1 Good morning everyone. Im Rodney Cook, CEO of Just Group plc. I am - - PDF document

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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

• n 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

• nly 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

• perate. 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

• pportunities, 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

• r 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

• ur balance sheet and dividend plans.

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Thanks Rodney. This slide shows the summary IFRS result. Rodney has already highlighted some key takeaways - but let me focus on one of them. Our adjusted operating profit grew by 39%, and underlying operating profit by 49%, both driven by the 106% increase in new business profit. This is a real vindication of our disciplined pricing approach, with the benefits

• f our cost synergies also starting to come through.

Clearly the new business profit growth and margin is the eye-catcher, and I’ll go into more detail on this in a moment. But further down the P&L, the in force profit was unchanged from last year. Here, the positive impact of a higher opening actuarial reserve was offset by further corporate bond spread tightening and a slightly reduced earning on surplus due to a change in mix of the surplus assets. We have some small operating variances were mainly a result of higher 10

mortality experience on our life time mortgage book. The Other Group Companies result includes our continued investment in HUB, our professional services and distribution business, which provides solutions to corporates and which helps to grow our addressable Open Market in GIfL and extend our distribution into the LTM market. The increase in our reinsurance and finance costs shouldn't come as a surprise and is a direct result of the issue of our £250m Tier 2 debt in October 2016. Now, these are pro-forma figures & I’ll circle back on the below the Operating profit lines when we look at the statutory figures later. So looking at our sales in a little more detail. 10

The total Retirement Income sales figure was up 16%, driven by the strong DB performance. DB sales have recovered strongly, up 80%. I should flag this was helped by a weak comparator in the first half of 2016, when the market was quiet after the rush to transact in Q4 2015 ahead of the introduction of Solvency II. Following this regulatory change, it is good to see the structural growth trend resuming. GIfL sales were broadly flat year on year, reflecting our disciplined pricing

• approach. The Open Market is growing again and this feels like a market

which is back on its feet after pension freedoms. We saw a 24% increase in

• ur own GIfL sales in Q2 compared to the first quarter, helped by some large

case sizes, particularly individual customers transferring from DB pension schemes. The other area to highlight is our mortgage sales which were slightly ahead of

• ur ALM appetite for the half year.

We highlighted at our full year results that we no longer targeted a 25% mix, but we will dynamically allocate life time mortgages in-line with the profile of 11

the liabilities written in any period. In the first half of this year, the optimal mix was just shy of 30% (about 29%) and LTM volumes are being managed with near-term DB and GIfL origination in mind. On the next slide, we look more closely at our DB sales. 11

We’ve already touched on the long term growth drivers in this area and, as I said earlier, DB sales increased by 80% over the comparative period. On the chart we wanted to highlight that after the reporting period - since the end of June 2017, we have written just over £260 million in premiums, which sets us up nicely for the seasonally busy Q4 period. In the near term I can say that our pipeline is robust, with multiple potential transactions of various sizes <£250m. Now turning to new business margins. 12

The benefits of our disciplined growth strategy are clearly demonstrated by

• ur new business margin expansion from 5% in H1 16 to 8.9% in H1 17.

As you can see on the chart, the first half 2017 margin was a further improvement on the 7.7% margin achieved in second half of 2016. Combined with Retirement Income sales growth of 16% this led to a more than doubling of new business profitability. This growth in new business margin was driven three key drivers.

• Firstly, following the implementation of Solvency II, pricing has generally

been maintained in the market, alongside that - we have continued to adopt a disciplined approach together with the implementation of some improvements in the targeting of margins.

• Secondly, margins were helped by continued attractive mortgage yields.

Rodney’s already described the market dynamics here. Growth in supply has been exceeded by growth in demand, and mortgage spreads have remained 13

• healthy. This has supported attractive overall new business margins.

In addition, as I explained earlier, we have selectively increased the mortgage proportion backing our new liabilities, to create more efficient asset-liability management. This efficiency is increasingly important for DB schemes with longer duration liabilities, and - on a case by case basis - we can selectively increase the amount of lifetime mortgages to better match the policyholder liabilities as they fall due. DB liabilities can have a much longer tail, typically due to the predominance

• f benefit indexation, in contrast to GIfLs.
• The final driver of the margin is the synergy benefits, which are now

being felt. The first half of 2017 saw the impact of a meaningful amount of synergy benefits . This is in contrast to the first half of 2016 which had no material synergy benefits to speak of - as the merger had just completed in April 2016. Looking ahead, for the full year, we feel that a new business margin in the mid 8%’s is increasingly likely. We remain comfortable with full year expectations, albeit with moderated volume growth and higher margins than previously expected. Now turning to our In force. 13

Our first half in force profit has been maintained at the same level as first half

• f 2016.

