Divestment of Ignis

Phoenix Group Holdings announces the divestment of Ignis Asset Management Limited to Standard Life Investments (Holdings) Limited for £390 million and the commencement of a long term strategic asset management alliance with Standard Life Investments

 

Summary of transaction

 

·     Phoenix Group Holdings today announces the divestment of Ignis Asset Management to Standard Life Investments for £390 million in cash payable on completion

 

·     Phoenix has also agreed a long term strategic asset management alliance with Standard Life Investments, a leading global asset management company with strength and heritage in managing insurance assets which is well placed to provide solutions for Phoenix's policyholders

 

·     In addition, Phoenix has agreed with Standard Life Investments a mechanism to share value resulting from any further Phoenix assets becoming managed by Standard Life Investments

 

·     The transaction will accelerate the achievement of the Group's planned reduction in gearing levels and assist in its plans to diversify its financing structure to exploit future growth opportunities

 

·     The expected cash proceeds received on completion, net of transaction and other related costs, but including the benefit of Ignis' earnings in the period to completion, will be used to repay an estimated £250 million of the Group's Impala debt facility, reducing the Group's gearing ratio from 44 per cent. to 39 per cent. (pro forma as at 31 December 2013¹). Phoenix would therefore meet its 2016 gearing target two years earlier than originally anticipated. The remaining proceeds of the Divestment would be used by the Group for general corporate purposes

 

·     The Group's MCEV will increase by £237 million to £2,615 million (pro forma as at 31 December 2013¹)

 

·     There will be a broadly neutral impact on the estimated IGD² surplus, which was £1.2 billion as at 31 December 2013

 

·     Estimated PLHL ICA² surplus will decrease by £0.1 billion due to the debt prepayment, resulting in a pro forma PLHL ICA surplus of £1.1 billion as at 31 December 2013¹

 

·     New long term cash generation³ targets set today of £2.8 billion between 2014 and 2019 includes the proceeds of the Divestment. The annual target of £500 - £550 million in 2014 is stated in addition to the proceeds of the Divestment

 

·     The transaction is conditional on regulatory approval with completion anticipated by the end of the second quarter of 2014

 

·     Policyholders are set to benefit from the stability and stewardship of Standard Life Investments - a leading asset manager that manages assets for a wide range of institutional clients in the UK and has investment capabilities across a range of asset classes as well as a strong heritage in insurance asset management

 

·     The Board believes that the Group is well positioned to participate in future consolidation of UK closed life funds and generate further value for shareholders

 

 

Clive Bannister, Phoenix Group Chief Executive, commented:

 

"This is a transaction which provides Phoenix with significant strategic and financial benefits.  The divestment of Ignis is compelling across all our key metrics, increasing our embedded value by £237 million, increasing our financial flexibility through the £250 million prepayment of debt and enabling us to reduce our gearing to 39% - achieving our 40% target two years earlier than the timescale we had set ourselves. Following this transaction, Phoenix will be solely focused on the management of closed life funds. We believe that we will be well placed to benefit from future acquisitions through the consolidation of closed life funds and our long term strategic alliance with Standard Life Investments. "

 

Transaction overview

 

Phoenix Group Holdings (the "Company", and together with its subsidiaries, "Phoenix" or the "Group"), the UK's largest specialist closed life fund consolidator, today announces the proposed divestment of Ignis Asset Management Limited ("Ignis") to Standard Life Investments (Holdings) Limited ("Standard Life Investments") for £390 million in cash payable on completion (the "Divestment"). The Company understands that the consideration will be funded from Standard Life Investments existing internal resources.  

 

Phoenix, Impala Holdings Limited ("Impala"), which is a subsidiary of Phoenix, and Standard Life Investments have signed a sale and purchase agreement under which Standard Life Investments will acquire the entire issued share capital of Ignis. The Divestment will be subject to regulatory approval.

 

Background to and rationale for the Divestment

 

Phoenix has two business divisions: Phoenix Life, which manages life assurance funds which no longer actively sell new life assurance policies (known as 'closed life funds') and Ignis Asset Management, which manages the assets that back the investments of the Group's policyholders and develops investment propositions for third party clients in institutional and retail markets, both in the UK and overseas.

