Keeping an eye on things
As InsuranceERM announced yesterday, the Financial Reporting Council has begun a review into equity-release mortgage accounting.
The UK’s accounting watchdog has initiated a review into the statutory accounting of equity-release mortgages (ERMs), a move which may result in changes to life insurers’ profits.
This webcast (4 September 2019) by David Richardson (Just interim CEO) casts some light on how the proposed NNEG hedge will work, but also casts significant amounts of darkness. Richardson states (my transcript)
The Just Group 2019 interim statement is out today. It has already received coverage in mainstream financial media, and we don’t normally repeat what is already said.
What caught our eye, however, was the mention on p.50 of the put option on property index, the NNEG hedge we discussed earlier. We speculated whether the firm has put the hedge in place, or whether they are still waiting to establish ‘appropriate regulatory treatment’ with PRA. Turns out (and we should have spotted this from the 2018 financial statement – 2018 p.72, section 25 ) that it was already in place by 2018, so it is merely the regulatory treatment they are waiting for .
But here’s the interesting thing.
The transcript is here. Some points to consider.
More later.
We learned on Friday that the High Court blocked the ‘Part VII’ transfer of a £12bn annuity portfolio from Prudential to Rothesay. According to the judge, Justice Snowden, Rothesay was ‘a relatively new entrant without an established reputation in the business’, and that although its capital strength was as strong as that of Prudential, it ‘does not have the same capital management policies or backing of a large group with the resources . . . to support a business that carries its name’.
This decision is significant for a number of reasons, some of which we will have to leave until later. The main thing for now is that at least one part of the system is working. The PRA and the Independent Expert approved the transfer and saw no detriment to existing policyholders. But the judge saw detriment, and that was that.
Whether or not Rothesay’s capital position is as strong as Prudential is an interesting question we shall put aside for now.
In other news, the shares of American insurer GE dropped last week after Madoff whistleblower Harry Markopolos claimed a $38bn fraud. Although whether it is fraud, or merely insurance accounting, is always difficult to say.
Kevin writes here
It also gets interesting if the firms use different valuation approaches from each other. In that case it would be theoretically possible for both parties to post a profit on the transaction or for both parties to post a loss on it.
He is referring to the approaches used to value the embedded put option in the ERM, and the actual put option used to hedge the ERM.
There is a troubling reminder here of what happened to AIG Financial Products in the run-up to the last financial crisis.
In a recent (July 30) posting, Dean wrote that
Since Just Group’s trading update last week, there has been much speculation about the ‘pioneering no negative equity guarantee (NNEG) hedging transaction’ announced by the firm. It is not clear whether the firm has put the hedge in place, or whether they are still waiting to establish ‘appropriate regulatory treatment’ with PRA. The current thinking is that the hedge will be transacted through a major reinsurer, and that it will be a purchase of some form of long dated put option on the housing index.
A related possibility is that the hedge, if there is one, is some kind of NNEG swap, which then raises the question: what is Just’s NNEG valuation?
Short answer: we don’t know and it would be naughty of us to speculate. We don’t have enough information about the firm’s ERM portfolio or enough information about the firm’s valuation approach.
But this got us thinking …
Since Just Group’s trading update last week, there has been much speculation about the ‘pioneering no negative equity guarantee (NNEG) hedging transaction’ announced by the firm. It is not clear whether the firm has put the hedge in place, or whether they are still waiting to establish ‘appropriate regulatory treatment’ with PRA. The current thinking is that the hedge will be transacted through a major reinsurer, and that it will be a purchase of some form of long dated put option on the housing index.
Craig Turnbull has just posted his latest ERM article on Linked In here.
Continue reading “On the Actuarial Treatment of Equity Release Mortgages: Part Two”
A good story here in the Telegraph about the cosy relationship between Age UK and Hub financial (owned by Just Group). Behind a paywall, but in summary, a couple took out an equity release mortgage with Just (then Just Retirement) in 2012. They were told the service was ‘the Age UK equity release service provided by Just Retirement Solutions’, and the advisor’s identification would show as ‘Age UK’. In reality, the advisor was wholly employed by JRS and had nothing to do with Age UK. The customers took out a £300k loan (which would now be worth nearly £470k).
The couple now want to change the loan to one with a cheaper rate, which will cost them £30k. Yet the advisor supposedly told them (in 2012) that gilt rates would move in their favour (i.e. go up) over the next few years, so they would face no early repayment charges.
Of course it would seem natural in 2012 to think that rates, then at a long term low of around 3%, would go up. Just as natural as thinking, in 2019, that house prices will continue to rise at 3-4% a year for ever, the assumption which is the basis of the entire equity release market.