The insurer Just is battling to convince investors that it is on an even keel. The FTSE 250 constituent, which had to suspend its dividend and pull back on writing new business after more stringent capital rules, trades at a steeper discount to net asset value than any other player listed in London.
It is hardly surprising that scepticism has been hard to shift. There is little worse than a capital crisis for an insurer. Regulatory change in 2018 that required insurers to hold more capital against equity release products forced the group to raise £375 million by issuing new shares and debt at a cumbersome 9.4 per cent coupon to try to shore up the balance sheet.
But the worst looks as though it has been and gone. A Solvency II ratio of 164 per cent is now above a level of 136 per cent after taking into account the impact of the new rules at the end of 2018, too close to the required minimum for comfort. Greater security here means the dividend was reinstated last year at 1p a share, equivalent to a yield of just 1.7 per cent based on the current share price, paltry in comparison to rivals. But it was the first time Just has paid a dividend since 2017.
A lofty medium-term target to grow underlying profits annually by 15 per cent, driven by new and existing business, should catch investors’ attention. That looks more possible since the return of capital self-sufficiency last year, which means that the group is generating enough capital to fund new business and the cost of the dividend.
How? The strain of writing new business — roughly the difference between premiums received by customers and the capital set aside to pay obligations and a margin for potential risk — reduced to 1.5 per cent of sales last year versus 7.7 per cent three years earlier. Refinancing a portion of its debt should also lower finance costs by £12 million this year. Greater organic capital generation means more cash available to invest back into writing new business and paying a higher dividend. Last year that metric more than doubled.
Just might have more cash to spend but now it needs to put it to use. Pensions freedom changes in 2015 made life harder for annuity providers, including Just, although sales of annuities accounted for a fifth of the group total last year.
The institutional pensions market could prove more fertile ground for new business. De-risking products, where companies offload all or some of their pension scheme liabilities on to an insurer, accounted for 60 per cent of new business sales last year, rising more than a quarter on the year before. The emphasis is on growing transaction levels in its traditional sub-£250 million market, expanding deals up to a cap of £1 billion and undertaking more pensions buyouts. Rising interest rates give schemes a better chance of reaching the funding position needed to undertake such transactions.
Falling house prices remain a risk to the capital position. A ten percentage point fall in property prices would cut Just’s capital ratio by the same amount, but that’s less than the 20-point blow that would have been sustained in 2019.
Just is cheap, but then so are other insurers, such as Aviva, which has a better regulatory capital position and the prospect of paying a more generous and secure dividend in the short to medium term. Even the 1.59p payment forecast for this year still equates to a dividend yield of 1.7 per cent, dwarfed by prospective yields of 6.8 per cent for Aviva and 7 per cent for Legal and General, based upon analyst forecasts for this year. The latter trades at a premium to NAV, but the former does not. For income investors, that represents a better option at a reasonable price.
ADVICE Hold
WHY Further progress in capital generation could help the shares to re-rate, but there are better options available for income investors
Sirius Real Estate
It is an odd time to break into the British office market, given that occupiers are still reluctant to sign up to new space. However, for the German-focused industrial landlord Sirius Real Estate there was the chance to make quick cash via the £245 million acquisition of BizSpace at the end of last year.
Admittedly the 72 small business parks, located on the outskirts of towns, are hardly akin to the glass and metal high rises located in the city of London.
Geographical diversification was one rationale behind the deal, particularly in light of the transition from a Merkel-led government in Germany. The belief that a post-Brexit shortening in supply chains would lead to greater regional demand for industrial space in the UK was another.
The challenge now is to let more vacant space in that business — the figure stands at 12-13 per cent for the industrial assets and 15 per cent for the offices that came with the acquisition — and boost rent rates.
Before being purchased by Sirius Real Estate, BizSpace had not put up rents for three years, but pricing has increased by 7.5 per cent in the past four and a half months. Making more progress in catching up rents provides one potential source of income growth. Filling newly acquired space in Germany and making upgrades to occupied properties is another.
The recovery out of the pandemic is plain enough: like-for-like rent roll in Germany rose by 6.4 per cent over the year thanks mainly to rising rates, representing the eighth consecutive year of like-for-like rent roll growth that is in excess of 5 per cent.
Two bond issuances reduced the cost and extended the average maturity of its debt, which gives the group a weighted average cost of debt of only 1.4 per cent and a term of just over four years, from just under three. Having three-quarters of its debt unsecured gives the property group greater flexibility in pursuing future deals.
The main bugbear for investors is a familiar one. The shares are trading at a premium — 32 per cent — to net asset value forecast at the end of March next year.
ADVICE Hold
WHY The likely prospect of further NAV growth looks priced in to the shares
