Next top-up - life insurance - Phoenix?

[ZipserSir]

Hi, I have some funds available for a top up and I am lightest in life insurance.

I already hold a small amount of Legal & General and Aviva. Since I bought, both share prices have gone up and their yields remained attractive.

LGEN was a cutter back in 2008, which automatically takes a share out of contention when I'm looking for opportunities (I managed to overlook this when I bought them first time around). But looking at it now, almost ten years on, is that still a reason not to consider?

AV. cut back in 2012 and then again in 2013 - should we be letting bygones be bygones?

Phoenix is the biggest company in the sector by value with an unblemished record, paying out a flavorsome 6.6% yield, and there seems to be some good things being said about this company's outlook.

I'd not heard of it before, because its a small cap, but some people around here like Chesnara.

I'm planning to buy PHNX, but welcome any points of view - in favour or against.

Thank you, ZipserSir

[idpickering]

Hi, I have some funds available for a top up and I am lightest in life insurance.

I already hold a small amount of Legal & General and Aviva. Since I bought, both share prices have gone up and their yields remained attractive.

LGEN was a cutter back in 2008, which automatically takes a share out of contention when I'm looking for opportunities (I managed to overlook this when I bought them first time around). But looking at it now, almost ten years on, is that still a reason not to consider?

AV. cut back in 2012 and then again in 2013 - should we be letting bygones be bygones?

Phoenix is the biggest company in the sector by value with an unblemished record, paying out a flavorsome 6.6% yield, and there seems to be some good things being said about this company's outlook.

I'd not heard of it before, because its a small cap, but some people around here like Chesnara.

I'm planning to buy PHNX, but welcome any points of view - in favour or against.

Thank you, ZipserSir

Hi ZipserSir,

On looking at Phoenix Group via digitallook here; http://www.digitallook.com/equity/Phoen ... oldings_DI , I see that the dividend cover is inadequate at 0.8, and a pe of 20. I don't think that the seemingly forward yield of 6.8% is either sustainable, nor worth the risk. I hold Legal and General along with Standard LIfe. I have no issues with either of them, and the later may be topped up in the future with LGEN already at average HYP capital value weighting. Personally I don't think PHNX are worth the risk. It's up to you, and I wish you well whatever you decide.

Regards,

Ian.

[monabri]

I think I'd be happier with LGEN followed by AV. Other than stamp collecting, is there any benefit in adding a 3rd share?

[monabri]

With further revisions to the Ogden rate (see link) it would further benefit companies like LGEN & Aviva which have an element of car insurance in their business.

http://www.thisismoney.co.uk/money/bill ... -fall.html

[tjh290633]

I would have thought that two insurers was plenty. Having said that, I have three, AV., LGEN and ADM in my 37 holdings. Phoenix isn't one that has come to mind, and LGEN was my last recruit.

How big is your portfolio, ZipserSir?

[Dod1010]

If we are discussing three insurers, I think Aviva is the weakest and it is accident prone.

Legal & General is I think the strongest and to dismiss because it cut its dividend 9 years ago does not make sense to me. It cut its dividend at the final for 2008 more as reaction to the financial crisis than any problem with its own business and in any case had more than made up the losses by the final for 2011 and since then it has more than doubled.

Phoenix seems fine to me and its low cover is probably because it is a zombie insurer with fairly predictable profits and cash flows.

However DYOR as always. Rules are fine up to a point but I do not think they make a lot of sense in investing.

Dod

[Wasron]

I'm planning to buy PHNX, but welcome any points of view - in favour or against.

As Dod says Phoenix is a zombie insurer, meaning it's closed to new business and making it's money from the legacy books of business it has bought. Revenue is therefore from charges levied on older pensions, which are likely to be higher than those of companies open to new business like Standard Life and Legal & General. This is because they don't really care how they're viewed by customers or financial advisers, as they're not looking to attract new customers with a good service or low charges.

This simplifies their business model, but does essentially mean your dividend is being paid by all the people with a pension stuck with Phoenix. I say stuck because Phoenix have no interest in lowering the exit charges they're able to charge if you want to transfer your pension to a provider with more flexibility and lower charges.

