Fitch Revises Just Retirement Limited's Outlook to Negative; Affirms IFS at 'A+'.
Fitch simultaneously affirmed the rating on Just Group's GBP230 million Tier 3 subordinated debt at 'BBB'.
KEY RATING DRIVERS
The Outlook revision reflects ongoing uncertainty regarding the ultimate impact of possible valuation changes in relation to the Just Group's portfolio of equity release mortgages (ERMs), which could lead to a significant decline in the group's capitalisation metrics. This uncertainty arises from the UK prudential regulator's (PRA) consultation paper (CP13/18) on the assumptions used in insurers' ERM valuation models. On 6 September 2018, Just Group confirmed that if implemented the proposals could result in a material reduction in its Solvency II (S2) capital position. However, the group highlighted a range of capital management options available to it in case of a detrimental impact.
The affirmation reflects the group's capital strength, investment risk and asset- liability management (ALM), all of which Fitch assesses as very strong. These are offset by the group's business profile and earnings, which we assess as strong.
Just Group valued its portfolio of ERM at around GBP7 billion at end-1H18. This holding is 37% of the group's total financial assets, the highest proportion among its peers. As a result, Fitch considers that Just Group's capital position is relatively more sensitive than peers to regulatory risk related to the valuation methodology of ERMs. However, we continue to view Just Group's economic exposure to no-negative-equity guarantees on its ERM business as limited, as a result of strict controls on the maximum loan-to-value ratios offered on the policies. Therefore we do not treat these as 'risky assets' in our assessment of investment and asset risk.
The group's S2 solvency capital requirement coverage ratio remains broadly stable at 142% at end-1H18 after a notional allowance for transitional measures (end-2017: 139%). A rise in own funds mainly as a result of a Tier 3 debt issue was offset by new business strain, interest and dividend payments and a negative variance on the group's real estate exposure through ERM.
Fitch continues to view the Just Group's capitalisation, as measured by Fitch's Prism factor-based model (Prism FBM) as 'Extremely Strong', at end-1H18. The agency estimates that this score remains unchanged under the assumption of a 5% haircut to the ERMs' fair value. This assessment does not assume any management actions are taken to strengthen the group's capital.
Fitch estimates that Just Group has sufficient capital flexibility to, through management actions, offset any adverse capital consequences of an up to 5% reduction of ERMs' fair value without significant deterioration to its overall credit profile. This excludes an allowance for any reinsurance options available to it. However, the group's financial leverage ratio (FLR) weakened to 25% at end-1H18 (end-2017:17%) following Just Group's GBP230 million Tier 3 subordinated debt issuance in February 2018.
The group's Fitch-calculated interest cover declined to around 6.2x after the Tier 3 debt issue in 1H18 (end-2017: 7.9x). However, on a run-rate basis we expect it to remain broadly stable at the 2017 level due to operating profit growth.
Fitch assesses Just Group's business profile as strong, with a strong franchise in an annuity market that is underpinned by sound economic fundamentals. We believe that UK annuity writers, including Just Group, will be able to adjust new business pricing to accommodate possible outcomes of CP13/18. The group has indicated that it has already made adjustments to new business pricing and product features in response to CP13/18.
In 1H18 Just Group achieved further growth in sales and profitability, driven by its strong franchise in retail annuities, and continued strong fundamentals in the pension fund de-risking market. New business sales increased by 56% reaching GBP1,517 million, and adjusted operating profit increased by 85% to GBP124 million. This was mainly driven by new business profit growth.
The Outlooks would be revised to Stable if the group's S2 ratio remains above 130% and its Prism FBM score is at the high end of the 'Very Strong' category following the conclusion of the CP13/18 process.
The ratings would likely be downgraded in the event of a weakening of the group's capitalisation as evidenced by a decrease in the group's S2 ratio to below 130%, a prolonged fall in the group's Prism FBM to the low end in the 'Very Strong' category or the group's FLR weakening to above 30% on a sustained basis.
The ratings could also be downgraded as a result of a sustained weakening in the group's financial flexibility, as evidenced, for example, by the group's fixed charge coverage declining to below 3x.
Deterioration in the group's business profile may also lead to a downgrade.
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|Publication:||Daily the Pak Banker (Lahore, Pakistan)|
|Date:||Dec 14, 2018|
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