Phoenix Group Holdings plc operates in the long-term savings and retirement business in Europe. The company operates through four segments: UK Heritage, UK Open, Europe, and Management Services. It provides a range of pensions and savings products to support people across various stages of the savings life cycle. The company manages Heritage in-force life and pensions policies; and offers and manages long term savings and pensions products. Its products include with-profits and unit-linked funds, and annuities; and workplace pensions, and individual savings and retirement solutions. The company serves individuals, corporates, and employers. It has a strategic partnership with abrdn plc, TCS, and HSBC. Phoenix Group Holdings plc was founded in 1782 and is based in London, the United Kingdom.
Competition
Phoenix Group, as a leading life insurance and pension provider primarily focused on managing closed insurance books and pensions in the UK, faces competition from companies with similar business models or overlapping areas in insurance, asset management, and retirement solutions. Key competitors include:
- Legal & General Group (L&G): L&G competes with Phoenix in life insurance, pensions, and retirement products. It also has significant expertise in asset management and bulk annuities, making it a major player in managing large pension schemes.
- Aviva: Aviva is another significant UK-based competitor in life insurance and pensions. Aviva provides services in retirement planning, life insurance, and asset management. Its focus on digital transformation and customer engagement is a strategic advantage.
- Swiss Re (ReAssure): Phoenix acquired ReAssure from Swiss Re in 2020, a move that underscored the competitive landscape in closed life books. Swiss Re remains an indirect competitor, as it focuses on reinsurance and has relationships with other UK life insurers and closed-book specialists.
- Standard Life (part of Phoenix) and Scottish Widows (Lloyds Banking Group): Scottish Widows competes in the pensions and life insurance markets. It also provides pension de-risking solutions and bulk annuity products, similar to Phoenix’s focus, especially through Standard Life.
- M&G plc: M&G combines asset management with pension solutions and life insurance products. As an investment manager, it competes with Phoenix in asset management and pension scheme management. Its pension expertise is a key overlap with Phoenix’s retirement-focused services.
- Rothesay Life: Rothesay Life is a specialist insurer focusing on bulk annuities and pension de-risking solutions. It’s a major player in managing pension liabilities, directly competing with Phoenix in acquiring large closed pension books.
Phoenix Group's core strategy centers around closed book acquisitions, bulk annuities, and retirement-focused services, which makes companies specializing in managing long-term pension liabilities and closed books its closest competitors. Additionally, the push toward digital transformation, asset management capabilities, and pension de-risking solutions is common among these firms, placing them in a tight competitive landscape.
Market
To understand Phoenix Group’s market opportunity, let’s look at its Total Addressable Market (TAM), Serviceable Available Market (SAM), and Serviceable Obtainable Market (SOM), specifically in the context of its primary business lines, which include closed-book life insurance, open-book insurance, Bulk Purchase Annuities (BPAs), and retirement solutions.
1. Total Addressable Market (TAM)
- Definition: The TAM is the total revenue opportunity available if Phoenix Group could achieve 100% market share in all its target sectors.
- Market Size: The TAM for Phoenix includes:
- The global life insurance market, especially in regions with significant closed-book insurance business (UK, Europe, some parts of North America).
- The global pension market, as companies seek to offload pension liabilities via Bulk Purchase Annuities (BPAs).
- The global retirement solutions and wealth management market, given the increasing demand for retirement products as populations age.
- Estimated TAM: For Phoenix, the TAM is likely in the trillions in GBP, as the global life insurance market alone is estimated to be worth several trillion dollars annually. However, for closed-book management and pension buyouts specifically, estimates suggest an addressable market in the hundreds of billions, particularly in Europe and North America, where regulatory and aging demographics drive demand.
2. Serviceable Available Market (SAM)
- Definition: The SAM represents the portion of the TAM that Phoenix Group could realistically service, given its specific focus and operational capabilities.
- Market Focus:
- UK and European Closed-Book Life Insurance: Phoenix Group is one of the largest consolidators of closed-book policies in the UK and Europe. The closed-book market in Europe alone is estimated to hold £300 billion to £400 billion in assets under management.
- Bulk Purchase Annuities (BPA): In the UK, the BPA market has seen significant growth, with estimates suggesting it’s worth around £30 billion annually. As more companies offload pension liabilities, this market is expected to grow.
- UK Retirement and Wealth Solutions: Given its acquisition of Standard Life and expansion into the open-book market, Phoenix can also tap into the retirement solutions market, worth an estimated £1 trillion in the UK alone.
