Phoenix Group’s chief executive wasn’t looking forward to his morning commitments on 28 March 2014.
“I was due to make a presentation to a rather hostile audience,” says Clive Bannister, the head of the FTSE 250 closed-book life insurer. “They didn’t want to think very kindly about Mr Bannister.”
And Bannister’s day was about to get much worse. Clive Adamson, the director of supervision at the Financial Conduct Authority (FCA) blindsided the sector by letting slip to the Daily Telegraph the day before that the watchdog was considering a wholesale and historical review of closed-book products.
“As I left my office to go to the presentation, I knew things were going wrong. I had to stand up and wave my hands around at 9am. Then somebody cheerful in the front row asked: ‘Mr Bannister, Clive, are you aware your share price is already down by 10 per cent?’
“Have you seen the movie The Big Short? Where you had the Lehman guy saying ‘look we’re rock solid and it’s going to be absolutely great’ while the whole hall is emptying as the share price falls?
“Well, you just sort of carry on,” says Bannister with the determination perhaps passed on from his father Roger, who in 1956 became the first person to break the four-minute mile.
By the end of the day, Phoenix’s share price had fallen by 27 per cent. Investors fled fearing firms’ business models could be critically undermined. More than £6bn was wiped off the market value of UK insurers.
Phoenix was hit hard because of the nature of its business. As a closed-book insurer, the firm does not write new policies. Instead it buys up legacy portfolios running them down to a natural conclusion providing retirees with what Bannister calls a “happy ending”.
By consolidating billions of pounds of retirement funds and running them more efficiently, Phoenix is an increasingly popular exit strategy for firms that want to concentrate on core operations. The assets and liabilities Phoenix controls swell as the firm acquires new portfolios from third parties and then contract as legacy schemes run off.
It makes money through a combination of economies of scale and managing assets more diligently. The aim is to generate better returns from investments to pay members benefits.
Phoenix had £74bn of assets under management and 6.1m policyholders at the start of the year. It is nearer the top end of the mid-cap index with a market capitalisation of just over £3bn.
So how does doing such business make Phoenix one of Britain’s largest insurers? Mainly through the sheer size of its transactions. For example, when Phoenix bought Deutsche Bank’s Abbey Life scheme last year, it took on 735,000 policyholders with associated assets totalling £10bn. In return, Deutsche Bank was able to free up nearly £1bn of regulatory capital.
“It’s not glamorous, and I say that without apology. There is a group of us that is determined to deal with the challenges of the past,” says Bannister.
He calls closed-book insurers – of which there are only a handful of players in the market left – the “ploughhorses”, as compared with the “racehorses”: the better known firms that write new policies.
But Bannister estimates there are around £300bn of deals to be done in the closed-book sector. He estimates half of Phoenix’s business comes from UK insurers looking to offload risk, with the other half coming from a combination of overseas insurers and other UK financial institutions.
Bannister takes inspiration from the automobile sector in early 20th century. A keen history buff, he recalls how the early car manufacturers shook up the established business model.
Where previously customers sourced the engine, chassis and other parts and went to a coach builder to put them together, Bannister describes how the likes of Bentley and Rolls-Royce recognised they could change the market by sourcing the parts and putting them together. The key to their success was quickly establishing sufficient market dominance to make it hard for competitors to copy their idea.
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“We can see a generation of growth in front of us, by which time we will have very high barriers around us,” he says.
So what does Bannister do in his free time?
“I have a great love of cars,” says Bannister, who is also the chairman of the Museum of London. “I screwed a Caterham kit car together as a form of therapy. It’s cheaper than a therapist by any stretch of the imagination.”
But his passion doesn’t mean the Phoenix chief exec is a dedicated speed demon, unlike his fast father. He says: “Much to the chagrin of my adolescent boys, I must be the slowest Caterham driver in the entire of the UK.” That safe and steady hand should help guide Phoenix towards its goal of being a “compelling” insurer.