In the Mail this morning, the threat to the proposed ‘ring fencing’ of the LV With-Profits fund if the acquisition by private equity plunderers Bain Capital goes ahead.
Continue reading “ERM threat to LV’s ring-fenced member funds”
City watchdog on alert
The Sunday Times featured our UKSA letter to the FCA yesterday.
Just days before the deadline for 1.2 million policy members of the mutual insurer to vote on the controversial deal, concerns were raised with Charles Randell, chairman of the Financial Conduct Authority.
The UK Shareholders’ Association wrote to Randell to query a description of the “with-profits” fund that, in effect, owns the insurer and is backed by policyholders as being “ring-fenced”.
The lobby group fears that the fund could be used to prop up the business if the Bain-owned business ran into financial difficulty.
Our letter coincided with a letter in similar vein sent by solicitors Leigh Day on behalf of some LV members, urging the FCA to withdraw its non-objection to the acquisition by Bain Capital and postpone the vote until it addresses a series of issues. The Mail reports:
They [the members] claim the process has been defined by a ‘material lack of procedural fairness’ and accuse bosses of providing ‘incomplete and/or contradictory information’ about the £530million takeover by Bain Capital. …’This is a deeply unsatisfactory situation which the FCA has allowed to take place and is unfair to the members of LV,’ the letter states.
The Leigh Day letter outlines a number of concerns, including the question whether the with-profits fund is really ‘ringfenced’.
It’s over
The High Court judgment on the PAC Rothesay transfer is here. I won’t comment for now, except to say it was a complete joke, even by the standards of such things.
Transfer window
Just noticed an article in the latest Eye about the PAC-Rothesay transfer. The Court Hearing is slated for 8 November.
Includes this:
Concerned Prudential policyholders say this puts them at greater risk, not least because they have a higher age profile (believed to be largely 75 -plus). Without applying the matching adjustment, an analysis in InsuranceERM magazine exposed recently, Rothesay is one of only two out of 14 life insurers in the UK that would be insolvent. So if anything goes wrong in the relatively short term, or the rosy view of Rothesay’s portfolio proves over-optimistic, they’re in trouble.
The policyholders also say the independent expert, Nick Dumbreck of risk management advisory firm Milliman LLC, hasn’t listened to their concerns adequately, including on the critical point of matching adjustment.
Milliman advises on a number of pension transfers, and the current dispute is effectively a test case for the business of selling portfolios regardless of the wishes of policyholders. If the Pru and Rothesay lose, it could kibosh the practice.
No it’s an error
Nom de Plume writes:
Just to make sure I have understood correctly, it is not that the independent expert has made an error, but that he used a number you don’t agree with i.e. if you didn’t subtract the £3bn transitional relief you would then get the 41% number.
If that is the case, why not say you don’t agree with the idea of transitional relief rather than call it a serious error.
No, it’s an error. Transitional relief is another form of fake asset, just like Matching Adjustment. If you take away the £7bn odd Matching adjustment ‘benefit’ from Rothesay’s book, their available capital amounts to pretty much zero. Clearly you can’t say that to policyholders, or they would object in their thousands. So Rothesay assumed that they would get back some of the lost MA in the form of transitional relief, i.e. having lost one fake asset the PRA would give some of it back in the form of another fake asset.
I can see no reason why that would happen, and in any case, as I pointed out in the previous post, TMTP is even more fake than MA, because you have to pay it back over 10 years. As well as the value of the fake asset, you have to include the present value of a series of fake cashflows over the amortising period. Thus zero minus zero equals zero, by my arithmetic.
Just Group flogs off more ERMs
Phoenix Group acquires £300m equity release portfolio from Just Group. “Consolidates Phoenix’s position among the largest equity release funders. Equity release is an important option for people planning their finances later in life” blah blah. Add that to the £334 million they sold off to Rothesay, and that’s a substantial part of their portfolio. Also, as we commented here, the deal will probably cause more losses for Just, as they lose the MA ‘benefit’.
Error? What error?
‘Nom De Plume’ writes “I am not sure what the serious error you are referring to in respect of Rothesay’s SCR ratio is. Rothesay’s SFCR contains the very same 41% number. (Page 50)”.
It does indeed contain the very same number. But why would ‘the very same number’ not also be in error? Rothesay say (ibid) that “Without the matching adjustment, the BEL would increase by £7.8bn, although this would be offset by an increase in transitional solvency relief leaving Own Funds £3.0bn lower “. But the present value of transitional relief, which has to be paid back in 10 years, is precisely zero.
Moreover the Independent Expert’s report does not assume any increase in ‘transitional relief’ for Prudential, but rather gives the unadjusted figures, which compounds the error, or should I say deception.
Without the ‘benefit’ of MA, which the Expert in his correspondence with me has acknowledged to be a benefit only to existing shareholders, Rothesay is technically insolvent.
‘Serious errors’ in Independent Expert report
Just makes no sense
There was an RMS announcement yesterday for the sale of a portfolio of equity release mortgages from Just Group to Rothesay Life. The sale was hinted at in the Interim results released last week.
The announcement is confused partly because the sale is the first of two tranches, with the numbers referring sometimes to the total amount, sometimes to the amount in the first tranche. As far as I can make sense of it, the total imputed value of the loans being transferred is £475m, and the total amount paid by Rothesay is £334m (see also their announcement here), resulting in a theoretical loss of £141m for both tranches. Just Group say that the loss will be only £125m, but they also refer to ‘IFRS value’ as being different from the imputed value.
The stated reason for the loss is “the insurance liabilities impact due to the lower investment yield on the replacement bonds” which does make a kind of sense.
Welcome back to the weird world of Matching Adjustment accounting.
Let Battle Commence
A page with a timeline for and sources on the Prudential-Rothesay Part VII transfer.