- Estimated SAM: For Phoenix, the SAM is likely in the hundreds of billions of pounds, focusing primarily on the UK and European closed-book life insurance market, BPAs, and retirement solutions.
3. Serviceable Obtainable Market (SOM)
- Definition: The SOM is the portion of the SAM that Phoenix Group can realistically capture, given competition, regulatory constraints, and its existing market share.
- Competitive Position:
- Closed-Book Consolidation: Phoenix already holds a significant market share in the UK closed-book insurance market. Its scale, expertise, and established relationships position it to capture a substantial portion of this market. Realistically, Phoenix could maintain a 10-20% share of the UK and European closed-book market, equating to £30-60 billion.
- BPAs: Phoenix is actively growing its presence in the BPA market. Given competition from other insurers like Legal & General, Phoenix might capture 5-10% of the BPA market, which could mean around £1.5-3 billion annually.
- Retirement and Wealth Solutions: This is a competitive market with players like Aviva, Prudential, and Standard Life. Phoenix’s SOM here could be around 5%, or £50 billion, within the UK retirement solutions market.
- Estimated SOM: Combining these factors, Phoenix’s SOM might realistically be between £80 billion to £120 billion across its primary markets. This includes substantial market share in closed-book management, a growing foothold in BPAs, and a smaller but strategic presence in retirement solutions.
Summary of TAM, SAM, and SOM for Phoenix Group:
| Metric | Market Size | Key Focus Areas |
|---|---|---|
| TAM (Total Addressable Market) | £1+ trillion | Global life insurance, pensions, retirement solutions |
| SAM (Serviceable Available Market) | £200-400 billion | UK and European closed-book, BPAs, UK retirement solutions |
| SOM (Serviceable Obtainable Market) | £80-120 billion | UK and European closed-book, BPAs, retirement solutions in the UK |
Phoenix’s strengths in closed-book consolidation, its expanding BPA business, and retirement solutions provide it with a substantial and accessible market within the broader insurance and retirement sector. This focus allows it to capitalize on predictable cash flows from closed books and emerging opportunities in BPAs, while building a foothold in the growing retirement market.
Risks
As with any investment, investing in Phoenix Group Holdings carries a level of risk. Overall, based on the Phoenix Group Holdings' adjusted beta (i.e. 0.76), the degree of risk associated with an investment in Phoenix Group Holdings is 'medium'.
Here, to estimate the adjusted beta, we used the iShares MSCI World ETF to represent the market portfolio; and in terms of the time period and frequency of observations, we used five years of monthly data (i.e. 60 observations in total), which is supported by a study and is the most common choice. The beta value in a future period has been found to be on average closer to the mean value of 1.0, and because valuation is forward-looking, it is logical to adjust the raw beta so it more accurately predicts a future beta. In addition, here, we have assumed that for an investment to be considered 'medium' risk, it must have a beta value of between 0.50 and 1.00. Further information about the beta ratings can be found in the appendix section of this report.
The key risks can be found below. For us, currently, the biggest risk to the valuation of the company relates to interest rate volatility (i.e. interest rate risk).
1. Regulatory and Legislative Risks
- Solvency II and Capital Requirements: As an insurer, Phoenix is subject to Solvency II regulations, which require insurers to hold a certain level of capital relative to their liabilities. Changes in these regulations or an increase in capital requirements could force Phoenix to retain more capital, reducing its flexibility and potentially impacting dividend payments.
- Pension and Insurance Regulation Changes: Since Phoenix operates heavily in the pensions and retirement solutions sectors, any adverse changes in pension or tax legislation could impact demand for its products, profitability, and its Bulk Purchase Annuities (BPA) business.
- Climate and ESG Regulation: Increasingly strict Environmental, Social, and Governance (ESG) requirements are pushing insurers to adjust investment portfolios to meet regulatory guidelines. Phoenix might need to divest from certain assets, which could reduce investment returns.
2. Interest Rate and Investment Yield Risks
- Low Yield Environment: A substantial portion of Phoenix's revenues comes from the investment returns on its policyholder funds. In a low-interest-rate environment, the company may struggle to generate adequate returns on its investment portfolio, which can impact profitability and dividend payouts.
- Rising Interest Rates: While rising interest rates might benefit Phoenix’s investment returns, they also increase discount rates, which can reduce the value of Phoenix's long-term liabilities, including its bulk purchase annuity (BPA) business. Higher rates can also reduce the value of the bond-heavy portfolios often held by insurers.
