I have held Phoenix shares in my SIPP for a long time and needless to say sitting on unrealised losses. I thought the Sept results were positive albeit pension accounting is difficult to understand.
What am I missing the brand names are well known ?
Before I post this I should say Phoenix is my largest shareholding, so I may be slightly biased, however I'm going to try to be balanced.
The September results were mostly positive, although there are some points that on some traditional metrics don't look good. The main issue appears to be that Phoenix's leveraging has increased, to a degree where it's higher than their rivals. In a financial climate where debt may be considered an issue, this will potentially spook the market. In fact that appears to be the reason that JP Morgan have downgraded Phoenix, they believe it will produce capital and growth risks. Given the complexity of pension accounting, as you allude to, broker upgrades and downgrades probably affect insurance companies more than some less opaque institutions.
From my perspective the fear of debt is very much being overplayed, I do have some knowledge of how annuities are costed and how they're funded. Admittedly I do not know how Phoenix manage their back books, having never been associated with them, but most companies that work with bulk annuities have similar ways of managing risks. Generally bonds, or derivatives of similar financial instruments, are used to provide the funds for payment of pensions. In the current climate the value of those bonds will have decreased, due to inflation, this will reduce the book value of those investments. On the flipside the amount being paid out should still be covered by the bond investment, so the actual value of the investment is fairly irrelevant so long as it covers liabilities. Unless Phoenix become a forced seller of their assets then their cut of profits should remain similar, perhaps even better taking into account the general restriction of pension increases to 2.5% or 5% (depending on the type of Pension Increase Order for the schemes).
If inflation reduces then the bonds should recover, and their value on the books should also recover as a result. Those capped increases will also be locked into the pension, meaning the value of future cash flows will be lower than anticipated, which should produce a surplus in the back book. If inflation does, however, stick then the debt of Phoenix could be downgraded and that would make it more expensive to borrow to fund new buyouts - this is the primary risk. I don't believe there's any immediate danger, and given the number of buys from Directors recently I don't believe they do either.
If we believe the director reports then the dividend will be increasing 5% each year, I don't believe the market can ignore this forever. There is a growth company hiding behind the back book, and the profits from this should provide future cashflow, at the moment I don't even believe the market is pricing in the value of just the closed business.
As with any life company you should also be aware that you're also relying on the actuaries producing sound figures for longevity, these are fairly standard across the industry again, but they are adapted based on life factors for each scheme. In reality these usually balance out, and most of the companies that may have been somewhat liberal with those figures are no longer in the market.
