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Following the announcement yesterday that the merger with Just Retirement had received regulatory approval we anticipate relatively little interest in the figures today and much more on the outlook for the merged entity. The merger is due to complete in early April now. For the record, the headline IFRS Operating profit at £40m (-37.5%) compared to our consensus at £43m with the slight miss due to some non-recurring assumption changes that have impacted the in force profit. The final dividend of will be based on the Just Retirement final dividend of 1.1p/share adjusted for the merger thus making 0.92p/share for Partnership shareholders or 1.42p for the full year (2014: 1.5p). The Embedded Value (MCEV) NAV at 31 Dec was flat at 144p (31 Dec 2014: 144p) per share lower than our 154p per share forecast partly reflecting lower profitability that we had anticipated. The Solvency II coverage ratio was 144% better than we believe many will have anticipated, with an economic surplus of £178m. Slightly disappointing figures but largely irrelevant given the merger.
Partnership Assurance Group
Just Retirement and Partnership have announced a delay to their planned nuptials. Just Retirement intends to delay the posting of the shareholder circular until the regulator (the PRA) has commented on its internal model, along with all the other insurers, in early December. Whilst it will only postpone the anticipated completion date a few weeks from late December into January we think it is disappointing given that the PRA timescale has been known about for many months. Separately following the detailed full year sales guidance provided by Partnership we are cutting our 2015F full year sales forecast from £602m to £558m which has led us to cut our 2015F IFRS Operating EPS to 9.6p/share from 10.8p/share previously. The valuation remains highly attractive with the share price at a 13% discount to our forecast Embedded Value at 31 Dec 2015 of 154p/share.
Partnership has announced the name of its partner in the US to launch a medically underwritten immediate annuity comparable to Partnership's UK Care annuity. It is Genworth, the market leader in Long Term Care (LTC) with c25% of the US LTC in force policies. Genworth will bring brand, market leading expertise, an existing operating platform and distribution in the US. We are not adjusting our forecasts at this stage but believe that this is very positive for the longer term outlook of Partnership/JRP post the merger with Just Retirement. The product will be launched in Q1 2016. The valuation remains compelling on both Partnership and Just Retirement and we consequently maintain our Buy recommendation and 165p/share target price.
Partnership has delivered a solid sales performance with sales at £109m (+22%) in Q3 following the introduction of the pension changes in April with good guidance for H2 (+10% on H1) and still on track to deliver £200m of Bulk sales (£92m at 9M stage with a further £60m of ‘exclusives'). Total sales in Q3 at £109m (+22%) was largely in line with consensus at £119m but below our £153m forecast reflecting lower hard to forecast Bulk sales at £24m (Q3 2014: £nil). The Bulk sales at £24m compared to our £60m forecast and consensus at £30m. Individual annuity sales at £68m (flat) compared to our £77m forecast and consensus at £73m. Following the share price fall we have upgraded our recommendation to Buy from Hold and note that the shares are now trading at a 10% discount to 30 June EV of 147p/share. In our view the shares should be trading at a premium rather than a discount to EV given the value of its new business. Buy. We anticipate that the proposed merger with Just Retirement will complete by 2015 year end.
We are surprised by today's announcement that Partnership and Just Retirement are to merge. It's an all share agreed merger whereby each PA share will be exchanged for 0.834 new shares in Just Retirement. In effect this equates to PA being taken out at c166p per share, although we think JR's share price will be under pressure today. The top jobs (CEO and FD) have been retained by JR's management team with PA's CEO Steve Groves stepping down. There are expected to be cost synergies of c£40m pa and the cost of achieving this is c£60m. Lastly there will be an equity raise of £150m. We are slightly sceptical of the reasons for the merger (Synergies, BPA scale etc) and take PA to a Hold recommendation and lower our target price to 165p per share from 175p previously.