- Market Volatility: A significant portion of Phoenix's assets is invested in fixed-income securities. Market volatility can cause fluctuations in the value of these investments, impacting the solvency position, especially if there’s a sudden downturn.
3. Longevity and Mortality Risk
- Longevity Risk: Phoenix bears longevity risk, as it is responsible for paying benefits as long as policyholders live. Longer life expectancies increase the liabilities on Phoenix’s books, potentially eroding profitability, particularly for its annuity and pension businesses.
- Mortality Risk: Unforeseen mortality events (e.g., pandemics) could lead to higher-than-expected claims, increasing Phoenix's short-term liabilities and impacting its solvency position.
4. Competition and Market Dynamics
- Intense Competition: Phoenix faces competition from other insurers, especially in the bulk purchase annuity (BPA) market, where players like Legal & General and Aviva have strong market positions. Competition could impact Phoenix’s ability to acquire new business profitably.
- New Market Entrants: As Phoenix expands into open-book insurance and retirement solutions, it faces competition from established life insurers and pension providers, which may make it difficult to gain significant market share in these areas.
5. Acquisition Integration and Execution Risks
- Dependence on Acquisitions: Phoenix's growth strategy is heavily reliant on acquiring closed-book life insurance portfolios and expanding into BPAs. However, integrating these acquisitions can be complex and costly. Any difficulties in integrating new acquisitions could affect Phoenix’s operational efficiency and financial performance.
- Integration Challenges: Acquisitions bring challenges, from technology integration to operational alignment. Phoenix’s success in generating returns relies on its ability to integrate and manage these new books effectively, which is not always guaranteed.
6. Liquidity and Refinancing Risks
- Debt Levels and Refinancing: Phoenix Group uses debt financing to fund some of its acquisitions. If the cost of debt rises (e.g., due to increasing interest rates or a change in credit rating), it could increase financing costs and reduce cash available for dividends and expansion.
- Liquidity Constraints: In a market downturn, Phoenix may need to access capital markets to fund operations or meet capital requirements. Limited access to liquidity or higher-than-expected costs could negatively impact Phoenix’s stability.
7. Reputation and Brand Risk
- Customer Trust and Brand Value: Phoenix relies on a strong brand, especially in retirement and pension solutions. Negative publicity or poor customer experience, especially following an acquisition, could erode brand trust and hinder its growth efforts.
- ESG and Social Responsibility: As public and investor scrutiny of ESG practices grows, any misalignment or failure to meet ESG standards could damage Phoenix’s reputation and investor appeal.
8. Operational and Technological Risks
- Cybersecurity: Phoenix holds vast amounts of sensitive policyholder information. Any breach could lead to financial losses, reputational damage, and regulatory scrutiny.
- Legacy System Management: With Phoenix’s expansion through acquisitions, the company must integrate various IT and data systems effectively. Operational disruptions, system failures, or integration issues could impact service levels and increase operational costs.
Valuation
Dividend Discount Model
To calculate the value of Phoenix Group using the Dividend Discount Model (DDM), we need to follow the basic formula for a Constant Growth Dividend Discount Model:
Value of the Stock (V)=r−gD1
Where:
- D1 = the expected dividend in the next period (i.e., the next year).
- r = the required rate of return or cost of equity.
- g = the expected growth rate of dividends.
Step-by-Step Calculation
- Find Expected Dividend (D1)
- Let’s assume Phoenix’s expected dividend in the next period is £0.30 per share (this is an assumption, so you should replace it with actual forecast data if available).
- Cost of Equity (r)
- From earlier, we estimated Phoenix's cost of equity (using CAPM) to be around 8.9%.
- Dividend Growth Rate (g)
- Phoenix’s dividends have been relatively stable, with moderate growth. Let’s assume an expected dividend growth rate of 2% per year.
Putting it into the formula:
V=0.089−0.020.30=0.0690.30 V≈4.35
Interpretation:
The value of Phoenix Group based on the DDM is approximately £4.35 per share, assuming the expected dividend for the next year is £0.30, the cost of equity is 8.9%, and the growth rate of dividends is 2%.
Important Considerations:
- The accuracy of this model is highly dependent on the accuracy of the dividend forecast, cost of equity, and growth rate. Any changes to these assumptions would significantly affect the outcome.
- This model is most suitable for companies with stable and predictable dividend policies, such as Phoenix Group, but it may not fully capture other aspects of value, such as potential capital gains or market changes.
