An insurer whose specialism is its biggest strength

The insurance sector results season showed that groups such as Legal & General (LGEN) suffered due to often contradictory market trends as the combination of asset price changes and interest rate rises pulled different parts of the business in opposing directions. It is also fair to say that any company operating a significant asset management business is going through a period of indifferent performance.

Luckily, this is not a problem for Just, which is starting to reap the benefit of years of effort in restructuring its balance sheet. This allows it to generate sustainable levels of capital without straining for new business. Fundamentally, the trend to take the risk out of pension commitments is entering a boom phase as interest rates lift defined-benefit (DB) schemes into surplus for the first time in years. The problem for Just will be to avoid gorging at the feast. 

 

The pensions de-risking wave

From the point of view of numerous pension funds, interest rates have risen at exactly the point when a bulge bracket of DB pensioners on pre-2001 schemes are due to go off and play golf. According to the latest figures from pensions consultant and administrator XPS (XPS), the aggregate surplus for DB schemes hit £131bn for the first half of the year, leaving total potentially transferable liabilities of £1.29tn, approximately 15 per cent of which has already been turned into annuities. Indeed, the only constraint on transfers to life insurers is the administrative capacity to deal with the paperwork associated with a large company scheme, which requires considerable investment in time and personnel to complete. Even a giant such as Legal & General reckons it can only handle about £11bn of new business per year, or around 20 per cent of the addressable market.

With the annual DB transfer market worth an estimated £200bn over the next three years, Just intends to up the amount of higher-value transactions. Its largest transaction this half was £513mn and management has confirmed that “we expect our participation in the larger deal segment to increase further”. The importance of DB transfers to Just cannot be understated. Its first-half results showed that £1.4bn, out of total sales of £1.9bn, was down to sales generated by DB transfers, which had risen by 149 per cent year on year. All of this has a positive impact further down the income statement, with the group generating a return on assets of 13 per cent.

Overall, the business is there to be had, with the main challenge being that Just, along with all the insurers, must avoid over-stretching its capital position or getting its hedging options wrong when it comes to dealing with long-term liabilities. The evidence so far is that new business isn’t putting too much capital strain on the balance sheet. Analysts at JPMorgan Cazenove reckon that the stronger-than-expected Solvency II ratio of 204 per cent is down to an adjustment in Just’s interest rate hedging strategy; one advantage that a UK-market-focused business has is that it only needs to worry about changes in sterling interest rates.

 

Insurance companies peer group comparison
TIDM	Price	Name	Price	Market Cap. (£mn)	Dividend payout ratio (%)	Earnings yield (%)	Gross gearing (%)	Price to NAV	%chg YTD	PE	Enterprise value (mn)	Dividend per share Adj	Price to NTAV
ADM	£23.72	Admiral Group	£23.72	7,159	65.7	5.3	107.7	7.5	11	19	£7,891	81.7	9.7
ALVD	€ 222.65	Allianz	€ 222.65	75,915	60.6	8.5	69.5	1.7	10.7	11.8	€ 120,100	1140	2.7
GM	€ 18.56	Assicurazioni Generali	€ 18.56	23,664	62.7	10.1	101.7	1.8	12	9.9	€ 38,890	116	5.4
AV.	381.8p	Aviva	381.8p	10,482	51.8	15.6	64.1	0.9	-13.8	6.4	-£3,443	31	1.3
CSP	€ 27.41	AXA	€ 27.41	52,488	55.2	11.3	140.6	1.4	5.01	8.8	€ 102,080	170	2.8
BEZ	540p	Beazley	540p	3,600	63	3.8	24.1	1.8	-20.5	26.3	£3,575	13.5	1.9
CSN	269.75p	Chesnara	269.75p	402	–	–	64	1.2	-4.85	–	£440	23.3	1.8
CRE	442.25p	Conduit Holdings	442.25p	729	–	–	0.3	1.1	3.33	–	£642	30.4	1.1
DLG	158.45p	Direct Line Insurance	158.45p	2,079	–	–	17.8	0.9	-28.4	–	£1,480	7.6	1.4
JUST	75.7p	Just Group	75.7p	788	–	10	32.5	0.4	-7.23	–	£997	1.7	0.4
LRE	550.5p	Lancashire Holdings	550.5p	1,365.	–	–	37	1.4	-15.3	–	£1,303	12	1.6
LGEN	218.65p	Legal & General	218.65p	13,062.	53.1	16.7	45.7	1.1	-12.4	6	-£17,194	19.4	1.1
MNG	184.975p	M&G	184.975p	4,371	–	–	286	1.6	-1.53	–	£7,492	19.6	4.8
PHNX	509p	Phoenix Group	509p	5,088	62.5	16	87.5	1.1	-16.4	6.3	£3,359	50.8	8.5
PRU	934.9p	Prudential	934.9p	26,073	18.6	8.3	29.9	2	-17.1	12	£28,770	15.4	3.7

Read more on Just on our dedicated company page

In Just’s case, its rate-hedging strategy is supported by the purchase of £2bn worth of long-dated gilts that are currently yielding generously after the combined impact of interest rate rises and the Trussonomics episode last autumn. Under IFRS 17 rules, this helps to mitigate the impact of interest rates on Just’s solvency ratios.

