Member Info for Meconopsis

“I believe the hearing is 1st -3rd April”

Just a note of caution…

From the Supreme Court’s web site…

‘Judgments are delivered orally by Justices in the courtroom. They are not usually delivered on the same day of the hearing but SOME TIME afterwards.’ (My emphasis.)

Six months is not untypical for a judgement.

“Shocking retracement”

You need to look at the movement in the context of the overall market.

As I type, LGEN is +3.26% against PHNX, AV. and MNG being -0.7% to -1.4% - that’s a 4%+ improvement on the market.

“… we may have some clarification in tomorrow's results…”

Are we expecting a trading update tomorrow? I can’t see anything on their financial calendar…

“Meconopis, I would imagine that holding "until maturity UNLESS a better option comes along" would generally only apply to the extent that the pensioner and their beneficiary are both deceased.”

As a simplification yes, but in truth no.

The sale of annuities relies on population morbidity rather than individual morbidity. If you’re 75 then you might have a 50% chance of living another 10 years. So if you were investing for yourself then you’d have to budget and invest for living past 85.

But you can say, with reasonable confidence, that 50% of 75 year olds will be dead within 10 years. So, if you’re providing an annuity to 1,000 75 year olds then (broadly) 500 will be dead before they’re 85. Which makes investing FAR simpler.

In broad terms, the totality of Gilts held need to be matched to the probabilised liabilities until death - so there the Life company will expect X people (and associated liability) to die in 2048; y in 2049 and z in 2050.

It might be the case that market inefficiency means that two substitutable Gilts provide an opportunity to swap horses - one for the other - to make a marginal gain. So, there might be a 50 year Gilt maturing in 2050; a 30 year Gilt maturing in 2050 and a 20 year Gilt maturing in 2050. As long as the sum of the probabilised liabilities expiring in 2050 are met then a Life company might shuffle between holdings to make marginal profits.

BUT they will only do it on the basis that holding the Gilt they are buying to maturity makes sense.

I hope that helps.

‘ “Secondly, PHX tends to hold such gilts to maturity, so intervening losses an/or profits arising on mark-to-market valuations generally never crystallise. "

i am always interested to know if that is always the case ....’

A better way of putting this is that this business is run in such a way that they assume they will hold Gilts/Treasuries and such until maturity UNLESS a better option comes along.

The interested reader would benefit from watching the Q&A section of the last LGEN investor day where they hint that it’s not a pure buy and hold strategy.

HOWEVER, from an investor point of view, the important thing is the purchase of the Gilt made sense at the time of purchasing on the assumption that it would be held to maturity. So, any selling of Gilts represents an upside opportunity rather than being a forced sale, realising a loss if values are down.

Porsche1946 - lovely to see you back - merry Christmas.

I’ve asked Santa to send you some common sense.

Cheapsharesboy - another alternative is just a change in sentiment around the way life insurers are valued. Current P/E ratings (against adjusted earnings) are cyclically very low. They got hit by the collapse of Silicon Valley Bank and haven’t recovered since.

Guitarsolo - the CSM can, and is, revalued. You can see this in the reporting of the various insurers. There is both down- and upside potential.

“… i would prefer a dividend no higher than 8% and a rising sp, when the sp is supressed for a longer period and the yield get's to a high level like 10%…”

First of all, you’re welcome to send me the difference between 10% and 8% if it makes you feel more happy.

“…you have to question how long it's sustainable for…”

Another way of looking at it is - IF the dividend is sustainable - then a suppressed share price is unsustainable.

The last results showed money going into the “future store of profits” faster than it is being drawn down - so I’m not concerned about sustainability of the dividend for as long as that’s the case.

“ Amazon have an animated show starting on 10 December, called Secret Levels…I've long suspected any announcement on the Amazon deal would be after this airs.”

Much respect for a very good call on timing.

The lack of share price movement suggests that the announcement was an open “secret” and is already priced in.

Good to see that I’ve effectively ended all discussion of PHNX in a single post 😂😂😂

“Personally I would prefer the cash to be used in increasing the dividend.”

Remember that any dividend or buy back is a return of excess capital. That is, capital that the company can’t see how to deploy more productively.

The issue with using one-off capital surpluses to increase dividends is the one-off nature of the surpluses - you can’t sustain the increase in dividend. Increasing and then decreasing a dividend is a sure-fire way of trashing the share price as no one knows how to value the shares.

(Unless you’re GAW, which I also hold, in which case it’s alone of the quirks that the shareholders seem to enjoy.)

A company *could* do a special dividend, but it’s a bit like an aircraft jettisoning fuel - the money evaporates into the atmosphere. Specials tend to cause a temporary spike in share price as people buy in for the special and then a big fat crash as everyone exits after the special is paid.

Even *if* the Board considers the excess capital to be ongoing, committing to an increased dividend ties their hands in the use of that capital. It prevents them doing what Aviva is currently doing and using the weakness of a competitor as a takeover opportunity.

The market likes consistent, predictable dividends.

Done well, a buyback is a leveraging mechanism - the company buys £1 of value for 80p of price - or gets £1.25 for every £1 spent. That’s a heck of a return. It increases EPS and that increase - all things being equal - is permanent.

