On the go: The Prudential Regulation Authority has been criticised over its supervision of the insurance sector, and in particular the proposed transfer of £12bn of annuities by Prudential to Rothesay Life.
The Financial Times revealed on October 27 that a group of pensions experts and policyholders have written to the watchdog’s chief executive querying its involvement in the case.
Rothesay Life, established in 2007, is owned by US private equity giant and US insurer Blackstone, the Singaporean sovereign wealth fund GIC and MassMutual.
In a surprise judgment, the High Court blocked the transfer back in August, and Prudential and Rothesay have since said they intend to appeal.
The judge concluded that savers who had picked Prudential because of its reputation and financial strength should not be forced to switch to a firm that did not have “an established reputation in the business”. This was despite the PRA’s recommendation that the transfer be allowed to proceed.
The letter’s authors argue that the judgment raises serious questions about the PRA’s oversight in this matter.
According to the FT, the authors of the letter claim the watchdog downplayed the “weak financial position” of Rothesay relative to Prudential by neglecting to flag its heavy dependence on “artificial capital”.
The FT stated that the Prudential had solvency capital of £35.7bn at end-2018, of which £2.1bn was created by matching adjustment, giving a “real” position of £33.6bn.
The group has just separated out the UK arm into a new company, M&G. But even after the split, M&G has capital of £13.9bn, according to the prospectus. After deducting an estimated £2.1bn of matching adjustment, that would still leave £11.8bn of “true” capital.
The authors contrast that with Rothesay, which had reported capital of only £3.9bn.
Dean Buckner, a former PRA regulator and one of the letter’s signatories, accused the watchdog of being “on the side of powerful vested interests”.
He added that by not disclosing the full risk of Rothesay’s assets it was “playing fast and loose with the hard-earned life savings of ordinary working people”.
For its part, Rothesay strongly contested the claims made in the letter, arguing that it contains “multiple significant factual inaccuracies and errors”.
These included “basing [the] analysis on the wrong Prudential company [the group and not the demerged M&G entity], and asserting that our owners have taken dividends out of the company”.
The company told the FT: “Rothesay Life is one of the best-capitalised insurers among its peers and has significant backing from its shareholders, who in the past month injected £700m of new capital in order to fund further growth of the business.
“Policyholders can gain comfort from the high level of security offered by the PRA’s regulatory capital regime, as well as its support from strong and committed shareholders.”
The PRA told the FT that it was “rigorous in the pursuit of its statutory objectives, including policyholder protection” especially when it came to transfers.
“There was no criticism in the court’s judgment regarding the PRA’s role and assessment in this case,” it said.