 

Phoenix's strategy is focused on the future consolidation of closed life funds, where it has generated significant value for shareholders in recent years, accelerating cashflow and increasing MCEV through a range of management actions. The board of directors of the Company (the "Board") believe that there is a significant market opportunity to further enhance shareholder value through a strategy to acquire further closed life funds.

 

Ignis has made significant progress in recent years in its development as a third party asset manager, attracting £1.9 billion of net third party assets in 2013 and investing in its investment and distribution teams. Following an approach from Standard Life Investments, the Board believes that the Group will benefit from having a large and experienced asset management partner in the form of Standard Life Investments and furthermore that the proceeds of the Divestment would help Phoenix to participate in future consolidation of the closed life sector.

 

At the time of the capital raising and debt re-terming announced on 30 January 2013, the Group stated that any acquisition of further closed life funds would only be undertaken if it resulted in a sustainable level of gearing for the combined Group of appreciably below 40 per cent. (around the mid-point of the 35 per cent. to 40 per cent. range) which is in line with the strategy of lowering the Group's gearing to attain an appropriate credit rating. The Divestment will reduce the level of gearing to 39 per cent. (pro forma as at 31 December 2013¹), thus providing the Group greater financial flexibility with regards to any potential future acquisition. The Board believes that such a strategy will generate significant value for shareholders, as it has done in recent years.

 

In addition, the Group has the potential to generate value from future closed life fund acquisitions through a Synergy Sharing Agreement with Standard Life Investments, whereby Standard Life Investments will pay to Impala, the immediate parent company of Ignis, on an annual basis, an agreed proportion of asset management revenues related to the future management of any additional assets by Standard Life Investments. The Board therefore believes that the Group would be well-positioned to participate in future consolidation of UK closed life funds and generate further value for shareholders.

 

The consideration payable by Standard Life Investments reflects, among other things, a level of certainty over the management of the assets of the Group's Life Companies for Standard Life Investments for a period of 10 years after completion (the "Price Adjustment Period"). If during the Price Adjustment Period, a Life Company withdraws assets from management by Ignis or any of its subsidiaries under an Investment Management Agreement ("IMA") (including on a termination of the IMA), Impala will pay to Standard Life Investments a Price Adjustment calculated for the remainder of the Price Adjustment Period. The Price Adjustment is calculated on the basis of base management fees that would have been payable under the relevant Investment Management Agreement, assuming that the assets have not been withdrawn and taking into account the expected run-off of the relevant assets. No Price Adjustment shall be payable in respect of any other fees or costs including performance fees and stock-lending fees. This Price Adjustment excludes withdrawals of assets that are made for specific reasons, including for poor investment performance or for material breaches of the IMAs.

 

Information on Ignis

 

Ignis Asset Management is the Group's asset management business. It provides investment management services to the Group's life companies as well as to third party clients, including retail, wholesale and institutional investors in the UK and overseas.  

 

As at 31 December 2013, Ignis was responsible for managing £65.9 billion of assets, including £50.9 billion of assets of the Group's Life Companies and Holding Companies, and £15.0 billion of third party assets. Ignis also manages £6.8 billion of stock lending collateral on behalf of the Group's Life Companies. Ignis generated IFRS pre-tax operating profits of £49 million in 2013, and had IFRS total assets of £345 million and IFRS net assets of £241 million as at 31 December 2013 (including goodwill and intangible assets).

 

With offices in London and Glasgow, and approximately 360 employees as at 31 December 2013, Ignis Asset Management has investment capabilities across multiple asset classes organised into four investment business units and its former joint ventures, which have been restructured as a series of investments. The minority interest in Castle Hill Asset Management LLC will not be transferred to Standard Life Investments in the Divestment, but instead will be retained by the Group.

 

Information on Standard Life Investments

 

Standard Life is a leading provider of long-term savings and investments. Established in 1825 and headquartered in Edinburgh, the Standard Life plc group has around 8,500 employees internationally. Standard Life plc is listed on the London Stock Exchange and has approximately 1.3 million individual shareholders in over 50 countries around the world. At 31 December 2013, the Standard Life plc group had total assets under administration of over £244 billion, directly looking after around six million customers worldwide and supporting a further 16 million customers through its Joint Ventures.

