The letter I sent to Hans Hoogervorst in October last year remains unanswered, but it turns out it was never received, or lost.
Radio Silence
Date for your diary
This will apply to a limited number of our readers, but here it is anyway. Just Group are having a general meeting on Wednesday 16 March, to seek authority from its members to issue restricted tier 1 bonds convertible into ordinary shares on the occurrence of ‘trigger events’.
The first resolution is to provide the directors with power to allot up to £42m or about 45% of the nominal value of existing share capital in connection with the issue. Remember the nominal value relates to 10p shares whose market value (last time I looked) is is about 95p, so this amounts to a considerable dilution. The second is that the new shares will not be offered to existing shareholders.
Now convertible bonds are nothing new, the interesting factor is the trigger event upon which conversion occurs.
Rebel rebel
There is a very fine article in InsuranceERM just published. Behind a paywall I am afraid, but it explains the idea of Eumaeus very well, although I would say that. For those without a subscription, an interesting part is here
As InsuranceERM went to press in December, the PRA published its policy statement (PS31/18), which Buckner largely welcomed. “For the first time it settles, with great authority and a wealth of cogent reasoning, how life insurers should correctly value a portfolio of simple European put options,” he says.
But he is scathing of the PRA’s change of heart on applying the rules for valuing guarantees to business written before Solvency II came into effect. Insurers can now apply different treatment to the same type of loans, depending on whether they were written before or after 1 January 2016. “It makes no sense to me,” he says.
Indeed it made so little sense to me that I queried it with the PRA after the interview.
Kingman
The Kingman report on the Financial Reporting Council is out this morning. Much to discuss, but the findings on the regulation of the Institute are telling.
Briefly:
The Memorandum of Understanding between the FRC and the Institute, set up in the aftermath of the Morris review, ‘is not in practice proving an altogether effective arrangement’, specifically the FRC ‘has no powers with which to enforce any meaningful oversight of the IFoA’ (my emphasis).
HMT and the Government Actuary told the Review that it wishes to see effective regulatory oversight of the actuarial profession. If stakeholders wish to see effective independent oversight of regulation of the actuarial profession, suitable legal powers must be put in place to make this possible, and the review questions whether the FRC is the best body to do this.
The review recommends
- The Government, working with the PRA and The Pensions Regulator (TPR), should review what powers are required effectively to oversee regulation of the actuarial profession.
- Neither the FRC, nor its successor body, is best-placed to be the oversight body. The PRA (which employs around 80 actuaries) is a much larger repository of regulatory actuarial expertise than the FRC and would be best-placed to take on all the actuarial responsibilities currently vested in the FRC.
No halfway house
The final PRA policy statement on equity release mortgages has too much to review in one post, so I will start with the tricky subject of Brownian motion.
Out today
Policy Statement 31/18 was published this morning. Contains a lengthy section addressing comments to the proposals of CP 13/18.
The main part which will interest the market is the removal of the proposals relating to the TMTP (paragraphs 3.9A, 3.24 and 3.25). Para 3.25 is the one that reads:
3.25 Although the PRA does not consider the purpose of TMTP to be a transitioning of an updated assessment of risk, the PRA does recognise that the consequences of applying the new calibrations in the proposed updates to SS3/17 when calculating their ICAS illiquidity premium may be significant for some firms. In such cases, the PRA would consider making a proportionate allowance for that impact on the firm. The PRA would expect this to be a short phase-in period, dependent on the circumstances of the firm, unlikely to exceed three years in any event. The PRA would not expect firms to require this phase in period in relation to calculating their ICAS illiquidity premium consistently with principles (ii)-(iv) in SS3/17 already published in July 2017.
The updated CP is here
We will comment later!
Paying the price
In this fine article in the FT, Alan Miller argues that the Financial Conduct Authority fails all of its statutory objectives — consumer protection, integrity and competition.
Jam tomorrow
There certainly was a ‘lively debate’ at the LSE on Monday evening. The house was packed, with guests including our friends at the Treasury, the PRA, and a number of analysts. Kevin will be writing some more about this, meanwhile here are the slides. Note that we covered them in a slightly different order. I discussed slides 16-19 (and mostly slide 16) on the ‘upper bound principle’ after Kevin’s main presentation.
The upper bound continues to be misunderstood, as I commented in our reply to the Institute yesterday. It does not depend in any way on arbitrage arguments, complete markets, geometric Brownian motion or any of that stuff.
Simply, jam today worth more than jam tomorrow, and should be valued as such by accountants such as KPMG. Yes?
EUMAEUS Concerns About CP 13/18
We replied at the last minute to the CP 13/18, our letter is here. For those who don’t have time to read it, the main points are:
- A jolly good set of proposals, but why did the PRA take nearly 4 years to decide on the pricing of a simple European put option? I shall be commenting upon this enigma at the discussion at the LSE this (Monday) afternoon.
- The CP does not consider the capital treatment of ERMs, yet an autocorrelated market such as residential property poses considerable problems for Var -type capital treatment.
- The Matching adjustment regime is completely impenetrable. “We believe the PRA should make it a priority to work on possible reforms to Solvency II or on a UK successor to Solvency II to bring it into line with accounting standards such as IFRS”.
- IFRS 17 is not consistent with the regulatory accounting treatment of Solvency II
I look forward to seeing our readers at the LSE tomorrow. There will be drinks.
[Update: The Institute of Actuaries has just published its response to CP 13/18. We will be commenting on this tomorrow, but note they also bring up the autocorrelation point, although, like many others, they confuse a valuation question with a risk management one.]
Doing God’s work
There was much talk about the UKAR ‘bad bank’ selling a portfolio of ERM loans to Rothesay Life, an insurance company once owned by the good bank. See e.g. this report by Ralph and Pooley.