Phoenix Group Holdings Regulatory News (PHNX)

Phoenix Group delivers strong results and will exceed upper end of two year cash generation target. Completion of Standard Life Assurance acquisition anticipated on 31 August 2018.

Phoenix Group, the UK's largest specialist closed life fund consolidator1, announces strong results for the six months ended 30 June 2018.

Financial and Group Highlights

· £349 million of cash generation2 in H1 2018 (H1 2017: £360 million). The Group expects to exceed the upper end of its cash generation target of £1.0 billion - £1.2 billion between 2017 and 2018.

· Solvency II surplus of £2.3 billion3 as at 30 June 2018 (£1.8 billion as at 31 December 2017). Shareholder Capital Coverage Ratio of 180% as at 30 June 20184 (164% as at 31 December 2017).

· Group operating profit of £216 million in H1 2018 (H1 0 £215 million).

· Interim dividend of 22.6p per share, consistent with Final 2017 dividend rebased for July rights issue.

· Fitch Ratings affirmed the Group's ratings in July at A+5; "stable" outlook.

· Phoenix to introduce fee caps on unitised non-workplace pensions for a one off expected cost of £68 million.

· Chairman and Non-Executive Director appointments announced (subject to regulatory approval) and Group Executive Committee strengthened.

Acquisition of Standard Life Assurance

· We anticipate completion of the acquisition on 31 August 2018 subject to obtaining regulatory approval from the CBI by 30 August. Previously announced synergy and cash generation targets unchanged.

· Acquisition funding in place following the £500 million Restricted Tier 1 bond issuance in April and the £950 million rights issue completed in July with 96.25% uptake.

· Strong shareholder support with 99.98% of shareholders voting in favour of the acquisition.

Delivering on strategic priorities

· AXA and Abbey Life integrations completed ahead of plan and targets, delivering cost synergy benefits of £27 million per annum and cumulative cash generation of £768 million.

· Completed first bulk purchase annuity - a £470 million transaction with the Trustee of the Marks and Spencer Pension Scheme.

Commenting on the results, Group CEO, Clive Bannister said:

"The Group has delivered strong cash generation; and expects to exceed its 2017-2018 target having completed the integrations of the AXA and Abbey Life acquisitions. Our commitment to improving customer outcomes is evidenced by the introduction of fee caps on unitised non-workplace pensions following a similar move with workplace schemes in 2017.

Having received enormous support from our investors I am delighted to announce that we anticipate completion of the acquisition of Standard Life Assurance on 31 August 2018. This acquisition and the ongoing Strategic Partnership with Standard Life Aberdeen plc represents a pivotal moment in the Group's history bringing growth opportunities from new business across both Heritage and Open books.

The transaction is evidence of the industry's bifurcation, splitting into "capital heavy" insurance specialists and "capital light" firms. Phoenix's vision is to be Europe's Leading Life Consolidator. The Standard Life Assurance acquisition is a stepping stone on our consolidation journey, but it isn't the final destination and we remain focused on doing more transactions.

I would like to take this opportunity on behalf of the Board to thank Henry for his leadership and guidance during his highly successful period as Chairman of the Group and to welcome Nicholas Lyons who, subject to regulatory approval, will replace Henry on 1 September 2018."

Presentation

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

J.P. Morgan, 1 John Carpenter Street, London, EC4Y 0JP

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

A replay of the presentation will also be available through the website.

Participants may also dial in as follows:

UK 020 3059 5868

International +44 20 3059 5868

Title of call: '2018 Half Year Results'

Dividend

The interim dividend of 22.6p per share is expected to be paid on 1 October 2018.

The ordinary shares will be quoted ex-dividend on the London Stock Exchange as of 6 September 2018. The record date for eligibility for payment will be 7 September 2018.

Warrants outstanding

Further to Phoenix Group Holding's (PGH's) announcement on 23 July 2018 with respect to the 5 million warrants over PGH's shares which were issued to certain of the Group's lenders on 2 September 2009, PGH has today redeemed and cancelled all 5 million of those outstanding warrants. Therefore none of those warrants remain in issue.

Enquiries

Investors/analysts:Claire Hawkins, Head of Investor Relations, Phoenix Group+44 (0)20 3735 0575

Media:Andy Donald and Vikki Kosmalska, Maitland + 44 (0) 20 7379 5151

Shellie Wells, Head of Corporate Communications, Phoenix Group

+44 (0) 203 735 0922/ +44 7872 414137

Notes

1. Phoenix Group is the UK's largest specialist consolidator of closed life funds with just over 5.4 million customers and £72 billion of life company assets.

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

3. Estimated HY18 Solvency II capital position assumes dynamic recalculation of transitionals as at 30 June 2018. Any references to Solvency II relate to the relevant calculation for Phoenix Group Holdings.

4. The Shareholder Capital Coverage Ratio of 180% excludes Solvency II Own Funds and Solvency Capital Requirements ("SCR") of unsupported with-profit funds and the PGL Pension Scheme.

5. Insurer Financial Strength rating of Phoenix Life Limited and Phoenix Life Assurance Limited.

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

7. Statements containing the words: 'believes', 'intends', 'will', 'may', 'should', 'expects', 'plans', 'aims', 'seeks', 'targets', 'continues' and 'anticipates' or other words of similar meaning are forward-looking. Such forward-looking statements and other financial and/or statistical data involve risk and uncertainty because they relate to future events and circumstances that are beyond the Group's control. For example, certain insurance risk disclosures are dependent on the Group's choices about assumptions and models, which by their nature are estimates. As such, actual future gains and losses could differ materially from those that the Group has estimated.

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

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

.

Interim Report 2018

Phoenix is the largest UK Consolidator of CLOSED LIFE ASSURAnCE FUNDS.

Financial highlights

OPERATING COMPANIES' CASH GENERATION £m

£349m APM

HY17: £360m

OPERATING PROFIT £m

£216m APM

HY17: £215m

SOLVENCY II SURPLUS £bn (estimated)

£2.3bn

FY17: £1.8bn

SHAREHOLDER CAPITAL COVERAGE RATIO % (estimated)

180% APM

FY17: 164%

interim Dividend per share p

22.6p

2017 Final Dividend per share: 22.6p1

IFRS LOSS AFTER TAX £m

£(24)m

HY17: £(96)m

Operational highlights

Half year ended 30 June 2018

- Acquisition of Standard Life Assurance and Strategic Partnership with Standard Life Aberdeen announced in February and on track to complete end August.

- AXA Wealth and Abbey Life integrations completed.

- First BPA transaction with the Marks and Spencer Pension Scheme completed in May.

- Fee caps on unitised non-workplace pensions introduced.

1 Rebased to take into account the bonus element of the rights issue completed in July 2018.

Note: All amounts marked with an 'APM' are alternative performance measures. See 'Alternative Performance Measures'note on page 52 for further details of these measures.