 

With assets under management of £184.1 billion, Standard Life Investments is one of Europe's leading investment houses. It is a wholly owned subsidiary of Standard Life plc. Headquartered in Edinburgh, Standard Life Investments maintains offices in a number of locations around the globe including Boston, Hong Kong, London, Beijing, Montreal, Sydney, Dublin, Paris and Seoul. In addition, Standard Life Investments has close relationships with leading domestic players in Asia, including HDFC Asset Management in India and Sumitomo Mitsui Trust Bank in Japan.

 

Principal terms of the Divestment

 

Standard Life Investments will acquire the entire issued share capital of Ignis from Impala, a subsidiary of the Company, in return for total consideration of £390 million which will be payable in cash on completion of the Divestment. After completion, the consideration shall be subject to certain post-completion price adjustments, including the offsetting of amounts which Phoenix may have to pay under the terms of the Divestment against the benefit of Ignis' earnings to completion. These post-completion price adjustments will not increase the total consideration payable to Phoenix.

 

Purchase Price Adjustment

 

The Investment Management Agreements between the Life Companies (and Opal Reassurance Limited) and Ignis will remain in force post the Divestment. This includes the continuation of the existing fee arrangements, and the notice periods for withdrawal of assets without cause remaining generally on a three year rolling basis.

 

Under the Disposal Agreement, Phoenix has agreed to a Purchase Price Adjustment for a period of 10 years if a Life Company withdraws assets from management by Ignis Asset Management or any of its subsidiaries under an Investment Management Agreement, subject to certain exceptions.

 

The Board believes that this price adjustment mechanism has the effect of providing a level of certainty for Standard Life Investments over the management of the Life Company assets, which is reflected in the purchase price that will be paid by Standard Life Investments upon completion.

 

This price adjustment mechanism is calculated on the basis of the base management fees that would have been payable under the relevant Investment Management Agreement, assuming the assets had not been withdrawn and taking into account the expected run-off profile of the relevant assets. No Price Adjustment shall be payable in respect of any other fees or costs including performance fees and stock-lending fees. For each of the last five years of the Price Adjustment Period, the Price Adjustment payable will be discounted at a rate of 50 per cent. The Price Adjustment is net of a notional corporation tax amount determined in accordance with the terms of the Divestment.

 

A purchase price adjustment is not payable in certain circumstances, including if the assets are withdrawn due to investment underperformance or a material breach of the Investment Management Agreement by the relevant asset manager. In addition, if any of the Group's Life Companies terminates an Investment Management Agreement on contractual notice, then no purchase price adjustment is payable in respect of the relevant notice period, but a purchase price adjustment would continue to apply in respect of the period between the end of such notice period and the end of the Price Adjustment Period.

 

For example, if an Investment Management Agreement is terminated in 2017 (notice of termination having been given in 2014) and is not replaced by another Investment Management Agreement, then a Price Adjustment will apply from 2017 to the end of the Price Adjustment Period.

 

Synergy Sharing Agreement

 

A Synergy Sharing Agreement has been agreed between Phoenix, Impala and Standard Life Investments, whereby Standard Life Investments will pay to Impala, on an annual basis, an agreed proportion of asset management revenues related to the future management of any additional assets by Standard Life Investments, which may include either Phoenix's existing life company assets not currently managed by Ignis or assets from acquisitions of closed life funds in future. Where the aggregate value of additional assets managed by Standard Life Investments or an agent of Standard Life Investments is valued at £5 billion or more (under each new asset management agreement for its entire duration), Standard Life Investments shall pay an amount equal to 20 per cent. of the asset management revenues. Where the aggregate value of additional assets managed by Standard Life Investments or an agent of Standard Life Investments is valued at less than £5 billion (under each new asset management agreement for its entire duration), Standard Life Investments shall pay an amount equal to 15 per cent. of the asset management revenues. This revenue sharing arrangement is linked to the quantum of additional assets that are transferred to the management of Standard Life Investments and which are not already under management. These amounts are subject to a potential adjustment for irrecoverable VAT.

 

The Synergy Sharing Agreement is conditional on completion and has an initial term of five years which can be extended by a further five years upon the agreement of Impala and Standard Life Investments. Under the Synergy Sharing Agreement, Standard Life Investments will be afforded the opportunity to make a proposal to the Life Companies to manage any with-profits assets, non-profit assets or shareholder assets which come under the control, as a result of certain circumstances, of a Life Company during the term of the Synergy Sharing Agreement. The Board therefore believes that the Group would be well-positioned to participate in future consolidation of UK closed life funds and generate further value for Shareholders.

