Category: firms

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Capital punishment

The AGM presentation by Just Group (13 June 2019) fell into the usual trap of confusing capital with capital requirement. Chris Gibson Smith:

As you will be well aware, new regulatory guidance released by the PRA in December – Policy Statement 31/18 (“PS31/18”) – imposed increased capital requirements for lifetime mortgage writers, particularly in relation to business written since January 2016.

[…]The strength of our customer offering has enabled us to adapt new business pricing to the increased capital requirements

David Richardson:

It is very clear that the capital requirements for this business have increased

Etc.

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Stress tests apply not only to banks

Sir John Vickers kindly mentioned us last week (6 June 2019) in his keynote address to the 19th Annual International Conference on Policy Challenges for the Financial Sector in Washington. Most of the speech is about bank stress tests – he has long insisted that market-based measures should play a greater role in regulatory assessment than is current practice – but he mentions the insurance stress tests towards the end, citing the PRA’s current consultation on its stress test for insurers.

For the valuation of pension scheme liabilities, firms should assume that the discount rate would change by the level of any change in the risk-free rate plus 50% of the change in spread on AA rated corporate bonds. Under the proposed stress the risk-free rate decreases by 100bps and 50% of the spread on AA rated corporate bonds is an increase of 85bps. Therefore, both elements combined result in a 15bps fall at all tenors to the discount rate.1

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Barclays Case Proves that UK Banks are NOT Adequately Capitalised

Shortly after the Adam Smith Institute/Cochrane/Dowd bank capital report came out on May 1st, the Bank of England has inadvertently confirmed our report’s core message – that UK banks are far from being adequately capitalised.

Sir John Vickers and I have been trying to tell the Bank this for years, and yet the BoE still remains in denial on this most important of prudential questions.

To quote a story in today’s Financial Times (“Bank of England warned criminal charge could destabilise Barclays” 15 May 2019):

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Just published

Just out, the Just Group financial report for 2018. The reconciliation of regulatory to statutory capital is on p.28, copied below (with added difference column).

As you see the fictive regulatory asset (TMTP) decreases by £372m over the year. This is mainly offset (1) by the increase in sub-debt, consisting of the Tier 3 subordinated debt issued in February 2018. Next year there will be a further increase of solvency II capital because of the £300m Tier 1 qualifying regulatory capital instrument issued in March this year.

There is also (2) the mysterious increase due to ‘other valuation differences’ but I have never been able to locate where this comes from.

31 December 2018 £m 31 December 2017 £m Difference
Shareholders’ net equity on IFRS basis 1,664 1,741 (77)
Goodwill (34) (33) (1)
Intangibles (137) (160) 23
Solvency II risk margin (851) (902) 51
Solvency II TMTP 1,738 2,110 (372)
Other valuation differences and impact on deferred tax (813) (1,009) 196
Ineligible items (7) (6) (1)
Subordinated debt 615 394 221
Group adjustments 1 0 1
Solvency II own funds 2,176 2,135 41
Solvency II SCR (1,597) (1,539) (58)
Solvency II excess own funds 579 596 (17)
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Just out

Just Group published its 2018 results this morning. It’s all over the financial press but the headlines are

  • Dividend cancelled for 2018.
  • Dividends expected to recommence in 2019 financial year but at a ‘rebased level’, approximately one third of the 3.72p total dividend paid during the 2017 financial year, subject to the usual constraints.
  • The firm plan to raise £300m in debt and around £80m in an equity placing. The company will issue about 94m new shares, equivalent to 10 per cent of the total already in issue.
  • They report a loss of £86m for the year because of “changes to property assumptions in light of the economic and financial uncertainty caused by Brexit.” The ‘change to property assumptions’ appears to be the change referred to on p.52, where the rate of assumed future house price growth changes from 4.25% in 2017 to 3.8%.
  • Deferment rate assumption drops from 0.5% to 0.3% (p.9), somewhat against the direction of travel set by PRA.  The rate will have to increase to 1% by year-end 2021 (p.26)

The shares fell by nearly 15% this morning, to 84p.

Interesting that losses could be caused by house prices failing to rise by as much as forecast. As we commented yesterday, that is a bit bonkers. How much do they lose if house prices actually start falling?

 

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Libor flat

I mentioned David Land’s bemused question to the Equity Release working party yesterday. If the working party hasn’t yet fixed the right method of calculating the forward, isn’t that a pretty major source of possible error?

No coherent answer emerged, but Land raised an interesting point. If we can’t lower the value of the no negative equity guarantee by putting in an optimistic growth forecast, perhaps we can tweak the funding rate instead? He drops a hint when he suggests that there’s a large range of possible funding rates that you could think about, and that ‘The PRA thinks that you could possibly fund a house at Libor flat, which seems remarkably difficult’.

Nice try, but there is a problem with that idea too.

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The whole truth

I wrote on 10 August2 about how possibly material facts – in this case a missing £1bn itemised as ‘other valuation differences’ – have been hidden in plain view, scattered across different reports or couched in opaque regulatory language. But there was something else in plain view that I failed to notice. Page 4 of Just Group’s 2017 Solvency and Financial Condition Report states

The main reason for the change since the publication in March 2018 follows the Group’s decision to change the assumptions underlying the valuation and credit rating of the LTM notes (described in D.2.6) in the Matching Adjustment in JRL as at 31 December 2017.

My emphasis. Further on it says that the impact of the reduction in Matching Adjustment was £470m. I had previously queried this with the firm on 31 July, via their publicist Alex Child-Villiers, who simply reiterated the same statement, and declined to answer my question about the £1bn. I asked again, and the whole firm (and their auditor KPMG) went into radio silence. A number of others have asked since then, and received the same stony silence.

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Just an update

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!