Phoenix Group Final Results

[blobby]

Phoenix reported today. Their business is to manage closed life funds.

The numbers by my interpretation are:

Share price: 790p

Shares: 393 million (market cap 3,100 million pounds)

Dividend yield: 50.2/790 = 6.35% (5% increase when adjusting for a rights issue)

Group operating profit of £351 million (2015: £324 million)

p/e 3100/324 = 9.6

Net assets per share = I can’t quite work this out. The results say “Shareholder Capital Coverage Ratio of 170%” which sounds OK and it looks like there are a lot of assets per share.

The outlook seems steady and positive.

[OLTB]

Is Phoenix Group a model that will mean its assets will eventually disappear? It is in the business of managing the assets (investments and pensions) of closed life companies, which means when the existing policy holders either retire or pass away, these assets would be transferred to annuities/drawdown plans or their estates outside of Phoenix Group. Granted, they have billions under management, but if the vast majority of policies can't have new money invested into them (I have seen that some policies allow top-ups) then eventually their fixed customer base will reduce to zero. It may take decades for this to happen, but for younger HYP investors with decades to go before retiring, maybe a consideration? There may of course be a future stream of life companies that haven't yet transferred their investment and pension assets to companies such as Phoenix in which case, the future may look rosier, but we can't possibly know that. Just thought I'd ask the question.

Cheers, OLTB.

[Dod1010]

First, Phoenix actually published its Annual Report on its website yesterday and it makes good reading.

Secondly, the Shareholder Capital Coverage Ratio does not have much to do with assets per share. It is defined in the Glossary in page 219/220 and it says that it is the shareholder view of the Group solvency position. It is calculated as the ratio of Eligible Own Funds to SCR with various adjustments.

SCR is Solvency Capital Requirements and that is calculated so that the likelihood of a loss exceeding SCR is less than 0.5% over one year, broadly (they say) a once in 200 years event. Aren't you glad you asked? Anyway as far as I can see the fact that it is moving higher must be a good thing.

The other question raised by OLTB has been raised in relation to Phoenix and its stablemate, Chesnara before. I think if they do nothing the broad answer is yes, but I also think that it will take decades to run off what they currently have under management and secondly there must be billions in other funds which will become available for these companies in the future. They will certainly be going long enough for me (I hold both) and I think in general they are likely to have a life at least as long as the tobacco companies, very probably longer. Phoenix I think is just getting into its stride and is a little behind Chesnara in getting its act together.

As always DYOR.

Dod

[blobby]

First, Phoenix actually published its Annual Report on its website yesterday and it makes good reading.

Thanks Dod, I've now found the annual report. However I'm still stumped on finding a NAV for the company. It seems that I don't understand the business as much as I thought I did.

[DYOR]

I also hold Phoenix. And I don't really understand why it yields such a high dividend, or put another way, trades at such a relatively low PE.

Like Dod, I was also quite pleased with yesterday's annual results, as well as the further dividend hike of 5% signalled for the next interim.

I read in yesterday's Evening Standard the fact Phoenix is incorporated in Cayman and domiciled in Jersey puts some (institutional) investors off. However, the group is in the process of creating a UK holding company and reorganising its legal entity structure, earmarked to be in place either June 2017 or 2018 (can't recall which now)

[Gengulphus]

I read in yesterday's Evening Standard the fact Phoenix is incorporated in Cayman and domiciled in Jersey puts some (institutional) investors off. However, the group is in the process of creating a UK holding company and reorganising its legal entity structure, earmarked to be in place either June 2017 or 2018 (can't recall which now)

Quote from the annual report http://www.thephoenixgroup.com/~/media/Files/P/Phoenix-Group-v3/Attachments/pdf/Phoenix_AR16_Bookmarked.pdf:

"... Furthermore, the bond provides the Group with additional Solvency II capital, assisting the rationalisation of the Group’s holding company structure.

