AKG Financial Strength Assessment Report

ISSUED 03 DECEMBER 2020

OFFSHORE SECTOR Standard Life International

FINANCIAL

STRENGTH

ASSESSMENT

Standard Life International O F F S H O R E S E C T O R

© AKG Financial Analytics Ltd 2 03 December 2020

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ABOUT THIS FINANCIAL STRENGTH ASSESSMENT

This AKG report and the analysis and ratings contained within it provide assessment of financial strength and associated considerations. Financial Strength is focused on the ability of a company to deliver ongoing operational capability in the interest of its customers and in line with their fairly held expectations. AKG’s perspective in the assessment of financial

strength is wholly that of a customer of a product or service. From that foundation, this analysis is specifically designed to inform financial advisers and assist in their required understanding of a company’s operational financial strength.

Given the underlying customer perspective, the financial strength of companies needs to be focused at an operational

level, specifically on the company that is effecting the product or service that a customer is selecting. This is important, because from the customer’s perspective it is that company that needs to survive in a form that maintains the requisite operational characteristics to meet their fairly held requirements. And it is thus at this level that the selection needs of the customers’ advisers must be met. This contrasts to credit rating, which will be undertaken at group or parent company

level where investment or debt placement etc. is made.

Further details on how analysis is undertaken is provided at the end of this report and may also be obtained from AKG.

TABLE OF CONTENTS

Rating & Assessment Commentary ........................................................................................................................................................................... 3

Ratings .................................................................................................................................................................................................................................................................... 3

Summary ............................................................................................................................................................................................................................................................... 3

Commentary ...................................................................................................................................................................................................................................................... 4

Group & Parental Context............................................................................................................................................................................................ 6

Background ......................................................................................................................................................................................................................................................... 6

Group Structure (simplified) ................................................................................................................................................................................................................... 7

Company Analysis: Standard Life International DAC ........................................................................................................................................ 8

Basic Information ............................................................................................................................................................................................................................................. 8

Operations .......................................................................................................................................................................................................................................................... 9

Strategy ............................................................................................................................................................................................................................................................... 11

Key Company Financial Data ............................................................................................................................................................................................................... 13

Guide ................................................................................................................................................................................................................................... 16

Introduction ..................................................................................................................................................................................................................................................... 16

Rating Definitions ......................................................................................................................................................................................................................................... 16

About AKG ...................................................................................................................................................................................................................................................... 19

CONTACT INFORMATION

AKG Financial Analytics Ltd, Anderton House, 92 South Street, Dorking, Surrey, RH4 2EW Tel: +44 (0) 1306 876439 Email: [email protected] Web: www.akg.co.uk



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Rating & Assessment Commentary

RATINGS

Overall Financial Strength

B+

OFFSHORE SECTOR VERY STRONG

STANDARD LIFE INTERNATIONAL DAC

Additional Financial Strength and Supporting Ratings

Non Profit

Financial

Strength

Unit Linked

Financial

Strength

With Profits

Financial

Strength

Service Image &

Strategy

Business

Performance

Standard Life International DAC ��

SUMMARY

August 2017 saw the merger of Standard Life plc and Aberdeen Asset Management plc, forming Standard Life Aberdeen plc (SLA)

Following an announcement in February 2018, Phoenix Group Holdings plc (Phoenix Group/PGH) acquired Standard Life Assurance Ltd (SLAL) and subsidiaries, including Standard Life International DAC (SLIDAC), on 31 August 2018 (for £2,994m), partly funded by a fully underwritten rights issue of £950m

Since February 2019 SLIDAC has operated as a direct subsidiary of Phoenix Group

SLIDAC currently has a clear niche growth-orientated role, drawing from its core competencies and infrastructure

SLIDAC currently has seen an additional Brexit structural focus, underscored in the Phoenix purchase. This sees it now established as Phoenix's European business with significant growth through transfers in of the German,

Austrian and Irish branch businesses from SLAL accompanied by future potential to facilitate any European growth opportunities for the group

UK platform business remains as a key activity with plans to maintain this in the event of different Brexit outcomes

Now a high impact firm from a regulatory perspective, SLIDAC is underway with work to implement a partial

internal model for its Solvency II capital management

Phoenix Group completed its first three Bulk Purchase Annuity (BPA) deals during 2018, totalling £0.8bn, £1.1bn in 2019 and a further £1.1bn in the first half of 2020

Phoenix Group is Europe's largest specialist closed life fund consolidator, with £248bn AuA as at 31 December 2019 [2018: £226bn]

At 30 June 2020, PGH had a Solvency II surplus of £4.0bn and a 'Shareholder view' coverage ratio of 169% [31 December 2019: £3.1bn and 161% respectively]

In July 2020, Phoenix acquired ReAssure Group plc from Swiss Re Ltd for total consideration of £3.1bn. This deal also saw Swiss Re take 13.25% ownership of Phoenix, with SLA's ownership, which had been increasing, reduced to 17.9%



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COMMENTARY

Financial Strength Ratings

Standard Life International DAC

As part of a part VII transfer, significant branch business from Germany, Austria and Ireland saw around 600,000 customers transferred from SLAL to SLIDAC on 29 March 2019.

Recognising that there would be an increase in its SCR and to maintain an appropriate level of capital adequacy, SLIDAC

received a capital injection of €287m from the Phoenix Group, ahead of the transfer to limit the impact upon SLIDAC's SCR coverage ratio. SLIDAC looks to maintain a SCR coverage ratio within its capital target framework, and there is evidence of parental support towards this aim with further injections of €34m and €23m during March 2020. The increase

in shareholders' funds and assets from the transfer has completely changed the size and shape of SLIDAC, with the company now far more significant and strategically important for the group.

