Shares in life insurer Just Group surged by more than a fifth on Monday to their highest level in over four months after UK regulators softened their stance on how companies must account for equity release mortgages.
Life insurers have turned to equity release mortgages— which allow older homeowners to borrow against the value of their home and leave the balance to be paid from its sale after their death — as they seek high-yielding assets to match long-term annuity liabilities.
A consultation by the Prudential Regulation Authority over the capital treatment of the mortgages had cast a shadow over Just Group since July. Analysts at Numis estimated the new rules could wipe at least £160m and up to £876m off Just Group’s regulatory capital.
Plans to introduce the rules from the end of 2018 had added to the uncertainty for both the industry and investors.
Other insurers are also affected by the changes, but equity release mortgages are a much bigger chunk of Just Group’s asset portfolio.
The PRA in October delayed the implementation date by a year, and on Monday it made changes to the rules themselves. Under the revised rules, the increase to capital requirements for Just Group could be less than £100m, Numis estimated.
Shares in Just Group jumped 22 per cent to 100p, although they are still well below where they started the year — at more than 160p.
Rodney Cook, Just Group’s chief executive, said the insurer welcomed the greater clarity.
“The regime envisaged is considerably less onerous for Just than set out in the consultation paper . . . the outcome is well within the range of what we have been planning for,” he said.
Alan Devlin, an analyst at Barclays, said it was “a very favourable outcome for Just, which gives the company the flexibility to continue as a going concern in what we view as one of the most attractive insurance markets in Europe.”
He added the extended transition period for business written before the EU’s Solvency II rules for insurers came into effect in 2016 was even better than the bank’s “upside” case assumption. The transition period will now last until 2031.
Analysts had been fretting that the outcome of the review would force Just Group to raise fresh capital through a rights issue, but Mr Devlin said there was “no need” under the “favourable announcement”, although the company could still look to use other means to boost its capital ratio.
He added: “The company now has time to explore its capital options, and is under no pressure to do so. Any raise in capital will be used to finance new business sales at attractive returns, not to build its capital position for an unfavourable PRA ruling.”
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