 

Timetable and approval

 

The Divestment, which is anticipated to be completed by the end of the second quarter of 2014, is conditional upon the approval of regulatory authorities.

 

Use of proceeds

 

As a result of the Divestment, the Company currently expects that the Impala Facility will be prepaid by approximately £250 million within five business days of completion. The remaining proceeds of the Divestment would be used by the Group for general corporate purposes.

 

Financial impacts of the Divestment on the Group

 

MCEV

 

As at 31 December 2013, the Group MCEV was £2,378 million. The Divestment and the subsequent approximate £250 million debt prepayment increases the Group MCEV by £237 million to £2,615 million on a pro forma basis as at 31 December 2013.

 

Gearing

 

As at 31 December 2013, the Group's gearing ratio was 44 per cent. The Divestment and the subsequent approximate £250 million debt prepayment reduces the gearing ratio by 5 per cent. to 39 per cent. on a pro forma basis as at 31 December 2013.

 

The Divestment therefore allows the Group to accelerate the achievement of its target to reduce its gearing to 40 per cent. or below by the end of 2016.

 

 

Group solvency

 

As at 31 December 2013, the estimated IGD surplus and IGD headroom were £1.2 billion and £0.5 billion respectively. At the same date, the estimated PLHL ICA surplus and PLHL ICA headroom were £1.2 billion and £1.1 billion respectively.

 

The Divestment and subsequent approximate £250 million debt prepayment have a broadly neutral impact on the estimated IGD surplus and IGD headroom.

 

The Divestment and subsequent approximate £250 million debt prepayment reduce the estimated PLHL ICA surplus and PLHL ICA headroom by £0.1 billion to £1.1 billion and £1.0 billion, respectively, as at 31 December 2013.

 

Key Individuals of Ignis

 

The names and principal functions of the key individuals of Ignis are set out below:

Name	Position
Clive Bannister.........	Chairman of the Ignis Asset Management Board
Chris Samuel.............	Chief Executive of Ignis Asset Management
James McConville.....	Director
Chris Fellingham.......	Chief Investment Officer of Ignis Asset Management
Claude Chene...........	Director and Global Head of Distribution for Ignis Asset Management
Gary Hutcheson........	Managing Director & CIO, Real Estate, Ignis
Mark Lovett..............	Managing Director & CIO Equities, Deputy CIO, Ignis
Michiel Timmerman..	Managing Director and CIO Ignis Advisors, Ignis
Russ Oxley................	Head of Rates
Grant Hotson............	Chief Financial Officer
Robert Bricout..........	General Counsel and Chief Risk Officer
Wendy Steel.............	Director IS, Operations and Change
Wyndham Hodgkins..	Head of Human Resources

 

Additional information in relation to Ignis

 

As at 31 December 2013, the gross assets of Ignis on a consolidated basis were £345 million including goodwill and intangible assets (£191 million excluding goodwill and intangible assets).

 

As at 31 December 2013, the net assets of Ignis on a consolidated basis were £241 million including goodwill and intangible assets (£108 million excluding goodwill and intangible assets).

 

For the year ended 31 December 2013, the operating profit before tax and the profit before tax of Ignis on a consolidated basis were £49 million and £51 million respectively.

 

Financial Advice

 

Evercore is acting as lead financial adviser and J.P.Morgan Cazenove is acting as financial adviser to the Company in relation to the Divestment.

 

Notes

 

1.        Figures are as at 31 December 2013 pro forma for the Divestment and including the impact of the planned debt prepayment.

2.        Any references to IGD and PLHL ICA relate to the calculation for Phoenix Life Holdings Limited, the ultimate EEA insurance parent undertaking.

3.        Operating companies' cash generation is a measure of cash and cash equivalents, remitted by the Group's operating subsidiaries to the Holding Companies and is available to cover dividends, bank interest and other items.

 

Enquiries

 

Investors:

Sam Perowne, Head of Investor Relations, Phoenix Group

+44 (0) 20 3735 0021

 

Media:

Neil Bennett, Maitland

Peter Ogden, Maitland

+ 44 (0) 20 7379 5151

 

 

Presentation

 

There will be a presentation for analysts and investors today at 9.30am (GMT) at:

Deutsche Bank, Winchester House, 1 Great Winchester Street, London EC2N 2DB

 

A link to a live webcast of the presentation, with the facility to raise questions, and a copy of the presentation will be available at www.thephoenixgroup.com.

