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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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Just Group flogs off more ERMs

Phoenix Group acquires £300m equity release portfolio from Just Group. “Consolidates Phoenix’s position among the largest equity release funders. Equity release is an important option for people planning their finances later in life” blah blah. Add that to the £334 million they sold off to Rothesay, and that’s a substantial part of their portfolio. Also, as we commented here,  the deal will probably cause more losses for Just, as they lose the MA ‘benefit’.

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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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War on cash

Our man Dowd has an article in the Telegraph today.

A cashless society gives the government the power to see your every transaction, and if the government can see your every transaction, then it can control your every transaction.

If it disapproves of what you buy, it can prevent you buying or penalise you. It can use that power for other ends too, at its discretion. If you say the wrong thing online, or disobey an order, it can use that power against you and compel you into compliance. A cashless society is creepy.

Strip away the techno pretence and what you have is an unholy alliance of corporates who want to rip you off and elitists who want to control you.

Not forgetting the restaurants who don’t give the ‘service charge’ to the staff.

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Extremely accommodating financial conditions

Source: Nationwide, Dallas Fed

There has been a pile of stuff in the media about the house price boom.  The FT is concerned that “House prices are booming in almost every major economy in the wake of the coronavirus pandemic, forging the broadest rally for more than two decades and reviving economists’ concerns over potential threats to financial stability”, and now seems to recognise that it is low interest rates to blame (“Extremely accommodating financial conditions”), although other pundits raise the usual concerns about affordability and the need to carpet green space with housing.

Continue reading “Extremely accommodating financial conditions”

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Shareholders’ association slams UK’s IFRS 17 discount rate paper

Interesting article here on the horrible UKEB paper that I mentioned earlier this week. I am quoted extensively.  Behind a paywall, but the main points are

  • the paper conflicts entirely with the points raised in the UKEB’s priorities list, published last week, and fails to reflect concerns raised by Sharon Bowles among others.
  • The paper says that absolute precision (in the ‘measuring’ the illiquidity spread to be used in discount rates) is not necessary, whereas the UKEB’s priority list says that discount rates often have a material impact on accounts.
  • The paper concedes that estimating the illiquidity spread is a matter of judgment, but that is OK because “such judgements and estimates are integral to insurance business and insurers have extensive relevant experience”. The article quotes Hoogervorst (ex chair IASB) highlighting discount rates as one of the inconsistencies IFRS 17 was aiming to correct.

The paper was beyond even the usual joke expected of accounting standards bureaucrats.

 

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Dangerous addiction

The Lords report on Quantitative easing is out this morning. Incredibly it is the UK’s first independent comprehensive report into QE.

The report … calls for the BoE to outline a road map that demonstrates how it intends to unwind QE and to engage more openly about the side-effects of the programme, particularly inequality. It suggested that QE artificially inflated asset prices, such as shares and house prices, which had disproportionately benefited those owning them, exacerbating wealth inequalities. “Just ask any youngster trying to buy a flat and they will tell you about the impact of QE,” said Forsyth. (Financial Times)

Generous coverage in the popular press.

Guardian

Independent

Times

Telegraph

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More nonsense

I reported earlier on the official list of priorities for the UK Endorsement Board to consider. They have now published the paper that the Board will consider on 20 July next week.

Warning: the paper is truly awful, and was the main reason I stepped down from the Technical Advisory Group in February. Note the inconsistency between the Priority List, which eerily reflects the concerns I raised while on the Group, and the relaxed and unconcerned nature of the paper itself. Left hand meet right hand etc.