Parental strength and commitment remain key considerations. Standard Life plc had exhibited a strong financial position,

maintaining a healthy level of surplus despite a challenging economic backdrop, enhanced by the merger with Aberdeen Asset Management. The change in ownership to Phoenix represents a significant difference, but the key parental strength consideration remains. Historically Phoenix has displayed very different characteristics to Standard Life, not least in terms of a far less pronounced focus (actual or perceived) on customer outcomes. However, the transition is a significant one

and is likely to see the Phoenix model and approach evolve with customers at the fore front of strategy.

Around €15bn out of €23bn of German and Irish with profits business has been transferred from SLAL to SLIDAC. This business is reinsured straight back and therefore enjoys the security of SLAL. Further details, including ratings, on the with

profits financial strength of SLAL and its with profits fund are contained in AKG's UK Life Office With Profits Reports.

SLA has in the past stated that it has a long-term commitment to an offshore proposition. This would augur well for the company should this commitment remain, albeit in a different guise under the partnership with Phoenix.

Phoenix is Europe’s largest specialist closed life fund consolidator, with £248bn AuA at the end of December 2019. PGH’s Solvency II surplus as at 30 June 2020 was £4.0bn and the Shareholder capital coverage ratio on a regulatory basis was 146% [31 December 2019: £3.1bn and 140% respectively].

The Group Solvency II surplus, on a pro-forma basis assuming that ReAssure had been acquired, was estimated at £4.4bn with a 'Shareholder view' coverage ratio of 137% on a regulatory basis.

Service Rating In common with SLA, service has been core to SLIDAC's overall proposition. Going forward the acquisition by Phoenix colours this, not least in terms of the requirement for this approach to ongoing investment in customer service needing to be maintained for it to retain its excellent reputation for service. SLA has committed to maintaining customer service

levels post the transaction.

The establishment of SLIDAC as a primary business based in Ireland has been an important part of the approach to date. A platform of shared resources with increasing cross-skilled capability has given the operation tangible depth in its

administration functions. Previously work was carried out to knit the administration capability together between the domestic and international operations, and deliver increased efficiencies and ability to deal with volume spikes in each. To date the company has also drawn development capability from its previous parent. However, increasingly it has been

developing specific resources solely for its own use, such as in IT. Recent improvement in workflow, scanning and implementation of DocuSign are examples of ongoing developments that enhance the service proposition and aligned to functionality provided by competitors.

Along with the wider industry, COVID-19 presented service challenges from the volume of adviser activity during the

initial period. The company appear to have managed this period successfully with positive metrics including Net Promoter Score (NPS) demonstrating a swift return to business as usual standards.



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Image & Strategy Rating SLIDAC's image and strategy was aligned with that of SLA. Activity in the UK recently was focused on deepening the

penetration of the offshore option for distribution using the Standard Life Wrap platform. There was also an emphasis on leveraging the strength of SLA's investment expertise to deliver innovative solutions, such as its multi-asset range. This link has been retained since new ownership, and the platform continues as a key strategic channel for new business.

SLA's product strategy had also changed substantially and it had of late been deliberate in positioning itself away from being seen as a provider of a product (the old life company raison d’être) to that of a technology and service provider delivering efficient propositions in the asset accumulation space for a range of distribution mechanisms, with an emphasis

on capital efficient and cash generative products, whilst at the same time maintaining positive aspects of its heritage and reputation. This had been successful and SLA had broadly in recent years anticipated market changes and delivered (both internally and externally) in time to respond to them.

In view of this, the change in ownership to Phoenix was a logical step. However, past experience with Phoenix led to initial reservations from advisers but this is becoming less of an issue as SLA involvement in the SLIDAC proposition is understood.

The acquisition of SLAL and its subsidiaries, was described by Phoenix as being 'transformational for Phoenix adding

significant additional scale to our business and extending both the quantum and duration of our cash generation. It also changed Phoenix into a biped with both Heritage and Open business channels and our product range under the Standard Life brand that is market-leading across workplace, retail pensions and Wrap products'.

Following the acquisition, Phoenix no longer describes itself as purely a 'closed' business but as a consolidator of both open and heritage life businesses. This has change been additionally underscored since the arrival of a new CEO, Andy Briggs, in March 2020 and by him. With an aspiration espoused of positioning the customer, whether new or existing, at

the heart of business actions. Now past the acquisition SLIDAC has assumed a role for wider European consolidation and new business opportunities which might be pursued by or encountered by its parent. The acquisition by Phoenix of ReAssure, being an example (albeit of limited international potential).

SLA retains the Standard Life brand and licenses it to the Phoenix Group.

Business Performance Rating SLIDAC experienced a mixed trading year in 2019, with success in two out of four KPIs:

Assets under management increased from €6.9bn in 2018 to €28.8bn at 31 December 2019, again reflecting the assets transferred from SLAL to the company

Net investment return was a gain of €1.3bn [2018 Net investment loss: €368m]

Net flows decreased by €110m to €112m due to a higher proportion of claims in 2019

A loss of €1.6m in 2018 was reduced to €0.2m in 2019, the result of 9 months of transferred Irish and German business, offset by negative impacts by changes to IFRS reserving methodology and unrealised losses from a

currency hedge. €15bn is reinsured back to SLAL

At 31 December 2019, SLIDAC reported €569m of available capital resources against a requirement of €438m, resulting in a SCR ratio of 130% [2018: 139%]. The company continues to actively manage its regulatory capital position, and is in

the process of obtaining approval for use of a partial internal model. Based on this model, the SCR ratio would have been higher at the same reporting period.

PGH reported an operating profit of £810m and generated £707m of cash in 2019 [2018: £708m and £664m

respectively]. At 30 June 2020, these figures were £361m and £433m. Assets under management, on a pro-forma basis including ReAssure, were reported at £324bn.



