With its share price continuing to fall it is no surprise that speculation has begun whether Just Group could be snapped up by another insurer, and insiders have touted Legal & General as a likely match.
The stock began a sharp decline with a 7.5% drop in July, after the group warned it may have to set aside extra capital to cover its lifetime mortgage products depending on the outcome of the Prudential Regulation Authority’s (PRA) consultation on lifetime mortgages.
The issue is whether the rules around lifetime mortgages, a type of equity release product which allows retirees to free up cash from their homes without making regular repayments, will be tightened.
The consultation asks whether lifetime mortgage providers are holding enough capital to mitigate against the risks of producing these loans, including falling house prices.
Should this rule be tightened, Just Group may have to go cap in hand to shareholders for a cash injection or consider a sale, analysts have suggested. The proposals will be published at the end of this month.
One industry source told New Model Adviser®: 'Just have roughly 38% of their assets in equity release mortgages, and the PRA has become increasingly concerned about life companies having too much money in assets that are hard to value.
'What they suggested in CP13/18 earlier this year was a continuation of that which effectively says you have to take a very bearish view on house prices when you are valuing equity release mortgages.
'The reaction you see in the market and the share price is broadly a reaction to the fact that Just have got quite a lot of these things, the PRA wants them to value them even more conservatively, and the upshot of that is that they will have to increase their capital position. That is not going to be good news for shareholders.'
Just told investors upon publication of its half year results earlier this month that it was ‘actively planning for a wide range of outcomes’ ahead of the potential rule changes.
A probable buyer, New Model Adviser® has been told, would be Legal & General (L&G).
The industry source added: ‘L&G trade at about 110% of embedded value. Life insurance companies generally trade between about 90% of embedded value (the value of all the future profits they are expected to make) and 110%. Just currently has an embedded value of about £2.5 billion and a market cap of about £700 million. That is about 35%, so they look cheap.'
The source suggested a prospective buyer would need to be a life company which can take Just's substantial book of equity release into its existing assets without it becoming a high proportion of overall liabilities.
They added: 'L&G like annuities, and buying just would be like doing a big bulk annuity deal. They also want more equity release, as they have launched into the market quite aggressively in the last couple of years. So from L&G's point of view, it would be a way to get more annuity business, which they like, and more equity release, which they have been trying to get in the open market, and to do it all quite cheaply.'
Lenders such as Just Group also use lifetime mortgages to underwrite annuities, meaning the PRA consultation may have a knock-on effect on new annuity rates too. In its half year results, Just reported lifetime mortgages advanced in the first half of 2018 were £312.7 million, a 36% increase since last year.
However, the group also announced a deferment to its interim dividend declaration until after the outcome of the PRA consultation is know, which analysts suggested has led to the dip in share price.
Panmure Gordon subsequently upgraded the stock to ‘buy’, owing to the scale of discount at which the shares are now trading. Shore Capital and Numis both reaffirmed their ‘buy’ ratings, setting price targets at 87.2p and 220p respectively.
L&G agreed a bulk annuity deal with the British Airways pension scheme earlier this month, and the similarities in focus between the two companies have not gone unnoticed.
AJ Bell senior analyst Tom Selby said: ‘When you look at the the focus of Just and L&G there are some obvious similarities. They both offer direct and bulk annuities, and you could see why Just's underwriting expertise might be attractive to a provider like L&G.
‘They've both also ramped up their focus on the growing equity release market post-pension freedoms and clearly see this as a significant growth area.
‘Given these similarities, you could see why a merger would be attractive - particularly as the individual annuity market has shrunk significantly post-freedoms. Usually by joining forces insurers with similar business models can lower costs and increase returns to shareholders.’
Selby suggested that should a deal be put on the table, the regulator and the Competition and Markets Authority would want to scrutinise it in order to ensure customers would not lose out in any way.
New Model Adviser® understands that while no official talks are underway concerning a buyout, Just would not rule out an approach.