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Favorable prospects justify investor support, Just Group CEO says as shares drop

As it sought nearly £400 million of fresh capital, Just Group PLC's CEO, Rodney Cook, said the "favorable prospects" in the U.K. life insurer's three main markets "warrant investor support, which we are clearly seeking today."

The CEO made the comments after the company announced a series of measures to bolster its capital base alongside its full-year 2018 earnings March 14. The measures include a £300 million Restricted Tier 1 bond offering, a share issue initially estimated at £80 million and the cancellation of its 2018 dividend.

Just's share price plummeted on the news and closed down 12.5% at 85.3 pence per share. After market close, the company announced that the issuance, representing 9.99% of existing share capital, had been placed at a price of 80 pence per share, for gross proceeds of about £75 million.

Although the market had been expecting the RT1 issue, the share placement was a "surprise," Panmure Gordon analyst Barrie Cornes said in a research note.

'Excellent growth potential'

Just Group moved to strengthen its capital base because of new rules the U.K. Prudential Regulation Authority issued in December 2018 regarding capital requirements for equity release mortgages, also known as lifetime mortgages, which allow people to borrow money against the value of their homes. The mortgages are frequently used by Just Group and other U.K. life insurers to back the liabilities they assume under bulk annuity defined benefit pension risk transfer deals.

Just Group in particular was in the spotlight because its asset base contains a higher proportion of equity release mortgages than its peers. It warned in its first-half 2018 earnings release that it could face a "material reduction in its capital base," although the rules were softened from those initially considered.

The PRA was particularly concerned about the capital held against the so-called no negative equity guarantee, or NNEG, in equity release mortgages, which guarantees that borrowers will not have to pay back more than the value of their house. This guarantee exposes insurers to the risk that the house sells for less than the loan plus interest.

Cook told analysts at a conference discussing Just Group's earnings that the insurer's three main business areas — defined benefit de-risking, lifetime mortgages, and guaranteed income for life business — "continue to offer excellent growth potential." He pointed to consulting firm Hymans Robertson's estimates that there would be £700 billion of de-risking opportunities over the medium term across the industry.

He stressed that the company's strategy "is about growing profit, not growing headline sales," and also said the company had "thought long and hard" about how to bolster the capital base "in the most shareholder-friendly way."

He added: "Given the extensive feedback we have received from our major shareholders, we judged strengthening the group's balance sheet is a very important step in supporting the value creation for them."

Capital and dividends

Cook also discussed the company's plan to become self-sufficient from a capital standpoint from 2022, which he noted was "an important element" for shareholders.

As part of the plan, Just will aim to reduce the capital requirement for lifetime mortgages, for example by targeting older customers and those who want to borrow less relative to the value of their homes. Cook also said the company is "working with third parties to develop innovative solutions to hedge NNEG risks," adding that Just would provide an update once it had found "a Solvency II effective solution."

The company will also cut costs, reduce the ratio of lifetime mortgages backing bulk annuity deals and seek other long-duration assets to back deals. Cook said the company had "increased our exposure to these new assets quite significantly over the last year," but he added that the company still viewed lifetime mortgages as "an excellent asset to back annuity liabilities."