Keeping an eye on things
It’s November again and time for the annual Bank of England stress test results.
To be honest I don’t take too much notice of these. The tests are hardly going to show that the UK banking system is not resilient to deep simultaneous recessions in the UK etc etc., although they may show Brexit is the worst thing ever.
But I was sad to see one chart has gone missing.
In our excitement about the 25 October 2018 update from the Bank 1, we missed this wonderful speech by Sam Woods (deputy head of Hogwarts)
According to some history books, the dreaded mob went into riot mode after it was proposed in February 1751 that Great Britain adopt the Gregorian calendar, already used in most of western Europe. ‘Give us our Eleven Days’ they cried.
The chart above shows the growth of the equity release market since 2000, based on figures published by the Equity Release Council on their website. Blue line shows the number of new customers (including returning customers) each year. The red line shows new lending for the same year.
Just Group’s business update for the 9m period ended 30 September 2018 is here. Shares were up 5% on the news this morning.
Headlines: £483m of ERM business written, which they say is CP 13/18 compliant, and they write:
CP13/18 is for us primarily a back book issue. The Group has no further clarity on the outcome of the consultation
In the same period, they took on about £1bn of defined benefit derisking business. ‘Derisking’ is actually an odd name for this kind of business, but Kevin and I shall be discussing that in Q1 next year.
The firm awaits the publication of the PRA’s final supervisory statement, as we all are. As I commented here, it is not certain whether it is just the implementation that has been delayed, or the publication. All we know is that it will be published in due course.
Get on with it then!
You saw it here first. At 10:00 yesterday we published the news that the PRA had delayed the implementation of CP 13/18 until at least the end of December 2019. The impact was dramatic, with a certain firm’s share price leaping by nearly 30% at one point.
Mr Market still doesn’t understand, if you ask me.
Update 25 October 2018 from the Bank.
The consultation period for PRA CP13/18 ‘Solvency II Equity Release Mortgages’ closed on 30 September 2018. The proposed implementation date for the proposals in the CP was Monday 31 December 2018. Based on feedback to the consultation, the PRA has decided that the implementation date will not be before 31 December 2019. The PRA is making this announcement now in order to clarify the position for insurers planning their year-end 2018 processes. The PRA is currently giving careful consideration to the consultation responses and the impact, if any, of the updated implementation date to the proposed phase-in period. The PRA will publish final policy and supervisory statements in due course.
This is hardly surprising.
[edit] Our own letter to the consultation team is here. It said (point 1).
It is a worry that the consultation as a whole has taken such a long time. The Dowd report ‘Asleep at the Wheel’ identified a number of letters going back to October 2014 and resulting in a stream of consultation papers, discussion papers and supervisory statements (see, e.g., CP 48/16, CP 23/17, CP 24/17, DP 1/16 and SS 3/17) expressing concerns on ERM valuation. Yet the valuation issue is a simple one: once the decrements have been quantified using standard longevity modelling, the ERM valuation model embeds a simple European put option. Clearly the deferment rate concept has caused an intellectual challenge for some, but it is a natural consequence of modern derivative pricing theory, which dates back more than 40 years. The PRA has apparently confirmed this assessment in judging that the valuation changes are not a consequence of Solvency II, but should have been applied all along. Yet during this extended consultation period the ERM market has grown significantly and the PRA has approved the raising of sub-debt and tier 3 debt, not to mention dividend payments, all based on valuation models it has known to be flawed. Investors could rightly complain that they have been misled.
Our emphasis. How long does it take to price a simple European put option?
Markets iffy last week but my shoulders shrug. I have a fixed price target for my portfolio, so what with all the market collapse my growth projection has increased. Moreover I discount all my future liabilities (paying gas bills, Sainsbury’s, ‘biting on granite’ worktops, garden shed, phone, new pair of trousers etc) by the same growth rate so my overall position is unchanged.
We should all do this. After all, that’s what the Bank of England recommends.2
We replied at the last minute to the CP 13/18, our letter is here. For those who don’t have time to read it, the main points are:
I look forward to seeing our readers at the LSE tomorrow. There will be drinks.
[Update: The Institute of Actuaries has just published its response to CP 13/18. We will be commenting on this tomorrow, but note they also bring up the autocorrelation point, although, like many others, they confuse a valuation question with a risk management one.]
There was much talk about the UKAR ‘bad bank’ selling a portfolio of ERM loans to Rothesay Life, an insurance company once owned by the good bank. See e.g. this report by Ralph and Pooley.