In the longer term they must find younger books of business to buy, or they'll run out of customers, but over time those customers will become far less profitable as the impact of the charging structure of stakeholder pensions filters through the customer mix.

I've never been comfortable with this model, so have never invested

Regards, Wasron

[Hypster]

Of the three I'd choose Legal and General. A dividend cut 9 years ago wouldn't bother me.

[Dod1010]

As Dod says Phoenix is a zombie insurer, meaning it's closed to new business and making it's money from the legacy books of business it has bought. Revenue is therefore from charges levied on older pensions, which are likely to be higher than those of companies open to new business like Standard Life and Legal & General. This is because they don't really care how they're viewed by customers or financial advisers, as they're not looking to attract new customers with a good service or low charges.

This simplifies their business model, but does essentially mean your dividend is being paid by all the people with a pension stuck with Phoenix. I say stuck because Phoenix have no interest in lowering the exit charges they're able to charge if you want to transfer your pension to a provider with more flexibility and lower charges.

In the longer term they must find younger books of business to buy, or they'll run out of customers, but over time those customers will become far less profitable as the impact of the charging structure of stakeholder pensions filters through the customer mix.

I've never been comfortable with this model, so have never invested

Regards, Wasron

This interpretation of the business model of a zombie insurer is not quite true. The bulk of the profits of a zombie insurer come from the capital released when policies mature. By the nature of life insurance, the insurer has to hold significant amounts of excess capital against the long term liabilities being guaranteed by them and in the case of a 'live' insurer, as policies mature there are other policies being written for which the capital being released is required. In the case of a zombie this is not the case. it is, in insurance parlance, a closed book and so the capital held becomes surplus to requirements and can flow straight into shareholder's bank accounts in the form of dividends. Hence the emphasis in their accounts of free cash; that is their raison d'etre. There are plenty of other closed books around and they should be able to repeat this pattern for some time to come without running out of business.

Of course Wasron's comments are to some extent true, but it would be inviting unwelcome poking around by the regulator to offer poor service and excessive charging. In fact, the books of business held by Phoenix are mostly old style contracts from companies which were never competitive in the marketplace, probably why the companies concerned went out of business in the first place. Some at least were the 'industrial' life model, that is the 'man from the Pru' type of monthly premium collection. In other words, high costs were inherited by Phoenix and of course they have no interest in reducing those.

For anyone seeking a high yield, Phoenix and Chesnara seem to me to be good investments.

Dod

[Arborbridge]

Wasron's point was exactly why I ignored Phoenix for many years. I was interested in a growing business model which could carry on for decades churning out products and profits. It seemed to me the zombie model was far from attractive. However, I took the plunge accepting the argument that there is a place for a high income which will not grow so much, but is relatively stable over the rest of my probable lifetime requirement. I'm trusting that the qui pro quo of lack of growth is less volatility type shocks.

However, the elephant in the room with all stocks these days seems to be government interference plus the "B" word. Some pressure group jumping up and shouting "unfair" seems to upset the apple cart, and has become almost normal. Anything could happen, and pensioners seem to be entering a period of open warfare with at least the labour party, if not with both parties. I do not like the landscape, but I anchor on the old saying "things are never as bad as they seem - neither will they be quite as good as they seemed"

Arb.

[77ss]

...
I already hold a small amount of Legal & General and Aviva. Since I bought, both share prices have gone up and their yields remained attractive.

LGEN was a cutter back in 2008, which automatically takes a share out of contention when I'm looking for opportunities (I managed to overlook this when I bought them first time around). But looking at it now, almost ten years on, is that still a reason not to consider?

....
I'm planning to buy PHNX, but welcome any points of view - in favour or against.

Thank you, ZipserSir

I wouldn't hold more than two life insurers. Which two is another matter. I have LGEN and PHNX.

I think you should certainly revisit your thinking on LGEN. Yes, it cut the dividend during the financial crisis, but look at its recovery! Both in terms of share price and dividend.