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Group & Parental Context

BACKGROUND

Phoenix has been a historical insurance brand in the insurance world since 1782. From its beginnings more than 200 years ago, it has evolved to become Europe's largest specialist consolidator (measured by total assets) of heritage life assurance funds.

The various life companies in the group at that time were closed in 2003, and the Pearl Group was created in 2005. In May 2008, Impala Holdings Ltd, a 75% subsidiary of Pearl Group Ltd (PGL) acquired Resolution plc. In September 2009, PGL was acquired by Liberty Acquisitions Holdings (International) Company of the Cayman Islands, which then renamed itself Pearl Group Ltd. Following extensive capital restructuring, the Cayman Islands registered ultimate parent changed its

name to PGH in March 2010, became listed on the London Stock Exchange, and moved its principal place of business to Jersey.

In January 2018, PGH's Head Office (and tax jurisdiction) was moved to the UK. As part of the ongoing Group

simplification process, Phoenix has put in place a new UK-registered holding company for the Group, Phoenix Group Holdings plc. This aims to provide greater clarity for the group’s stakeholders, including investors and regulators.

The Phoenix group's brands are Phoenix Life (Phoenix Life Ltd and Phoenix Life Assurance Ltd), Phoenix Ireland (Phoenix

Life Ltd), SunLife (Phoenix Life Ltd) Phoenix Wealth (Phoenix Wealth Services Ltd), Abbey Life (Abbey Life Assurance Company Ltd), Standard Life and Standard Life International. Phoenix's core business segment before the Standard Life acquisition, life assurance (including its management services operations), is referred to as 'Phoenix Life'. Most recently,

Phoenix completed the acquisition of ReAssure Group plc.

The Group has four UK operating life companies which hold policyholder assets and a distribution business, SunLife Ltd.

The Life Insurance Company of Scotland was founded in Edinburgh in 1825. It was renamed as The Standard Life

Assurance Company (SLAC) in 1832 and reincorporated as a mutual assurance company in 1925. Standard Life Investments was established in 1998 and Standard Life entered the offshore market with the launch of the Dublin based subsidiary, Standard Life International Ltd, now SLIDAC and the focus of this assessment, in January 2006. Following the demutualisation of SLAC and the flotation of Standard Life plc on the London Stock Exchange on 10 July 2006, SLAL

operates in the UK alongside its now considerably smaller subsidiary, Standard Life Pension Funds Ltd. The Standard Life Wrap is provided by Standard Life Savings Ltd which remains part of SLA.

Aberdeen Asset Management was founded in 1983 and listed in 1991. Acquisitions included the UK and US institutional

businesses of Deutsche Asset Management (2005), certain parts of Credit Suisse's Global Investors fund management business (2009), parts of RBS Asset Management (2010), Scottish Widows Investment Partnership (2014) and the platform provider Parmenion Capital Partners LLP (2016).

SLA was formed in August 2017 from the merger of Standard Life plc and Aberdeen Asset Management plc and is a UK based financial services group focused on providing long-term savings and investment solutions on a global basis. February 2018 saw the announcement of the proposed acquisition of Standard Life Assurance Ltd by Phoenix Group, a transaction

which included SLIDAC. The acquisition was financed by a fully underwritten rights issue of £950m, with the remaining cash consideration of £1,021m funded by a mix of new debt and Phoenix’s own resources. In addition, SLA took a 19.99% equity stake in the enlarged group on completion, which has since increased to 25.71%. The acquisition created a group with £240bn of legacy assets and 10.4m policyholders. Since the acquisition of ReAssure Group plc, the main shareholders

are as follows: SLA has 17.90%, MS&AD Insurance Group Holdings, Inc. 14.50%, Swiss Re 13.25% and Artemis Investment Management 5.06%.

The Phoenix Group's main focus is on closed life fund consolidation where it specialises in the acquisition and management

of closed life insurance and pension funds and operates primarily in the UK - its Heritage business. Alongside this, it has an open business which is underpinned by a strategic partnership with SLA following its acquisition of Standard Life Assurance Ltd (and subsidiaries) in 2018. Additionally, Phoenix Life Ltd trades as SunLife and is the provider of SunLife's

over 50s life cover. In 2017, Phoenix announced that it was entering the BPA market, and in May 2018 it announced that



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it had completed its first external transaction, a £470m bulk purchase annuity with the Marks and Spencer Pension Scheme. By the end of 2018, the group had purchased 3 BPAs totalling £800m. During 2019, the group completed 4 transactions, with total contract liabilities of c £1.1bn. A similar value of BPAs had been agreed in 2020.

PGH had a Solvency II surplus of £4.0bn and a coverage ratio of 146% as at 30 June 2020.

In 2020, the group stated that the end state operating model will have one UK life company legal entity with two business segments (UK Heritage, UK Open) and a European business (SLIDAC). Work is ongoing with relevant regulatory bodies

towards a Group-wide Solvency II Internal Model by 2021.

The group has recently undergone a Part VII transfer to transfer in to SLIDAC the SLAL business written in Ireland and Germany through its Irish and German branches, and in Austria through its Austrian sales office. This took effect on 29

March 2019, and included the transfer of €23bn of liabilities. New funds have been established in SLIDAC. In addition, SLAL and SLIDAC entered into reinsurance arrangements, which reinsure the transferring with-profits business back to SLAL.

Former Aviva UK CEO Andy Briggs assumed the role of chief executive of PGH, replacing Clive Bannister who retired, in March 2020.

In December 2019, the Phoenix Group announced the proposed acquisition of ReAssure Group plc from Swiss Re Group and MS&AD Insurance Group Holdings Inc. for a total consideration of £3.1bn. As part of this proposed transaction,

Phoenix will acquire further business in Ireland and continental Europe. The transaction was completed in July 2020.

