European supervisors warn of risks in valuing illiquid assets


first_imgThe report said: “Risks resulting from low interest rates and search for yield remain unchanged.”The fragile economic recovery is still hitting profitability in the financial sector, it said.It added that market uncertainty linked to Greece’s financial situation had led to capital controls, high market volatility and renewed risks to the cohesion of the euro area, though it noted that a pact between Greece and the other euro-area countries had mitigated immediate risks.Reduced corporate bond market liquidity has exposed asset managers to valuation risks, the report said, adding that managers also face risks because they are investing more in illiquid assets. The authorities said worries about asset managers’ liquidity risks could get in the way of plans to spur economic growth by channelling funds managed by institutional investors to SMEs.Supervisors need to scrutinise efforts to clean up balance sheets and look closely to see how sustainable financial entities’ business models are, in order to manage current risks and make asset owners more able to lend, the report said.“A clear picture of institutions’ earnings potentials, funding mixes and strategies is crucial,” it said. “Promotion of rigorous valuation of assets and liabilities and transparency in the disclosure of valuation risk is essential to discourage mis-valuation tendencies.”They said regulators should go ahead with plans to support market-based funding by, for example, making suitable rules for non-bank loan origination models.They should also support “adequate, transparent and harmonised marketing of investment products”. Three European supervisory authorities have jointly warned that there are still risks in EU financial markets and said that action needed to be taken, particularly to counter the valuation risks that exist in illiquid markets.In their Joint Committee Report on Risks and Vulnerabilities in the EU financial system for August, the European Supervisory Authorities for securities (ESMA), banking (EBA) and insurance and occupational pensions (EIOPA) said risks resulting from low interest rates, the search for yield and low profitability of financial institutions were still there.These risks are just as severe as reported in the March 2015 report, they said.There are also risks related to lower market liquidity and their possible implications for asset managers, according to the supervisors’ latest assessment.last_img read more

Implementation of new insurance laws has implications – GTM Chairman


first_imgThe GTM employees who were awarded for their outstanding contributions and achievements…as company records $1.93B profit in 2018The recent implementation of the Insurance Act 2016 is causing major setbacks for local insurance companies, according to the Guyana and Trinidad Mutual Life Insurance Company Limited (GTM).The Insurance Act of 2016 and its supporting Regulations of 2018 took effect mid-last year.At the company’s Annual General Meeting on Wednesday, Chairman Ram L Singh spoke of the factors that have influenced the performance and operation of the company.“The myriad of new requirements have had and will continue to have significant and profound implications for your company financially and operationally well into the future,” he told stakeholders at the Georgetown Club.The Chairman pointed to Note No. 48 of the Insurance Act, which sets a limit on investments for statutory fund requirements. “Though the Insurance Act gives an implementation of five years from the date of the Act came into force, the implication for all companies carrying on long-term business in nonetheless far-reaching,” he noted.Singh explained that a key investment requirement for any insurance company, especially life insurance companies, was viable, secure long-term investments. GTM currently has substantial investments in shares of large entities such as Banks DIH Limited; Demerara Distillers Limited (DDL); Republic Bank Guyana Limited and Guyana Bank for Trade and Industry (GBTI).The Chairman noted that some of the equity in these companies was pledged towards the statutory funds.“The new regulations seek to limit the equity pledged to a paltry 20 per cent of the statutory fund. If your company is to comply, it will need to dispose of millions of shares in companies that are considered in the investment world as ‘blue chip’ or reliable high- quality investments. With the unavailability of alternative sources of viable secure long-term investments, liquidating these shares means your company would now have billions of dollars in deposits earning far lower rates of return,” he told shareholders.Singh went on to outline that beyond the issue of excess liquidity and unnecessary exposure to low-yielding returns, the sudden disposal of large amount of shares in a company would inevitably have negative repercussions for the company’s share price and value. Moreover, three or four insurance companies disposing of their shares in these large companies would, according to the Chairman, not only be devastating but catastrophic for those companies.In fact, he disclosed that the 24 per cent appreciation in value of GTM from $10.31 billion to $12.78 billion at the end of December 2018 was a direct result of increased share prices from these investments. This, he added, contributed to the company’s “favourable performance” as reflected in its accounts.Financial positionTurning his attention to the company’s financial position, Singh revealed that GTM’s total income for 2018 was pegged at $1.93 billion, which is $124 million more than the previous year. At the end of December 2018, the company’s asset base increased by $2.47 billion. This 23.97 per cent growth over 2017’s figure is as a result of the increase in value of non-current assets and improved share values of the local companies in which GTM invested.Further, the company’s insurance premiums written, unlike 2017, recorded a growth of $133.76 million or 7.74 per cent in 2018. After the payment of reinsurance, GTM’s net premium growth was $121.67 million over 2017.Meanwhile, of the company’s 1.86 billion insurance premiums written last year, Guyana continues to be the top contributor with $899 million or 48 per cent, followed by St Lucia with $589 million or 32 per cent and Grenada with $281 million or 15 per cent.According to the Chairman, GTM settled some $568 million in insurance claims during 2018 compared to $461 million paid out in 2017.“The increase is a direct result of claims association with routine health, car, surgeries and treatment of non-communicable diseases such as cancer, renal failure and heart-related illness. As opposed to being a cause for alarm at this stage, an increase in the use of health-care services is seen as the growing awareness of the importance of preventative health care which provides an opportunity to expand your company’s health insurance portfolio,” he told the shareholders.On the other hand, Singh explained that concerted efforts were made to aggressively manage expenditures and as such, a decline in management expenses was recorded. Notwithstanding this, however, he noted that the new Insurance Act and its attendant Regulations required the introduction of additional positions at senior levels.“Steep increases in insurance levies to fund operation of the insurance regulator’s office and charges that are not imposed by other regulators in other territories in which your company operates, run counter to the regulator’s call for cost efficiency. Nonetheless, the Board of Directors working in collaboration with management have taken steps to comply and have already established a fully functional Compliance Department and identified persons for the positions of Risk Officer and Client Ombudsman,” he added.As customary at its Annual General Meetings, GTM also recognised its staff for their contributions and achievements over the past year.GTM Chairman Ram L Singhlast_img read more