Appendix
Dividend
| Interim | Final | Total | Change (%) | |
|---|---|---|---|---|
| 2024 | 0.2665 | 0.2665 | ||
| 2023 | 0.2600 | 0.2665 | 0.5265 | 4% |
| 2022 | 0.2480 | 0.2600 | 0.5080 | 4% |
| 2021 | 0.2410 | 0.2480 | 0.4890 | 3% |
| 2020 | 0.2340 | 0.2410 | 0.4750 | 1% |
| 2019 | 0.2340 | 0.2340 | 0.4680 | 2% |
| 2018 | 0.2260 | 0.2340 | 0.4600 | -8% |
| 2017 | 0.2510 | 0.2510 | 0.5020 | -1% |
| 2016 | 0.2670 | 0.2390 | 0.5060 | -5% |
| 2015 | 0.2670 | 0.2670 | 0.5340 | 0% |
| 2014 | 0.2670 | 0.2670 | 0.5340 | 0% |
| 2013 | 0.2670 | 0.2670 | 0.5340 | 12% |
| 2012 | 0.2100 | 0.2670 | 0.4770 | 14% |
| 2011 | 0.2100 | 0.2100 | 0.4200 | 0% |
| 2010 | 0.2100 | 0.2100 | 0.4200 | |
| 2009 | 0.1527 | 0.1527 |
| Mean | Median | Mode | |
|---|---|---|---|
| Since inception | 2% | 1% | 0% |
| Since the last five years | 3% | 3% | #N/A |
| Since the last three years | 3% | 4% | #N/A |
Economic links to cash flow patterns
| Cash flow type | Introduction | Growth | Shake out | Mature | Decline |
|---|---|---|---|---|---|
| Operating | - | + | +/- | + | - |
| Investing | - | - | +/- | - | + |
| Financing | + | + | +/- | - | +/- |
Beta risk profile
| Beta value | Risk rating |
|---|---|
| 0 to 0.50 | Low |
| 0.50 to 1.50 | Medium |
| 1.50 to 3.00 | High |
| 3.00 and above | Extremely high |
Phoenix adjusted beta calculation
| Date | iShares MSCI World ETF unit price (USD) | Phoenix share price (GBP) | iShares MSCI World ETF unit price change (%) | Phoenix share price change (%) |
|---|---|---|---|---|
| 01/11/2019 | 96.76 | 745.50 | ||
| 01/12/2019 | 98.78 | 749.00 | 2.09% | 0.47% |
| 01/01/2020 | 97.73 | 758.00 | -1.06% | 1.20% |
| 01/02/2020 | 89.67 | 691.20 | -8.25% | -8.81% |
| 01/03/2020 | 77.93 | 626.60 | -13.09% | -9.35% |
| 01/04/2020 | 86.36 | 601.00 | 10.82% | -4.09% |
| 01/05/2020 | 90.70 | 616.20 | 5.03% | 2.53% |
| 01/06/2020 | 92.14 | 644.00 | 1.59% | 4.51% |
| 01/07/2020 | 96.65 | 658.60 | 4.89% | 2.27% |
| 01/08/2020 | 102.96 | 692.00 | 6.53% | 5.07% |
| 01/09/2020 | 99.52 | 688.20 | -3.34% | -0.55% |
| 01/10/2020 | 96.53 | 662.40 | -3.00% | -3.75% |
| 01/11/2020 | 108.94 | 716.80 | 12.86% | 8.21% |
| 01/12/2020 | 112.41 | 700.60 | 3.19% | -2.26% |
| 01/01/2021 | 111.49 | 674.80 | -0.82% | -3.68% |
| 01/02/2021 | 114.27 | 710.00 | 2.49% | 5.22% |
| 01/03/2021 | 118.49 | 734.20 | 3.69% | 3.41% |
| 01/04/2021 | 123.61 | 711.40 | 4.32% | -3.11% |
| 01/05/2021 | 125.60 | 735.60 | 1.61% | 3.40% |
| 01/06/2021 | 126.57 | 676.40 | 0.77% | -8.05% |
| 01/07/2021 | 128.83 | 679.40 | 1.79% | 0.44% |
| 01/08/2021 | 132.02 | 623.40 | 2.48% | -8.24% |
| 01/09/2021 | 126.46 | 645.60 | -4.21% | 3.56% |
| 01/10/2021 | 133.84 | 656.60 | 5.84% | 1.70% |
| 01/11/2021 | 131.10 | 640.20 | -2.05% | -2.50% |
| 01/12/2021 | 135.32 | 653.20 | 3.22% | 2.03% |
| 01/01/2022 | 128.32 | 660.20 | -5.17% | 1.07% |
| 01/02/2022 | 124.58 | 618.60 | -2.91% | -6.30% |
| 01/03/2022 | 128.16 | 614.00 | 2.87% | -0.74% |
| 01/04/2022 | 117.42 | 609.00 | -8.38% | -0.81% |
| 01/05/2022 | 117.94 | 637.60 | 0.44% | 4.70% |
| 01/06/2022 | 106.88 | 590.40 | -9.38% | -7.40% |