[Arborbridge]

LGEN was a cutter back in 2008, which automatically takes a share out of contention when I'm looking for opportunities

I think a usual criterion for HYP would be five years or rising dividend, or at least with no setbacks. LGEN qualifies on this account, doesn't it? - so I would not be so harsh. If you need more than that, maybe just check out the UK Dividend Aristocrat list of shares for candidates (UKDV), but I think you might be editing out some good shares unecessarily.

[Alaric]

I say stuck because Phoenix have no interest in lowering the exit charges they're able to charge if you want to transfer your pension to a provider with more flexibility and lower charges.

On unit linked business, the model is at least in part a custody model, so similar to Hargreaves and others. It looks after pension money in exchange for (high fees and charges. There's a sting in the tail, that the contracts may have been worded so as to only promise to return the full asset value at a retirement age. If also they use excess fees to add to the client's investment, they can anticipate future earnings by funding the notional assets at below 100%. The other side of that coin is paying less than 100% on early transfer. Hence the problem if intervention requires exit charges to be removed.

[Gengulphus]

LGEN was a cutter back in 2008, which automatically takes a share out of contention when I'm looking for opportunities (I managed to overlook this when I bought them first time around). But looking at it now, almost ten years on, is that still a reason not to consider?

IMHO no, it isn't such a reason. It happened during the 2008 credit crunch, when it became a lot more difficult to borrow and lots of companies cut their dividends - either because they were actually in trouble (which would be a bad thing for HYPers) or because they were being cautious in case things got worse (which I at least don't mind much - I'd much rather a company did that than that it keeps paying out and risks really getting into trouble say 1-3 years later). In such circumstances, it's rather hard to tell at the time which of those reasons it is for any particular company, but one can judge it with hindsight. And we've got plenty of that now, and it says that the company grew its dividend quickly after the cut, getting back above the 2007 level in 2011 and now at more than twice that level and still increasing rapidly. I'd say that that's a pretty clear indication that the company was never in any actual trouble - it's just that its management was cautious enough to steer well clear of it!

AV. cut back in 2012 and then again in 2013 - should we be letting bygones be bygones?

First, I would say that Aviva did cut twice - but in 2009 and 2012, not 2012 and 2013, and indeed it also appears to have cut in 2002 (*). The reason is that when counting dividend cuts, one really needs to take into account the fact that any one decision to cut a company's dividends typically actually results in two reduced dividend payments - an interim and a final (or four for a quarterly payer, or just one for the very rare yearly payers). The decision can come at any time, and so it's just as possible that it will affect one year's final and the next year's interim as that it will affect the interim and final of the same year - and when it does affect one year's final and the next year's interim, each of the two years' totals are likely to drop. I.e. one actual cut can end up affecting either just one year's total or two years' totals.

That happened for Legal & General's 2008 cut, which caused its 2008 final to drop to 2.05p (from 4.1p in 2007) and its 2009 interim to drop to 1.11p (from 2.01p in 2008). As a result, its yearly totals dropped from 5.97p in 2007 to 4.06p in 2008 to 3.84p in 2009. It didn't happen for Aviva's 2009 cut, which caused drops to both its 2009 interim and final, but did for the company's 2012 cut, which caused reductions in its 2012 final (to 9p from 16p for 2011) and its 2013 interim (to 5.6p from 10p for 2012), and so caused yearly total reductions from 26p for 2011 to 19p for 2012 to 15p for 2013.

Secondly, about letting bygones be bygones for Aviva, possibly - but I regard it as a much less clear case than for Legal & General. That's because the cut is more recent and being recovered from more slowly (Legal & General was back to above the pre-cut dividend level in 2011, three years after the cut in 2008, while Aviva hasn't yet managed it but looks reasonably likely to once this year's full results come out next year, five years after the cut in 2012). And also because it's a 'serial offender': it has repeatedly cut and each time so far, it has failed to get above the pre-cut dividend before it cut again. I.e. there a lot of bygones to let go of!