While opening reserves for the period grew, the flat in-force profit is reflective

• f a couple of other factors.
• Firstly corporate bond spreads continued to tighten.
• In this half year they fell a further 30b.p. as investors searched for yield.

This followed the falls in second half of 2016 which led to a more pronounced effect on the In-force margin in the first half of 2017.

• Remember, we apply actual rather than opening yields, and that

although the fall in bond spreads dampens our In-force earnings, it releases the full effect of the fall in default allowances into our investment & economic variances, so it is not lost.

• The second issue was created by the fact that we had warehoused more

mortgages in surplus in the first half of 2016, this gave the return on surplus assets a boost. The level of warehoused mortgages has fallen in the first half 14

• f 2017 and that has slightly reduced the return.

Looking ahead, for the remainder of the year, subject to spread developments, I’d expect the second half In-force profit to be broadly similar to the first half. I just wanted to look at our statutory result, specifically the non-operating items. 14

This slide shows the statutory result and compares 6 months of Just against 6 months of Just Retirement and 3 months of Partnership - you’ll recall that the merger completed for accounting purposes in April 2016. I want to highlight the below the operating profit line items. These include

• Non recurring expenditure of £3m. This includes investment in digital and
• nline capability, although these amounts are relatively modest.
• The Investment & Economic profit line makes a positive contribution of

£31m. Here, as I mentioned in the In force discussion, this line mainly benefitted from the tightening of credit spreads partially offset by the impact of rising interest rates on our surplus assets. This is comparatively much smaller than the positive economic variance last year of £145m, which was mainly driven by last year’s huge falls in risk 15

free rates.

• Merger integration costs of £16m were relatively static – more on the

cost synergies in a moment.

• Finally we have the amortisation of intangible assets which has doubled

due to the inclusion of two quarters post-merger rather than one in the prior half year. Now moving to cost synergies. 15

We have been making rapid progress on the integration programme, which has already achieved a £41m run-rate of cost synergies, and expect to achieve around £45m by the end of 2017, a year ahead of target. You can see in the chart that savings have been made across the business – although staff savings make up the majority of the £41m. In relation to our properties, we have sublet two floors out of four at our Bishopsgate offices and we did not renew our lease in Redhill, significantly reducing our premises costs. Now finally from me, I wanted to highlight that we have made real progress in terms of improving our financial flexibility. 16

Our new five year revolving credit facility gives us flexible access to up to £200m from a group of three banks at attractive rates of interest. These rates are broadly 100b.p. less than under the previous senior term facility, recognising the balance sheet progress we have made. As you can see on the chart, increasing investor confidence in our credit story was already being expressed by the falling secondary market yields on both

• f our Tier 2 bond issues.

You can also see that this confidence appears to have risen further following the recent announcement of our inaugural investment grade credit ratings from Fitch, where they rated Just Retirement Limited with an A+ Financial Strength Rating. We now have better access to liquidity via the RCF, and our new credit rating should significantly improve our access to debt capital markets should the time come. With that, I’ll hand over to David. 17

Thanks Simon, a strong set of figures I’m going to focus on dividends and our resilient capital position, before Rodney wraps it up. 18

First of all on slide 19, our Solvency II coverage ratio continued to be resilient, and was 150% at the end of June, almost unchanged from December. This was despite the final dividend payment, new business strain, integration costs and amortisation of transitionals over the period. We’ll go through the moving parts shortly. The figure is well ahead of the 134% we reported a year ago, due to the £250m hybrid debt we issued in October of last year. Our economic capital ratio was similarly resilient at 214%. It is significantly higher than our Solvency II capital ratio as it reflects our true economic view and does not contain the more onerous elements of Solvency II, for example the risk margin. I want to highlight that our gearing level remains conservative compared to