| 01/07/2022 | 115.57 | 643.80 | 8.13% | 9.04% |
| 01/08/2022 | 110.28 | 602.40 | -4.58% | -6.43% |
| 01/09/2022 | 99.95 | 526.80 | -9.37% | -12.55% |
| 01/10/2022 | 107.42 | 542.40 | 7.47% | 2.96% |
| 01/11/2022 | 115.44 | 588.80 | 7.47% | 8.55% |
| 01/12/2022 | 109.25 | 608.60 | -5.36% | 3.36% |
| 01/01/2023 | 117.01 | 640.80 | 7.10% | 5.29% |
| 01/02/2023 | 113.98 | 633.40 | -2.59% | -1.15% |
| 01/03/2023 | 117.67 | 546.40 | 3.24% | -13.74% |
| 01/04/2023 | 119.79 | 591.80 | 1.80% | 8.31% |
| 01/05/2023 | 118.60 | 552.40 | -0.99% | -6.66% |
| 01/06/2023 | 124.52 | 531.80 | 4.99% | -3.73% |
| 01/07/2023 | 128.54 | 550.20 | 3.23% | 3.46% |
| 01/08/2023 | 125.70 | 521.00 | -2.21% | -5.31% |
| 01/09/2023 | 120.17 | 482.20 | -4.40% | -7.45% |
| 01/10/2023 | 117.11 | 453.80 | -2.55% | -5.89% |
| 01/11/2023 | 127.78 | 465.20 | 9.11% | 2.51% |
| 01/12/2023 | 133.02 | 535.20 | 4.10% | 15.05% |
| 01/01/2024 | 134.20 | 505.40 | 0.89% | -5.57% |
| 01/02/2024 | 140.28 | 497.30 | 4.53% | -1.60% |
| 01/03/2024 | 144.91 | 552.60 | 3.30% | 11.12% |
| 01/04/2024 | 139.17 | 489.80 | -3.96% | -11.36% |
| 01/05/2024 | 145.71 | 496.20 | 4.70% | 1.31% |
| 01/06/2024 | 147.49 | 521.50 | 1.22% | 5.10% |
| 01/07/2024 | 149.97 | 547.00 | 1.68% | 4.89% |
| 01/08/2024 | 154.18 | 565.50 | 2.81% | 3.38% |
| 01/09/2024 | 156.91 | 559.50 | 1.77% | -1.06% |
| 01/10/2024 | 153.73 | 491.20 | -2.03% | -12.21% |
| 01/11/2024 | 160.13 | 492.00 | 4.16% | 0.16% |
| Value | Comment(s) | |
|---|---|---|
| Beta | 0.642647 | |
| Adjusted beta | 0.761765 |
Cost of equity
| Input | Input value | Additional information |
|---|---|---|
| Risk-free rate (%) | 4.473% | Here, the risk free rate is the US 30 year treasury bond, and is calculated as at 11th November 2024.[1] Research suggests that for the risk-free rate, it's best to use one that has the same or similar maturity to the estimated remaining lifespan of the company. Here, we have assumed that the estimated lifespan of the company is 50 years, so we have used the longest maturity, which is 30 years. |
| Adjusted beta | 0.76 | Here, to estimate the adjusted beta, we used the iShares MSCI World ETF to represent the market portfolio; and in terms of the time period and frequency of observations, we used five years of monthly data (i.e. 60 observations in total), which is supported by a study and is the most common choice. The beta value in a future period has been found to be on average closer to the mean value of 1.0, and because valuation is forward-looking, it is logical to adjust the raw beta so it more accurately predicts a future beta. |
| Equity risk premium (%) | 5.48% | Here, the equity risk premium is in relation to the global region, and is calculated as at 1st July 2023.[2] Research suggests that for the region of equity risk premium, it's best to use one that is the same or similar to the region of the beta market portfolio. Here, the region of the beta market portfolio is the world/global, so we have used the world/global region for the equity risk premium. |
| Cost of equity (%) | 8.64% | Cost of equity = Risk-free rate + Beta x Equity risk premium. |