Zombie life insurer could buy rival for £1bn

A "deal frenzy sweeping the UK insurance sector" is set to continue, Sky News reports, as so-called 'zombie fund' manager Phoenix Group lines up a "£1bn-plus" takeover bid for rival Guardian Financial Services.

Phoenix, which is listed and has a market value of £1.9bn, manages around £52bn worth of assets on behalf of five million policy holders, spread across group personal pension and life assurance funds acquired from other providers. All are closed to new business, which is why they are called zombie funds.

The company makes money by taking fees from policyholders and selling follow-on products, such as income-for-life annuities to those whose pension funds have matured.

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Consolidation is sweeping the sector in the wake of new pension freedoms, which give savers unlimited access to savings, cutting dramatically the number of annuities sold. New European laws increasing the amount of capital reserves insurers must hold have also contributed to the trend.

Elsewhere, Zurich is on the verge of buying British rival RSA in a £5.6bn deal, while Aviva acquired Friends Life earlier this year in a £5.2bn transaction.

Guardian is owned by private equity firm Cinven and controls around £18bn in assets on behalf of 695,000 customers in the UK and Ireland. If Phoenix were to buy the company it would be "reunited" with around £1.7bn worth of funds it previously sold to its potential takeover target. That sale was intended to reduce a debt pile that stood at £3.5bn, and which is now closer to £1.7bn.

Sky News adds that Phoenix is "not the only party in discussions with Cinven, according to people close to the situation". Other potential bidders could include Admin Re and fellow private equity form CVC Capital Partners.

Broader interest could be helpful in Cinven securing an acceptable return from any sale, the Financial Times suggests. "Insiders have previously said that the business had an 'embedded value' of more than £1bn" and, "although listed companies in the sector tend to trade at a discount to this metric", a buyout at half this could prompt "questions from prospective investors".