Swiss Re has finally found its exit point from its UK closed life book consolidator business, ReAssure, agreeing to sell the ReAssure Group plc business to the largest pensions and life consolidation specialist in Europe, Phoenix Group Holdings plc in a deal worth UK £3.25bn.
Swiss Re has been seeking to downsize or sell its holding in ReAssure for a long time now, having taken investment in it to sell down its stake, then pursuing an initial public offering (IPO) that proved unable to generate the demand hoped for and was shelved.
Finally the reinsurance firm has found a buyer for the ReAssure business, with Phoenix set to acquire the UK focused acquirer of closed life insurance books in a transaction valuing it at UK £3.25 billion.
Swiss Re had previously said that an IPO valued ReAssure at up to UK £3.3 billion, so this deal seems to generate the value the reinsurance firm had been looking for.
For Phoenix Group, this transaction cements its position as the largest in Europe and enlarges its platform for buying closed life books in the UK, also giving it a large portfolio of in-force policies to service.
Swiss Re will receive a UK £1.2 billion cash payment as part of the arrangement, with the balance set to be paid in Phoenix shares.
The company said that selling ReAssure will have a positive impact on its solvency, lifting its Swiss Solvency Test (SST) ratio and economic profit, but Swiss Re warned it could have a negative impact on its US GAAP results in Q4 2019.
Swiss Re will keep its skin in the game of life consolidation, with the shares it will receive in Phoenix representing a 13% to 17% stake in that company and also giving it a seat on its Board of Directors.
ReAssure’s minority shareholder, MS&AD Insurance Group Holdings Inc which made an £800 million investment in the company, is set to receive shares in Phoenix representing an 11% to 15% stake.
Precisely how many shares the two companies receive in Phoenix will be down to Phoenix’s share price at the closing of this deal, while the total shareholding of both companies is fixed at roughly 28%.
Christian Mumenthaler, Swiss Re’s Group CEO, commented on the news, “We believe this transaction maximises long-term value for Swiss Re shareholders. Swiss Re’s goal has been to deconsolidate ReAssure, and we are pleased to have found a strong buyer for the business. The strategic rationale for the combination of the businesses is compelling, and we look forward to working together with Phoenix and to sharing the financial benefits of the combination.”
Phoenix sees the acquisition as particularly positive for its business model, with ReAssure growing it significantly and the deal forecast to deliver additional cash flows of approximately UK £7 billion over time, with UK £2.7 billion expected to be generated between 2020 and 2023 and another UK £4.3 billion from 2024 onwards.
Additionally, Phoenix expects it can generate cost and capital synergies of £800 million through bringing ReAssure under its operating model and capital management strategy.
Phoenix Group’s CEO, Clive Bannister, stated, “This is a highly attractive acquisition for Phoenix that follows our growth strategy and delivers value to our shareholders. The acquisition will contribute £7 billion of incremental cash generation and give us the opportunity to capture significant cost and capital synergies. The purchase price, at 91% of ReAssure’s pro-forma Solvency II Own Funds, is attractive; as is the efficient financing structure. Together, this enables us to maintain our balance sheet strength.
“The deal confirms Phoenix’s position as Europe’s largest life and pensions consolidator with £329 billion of assets under administration and 14.1 million policies and will give us an enhanced platform to pursue further growth opportunities, including Bulk Purchase Annuities. We also welcome Swiss Re and MS&AD as significant new shareholders and see their investment as a recognition of the many benefits that this combination can bring.”
In addition, Keith Skeoch, CEO, Standard Life Aberdeen, which is Phoenix’s strategic investment partner and current largest shareholder, said, “Today’s announcement by Phoenix illustrates the substantial consolidation opportunities that exist within the UK and European insurance sectors which was a key factor in our making our strategic investment in Phoenix.
“As a leading provider of investment solutions to both Phoenix and ReAssure we will be working with Phoenix to understand the additional opportunities that the proposed acquisition creates for Standard Life Aberdeen.”
Phoenix will build on its position as Europe’s largest life and pensions consolidator, with GBP £329 billion of assets under administration and over 14.1 million policies, which it sees as a platform that can deliver further growth and of course profits to its new shareholders.
Thierry Léger, CEO of Swiss Re’s Life Capital Business Unit, said, “The expertise of ReAssure’s team combined with that of Phoenix will create a very powerful closed book consolidator. At the same time, the sale will accelerate the transition of Life Capital towards a dynamically growing digital B2B2C business that leverages technology and data.”
As part of this deal, Swiss Re will reacquire the 25% stake in ReAssure currently held by MS&AD, paying for it in Phoenix shares valued up to UK £1 billion at signing, representing a UK £0.1 billion premium to MS&AD’s cost base for its holding in ReAssure.
The sale of ReAssure to Phoenix is expected to close in 2020 and Swiss Re expects significant benefits from it.
Swiss Re said the economic benefits will depend on Phoenix’s share price prior to the closing, but it estimates the transaction will result in a 12% increase in its Group SST ratio and generate economic profit of US $0.3 billion.
However, an estimated US GAAP pre-tax charge of approximately US $0.3 billion in Q4 2019 is also expected, reflecting the higher consolidated book value of ReAssure in the main, driven by historically low interest rates, the reinsurance firm explained.
Swiss Re said that its Board of Directors will “assess the optimal use of the proceeds of the sale,” and will provide an update on this with the full-year results.
The firm said that it will also issue a guarantee in favour of the holders of the EUR 750 million 1.375% notes due 2023 of Swiss Re Finance Jersey (previously Swiss Re ReAssure Limited), which is set to remain a wholly owned subsidiary of the reinsurer.
Swiss Re’s CEO Mumenthaler said that this deal delivers on the firms stated objective of deconsolidating ReAssure, explaining, “Phoenix is a natural acquirer of ReAssure and has a proven track record of delivering value to both shareholders and customers. We look forward to working with Phoenix and supporting them in achieving their vision of being Europe’s Leading Life Consolidator.”
This transaction ticks all the boxes for Swiss Re, enabling it to de-consolidate and sell the bulk of the ReAssure business at a valuation that is commensurate with its ambitions. But also allowing it to keep skin in the game and benefit from the ongoing growth of the Phoenix platform, while also potentially giving it the ability to put its reinsurance expertise to use in future as well.
That’s got to be seen as a positive all around and the shareholding in Phoenix could become a very valuable commodity in years to come as that company continues to build out its life and pensions platform.
