A spokesman for UKAR got back to me saying I got the numbers wrong in this post. I said that the total loan value of the book bought by Rothesay Life, i.e. the original amount lent accrued at the loan rate is somewhat north of £1bn. Apparently not, for that value, which they call ‘unpaid balances on portfolios sold’, is £860m, hence somewhat south of £1bn. So there are five different values to choose from:
- The loan value (i.e. original amount lent accrued at the loan rate) £860m
- The book value of c. £750m
- The amount that would have been paid if not for the NNEG
- The amount paid by Rothesay, which UKAR cannot disclose, but which was greater than book value, and £200m less than the amount that would have been paid if not for the NNEG
- Government loan repayment: over £1bn
Fans of linear algebra will spot that there are still too many unknown quantities to make any sense of this.
Why is the book value less than the loan value? Is it because of the NNEG? Well no, because that is already accounted for by the ‘amount that would have been paid if not for the NNEG’. I asked UKAR how they estimated that amount, but they declined to say. Perhaps it is a guess of the present value of future ERM profits, but then as I pointed out in the earlier post, UKAR are using the projection-discount method of valuation now discredited by the PRA (and by Prof Dowd and myself).
They key point is that the public cannot know these numbers because UKAR are ‘constrained by commercial sensitivities’, and here I am reminded of my late father’s old accounting textbook.
‘The plea that published accounts may afford trade rivals valuable information is somewhat overworked’.1.
Clearly UKAR are not constrained by such sensitivities, so Rothesay must have insisted on secrecy (‘confidentiality’) as a provision of the deal. That is, the government is happy to keep pensioners’ assets a secret from the pensioners, but not from the management and current owners of Rothesay. Don’t pensioners have a right to know? Apparently not.
On that subject, it’s currently not so bad, according to Rothesay’s 2018 Interim financials. They were already ‘overweight in gilts’ to the tune of about £12bn as a result of taking on Aegon pension obligations in 2016, and the acquisition of a £12bn block of annuities from Prudential in March this year brought the gilt exposure to more than £19bn, plus a further £5bn of corporate bonds.
But this will change. As usual, Rothesay state that they will later invest the assets received as part of the Prudential transaction ‘in line with our long-term investment strategy’. The long term strategy 2 is to reinvest in assets which they can generate profits on, which presumably requires investing in assets with higher yields than gilts and the current set of corporate bonds. Or if not, perhaps they should say. But given their strategy is also ‘designed to protect the security of our obligations to policyholders’, these higher yielding assets must be equally as safe as gilts and highly rated corporates, so no need for pensioners to worry.
We now know these reinvestment assets will include Equity Release mortgages, so no worry there either.
It is interesting to note that the Prudential deal generated losses. But as they note, once the safe assets are invested in higher yielding but equally safe assets, they will ‘reverse these losses and … generate significant IFRS profits’. Also interesting that the losses arose from ‘new business strain’, and ‘actions taken by the Group to reduce investment risk’. How will they return to profit without increasing investment risk is a perplexing question.
On a further note, there was a fascinating article here noting that the ERM sale was to an unauthorised lender, i.e. Rothesay, who cannot give the existing Bradford and Bingley borrowers a cheaper mortgage. This is the so-called ‘mortgage prisoner’ dilemma which is a political issue, given the prisoners have a life sentence of more expensive mortgages. Will the government release them at some future point? Does that mean Rothesay will have to reverse the profits with resulting ‘business strain’?