While investing in the market for retirement income may not sound very exciting, even in the case of a self-proclaimed ‘disruptor’ like Just Group (JUST), for those approaching retirement it actually makes a good deal of sense.

Just Group offers bulk annuities, individual annuities and lifetime mortgages.

Bulk annuities are insurance products which are sold to defined benefit schemes allowing them to transfer their risk, so that the insurance company – in this case Just Group – pays benefits to pension scheme members covered by the policy until they die.

The market for bulk annuities, which make up 60% of the group’s new sales, is currently booming as most pension schemes are sitting on strong surpluses.

Consultant Lane Clark & Peacock estimates that more than £600 billion of bulk annuity deals will complete over the next 10 years.

Individual annuities, which make up 20% of new sales, are ‘guaranteed income for life’ products which allow members of a defined contribution pension scheme to transfer their cash lump sum to the group in exchange for a guaranteed regular income until they die.

Lifetime mortgages are a kind of equity release, which sounds risky if house prices fall but they only make up 16% of new sales and Just Group’s average loan to value is just over 35% so it has a big ‘cushion’ if the market does decline.

What makes the company attractive is not just the fact that the share price has come down a long way in the last five years, but since the firm became self-financing in 2020 it has built up a high level of capital which is set to keep on building.

Prior to 2020, the company faced a major headwind as every time it sold a product it had to put aside a large amount of cash which it didn’t have meaning it was constantly in debt.

Now, cash generated by in-force policies is more than enough to offset the ‘business strain’ of selling new products.

Bearing in mind the long duration of many annuity products, Just Group is producing steady and predictable cash flow over decades, with analysts at Jefferies estimating in-force cash generation growing by 7% per year between the start of 2022 and the end of 2026.

Combined with reforms to Solvency II rules, which mean a reduction in the ‘risk margin’ on new sales, the group’s underlying surplus cash is set to grow by an average of over 20% per year over the same period. It offers a 2.1% prospective dividend yield.

‹ Previous2022-12-01Next ›