 

IFRS 17: 101

So that investors can follow Just’s accounts, the impact of accounting rule changes must be understood in order to gain an adequate view of the company’s performance. The latest accounting rules for insurance contracts, IFRS 17, affect insurers particularly because premiums and fees used to be an accrual-based form of income. Under traditional accounting, these could be booked as sales at the point of billing, rather than at payment, which simplifies the income statement but also assumes 100 per cent conversion to bookable sales at some point in the future. This has now changed and insurance profits – the premiums that are charged – are now considered to be deferred income resting instead on the balance sheet until the matching bill comes through.

As a UK-only market player, the impact of the changes on Just has been considerable when it comes to the restatement of its accounts over the past couple of years. JPMorgan Cazenove points out that the effect of this will mean a 70-80 per cent reduction in reported profits through to 2027. The upside to the changes, according to the broker, is that they remove interest-rate risk from Just’s solvency numbers and, besides, they do not affect either capital generation or cash flow.

This is why Just’s hiking of its interim dividend by 15 per cent earlier this month was welcomed because the cash flow from its comprehensive profit is expected to rise by the same compound annual growth rate. Overall, Just is forecast to achieve a Solvency II ratio of 205 per cent by the end of the year, outstripping many of its peers, the broker says.

 

JUST-GB
Company Details	Name	Mkt Cap	Price	52-Wk Hi/Lo
	Just (JUST)	£788m	76p	96.5p / 53.2p
Size/Debt	NAV per share	Net Cash / Debt(-)	Net Debt / Ebitda	Op Cash/ Ebitda
	210p	-£137m	–	–
Valuation	Fwd PE (+12mths)	Fwd DY (+12mths)	FCF yld (+12mths)	CAPE
	3	2.7%	–	12.0
Quality/ Growth	EBIT Margin	ROCE	5yr Sales CAGR	5yr EPS CAGR
	–	–	4.7%	–
Forecasts/ Momentum	Fwd EPS grth NTM	Fwd EPS grth STM	3-mth Mom	3-mth Fwd EPS change%
	20%	12%	-17.6%	16.5%
Year End 31 Dec	Sales (£bn)	Profit before tax (£mn)	EPS (p)	DPS (p)
2020	4.65	225	18.8	0.00
2021	2.68	245	18.7	0.50
2022	3.39	-317	19.6	1.69
f’cst 2023	4.11	289	25.9	1.92
f’cst 2024	4.59	335	29.8	2.10
chg (%)	+12	+16	+15	+9
Source: FactSet, adjusted PTP and EPS figures
NTM = Next Twelve Months
STM = Second Twelve Months (i.e. one year from now)

 

Inherent complexity

Shares in life insurers are generally discounted by the market for a reason – a technical reading of the balance sheet is exceptionally difficult for anyone without specialist knowledge, meaning that companies, including Just, often operate as a black box. So investors in insurance shares tend to fall into two camps: those who won’t touch them because of the complexity of the underlying business and others who accept risk in return for steadily rising dividends.

There is also the issue of whether Just has the scale to break through into greater profitability on its own resources. In comparison with its larger peers, Just represents a rounding error for someone like Aviva (AV.) and may ultimately end up as an adjunct to another business. Arguably, its willingness to deal with a huge middle market of pension funds that don’t quite interest the big boys is a relative strength. It means Just attracts regular flows of business – the company looks set for its best year since 2019 – while maintaining a level of manageability and situational awareness that can sometimes be lacking from much larger organisations. Small in this sense can be beautiful, so long as it remains consistently profitable.

As with all insurers, valuing its shares is not necessarily straightforward. JPMorgan reckons the current share price rates Just at approximately 0.4 times its embedded value, suggesting the shares are cheap if the company meets its targeted growth of 15 per cent of compound annual rate. The broker also forecasts a return on equity of 10 per cent. The market has always discounted Just’s shares because of its long process of reorganising its balance sheet. Now that this has finished, investors either need to find a new excuse to continue undervaluing the company or its results will ultimately speak for themselves. On balance, buy.