lifetime mortgages - An essential ingredient in DB de-risking transactions

Transcription

1 lifetime mortgages - An essential ingredient in DB de-risking transactions 18 April Bulk Annuities seminar

2 Introduction & agenda Lifetime mortgage ("LTMs") market and key drivers Why invest in LTMs? o attractive risk-adjusted yields o long duration assets suitable for matching David Richardson Deputy Group CEO & MD UK Corporate Business The economics of NNEG (no negative equity guarantee) Differentiation via medical underwriting offering Conclusion, Q&A 2018 RBC annuities seminar 2

3 A strong starting point in LTM Just expects a 6.6bn market by 2021, a CAGR of 21% from the 3.1bn market in 2017 LTM market forecast ( m) m 6, ,073 26% CAGR 1,379 1,602 2,149 3,057 21% CAGR Lump sum mortgage sales New drawdown mortgages - initial advance Existing drawdown mortgages - further advance Forecast Changing attitudes towards using housing equity Peace of mind from No Negative Equity Guarantee ( NNEG ) feature in products Favourable demographics Increased housing wealth amongst retirees Maturity of Interest Only mortgages Source: Equity Release Council, Just internal analysis Growth drivers Move from Defined Benefit to Defined Contribution pensions Retirement Income shortfall Increased advertising spend by providers and distributors Increased distribution capacity 2018 RBC annuities seminar 3

4 LTMs are demand driven and benefit the wider economy Just expects a 6.6bn market by 2021, a CAGR of 21% from the 3.1bn market in 2017 Only 3% of those eligible have thus far accessed LTMs. Overall, 24% of UK homeowners or 3.4m UK households are open to the idea of accessing property wealth in retirement 1 Drawdown lifetime mortgages filling the savings void and also enabling pensioners to keep pension savings invested 37, new lifetime mortgage plans up 34% 29,661 Further advances to existing plans Q2 16 Over 55s accessed 29p of property wealth for every 1 of flexible retirement savings FY2016 ratio rose to 38p, FY 2017 ratio rose to 47p, and in Q the ratio was 56p c.67k customers supported 3.06bn of advances, up 42% January product offerings, up 25% yoy, including inheritance protection on almost half of products, and downsizing protection on 2 in 5 products Source: Equity Release Council - news section and Spring 2018 market report, released 22 March 2018 Note 1: Legal & General Silver Spenders, February 2018, research carried out for L&G Home Finance and CEBR Note 2: Being first-time buyers, remortgagers, homemovers and new or remortgaging buy-to-let borrowers generating 7.1bn of economic activity and supporting 37,100 jobs RBC annuities seminar 4

5 Demographics and housing wealth Number of people (m) age % 19% 20% 22% 24% 24% Profile of UK Interest Only loan book 2013 ( bn) 470bn 42bn 21bn Maturing after 5 years, 91% Borrower <65 at loan maturity, 49% 100%+ LTV (3%) % LTV (10%) 60-80% LTV (25%) % of UK population over age 65 Net housing wealth held by those aged 55+ Age 85 and over 0.2tn Age tn Age tn Age tn 3tn We estimate an existing industry LTM book of 20bn, thus a penetration rate (at 30% LTV) of c2.2% amongst those aged 55+ Maturing in <5 years, 9% Source: Just IO loans outstanding Borrower aged 65+ at loan maturity, 51% IO loans maturing within 5 years 40-60% LTV (26%) 20-40% LTV (25%) <20% LTV (11%) IO loans maturing within 5 years with borrower aged bn addressable market Source: ONS, Wealth and Assets Survey ( ), released 6 March RBC annuities seminar 5

6 Nether Italy Austria Denmark France OECD 34 Canada Germany USA Australia Ireland Japan UK Shift from DB to DC exacerbating retirement income shortfall 85% of schemes (by number) are closed to future accrual or new members Net pension replacement ratio 1 - %, average earners 100% % 80% 80 70% 60% 60 50% 40% 40 30% 20% 20 10% 0% Closed to new members Closed to future accrual Source: PPF purple book 2017 Note 1: OECD Net pension replacement rates by earnings, as of 12 December RBC annuities seminar 6

7 Return per annum Investing in LTMs relative to other asset classes 6% 5% 4% 3% 2% 1% Emerging market debt 10 year A / BBB 10 year AAA / AA Commercial mortgages Lifetime mortgage Infrastructure Par gilt curve Social housing Ground rent 0% Source: Illustrative according to Just estimates Typical return: 4-6% depending on initial LTV Cash-flow profile o Roll up mortgages provide one big repayment at maturity o Interest paying mortgages provide regular income o Duration: years Modified duration profile (years) Metric Credit risk: in the form of NNEG, risk reduction via low initial LTV (25-30%) Liquidity: relatively illiquid, structuring required Supply: growing, market up 42% to 3.1bn in RBC annuities seminar 7