Group Chief Executive Officer's Report

"Phoenix has a new vision - to be Europe's Leading Life Consolidator"

Clive bannister

Group Chief executive officer

Phoenix had a very successful first half of the year, announcing the transformational £2.9 billion acquisition of Standard Life Assurance and Strategic Partnership with Standard Life Aberdeen and the completion of our first Bulk Purchase Annuity ('BPA') transaction.

We also completed the integration of the AXA Wealth and Abbey Life businesses ahead of plan and targets, delivering cost synergy benefits of £27 million per annum and cumulative cash generation of £768 million.

Phoenix has delivered strong financial results, generating £349 million of cash from Phoenix Life and therefore expects to exceed the upper end of the 2017 to 2018 cash generation target range of £1.0 billion to £1.2 billion.

The Board has declared an interim dividend for 2018 of 22.6p per share, consistent with the final 2017 dividend per share rebased to reflect the recent rights issue.

ACquisition of Standard Life Assurance and Strategic partnership with standard life aberdeen

The acquisition of Standard Life Assurance represents a pivotal moment in the Group's history. The enlarged Group will have £240 billion of assets under management and 10.4 million policyholders. This greater scale and alignment with Phoenix's existing product mix strengthens the Group's capacity to generate shareholder value through the delivery of management actions and future accretive acquisitions.

The transaction is evidence of the industry bifurcating and splitting into 'capital heavy' insurance specialists who will continue to underwrite and administer insurance products and 'capital light' firms who will concentrate on sales and distribution. Phoenix's vision is to be Europe's Leading Life Consolidator in this bifurcation which we estimate has a market size of £540 billion across the UK, Germany and Ireland.

We expect to generate a total of £5.5 billion of additional aggregate cash flows from the acquisition, of which £1.0 billion is expected to be generated between 2018 and 2022 and £4.5 billion from 2023 onwards.

The long-term nature of these cash flows enhances the sustainability of our dividend and allows us to increase our 2018 final dividend to an annualised level of £338 million. Whilst we had expected this to equate to a 3.0% uplift in dividend per share, the actual pricing of our rights means that the uplift in our dividend per share is expected to be 3.5%.

The acquisition also significantly enhances the new business capabilities within the Group to generate organic growth which will dampen the run-off of our in-force business. The Strategic Partnership with Standard Life Aberdeen will bring new business in the form of workplace pensions, SIPP and drawdown products which will be managed alongside our existing new business streams and include vesting annuities and protection products sold by SunLife, a distribution company within the Group.

As a result, Phoenix will no longer describe itself as purely a 'closed' business, but as a consolidator of both open and heritage life businesses with a new business capability.

Shareholder approval of the transaction was received at our EGM in June when 99.98% of voting shareholders gave their support to the transaction.

Our acquisition funding is also now in place following the £950 million rights issue completed in July with a take up rate of 96.25% and the £500 million Restricted Tier 1 bond issuance in April. I would like to take this opportunity to thank our investors for their overwhelming support for this acquisition.

The PRA and FCA have now approved the transaction and we expect to receive approval from the CBI by 30 August. We anticipate completion to follow on 31 August. We have been working extensively with our future colleagues at Standard Life to prepare for 'Day 1' and ensure that we will be ready to welcome the 3,500 transferring staff based in five locations to the Phoenix Group.

We are building up the Strategic Partnership between Phoenix and Standard Life Aberdeen. The partnership covers two key areas: firstly, Standard Life Aberdeen will continue to manage the majority of Phoenix's assets and secondly, Phoenix will underwrite workplace pensions, SIPP and drawdown products which Standard Life Aberdeen will continue to market under its own brand.

Phoenix will be forever changed by this transaction and I have announced a number of new appointments to my executive team to enable us to run the enlarged group with appropriate focus from completion.

Susan McInness has been appointed as the CEO of Standard Life Assurance and James McConville will take on new responsibilities as 'Group Director, Scotland' whilst continuing as Group Finance Director. Both appointments will be effective on completion of the acquisition.

Jonathan Pears, currently Chief Risk Officer at Standard Life, will replace Susan as Phoenix Group Chief Risk Officer on completion of the acquisition and John McGuigan, currently Managing Director, Customer Operations at Standard Life, will join the Phoenix Executive Committee as Group Head of Customer; a new Group function covering Standard Life Assurance and Phoenix Life.

BPA

In parallel, Phoenix has progressed its BPA strategy announcing a £470 million BPA transaction with the Marks and Spencer Pension Scheme in May. The transaction has been structured under an umbrella contract to facilitate potential future transactions between Phoenix and the scheme, which will allow the parties to move quickly to take advantage of future market opportunities that may present themselves. This was Phoenix's first external BPA transaction having announced its intention to enter this market in 2017.

BOARD cHANGES

The Board would like to take this opportunity to express its gratitude to Henry Staunton who announced his intention not to seek re-appointment as our Chairman back in May. Phoenix has benefited from his significant expertise and judgement during a time of immense growth. Henry leaves Phoenix stronger and more confident than it has ever been and the Board thanks him for his leadership and guidance.

The Board welcomes Nicholas Lyons who, subject to regulatory approval, will replace Henry as Chairman from 1 September 2018. Nicholas brings a wealth of experience from the life insurance sector and the Board looks forward to working with him in the future.

The Board is also pleased to announce the appointment of two new Non-Executive Directors, Barry O'Dwyer and Campbell Fleming who will join the Board on completion of the Standard Life Assurance acquisition. Barry and Campbell bring substantial experience and executive skills complementary to those of our existing Directors and very relevant to our evolving strategy. We look forward to working with them as we realise our role as Europe's Leading Life Consolidator.

Outlook

The acquisition of Standard Life Assurance is transformational for Phoenix and will take us from being a closed book business, to one that has additional new business capabilities. We are witnessing the bifurcation of our industry and Phoenix is well placed to be the leading life consolidator in Europe during this process. Contemporaneously, the bulk annuity market constitutes a potential complementary source of inorganic growth and the Group intends to continue to compete selectively across both markets on accretive transactions to generate incremental value.

Phoenix has a number of strengths which position the Group at the forefront of these markets:

Scale: Scale as the largest consolidator of heritage life insurance books in Europe.

Security: Phoenix has a strong balance sheet and generates long term cash flows.

Specialism: Our specialist operating model enables us to efficiently manage and integrate heritage books.

Service: Providing a high quality service with continuity to customers and their intermediaries is critical to our strategy.

Skills: Phoenix employs a uniquely talented and experienced team and we will continue to invest in this expertise.

Significant growth: Organic growth through new business and a wealth of acquisition opportunities across Europe.

We are confident about our future as we continue to build an enduring institution.

CONCLUSION

I would like to thank all of my colleagues, but particularly those in the Life Company and Corporate Office, for their hard work during the first half of the year in successfully delivering the Group's strategy.

