Just Group jumps as PRA dials down equity-release policy
By Oliver Haill
Date: Monday 10 Dec 2018
(Sharecast News) - Just Group shares leapt higher in early trading on Monday after the Bank of England's regulatory arm confirmed some changes to its plans for equity release mortgages.
The Prudential Regulation Authority provided feedback on responses to its consultation paper on equity release mortgages being held to back annuity liabilities under the European Solvency II rules.
Importantly for Just Group, the PRA confirmed that transitional relief will remain available for business arranged pre-2016.
The FTSE 250 group said its interpretation of the PRA policy statement was that there were several key changes compared to the consultation paper that will affect the treatment of lifetime mortgages within the effective value test.
Firstly, that transitional measures for technical provisions for pre-2016 business will be recognised over the remaining transitional period to 31 December 2031.
The deferment rate will be set at 1% and property volatility will initially be set at 13%, towards the lower end of the range considered in the consultation paper.
As of 30 June, some 38% of Just Group assets were related to equity-release mortgages.
The PRA confirmed it has no plans to apply the effective value test approach to other assets.
In its policy statement, the PRA said it intends to consult further in early 2019 on various matters, including the process by which the volatility and deferment rates will be reset and how the effective value test applies in stress.
The changes prescribed by the PRA statement will take effect from 31 December 2019.
Just Group chief executive Rodney Cook said: "The regime envisaged is considerably less onerous for Just than set out in the CP, particularly in respect of pre Solvency II business, and the outcome is well within the range of what we have been planning for."
Just Group shares were up more than 21% to just below 100p after midday on Monday.
Having estimated in the summer that the company was facing a capital impact of between £160m and £876m, analysts at Numis said that, based on published sensitivities at end 2017, a move in the deferment rate to 1% would increase capital requirements by £160m and a move in volatility to 13% would add around £60m, with both of these being reduced by up to 70% from the effect of transitional rates.
"As we see this, the increase to capital requirements would be less than £100m, or around 4 points off the Solvency II coverage ratio," which stood at 142% at June.
Numis added that the PRA announcement "removes a considerable amount of the uncertainty faced by shareholders".
Broker Panmure Gordon agreed that the key point is that the PRA has confirmed that transitional relief for technical provisions for pre-2016 business will be recognised for the remaining period to 31 Dec 2031, and that the company "now has breathing space".
Analysts at RBC Capital Markets said the outcome is positive news for Just Group, in particular, "but also for Aviva and L&G, who also hold ERM assets, but to a lesser extent", calculating them to be less than 5%.
"We calculate that the new approach will only reduce the Solvency II ratio by 3% points to 139%."
With Just Group's share price down 40% since the announcement, from 135p, despite business results that were 30% ahead of consensus over the nine months to 30 September, RBC said: "The business is flying, in our view, and the removal of uncertainty around the ERM consultation allows management to focus on key areas of growth, including, bulk annuities which we see as the best structural growth opportunity in Europe and a market where we believe £30bn is the new norm. This creates a compelling buying opportunity in our view."
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