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Life insurance is supposedly a stable and predictable business. But Just Group has been buffeted by a blizzard of policy and regulatory changes since it floated in 2013. The latest is a new accounting standard that cuts the FTSE 250’s group operating profit by 80 per cent. Yet the underlying economics of the business are unchanged — and healthy.
Just Group occupies a desirable niche in one of the few fast-growing segments in the UK finance sector. The once moribund annuity market has perked up on the back of vastly improved offered rates. Bulk annuity transfer deals have also boomed. Higher interest rates reduce company defined-benefit-scheme funding deficits, making transfers to insurers more affordable.
Just Group is well placed. On Tuesday it reiterated its target of 15 per cent annual growth in underlying operating profit. This adjusted metric involves adding back some of the profit deferred under the new IFRS 17 accounting standard. Unlike the old IFRS 4 rule, this change does not allow a proportion of the expected profits on new business to be capitalised upfront, thus muting apparent earnings growth.
The switch to IFRS 17 aims to boost comparability of insurers’ statements. Just Group simply hopes its adjusted number will clarify its earnings potential. Its share price jumped 4 per cent on the day.
Yet investors have been burnt before. Back in 2014, pension freedoms unveiled by former chancellor George Osborne destroyed nearly half its market value. In 2019, it cut its dividend and raised £400mn in a combined equity and debt issue to protect itself following the introduction of stricter capital rules.
Its capital position has since strengthened. But the shares still languish at a whopping 60 per cent discount to tangible net asset value. They trade on just 3 times earnings, less than half the multiples of larger rivals such as Phoenix and L&G.
A mismatch between the booming annuities business and subdued share prices invites investors to take a closer look.
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