I would also like to welcome our new colleagues who will be transferring to Phoenix from Standard Life. I look forward to working with you as Phoenix seeks further opportunities to grow and realise its vision.

The Standard Life Assurance acquisition is a stepping stone on our consolidation journey, but it is not the final destination and we remain focused on doing more transactions.

CLIVE BANNISTER

GROUP CHIEF EXECUTIVE OFFICER

22 AUGUST 2018

Business Review

"The Group is expected to exceed its 2017 to 2018 cash generation target "

JAMES McCONVILLE

GROUP FINANCE DIRECTOR

2017 - 2018 CASH GENERATION TARGET DELIVERED

The Group has delivered £349 million of cash generation taking cash generation for 2017 to 2018 to £1,002 million. We now expect to exceed our two year cash generation target for 2017 to 2018 of £1.0 to £1.2 billion.

The Group currently has a cash generation target of £2.5 billion between 2018 to 2022.

CAPITAL STABILITY

The PGH Solvency II surplus has increased to £2.3 billion (FY17: £1.8 billion) in the period.

The increase has been driven by management actions and the issue of the £500 million restricted Tier 1 bond in April in anticipation of the completion of the Standard Life Assurance acquisition.

Our strong financial position has been recognised by Fitch who confirmed their A+ rating for the insurance subsidiaries of the Group and continue to have us on a 'stable' outlook. Fitch has also assigned Standard Life Assurance Limited an expected Insurer Financial Strength rating of A+(EXP).

group operating profit remains stRong. IFRS after tax Result continues to Be impacted by our hedging strategy

Group operating profit has remained in line with the prior period at £216 million (HY17: £215 million).

The IFRS loss after tax of £24 million (HY17: £96 million) was impacted by losses on derivative positions held to hedge the Group's exposure to additional equity risk as a result of the acquisition of Standard Life Assurance.

Cash Generation

£349m APM

Operating companies' cash generation

Operating companies' cash generation represents cash remitted by the Group's operating companies to the holding companies.

Please see the Alternative Performance Measures ('APM') note on page 52 for further details of this measure.

Maintaining strong cash flow delivery underpins debt servicing, debt repayments and shareholder dividends.

The cash flow analysis that follows reflects the cash paid by the operating companies to the Group's holding companies, as well as the uses of those cash receipts.

CASH RECEIPTS

Cash remitted by the operating companies during the period was £349 million (HY17: £360 million).

RECURRING CASH OUTFLOWS

The operating expenses of £19 million (HY17: £17 million) principally comprise corporate office costs, net of income earned on holding company cash and investment balances.

Pension scheme contributions of £23 million (HY17: £38 million) are made on a monthly basis and comprise £20 million for the Pearl Group Scheme and £3 million for the Abbey Life Scheme. The decrease compared to prior period reflects the payment in HY 17 of £10 million of contributions to the Pearl Group Scheme in respect of the final quarter of 2016 as part of the move from annual to monthly funding. In addition, no further contributions are required to be paid into the PGL Staff Pension Scheme under the existing funding agreement (HY17: £8 million).

Debt interest of £10 million (HY17: £13 million)represents a semi-annual interest coupon paid on the US$500 million (£385 million) Tier 2 bond which was issued in 2017. Cash interest payments are expected to be paid on all of Phoenix Group Holdings' outstanding debt instruments in the second half of the year.

NON-RECURRING CASH OUTFLOWS

Non-recurring cash outflows of £188 million (HY17: £20 million) include £22 million of option premiums and £49 million of collateral posted in respect of derivative instruments entered into to hedge the Group's exposure to equity risk arising from the Group's acquisition of Standard Life Assurance. The remainder of the balance includes a further £21 million of collateral posted on other Group hedging positions, £62 million of funding provided to the life companies to support bulk purchase annuity new business (based on a conservative asset mix) and other corporate costs, including acquisition and integration costs.

DEBT REPAYMENTS AND SHAREHOLDER DIVIDEND

External debt repayments were £nil in the period. The HY17 comparative of £503 million comprised £300 million part-settlement of the revolving credit facility and repayment of £178 million of the £300 million senior bonds which were redeemed at a premium of £25 million.

The shareholder dividend of £99 million represents the payment of the 2017 final dividend in May.

DEBT ISSUANCE (NET OF FEES)

The £494 million debt issuance comprises the proceeds of the restricted Tier 1 bond issuance of £500 million completed in April, net of associated fees.

TARGET CASH FLOWS

The Group has previously announced a five-year cumulative target cash flow for 2016 to 2020 of £2.8 billion, of which £1.0 billion to £1.2 billion is expected to be achieved in 2017 to 2018. With cash generation of £653 million for the full year 2017 and £349 million for the half year ended 30 June 2018, the Group expects to exceed the top end of our £1.0 to £1.2 billion range for 2017 to 2018.

The Group currently has a cash flow target of £2.5 billion in respect of the years 2018 to 2022 and the resilience of the target is demonstrated by the illustrative stress testing in the table below.

EXPECTED CASH FLOWS AFTER 2022

The successful bulk purchase annuity transaction completed in April increased the long-term cash generation by £0.2 billion and cash generation post 2022 for the existing Group is now expected to be £4.0 billion. This assumes no management actions after 2022 and does not include any cash generation expected from Standard Life Assurance.

1 Includes amounts received by the holding companies in respect of tax losses surrendered to the operating companies of £14 million (HY17: £11 million).

1 Assumes stress occurs on 1 July 2018.

2 Assumes recalculation of Transitional Measures on Technical Provisions (subject to PRA approval).

3 Credit stress equivalent to an average 150bps spread widening across ratings, 10% of which is due to defaults/downgrades.

4 Equivalent of six months increase in longevity applied to the annuity portfolio.

5 Assumes most onerous impact of a 10% increase/decrease in lapse rates across different product groups.

Capital Management

£2.3bn

PGH Solvency II surplus (estimated)

180% APM

PGH Shareholder Capital Coverage Ratio (estimated)

PGH SOLVENCY II SURPLUS OVERVIEW

A Solvency II capital assessment involves a valuation in line with Solvency II principles of the Group's Own Funds and a risk-based assessment of the Group's Solvency Capital Requirement ('SCR'). PGH Own Funds differ materially from the Group's IFRS equity for a number of reasons, including the recognition of future shareholder transfers from the with-profit funds and future management charges on investment contracts, the treatment of certain subordinated debt instruments as capital items, and a number of valuation differences, most notably in respect of insurance contract liabilities and intangible assets.

The SCR is calibrated so that the likelihood of a loss exceeding the SCR is less than 0.5% over one year. This ensures that capital is sufficient to withstand a broadly '1-in-200 year event'.

