Mergers and acquisitions has been the zeitgeist in the life insurance industry amid regulatory upheaval, low interest rates and an unsavoury past blighted by product mis-selling scandals.
In the forefront of these consolidations is the Phoenix Group, which, on 1 November, announced the completion of the £375m acquisition of Axa’s UK pensions and investment business, along with SunLife which offers protection to individuals aged 50 and over.
The deal was touted to add an extra £12.3bn of assets under management to its books and more than 910,000 policies
The amalgamation will mark the closure of the former’s unit-linked business – with the exception of its corporate trustee investment plan which will be rebranded with the Phoenix group name, according to Andy Moss, chief executive of Phoenix Life.
It will be business as usual for SunLife, which will continue to run as a stand-alone business with its brand, products and management board intact, Mr Moss added.
Phoenix reached its second significant agreement of the year to acquire Abbey Life insurance business from Deutsche Bank for £935m – funded by a share sale along with a banking facility. The acquisition is set to add £10bn of AUM and approximately 735,000 policyholders.
Mr Moss said: “Abbey Life is very much like our business. It is a closed book and is largely outsourced in terms of customer administration. We will run the business like we run our Phoenix business.
“Abbey Life will also be rebranded to Phoenix over time. We will ensure that customers will be able to identify their product from its original brand name. We think this is important.”
Phoenix has made no secret of its ambitions to make acquisitions to expand its scale. Last year, the company lost out to Swiss Re in a £1bn-plus race to acquire Guardian Financial Services.
Mr Moss was coy on the prospect of further acquisitions, but teased: “We think there will be more consolidation in the market and we have a big role to play.”
Mr Moss was appointed to his current position in 19 May 2014 - mere months after the FCA announced it would begin an investigation into zombie funds as part of a wider inquiry into the treatment of longstanding insurance customers. The news saw shares in life assurers operating in the UK tumble – by as much as 11.5 per cent for the group.
The resulting thematic review into fair treatment of legacy insurance customers, published in March this year, brought the disclosure of ongoing charges applicable to legacy products into the spotlight.
Mr Moss, said: “The guidance the FCA provided in that review was enormously useful. For us, it has been an evolution rather than revolution. Greater disclosure of charges to customers in a way that they can understand is a challenge for the industry as a whole.
“We made a number of changes in our communications and there will be more to come going forward. We have a customer panel we will use to test news communication.”
Closed ended in-profit funds, colloquially known as zombie funds, have in the past attracted criticism for steep ongoing costs. While not excusing poor performance, Andy Moss said that cost is not the definitive determiner of the suitability of an investment product.
He said: “On the face of it, it may seem that the charge on a legacy product is high but if you take into account things like return guarantees, the charges may all of a sudden seem reasonable.”
The group revealed it had temporarily stopped ongoing scheme charges on some of its pensions following concerns raised by its independent governance committee over these levies in its first annual report published in spring this year.
The report also found that 21 of Phoenix’s 44 scheme designs are likely to incur ongoing charges of above 1.5 per cent per annum.
Mr Moss said: “We look at our own products on an ongoing basis to see if they generate the outcomes set out to do from the beginning.”
Interest rates are critical to the insurer because they typically run substantial portfolios in interest rate sensitive investment vehicles such as bonds, and have a number of customers with guaranteed return policies.
Phoenix has not been immune to the pressures that come with low interest rates. A high proportion of its policies do have guarantees, either in the form of annuities or annual returns.
The firm’s headline performance has been dampened somewhat by the requirement to retain capital to fund these guarantees, Mr Moss admits.
He said: “We have looked at other asset classes to get higher yield. We have invested in equity release mortgages for example and we are looking at other assets that will give us greater returns while considering the risk. We have to make sure that we do not expose ourselves to too much risk because it can impact the level of capital that can be held.”
Myron Jobson is features writer of Financial Adviser