GROUP STRUCTURE (SIMPLIFIED)

Standard Life International DAC O F F S H O R E S E C T O R


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Company Analysis: Standard Life International DAC

BASIC INFORMATION

Company Type Life Insurer

Ownership & Control Phoenix Group Holdings plc

Year Established 2006

Country of Registration Republic of Ireland

Head Office

90 St Stephen's Green, Dublin 2

Contact Tel: 00 353 1639 7000 www.standardlife.ie

Key Personnel

Role Name

Phoenix Group:

Chairman N Lyons

Chief Executive Officer A D Briggs

Chief Financial Officer R Thakrar

Chief Operating Officer A Kassimiotis

Chief Risk Officer Dr J R Pears

Chief Investment Officer M Eakins

Chief Executive, Phoenix Life, SLAL and Group Director, Heritage

Business A Moss

Chief Executive, ReAssure M Cuhls

Chief Executive, Savings and Retirement UK & Europe A Curran

Customer Director J G McGuigan

SLIDAC:

Chairman A Brady

Chief Executive Officer N Dunne

Chief Financial Officer N Kapoor

Chief Operating Officer M McKenna

Chief Risk Officer G J van den Brink

Head of Actuarial Function A O'Leary



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Company Background SLIDAC was launched in January 2006. It is a Dublin based operation and sells cross border into the UK under EU 'freedom of services' legislation. SLIDAC is authorised and regulated by the Central Bank of Ireland and regulated by the FCA for

the conduct of UK business and by the Financial Services Commission for the conduct of business in Jersey.

In November 2012 a branch was established in Singapore, followed by the opening in February 2013 of a branch operation in Dubai. Both, however, felt the impact of structural market and regulatory change. In particular this led to the decision

to close the Dubai branch in late 2014 with work running through 2015 to return premiums and decommission infrastructure. This was followed by the closure of the Singapore operation in 2015 with the process completed by November. A key future focus will be on supporting the UK with offshore product capability.

As a result of Brexit, the company was identified as having a key part to play in facilitating changes required to branch and

subsidiary structures needed for managing existing business and further new business developments within Europe, under potential new arrangements. This continued under the new ownership with transfers in of branch business from Ireland and Germany increasing the size of the company and moving it to a 'High Impact firm' from a regulatory perspective from

29 March 2019.

A new organisational structure replaces the SLAL branches in Ireland and Germany, and the sales office in Austria, with an expanded SLlDAC operation in Ireland, a SLIDAC branch in Germany and a sales office in Austria.

These changes were required so that new business can continue to be written within the EU, and existing Irish and German branch policyholders serviced, post-Brexit.

OPERATIONS

Governance System and Structure SLIDAC's system of governance is the overall framework of policies, controls and practices by which its 'meets the

requirements of sound, risk-based management'. Following the acquisition by PGH, SLIDAC transitioned to a new governance framework.

Governance framework - how the business is managed including the role of the Board and its Committees

Organisational and operational structure - how business is structured and roles, responsibilities and reporting lines are defined to ensure that appropriate spans of control operate throughout the organisation

Risk management system - a risk-based approach to managing the businesses. It includes the methods and processes used to manage risks consistently across the group. This is referred to as the Enterprise Risk Management

(ERM) Framework

Internal control system - contains a range of processes which are captured under the ‘Conduct and Operational Risk Framework’ and includes policies to manage risks at the highest level, how the impact and likelihood of risks is

assessed and how the effectiveness of key controls is determined

An effectiveness review of the system of governance and ERM Framework is conducted annually. This process considers each key component of the system of governance in isolation and assesses its effectiveness. In addition to the established

Board, there also exists a Nomination Committee, an Audit Committee, a Remuneration Committee and a Risk Committee. At a management level, SLIDAC has an established European Senior Leadership Team as well as sub-committees that provide decision making at regional or specific areas.

With the scale of the 2019 part VII transfer, and the subsequent change of status to a 'High Impact Firm' by the Irish regulator, SLIDAC has continued to enhance its regulatory capabilities to ensure this remains appropriate. A new Compliance team has been established, with a focus on ensuring the capabilities and scale is in place as soon as possible.

As a high impact firm, there are additional obligations placed on SLIDAC by the Corporate Governance Requirements for Insurance Undertakings 2015 with respect to the frequency of Board meetings: 'The Board shall meet as often as is appropriate to fulfil its responsibilities effectively and prudently. The Board shall meet at least six times per calendar year and at least three times in every six month period'.



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Risk Management Phoenix’s Risk Management Framework (‘RMF’) embeds proactive and effective risk management across the group. It seeks to ensure that all risks are identified and managed effectively and that the group is appropriately rewarded for the

risks it takes.

The risk management framework of the SLIDAC is undergoing harmonisation with Phoenix’s RMF as part of integration of both businesses. Work is underway to finalise implementation plans for the enhanced risk management framework for

the enlarged Phoenix Group which will combine elements from both Phoenix Group and the company’s existing frameworks.

Phoenix operates a ‘three lines of defence’ model of risk management, with clearly defined roles and responsibilities for statutory boards and their committees, management oversight committees, Group Risk and Group Internal Audit.

Phoenix seeks to embed a culture that is 'forward-looking and competent in its assessment and management of risk, a culture where everyone in the group is aligned in their goals to deliver better risk-based decisions'.

Administration

In common with Standard Life, service has been core to Standard Life International's overall proposition. Going forward the new owner colours this, not least in terms of the requirement for this approach to ongoing investment in customer service needing to be maintained for the company to retain its excellent reputation for service. Standard Life has committed to maintaining customer service levels post the transaction and initial indications, including in its and the wider

group's response to COVID-19, appear positive.

To date the company has also drawn development capability from the group. However, increasingly it has also been developing specific resources solely for its own use, such as in IT.