In December 2015, the Group was granted the PRA's approval for use of its Internal Model to assess capital requirements. Following the acquisitions in 2016, the Group obtained the PRA's approval to incorporate the acquired AXA Wealth and Abbey Life businesses within the scope of the Group's Internal Model in March 2017 and March 2018 respectively.

The Solvency II surplus excludes the surpluses arising in the Group's unsupported with-profit funds and the PGL Pension Scheme. In the calculation of the Solvency II surplus, the SCR of the with-profit funds and the PGL Pension Scheme is included, but the related Own Funds are recognised only to a maximum of the SCR amount. Surpluses that arise in with-profit funds and the PGL Pension Scheme, whilst not included in the Solvency II surplus, are available to absorb economic shocks. This means that the headline surplus is resilient to economic stresses.

As part of the ongoing simplification of the Group structure, Phoenix intends to put in place a new UK-registered holding company following the completion of the Standard Life Assurance acquisition. The new company will be the ultimate parent company and the highest EEA insurance Group holding company. When complete, the Solvency II capital assessment and Group supervision will be performed at this level.

CHANGE IN PGH SOLVENCY II SURPLUS (ESTIMATED)

The PGH Solvency II surplus has increased to £2.3 billion (FY17: £1.8 billion estimated) in the period.

The increase includes surplus generation and reduction in capital requirements of £0.1 billion.

Management actions undertaken, including further investment in illiquid assets within annuity portfolios, reductions in investment expenses and anticipated cost savings associated with process improvements and continued investment in digitalisation of the customer journey, increased the surplus by £0.4 billion.

The Tier 1 bond issuance completed in April increased the surplus by £0.5 billion ahead of the completion of the acquisition of Standard Life Assurance.

The adverse impact of economic and other variances reduced the surplus by £0.3 billion. This includes losses and capital requirements of £137 million arising on derivative instruments entered into on announcement of the Standard Life Assurance acquisition to hedge shareholder exposures to equity risk from that business.

Equity market gains in the subsequent period have triggered losses on these instruments. The corresponding increase in the value of future profits arising in the Standard Life Assurance Own Funds is not recognised in the Group solvency calculation as at HY18, pending completion of the acquisition. The figure also includes a provision of £68 million in respect of a commitment to reduce ongoing and exit charges for unitised non-workplace pensions, the day 1 solvency strain arising from the writing of bulk purchase annuity new business, together with acquisition related project costs.

Financing costs, pension contributions and the dividend payments (including the expected payment of the £163 million interim dividend on 1 October), amount to £0.2 billion and reduce the surplus in the period.

SHAREHOLDER CAPITAL COVERAGE RATIO (ESTIMATED)

The Group focuses on a shareholder view of the capital coverage ratio which is considered to give a more accurate reflection of the capital strength of the Group. The Shareholder Capital Coverage Ratio is calculated as the ratio of Eligible Own Funds to SCR adjusted to exclude Own Funds and the associated SCR relating to the unsupported with-profit funds and the PGL Pension Scheme.

Please see the Alternative Performance Measures note on page 52 for further details of this measure.

Unsupported with-profit funds and the PGL Pension Scheme consist of £2.7 billion of Own Funds and £1.8 billion of SCR. Of the £2.7 billion of Own Funds, £2.1 billion consists of estate within the unsupported with-profit funds and £0.6 billion of Own Funds within the PGL Pension Scheme. As noted previously, surpluses in these funds do not contribute to the PGH Solvency II surplus.

Excluding the SCR and Own Funds relating to the unsupported with-profit funds and the PGL Pension Scheme, the estimated Solvency II Shareholder Capital Coverage ratio is 180% as at 30 June 2018 (FY17: 164% estimated).

The estimated PGH Solvency II surplus position at 30 June 2018 is set out in the table below:

1 Own Funds includes the net assets of the life and holding companies calculated under Solvency II rules, pension scheme surpluses calculated on an IAS 19 basis not exceeding the holding companies' contribution to the Group SCR and qualifying subordinated liabilities. It is stated net of restrictions for assets which are non-transferable and fungible between Group companies within a period of nine months.

2 The SCR reflects the risks and obligations to which Phoenix Group Holdings is exposed.

3 The surplus equates to an estimated regulatory coverage ratio of 149% as at 30 June 2018. (FY17: 139% estimated).

PHOENIX LIFE FREE SURPLUS (ESTIMATED)

Phoenix Life Free Surplus represents the Solvency II surplus of the life companies that is in excess of their Board-approved capital management policies.

As at 30 June 2018, the Phoenix Life Free Surplus is £0.8 billion (FY17: £0.7 billion). The table below analyses the movement during the period:

SENSITIVITY AND SCENARIO ANALYSIS

As part of the Group's internal risk management processes, the regulatory capital requirements are tested against a number of financial scenarios. The results of that stress testing are provided below and demonstrate the resilience of the PGH Solvency II surplus.

In relation to the acquisition of Standard Life Assurance, the Group has undertaken additional hedging activity in 2018 to protect the economic value of the acquired business from adverse equity and currency movements. Upon completion, the Group's hedging strategy will be applied to the business acquired. The sensitivities below have not been amended to reflect exposure to that additional hedging programme in the period prior to completion of the transaction. The sensitivities represent the standalone position for the Phoenix Group based on hedging in place as at 30 June 2018.

Furthermore, we note that on 2 July 2018, the PRA issued Consultation Paper 13/18 which focuses on whether firms are making appropriate allowance for non-standard risks arising when Equity Release Mortgages ('ERM') are included within their Solvency II Matching Adjustment portfolios. The Consultation proposes an approach and calibration for assessing the property risk associated with the no negative equity guarantee feature of ERM assets when determining an entity's Solvency II Technical Provisions.

The Consultation Paper, if published as a Supervisory Statement in substantively its current form, could potentially have adverse impacts on the solvency position of insurers. For Phoenix, the potential impact is driven by the requirement for the benefit from transitional measures to be tested against a risk neutral valuation. An initial assessment of the impact of the proposals has estimated that the PGH Solvency II surplus could reduce by circa £0.2 billion. Any strain of this nature would be expected to unwind over time as the transitional benefits run-off. Therefore, were the proposals to be confirmed, we would not expect any impact on our stated cash generation targets. The PRA are accepting feedback on the Consultation Paper until 30 September 2018 with a proposed implementation date of 31 December 2018. No impacts of the Consultation Paper have been reflected in the Group's solvency position reported as at 30 June 2018.

1 Assumes stress occurs on 30 June 2018.

2 Assumes recalculation of Transitional Measures on Technical Provisions (subject to PRA approval).

3 Credit stress equivalent to an average 150bps spread widening across ratings, 10% of which is due todefaults/downgrades.

4 Equivalent of six months increase in longevity applied to the annuity portfolio.

5 Assumes most onerous impact of a 10% increase/decrease in lapse rates across different product groups.

IFRS Results

£216m APM

Operating profit

£(24)m

IFRS loss after tax

OPERATING PROFIT

Operating profit is a non-GAAP financial performance measure based on expected long-term investment returns. It is stated before amortisation and impairment of intangibles, other non-operating items, finance costs and tax.

