Phoenix continues to rise

The vagaries of investment asset returns explained the big rise in reported pre-tax losses at life insurer Phoenix (PHNX) – IFRS, unfortunately, seems designed to make reported numbers for life insurers very difficult to interpret as insurers must mark-to-market their asset reserves. However, at the operating level the performance was solid from Phoenix and income investors will also relish the steady rise in the dividends seen in these results. The company’s proven ability to generate cash also meant it could easily fund the acquisition of Sun Life of Canada UK.  

While not exposed to the immediate issues related to rising inflation – this tends to be offset by rising interest rate returns – Phoenix must hedge its balance sheet against rising credit spreads and yields. In fact, the balance sheet is over-hedged because it does not recognise specific requirement related to solvency II regulations, which is why the company booked higher investment losses of £1.07bn, compared with £824mn last time.  

However, when the impact of these investment movements is stripped out, operating profits were £20mn lower at £507mn compared with last year. The lower return was down to higher costs as the company invests in its asset management arm, in addition to changes in assumptions at the with-profits life business that meant lower bonuses and the likelihood of later retirements. It is worth pointing out that this segment lies within Phoenix’s so-called Heritage business, and it is now a closed book for new life insurance policies and is being run-off instead. The Open business, which sells retirement products through the SunLife brand, is where most of Phoenix’s profit growth is generated and the company is investing to expand it. Profits here actually doubled to £77mn as the company ramped up spending in the division.   

As ever with life insurers, investors must assess the direction of organic capital generation, which is key to maintaining dividends and the company’s basic solvency. In this respect, Phoenix passed the test, having delivered £950mn of organic capital during the half. This means that it will achieve its full-year prediction of between £1.3bn-£1.4bn organic cash generation. With the core business throwing off cash in this quantity, Phoenix was able to entirely self-fund the £248mn acquisition of Sun Life of Canada UK, the forecast cash flow from which is expected to fund the 2.5 per cent inorganic increase in the dividend.

These were solid results from Phoenix, that are reflected in the steady consensus price/earnings ratio of 9.4 for 2022, which isn’t expensive for a quality business in this sector. Buy.

Last IC View: Buy, 685p, 11 Aug 2021