With all the hype around technology stocks, and AI (artificial intelligence) in particular, the UK life insurance sector is probably a long way down the list of investors’ priorities right now, yet for value players as well as income seekers there is plenty to like.

On one hand, the unrecognised value of the cash flows from their existing businesses could far outweigh their current valuations meaning substantial ‘hidden’ potential, while on the other dividend yields across the sector are on a par with inflation.

We think Phoenix (PHNX) is the stand-out, and believe the FTSE 100 player’s shares should be trading substantially ahead of their current level.

Berenberg analyst Thomas Bateman describes Phoenix, the UK’s largest consolidator of long-term savings and retirement plans, as ‘a cash machine’.

The current in-force book of policies generates £500 million per year in surplus capital, which the firm ploughs back into the ever-growing UK pension market acquiring back books from other insurers such as 2022’s deal to buy Sun Life UK.

At the end of December 2022, Phoenix reported in-force long-term free cash flow of £12.1 billion, which represents all the cash available
to shareholders if the group decided to stop making acquisitions and simply let its existing policies run down.

By discounting all this future cash flow back to today Bateman estimates the net present value of the group is £8.7 billion, which he considers ‘extremely conservative’ but still compares very favourably with the firm’s current market value of around £5.3 billion.

‘Long-term free cash flow is a good proxy for the value of the company, and has become an even more important KPI (key performance indicator) since the management remuneration is tied to it; the target implies growth between 20% and 27% over the next three years,’ says the analyst.

UK pensions are a structurally growing market, and Phoenix is exposed to positive trends in both DB (defined benefit) and DC (defined contribution) schemes.

Meanwhile, there are still plenty of opportunities to keep reinvesting excess capital at attractive margins.

‘Phoenix continues to search the UK heritage market for potential back-book acquisitions – the acquisition of Sun Life UK, which closed in April, represented £10 billion of AUM (assets under management), and there is still £470 billion in this market,’ observes Bateman.

Finally, thanks to its prodigious cash flow generation and £1.7 billion of ‘surplus’ solvency, Phoenix pays out more than 50p per share in annual dividends meaning at the current price it yields almost exactly 10% making it ideal for income-seekers as well as value investors.

‹ Previous2023-07-13Next ›