Please see the APM note on page 52 for further details of this measure.

The Group has generated an operating profit of £216 million (HY17: £215 million). The net positive impact of experience variances during the first half of 2018 has been largely offset by the lower impact of management actions within operating profit compared to the prior period and the net positive impact of actuarial assumptions recognised in HY17.

IFRS LOSS AFTER TAX

The IFRS loss after tax attributable to owners is £(24) million (HY17: £(96) million). The loss principally reflects adverse economic variances arising on derivative positions held to hedge the Group's exposure to equity risk arising from the acquisition of Standard Life Assurance.

PHOENIX LIFE OPERATING PROFIT

Operating profit for Phoenix Life is based on expected investment returns on financial investments backing shareholder and policyholder funds over the reporting period, with consistent allowance for the corresponding expected movements in liabilities (being the release of prudential margins and the interest cost of unwinding the discount on the liabilities). The principal assumptions underlying the calculation of the long-term investment return are set out in note 4 to the IFRS interim financial statements.

Operating profit includes the effect of variances in experience for non-economic items, such as mortality and persistency, and the effect of changes in non-economic assumptions. Changes due to economic items, for example market value movements and interest rate changes, which give rise to variances between actual and expected investment returns, and the impact of changes in economic assumptions on liabilities, are accounted for outside of operating profit. Phoenix Life operating profit is net of policyholder finance charges and policyholder tax.

The with-profit operating profit of £40 million (HY17: £39 million) represents the shareholders' one-ninth share of the policyholder bonuses, and is in line with the comparative period.

The with-profit funds where internal capital support has been provided generated an operating loss of £6 million (HY17: £76 million loss) reflecting the net adverse impact of updating actuarial assumptions. The larger loss in the prior period was due to the relatively higher impact of strengthening actuarial assumptions related to persistency of products with valuable guarantees and the associated assumptions in relation to late retirements.

The non-profit and unit-linked funds operating profit decreased to £185 million (HY17: £250 million). The decrease reflects the relative lower positive impact of updating actuarial assumptions of £27 million (HY17: £142 million), where the prior period benefited from updates made to longevity base and improvement assumptions. This impact has been partially offset by positive experience variances recognised in the period and benefits from actuarial modelling enhancements delivered during the period.

The long-term return on owners' funds of £1 million (HY17: £2 million) reflects the asset mix of owners' funds, primarily cash-based assets and fixed interest securities. The investment policy for managing these assets remains prudent.

The operating profit for management services of £8 million (HY17: £11 million) comprises income from the life and holding companies in accordance with the respective management service agreements less fees related to the outsourcing of services and other operating costs. The decrease compared to the prior period reflects the impact of life company run-off.

GROUP COSTS

Group costs in the period were £12 million (HY17: £11 million), in line with the prior period. They mainly comprise project recharges from the service companies offset by returns on the scheme surplus of the Group staff pension schemes.

INVESTMENT RETURN VARIANCES AND ECONOMIC ASSUMPTION CHANGES ON LONG-TERM BUSINESS

The net positive investment return variances and economic assumption changes on long-term business of £ 27 million (HY17: £56 million adverse) primarily arise due to the positive impact of strategic asset allocation activities, including investment in higher yielding illiquid assets. This has been partially offset by the adverse impact of rises in yields and equity market gains during the period. The Group's exposure to equity movements arising from future profits in relation to with-profit bonuses and unit-linked charges is hedged to benefit the regulatory capital position. The impact of equity market movements on the value of the hedging instruments is reflected in the IFRS results, but the corresponding change in the value of future profits is not.

VARIANCE ON OWNERS' FUNDS

The adverse variance on owners' funds of £136 million (HY17: £77 million negative) includes the impact of fair value losses on derivatives held in the shareholder funds of the life companies to protect the Group's regulatory capital position as a result of an increase in yields in the period together with swap decay costs. It also reflects the impact of derivative instruments entered into on announcement of the Standard Life Assurance acquisition in order to hedge shareholder exposures to equity risk from that business. Following equity market gains in the period, unrealised losses of £83 million have been recognised on these instruments, together with option premiums of £22 million.

AMORTISATION OF ACQUIRED IN-FORCE BUSINESS AND OTHER INTANGIBLES

Acquired in-force business and other intangibles of £2.7 billion were recognised on the acquisition of the operating companies in 2009. Following the acquisition of the AXA Wealth and Abbey Life businesses in 2016, a further £0.2 billion of acquired-in-force business and other intangibles have been recognised in the Group's balance sheet.

The acquired in-force business is being amortised in line with the run-off of the life companies. Amortisation of acquired in-force business during the period totalled £46 million (HY17: £42 million). Amortisation of other intangible assets totalled £8 million in the period (HY17: £8 million).

OTHER NON-OPERATING ITEMS

Other non-operating items of £37 million negative (HY17: £82 million negative) includes an actuarial provision for £68 million in respect of a commitment to reduce ongoing and exit charges for unitised non-workplace pensions and acquisition related costs of £17 million in respect of the Standard Life transaction. This is partially offset by a £52 million net benefit reflecting anticipated cost savings associated with process improvements and continued investment in the digitalisation of the customer journey and net other one-off items totalling £4 million.

The prior period result included a premium of £25 million paid on redemption of £178 million principal of the senior unsecured bond, costs of £18 million in respect of integration and restructuring of the Abbey Life and AXA Wealth businesses, a provision of £28 million in respect of a commitment to the reduction of ongoing charges for workplace pension products, an £8 million increase in the provision for costs of claims relating to historic creditor insurance underwritten by a subsidiary of the Group, PA(GI) Limited; and net other one-off items totalling a cost of £3 million, including corporate project costs.

FINANCE COSTS ATTRIBUTABLE TO OWNERS

Finance costs have increased by £3 million, comprising a £7 million decrease in bank finance costs driven by the repayment of bank debt; and a £10 million increase in other finance costs driven by hybrid debt issuances during 2017.

TAX CREDIT ATTRIBUTABLE TO OWNERS

The Group's approach to the management of its tax affairs is set out in its Tax Strategy document which is available in the corporate responsibility section of the Group's website. The Group's tax affairs and tax controls are managed by an in-house tax team who report on them to the Board and the Audit Committee on a regular basis throughout the year. The Board believes that its Tax Strategy accords with the Group's approach to its wider Corporate Social Responsibility. In the first half of 2018, the Tax Strategy was refreshed and published in accordance with the relevant statutory requirements.

Implicit in the Group's Tax Strategy and the management of its tax affairs is a desire for greater transparency and openness that will help the Group's stakeholders better understand the published tax numbers. In this way the Group aims to participate in a substantive manner with HMRC and other insurance industry stakeholders on consultative documents and tax law changes that potentially impact on the insurance sector.