Recent improvement in workflow and scanning are examples of ongoing developments. Digital improvement remains a current focus to complement the service proposition, and the roll-out of DocuSign across all three territories by the end of 2020 is evidence of this.

Benchmarks SLIDAC has won a number of independent awards, in particular winning the award for 'Best Regular Premium Investment Product (UK)' at the International Adviser International Life Awards from 2011 to 2016. It has also previously won awards for its UK single premium product.

It won Best Adviser Support & Customer Service in the International Adviser International Life Awards between 2010 and 2014. In 2015 it won Best Online Proposition in these same awards.

In recent years Phoenix companies have not fared well in external industry service awards and metrics. Phoenix's own

customer satisfaction survey (managed by Ipsos MORI) showed a 94% customer satisfaction score in 2019 [2018: 93%] and it reports that it is currently (as at August 2020) meeting or exceeding all its mutual service targets.

Internal metrics for SLIDAC are broadly positive. Despite initial challenges at the start of COVID-19 with a surge of

adviser/customer demand, service levels have returned to previous levels, with a positive NPS in 2020 demonstrating the company overcoming historic advisor attitudes towards the Phoenix Group.

Outsourcing SLIDAC adopts and fully complies with the Phoenix group’s Outsourcing Policy which set the standards that Standard Life

International must comply with for outsourcing arrangements.

SLIDAC expressly retains responsibility for the meeting of all relevant regulatory and legal requirements by the outsource provider and includes the requirement for the implementation of appropriately robust governance structures. The policy

also highlights that customer outcomes must be considered at the outset and throughout the lifecycle of any outsourcing arrangement.

The company does not currently outsource any of its servicing functions, preferring to keep control of this function in-

house. Standard Life Assets and Employee Services Limited, a group company, provides intra-group services in respect of finance, actuarial, risk, internal audit, information technology, human resources, facilities and legal.



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The Head of Actuarial Function (HoAF) was previously outsourced to Milliman Ltd, but after the transfer-in, the HoAF became an internal role as planned. This also represents a key change as the business moves towards the development and use of a partial internal model for its Solvency II capital management. Itself a significant project that will see a blend of

SLIDAC, group and external consultancy resources employed.

In the wider Phoenix group the most significant outsourcing arrangement is with Diligenta. During 2019, the group announced its intention to move all policies to Diligenta as a single outsourcer platform, and this is expected to be

complete by 31 December 2022.

STRATEGY

Market Positioning The company continues to strive for profitable growth by offering products in the UK designed to meet customer needs in line with market developments post Brexit. In order to provide continuity of service for existing customers, and to

continue to write new business in Germany, Austria and Ireland, SLIDAC has received regulatory approval to act as a base from which to serve its European customers and existing SLIDAC customers. SLIDAC now also operates from a base in Frankfurt and a sales office in Graz as a result.

Standard Life International’s fortunes were clearly aligned to the success or otherwise of its former parent, and whilst it was well placed to benefit from its parent's brand, distribution, investment and servicing capabilities, future direction is in large part now determined by the success of the partnership of PGH and SLA, alongside other group strategic opportunities.

Key elements of SLA’s current distribution strategy are: to further embed existing relationships and use of the Standard Life Wrap platform; to diversify distribution channels - including through private banks and Discretionary Fund Manager (DFMs) where it has seen some recent success; and to grow availability of its offering direct to customers.

The Standard Life Wrap platform, launched in 2006, includes an offshore bond from Standard Life International as part of its range of products. This arrangement continues under the strategic partnership between Phoenix and SLA and also includes distribution and additional potential (currently being pursued) in the non-platform space.

An increasing proportion and amount of business is now also successfully being distributed via DFMs.

The uncertainty brought by Brexit is a continuing component to the company's operating environment. SLIDAC has planning in place, which alongside the transitional permissions which have been announced, includes consideration of other

strategic options which it believes will enable UK new business to continue under the range of potential Brexit scenarios.

Proposition The majority of new business is written on a unit linked basis. Standard Life International's core product in the UK market is the International Bond which is a unit linked offering. This is an offshore portfolio bond which provides a tax efficient

wrapper with a transparent charging structure and flexible adviser charging options. The International Bond product, when launched in 2006, only allowed investments in a range of insured funds. In 2007 open architecture investment became available on the International Bond, both for new and existing bonds, thus increasing the range of investments. The

customer has the option to invest in unit linked funds offered by the company and mutual funds and deposit accounts offered by other providers, alongside platforms and access to a range of discretionary investment managers.

In October 2019, SLIDAC launched the Capital Redemption Bond for UK customers. This is a variant of the existing

International Bond, but without the requirement to have lives assured attached to the policy. This has already increased the number of panels the company appears on, and is expected to provide sizeable flows in future periods.

Future proposition focus includes the relaunch of the German product in 2020, for which roll out began on a virtual basis in June.

Standard Life International has the ability to invest in:

Excess of 2,000 investment funds (insured and mutual) from more than 70 UK fund managers



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A range of DIMs (Discretionary Investment Managers)

A range of bank and structured deposits

Access to a range of portfolios using Aberdeen Standard Capital’s Managed Portfolio Service

Access to investments on the Standard Life Elevate platform via the Elevate General Investment Account (following the acquisition of Elevate Portfolio Services Ltd by Standard Life Aberdeen)

The option to select any fund not available on the fund platform via a whole of market option, subject to the

personal portfolio rules

In particular the choice of funds includes MyFolio fund range, Vanguard passive fund range and Manager of Manager funds.

The range is reviewed regularly, with the aim of ensuring the fund range meets the expectations of intermediaries and customers. However, in numerical terms it is likely to remain focused on a core number of around 50 with any request for wider investment choice being met through the whole of market route via a portfolio bond. A with profits option is

not available. The majority of insured funds are managed by Aberdeen Standard Investments who believe that it is possible to achieve consistent long term out performance within acceptable levels of risk by adding value at both asset allocation and stock selection levels.

