UK retirement products provider Just has suspended its dividend while it awaits the outcome of a consultation on equity release mortgages (ERMs).
The UK’s Prudential Regulation Authority issued consultation CP13/18 in July, concerning the valuation of the no negative equity guarantee (NNEG) included in ERMs.
The potential implications for Just from the consultation proposals could be severe. Some analysts have estimated it could send Just's solvency coverage ratio below 100%.
Just writes annuities and backs these with ERMs. It has a significant back book of ERMs and claims a large capital benefit from the Solvency II matching adjustment and transitional measure on technical provisions (TMTP).
The firm revealed a solvency capital coverage ratio of 150% as of 30 June, or 142% after a notional recalculation of the TMTP, compared with 139% six months earlier. The figure was boosted by £230m of tier 3 capital raised in February.
Chief executive Rodney Cook said: “CP13/18 is for us primarily a back book issue and we believe we have a robust mortgage book that is performing well economically. Additionally we are already making material allowances for mortgage risk within our Solvency II balance sheet.
“We are actively planning for a wide range of outcomes from the consultation process. We have a number of capital management options open to us and in evaluating those will seek to optimise shareholder value.”
Those options include reinsuring part of the in-force book to reduce capital requirements; issuing more debt, either tier 2 or restricted tier 1; or issuing more equity.
Cook added: “Given the uncertainty surrounding the potential outcomes from CP13/18, the board felt it appropriate to defer any dividend declaration until we have greater clarity on our capital position.”
Just reported an adjusted operating profit of £124m in the first half of 2018, up 85% on the same period last year.
Companies:Just
People:Rodney Cook