• ur sector peers. At 17%, we still have significant hybrid debt capacity,

whether you consider the regulatory capital limit of 50% of SCR, or market norms as shown here in the bottom left corner. The improving credit market perception of us means that this is an increasingly viable option if we see scope to accelerate profitable growth. 19

This chart shows the development in our Solvency II surplus over the first half

• f 2017. I will step through each component and share our view on how we

expect each to develop in the future. Note that all figures here are net of tax In-force surplus over the period was £58m. This represents the gradual release of all the prudent margins Solvency II requires you to hold, including risk margin and SCR, and allowing for six months’ amortisation of

• transitionals. For the avoidance of doubt, this means the release of prudent

Solvency II margins was significantly in excess of the amortisation of transitionals over the first 6 months of 2017. New business strain over the period, loaded for post-synergy cost levels, was £29m. On £723m of new business premiums, that represents a strain of 4%

• f premium, in line with our previous “mid-single digit % of premium”
• guidance. This figure benefitted from the same new business drivers that

Simon highlighted in the IFRS results. As previously explained the amount of new business strain is subject to a number of variables including customer rates on GIFLs and DB, the level of spreads on LTMs, risk-free rates and

• ther economic variables. We continue to expect our new business strain to

typically be a mid single digit % of premium fully loaded for post-synergy 20

expense levels. The dividend and interest cost in the first half captures a final dividend, and reflects the coupon on our new hybrid debt. For 2017 full year interest costs are expected to be £32m pre-tax, which you can then net down for tax in your projections As Simon explained, we’ve made great progress in achieving merger expense

• savings. However we have not fully achieved them yet and over the period

there was still a £15m cost overrun; this includes an element of expense over- run due to seasonality in our DB new business premiums. In addition there was £13m of merger integration costs. We expect both of these items to be eliminated during 2018. Finally, H1 17 also benefited from favourable financial market effects, with risk free rates rising, which is a benefit for a Solvency II balance sheet, and credit spreads tightening. This contributed to “Other”. Please note that, the cumulative changes in economic conditions since the previous point the transitionals was re-calculated (i.e. based on 30 June 2016 economics) did not trigger a need to recalculate the transitionals. However, if we had recalculated the transitionals at 30 June 2017, it would have reduced the surplus by c. £63m, reducing the Solvency II coverage to approximately 145% Putting this together, our expectation remains that the business will be capital neutral in £ terms by the end of next year. We still expect the Solvency II coverage ratio to reach its low point in 2019, and to improve around 2020. Of course there are lots of variables which will affect the actual capital ratio development over time, but that is our base-line expectation 20

Let me briefly touch on the interim dividend whilst we discuss the capital position. We’re pleased that the Board has declared an interim dividend of 1.17p per

• share. This is consistent with our resilient capital position.

The payout ratio is not something we intend to change significantly in the short-term. However, the dividend has always been intended to be progressive, subject to continued earnings growth and a satisfactory capital position. 21

This chart shows the sensitivity of our capital position to the key risks that the balance sheet is exposed to. First, we can absorb falls in interest rates. A 50bp fall from 30 June 2017 levels leaves the Solvency II coverage ratio at 138%. For bigger than 50b.p. falls, we have positioned the balance sheet so that the Solvency II coverage ratio is broadly neutral to changes in risk-free rates after recalculation of the

• transitional. To be clear, a 50b.p fall does not automatically trigger a

recalculation of the transitionals, but it does allow you to understand the dynamics, and how we manage the balance sheet. Please note, the transitionals will be recalculated at the end of 2017 regardless of what happens over the year. In terms of impact on capital ratio, credit spread expansion in isolation is broadly neutral for us in the world of Solvency II. Our principle balance sheet risks otherwise remain property and longevity. Our exposure to property risk primarily relates to our No Negative Equity Guarantee commitment on Lifetime Mortgages. The Property stress 22

represents a 10% permanent fall below the assumed long term trend for property prices, and assumes no subsequent recovery of that fall. In other words, a permanent step down below the long-term trend. This stress would reduce Solvency II coverage ratio to 138%. As for longevity, trends are actually favourable currently, judging by the general population statistics and analysis carried out by the CMI Bureau. The 5% uniform increase in longevity shown here would represent a material shock to the business given the credibility of our accumulated mortality IP, but again this is a risk we could absorb. In addition, we recently increased our longevity reinsurance cover to 75% for standard underwritten DB business, and for GIFL business. So over time our longevity sensitivity will fall as a proportion of our balance sheet as more years are added under the new reinsurance terms. Overall, the picture is one of a resilient balance sheet, with scope to absorb various stress scenarios and still support the growth of the business. 22

