Phoenix ready to rise

To begin, it’s important to get a good idea of the Phoenix’s sector and the rationale behind its roll-up strategy. Although it writes some new insurance products, its principal focus is buying up closed life assurance funds in Europe. Sellers include insurers keen to free up capital and improve the efficiency of their balance sheets, or pension funds keen to shift the complex asset liability management to a third party. Phoenix believes the size of this market across the UK, Germany and Ireland is around £580bn of assets under management.

Its share of the market has grown dramatically. Since the beginning of 2016, when Solvency II rules came in to harmonise and boost European insurers’ capital buffers, Phoenix has bought the life insurance businesses of Abbey Life, AXA and – most notably – Standard Life Aberdeen, which it acquired in 2018 for £3bn. While integration of the latter is still ongoing, so far it has been an unqualified success. A year after the transaction was announced, Phoenix raised its cost synergy guidance from £720m to £1.2bn, in turn helping it to generate £707m of cash in 2019, above the upper end of its target range.

Investors will be hoping it can soon repeat the trick. Last month, Phoenix made its biggest move to date when it unveiled plans to buy its largest rival, ReAssure, for £1.2bn in cash and £2bn in new shares, representing a 28 per cent stake in the enlarged group to be divvied up between the sellers, Swiss Re and MS&AD Insurance. The deal adds 4.1m life policies, cementing Phoenix’s position as Europe’s largest life and pensions consolidator, with £329bn of assets under administration.

The market’s reaction was slightly muted. In some ways this is understandable. After all, there was a failed attempt to list ReAssure in 2019 that encountered a lack of investor interest. The purchase price represents 91 per cent of ReAssure’s pro-forma funds, which is a slight increase on the multiples of other deals, although the scale of cost savings offers some good justification. Meanwhile, ReAssure is still integrating two of its own purchases, adding to the considerable challenge of combining the businesses.

Because the cash component will be partly funded by debt, Phoenix’s leverage ratio will also rise to the top of its 25 to 30 per cent target range, while its solvency ratio will decline to 148 per cent. This, together with the front-loaded nature of ReAssure’s future cash flows, helps to explain Deutsche Bank’s assertion that the 3 per cent proposed dividend increase feels “a little ungenerous”, although paying out less to shareholders means acquisition coffers will be refilled more quickly. 

However, in light of Phoenix's track record, we believe the positives outweigh these concerns. After accounting for £50m of transaction costs, Phoenix expects £800m of one-off and recurring synergies (a quarter of the purchase price), and a £7bn increase in the future cash-flow profile, including £2.7bn by 2024. Then there are the benefits of scale: technology and know-how, profile within capital markets, lower financing costs, and a bigger seat at the regulatory table.