The Phoenix Group [PHNX] share price rose last week on the announcement that it was acquiring Sun Life UK for £248m and increasing its dividend by 2.5%. Shares in the insurance company have bounced back 12.9% in the month to 11 August, and are up 7.2% year to date.
The deal was funded from existing cash resources. Phoenix Group, which announces its half-year results on Monday 15 August, believes that the newly acquired closed book UK life insurance company will deliver roughly £470m in long-term cash generation, 30% of which will be in the next three years. Sun Life UK has around 480,000 policies and £10bn in assets under administration, making it a considerable addition to Phoenix’s operations.
Within the UK insurance industry, the Phoenix Group share price has performed relatively well. In comparison, Admiral [ADM] shares have slumped 27% so far in 2022, while Direct Line [DLG] was down 15.2% over the same period. The industry has been hit by concerns that insurer’s investments will be harmed by increased market volatility.
Alongside announcing the acquisition, Phoenix reported a 2.5% increase in the group’s dividend to take effect from and including the 2022 final dividend. This sits in line with the company’s plans to sustainably grow its dividend over the next few years.
Acquisitions key to business strategy
The recent acquisition is not a surprising move from the insurer. Phoenix Group has had a strong history of buying heritage pension and maturing life insurance plans that are no longer open to business. It migrates the plans towards its own platform to cut costs, improve efficiency and extract value.
The company believes that there is an estimated £480bn in assets in UK heritage insurance plans to be captured from M&As. It aims to continue to buy and integrate assets into existing operations and release value to shareholders through steady dividend rises.
Phoenix has acknowledged that relying on future M&As to drive inorganic growth provides its own set of risks. If management is unable to secure future acquisitions, the group would see its income considerably dented.
The group surprised investors in March by announcing better-than-expected full-year results for 2021. It saw operating profit rise to £1.23bn from £1.2bn in 2020 and reported a record cash generation of £1.72bn, which exceeded targets of between £1.5bn and £1.6bn for the year. In line with its existing plans, Phoenix announced a dividend increase of 3% alongside the strong 2021 results.
Analysts optimistic as Phoenix Group searches for growth
Looking forward, Phoenix Group has the challenge of balancing its strong heritage business with its open book operations, which offer greater organic growth. Heritage insurance plans typically become less profitable as fixed operational costs remain in place until the last contract expires. As the plans are more valuable the younger they are, the company is required to make new acquisitions to keep the division profitable
In the past few years, the group has been trying to expand its open book business to inject more organic growth into the company. In 2018, it bought Standard Life for £3.2bn in a major move to boost its presence in the open insurance market. In the 2021 results, the company revealed that the organic growth from its open business offset the runoff from its heritage business for the first time. Phoenix thanked the Standard Life brand for providing this strong sustainable and organic growth.
The heritage insurance strategy remains at the centre of Phoenix’s future operations as has been highlighted by the recent acquisition of Sun Life UK. However, by developing its open book operations, Phoenix Group has pumped more organic and diversified growth into the business.
Analysts share an optimistic outlook on Phoenix Group shares. Out of 18 analysts polled for the Financial Times, one rated the shares a ‘buy’, nine believed they would ‘outperform’ and the remaining eight gave the shares a ‘hold’ rating. Out of 17 analysts offering 12-month price targets, the median was 750p, which is an 11.5% premium on its 11 August closing price of 672.6p.
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