Our confidence in the capital position is partly premised on not just the amount of our surplus, but also our diversified investment strategy. The overriding investment strategy is to meet policyholder liabilities as they fall due through duration and cashflow matching with prudent investments The public bond portfolio is managed by Insight, Robeco and Blackrock with clear mandates and oversight provided by our in-house Investment team and the Investment Committee of the Board. Interest rate, inflation and currency risks are hedged using derivatives and supported by collateral agreements. Migration risk is reduced as the bonds are predominantly used to match shorter dated liabilities, and we have appropriate controls on: 1) Rating - where we limit ourselves to no more than 5% deviation on BBBs relative to the iBoxx corporate sterling index 2) Single name exposure - where we won’t hold more than 1.5% of total non- reinsurance assets in one issuer. To provide some context on this, we have a total of 340 issuers, with an average holding of £31m 23

3) Sector – On Financials, we formally review exposures if the managers exceed the iBoxx financials sector by 5%, and for other sectors, we target a limit of 20% of the life company’s credit assets, and 4) Foreign currency – we hedge all currency risk . Exposures are closely monitored and we swap cashflows to maturity back to sterling The charts shows a well-diversified portfolio, of good credit quality, with an average rating of single A. Continuing the trend since the 2008-2010 financial crisis, we experienced no defaults, and the portfolio is performing as

• expected. At the previous seminar, we talked about the lifetime mortgage

portfolio, and that had an unchanged 28% LTV ratio, and is well diversified geographically across the UK 23

Reinsurance remains a key tool for us. We continue to reinsure more than half of longevity risk in our key DB and GIfL business lines, which significantly reduces our Solvency II capital requirements. For recent years’ business our reinsurance treaties are straightforward longevity swaps. If experience differs from expectations, we pass on a proportion of the difference to our reinsurers This reduces our longevity risk which in turn significantly reduces Solvency II capital requirements on new business. This increases the Internal Rate of Return on capital invested in new business. Of course, reinsurers do not provide longevity risk transfer for free, and we do give up some future profits. However, by utilizing longevity re-insurance, we are able to generate more profit per £ of capital invested, than we could otherwise do without reinsurance More generally on the topic of longevity, there has been much industry comment on a slowdown of longevity improvements at national population 24

• level. Our view is this is a real change in general population trends, rather

than a temporary blip. However it is too soon for us to make any reserve releases. It is not a simple read across from the general population to our portfolio of business. Insured lives are not always typical of the population. This is particularly the case for Just due to our use of medical underwriting which places more emphasis on the individual customer’s circumstances and less emphasis on proxies drawn from the general population. That said, we have seen some early evidence of higher mortality experience

• n our own book, for example on our Care portfolio where the average age is
• high. We will review the evidence closely as part of our usual year-end review
• f longevity assumptions and update you with our preliminary full-year results.

With that, I will hand back to Rodney for concluding remarks. 24

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Thanks David I want to finish by going back to our investment thesis once more. First: We are increasing profits in markets that are growing and economically

• attractive. We are maximising our profits by risk-selection rather than headline

sales growth for its own sake. Second: We have a sustainable competitive advantage within these attractive markets, driven by our medical underwriting, extensive distribution franchise and importantly, mortgage origination capability. These advantages power our risk selection and are translating into higher profits. Thirdly: These improving returns mean we remain confident in achieving a self sustaining capital position in the medium term. In the meantime, we have improved our access to both liquidity and hybrid debt markets. And finally: we are driving growth in profits by delivering the benefits of the merger at least a year ahead of schedule. 26

Bringing this all together I hope you’ll conclude like we do that this adds up to a sustainable model in growing markets. As you have seen today, this strategy has already driven a significant improvement in returns, but we think there is more to come, as the store of value we are creating matures, and we are looking forward to the second half

• f the year with confidence.

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With that, who wants to ask the first question? [Questions from the floor] Steve are there any questions from those people have joined on the webcast? In that case I’d like to thank you all again for your interest, and I hope to see you again soon. 27

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