It’s a massive day for retirement advice specialists Just Group (LSE: JUST), whose share price is up almost 22% at time of writing, as fears of a regulatory clampdown on the equity release market prove overblown.
Just the job
The £942m FTSE 250-listed stock is a specialist in later life advice, offering retirement income products such as annuities, drawdown, and equity release lifetime mortgages.
Equity release has been the worry for investors since the summer, when the Bank of England’s regulatory arm, the Prudential Regulation Authority (PRA), issued a three-month consultation process on plans to introduce more stringent capital requirements for insurance companies, to ensure they hold sufficient capital to protect themselves against a future house price crash.
What a nerve
As I wrote in September, the Just share price plunged 30% as a result, as investors feared it might have to re-insure some of its book, issue debt, or raise equity as a result. I kept my nerve and hailed it a brave buy. Trading at just 5.7 times forecast earnings, with a prospective yield of 4.5% and chunky cover of 4.3, I’m glad I did!
I also wrote: “Dividends payouts are on hold for now, but will hopefully flow later. The lifetime mortgage issue seems very much in the price and, if you’re willing to gamble, the stock could fly if it finds a resolution.”
Regime change
It’s flying today after the PRA issued a policy statement stating that, as Just puts it, “transitional measures for technical provisions for pre-2016 business will be recognised over the remaining transitional period to 31 December 2031.” The new regime comes into force on 31 December 2019, giving the group breathing space to sort out its new capital structure. It has already aligned new business pricing with the anticipated capital requirements.
Management grabbed the opportunity to highlight the company’s recent strong performance, including a 44% increase in group retirement income sales during the nine months to 30 September. It said the £1.4bn merger with Partnership in 2016 has brought efficiency gains and pricing discipline, expanding new business margins from 3.3% in 2015 to 10.2% in the six months ending 30 June.
Group CEO Rodney Cook welcomed the greater clarity and said the regime is considerably less onerous for Just, particularly for older business. “The outcome is well within the range of what we have been planning for.”
Just in time
With equity release, pensioners raise capital against their homes, with the debt repaid when they die or go into care. A house price crash threatens insurers as they may get less back when they sell, but I always felt the risks were overstated. Just is now protected if the price of every house in its portfolio fell by 35% overnight and remained there indefinitely. Yes, house prices could fall that much, but like stock markets, they tend to recover over the years.
Just was a market darling once, and it is again today. The time to buy was when I tipped it in September (just sayin’) but it still looks an attractive income and growth stock to me. Just the ticket.