All of the Group's insurance operations are based in the UK and are liable to tax in accordance with applicable UK legislation. The Group derives a de-minimis level of income from non-UK sources. Phoenix Group Holdings was a Jersey resident holding company until 31 January 2018 when it became tax resident in the UK.

The Group tax credit for the period attributable to owners is £14 million (HY17: £5 million tax credit) based on a loss (after policyholder tax) of £38 million (HY17: £101 million loss). The significant tax adjustments to the owners' profit before tax are primarily due to the prior year credit for shareholders £(4) million and profits taxed at a rate other than the statutory rate of £(4) million.

Risk Management

"The Group's Risk Management Framework has supported the acquisition of Standard Life Assurance and will evolve to manage the risks and opportunities that the enlarged group will face."

Susan McInnes

GROUP CHIEF RISK OFFICER

PRINCIPAL RISKS AND UNCERTAINTIES FACING THE GROUP

The Group's top principal risks and uncertainties are detailed in the table below together with their potential impact, mitigating actions which are in place and the change in the risk from last year. As economic changes occur and the industry and regulatory environment evolves, the Group will continue to monitor the potential impact of these risks and take appropriate actions.

The current assessment of the residual risk in respect of each of the Group's principal risks is illustrated in the chart opposite. The residual risk is the remaining risk after controls and mitigating actions have been taken into account.

EMERGING RISKS

The Group's senior management and Board also take emerging risks into account when considering potentially adverse outcomes and appropriate management actions prior to the risk crystallising.

Some of the current emerging risks the Group considers are listed in the table below.

Financials

In this section

Statement of Directors' Responsibilities

The Board of Directors of Phoenix Group Holdings (as listed below) hereby declares that, to the best of its knowledge:

- the condensed consolidated interim financial statements for the half year ended 30 June 2018, which have been prepared in accordance with IAS 34 Interim Financial Reporting, gives a true and fair view of the assets, liabilities, financial position and results of Phoenix Group Holdings and its consolidated subsidiaries taken as whole;

- the Interim Report includes a true and fair view of the state of affairs of Phoenix Group Holdings and its consolidated subsidiaries as at 30 June 2018 and for the financial half year to which the Interim Report relates, as required by DTR 4.2.7 of the Disclosure Guidance and Transparency Rules. This includes a description of the important events that occurred during the first half of the year and refers to the principal risks and uncertainties facing Phoenix Group Holdings and its consolidated subsidiaries for the remaining six months of the year; and

the Interim Report includes, as required by DTR 4.2.8, a true and fair view of the information required on material transactions with related parties and any material changes in related party transactions described in the last annual report.

By order of the Board

Clive Bannister James McConville

Group Chief Executive Officer Group Finance Director

22 August 2018

PHOENIX GROUP HOLDINGS BOARD OF DIRECTORS

CHAIRMAN

Henry Staunton

EXECUTIVE DIRECTORS

Clive Bannister

James McConville

NON-EXECUTIVE DIRECTORS

Alastair Barbour

Karen Green

Wendy Mayall

John Pollock

Belinda Richards

Nicholas Shott

Kory Sorenson

Independent Review Report to Phoenix Group Holdings

To: The Board of Directors of Phoenix Group Holdings

Introduction

We have been engaged by the Company to review the condensed consolidated set of interim financial statements in the half-yearly financial report for the six months ended 30 June 2018 which comprises of the condensed consolidated income statement, condensed statement of consolidated comprehensive income, pro forma reconciliation of group operating profit to result attributable to owners, condensed statement of consolidated financial position, condensed statement of consolidated cash flows, condensed statement of consolidated changes in equity and the notes to the condensed consolidated interim financial statements. We have read the other information contained in the half yearly financial report and considered whether it contains any apparent misstatements or material inconsistencies with the information in the condensed consolidated set of interim financial statements.

This report is made solely to the company in accordance with guidance contained in International Standard on Review Engagements 2410 (UK and Ireland) 'Review of Interim Financial Information Performed by the Independent Auditor of the Entity' issued by the Auditing Practices Board. To the fullest extent permitted by law, we do not accept or assume responsibility to anyone other than the company, for our work, for this report, or for the conclusions we have formed.

Directors' Responsibilities

The half-yearly financial report is the responsibility of, and has been approved by, the Directors. The Directors are responsible for preparing the half-yearly financial report in accordance with the Disclosure Guidance and Transparency Rules of the United Kingdom's Financial Conduct Authority.

As disclosed in note 1, the annual financial statements of the Group are prepared in accordance with International Financial reporting Standards ('IFRSs'). The condensed consolidated set of interim financial statements included in this half-yearly financial report has been prepared in accordance with International Accounting Standard 34, 'Interim Financial Reporting'.

Our Responsibility

Our responsibility is to express to the Company a conclusion on the condensed consolidated set of financial statements in the half-yearly financial report based on our review.

Scope of Review

We conducted our review in accordance with International Standard on Review Engagements (UK and Ireland) 2410, 'Review of Interim Financial Information Performed by the Independent Auditor of the Entity' issued by the Auditing Practices Board for use in the United Kingdom. A review of interim financial information consists of making enquiries, primarily of persons responsible for financial and accounting matters, and applying analytical and other review procedures. A review is substantially less in scope than an audit conducted in accordance with International Standards on Auditing (UK) and consequently does not enable us to obtain assurance that we would become aware of all significant matters that might be identified in an audit. Accordingly, we do not express an audit opinion.

Conclusion

Based on our review, nothing has come to our attention that causes us to believe that the condensed consolidated set of interim financial statements in the half-yearly financial report for the six months ended 30 June 2018 is not prepared, in all material respects, in accordance with International Accounting Standard 34 and the Disclosure Guidance and Transparency Rules of the United Kingdom's Financial Conduct Authority.

Ernst & Young LLP

London22 August 2018

Condensed Consolidated Income Statement

For the half year ended 30 June 2018

Condensed Statement of Consolidated Comprehensive Income

For the half year ended 30 June 2018

Pro Forma Reconciliation of Group Operating Profit to Result attributable to owners

For the half year ended 30 June 2018

Condensed Statement of Consolidated Financial Position

As at 30 June 2018

Condensed Statement of Consolidated Cash Flows

For the half year ended 30 June 2018

Condensed Statement of Consolidated Changes in Equity

For the half year ended 30 June 2018

Condensed Statement of Consolidated Changes in Equity

For the half year ended 30 June 2017

Condensed Statement of Consolidated Changes in Equity

For the year ended 31 December 2017

Notes to the Condensed Consolidated Interim Financial Statements

1. BASIS OF PREPARATION

The condensed consolidated interim financial statements ('the interim financial statements') for the half year ended 30 June 2018 comprise the interim financial statements of Phoenix Group Holdings ('the Company') and its subsidiaries (together referred to as 'the Group') as set out on pages 15 to 44 and were authorised by the Board of Directors for issue on 22 August 2018. The interim financial statements are unaudited but have been reviewed by the auditors, Ernst & Young LLP and their review report appears on page 14.

