Category: firms

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Just Group Business Update for the Year Ended 31 Dec 2020

Here.

Key points.  On the sale of £540m of lifetime mortgage balances on December, a footnote explains that the proceeds are “Amount outstanding, including rolled up interest”. This is simply the loan balance, without any benefit of MA, but they replaced with corporate bonds, saying that “sale proceeds were immediately reinvested in corporate bonds, with the reduced yield resulting in a one-off reduction in IFRS net equity of £90m.” I.e. they are claiming MA on the bonds, but it is not as much as the MA on the ERMs, unsurprisingly.

I occasionally correspond with a Just shareholder who refuses to believe that the firm bakes in expected  profit from ERMs. I wonder how he would explain that.

They note also that they have completed their third NNEG hedge. Again, you would expected this would lead to a loss on the assumption that the hedge is at market value, although nothing is certain in the crazy world of non-market actuarial valuation.

 

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More than a slap on the wrist

Sanctions against Deloitte and two audit partners in relation to Autonomy Corporation Plc

The Financial Reporting Council (FRC) today announces sanctions against Deloitte and former partners, Richard Knights and Nigel Mercer, following an investigation in relation to the audit of the published financial reporting of Autonomy Corporation Plc (Autonomy) for periods between January 2009 and June 2011 (the Autonomy Audits). An independent Disciplinary Tribunal made findings of Misconduct following a seven-week hearing during October and November 2019 and sanctions were determined following a hearing in July 2020.

Sanctions

  • Deloitte has been fined £15 million, severely reprimanded and has agreed to provide a Root Cause Analysis of the reasons for the Misconduct, why the firm’s processes and controls did not prevent the Misconduct and whether the firm’s current processes would lead to a different outcome.
  • Richard Knights has been excluded from membership of the Institute of Chartered Accountants for England and Wales for five years and has been fined £500,000.
  • Nigel Mercer has been fined £250,000 and received a severe reprimand.

 

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Equity release in the news again

By Adam Williams, Sunday Telegraph.

..  those looking to release equity have been urged to compare the fees charged by advice firms. The UK Shareholders’ Association, a not-for-profit consumer group, found that some homeowners could be charged almost 10 times more if they used certain advice firms. All equity release sales must be conducted through an adviser.

But the UKSA said the fee often bore no relation to the amount of advice given. It found that one broker, Age Partnership, charged a fee equivalent to 2.25pc of the cash released. This would mean that a 70-year-old taking out a 40pc mortgage on a home valued at £750,000 would pay £6,750 in fees.

[..]

The UKSA questioned whether there was a potential conflict of interest at firms that only charged customers who were sold a loan, rather than charging for the advice itself.

 

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Just wrong

From the Just Group 2020 interim:

There has been significant academic and market debate concerning the valuation of no negative equity guarantees in recent years, including proposals to use risk-free based methods rather than best estimate assumptions to project future house price growth.

To be sure, there has been significant debate about the subject, but there still seems to be significant confusion about what the debate is.

Continue reading “Just wrong”

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Just managing

Just Group interim out today, with an upbeat commentary that pleased the analysts. Who are easily pleased, it seems.

  • Solvency Coverage is up to 145% from 141%, but as they say this figure allows for a notional recalculation of TMTP as at 30 June 2020, and without it the SCR would have fallen to 123%, see p.61.
  • Page 8 shows that the TMTP (a regulatory asset that bolsters a firm’s balance sheet) increased from £1,891m to £2,201m). There is no explanation for the increase that I can find in the report.
  • They claim that “movements in the financial markets have had limited impact to date on the Group’s capital position”, but then perversely note that credit downgrades have affected over 16% of the Group’s corporate bond portfolio.1
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Wirecard illiquidity


Wirecard ticks all the Eumaeus boxes for things that went wrong for entirely predictable reasons. More on that later.

Meanwhile, the chart above shows the yield of the bond that Wirecard issued last September. Notice how it explodes a bit at the end. The Sam Woods theory is that such explosions are the effect of illiquidity.

Note the smaller blip upwards in the middle of October 2019 which happened to coincide with the FT’s revelation of internal documents from Wirecard pointing to “a concerted effort to fraudulently inflate sales and profits”.

Why would such a revelation affect the liquidity of the bond? And why would the later revelation this month that nearly €2bn had gone missing affect the liquidity so much that the bond is now only worth 20c?

Still, if Sam is right it looks a great buy. Repays in 2024 with a 99.5% probability of full repayment. Any offers?

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To Be or Not to Be, L&G’s £10 Billion Question

L&G have been much in the news recently, so too has our own Dean Buckner, with star appearances in the Financial Times, the Times and the Daily Mail (see also here) and all in two days.

The fur continues to fly over L&G’s planned June 4th dividend, but the attention is shifting subtly from the dividend itself to the underlying valuation methodology and the central issue is (one again) the Matching Adjustment.

There is also the issue of the firm’s ‘virus spread’ losses or, more precisely, Dean’s estimate that these could be up to £10.3 billion. Dean has stirred up a right hornets’ nest this time.

Here is my take.

Continue reading “To Be or Not to Be, L&G’s £10 Billion Question”

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Just 2019 Solvency and Financial Condition Report

The Just Group SFCR is out today.  One thing leapt out.  Table S.22.01.22 on page 110 which quantifies the effect of transitionals and matching adjustment, shows a large increase in the effect of TMTP from £1.7bn in 2018 to £2.8 bn in 2019, that more than a £1bn increase. The figure is broadly consistent with the figure for JRL on p.120 and for Partnership Life on p.129 (although, unlike last year, they don’t add up precisely).

If correct, the coverage ratio would have fallen to 82%.

Yet the figure is not consistent with the figures on p.80, which show the effect of transitionals at only £1bn, leaving the capital coverage ratio broadly unchanged at 141%. I have no way of explaining this.

Note also the weird lack of sensitivity to a 100bp changes in credit spreads, given on p.10 as 1% of coverage ratio. The puzzle is resolved on p.62 where it states “Credit Spread Risk: “The 100bps increase in credit spread for corporate bonds (excludes gilts, EIBs, any other government/supranational) assumes that the Fundamental Spread and volatility adjustment remain unchanged”.

More bizarre insurance accounting, in other words. The fundamental spread represents the supposed default risk for the firm, which if unchanged would not impact p/l. The widening of the spread, for example in a crisis period like now, would therefore be attributable to a change in Matching Adjustment, and the fall in asset value be matched by a corresponding fall in obligations.

This is not false accounting at all!

 

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Just the spread changes

Data source: ICE BofA US Corporate Index Option-Adjusted Spread, and Eumaeus

The chart above shows estimated losses on the recent credit spread movements on the corporate bond exposure of a firm like Just Group. First of all, let me state I have nothing against Just, which I am using as an example. My target, as always, is the regulatory system that approved the capital position of such a firm in the first place.

Continue reading “Just the spread changes”