Just growing volumes and margins

Rising longevity expectations, changing inflation assumptions and low bond yields have all contributed to the appetite for companies to offload risks associated with DB pension schemes. De-risking products can involve anything from insuring against rising longevity of members (so-called buy-ins) to offloading the management of entire schemes (buy-outs).

While recent increases in corporate bond yields have reduced the burden of liabilities on schemes, last month consultancy Mercer put the average aggregate funding of FTSE 350 companies' schemes at just 93.5 per cent, representing a deficit of £53bn. But while the risks associated with precarious funding is driving demand, it is an overall improvement in pension funding that is making de-risking an option for more schemes. Consultancy LCP estimates that one in five FTSE 100 schemes is now funded well enough to consider de-risking, compared with just 11 per cent in 2015. It expects the volume of buy-ins and buy-outs to have increased from £10.2bn in 2016 to £12bn last year, and to rise again to £15bn this year.

All this is to the benefit of Just. Sales of DB products were up 6 per cent last year to almost £1bn, while broker Numis forecasts they will be close to £1.5bn by 2019.

The individual annuity market (refered to ‘guaranteed income for life’ by Just in an admirably prosaic flourish) has experienced sluggish sales since the introduction of the new pension freedoms in 2015. That year sales were just 82,000, down from 353,000 in 2013, according to the Association of British Insurers (ABI). However, the decline in sales started to moderate in 2016, at 75,000. Against this backdrop, Just has been holding its own. Admittedly, at Just Retirement – the larger constituent of the combined group – sales of individual annuities declined by more than half to £478m during the year to June 2015.

Following a sharp fall in 2015, on a pro-forma basis sales of individual annuities grew marginally to £778m in 2016 and were up 5 per cent last year to £821m. Part of that rise may be because more people are shopping around when choosing an annuity provider. Around 52 per cent of people bought an annuity from a new provider in the first half of last year compared with 48 per cent in 2016, according to the ABI. Just could also stand to benefit from the exit of some large players in the UK annuity market, which most recently included Prudential (PRU). Numis expects individual annuity sales to rise 10 per cent this year.

Importantly, Just has not been sacrificing margins for sales growth. In fact, its new business margin at the end of 2017 was more than double the 3.3 per cent reported in 2015 (see chart). Management has focused on writing risk at an appropriate price and is guiding towards a margin in excess of 8 per cent for 2018.

The life assurer has also benefited from cost synergies, that have outperformed expectations prior to the merger. With the integration of the two businesses all but completed by the end of last year, cost synergies came in at £52m, 30 per cent above expectations and a year ahead of schedule. That also meant reduced running costs per policy, which led to a £90m release of maintenance expense reserves.