The interim financial statements have been prepared in accordance with IAS 34 Interim Financial Reporting as issued by the International Accounting Standards Board ('IASB'). The accounting policies applied in the interim financial statements are consistent with those set out in the 2017 consolidated financial statements except for the adoption of new standards and interpretations effective from 1 January 2018 as referred to below.

The interim financial statements do not include all the information and disclosures required in the 2017 consolidated financial statements, and should be read in conjunction with the Group's 2017 Annual Report and Accounts, which have been prepared in accordance with International Financial Reporting Standards ('IFRSs') issued by the IASB.

In preparing the interim financial statements the Group has adopted the following standards, interpretations and amendments effective from 1 January 2018:

- IFRS 15 Revenue from Contracts with Customers. IFRS 15 establishes a single comprehensive framework for determining whether, how and when revenue is recognised. The standard does not apply to insurance contracts or financial instruments within the scope of IAS 39 Financial Instruments: Recognition and Measurement. The Group adopted IFRS 15 using the full retrospective method of adoption however the effect of adopting IFRS 15 has been minimal and has not resulted in an adjustment in either the current or prior period. There has been no change to the Group's accounting policies nor to the basis of revenue recognition. Additional disclosures will be incorporated within the 2018 consolidated financial statements and 'Disaggregation of revenue' disclosures have been included within note 3 in these interim financial statements.

- Amendments to IFRS 4 Insurance Contracts: Applying IFRS 9 Financial Instruments with IFRS 4. The amendments address concerns arising from implementing the new financial instruments standard, IFRS 9, before implementing IFRS 17 Insurance Contracts, which replaces IFRS 4. The amendments introduce two options for entities issuing insurance contracts: a temporary exemption from applying IFRS 9 and an overlay approach. The Group has taken advantage of the temporary exemption granted to insurers in IFRS 4 from applying IFRS 9 until 1 January 2021 as a result of meeting the exemption criteria as at 31 December 2015. As required by IFRS 4, a number of disclosures will be made in the 2018 consolidated financial statements to provide information to allow comparison with entities adopting the standard in 2018.

- Amendments to IFRS 2 Classification and Measurement of Share-based Payment Transactions. The IASB issued amendments to IFRS 2 Share-based Payment that address three main areas: the effects of vesting conditions on the measurement of a cash-settled share-based payment transaction; the classification of a share-based payment transaction with net settlement features for withholding tax obligations; and accounting where a modification to the terms and conditions of a share-based payment transaction changes its classification from cash-settled to equity-settled. On adoption, entities are required to apply the amendments without restating prior periods, but retrospective application is permitted if elected for all three amendments and other criteria are met. The Group has reviewed its current share-based payment schemes and has determined that it does not have any cash-settled share based payment schemes and that the narrow scope amendment regarding 'net settlement features' does not apply. As a consequence, these amendments do not have any impact on the Group.

- Amendments to IAS 40 Transfers of Investment Property. The amendments clarify when an entity should transfer property, including property under construction or development into, or out of investment property. The amendments state that a change in use occurs when the property meets, or ceases to meet, the definition of investment property and there is evidence of the change in use. A change in management's intentions for the use of a property of itself does not provide evidence of a change in use. These amendments do not have any impact on the Group.

- IFRIC Interpretation 22 Foreign Currency Transactions and Advance Consideration. The Interpretation clarifies that, in determining the spot exchange rate to use on initial recognition of the related asset, expense or income (or part of it) on the derecognition of a non-monetary asset or non-monetary liability relating to advance consideration, the date of the transaction is the date on which an entity initially recognises the non-monetary asset or non-monetary liability arising from the advance consideration. If there are multiple payments or receipts in advance, then the entity must determine a date of the transactions for each payment or receipt of advance consideration. This Interpretation does not have any impact on the Group.

- Annual Improvements Cycle 2015-2017: Amendments to IFRS 1 First-time adoption of IFRSs and Amendments to IAS 28 Investments in Associates and Joint Ventures. The first amendment deletes short-term exemptions for first time adopters as they have now served their intended purpose. The second amendment clarifies that an entity that is a venture capital organisation, or other qualifying entity, may elect, at initial recognition on an investment-by-investment basis, to measure its investments in associates and joint ventures at fair value through profit or loss. These amendments do not have any impact on the Group.

The Group has not early adopted any other standard, interpretation or amendment that has been issued but is not yet effective. In May 2017, the IASB published IFRS 17 Insurance Contracts, a comprehensive new accounting standard for insurance contracts covering recognition and measurement, presentation and disclosure. This standard applies to annual reporting periods beginning on or after 1 January 2021 and once effective, will replace IFRS 4. IFRS 17 applies to all types of insurance contracts and investment contracts with discretionary participation features. The impact of the adoption of IFRS 17 has yet to be fully assessed by the Group but it is expected there will be significant impacts relating to the measurement and presentation of the contracts in scope of the standard. During the period the Group has prepared a detailed implementation plan in respect of IFRS 17 and has performed an initial high level impact assessment. Work is now ongoing to determine the detailed impacts of the standard and to develop appropriate accounting methodologies and policies.

After making enquiries, the Directors consider it appropriate to adopt the going concern basis in preparing these interim financial statements.

2. ACCOUNTING POLICIES

The accounting policies adopted in the preparation of the interim financial statements are consistent with those followed in the preparation of the 2017 consolidated financial statements except in relation to the treatment of the Fixed Rate Reset Perpetual Restricted Tier 1 Write Down Notes ('Tier 1 Notes') which were issued during the period. These Tier 1 Notes meet the definition of equity for accounting purposes and accordingly are shown as a separate category within equity at the proceeds of issue. The coupons on the instruments are recognised as distributions on the date of payment and are charged directly to the statement of consolidated changes in equity.

3. SEGMENTAL ANALYSIS

The Group defines and presents operating segments based on the information which is provided to the Board, and therefore segmental information in this note is presented on a different basis from profit or loss in the interim financial statements.

An operating segment is a component of the Group that engages in business activities from which it may earn revenues and incur expenses, including revenues and expenses relating to transactions with other components of the Group.

For management purposes, the Group is organised into business units based on their products and services. For reporting purposes, business units are aggregated where they share similar economic characteristics including the nature of products and services, types of customers and the nature of the regulatory environment. As such, Phoenix Life is considered to be the Group's only reportable segment, which includes all of the operating insurance entities and management services entities in the Group.