Within risk parameters set for each fund, specific investment decisions follow a top down approach, consistent across all funds, with an emphasis on 'in house' research. Aberdeen Standard Investments can point to some good recent fund performance, and a host of awards year on year. Since 2013 the funds managed by Aberdeen Standard Investments on behalf of external clients have exceeded the group's own funds. The MyFolio Fund range, launched in September 2010

and now available to both retail and corporate clients, is a family of 23 risk-based portfolios, offering a choice of active and passive investment strategies across five risk levels and five investment styles. By 31 December 2019 it had £15.5bn of assets.

The International Bond offers a transparent charging structure for customers and flexible adviser charging options for financial advisers. The Capital Redemption Bond filled a gap in the offering which had impacted new business. Success in this being a key part of targeted activity with SLA distribution.

Standard Life International also offers a range of Estate Planning Solutions that provide a variety of trusts that can be used in conjunction with the International Bond to help intermediaries deal with estate planning issues. European business, brought as part of the branch consolidation, is now also being more actively pursued following the re-design and launch

of the company's German product and the emphasis on Europe as a business unit within the wider group.

A focus for Standard Life International has been on support tools to the adviser. The aim overall being to replicate the onshore offering. Standard Life International, from an intermediary perspective, operates through Standard Life’s

Adviserzone website. Policyholders have their own dedicated standalone website. At a higher level, the development of the service and digital propositions aims to aggregate all investments into one portal, so that advisers and customers can see everything in one place. The complex nature of this exercise means this will be a longer-term target.

Phoenix’s mission is now stated to be 'to improve outcomes for customers and deliver value for shareholders'. The group

aims 'to be Europe's Leading Life Consolidator'.



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KEY COMPANY FINANCIAL DATA

Last 3 reporting periods up to 31 December 2019

Assets

Dec 17

£m

Dec 18

£m

Dec 19

€m

Fixed interest 17 16 332

Equities 0 0 0

Collectives 0 62 19

Property 0 0 0

Linked 6,207 6,053 14,583

Derivatives 0 0 1

Loans and mortgages 0 0 49

Reinsurance recoverables 0 0 16,201

Cash 14 14 37

Other 62 5 582

Total Assets 6,300 6,150 31,803

Liabilities

Dec 17

£m

Dec 18

£m

Dec 19

€m

Technical provisions - non-

life 0 0 0

Technical provisions - health (similar to life)

0 0 168

Technical provisions - life 0 0 15,662

Technical provisions - linked 6,119 5,986 15,105

Other 45 49 300

Total Liabilities 6,164 6,035 31,234

Excess of assets over liabilities

136 115 569

Following the Part VII transfer and resultant change in the functional currency, for 2019 reporting the company elected to change the presentation currency from GBP to EUR, to better reflect the performance and financial position of the company.

The business transfer from SLAL has significantly altered the scale of SLIDAC. On a gross basis, liabilities have increased to €31.2bn, although €14.8bn of this is reinsured back to SLAL.

At the end of June 2020, PGH AuA was reported as £324bn on a pro-forma basis including ReAssure.

Life & Health SLT Technical Provisions

Dec 17

£m

Dec 18

£m

Dec 19

€m

Insurance with profit

participation 0 0 14,882

Linked insurance 6,119 5,986 14,215

Other life insurance 0 0 780

Annuities - from non-life health

0 0 0

Annuities - from non-life

non-health 0 0 0

Health insurance 0 0 168

Health reinsurance 0 0 0

Life reinsurance 0 0 890

Total life and health SLT technical provisions

6,119 5,986 30,935

Life Expenses

Dec 17

£m

Dec 18

£m

Dec 19

€m


Insurance with profit

participation 0 0 54

Linked insurance 29 27 92



health 0 0 0


non-health 0 0 0



Other expenses 0 0 0

Total life expenses 29 27 148



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Historically unit linked insurance has been the company's sole business line. The transfer in from SLAL has resulted in the company additionally now holding both non-profit and with profits business, albeit with profits business is reinsured back to SLAL.

Solvency Capital Requirement (SCR)

Dec 17

£m

Dec 18

£m

Dec 19

€m

Market risk 63 48 167

Counterparty default risk 2 2 149

Life underwriting risk 63 54 195

Health underwriting risk 0 0 0

Non-life underwriting risk 0 0 0

Diversification (28) (23) (149)

Intangible asset risk 0 0 0

Operational risk 1 1 78

Capital add-ons already set 0 0 0

Other items 0 0 (3)

Solvency capital

requirement 102 83 438

Own Funds

Dec 17

£m

Dec 18

£m

Dec 19

€m

Tier 1 unrestricted 136 115 569

Tier 1 restricted 0 0 0

Tier 2 0 0 0

Tier 3 0 0 0

Eligible own funds 136 115 569

Excess of own funds over

SCR 35 32 130

SCR coverage ratio (%) 134.0 139.0 130.0

Standard Life International uses the standard formula to calculate its SCR, and there was a surplus over this of €130m, which led to a decrease in the SCR ratio from 139% to 130%. This was at the lowest part of the company's 130-150 target range % and maintained by capital injections.

The risk profile of Company changed significantly during 2019 as a result of the part VII transfer for Irish, German & Austrian policies in March 2019. Along with the transfer of this business, a reinsurance arrangement was set up whereby certain tranches of policies were reinsured back to SLAL, leading to a material increase in the company’s Counterparty Default and Operational risks. As part of this reinsurance arrangement, insured unit-linked funds available to German,

Austrian and Irish policyholders were ceded back to SLIDAC via an External Fund link retrocession arrangement.

SLIDAC received a capital injection of €287.1m from Phoenix Group Holdings plc to ensure that the Company was appropriately capitalised ahead of the planned Part VII transfer.

