Author: db

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The experience of the 1930s – more from the postbag

Source: Giseck/Longstaff/Schaefer

A friend of Eumaeus comments on my post yesterday, where I said “I have argued many times in the past that we should look at the default experience of the 1930s (or the 1880s or whenever) in assessing the true default risk of long term credit exposure.” He objects that the PRA have done exactly that, citing Supervisory Statement 8/18:

When using transition data, the PRA expects firms to … compare their modelled 1 in 200 transition matrix and matrices at other extreme percentiles against key historical transition events, notably the 1930s Great Depression (and 1932 and 1933 experience in particular). This should include considering how the matrices themselves compare as well as relevant outputs…

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An unavoidable leap of extra-statistical faith

Craig Turnbull (Investment Director at Aberdeen Standard Investments, author of A History of British Actuarial Thought) offers an intriguing critique of the Matching Adjustment here. ‘To the extent that the profession wishes to defend the MA as a matter of actuarial principle’, he says, alluding to the IFoA president’s recent defence of it, ‘we must provide a clear explanation of the apparent logical contradiction at the core of its treatment of credit risk capital: that the capital required to support the risk of adverse asset outcomes can be (partly) created by assuming those same assets perform well.’ (Our emphasis).

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Panic wot panic

 

Wait here for the next available cashier

A topical article in the FT today on the queues spotted at Metro Bank over the weekend, which received almost viral attention in ‘social media’.

The long queues that formed at several Metro Bank branches in west London on Sunday have been seen by some, especially on social media, as an alarming echo of the days just before Northern Rock’s collapse in 2007. The comparison is irresponsible. This lender’s problems — a few dozen customers emptying their safety deposit boxes amid unfounded rumours of imminent collapse — cannot be likened to those of a defunct bank whose woes foreshadowed the global financial crisis. Conflating them risks creating a vicious circle of customer panic.

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Just published

Just out, the Just Group financial report for 2018. The reconciliation of regulatory to statutory capital is on p.28, copied below (with added difference column).

As you see the fictive regulatory asset (TMTP) decreases by £372m over the year. This is mainly offset (1) by the increase in sub-debt, consisting of the Tier 3 subordinated debt issued in February 2018. Next year there will be a further increase of solvency II capital because of the £300m Tier 1 qualifying regulatory capital instrument issued in March this year.

There is also (2) the mysterious increase due to ‘other valuation differences’ but I have never been able to locate where this comes from.

31 December 2018 £m 31 December 2017 £m Difference
Shareholders’ net equity on IFRS basis 1,664 1,741 (77)
Goodwill (34) (33) (1)
Intangibles (137) (160) 23
Solvency II risk margin (851) (902) 51
Solvency II TMTP 1,738 2,110 (372)
Other valuation differences and impact on deferred tax (813) (1,009) 196
Ineligible items (7) (6) (1)
Subordinated debt 615 394 221
Group adjustments 1 0 1
Solvency II own funds 2,176 2,135 41
Solvency II SCR (1,597) (1,539) (58)
Solvency II excess own funds 579 596 (17)
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Age UK equity release deals under fire

In the Telegraph today.  Continues the story that began in Private Eye about Age UK inviting us to take out equity release with the help of its ‘Age Co UK Equity Release Advice Service’, provided by Hub Financial Solutions Ltd, owned by Just Group.

You can read the article for yourself, the crux of it is that, according to the article, Hub Financial routinely recommends equity release deals from its own parent company (i.e. Just).

While it makes clear that it offers only a selection of the plans sold by these firms, Telegraph Money can disclose that the way its advice process is structured means that in most cases a customer will be offered a deal by just one panel member – Just.

Precisely why the customer in most cases is offered the Just product is not disclosed. Hub claim that “The panel at any point reflects the attractiveness and competitiveness of each loan’s design, features, rate and service levels.” On the other hand, the Telegraph hints that “In 2016 Age UK was criticised by the Charity Commission for recommending an energy tariff, through a business partnership with E.On, which was not the cheapest available”.

Kevin and I are quoted.

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Doom and gloom

Source: Dallas federal reserve

 

If you have come to this blog looking for upbeat fluffy stories then you have come to the wrong place.  If the market is up at record highs, then we say the bubble will burst, and it’s doom. If we are in the vasty deeps of a massive bear market and, well, it’s gloom all round.

We have been following the Aussie and Canada housing market for a while

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Return of the Matching Adjusters

By DB and KD

Since we published our objections to the Matching Adjustment, and particularly since the FT article about the magic money tree, Eumaeus has been faced with a barrage of criticism. Are we being funded by right-wing think tanks such as the Adam Smith Institute? (No we aren’t) Shouldn’t the Guardian investigate Kevin’s links to pro-Brexit groups? (No point. ‘Unearthed’ already did and they didn’t, er, unearth anything that was not already in the public domain. Took them a year to find out less than they could have found had they asked politely.) Are we trying to bring about the zombie apocalypse of the insurance industry by mass insolvency? Give us a break. We are however trying to expose bad practice, and there seems to be a bit of that around.

There are three objections to consider.

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Minority of one?

Jonathan Ford’s article last week (Investors should beware the insurance magic money tree) predictably attracted a lot of comment. A few observers, noting Martin Taylor’s famous comment that the “actuarial convention” by which the composition of an insurer’s assets determines the size of its liabilities was “one of the weirdest emanations of the human mind”, suggested that poor Martin was out of kilter with the rest of the Bank, or the PRA.

Far from it.

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Matching adjustment open to abuse

FT letters today.

 It is unfortunate that John Taylor (Letters, April 18) elevates “one of the weirdest emanations of the human mind”, the matching adjustment, to the status of a “fundamental actuarial principle”.

Matching adjustment allows life companies to buttress their balance sheets by creating tens of billions in fake capital, and makes companies appear to be in much better financial shape than they are. There are companies whose capital would be wiped out but for matching adjustment.

It is also naïve to think that matching adjustment is not open to abuse merely because it is consistent with rules that the companies lobbied for. For life companies, matching adjustment provides the ultimate way to game the capital rules — in some cases, with no capital. The Prudential Regulation Authority should put a stop to it.

Dean Buckner

Kevin Dowd

The Eumaeus Project and Durham University, UK