UK Edition
Questor: Phoenix Group is poised to return to the acquisition trail
The doomsday prediction that thousands of City workers would move out of London because of Brexit has yet to translate into actions that are anything like as devastating to the Square Mile. Those warnings could still come true, but because aspects of financial regulation and passporting rights are still up in the air, banking bosses are hopeful they can keep many more staff in London than first thought.
Meanwhile, 2018 is the year that at least one financial services group will consolidate its position on home turf. Phoenix Group, the closed life funds integrator, is putting in place a UK-registered holding company as it scraps its Cayman Islands registration and Jersey domicile. It helps that Phoenix is focused exclusively on the UK and so has little concern over cross-border trade flows. The change will have a minor impact on City jobs numbers – although Phoenix hopes it will increase its appeal to investors, and simplify its corporate structure.
Here is evidence that a company that spends much of its time dealing with challenges from the past also has an eye on the future.
Phoenix has had a premium London listing and membership of the FTSE 250 since 2010, but is far from a household name despite being the largest company of its kind. Instead of writing new life insurance policies it buys up legacy books of business with the aim of running them better. Some of its 6.1m customers and £75bn of assets under management date back to great old industry names such as Pearl Assurance and Swiss Life.
For a company that needs to be fed with deals, Phoenix went for many years without doing any until acquiring French insurer Axa’s UK life business for £375m in 2016. Like buses, Abbey Life came along a few months later, costing £935m from Deutsche Bank. Not surprisingly, last year was far less dramatic but the City expects Phoenix to return to the takeover trail in 2018.
The value of scale is clear to see by looking back at the firm’s half-year figures from August. Phoenix was in bullish mood then, saying it was ahead of target for realising acquisition benefits.
The Axa acquisition had thrown off £282m of cash, well ahead of the £250m targeted within six months of completion. Abbey was bought for 23pc below book value and because some of the business is unit-linked it requires less capital than annuities and so could boost Phoenix’s Solvency II ratio – the amount of capital that insurers must hold to guard against insolvency risk.
The group’s Solvency II surplus rose to £1.7bn compared to £1.3bn at the previous year-end. In addition, it stuck by its forecast to generate £2.8bn of cash between 2016 and 2020.
The question is what comes next. Last summer Fitch Ratings upgraded its stance on Phoenix’s two main operating companies to A+ with a stable outlook, trimming the interest margin on its unused £900m revolving credit facility. Analysts at Bank of America Merrill Lynch point out that the company has no debt calls until 2021, which increases flexibility.
Together with around £500m of cash, chief executive Clive Bannister is already pointing towards further acquisition activity. JP Morgan Cazenove sees opportunities “in the near future”, which would boost cash flows and dividends.
There are several routes open to Bannister. The trend for insurers to reduce their risk and capital constraints may see some of the remaining £300bn of UK closed life funds come his way.
There has been chatter that Phoenix is well-placed to pick up some of Standard Life’s life and pensions business now the insurer is fashioning a new future having merged with Aberdeen Asset Management.
A relationship already exists because Standard Life Investments manages some Phoenix funds. There is also the option of taking on more bulk annuities associated with a company’s final salary pension scheme.
There are high barriers to entry for anyone approaching this market and the shares offer an attractive 6.5pc yield.
But Phoenix might need to do something eye-catching to get the stock moving after an unremarkable year in which it has traded in a fairly tight band at a slight discount to book value. Hold for now.