A project is underway to change the basis of formula from a standard basis to a partial internal model.

PGH’s Solvency II surplus as at 31 December 2019 was £3.1bn and the Shareholder capital coverage ratio was 161% [2018: £3.2bn and 167% respectively].



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Gross Life Premiums Written By Line of

Business

Dec 17

£m

Dec 18

£m

Dec 19

€m


Insurance with profit participation

0 0 613

Linked insurance 749 621 1,133



health 0 0 0

Annuities - from non-life non-health

0 0 0



Total gross life premiums

written 749 621 1,803

Gross Life Premiums Written By Country

Dec 17

£m

Dec 18

£m

Dec 19

€m

Home country 0 0 492

Country 1 749 621 662

Country 2 0 0 570

Country 3 0 0 0

Country 4 0 0 0

Country 5 0 0 0

Other countries 0 0 79

Total gross life premiums written

749 621 1,803

A new organisational structure replaced the SLAL branches in Ireland and Germany, and the sales office in Austria, with an expanded SLlDAC operation in Ireland, a SLIDAC branch in Germany and a sales office in Austria.

These changes were required so that new business can continue to be written within the EU, and existing Irish and German branch policyholders serviced, post-Brexit.

With nine months of Irish and German SLAL premiums, the majority of total gross premiums can be broken down by Germany (37%), Great Britain (32%) and Ireland (27%).

Profit

Dec 17

£m

Dec 18

£m

Dec 19

€m

Profit (loss) before taxation 2.5 (1.4) (0.2)

Taxation (0.1) (2.7) 9.9

Profit (loss) after taxation 2.4 (4.2) 9.6

Other comprehensive

income 0.0 0.0 2.7

Dividends 0.0 0.0 0.0

Retained profit (loss) 2.4 (4.2) 12.3

Life Business Flows

Dec 17

£m

Dec 18

£m

Dec 19

€m

Net life premiums earned 749 621 1,166

Net life claims incurred (387) (425) (1,361)

Net flow of business 362 196 (195)

The company generated a loss before tax of €0.2m [2018 loss before tax: £1.4m/€1.6m]. The main driver of this reduction

was the inclusion of nine months of the transferred Irish and German business from SLAL, offset by a negative impact from changes to IFRS reserving methodology and unrealised losses from a currency hedge.

There was a positive tax credit of €9.9m [2018: tax expense of £3.1m/€3.1m], largely as a result of the recognition of previously unrecognised tax credit. Combined with other comprehensive income of €2.7m [2018: nil], there was a retained

profit of €12.3m [2018: retained loss of £4.2m/€5.7m].

As net life claims exceeded net life premiums earned, there was a net outflow of €195m.

PGH reported an operating profit of £810m and generated £707m of cash in 2019 [2018: £708m and £664m

respectively].



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Guide

INTRODUCTION

For over 20 years AKG has particularly focused on the financial strength requirements of financial advisers, who when acting on behalf of their clients, need to ascertain a company's ability to deliver sustained provision.

From this customer perspective, the financial strength of companies needs to be focused at an operational level, specifically

on the company that is effecting the product or service that a customer is selecting. This is important, because from the customer’s perspective it is that company (not some higher corporate entity) that needs to survive in a form that maintains the requisite operational characteristics to meet their fairly held requirements. And it is thus at this level that the selection needs of the customers’ advisers must be met.

It is also important to understand the sector approach (comparative peer groups) that is adopted in financial strength assessment and rating process.

At AKG, this is again driven by the end customer perspective and the fact that assessment is designed solely for this

purpose, i.e. as a component in helping customers’ advisers to select between comparable companies competing to deliver relevant products or services.

AKG’s focus and approach has remained consistent over the years since it commenced assessment and rating support for

the market. However, coverage, format and presentation has rightly evolved over this period, in line with the needs and expectations of assessment and rating users in the market. And AKG considers further changes on a continual basis.

Further details including an explanation of what is included in the assessment reports and coverage can be found online

at https://www.akg.co.uk/information/reports/offshore.

AKG’s process for assessment and rating is to use a balanced scorecard of measures and comparative information, relevant to the companies contained within each peer group. This is gathered via Public Information only for non-participatory

assessments and public information plus company interactions with companies for participatory assessments. Further details on AKG’s process can be found at https://www.akg.co.uk/information/reports.

This includes further information on the different participatory and non-participatory basis and for companies wishing to learn more about participatory assessment AKG is pleased to outline this and welcomes contact.

This is a participatory assessment.

RATING DEFINIT IONS

Overall Financial Strength Rating The objective is to provide a simple indication of the general financial strength of a company from the perspective of those financial advisers who when acting on behalf of their clients need to ascertain a company's ability to deliver sustained

operational provision of products or services.

The overall rating inherently reflects the mix of business within the company, since different types of customer or policyholder have different requirements and expectations, and the company may have particular strengths and

weaknesses in respect of its key product or service areas. However, it also takes account of comparison across the sector in which it is assessed.

The rating takes into account those of the following criteria which are relevant (depending upon the company's mix of

business in-force): capital and asset position, expense position and profitability, structure (and size) of funds within the company, parental strength (and likely attitude towards supporting the company), operational capability, management



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strength and capability, strategic position and rationale, brand and image, typical fund performance achievements or product / service features, its operating environment and ability to withstand external forces.

Rating Scale A B+ B B- C D �

Superior Very Strong Strong Satisfactory Weak Very Weak Not applicable

With Profits Financial Strength Rating

The objective is to provide a simple indication of the with profits financial strength of a company, where it currently offers with profits business or has existing with profits business within it.

This is from the perspective of those financial advisers who when acting on behalf of their clients, for this product type, need to ascertain a company's ability to deliver sustained operational provision of with profits funds, products or

propositions. Its comparison is with other companies within the assessment sector that offer or have with profits business.

