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Phoenix has most defensive dividend yield among life insurers as Brexit looms, says Barclays

Barclays upgraded its rating on Phoenix to 'equal weight' from 'underweight' but left its target price at 680p, noting that shares have fallen in line with peers over the past year
UK life insurers are pricing in a 30% chance of a recession in the case of a no-deal Brexit

Phoenix Group Holdings (LON:PHNX) is the most defensive life insurance stock and offers one of the safest dividend yields amid concerns a hard Brexit will lead to a recession, Barclays said.

Barclays said UK life insurers are pricing in a 30% chance of a financial crash if Prime Minister Theresa May is unable to negotiate a new Brexit deal that MPs can agree on before Britain leaves the European Union on March 29.

Barclays upgrades Phoenix 

The bank believes insurers’ capital is most at risk during a recession and Phoenix has the “most defensive balance sheet” of its peers due to an increased level of hedging.

“We upgrade Phoenix to equal weight (from underweight), as our analysis suggests this is the most defensive life insurance stock, with the lowest volatility of solvency capital, an attractive defensive dividend yield (FY yield of 7.6%), but the stock has declined in line with UK peers over the past 12 months (down 12% vs STOXX Europe 600 insurance index down 10%),” Barclays said,

“UK life insurance stocks are among the cheapest in the sector despite enjoying some of the highest earnings revisions and, in our view, having attractive business models, as investors are concerned about the asymmetric risk from the UK’s exit from the EU.”

Life insurance stocks are trading 20% below their long-term price-to-book/price-to-earnings multiples with dividend yields of 6.4%, the bank said.

Life insurance markets 'attractive'

Barclays thinks UK life insurance markets are attractive with auto enrolment driving genuine net flows into pensions and the bulk annuity market providing a possible £180bn opportunity over the next six years.

“While work place pensions are low-risk / fee business, they are also low-margin business, and it is the bulk annuity opportunity that will drive the bulk of earnings growth,” it said.

“While we believe insurers earn an attractive double-digit return on capital for taking the credit and longevity risk, the business does require capital and the annuity players are levered credit plays.”

Phoenix acquisition of Standard Life insurance arm protects dividend for 18 years, says Barclays

On Phoenix, Barclays said it is not changing its estimates or target price of 680p. But the target price offers at 10% upside and the stock provides an estimated 2019 dividend yield of 7.6%.

“While Phoenix’s dividend may not grow in the absence of further deals (which we do not model in our estimates), it does have the most defensive yield among its peers in times of market stress, and the recent acquisition of Standard Life Insurance protects the dividend for 18 years,” it said.

Phoenix completed the acquisition of Standard Life Aberdeen’s insurance arm for £3bn last August. Standard Life Aberdeen sold the business following the merger between insurer Standard Life and asset manager Aberdeen in 2017.

READ: Phoenix Group's Standard Life transaction a win-win deal

As part of the deal, Standard Life Aberdeen was given a stake of just under 20% in Phoenix.

In morning trading, shares in Phoenix edged up 0.4% to 637.5p. 

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