonds, we’ve certainly seen continued interest in that. And I think one of the other interesting areas that we’ve seen an increase is in equity, our equity franchise. And in particular around the unconstrained area where we’ve schooled some wins during the course of this year.

So, overall levels at or about just below ‘15 levels, substantially up on three or four years ago. But just now an interesting change in the mix which I think is, again it’s very consistent with that story about product diversification in SLI and I think supports some optimism about the way that’s going to change shape over the next couple of years.

The one that I would flag that I’m particularly interested in is the arrival on the scene of a good deal of prospects and the activity and conversations with clients, who have an insurance background and a whole asset liability approach if you like which we first started to talk to the market about the time of the Ignis, and transaction both from a point of view of launching ILPs, integrated Liability Plus for the maturing the D-plans or on the other side of the equation going to talk to insurance companies. Both for those two product areas we’re really seeing very good signs during the course of 2016.

So, I hope - that’s a very full answer, I hope it gives you an impression of the breadth of the capability and the interest across the range.

Rod Paris

And then on the cost question, I don’t have the breakdown in the same format that we showed in Investor Day. And I didn’t quite pick-up on whether your question is, the Ignis savings and where they’ve come through or whether it is the year-to-date cost discipline that we’ve shown? So, I’ll answer both questions.

In terms of the Ignis savings, it’s pretty much across the board. Again, when you integrate Ignis into Standard Life Investments, you can rationalize all of the enabling functions as well as to an extent rationalize some of the fund management [indiscernible] combined funds.

In terms of the 3% growth in SLI’s cost this year versus much more significant revenue growth, I think that was right from the beginning of the year, the SLI management team recognizing it potentially to be a bumpy year had just been very disciplined in their approach to growth. So perhaps doing things like slowing down hiring and o on in order to make sure that we’ve got a firm handle on that cost lever.

And Keith, you’re probably better placed to provide more granularity on that.

Keith Skeoch

Yes, I mean, basically it happened in the first week of the year or when it was clear, where equity markets were on market revenue. We’re on the team there which is used to making sure they manage their cost income ratio very effectively, started to phase hiring started to think about the must-dos where we needed to invest as opposed to nice to have to make sure we created space. And of course the other thing is, the maintenance, we have also in the people front, a pretty efficient remuneration ratio of about 38%.

So, it isn’t just one thing, it really is the ability to make sure that within a given budget you’re pulling the lever and reacting to a combination of events and flows.

Rod Paris

And I think that just reinforces my points about imaging that cost to income ratios of dynamic activity which were revenue growth investment and tight financial discipline.

Andy Hughes

So, does that mean the cost ratio for SLI might tick-up in the second half as you invest more given your steady slowdown in the first half or is it kind of peaking out the cost ratio of SLI?

Keith Skeoch

I wish that I had such fine control over the levers that I could control the cost income ratio from week to week, from month to month and from quarter to quarter. So the honest answer Andy is it is a combination of what goes on, on the market.

So, I think what I would likely believe is that you can trust management to make sure that we pull the right levers to make sure that trajectory continues to fall, whether that comes through in the second half of the year, I think is a move point something it will forecast. What I can tell you, is it will fall in ‘17 and ‘18 from current levels.

Andrew Sinclair

Hi, Andrew Sinclair from BofA Merrill Lynch. I’ll just keep it two questions on a busy morning. Firstly just on your other line of your P&L which has improved from negative 32 last year to negative 23 this year. It’s a pretty marked improvement. I mean, how much does that in Q2 is the least group improvements in registering costs that you’ve talked about? And really where does this improvement come from?

Rod Paris

I think if my cost management hat on and the answer would be not answer. This item is not like capital management and in fact that’s so better returns on the surplus funds that we hold at group. There is a number of small bits and bolts in there, there is no significant single item.

Andrew Sinclair

So nothing that will change an underlying run rate?

Rod Paris

No.

Andrew Sinclair

And second question, you’ve talked a few times about sharpening focus, would that possibly include the disposal of the annuities business for scales perhaps not what is in the other parts of the group? Thanks.

Keith Skeoch

I’ve been very, very clear about that. At this, if we were ever going to do anything, that’s got to be for the benefit of shareholders. At this very, very low level of interest rates, there isn’t much value I think in moving an annuity book on for shareholders. We have the benefit of that are an UC book runs off at the same rate as our transitional.

So actually we can be very, very patient about optionality and how we create value for shareholders. So in the short-run, in this low-interest rate environment we’ll be heavily focused through Barry on improving operational efficiency.

Luke Savage

And that comes back to the point I made earlier about regulatory capital neither being a constraint on us because of the amount of WIF we have now as a source of deployable capital.

Keith Skeoch

And then we can move on to Ravi.

