Phoenix Group is poised to re­turn to the ac­qui­si­tion trail. Hold to see its progress

The closed life funds in­te­gra­tor is in bullish mood and has a range of growth op­tions, says James Ash­ton

The Sunday Telegraph - Money & Business - - Business -

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.

Cor­rec­tion: on Dec 31 we in­cor­rectly stated the share price of Young & Co at £13.45. The cor­rect price of non-vot­ing shares (ticker: YNGN) was then £11.05.

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