Changes in assumptions about how long people live help Phoenix profits soar

It is a £7.25bn FTSE 100 giant that touches the lives of 14 million customers.

So it is remarkable, in many ways, that the life company Phoenix Group is not better known among the general public.

That may be about to change and for a couple of reasons.

Firstly, following the completion of last year’s £3.2bn acquisition of ReAssure, the UK arm of Swiss reinsurer Swiss Re, Phoenix is now the UK’s largest long term savings and retirement business.

Secondly, while the company has traditionally focused on its so-called ‘heritage’ business – managing life policies that are no longer being actively marketed to customers – it is increasingly focusing on so-called ‘open’ policies to new customers, as shown by last month’s £60m acquisition of the Standard Life brand.

It means Phoenix now owns the entire life and pensions business of Standard Life whose previous owner, Standard Life Aberdeen, has reshaped itself as a pure fund management business.

Today, partly reflecting the benefits of the ReAssure deal, Phoenix reported record full year operating profits of £1.2bn, up from £810m in 2019, with new business up 59% to £766m.

That figure was also flattered by £190m resulting from changes in assumptions about how long customers will live.

This is a crucial factor for life companies in how they run their business as they have to cover the risk that the customers whose pensions they pay live longer than expected.

During recent years, life companies have been reassessing their previous assumptions, with the effect that many have realised they did not need to set aside quite so much cash as before.

So today’s results also saw Phoenix announce a £0.2bn release of reserves reflecting previous over-estimates of how long its customers will live.

It stressed that none of these changes in assumptions were due to the pandemic.

While many companies have cut or suspended dividend payments during the last year, reflecting a need to conserve cash during the onslaught of COVID-19, Phoenix has raised its full year dividend by 3%.

Andy Briggs, who became chief executive just before the UK entered lockdown last year, said Phoenix was now the 27th biggest dividend payer in the Footsie.

That pay-out is made possible by prodigious cash generation.

Phoenix, whose heritage business manages policies previously sold by household names such as Britannic, Pearl, Abbey Life, Scottish Provident, National Provident and Scottish Mutual, generated £2.4bn in cash in 2019 and 2020.

The company today increased its targets for cash flow on a one-year and three-year basis.

Rakesh Thakrar, the chief financial officer, said Phoenix now expected to generate £4.4bn in cash during the next three years.

He said much of this would be recycled into further growth but also pointed out the extent to which the pay-out is underpinned.

Most big companies aim for their dividend pay-out in any given year to be at least twice covered by their earnings in that year – but Phoenix’s pay-out this year was more than three-and-a-half times covered.

In terms of where the company goes from here, Mr Briggs said today that Phoenix had three key priorities, the first of which was making the best use of its existing business to improve cash generation and customer outcomes.

He said the second was deepening relationships with customers, which he said reflected an increase in “demand from people for guidance to consolidate the journey to and through retirement, to support the right choices through the savings life cycle”.

The third priority, he added, was to win new customers.

He said Phoenix would be helped in this regard by strong growth in demand for workplace pensions and also by continued demand for so-called ‘bulk purchase annuity’ (BPA) transactions – where an employer pays a life insurance company to take on the assets and liabilities of its company pension scheme.

Mr Briggs said Phoenix would also continue to look at buying books of life policies where the previous life company had closed the door to new customers, something which it did to notable affect under his predecessor, Clive Bannister.

He added: “We continue to see M&A (mergers and acquisitions) as a core driver of our growth.

“There remains a huge opportunity for us to explore.

“The UK heritage market alone is a £440bn opportunity.”

Mr Briggs, who said Phoenix could have up to £2bn at its disposal for acquisitions, said he would also consider buying ‘open’ books if they met the company’s criteria.

However, while Phoenix’s credentials as a reliable generator of dividends to shareholders are well-established, there are also challenges ahead.

Undoubtedly the biggest of these will be accelerating growth in the ‘open’ business.

Phoenix has a strong track record in consolidating closed books of life policies and integrating those onto its IT platforms – but, culturally, it is less well-versed at marketing life policies to new customers.

Another challenge will be ensuring the integrity of the company’s IT platforms.

With more than 14 million customer relationships to manage, any systems glitches would pose a reputational threat, with Phoenix’s name already occasionally cropping up in the trouble-shooter columns of personal finance pages.

Mr Briggs insisted today that Phoenix was currently meeting or exceeding all customer satisfaction targets, suggesting that this reflected a decision to keep all of the company’s call centres open, when others had closed theirs.

He added: “I often see commentary which suggests heritage providers offer the worst customer service.

“That is definitely not the case at Phoenix – all of our key customer satisfaction KPIs (key performance indicators) are at 90% or higher.”

More straightforward will be seeking to bolster the company’s credentials as a purpose-led organisation.

Mr Briggs spoke today about “investing to help Britain build back better and greener” but at least as important, surely, is its role in helping millions of Britons through the minefield of retirement planning – a minefield made more treacherous by Rishi Sunak’s move, in last week’s budget, to freeze the lifetime amount that may be saved in a pension.

The financial services sector has a patchy reputation, to say the least, in how it serves its customers.

Phoenix, given the reach of its businesses and its customer relationships, has a real opportunity to reshape that reputation.

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