Segment performance is evaluated based on profit or loss which, in certain respects, is presented differently from profit or loss in the consolidated financial statements. Revenues or expenses that are not directly attributable to a particular segment are allocated between segments where there is a reasonable basis for doing so. Group financing (including finance costs) and owners' taxes are managed on a Group basis and are not allocated to individual operating segments.

Inter-segment transactions are set on an arm's length basis in a manner similar to transactions with third parties. Segment results include those transfers between business segments which are then eliminated on consolidation.

Predominantly all revenues from external customers are sourced in the UK. No revenue transaction with a single customer external to the Group amounts to greater than 10% of the Group's revenue.

Predominantly all non-current assets are located in the UK. There are no differences between the measurement of the assets and liabilities reflected in the primary statements and that reported for the segments.

3.1 SEGMENTAL RESULT

Half year ended 30 June 2018

1 Fee income of £103 million includes annual management charges of £92 million.

Half year ended 30 June 2017

1 Fee income of £63 million includes annual management charges of £55 million.

Year ended 31 December 2017

1 Fee income of £173 million includes annual management charges of £131 million.

3.2 RECONCILIATION OF OPERATING PROFIT/(LOSS) ITEMS TO THE SEGMENTAL RESULT

Half year ended 30 June 2018

Other non-operating items include:

- a provision for £68 million in respect of a commitment to reduce ongoing and exit charges for non-workplace pension products;

- costs of £17 million associated with the acquisition of Standard Life Assurance;

- a net benefit of £52 million reflecting anticipated cost savings associated with process improvements and continued investment in the digitalisation of the customer journey; and

- net other one-off items totalling a cost of £4 million.

Half year ended 30 June 2017

Other non-operating items include:

- a premium of £25 million paid on redemption of £178 million principal of the senior unsecured bond;

- costs of £18 million in respect of integration and restructuring of the Abbey Life and AXA Wealth businesses;

- a provision of £28 million in respect of a commitment to the reduction of ongoing charges for workplace pension products;

- an £8 million increase in the provision for costs of claims relating to historic creditor insurance underwritten by a subsidiary of the Group, PA(GI) Limited; and

- net other one-off items totalling a cost of £3 million, including corporate project costs.

Year ended 31 December 2017

Other non-operating items include:

- a premium of £25 million paid on redemption of £178 million principal of the senior unsecured bond;

- costs of £21 million in respect of integration and restructuring of the Abbey Life and AXA Wealth businesses;

- costs of £20 million in respect of short-term expense overruns arising from the AXA Wealth businesses prior to completion of the implementation of the Phoenix operating model;

- a provision of £27 million in respect of a commitment to the reduction of ongoing charges for workplace pension products;

- a £21 million increase in the provision for costs for claims relating to historic creditor insurance underwritten by a subsidiary of the Group, PA (GI) Limited, offset by the recognition of recoveries due or received from third parties under contractual arrangements of £39 million; and

- net other one-off items totalling a cost of £5 million, including corporate project costs.

4. INVESTMENT RETURN VARIANCES AND ECONOMIC ASSUMPTION CHANGES

The long-term nature of much of the Group's operations means that, for internal performance management, the effects of short-term economic volatility are treated as non-operating items. The Group focuses instead on an operating profit measure that incorporates an expected return on investments supporting its long-term business. The methodology for the determination of the expected investment return is explained below together with an analysis of investment return variances and economic assumption changes recognised outside of operating profit.

4.1 CALCULATION OF THE LONG-TERM INVESTMENT RETURN

The expected return on investments for both owner and policyholder funds is based on opening economic assumptions applied to the funds under management at the beginning of the reporting period. Expected investment return assumptions are derived actively, based on market yields on risk-free fixed interest assets at the start of each financial year, and reflects hedging arrangements the Group has in place.

The long-term risk-free rate used as a basis for deriving the long-term investment return is set by reference to the swap curve at the 15 year duration plus 10bps at the start of the year. A risk premium of 350bps is added to the risk-free yield for equities (30 June 2017 and 31 December 2017: 350bps), 250bps for properties (30 June 2017 and 31 December 2017: 250bps), 150bps for other fixed interest assets (30 June 2017 and 31 December 2017: 150bps) and 50bps for gilts (30 June 2017 and 31 December 2017: 50bps).

The principal assumptions underlying the calculation of the long-term investment return are:

4.2 LIFE ASSURANCE BUSINESS

Operating profit for life assurance business is based on expected investment returns on financial investments backing owners' and policyholder funds over the reporting period, with consistent allowance for the corresponding expected movements in liabilities. Operating profit includes the effect of variance in experience for non-economic items, for example mortality, persistency and expenses, and the effect of changes in non-economic assumptions. Changes due to economic items, for example market value movements and interest rate changes, which give rise to variances between actual and expected investment returns, and the impact of changes in economic assumptions on liabilities, are disclosed separately outside operating profit.

The movement in liabilities included in operating profit reflects both the change in liabilities due to the expected return on investments and the impact of experience variances and assumption changes for non-economic items.

The effect of differences between actual and expected economic experience on liabilities, and changes to economic assumptions used to value liabilities, are taken outside operating profit. For many types of long-term business, including unit-linked and with-profit funds, movements in asset values are offset by corresponding changes in liabilities, limiting the net impact on profit. For other long-term business the profit impact of economic volatility depends on the degree of matching of assets and liabilities, and exposure to financial options and guarantees.

The investment variances and economic assumption changes excluded from the long-term business operating profit are as follows:

Positive investment return variances and economic assumption changes on long-term business of £27 million in the first half of 2018 (half year ended 30 June 2017: negative £56 million; year ended 31 December 2017: negative £6 million) primarily arise due to the positive impact of strategic asset allocation activities, including investment in higher yielding illiquid assets. This has been partially offset by the adverse impact of rises in yields and equity market gains during the period. The Group's exposure to equity movements arising from future profits in relation to with-profit bonuses and unit-linked charges is hedged to benefit the regulatory capital position. The impact of equity market movements on the value of the hedging instruments is reflected in the IFRS results, but the corresponding change in the value of future profits is not.

4.3 OWNERS' FUNDS

For non-long-term business including owners' funds, the total investment income, including fair value gains, is analysed between a calculated longer-term return and short-term fluctuations.

The variances excluded from operating profit in relation to owners' funds are as follows:

The adverse variance on owners' funds of subsidiary undertakings of £136 million (30 June 2017: negative £77 million; 31 December 2017: negative £87 million) includes the impact of fair value losses on derivatives held in the shareholder funds of the life companies to protect the Group's regulatory capital position as a result of an increase in yields in the period together with swap decay costs. It also reflects the impact of derivative instruments entered into on announcement of the Standard Life Assurance transaction in order to hedge shareholder exposures to equity risk from that business.

Following equity market gains in the period, unrealised losses of £83 million have been recognised on these instruments, together with option premiums of £22 million.

5. TAX (credit)/charge

5.1 CURRENT PERIOD TAX (credit)/charge