 

A replay of the presentation will also be available through the website.

 

Participants may also dial in as follows:

 

UK                                          020 3059 8125

International                     +44 20 3059 8125

Participant password:    'Phoenix'

 

 

Notes

 

Phoenix is the UK's largest specialist consolidator of closed life funds with over 5 million customers and £68.6 billion of assets under management.

 

Operating companies' cash generation is a measure of cash and cash equivalents, remitted by the Group's operating subsidiaries to the holding companies and is available to cover dividends, bank interest and other items.

 

Gearing is calculated as gross shareholder debt as a percentage of the gross MCEV. Gross shareholder debt is defined as the sum of the IFRS carrying value of shareholder debt and 50 per cent. of the IFRS carrying value of the Tier 1 Notes given the hybrid nature of that instrument. Gross MCEV is the sum of the Group MCEV and the value of the shareholder and hybrid debt as included in the MCEV.

 

Any references to IGD Group, IGD sensitivities, IGD or PLHL ICA relate to the relevant calculation for Phoenix Life Holdings Limited, the ultimate EEA insurance parent undertaking.

 

The financial information set out in this announcement has been extracted without material adjustment from the Annual Report and Accounts of Phoenix Group Holdings for the year ended 31 December 2013.  The Ernst & Young Accountants LLP audit opinion on the Phoenix Group Holdings consolidated IFRS financial statements is unqualified. 

 

This announcement in relation to Phoenix Group Holdings and its subsidiaries (the 'Group') contains, and we may make other statements (verbal or otherwise) containing, forward-looking statements and other financial and/or statistical data about the Group's current plans, goals and expectations relating to future financial conditions, performance, results, strategy and/or objectives.

 

Statements containing the words: 'believes', 'intends', 'expects', 'plans', 'seeks', 'targets', 'continues' and 'anticipates' or other words of similar meaning are forward-looking.  Such forward-looking statements and other financial and/or statistical data involve risk and uncertainty because they relate to future events and circumstances that are beyond the Group's control. For example, certain insurance risk disclosures are dependent on the Group's choices about assumptions and models, which by their nature are estimates. As such, actual future gains and losses could differ materially from those that the Group has estimated.

 

Other factors which could cause actual results to differ materially from those estimated by forward-looking statements include but are not limited to:  domestic and global economic and business conditions; asset prices; market related risks such as fluctuations in interest rates and exchange rates, and the performance of financial markets generally; the policies and actions of governmental and/or regulatory authorities, including, for example, new government initiatives related to the financial crisis and ultimate transition to the European Union's "Solvency II" on the Group's capital maintenance requirements; the impact of inflation and deflation; market competition; changes in assumptions in pricing and reserving for insurance business (particularly with regard to mortality and morbidity trends, gender pricing and lapse rates); the timing, impact and other uncertainties of future acquisitions or combinations within relevant industries; risks associated with arrangements with third parties; inability of reinsurers to meet obligations or unavailability of reinsurance coverage; the impact of changes in capital, solvency or accounting standards, and tax and other legislation and regulations in the jurisdictions in which members of the Group operate.

 

As a result, the Group's actual future financial condition, performance and results may differ materially from the plans, goals and expectations set out in the forward-looking statements and other financial and/or statistical data within this announcement. The Group undertakes no obligation to update any of the forward-looking statements or data contained within this announcement or any other forward-looking statements or data it may make or publish. 

 

Nothing in this announcement should be construed as a profit forecast.

 

Evercore Partners International LLP ("Evercore") and J.P. Morgan Limited (which conducts its UK investment banking business as J.P. Morgan Cazenove) ("J.P. Morgan Cazenove"), each of which is authorised and regulated by the Financial Conduct Authority in the United Kingdom, are each acting as financial adviser exclusively for the Company and for no-one else in connection with the Divestment and will not regard any other person (whether or not a recipient of this announcement or any other announcement relating to the Divestment) as its client in relation to the Divestment and will not be responsible to anyone other than the Company for providing the protections afforded to their clients or for providing advice in connection with the Divestment or the contents of this announcement or any other matters referred to in this announcement.