Our postbag is bursting its seams with comments, largely critical, about how we have misunderstood the ‘two balance sheet’ approach used by Just group. We have claimed that Just were (past tense) using an implied deferment rate of minus 2.75% for both their IFRS and Solvency II balance sheet. Our critics say that, while the firm are using that rate for the IFRS balance sheet, they are (present tense) using a rate of 0.5% for Solvency II purposes. See their 2017 Solvency report, p.54.
We are wrong, and must apologise immediately!
But there is no inconsistency in our claim, and we will not apologise! We stick to our line that Just were (past tense) using a totally incorrect deferment rate for both balance sheets. We stick to our line that they are now (present tense) using the stronger deferment rate for the Solvency II balance sheet. Hence they have changed their method of calculation between the 2016 and 2017 Solvency reports.
We have always said this. It is exactly what I argued here on 7 August 2018 on the day that Asleep at the Wheel was published, saying that the firm must have changed their Solvency calculation between 2016 and 2017. Why? Well, the PRA has said over and over again that HPI assumptions are irrelevant to the pricing of ERMs, but the PRA is concerned only with the regulatory balance sheet, not IFRS. Furthermore, as I argued a few days later here, there is a large and unexplained change in their Solvency balance sheet ‘hidden in plain view’, but that brings us to the second point raised by our critics.
Our critics point to the 2017 breakdown of ‘technical provisions’ (i.e. insurance obligations) in the 2017 Solvency report p.65, copied in the table above. There you can see that IFRS and Solvency II technical provisions (‘other life’) are approximately the same – £16,491.4m for Solvency II, £ 16,799.0m for IFRS. But for Solvency II this is net of the effects of risk margin and transitionals, whereas the solvency Gross Best Estimate is £17,699.5m, nearly £1bn difference. Clear proof, they allege, that the firm is using a much lower discount rate – hence a much higher deferment rate – for solvency purposes than for statutory purposes.
To be sure, and we don’t disagree. We have been saying this since the publication of AATW. Where we disagree is on the rate the firm was (past tense) using for its 2016 report, and here we turn to the same table reported for 2016 (p.61), see below.
You see that the solvency Gross Best estimate (£16,164.9m) was then (past tense) fairly close to the IFRS number (£15,974.4m). The difference between 2016 and 2017 is therefore explained by the change in transitional measures, £1.3bn in 2016, £2.1bn in 2017. And if you ask why the transitionals have changed, refer to p.83 of the 2017 SFCR E.1.4, below:
Behold the TMTP going up, as above, largely offsetting the whopping great £1bn change in ‘other valuation differences’.
But when we ask the reason for ‘other valuation differences’, we come to a halt. I emailed to Just Group press office, 30 July (before the BBC programme), and received a reply from Alex Child Villiers (agent for Just) on 31 July, which answered precisely nothing by directing me elsewhere. I sent a further email on 1 August asking specifically about table E.1.4, with a reply from Alex saying ‘I don’t think its helpful to speculate about the future’, although actually I was asking about the present, tense problems again.
Finally I asked James Pearce (Just press office)
James, this is not about capital computation, but about balance sheet. Can you help? Just a simple question. What is the reason for the large increase in ‘other valuation differences’ over the two year ends. Looks like £1bn. Surely the firm can specify the exact cause?
He did not reply, so we still don’t know. The simplest hypothesis is that the change in ‘other valuation differences’ was the direct result of a deferment rate change from minus 2.75% to plus 0.5%. If our critics argue that Just were using a rate of plus 0.5% all along, then the £1bn change in valuation differences must have other causes, but then they should reasonably explain what those other causes might be.
Underlying all of this is the undue complexity arising from the two balance sheet system, originally proposed by the European regulators to help analysts ‘understand exactly what is going on’. Does any analyst have a clue what is going on? Clearly not, judging from our postbag. It’s not just a problem with tenses.