Just Share Discussion Threads

[18bt] 16/12/2020 10:09

Unfortunately, it is the technical stuff which holds back the valuation of life assurers IMHO as there are a number of investors including insitutions who don't feel they can undertstand them. I'm no actuary, but my tip is always to remember the underlying business which is to insure lives for the long term (avg 20) years or so) and invest the premiums in assets which provide returns which are broadly matched in duration to the liabilities being insured. The technical stuff is all focussed on whether the assumptions back this fundamental equation. In many ways it is similar to the subscription models which are currently so flavour of the month, but in this case the subscription is arguably longer ... (ok, perhaps that's pushing it!)

[undervaluedassets] 16/12/2020 08:12

Both the technicals and fundamentals look to be aligning nicely.

Truly appreciate the depth of knowledge on this board. Humbling.

[18bt] 15/12/2020 11:56

Thanks Rapier - yes - I'd forgotten that, but that c£45m for a 5% movement is matched by a c£145m change in the valuation of liabilities as shown on p52 of the interims. So, it won't quite be linnear, but a say 3% change could have a £60m net benefit. 3% is probably something like 1-2 year's previous improvement in longevity assumed for a65 year old - so not out of the question.

[rapier686] 15/12/2020 11:41

It's broadly what I expect, though some longevity risk is also laid off to reinsurers.

A modest percentage change may still be quite sizeable in absolute terms when applied to £20bn of liabilities though.

Equity release valuation is sensitive to mortality projections (see sensitivity table on p47 of interims).

[18bt] 15/12/2020 11:24

So as I understand the likely effect on JUST, there should be 2 potential releases of mortality reserves:
1. Any deaths in excess of assumptions for 2020 - there will be some COVID deaths given that the excess deaths figure which has been reported this morning is c80,000 YTD
2. The adjustment that the CMI will make to future life expectancy (albeit modest as it will discount the 2020 effect in its entirety) models because, even discounting 2020, life expectancy has fallen since the last adjustment.

There may then need to be some offsetting adjustment to equity release there may have been excess deaths on the mortgage book. Even though the mortgages will not last so long, they are not allowed to account for future profit, so the CMI should have little effect on the ERM portfolio,

Is that correct?

[rapier686] 15/12/2020 10:12

The CMI have reached their decision - to place no weight on 2020 experience in projecting the future, as it's clearly anomalous.
Despite applying no weight to 2020, CMI_2020 life expectancy will still be lower than CMI_2019 was.

[18bt] 14/12/2020 12:42

Some interesting industry stats in here

Shows JUST with a 3% market share in 2019 - £1.2bn over 22 transactions for a £56m avg deal size. And broadly positive about the market for 2020 and 2021.

[undervaluedassets] 14/12/2020 11:19

Breaking firmly through resistance at 60p.

All those annuities they are not going to have to pay is my bet as to why.

[scrapheap] 24/11/2020 13:28

Another chunk of new business in the DB space by Just...

hxxps://www.professionalpensions.com/news/4023869/group-agrees-gbp74m-engineering-scheme

[battyliveson] 23/11/2020 21:49

Thanks Jimmyh1, I hadn’t considered the subordinated debt. If you exclude it, then basic own funds is just about covering SCR.

B

[jimmyh1] 23/11/2020 20:33

Battyliveson: you need to deduct the debt capital that is allowable for solvency purposes to get to an “Equity Own Funds” measure. There’s quite a lot of debt on the balance sheet that is allowable for regulatory purposes because it is subordinate to policyholder liabilities.

[battyliveson] 23/11/2020 09:01

In one of the more recent posts it was mentioned that the only thing that matters (re price to book valuation) is the regulatory balance sheet, rather than the IFRS one. I had a quick look at the website where they have a section on regulatory returns and a copy of the Financial condition report. I only skimmed read it but the Sol II own funds were approx 1.9bn vs IFRS 2.3mn in 2019. The excess of own funds over Sol II capital requirement (presumably at 99.5% confidence, although I see there is some transitional relief), was quoted as £748mn.

All historic, (31/12/2019) and 2020 has been a bit of a year, but all suggests that current valuation in the £660-700mn range is not that racy.

B

[undervaluedassets] 23/11/2020 08:31

I think that people will buy here currently on the annuity issue alone

That and the fact that is penny stock (under £1).. and that for the moment penny stocks are on fire.

Investors facing loss making stocks everywhere due to covid are buying shares based on price and momentum and sentiment.

It is that simple

There is some momentum here and this is a penny stock

with the added kicker that we are profitable

[cjac39] 22/11/2020 18:00

indeed although the scale of one or other can be significant. in the real world approach your liq premium will be large (as much as 100%) and the nneg will be small 0-10%. as you start to lower hpi assumptions the nneg will grow and the lq will fall. in extremis, if you believe in the arbitrage free pricing argument for a long dated , non traded, totally illiquid option, then you could swamp the lq with the option price and end up making a loss day 1.

of course its all nonsense as long dated property options don't exist; there is no 2 way market in property options to speak of (you do get a few short dated ones but insignificant) and by the very definition of the loan the seller of this option, in this case Just, is holding to maturity. so the classic option pricing methodology is somewhat redundant and fortunately the PRA has not been lost to this nonsense and has agreed a broadly sensible methodology for how this is represented in the regulatory balance sheet albeit still quite conservative

classic case of doffing ones cap at the doctrine of market based pricing in scenarios where its irrelevant such as using credit spreads movements to define capital in buy to maturity annuity books. always was nonsense and always will be.

