Just Share Discussion Threads

[charlie] 11/8/2018 17:47

I also think there is something a bit dodgy about the argument that deferment price must be lower than the spot price.

Clearly there is no observable market for clean deferment prices. The only buyers prepared to engage in deferment-type transactions (when bundled with a loan) are apparently the LTM providers themselves. As such, arguments about a hypohetical buyer choosing between “possession & occupation/letting” now versus “possession after T years” seem to me only weakly persuasive, because they are entirely hypothetical.

Once one wanders into such hypothetical worlds, one can conceive of a separate class of buyer who want exposure to house prices, but do not want to occupy or to let, and welcome the opportunity to avoid Council tax and maintenance costs. There is no reason why the deferment price should be determined solely by the other class of hypothetical buyer in the previous paragraph.

[charlie] 11/8/2018 17:28

On a different tack, geometric Brownian motion seems an absurd model for house prices anyway. I really don’t see that this model is unambiguously “correct”;, and that a positive drift for HPI is unambiguously "wrong".

As a matter of public policy, if I made the rules, I would allow some positive HPI drift. Less than GDP, and less than historically, but I would allow something.

[charlie] 11/8/2018 17:25

Toy model. Customer age 60. Suppose mortality is a step function, 2.5% chance of dying each year, so dead by 100. (Obviously really deaths peak at about 80 and then decline, but I’m simplifying).

The PRA procedure adds up 40 options for the customer, each option probability-weighted at 2.5%. The result is an ensemble average. It only works if the options maturing at e.g. ages 98, 99, 100 are each from different “parallel worlds” as far as the geometric Brownian motion is concerned. It’s counting a separate quantum of randomness from each parallel world.

But this is not the situation. The possible maturities at e.g. ages 98, 99, 100 are really from one world, and highly correlated. The customer doesn’t have 40 options from parallel worlds each weighted 2.5%, he has one option from one random world, within which there is a random exercise date.

Does the PRA procedure get the right answer for this? Maybe it does, averaged over a portfolio of customers. But it’s not obvious to me.

[charlie] 11/8/2018 17:24

I think Numis are half-right. The PRA is also only half-right.

The NNEG is neither an American option (exercise at any time), nor a European option (exercise at a fixed maturity date). It's an option with a RANDOM maturity date.

As far as I can see this is not really addressed by Black 1976. (Is it by anyone else?)

CP13-18 para 3.20 suggests a procedure as follows: add up a series of Black 1976 options maturing in each successive year, each weighted by the exit probability (mainly risk of dying) for that year.

This seems, in effect, to be adding up a whole bundle of options for each underlying customer. But each customer has only one option (with a random exercise date).

Does the PRA procedure give a correct convolution of the randomness in the term of the option with the randomness of the geometric Brownian motion for price inherent in the Black formula? I’m not sure about this!

My intuition (which may be wrong!) is that an option with a random exercise date seems less valuable than one with a fixed exercise date.

Also, in general: (a) a portfolio of options is worth more than an option on a portfolio; and (b) a series of short-dated options is worth more than one longer-dated option.

Granted, the PRA procedure doesn’t correspond exactly to (a) nor (b). And I appreciate the PRA is probability-weighting all the options it’s adding up. But the “adding up a lot of options” aspect still smells to me like an over-valuation of the NNEG.

[bolador] 10/8/2018 11:59

P/EEV at current price is .45 on an EEV of 228.4. Some discount ! Hopefully the share price is more to do with August than serious problems. Sometimes when "funds" want out of a holding they just sell and go on selling until the holding has gone. Sounds mad but changes of fund manager, adjustment to the mandate of the fund manager force such things.The upshot in this case might be that the share price collapses because potential buyers are on holiday whilst the seller/s is/are not.Others are put off by the fall that has been helped along by bears and those worried by the PRA review and possible capital requirement.
Meanwhile the company gets on with its work and the shares wallow at 102p on a pe of six and a bit.Opportunity knocks

[scrapheap] 10/8/2018 11:23

I think there's an interesting angle here - if other insurers involved in LTM don't think the outcome will be 'too' penal then there's a chance to take out Just now at a massive discount to embedded value which may not last.

If they think it really is going to get messy then they just sit and wait for more damage to the share price before moving on them.

[eumaeus] 10/8/2018 07:44

‘Especially when the existence of negative equity implies that exercising this option results in no financial gain for themselves or their estate’. If the borrower’s estate does not exercise the option then they pay the negative equity themselves. If they exercise the option, then there will be a huge financial gain, so the statement is plain wrong. The distinguishing feature of an option is the max(0, X) feature. The borrower or the estate has the right, but not the obligation to sell the house at the rolled up loan value X, so owns a put option which the lender will exercise for them. So it’s an option.

[eumaeus] 10/8/2018 07:22

The PRA consultation is only about pricing and valuation.

I saw the Numis report and seemed quite a muddle to me. Confusing an American option (which can be exercised at any time) with a European option (exercisable only at expiry).