Ravi Tanna

Good morning, thank you. Ravi Tanna, Goldman Sachs. And I had three questions please. The first one is in relation to India, I suppose I’ll try it different way. But I was just wondering the decisions take the stake up to 35% as opposed to the 49% receiving value. I was just wondering how that sits in the context of the new Max Life deal and whether that’s subject to change or whether that’s kind of set in stone?

And the second one was on GARS flows and obviously you’ve outlined where the wholesale flows were particularly challenging. I just wonder whether given the volatility of wholesale flows over time. Do you have a sense of where the £300 million to £400 million a month GARS’ run rate sits in the context of that change year-to-date? And whether we should continue to expect that going forward?

And then thirdly, you’ve talked about the cost income kind of excluding 1825 and Elevate, and I was just wondering whether we should anticipate quite a lot more investment in either of those going forward, I know you’ve given some guidance on Elevate. But 1825, what should we expect please?

Keith Skeoch

As far as India is concerned, I’m not sure I quite understood the point Ravi about the 49 and the 35. We made an explicit decision to increase our stake to 35%. And we executed that. Once that decision, have been made that was a trigger to deliver an IPO of HDFC Life.

What happened in the intervening period is this transaction came along which is a quicker and potentially more valuable route to the listing of HDFC Life in the Indian market. And therefore was a quicker route to delivering shareholder value or making the value that’s available in that Life Insurance business transparent to the marketplace. So I think that’s in essence I think the mechanism.

Luke Savage

So, can I just add one thing, from me, which is, yes, in fact we had the ability to go to 49%. In practice we would never have got there because there is a certain percentage of the stock that would have been out there with share options for employees and so on.

So, we never could have got this far as 49 in exchange for giving up the difference between a theoretical 46% to 47% and the 35% we did take. That was reflected in the price at which we increased our stake to begin with.

Ravi Tanna

Okay, thank you.

Keith Skeoch

On GARS flows, in terms of guidance, if I knew what was going to happen to equity markets, to sentiment, the nature of the autumn statements and the reaction of the wholesale market, I could give you strong guidance. I think given the volatility in the markets and the sentiment, that’s actually quite difficult to do. What I would ask you to note is the difference between the attitude of institutional investors and wholesale investors.

So, a lot will depend on the kind of volatility out there in the marketplace, things as Colin pointed out in July and August so far have been calmer in markets.

Colin Clark

Then just on the 1825, we announced five positions this year those deals are in the process of going through the works. And in terms of looking forward to 2017, we’d expect revenues and expenses from 1825 to be in single-digit millions with the business breaking even towards the end of 2017.

Ravi Tanna

Thank you.

Lance Burbidge

Yes, good morning. It’s Lance Burbidge from Autonomous. I got a few questions. Firstly, one for Paul, with that to say something I suspect. On the workplace the redemption seemed to tick-up in the first half. So I just wanted to check there was nothing going on in terms of movement of scheme or something like that?

Secondly on the multi-asset outflows, which were £400 million in Q2, I wonder if Colin you could split those between GARS and non-GARS in terms of perhaps showing us some momentum in the others in numeric terms?

And then on the mature cost savings, the mature business and Barry’s project. Are there any long-term outsourcing contracts that need to come up renewal that will prevent you from getting savings early?

Paul Matthews

So, shall I go first?

Keith Skeoch

Yes.

Paul Matthews

So, there is nothing going on with workplace. And what workplace predominantly is working premium, 70% are inflows and regulars, one half really in first half, second half we’ve got similar. We’ve had some customers leaving from pensions’ freedom at one scheme also transfer away.

We did also see some of the tick-up in single-prudent transfers that we saw in the first half of 2015 with two schemes coming on in 2015, but I would expect to see some loans come through the next 12 months in addition to this regular premiums, which are ticking up quite nicely I suppose with little turnover as well.

Keith Skeoch

Colin.

Colin Clark

Short answer on the multi-asset flow is on other, in our Q2, we did see positive flows we’re about £200 million something like that. And you’ve got negative on GARS as we mentioned. The picture as a whole for the year I think you also know, we are seeing as I mentioned earlier in the answer to the other question, quite a lot of interest in GFS.

We’ve adjust had interest, managed to register for GFS, Global Focus Solutions in North America, a [indiscernible] Fund. And we’ve also just put on John Hancock platforms, so I think you’re continuing to see a broadening of that multi-asset franchise as well as the additional interest that we’re seeing in the current market environment from an absolute return government bonds.

Keith Skeoch

And Luke, outsourcing contracts?

Luke Savage

Yes. There is none of significant that I can think of. And we’ve just come in a quick set of contractors to what we’ve got out there. One; things we have been doing we continue to do as part of this work is to try and move more of the cost base to fixed variable so that as the mature book runs down, we’re not saddled with fixed costs.

And an example of that might be when we unload our systems on mainframe, mainframes come with significant license pleas. We’ve already talked to you about the work that we’re doing within the U.K. business to transform the IT off of legacy platforms onto technologies that now believe the mainframe. And would therefore enable us to help take those cost down over time.

