Phoenix In Talks Over £3bn Swiss Re Merger

Phoenix Group, the life assurer backed by one of the entrepreneurs behind the Pizza Express chain, is in talks about a £3bn merger that would transform it into an industry powerhouse.

Sky News can exclusively reveal that Phoenix (LSE: PHNX.L - news) , whose directors include Hugh Osmond, one of Britain’s best-known businessmen, has begun discussions over a combination with Admin Re, a subsidiary of the giant Zurich-based insurer Swiss Re (Other OTC: SSREY - news) .

If completed, the merger would create a business with more than £100bn under management and close to 10m policy-holders.

The talks are at an early stage and may falter before a deal can be reached, according to insiders.

However, the fact that they are taking place at all underlines the renewed strength of Phoenix’s financial position following a restructuring late last year that saw £250m of new capital injected into the company, which also acts as a consolidator of pension funds.

Formerly known as Pearl, Phoenix brought in the US hedge fund giant Och-Ziff as part of the restructuring.

The structure of a merger of Phoenix and Admin Re has not been finalised but under one of the scenarios being discussed, Phoenix would issue new shares that would result in Swiss Re becoming a major shareholder in the British company.

Swiss Re is best-known in the UK for its former ownership of the Gherkin, the nickname given to the iconic City building which is home to Sky News’ studio in the Square Mile.

At Thursday’s closing share price of 653p, Phoenix had a market capitalisation of £1.46bn while Admin Re is understood to have approximately the same value attached to it by its current owner.

Phoenix may be forced by regulators to issue a statement confirming the talks as soon as Friday morning.

A combination of the two companies would make Phoenix a much closer rival to Resolution, which has a market value of £4.3bn.

Phoenix’s chairman is Sir Howard Davies, who is leading a Government-commissioned review of aviation capacity in the south-east of England.

It is unclear whether Swiss Re, which had previously signalled its interest in a disposal of the closed-life business, is also holding talks with other would-be purchasers of the division.

Sources said that it had in recent months engaged with other potential providers of third-party capital into the business.

Closed-life funds such as Phoenix and Admin Re specialise in acquiring books of insurance policies which are no longer open to new business.

They have become a popular mechanism for large insurance and financial services groups to divest themselves of non-core assets, freeing up capital for other investment opportunities.

They also produce lucrative savings in administration costs, meaning that the role of industry consolidator has become a prized one, particularly as the new Solvency-II regulatory regime for the insurance sector has begun to dictate companies’ capital allocation decisions.

Their history in the UK has not been entirely smooth, however, with major players such as Resolution and Phoenix having to overcome significant capital obstacles at various points of their existence.

Until recently, Swiss Re has continued to be an acquirer of assets, announcing two years ago a deal to buy 300,000 policies and £1.6bn in assets from American Life Insurance Company.

At the time, David Blumer, chairman of Admin Re, said the transaction confirmed its "commitment to being a recognised force in the closed life book business.

"Transactions like this allow life insurance companies to monetise the value of in-force blocks of business, while providing Swiss Re with attractive, diversified returns."

Admin Re has gained scale through dozens of acquisitions during the last 15 years. Last year, however, it turned into a seller of Admin Re assets, generating a $630m gain when it offloaded its US division to Jackson National Life Insurance, a division of Prudential (LSE: PRU.L - news) , the UK’s biggest insurance company.

Phoenix is being advised by Deutsche Bank (Xetra: 514000 - news) while Swiss Re has hired JP Morgan Cazenove to work on the potential deal.

The Swiss company first examined a bid for Phoenix in 2011 when the UK-based group also explored a takeover by both Resolution and CVC Capital Partners, the private equity firm.

Both companies declined to comment on the current talks.