The current holding company structure was formed at the time of the Group’s restructuring in 2009, with Phoenix Group Holdings being a Cayman Island-registered company domiciled in Jersey. This structure is complex for our stakeholders and imposes additional burdens on our internal governance processes. As part of the ongoing Group simplification process, Phoenix intends to put in place a new UK-registered holding company for the Group in 2018. This will provide Phoenix with a streamlined and cost efficient internal governance structure as well as greater clarity for the Group’s stakeholders, including shareholders, debt investors and regulators.

Gengulphus

[ReformedCharacter]

Good results, I'm glad to have taken up the rights issue. Thanks Dod for mentioning Phoenix previously on the other board!

RC

[77ss]

Is Phoenix Group a model that will mean its assets will eventually disappear? It is in the business of managing the assets (investments and pensions) of closed life companies, which means when the existing policy holders either retire or pass away, these assets would be transferred to annuities/drawdown plans or their estates outside of Phoenix Group. Granted, they have billions under management, but if the vast majority of policies can't have new money invested into them (I have seen that some policies allow top-ups) then eventually their fixed customer base will reduce to zero. It may take decades for this to happen, but for younger HYP investors with decades to go before retiring, maybe a consideration? There may of course be a future stream of life companies that haven't yet transferred their investment and pension assets to companies such as Phoenix in which case, the future may look rosier, but we can't possibly know that. Just thought I'd ask the question.

Cheers, OLTB.

From yesterday's report:

There are over £300 billion of assets held in closed life funds in the UK (excluding Phoenix).

A pretty sizeable potential 'future stream'! And that's only looking at the UK.

[Arborbridge]

I rejected PHNX out of hand when I first heard of it. What? Invest in an industry of dying policies - it certainly doesn't inspire me. But then, as Dod puts it, there is probably enough of an income stream to last an old codger like me for long enough, so why care?
There remains a doubt over whether income will increase, but one can be pretty sure it won't collapse like other hig yielders. There must also be a question posed about why the yield has not dropped if investors are (as we are told) scrambling to find good yield. With all the research which goes on, one would expect this yield to drop quite rapidly: maybe the market is demanding compensation for the limitations bound up with its future operation.

I bought PHNX for my wife's HYP and may well do so in my own HYP when other issues are resolved and cash available.


Arb.

[Dod1010]

I think the only possible fly in the ointment is regulation. Although they are now bound by the new solvency regime, there was an issue not so long ago by one of the regulators about an investigation into their management fees was it?

I doubt really that many people understand more than the broad principles (any more than I do) of what they are doing and do not see much prospect for growth., They may be right but meanwhile I am enjoying the yield.

Dod

[Alaric]

Is Phoenix Group a model that will mean its assets will eventually disappear?

The answer to that is yes, but there's always likely to be markets for organisations willing to take on the management of failing financial operations or where the existing owners want to divest.

Page 101 of the Report and Accounts shows that money in ("Premiums") was 999 (£ million) and money out ("Policyholder Claims") was 3726. To put that in context, funds held for policyholders as "Insurance Contract Liabilities" were 46,686 and what they describe as "Financial Liabilities" was 27,332.

Their model aims to extract value from obsolete forms of financial contract. To the extent that depends on levels of fees now regarded as rip off, that can be vulnerable to regulatory intervention.

[Dod1010]

With respect, I do not think Alaric is entirely accurate in his comments. Neither Phoenix nor Chesnara is 'taking on the management of failing financial operations'. They are maybe outdated contracts but certainly not failing in any financial sense and his comments give entirely the wrong impression. I have no doubt that their contracts have in some cases decades to run to natural expiry and in the meanwhile the insurers are required to hold significant solvency margins (margins well in excess of that contractually required) and that is I think where most of the substantial cash being generated is coming from when these are no longer required, not inflated fees.

Dod

[Alaric]

Neither Phoenix nor Chesnara is 'taking on the management of failing financial operations'.

Much of their business comes from Companies that have attempted and failed to build a presence in the UK market. I'd slightly lost track of Abbey Life, that Phoenix have recently taken over. This used to be a major presence in the direct sale, unit linked sector, but was closed to new business by Lloyds perhaps twenty years ago. It didn't appear to have been sold by directly by Lloyds to Phoenix though. As regards fees, Abbey had contracts with what were called "capital units". These had enhanced annual fees but they were run with the actual matching assets discounted by the anticipated future fees. This meant that for younger holders, the transfer value could be 50% or less of the face value. That type of contract was commonplace in the days when commissions on a pension plan could be equivalent to the first nine monthly premiums.