The main criteria taken into account are: capital and asset position, expense position and profitability, the amount of with profits business in-force, parental strength (and likely attitude towards supporting the company), and image and strategy.

NOTE: More detailed analysis of with profits companies is included in AKG’s UK Life Office With Profits Reports.

Rating Scale ��

Excellent Very Good Good Adequate Poor Not Rated

Unit Linked Financial Strength Rating The objective is to provide a simple indication of the unit linked financial strength of a company, where it currently offers unit linked business or has existing unit linked business within it. This is from the perspective of those financial advisers

who when acting on behalf of their clients, for this product type, need to ascertain a company's ability to deliver sustained operational provision of unit linked products or propositions. Its comparison is with other companies within the assessment sector that offer or have unit linked business.

The main criteria taken into account are: capital and asset position, expense position and profitability, structure (and size) of funds within the company, parental strength (and likely attitude towards supporting the company), operational capability, management strength and capability, strategic position and rationale, brand and image, typical fund performance

achievements or product / service features, its operating environment and ability to withstand external forces.

Rating Scale ��


Non Profit Financial Strength Rating The objective is to provide a simple indication of the non profit financial strength of a company, where it currently offers or has existing products and propositions such as term assurance and annuities. This focuses on the company’s ability to

deliver sustained operational provision of such non profit products or propositions. Its comparison is with other companies within the assessment sector that offer or have non profit business.

The main criteria taken into account are: capital and asset position, expense position and profitability, structure (and size) of funds within the company, parental strength (and likely attitude towards supporting the company), operational capability,

management strength and capability, strategic position and rationale, brand and image, product / service features, its operating environment and ability to withstand external forces.



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Rating Scale ��


Service Rating The objective is to assess the quality of the organisation's service to the intermediary market in respect of the brand concerned.

Criteria taken into account include: performance in surveys, awards and benchmarking exercises (external and internal), the organisation's philosophy, service charters, the extent of investments designed to improve service, and feedback from intermediaries.

Rating Scale ��


Image & Strategy Rating

The objective is to assess the effectiveness of the means by which the organisation currently positions itself to distribute its products for the brand concerned and the plans it has to maintain and/or develop its position.

Criteria taken into account include: overall trends in the company’s market share position, brand visibility and reputation, feedback from intermediaries and industry commentators, and AKG’s view of the company’s general strategy.

Rating Scale ��


Business Performance Rating This review is an assessment of how the company and the brand has fared against its peers, and how it is perceived externally. Effectively this is how it has performed recently in the market. Whilst it will include performance indicators from the most recent available statutory reporting (report and accounts and SFCRs in the case of insurance companies,

for example) it will also draw on other recent key performance elements before and after such disclosure, up to the point at which the assessment is undertaken.

Criteria taken into account include: increase/decrease in market shares, expense containment, publicity good or bad, press

or market commentary, regulatory fines, and competitive position.

Rating Scale ��




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ABOUT AKG

AKG is an independent organisation. Originally established as an actuarial consultancy AKG has, for over 20 years, specialised in the provision of assessment, ratings, information and market assistance to the financial services industry.

As the market has evolved over this period, the range of entities considered by AKG has expanded. Consequently, AKG

has brought additional skill sets into its operations. This has meant the inclusion of accounting, corporate finance, IT and market intelligence experience, alongside actuarial resources, to deliver an expanded professional capability.

Today AKG’s core purpose is in the provision of financial analysis and review services to support the wider financial services

sector and its customers.

© AKG Financial Analytics Ltd (AKG) 2020

This report is issued as at a certain date, and it remains AKG's current assessment with current ratings until it is superseded by a subsequently issued

report or subsequently issued ratings (at which point the newly issued report or ratings should be used), or until AKG ceases to make such a report

or ratings available.

The report contains assessment based on available information at the date as shown on the report’s cover and in its page footer. This includes prior

regulatory data which may have an earlier date associated with it, but the report also takes into account all relevant events and information, available

to and considered by AKG, which have occurred prior to this stated cover and footer date. Events and information subsequent to this date are not

covered within it, but AKG continually monitors and reviews such events and information and where individually or in aggregate such events or

information give rise to rating revision an updated report under an updated date is issued as soon as possible.

All rights reserved. This report is protected by copyright. This report and the data/information contained herein is provided on a single site multi

user basis. It may therefore be utilised by a number of individuals within a location. If provided in paper form this may be as part of a physical library

arrangement, but copying is prohibited under copyright. If provided in electronic form, this may be by means of a shared server environment, but

copying or installation onto more than one computer is prohibited under copyright. Printing from electronic form is permitted for own (single

location) use only and multiple printing for onward distribution is prohibited under copyright. Further distribution and uses of the report, either in its

entirety or part thereof, may be permitted by separate agreement, under licence. Please contact AKG in this regard or with any questions:

[email protected], Tel +44 (0) 1306 876439. AKG has made every effort to ensure the accuracy of the content of this report and to ensure that the

information contained is as current as possible at the date of issue, but AKG (inclusive of its directors, officers, staff and shareholders and any affiliated

third parties) cannot accept any liability to any party in respect of, or resulting from, errors or omissions. AKG information, comments and opinion,

as expressed in the form of its analysis and ratings, do not establish or seek to establish suitability in any individual regard and AKG does not provide,

explicitly or implicitly, through this report and its content, or any other assessment, rating or commentary, any form of investment advice or fiduciary

service.

AKG Financial Analytics Ltd Anderton House, 92 South Street, Dorking, Surrey RH4 2EW Tel: +44 (0) 1306 876439 Email: [email protected] Web: www.akg.co.uk © AKG Financial Analytics Ltd 2020

AKG Financial Strength Assessment Report

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