8 Cash flows per annum ( m) Why use LTMs for DB? ALM and yield LTMs play a key role in our ALM process iboxx stg corporate bond index Issuers and market value by term Corporate Bonds & Gilts Lifetime Mortgages GIfL Liabilities DB Liabilities Year Source Just analysis No. of Issuers Market value ( bn) 0-10 yrs yrs yrs 30 yrs + Different types of Lifetime mortgages PV cashflow profiles iboxx stg corporate bond index - spread over GBP swaps by term (bps) Years Drawdown Interest Serviced Lump Sum 0-10 yrs yrs yrs 30 yrs + Spread over GBP swaps (bps) Additional term spread 2018 RBC annuities seminar 8

9 Q Q Q Q Q Q Q Q Q Q Q Q Q Q Q Q Q Q Q Q Q Q LTMs The economics of NNEG, 30% initial LTV UK life expectancy from age 70 1 females c.18 years males c.16 years Projected LTV by age and HPI (initial 30% LTV and 5.5% interest) 160% 140% 120% 100% 80% 60% 40% 20% 0% 100% LTV at 92 ½ years Impact of NNEG for different HPI growth rates (initial 30% LTV and 5.5% interest) 0% HPI 1% 2% 3% 4% No-Negative Equity Guarantee (NNEG) We guarantee that a borrower s estate will never have to repay more than the value of the house House price inflation of 0% indefinitely would only drive a 100% LTV as our typical 70 year old, initial 30% LTV customer is 92½. At 20% initial LTV, 100% LTV is reached approaching age 100 Nationwide UK house price index: Q Q % 5.0% 4.0% 3.0% 2.0% 1.0% 250, , , ,000 50, % 30% 20% 10% 0% -10% -20% 50-3% -2% -1% 0% 1% 2% 3% 0.0% Age at which NNEG materialises Yield if lives to exactly 100 Note 1: Source, CMI 2017, published on 1/3/2018, based on life expectancy data at age RBC annuities seminar 9 Property price ( ) % change per annum

10 Greater London Outer Metropolitan Outer South East East Anglia South West East Midlands West Midlands Yorkshire & Humber North West North Wales Scotland Northern Ireland Outstanding LTV Lifetime mortgages Just s current portfolio LTV breakdown by geography ( m / %) 31 December 2017 A low risk LTM portfolio 1, % 30% 20% 10% 0% Total outstanding of 5.3bn 1 is made up of over 65k loans, average balance 82k Average property-weighted LTV for new business is c.27%, only 0.5% of loans with LTV greater than 75% Self origination and funding to 3 rd parties LTV breakdown by customer age bands ( m) 31 December Total outstanding (LHS) Average of LTV based on total outstanding (RHS) Below <30% 30% ~ 50% 50%+ <1% by value at 50%+ LTV Average LTV across portfolio remains low at 29% NNEG SII allowance is sufficient if property prices immediately fall by c. 20% and never grow again each year, the allowance is released into SII surplus as the risk margin and SCR associated with liabilities unwinds Actual experience: <1bps Note 1: The difference between the total amount outstanding (principal and accrued interest), and the balance sheet amount of 6.8bn is due to the discount rate used to compute fair value RBC annuities seminar 10

11 Continued innovation by Just in our chosen markets Launch of DB Choice proposition November Top-slicing (pre transaction) Pre transaction Medical Underwriting <300 lives or Standard underwriting combined into DB Choice Post transaction >300 lives lives New DB Choice proposition offering a guaranteed dual pricing structure with o o o Choice A lower medically underwritten price (minimises premium), or standard underwritten price (minimises contact with members) Upfront certainty price is not dependent on gathering medical data post transaction, or indeed the outcome of that medical data Value trustees and sponsor can see the value of MU upfront, irrespective of appetite for MU. The sponsor can compare both prices with those of other insurers ahead of transaction Will continue to offer existing suite of 4 pricing solutions on a case by case basis 2018 RBC annuities seminar 11

12 Summary LTMs combined within an optimal asset mix, reinsurance, and medical underwriting where appropriate Illiquid ASSETs Infrastructure LTMs Commercial Real Estate Liquid ASsETS Gilts Cash Corporate credit Improved pricing for sponsors, trustees and EBCs 1 2 Illiquidity premium increases yields Long-term cash flows, very suitable for ALM 3 Secured asset Lifetime mortgages an essential ingredient for DB 4 Utilises our longevity expertise 2018 RBC annuities seminar 12

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