We commented yesterday on the rise in triple B spreads. Today, the FT mentions the rise in investment grade spreads as a whole (see chart above).
And now to comment briefly on the Just 2019 annual report.
Age Co end equity release
We reported here and elsewhere about Age Co (a company owned by the trusted brand Age UK) referring potential borrowers to Hub Financial, who routinely recommended equity release deals from its own parent company (i.e. Just), despite the suggestion of a whole of market offering and a ‘panel’ of providers.
Neither the FCA or the Charity Commission have commented.
Equity released
The Tonight program can be viewed on catch-up here. It was a useful critique of equity release, although some of the wider issues were skirted, such as why people would need the product in the first place, given that their pension or health insurance should have been adequate.
The story behind the mystery shop (see 14:00 onwards) is more complex.
Matching adjustment reaches Parliament
Just spotted this from Hansard (02 October 2019, Volume 664), reporting a debate that day on Leasehold and Commonhold Reform. Sir Peter Bottomley:
As an example for those who do not read Private Eye on the day it comes out, there is a story about Rothesay Life, which apparently has £1.5 billion of loans. It can revalue the interest over 30 years and take it almost as instant profit. That is the kind of thing that leads people to say, “I am going to be greedy and get away with things as long as I can.”
See our story here.
There could be more to come, so stay tuned.
Letter to watchdog full of inaccuracies?
Rothesay’s chairman (Naguib Kheraj) has written to the Financial Times saying that the policyholders and experts’ letter to the PRA “contains so many inaccuracies as to be unhelpful and irresponsible”.
Unbalanced sheets
The Independent Expert report on the Prudential-Rothesay transfer has a curious statement in footnote 17.
The figure of c.£11.3 billion differs from the figure of c.£12.9 billion in paragraph 5.17 because £11.3 billion is the gross BEL held by Rothesay in relation to the reinsured business, whereas £12.9 billion is PAC’s gross BEL in relation to the reinsured business. The difference between these figures principally arises because the Transferring Business is not part of PAC’s Matching Adjustment portfolio (and therefore its BEL is not calculated using the Matching Adjustment), whereas the inwardly reinsured business in Rothesay under the Laker Reinsurance Agreement is part of Rothesay’s Matching Adjustment portfolio, which means that Rothesay’s BEL is calculated using a discount curve that includes a Matching Adjustment, resulting in a higher discount rate and a lower BEL.
My emphasis.
PRA playing fast and loose
An interesting article in the FT published this Sunday, quoting one expert as saying that the Prudential Regulation Authority is playing “fast and loose” with pensions over its willingness to nod through transfers of savings from long-established insurers to newer specialist rivals.
Continue reading “PRA playing fast and loose”
Sound of silence
Sorry for the lull. Our latest work, and this was always the plan, has been on the wider issue of specialist insurers who make excessive use of the Matching Adjustment ‘benefit’ to create capital, both statutory and regulatory, on their balance sheet.
The recent High Court judgment which blocked the proposed transfer of annuities from Prudential to Rothesay was welcome to us, but came as a surprise, and raised legal questions about what we can publish while the judgment is under appeal.
We hope to say something next week, so stay tuned.
Market Consistent or Real World?
Although we have often criticised it, the Discounted Projection aka ‘Real World’ Approach used by the equity release industry to value their NNEGs and ERMs has two significant things going for it. The first is fantastic marketing. Who could be against a ‘real world’ approach, especially when the alternative is a Market Consistent or ‘Risk Neutral’ approach? Everyone knows that most people are not risk-neutral. ‘Real world’ or ‘risk neutral? It’s a no-brainer.
The other thing that the DP/’Real World’ approach has going for it is that it produces much lower valuations. Hosty et alia (2007) hit the nail right on the head:
7.3.3 Market consistent or real world?
On our proxy market consistent approach we have derived a cost for the NNEG which would render the product non-profitable, whilst real world modelling has produced a significantly lower cost.
The importance of commercial considerations as a reason for preferring this approach was confirmed by Tom Kenny at the 28 February 2019 Staple Inn launch event for the Tunaru report. Mr Kenny was the chair of the event, and is Director of Actuarial & Underwriting, Retirement Lending at Just Group plc in his day job: “clearly if we move down a purely market consistent route … it’s going to be extremely expensive,” he said.
Darn right it’s going to be expensive.
The Discounted Projection Approach
The standard approach used by UK ERM actuaries to value NNEGs and ERMs is the Discounted Projection (DP) approach, which its adherents like to call the ‘real world’ approach.
This approach is based on the use of a projection of future house price growth to value the NNEG. In particular, it replaces the forward house price as the underlying in the Market Consistent (i.e., correct) approach with some expected future house price ‘forecast’ that a cynic (not us!) might say was indistinguishable from a convenient guess.