Keith Skeoch

Barry, just check in, I do think they aren’t any outsourcing contracts out for review.

Keith Skeoch

Ashik.

Ashik Musaddi

Yes, hi, good morning. Just three questions, its Ashik Musaddi from JPMorgan. First question, to your last point about what Luke you flagged move away from fixed to variable cost for the mature books. Are we looking at the indirect cost as well or are we just looking at the cost which was already allocated to the mature book, the way you split the profitability, there is another different way? So, what I’m trying to get here is, can the indirect cost come down as the mature book goes down, so that’s one thing?

Second thing is, can you share some thoughts on risk from Scottish referendum I mean, how should we think about that scenario? What are your options. Can we get some sense about that?

And third thing is, for Colin, can you give us some sense about this cross-selling, it looks like you mentioned that 85% of your flows in MyFolio is coming from this Life & Pensions and you’re trying to do a bit more cross-selling between products because you are looking this as an investment company. So what are the real risk you are worried about? I mean, are you really transparent enough so that FCA will not create a problem in future? Or how should we think about that risk? Thank you.

Keith Skeoch

Luke.

Luke Savage

Yes, for the cost price, it’s an excellent question and on one of the supplemental slides in the deck, there was a line item which we call indirect expenses and capital management which shows that a large part of the expense base about pensions and savings business has historically been thought of as an common expense base. That spans all of the activity.

Part of the focus I’m thinking about the books separately is just that trying to pull apart that expense base and saying rather than it being a humongous amount that we spread across everywhere, if we start to pull it apart, having identified ways of chipping away that as the mature book runs down. So that’s a very good question, and the answer is yes.

Ashik Musaddi

So, it’s possible that the indirect expenses can run down a bit and it may not?

Luke Savage

And that is part of the focus of looking at the mature book, yes.

Ashik Musaddi

Thank you.

Keith Skeoch

On Scottish referendum, I mean, there is obviously going to be a lot of noise. I’m not going to get involved in the politics at all. What I would say is looking at it through the lens of our clients that drive asset flows. So, on the institutional side there is no evidence that our clients see it as an issue.

And I can tell you in the week following the vote, we had a large mandate fund from an institutional North American client base. So, that I think was a strong sense of discipline.

And if you look at those wholesale outflows, there is no evidence whatsoever that Scottishness is coming into it, in fact, I would argue our wholesale outflows given that we had such a large market share were subdued. So I think we’re going to get an awful lot of noise, that’s inevitable.

But actually that’s noise that our clients look through to the strength of the relationship and actually what we deliver for them. And on that front I’ve actually have looked back to the Scottish referendum and remember there was a lot of noise, there was no disruption to flows either at Standard Life Investors or indeed to the retail and wholesale side of Standard Life. Colin?

Colin Clark

Yes, I should stress, close to the question on the MyFolio 85% of distribution going through the pensions and savings business. Yes, just to be clear, the FC has no issues or questions about the closeness or nature of that relationship. It’s not vertically integrated. And I think there are two or three elements as to why and how we need to keep it. So I’ll keep it that way.

The first, and the most important one is that customers are given choice through the MyFolio range and two, important respects as you’re probably familiar with the range there is choice between active management and passive management and SLI doesn’t manufacture any passive management.

And secondly, there is choice to whether the customer wants to choose whole of market involving other funds from other fund management groups or just from SLI. So there is choice in that.

And the other important element is, of course the role of the IFA, whose providing advice in many instances. So, I think we’re happy on that. I think the other thing that I would flag, 85% seems like a high number.

We are during this final quarter of this year, started to launch the seek-out version of MyFolio. And specifically targeting the German market. And that’s an area where we think similar characteristics have changed. So I suspect you could actually see that 85% number come down quite considerably anyway through growth elsewhere.

And finally, if I had the opportunity to get on a plane and go and talk to our colleagues in India about it, I would also be very interested.

Keith Skeoch

Unless there is another burning question, I’m aware that you probably need to be elsewhere, so.

Unidentified Analyst

Okay. A very quick question on annuity, I’m obviously put through CMI 15, I imagine that’s not very big for you. But I guess given your growth the deferred annuity stuff with profit fund, if you reduce some minimum rate improvement that would be more significant at the year end. Have you any idea about go and seek the minimum rate improvement to 2% and there is a chance peer might drop the year end give last five years we’ve had zero improvements?

Luke Savage

As you’re asking the question, I’m looking to my learned colleagues and the audience who are kind of shaking and saying, they don’t have that number to have. But we could take that offline if you want to.

Keith Skeoch

We’ll get back to you on that.

Unidentified Analyst

All right. Thank you.

Keith Skeoch

Okay. Can I say thank you very much for coming along. I’m aware it’s a busy day. I hope what you’ve seen in the first half is continued delivery of strategy that really is focused on building a world-class investment company at Standard Life Investments. Thank you very much. And please enjoy the rest of your day.

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