Annuities and lifetime mortgage specialist Just Group (JUST) looks screamingly cheap at its current price. We think 2024 will see a rerating from its current low single-digit PE (price to earnings) ratio with the company confident of hitting its 15% underlying operating profit growth target in 2023.

This profit growth should underpin growth in dividends at a similar level, particularly given the company’s actions to reduce balance sheet risk through interest rate hedging.

Just Group’s mission statement is to provide competitive products, financial advice and guidance to people in later life. There are growth drivers in the short, medium and long term - not least a growing over-65 population in the UK.

Right now, the company is benefiting from a strong bulk annuities market. Bulk annuities are insurance products which are sold to defined benefit schemes allowing them to transfer their risk, so that the insurance company - in this case Just Group - pays benefits to pension scheme members covered by the policy until they die.

Higher rates have made it more affordable for pension schemes to go down this road and according to Just Group only 11% of total defined benefit liabilities have been ‘de-risked’ this way - which underpins the company’s bullishness on the scale of the opportunity ahead of it.

Consultant Lane Clark & Peacock estimated in 2022 that more than £600 billion of bulk annuity deals would complete over the following 10 years. In a record first half of 2023 Just Group chalked up 35 such deals.

Individual annuities are ‘guaranteed income for life’ products which are bought by people when they reach retirement age. These have become more attractive of late, again thanks to higher interest rates.

Just Group also sells lifetime mortgage products which are effectively a type of equity release product. Any risks associated with exposure to the housing market are mitigated as the average loan to value is little more than 35%.

The shares appear to have fallen out of favour thanks to accounting changes - the new IFRS17 standard means profit on bulk and individual annuities is deferred, making it seem as if earnings have dropped off a cliff. This resulted in a 90% drop in reported 2022 profit and is expected to have a 70% to 80% impact from 2023 to 2027.

However, IFRS17 has zero impact on cash flow, capital generation or the economics of the business. As this becomes more apparent, for example as the company continues to serve up generous dividends, we would expect the market to reappraise the investment case.

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