[rapier686] 22/11/2020 11:30

Anyhow I suspect there'll be a compensating effect. As I understand treatment of ERLs:

LoanValue = RiskFreeLoan - NNEG - LiquidityPremium

RiskFreeLoan is what the cash flows would be worth if they were risk free and there wasn't a NNEG.
NNEG is how much this gets reduced to account for the guarantee.
LiquidityPremium is then (p46 interims) a fudge factor so that on day 1 LoanValue equals the amount actually advanced.

As the loan proceeds, LiquidityPremium drains away releasing in-force profit over the term.

Now current practice is to try and get the expected value of NNEG correct. So in-force profit derives from the release of LiquidityPremium with hopefully even handed adjustments as NNEG is adjusted as property experience replaces assumption.

Were the presentation to be changed so that NNEG was calculated on the pessimistic market consistent basis, then it wouldn't change things for a newly minted loan as LiquidityPremium would shrink to match.

Consequently as the loan proceeds, less in-force profit arises from releasing LiquidityPremium. But because the assumptions underlying the NNEG are pessimistic, a year's experience is usually going to release a chunk of NNEG (rather than it being a toss up which way the NNEG value goes).

Consequently the effect on the balance sheet of going full gloom on NNEG is likely to be mostly cancelled out by a reduced liquidity premium.

[rapier686] 21/11/2020 22:55

Should have guessed the IFRS17 point was leading back to the usual hobby horse. But still I'm glad to be educated about that potential consequence.

To be honest, if the accounts had presented a 10p book value and negligible earnings then I'd have been quite unlikely to have taken a second look, let alone to the detail to conclude that "market consistent" was code for a ridiculously pessimistic perspective.

But I have now, so I'd be ill served by the standard that required a false and unfair presentation but reasonably unperturbed. I might lose the "buying pound coins for 25p" soundbite - but I'll remain confident that equity release loans around current parameters were (a) highly unlikely to be a poor deployment of assets and (b) highly likely to be a good match to annuity liabilities.

Were this change in presentation to happen in isolation - I'd say it would be broadly equivalent to changing the existing 3.8% central house price inflation figure to around 0%. We are given sensitivities to a -0.5% change in assumptions, so we can get a first stab at the magnitude - perhaps reducing "Loans secured by residential mortgages" by around £1bn.

So it would still be 50p coins on sale for 25p - and there'd be a load of future profit baked into the pretty nailed on scenario that the actual course of future house prices turned out to be positive.

[cjac39] 21/11/2020 18:03

indeed as that would be entirely irrelevant. in a former life we would only care about ifrs as it does tie into tax and therefore you would manipulate it to lower tax outcomes. otherwise its entirely meaningless to the running of a life co.

so do i think they reserve reasonably in their bs for risk? yes

do they follow an entirely theoretical, probably wrong, arbitrage free pricing basis. no.

do i care. no

[eumaeus] 21/11/2020 16:25

"Ifrs is not a sensible way to look at insurers."

OK but many others (not you) on this thread have commented frequently about the disparity between the IFRS 4 book value, and the market value. That's my only point. Clearly if the book value comes down to 10p per share, you would have no problem, and that's fine.

[cjac39] 21/11/2020 16:19

Nope. Ifrs is not a sensible way to look at insurers. The reg bs gives a more sensible picture and more importantly is the primary way insurers are controlled and measured and allowed to pay dividends. Own funds under reg bs is the primary measure by which you should consider valuation.

[eumaeus] 21/11/2020 15:57

"In Just’s case, they have already implemented IFRS"

IFRS 4, not IFRS 17. The latter could be a real game changer, as it is (supposed to be) market consistent.

[eumaeus] 21/11/2020 15:56

"irrespective of the accounting rules which roughly speaking are irrelevant when one considers investing in a life company"

I don't think I mentioned options recently. Simply observing that many on this extended thread have been impressed by the fact that book value is considerable multiple of market value. If the new accounting rules change the book value to something like the market value (or indeed lower) then that argument does not hold good. Do you agree?

[cjac39] 21/11/2020 11:33

blimey i hadnt realised eumaeus was still going on about mispriced options. the method they use is agreed with the PRA and therefore, irrespective of the accounting rules which roughly speaking are irrelevant when one considers investing in a life company, its the reg bs that really matters. who cares about theoretical option pricing really. its just that. they arent trading erm options they are long term holders. it doesn't matter what you think the right price is because they are not going to sell so long as you have some reasonable expectation as to the cost of the option baked in. as the loan progresses you can then move your assumptions to reflect reality which is what they do. so i agree with your basic point that forwards are not based on expected outcomes but its roughly speaking irrelevant to my decision to invest in just or other erms.

[rapier686] 20/11/2020 16:27

Perhaps not just the pandemic. Yesterday's Telegraph drew my attention to the proposal to align RPI to CPI-H, and suggested the chancellor might be making a statement about it at his spending review next week.
I've found the consultation paper here

but don't really know anymore.
Such a change might be quite significant to the liability represented by RPI linked annuities.

On reflection, if RPI was economically significant then the report would give sensitivities. So this is unlikely to explain the recent uplift in ahareprice.

[undervaluedassets] 20/11/2020 12:08

I think that the notion that those that write annuities are set to do well out of the pandemic is finding traction here.

Just Group and Legal and General are obvious picks.

[eumaeus] 20/11/2020 10:23

"Accounting profit - i.e. IFRS" Changes to IFRS (via IFRS 17) may also impact the book value of life companies. A recurring theme of the comments on this board is that the company is grossly undervalued if one compares the market value to the book value (about 25% the last time I looked). This presumes that the book value is correct, as measured by modern accounting standards.