Nevertheless, if one goes along with HYP1's "five year dividend record shows four increases between years" test about dividend history, Aviva passed that for final dividends with its 2016 final results earlier this year and has recently done so for interim dividends as well. It hasn't yet got it for total dividends, due to the cut having been split between years, but will do so with its 2017 final results as long as it increases the final. Whether one regards that as passing the test overall depends on your exact interpretation of the test. But it's clearly close to passing - and of course no-one is actually obliged to follow that test precisely: they can look for longer or shorter histories, they can choose whether to look for increasing or non-decreasing dividend histories (i.e. does a static dividend cause the test to fail?), they can choose a test with three outcomes ("pass", "fail" and "needs a closer look") rather than just "pass" and "fail", etc - or indeed they can choose not to look at dividend history at all.

So I'm not ruling Aviva out entirely. But its dividend history, and especially the fact that after each of the 2002 and 2009 cuts, it failed to grow the dividend back up to its previous high before cutting again, does make me a lot more suspicious of it than of Legal & General...

(*) I haven't tried to work out precise details of that cut - the merger that formed the company makes working them out a bit difficult - but certainly its 2002 annual report says it cut its dividend to 23p from 38p in 2001.

Phoenix is the biggest company in the sector by value with an unblemished record, paying out a flavorsome 6.6% yield, and there seems to be some good things being said about this company's outlook.
...
I'm planning to buy PHNX, but welcome any points of view - in favour or against.

I don't really know much about the company - my previous looks at it have come to an end quite quickly when I saw its "Cayman Island-registered
company domiciled in Jersey" status. I should say that that's not a clear point against the company, just personal taste - investing in foreign companies suits some HYPers, not others, and I'm one of those it doesn't suit. While preparing this post, though, I have noticed the following paragraph on page 9 of its 2016 annual report:

"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."

So I may well be getting more interested, but not quite yet!

One thing I did notice while looking at it this time is that its recent dividend growth has been pretty slow: held in 2014 and 2015, up 3.02% in 2016 according to http://www.dividenddata.co.uk/dividend- ... ?epic=PHNX (*). I would regard the held dividends as a blemish on its dividend record: companies generally want to announce an increase in their dividend each year, and so deciding not to do so indicates that they feel they're on the verge of overpaying - or even slightly over it but hoping inflation and/or company growth will whittle the overpayment down before any real damage has been done. They are increasing the dividend again, and the increase in this year's interim is big enough to suggest that they're feeling quite comfortable about doing so - but they're probably still close enough to the edge that a serious worsening in market conditions could push them into halting increases or even cutting quite quickly. (As a possibly-parallel example from history, take a look at Lloyds in the 2000s. They held their dividend for each of 2003-2006, then started increasing it again modestly for 2007 and the 2008 interim. And then the credit crunch hit and it turned out that they no longer had anything to spare for dividends... That was a very serious worsening in market conditions, of course, but such things can happen!)

Not saying that it's a major blemish, by the way: a couple of years of held dividends is almost as minor a dividend-record blemish as I can think of. But I wouldn't describe Phoenix's record as unblemished!

(*) After adjusting for the rights issue just under a year ago. Such adjustments are fair IMHO: a rights issue splits off some of the value of the pre-rights-issue shares into the rights rather than the post-rights-issue shares, and the shareholder gets that value (give or take market price fluctuations) one way or another, whether because the rights act as part-payment for the new shares if they're taken up, or by selling them or receiving a lapsed-rights payment if they're not. So basically either the value of a part of your old holding moves into your new shares and you should count an appropriate proportion of the dividends from those new shares as coming from the old holding, or you've effectively sold that part of your old holding and you shouldn't be surprised that a corresponding part of its income disappears!

Gengulphus

[escalader]

I estimate that less than 20% of Phoenix Group business is Pensions:

GROSS POLICYHOLDER LIABILITIES BY PRODUCT TYPE
A With-profit 41%
B Unit-linked 42%
C Non-profit - annuities 16%
D Non-profit - protection and other1%

https://www.google.co.uk/search?q=https ... MelD4N4IPU

For the last 4 or 5 years they have been paying dividends from reserves due to negative cash flow and last year made a loss of £100m - 0.34 per share

https://www.google.co.uk/search?q=https ... Pb9onCTz0I

Escalader

[Alaric]

For the last 4 or 5 years they have been paying dividends from reserves due to negative cash flow and last year made a loss of £100m - 0.34 per share

That paints a rather different position. It's a Company paying high dividends in order, presumably, to boost its share price. That usually comes to a sticky end, when the market finally decides to price against the profits rather than the dividend, coupled with running out of money to finance the dividend.

