Phoenix's cash generation takes Solvency II hit

Bolstering its balance sheet, as well as the impact of widening credit spreads, meant the group's embedded value, a measure of current and expected profits, fell by £134m to £2.5bn. This would have been worse but for management actions - in layman's terms, reducing costs, releasing capital and accelerating cash flows - which contributed £205m towards this total. That means the group has come in a year ahead of schedule on its target to generate £400m in this way between 2014 and 2016.

The group's ability to make acquisitions is crucial in the long term to growing its cash generation and supporting the dividend. Phoenix recently lost out on its bid for Guardian Financial Services to Swiss Re, leaving investors hungry for the next deal. The insurance industry's pre-occupation with readying itself for Solvency II has suppressed merger and acquisition activity within the sector, says finance director James McConville. However, he says "that fog's beginning to lift" and anticipates acquisitions picking up during the next couple of years.

The group reduced its leverage (gross debt as a proportion of gross embedded value) to 37.8 per cent, from 39.3 per cent the previous year, after repaying £190m of its bank debts. As a result Phoenix was awarded an investment grade credit rating by Fitch Ratings agency in August. This triggered a 50 basis point margin reduction on the group's outstanding bank facility. Management says gaining the credit rating will also broaden the group's access to the debt capital markets in future.

Analysts at JP Morgan Cazenove expect adjusted EPS of 54p this year, down from 89p in 2015.