[18bt] 10/8/2018 06:50

eumaeus My point about HPI is whether the NNEG will be called on not about the pricing of it. Over time house prices should increase at least in line with the growth in the economy. The key thing is the interaction of the mortgage role up with when/if the mortgage has to be redeemed by death or moving out with a fall in house prices. Of course this isn't impossible and can be mitigated by low interest rates and low LTVs. JUST's products are at the high end of both, but not all their mortgages have these characteristics and current sales are at lower interest rates than those of, say 5 years ago.

One other interesting point from the Numis note above on the NNEG pricing:
"Option pricing. We are unsure why the PRA want to value NNEG guarantees using
an option pricing formula, when there are no embedded options within the product.
This seems to fall foul of two principles of option pricing: the mortgagee cannot choose to exercise this option other than by dying (or going into care). Secondly there is no financial gain for the mortgagee or its estate in exercising this option."

This makes the point effectively, that people may not "redeem" by death or moving if the mortgage exceeds the house price and that allows for some recovery in house prices. In that respect they are most unlike how those with options tend to behave and the frictional costs (moving costs, stamp duty, or time to get probate on death etc) are much higher than that faced by an option holder. Numis put it rather humourously as: "We believe there are very few people who would make the serious lifestyle choice of going into care or
dying, on the basis that they could exercise an option against a mortgage lender, during a period of depressed property values. Especially when the existence of negative equity implies that exercising this option results in no financial gain for themselves or their estate."

[18bt] 10/8/2018 06:42

Note from Numis with the following conclusion:

CP13/18 contains flawed thinking, in our opinion
In this note we continue our thinking on CP13/18, and believe there are a range
of possible outcomes. For new business, we believe it makes sense to take a
conservative view of house prices through lower LTVs at a given age. The back
book is very a different matter and a literal application of this CP could cause
problems, although we think this is unlikely. The PRA has been regulating this
type of business for some time and should understand the problems caused by
sudden changes - witness the problems with market consistent accounting in 2009.
Solvency II introduced measures to prevent this. We do not feel it is practical to
make large and sudden changes to the back book assumptions, particularly when
terms are locked in, and there has been no deterioration in actual experience.
Most worrying is the PRA's use of option pricing to value something that is not
an embedded option. Just may have to make some changes, and we consider its
options. We would not expect it to have to issue equity, except as a last resort.

Echo's one of my concerns about the PRA's CP - that they are trying retrospectively to move the goalposts on "Transitionals" which affect the back book. Ironically, if the pRA did this, they will screw the tax payer as a huge backbook is on the market from UKAR and insurers are one of the most likely buyers.

[fez77] 09/8/2018 22:21

Hoping for a tick back here up to 120 and onwards once the air has fully cleared from this episode. Market is like a frightened rabbit looking for headlights.

[exmooroil] 09/8/2018 16:45

What is the epic/code for the 2026 9% bond please. Thanks in advance.

[grannyboy] 09/8/2018 16:00

SpectoAcc 243...Yes the similar line of business as Character group..

[topvest] 09/8/2018 15:51

Yes, I did get back in again. Looks like its holding at about the £1 level. Not a proud moment!

[bolador] 09/8/2018 14:40

Berenbereg reckon the shares to be worth between 109p and 130p and ave a target of 120p.This target was after a sell advice from them after a tough review.

Since that sell recommendation the shares have continued to fall as we all know but now 120p looks rather good ! Today so far the shares have turned up a little as the supply order book dried I am told.

Could be right now for a bit..

[qs99] 09/8/2018 10:25

OK maybe it has found its bottom?

[spectoacc] 08/8/2018 15:52

Out of interest - anyone been round long enough to remember the previous Just Group?

[topvest] 08/8/2018 14:54

Told you.....Up 1p already.

[topvest] 08/8/2018 14:47

P.S. share price will now probably surge!

[topvest] 08/8/2018 14:41

I've hit my stop loss. There is no point just watching this go down. Think its unjustified. Will hope to buy back in once the dust settles. Clearly something is not right though and additional funding may be needed and so I'm taking action. Trying to make sure I drop losers more than I have in the past and accept that I have got this one wrong for now. I'm not a trader, but when something is just tanking like this, then you can't fight it.

[qs99] 08/8/2018 14:08

tis very odd, going to be difficult to call the "turn" but its embedded value and capital adequacy ratios will need flexing to see where any new "rules" could come out but over 20 years do people really think the UK property market will tank that much? Cyclical yes, but total tank? I may have a few at around 80p.....DYOR

[edwardt] 08/8/2018 13:53

topvest - i think you already know the answer to that question!

[topvest] 08/8/2018 12:38

Anyone with a charting angle, able to predict the support level?

[lovat scout] 08/8/2018 10:44

Agreed bolador - I wouldn’t mind a capital raise or rights issue here as long as I don’t have my pre-emption rights disapplied.