[Arborbridge]

Alaric's comments make it all sound a bit more worrying. Do we have another fees scandal brewing? Is there anything immoral going on here taking advantage of vulnerable people? I don't know - I'm just asking what might hit the fan.

One puzzling thing about this and similar ideas for making a bob or two, is how can companies like Phoenix make money - on a handsome level it seems - where the original companies couldn't? Something doesn't feel right there: are we in the "if seems to good to be true, it probably is" sector?

[Alaric]

. Do we have another fees scandal brewing?

It's not a new story
http://www.thisismoney.co.uk/money/pens ... onger.html

https://www.theguardian.com/money/2016/ ... d-over-55s

One puzzling thing about this and similar ideas for making a bob or two, is how can companies like Phoenix make money - on a handsome level it seems - where the original companies couldn't?

There are several angles. Economies of scale in administration is one of them. Release of solvency capital through scale being another. You might suspect being closed to new business can mean taking a harder line on concessions and soft deals to advisers. On the With Profit side, there would be no need to retain a reputation for maintaining bonuses. Perhaps they've built up a more competent management team, skilled at balancing risks.

[Dod1010]

But none of these were 'failing financial operations' By and large they were companies where the costs of sales were too high and where the investment returns were mediocre with the result that the financial outcomes were not good. Abbey Life was just one example, Phoenix itself was usually regarded as second tier as well, a step or three below the likes of Scottish Widows, Clerical Medical and Legal & General.

They gave up selling new business and were it not for the long term nature of the contracts would have gone out of business. As it was they closed their life funds to new business and set about honouring the terms of their outstanding contracts, often selling the whole business to a larger organisation. They found it all a bit of a bore after a while and so was born Chesnara and Phoenix as specialist life insurers to run off portfolios.

The fees issue was brought up by one of the financial regulators two or three years ago but little has been heard since.

There is nothing immoral about what they are doing and although the policyholders are not necessarily getting the best deal in the market that is not the fault of Phoenix or Chesnara; the original company was poor value in most cases and the fault really lies with the climate at the time the original policy was sold. Usually a very high initial commission to the intermediary was required to attract business and guess who was ultimately paying for that?

Dod

[Gengulphus]

I think the only possible fly in the ointment is regulation. ...

There is at least one other possible fly in the ointment: poorer investment performance and/or greater increases in longevity than their actuaries have assumed. And of course, those are exactly the situations in which a HYPer is most likely to want their HYP to perform relatively well...

Not saying "don't invest in life insurers", more "beware of investing too much in life insurers". And "beware of rose-tinted spectacles": the belief that a company has only one way it can go wrong is only slightly less rose-tinted than the belief that it has none at all...

Gengulphus

[Alaric]

There is at least one other possible fly in the ointment: poorer investment performance and/or greater increases in longevity than their actuaries have assumed.

I got the impression from the Report and Accounts that they don't actively seek annuity business. They write it when they have to in order to honour Guaranteed Annuity Rate contracts and when they take it on as part of absorbing another fund. They hedge the risks with reinsurance and also by writing new business (Sun Life over 50 plan) of a type where longevity is good for their profits.

Much of the rest of the business is unitised or with profits where investment risk is wholly or partly passed on to policyholders.

[Dod1010]

Thanks Gen. You are right of course although they seem to be pretty well covered in terms of reserving and after the Equitable Life debacle, they are likely to be very wary of giving very generous guarantees. Anyway life companies in general are derisking their operations where ever they can. and like banks have much tighter regulations than before, see Solvency II.

But being complacent is a very dangerous thing to do in any form of investing and I had no intention of conveying that.

Dod

[jackdaww]

[quote="DYOR"] ............ I don't really understand why it yields such a high dividend, or put another way, trades at such a relatively low PE.
/quote]

===========================

maybe its a free lunch.................

i hope so , hold it , and chesnara , and aviva (which contains another zombie friends life).