Phoenix Holdings keeps up the cash focus

“We continue to deliver cash, resilience and growth,” trumpets Phoenix Group (PHNX) chief executive Andy Briggs at the half-year mark.

As ever with Phoenix, it’s useful to get a handle on each of these concepts. But it’s particularly important after a period in which the FTSE 100 group swung to a £1.4bn net operating cash outflow, shareholder equity contracted 13.4 per cent, and gross written premiums hit £2.14bn, versus £2.46bn in the first half of 2020.

Let’s start with ‘cash’, which for Phoenix is confusingly less about the cash flow statement – which must reconcile cash to both policyholders and shareholders – and more to do with the implications for investors’ dividends.

Cash generation, which the life insurer defines as cash and cash equivalents remitted by its subsidiaries to the group, is its preferred proxy for operating profits, as it is measured against its ability to “cover dividends, debt interest, debt repayments and other items”.

This doubled to £872m in the six months to June, meaning a £1.5bn to £1.6bn guidance range for the year looks beatable. Citing extra value generated from the 2020 acquisition of rival ReAssure, the board was happy enough to pass on the benefit via an increase in the half-year dividend.

There are also plenty of ways to measure ‘resilience’ beyond the statutory balance sheet, which tends to jump around. Though the group’s capital surplus dipped to £5.1bn in the period, this was thanks to a £200m debt repayment in March and left both leverage and the group’s coverage ratio well within comfort ranges.

Phoenix, which recently called on fellow asset managers to up their role in the battle against climate change, is also keen to be associated with a kind of ESG-themed resilience. A pledge to eliminate carbon from its investment portfolio – which following the sale of various businesses has declined to £304bn – sounds laudable, but like many ‘net zero’ commitments relies on the actions of counterparties, in this case sovereign and corporate bond issuers.

A deadline of 2050 for asset juggling is also well beyond the shelf life of many of its existing policies, though investors can at least point to tangible signs of long-term business ‘growth’, following a £1bn buy-in with its own pension scheme.

RBC, which expects adjusted earnings of 108p per share this year, sees fillips in M&A prospects stemming from European insurers keen to offload their legacy UK life books, and the approval of a new internal model – which would lower capital requirements. Improved long-term cash generation could follow. Buy.

Last IC View: Buy, 746p, 8 Mar 2021