Keeping an eye on things
A copy here of the letter I sent to Hans Hoogervorst on 10th October. I sent a similar letter to Stephen Haddrill of the Financial Reporting Council.
The reason is to understand whether the valuation issue of ERM firms is a problem with IFRS accounting standards themselves, or whether the standards are perfectly fine, but the problem was failure to comply with those standards
A spokesman for UKAR got back to me saying I got the numbers wrong in this post. I said that the total loan value of the book bought by Rothesay Life, i.e. the original amount lent accrued at the loan rate is somewhat north of £1bn. Apparently not, for that value, which they call ‘unpaid balances on portfolios sold’, is £860m, hence somewhat south of £1bn. So there are five different values to choose from:
Fans of linear algebra will spot that there are still too many unknown quantities to make any sense of this.
I was at a discussion today where we were asked whether corporate reporting faced any problems. Most hands went up. Then we were asked whether reporting faced any significant problems. Only two hands went up, including mine. I briefly skirted around the problems with life company reporting.
My point was dismissed. Everyone agrees, said the room, that life company accounting is fundamentally broken, so that objection didn’t count. What else haven’t the Romans done for us, sort of thing.
To be sure, I have heard this many times, including in the corridors of power, even from life insurance accountants. But if everyone thinks that, why has no one done anything? Life insurance is about, well, our pensions and stuff. Could it really be too difficult to fix?
Our contact form is on the menu above, all suggestions welcome. Is there a problem? How do we fix it?
As discussed in yesterday’s post, the Just Group auditors stated that the final outcome of CP 13/18 could have a materially negative effect on the regulatory capital position and financial condition etc. of the Group, and constitute a material uncertainty that may cast significant doubt on the Group’s ability to continue as a going concern. You might have thought that was clear enough, but lest you should have been misled, Rodney Cook (Group CEO) clarified matters at a presentation. [1:11:00]
“Let me just cover off the word ‘doubt’, that is an auditing and accounting and statutory set of words, and that is why it is in there.”
That makes sense. ‘Material uncertainty’, ‘significant doubt’, ‘going concern’ etc do not have their usual English meaning, but are merely accounting and auditing technical terms, signifying nothing in particular as Mr. Cook notes.
Just Group’s interim results were published this morning (6 Sep 2018). As has been widely reported, they did not declare a dividend. ‘In light of the uncertainty created by Consultation Paper 13/18, the Board has deferred any interim dividend declaration until the position is clarified’.
All investors accept, or should accept, the importance of corporate transparency. The purpose of governance structures, including statutory reporting supported by independent external audit, is to ensure that minority shareholders receive reliable information about the value of firms and that company managers do not cheat them. Management should also be motivated to maximize firm value rather than pursue personal objectives (Bushman and Smith, citing Black 2000).
In my previous post I puzzled about what impact the current PRA proposals on Equity Release valuation would have on the capital of Just Group, finding that their own figures suggest a hit of nearly £1bn, in fact over £1bn if we add on the PRA expectation of a minimum 1% deferment rate. Where is this number to be found? Just’s regulatory report states that the regulatory capital has gone up, not down. Altissimum est negotium et maioris egens inquisitionis. Let us investigate this deep mystery further!
Continue reading “Hidden in plain view”
The share price of Just Group has been in freefall since 24 July following a statement by the firm about proposals by the Prudential Regulation Authority (PRA) which, if implemented, would result in a ‘reduction in its regulatory capital position’.
The proposals concern the valuation of the ‘no negative equity’ guarantee embedded in equity release mortgage assets. The PRA is fretting that firms are undervaluing them. But how much is the undervaluation, and how much would the reduction in capital be? Analysts have been scratching their heads for weeks. One estimated a loss of no more than £50m, another thought it could be as much as £500m.
Nobody seems to know. How large is the impact, and why is it so difficult to tell from regulatory reports, given the more transparent, risk-based and dynamic era of supervision ushered in by the Solvency II insurance capital regime?