Following the release of its 2024 results, the Phoenix Group (LSE:PHNX) share price enjoyed a double-digit rally, rising by over 10% on the news. It’s a welcome change of pace compared to the downward trajectory this life insurance stock has been on since interest rates started climbing in 2021.
Typically, higher interest rates are more beneficial to the banking sector. That’s actually a big reason why shares like Lloyds and Barclays have delivered much stronger performances lately. However, they’ve also sparked fresh activity within the pension market with the volumes of bulk purchase annuities and pension risk transfers ramping up. That’s provided some nice catalysts for Phoenix Group. And the impact was on full display in its latest results.
Raising guidance
Operational cash generation jumped 22% to £1.4bn, while total cash generation came in at £1.8bn. The latter is £300m higher than the top end of management’s previous guidance. And incoming efficiency improvements throughout 2025 and 2026 could see a total of £250m in annualised savings over the next two years or so.
Initially, management wasn’t expecting operational cash generation to reach £1.4bn until 2026. However, with this milestone achieved two years earlier, the group has upgraded its two-year targets. Specifically, it expects adjusted operating profits to hit £1.1bn by 2026, up from the original target of £900m. For reference, this metric stood at £825m in 2024, which was a 31% boost from the 2023 levels.
Needless to say, this is terrific news for shareholders, especially if Phoenix Group remains on track. And in terms of its 12-month share price target, analyst forecasts range from 515p (-10%) all the way to 850p (+50%). So in the best-case scenario, investing £1,000 today could grow to £1,500 by this time next year, along with a 9.4% dividend yield that’s just been hiked once again for the ninth year in a row.
The challenge of complexity
With interest rates expected to decline steadily, the excitement surrounding bank stocks will likely start to dwindle, especially if the conclusion of the motor finance scandal ends up going badly for them. That could translate into a migration of investor capital into sectors like life insurance.
However, this sector can also get complicated. Despite the tremendous growth in cash flow, Phoenix’s after-tax profits actually collapsed into negative territory by £1bn. Subsequently, the balance sheet reported a 55% slash to accounting equity.
The root cause is a change in IFRS 17 accounting rules that were implemented last year. Insurance businesses like Phoenix now have to recognise certain profits over a longer period of time, which has been wreaking havoc on financial statements.
Management claims this shift in accounting standards doesn’t have a material impact on the business and that equity should recover as of 2027. However, for non-specialist investors, wading through increasingly complex accounting to work out what’s going on under the surface could make Phoenix a tough idea to get behind. After all, if something goes wrong, it could be challenging to detect.
Nevertheless, complexity is often where the best bargains can be found. And while it may take a few years before the Phoenix share price takes off, the chunky dividend yield helps make up for this potential delay. That’s why I think investors should consider taking a closer look at this insurance stock.
