Category: matching adjustment

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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.

 

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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.

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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.

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Float Like a Butterfly

Brexit superhero Steve Baker MP was in fine form on the last (23 June 2021) Treascom meeting. The witness before the Committee was PRA chief executive Sam Woods. Steve began by asking (transcript here, Q69 ff)

‘Q69 Mr Baker: …can I go back to Harriett Baldwin’s question about matching adjustment? If I understood correctly … you said it is about capital being set against expected cash flows. Could you just tell me something about the risk profile of those expected cash flows?

Continue reading “Float Like a Butterfly”

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Impact of Matching Adjustment 2020

Insurance ERM today has a fine table and an accompanying article showing how much life insurance companies are ‘benefiting’ (my scare quotes) from Matching Adjustment.

In summary, the total benefit of MA (created capital plus reduced capital requirement) is now £92bn, up 13% from 2019, and probably reflects the growing business in bulk annuities.

“In 2020, the biggest beneficiary was Legal & General (£28.4bn), followed by Aviva (£14.5bn) and Rothesay Life (£14.1bn)”

The data now allows us to update our own table on the capital coverage ratio ‘benefit’.

Source: Eumaeus, Insurance Risk Data

The blue line shows the capital coverage ratio with MA, the red line, the same ratio but without MA. The usual suspects are still lurking at the right hand side.

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Speculating on short term volatility

Retriever writes

But isn’t the point that hedge funds tend to have fairly short time horizons, and that bonds close to redemption will be trading close to par – leading to limited scope for making money in the way you suggest? I’d have thought that what you suggest only works if you can hold the bonds for a long time – so it might work for life insurers even if it doesn’t work for hedge funds?

Continue reading “Speculating on short term volatility”