1
Good morning everyone. I’m Rodney Cook, CEO of Just Group plc. I am joined as usual by our CFO, Simon Thomas and our Deputy CEO, David Richardson. Once again I’d like to thank Numis for the use of their conference facilities and welcome all of you joining us today. We really do appreciate your interest. 2
So here is today’s agenda. As usual, I’ll start by giving you a brief update on how we see the business. Simon will then go through the numbers in more detail, and David will talk about our capital position. After that, we’ll conclude with your questions. Please note that the comparative figures in many of the slides are presented on a pro forma basis as if the merger had taken place at the beginning of 2016 rather than in April. 3
Before I launch into the detail of the first half years trading, I want to highlight the investment story of our company in very simple terms. I make no apology that this may be repeating what I have explained before - we think the story bears repetition. Our model is unique and actually quite simple. First, we are at work in some of the UK’s most attractive financial services growth markets. The DB de-risking segment offers a huge opportunity which only a handful of companies can compete for. Although the Guaranteed Income for Life - or GIfL market - has had its challenges in the last few years, conduct regulation is moving in our favour and our addressable market should grow as shopping around continues to improve. Second, we enjoy a competitive advantage in our markets, based on our hard-to- replicate intellectual property. And I’m not just talking about our medical underwriting and powerful distribution franchise, but also our expertise at lifetime mortgage origination. This creates an attractive matching asset in which to invest our GIfL and DB premiums. And our competitive advantages are more valuable as standard underwriting models become 4
difficult to sustain. And Thirdly, we understand the value of capital and will continue to manage it carefully. We are creating a sustainable capital story, and while there is growth in our markets, we are taking advantage of it to expand our margins and to improve shareholder economics, even if that means a lower market share. We are seeking to maximise profit rather than headline volumes. The cost efficiency achieved from the merger has contributed much to the margin improvement story and the higher returns are clear for you to see from today’s figures. We also adopted our vibrant new brand during the first half of the year, and have well and truly moved on from the predecessor groups. We’ll be going into more detail in some of these areas shortly, but you’ll see these results demonstrate our success in: • Increasing volumes • Expanding margins; and • Creating a store of value today, from which we will draw from in the future. I want to say right up front that we think this adds up to a sustainable model in growing markets. Now for the first half performance. 4
You’ll see, the main operating highlight today is the further improvement in new business margin, which drove a 39% increase in adjusted operating profit to £67m. We have already reported that we have reached our original £40m cost synergy target more than a year ahead of plan and we will now seek to exceed the updated target of £45m. We indicated to you in July that we expected the margin to exceed 7% for 2017, so I’m very pleased to announce the result for the first half at 8.9%. This is a substantial increase from the results for the first half of the previous year of 5.0% and remains ahead of pre-Pension Freedom levels. This margin expansion was necessary given changing capital requirements under Solvency II, and we are making good progress on the cost-base which will increase returns on capital invested in new business. You’ll see its also been a solid six months for our balance sheet. The Group's Solvency II ratio at 30 June 2017 is estimated at 150%, more or less the same as in December when it was 151%. This is pleasing given the new business strain, integration costs and amortisation of transitionals for the period. 5
We significantly increased our financial flexibility just after the end of June by agreeing a £200m revolving credit facility with a group of three banks on more attractive terms than our prior arrangement. In addition, our recent announcement of inaugural investment grade credit ratings for various group entities should reduce the cost of new capital were we to re-enter debt markets. Our EV per share ticked up to 221p, and our IFRS tangible NAV was 155p at the end of June. So overall a very strong first half. Now I’m going to talk about the attractive growth markets in which we operate. Whilst our strategy is about growing profit not headline sales - expanding markets also enable profit growth, as risk selection is easier when you have more business to choose from. 5
You’ll see DB momentum has been strong, with H1 2017 industry volumes of £5.1bn, being 88% ahead of last year. This bodes well for the second half. Hyman Robertson’s research suggests the DB de -risking market will continue to grow substantially during the next decade. They have increased their forecast to £700bn of de-risking over the period to 2031. This averages out at more than £45bn pa., well ahead of historic levels of between £10 to £15 billion per year. We note the recent market comments about back-book acquisition opportunities, but £10bn case sizes are not on our radar. Our focus is on the £250m or less transaction size sub-segment, especially buy-ins. I’ll leave it at that on DB, given that many of you came to our seminar in February. The GIfL outlook is also positive. You’ll see from the top right chart that open market GIfL volumes were up by a little over 12% in the first half of the year compared to the first half of 2016, and that’s more than double the growth - of just over 5% - in the total GIfL market. What I’m also pleased to report is that Open Market sales now accounts for 50% of the total market, which is the highest level since the introduction of Pension Freedom and Choice. It’s good 6
to see the inputs we have described to you in previous presentations translating into more open market business. Our team went through this in detail at the GIfL seminar in June, detailing a series of growth drivers - it’s worth a look if you missed the seminar and we have reproduced our market forecasts in the appendix. Adding it up, we think that by 2021 the open market could grow to £2.9bn from £1.9bn last year. But if things go well across all drivers, the upside could be considerably more. The lifetime mortgage market is also developing favourably. In the bottom left chart you’ll see that in 2016 the market grew by 34% and in the first half, it grew by a mighty 54% year on year. We expect continued growth to be driven by demographics, increasing housing wealth coinciding with inadequate DC pension saving, and the need to settle mortgages and credit card debts upon retirement. Obviously this market has generally been growing more quickly than the DB or GIfL segments which fund our mortgage advances. This means we have been able to achieve the volume we require at attractive spreads, both of which contributed to our positive overall margin story. New capacity is certainly entering the LTM market, but demand has been growing more quickly, and so pricing has remained sound. We’ll explain more about mortgages at another seminar, probably in Q4, but for now the takeaway is that this remains an attractive market in its own right, not just a valuable investment for some of our DB and GIfL premiums. 6
So before I hand over to Simon I’ll pause to highlight the key financial figures for the half year. You’ll know, we have been pursuing new business margin expansion rather than headline sales growth. But this is where our relatively young business comes into its own. As the left hand chart shows, reserves grew by 7%, driven by continued net inflows. These inflows far exceeded outflows in the 12 months to June 2017 and falls in bond yields have also contributed positively. Our net inflow dynamics ensure we are still growing our reserves, which will drive future profit growth. As these flows accumulate each year they build a store of value which will be released over time as the invested capital and prudential margins built into the reserves unwind. This stock of capital and discounted future profits on existing business are shown in the chart on the right as Embedded Value, which increased to 221p per share. 7
You can observe on the left chart, new business margins made further substantial progress in the first half of 2017. This margin expansion, together with a 16% increase in first half retirement income sales meant new business profit more than doubled, helping adjusted operating profit to a 39% increase. Like us you may conclude that our strategy of disciplined growth is working. So with that I’ll pass over to Simon to explain the detail, then David will cover our balance sheet and dividend plans. 8
9
Recommend
More recommend
