RE: Times comment9 Apr 2024 09:49
From The Times part 1. ‘The insurer Phoenix Holdings has the third highest dividend yield in the FTSE 100 at 9.5 per cent, behind only Vodafone and British American Tobacco. It is little wonder that it has come to be a favourite among retail investors, now a fixture in brokers’ most popular buys. The company spent £530 million on shareholder payouts last year alone, which represents around a tenth of its market value. This is a huge sum, and investors would be right to approach with caution.
Phoenix manages the pensions, savings and investments of about 12 million people in Britain and Europe. It has four businesses: the first is “pensions and savings”, which manages defined contribution workplace pension schemes. The second is “retirement solutions”, which is its defined benefit pension scheme and annuity division. Then there is “Europe and other”, which covers operations in Ireland and Germany. Finally, there is “with-profits”, which is the management of legacy pensions and savings policies. This is closed to new business.
Phoenix’s model is based on acquiring old portfolios of life policies, then optimising the cost and capital requirements for running them. The closed portfolios shed cash as their policies mature, so they naturally shrink. This has historically meant that business needs to be replaced through mergers and acquisitions. Phoenix has been particularly successful at this, and is most well-known for its £3.3 billion purchase of Standard Life Aberdeen’s insurance division in 2018. At the end of last year Phoenix completed the Part VII transfer of this business, the final step in its integration, which boosted its cash generation by £400 million It is by this metric that the market judges whether Phoenix’s dividend is sustainable. Happily for investors, cash generation has been very high. It surpassed £2 billion last year, and management recently updated its target range to between £1.4 billion and £1.5 billion in 2024, and a cumulative £4.4 billion from 2024 to 2026. Phoenix’s Solvency II coverage ratio, which is the key gauge of an insurer’s balance sheet, also stands at a healthy 176 per cent. Meanwhile, cash turned out by new business was £1.5 billion in 2023, an increase from £1.2 billion the year before.
Overall then, the dividend looks well covered. There has been some concern around Phoenix’s balance sheet, as leverage is relatively high compared with peers. But last month the company revealed a plan to reduce leverage by at least £500 million, and has set out a target for a Solvency II ratio under 30 per cent by the end of 2026, down from its current 36 per cent.
Investors should note that there is some risk around the financial regulator’s new “consumer duty” framework, which could impact heritage policies in its portfolio, as some older clients may find they do not have good transparency on how much they are paying in management fees on their retirement savings.’
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