On Friday, Standard Life Aberdeen (SLA) found a way to turn the lemons from a broken down deal with Lloyds Banking Group into lemonade, announcing a strategic partnership with insurer Phoenix Group that will see it part ways with its insurance arm.
Phoenix will continue to provide and administer insurance products to SLA’s retail platforms, comprising largely Sipps and offshore bonds.
The timing is curious, suggesting potentially that the mega manager was keeping its options open all along, courting two serious candidates – Lloyds insurance arm, Scottish Widows, and Phoenix – over the past six to 12 months to suss out which would inherit the vast sum of its insurance unit.
However, the group’s co-chief executive, Martin Gilbert, stressed: “We haven’t done this transaction to solve the competition issues [with Lloyds]. We have a very good relationship with Lloyds, it was more out of sadness that we reached where we were.”
The fallout with Lloyds cost the firm its biggest client but the group’s asset management arm, Aberdeen Standard Investments, looks after £48bn of assets for Phoenix, which is no small chunk of change either.
SLA bosses Gilbert and Keith Skeoch said the match-up between their £158bn investment group and the FTSE 250 insurance provider “represents excellent value for our shareholders, including a comprehensive and mutually beneficial strategic relationship entered into with Phoenix Group, a longstanding partner of the firm”.
Gilbert even took to the internet, posting on social media site, Linkedin, about the “busy day ahead” and the firm’s completed “transformation to a fee based capital-lite investment company”.
Commentators had a generally positive outlook on the spinoff.
Jason Hollands, managing director at Tilney Group, said the decision to nix its insurance arm was “a strategically significant development for Standard Life Aberdeen that will firmly reposition it as a highly cash-generative asset-lite investment business with a recurrent revenue model that is geared to market returns”.
A ‘compelling’ deal
However, the union between the two firms seemed like an even better deal for Phoenix, which explains why its shares took off on Friday morning and were up 7.5% at 817p shortly after markets opened.
Though SLA’s shares opened close to 5% higher, pushing above the 400p mark, they were back down at 390p in the afternoon.
“I think it is a good deal for Phoenix, as shown by the share price reaction,” says Peter Sleep, senior investment manager and passives specialist at Seven Investment Management.
“It frees up some spending money for SLA, but it remains to be seen what they will do with it. All of the new shares being issued by Phoenix are being taken by SLA – so if you like it is a form of vendor finance. SLA are giving Phoenix some of the money to buy the business of off them. There are not too many buyers like Phoenix, and they have some very experienced staff, so I am sure it is a better deal for them than it is SLA.”
On Monday 26 February at 4pm, Phoenix’s share price was down slightly by 2.4% – hitting 796p. At the same time, SLA’s shares were at 375p, a marginal dip of 0.24%.
Zombie funds
The trend of “spinning off insurance books” is “nothing new”, says Hollands, noting that this activity has been going on for two decades, with Phoenix acting as “the main industry consolidator”.
Phoenix has carved out a name for itself as one of the biggest consolidators of closed with-profits funds or zombie funds, so called because they no longer write new business or policies.
It bought Deutsche Bank’s insurance business, Abbey Life, in 2016, shortly after purchasing Axa Wealth’s non-platform investment and pension business.
Phoenix’s acquisition of SLA’s entire life and pensions business, with the exception of its Asian and UK platform businesses (Wrap and Elevate), will give the group an additional £166bn of assets, taking total assets from £74bn to £240bn.
It will also add 4.8 million policyholders to the Zombie life insurer’s existing crop of 10 million and £6bn of offshore bond business.
This news certainly gave Clive Bannister, Phoenix chief executive, reason to smile on Friday. He called the deal “a compelling transaction” that “established Phoenix as the pre-eminent closed life fund consolidator in Europe”, in a stock exchange announcement.
Importantly, the deal is expected to help accelerate the company’s cash generation, creating £3.5bn between 2018 and 2022 with a further £8.3bn expected from 2023, onwards.
Ashik Musaddi, JP Morgan Cazenove analyst, estimates that Phoenix’s adjusted earnings per share will skyrocket from 2017 to 2018 from £8.79 to £54.49.
There is also a distinct possibility that other life insurer/investment houses will follow in SLA’s footsteps to become more “capital lite”.
It has been suggested that the life company and asset management cultures might be “a tough balancing act”, given that the former have to keep big assets and liabilities on their balance sheets to offset their policies, while the latter aren’t bound by the same solvency requirements.
Should this be the case, Phoenix could stand to expand its closed-life assurance empire even further. With continued downward pressures on fees, it will be interesting to see whether SLA will prove a trail blazer for other firms in the coming months and what shape it is in financially after freeing itself from the weight of its mature insurance unit.