The other possible story is that it is actually making profits, but regulatory requirements are dictating that it has to increase its internal solvency capital, so reporting of profits in the statutory accounts is deferred.

[monabri]

ZipserSir said: "I already hold a small amount of Legal & General and Aviva".

LGEN offers over 6% at the moment as does PHNK (6.8%) so there is not a lot in it in terms of yield for what I think is an increased risk.

(for what it's worth - I looked at the Wall Street Journal and the FT pages and I would definitely be topping up LGEN in preference to adding PHNX).

There was "too much red" on the PHNX page of the WSJ (and you can see the negative 34p eps figure referred to by Escalader).

http://quotes.wsj.com/UK/XLON/PHNX/financials

I'd suggest a browse of both the FT and WSJ websites and then come to a conclusion on the relative merits of a top up of LGEN v addition of PHNX.

[OZYU]

I take a more positive view.

PHNX has been putting its house in order, and let us not forget that there have been two very attractive recent acquisitions, one if which is yet to make a full impact.
When it comes to cash flow, from recent accounts, and looking forward, we have:

TARGET CASH FLOWS
The five-year cumulative target cash flow for 2016 to 2020 is £2.8 billion, of which £1.0 billion to £1.2 billion is expected to be achieved in 2017 and 2018.
The resilience of the cash generation target is demonstrated by the following stress testing(1):
1 January 2016 to 31 December 2020.............................£bn
Base case five-year target...............................................2.8
Following a 20% fall in equity markets.................................2.8
Following a 15% fall in property values ...............................2.8
Following a 55bps interest rates rise(2)...............................2.9
Following a 80bps interest rates fall(2)...............................2.6
Following credit spread widening(3)...................................2.6
Following 6% decrease in annuitant mortality rates(4).............2.5
Following 10% increase in assurance mortality rates................2.7
Following a 10% change in lapse rates(5)..............................2.7
1 Assumes stress occurs on 30 June 2017.
2 Assumes recalculation of transitionals (subject to PRA approval).
3 Credit stress equivalent to an average 150bps spread widening across ratings, 10% of which is due to defaults/downgrades.
4 Equivalent of six months increase in longevity applied to the annuity portfolio.
5 Assumes most onerous impact of a 10% increase/decrease in lapse rates across different product groups.
expected cash flows after 2020
The expected cash generation post 2020 is expected to be £4.5 billion. This illustrative cash generation does not assume any additional management actions after 2020., my bold

Therefore I hold. Would I buy it, no because I have a full holding, and since I prefer to dive in when they are throwing the stuff away cheap to get both capital and divi uplift potential, having joined the Chairman in putting in a packet when there was a flap on these zombies induced by the FCA/Chancellor three and a half years ago.

But it does still look reasonably tasty for income.

Ozyu

PS Now at long last this Eurotunnel train is loading! So off to drive on decent emptier roads for a change.

[Horsey]

If you can handle non-UK listed companies and are looking for a 'value' candidate with a good yield, maybe check out Aegon. Listed in Amsterdam, healthy yield, mostly active in the EU and US.

[vrdiver]

I thought I'd look at the dividend CAGR of insurance companies I've had an interest in (figures include specials):

Company	  1 year CAGR	5 Year CAGR	10 Year CAGR
Admiral          0.45          5.67	9.2
Aviva           12.2          -1.36    -2.44
Chesnara         3.2           3.0	2.8
DLG*            15.1          13.6	
LGEN             5.1          16.94	9.94
Phoenix*        -7.0           0.85	
Prudential     -11.0          11.94	9.97
Standard Life    8.1           7.61	8.26

Based on the above, if buying for a growing income stream, I'd be interested in Legal and General, Direct Line Group or Standard life. Admiral might also be worth looking into.


*Not the full 5 years, but close