As I’ve posted before, the CEO has asked shareholders for permission to buy back up to 10% of the shares and will look like a numpty if they only buy back 1-2% this year.

I’d be very surprised at anything less than around £1bn buyback over the year beginning in March.

I’d also be very surprised if the CEO doesn’t have a share price target (or proxy) as part of his balanced score card. If you look at the last presentations from the Nigel Wilson era then you’ll find a slide that shows what L&G’s share price would be if valued like (IIRC) Vanguard. There is clearly frustration at Board level at the share price - not least because it makes the company vulnerable to a takeover.

But that’s pure speculation on my part.

“Worth noting that directors bonuses are frequently linked to EPS, making buybacks a particularly attractive option for their own self interest!”

I know that this is the generally held view, but the reality is that the remuneration committees that set EPS targets are also aware of the buybacks and their impact on EPS.

No. It’s against the law. They can be only paid out if retained profit.

https://letmegooglethat.com/?q=can+dividends+be+paid+out+of+debt

“I am guessing the ISA Wrapper is a kind of retirement vehicle., but a quick google search, says that new accounts are closed, and only available to existing accounts.“

They are a tax efficient general savings wrapper that shields you from taxes on capital gains and income.

You can invest a maximum of £20k a year in shares/funds or savings.

Still very much alive and available.

Gary59 - that payout ratio is calculated based on IFRS earnings, which is a misleading indicator because it includes “losses” based on the mark to market valuation of assets that will be probably never sold.

Unfortunately, financial boards report that number (and dividend cover).

If you want a true view of earnings, dividend cover and payout ratio then you need to base them on the company’s Adjusted Operating Profit.

The perversity of the accounting standards is that should make things easier to compare, but does so by assuming all companies are in the worst possible position and would have to sell all of their assets “today”.

So, instead, companies create their own “alternative performance measures”, which makes it harder to compare as they all take their own view of the definition of those measures.

“Porsche's comments…but he may have a point…”

In the interests of balance…

Bond prices generally should have very little impact on life insurers as they generally hold bonds to maturity. In very simplified terms, you make a 20 year commitment to someone and support that commitment by buying an asset that is matched to the 20 year commitment. Bonds are one way to match that commitment. As are infrastructure investment, buying companies with inflation-linked returns (like air traffic control), shopping centres, office blocks and student accommodation.

And/but the one place where bond valuations can feed through is in the calculation of Solvency II ratio. The ratio is calculated as the ratio of Solvency II Own Funds to the Solvency Capital Requirement (SCR). This currently sits at 168%.

“Solvency II Own Funds” can include bonds - so movement in bond values can feed through to the own funds.

I’d encourage you to read about this at your leisure, but the important thing to understand is that the “Solvency” Capital Ratio has nothing to do with solvency in the sense of bankruptcy. The SCR is the capital required for a company to keep paying out in 99.5% of a range of “worst case” scenarios (including huge drops in bond and asset values).

So, a potential drop in bond values is already baked into the SCR.

Those worried about solvency in the bankruptcy sense are better looking at the Minimum Capital Requirement (MCR), which is way lower.

“Yes there was an increase in cash generation & operating profit shown at the last results but PHNX still isn’t covering the dividend payments with current earnings or free cash flow. Happy to be proved wrong by those more intelligent than myself.”

Where are you getting your free cash flow number Gary?

I’m looking at https://www.thephoenixgroup.com/media/dtwf3rhy/phoenix-group-holdings-interim-financial-report-2024.pdf

Page 6 is our friend here. This shows

H1 2024 closing cash position of £1,027m vs H1 2023 of £696m.

2023 includes Sun Life acquisition costs £250m and 2024 includes net debt repayment of £253m - so are broadly equivalent.

If you look on the table then you’ll see that the only material difference is use of cash is a reduction of circa £160m on Business Process Automation (BPA).

Another good check is the moment in the CSM.

Life insurers now need to put future years’ profits from business already written into the CSM (Contractual Service Margin). Every year, the company draws down that year’s already booked profit and adds money for the profit attributable to future years.

What matters is whether the CSM is going up (profits coming in faster than being drawn down) or going down (drawing down faster than being replenished).

CSM is up 10% (page 10).

Few companies have the certainty of cash flows that life insurers have. Phoenix has even more certainty because of its current skew to closed book business.

“… if these have to mark to market soon Phnx becomes insolvent…”

@Porsche1946 - that just shows your complete financial illiteracy. Throw in two unrelated accounting terms and seek to cause alarm.

IFRS profit (which is based on a “liquidate today” value of the company) has absolutely nothing to do with solvency (is the cash coming in enough to cover the cash going out).

It’s the net cash flow that matters. Not a transitory paper accounting measure.

“ I thought it was a 5% increase for the final dividend this year”

It is.

Completely correct Lending.

And yet I go back to my point that you don’t ask for permission to buy back 10% and only buy back 1.5%.

1.5% makes it look like you haven’t a Scooby when you asked for 10%. If they land at closer to 7% then it looks more like judgement.

They’ve only announced £200m so far. They haven’t stated that as the only shares they intend to buy back.

As I say, I wouldn’t be surprised if the announcement of completion of the Cala disposal wasn’t accompanied by a buy back using a the first payment and associated solvency capital release.

I could, of course, be completely wrong…