Monthly Archives: March 2014

Getting Your Facts Right

NW Brown attends exhibitions and puts on property events at our offices in Cambridge and Norwich.  We speak to many landlords who have queries relating to insurance. We have been shocked to find that many ‘accidental landlords’ have moved out of the home they previously lived in and not told their home insurer about the change in their circumstances.

Home insurance policies are rated on various factors including the individuals living in the home. For example, a home owner living at the premises has a greater level of control over the property compared to the same property with tenants living there. It is also important to remember that cover provided under a Home insurance policy and a Property Owners policy meet different needs.

Millions of policies are issued every year, and it is impossible for insurers to check the details of every policy to ensure the correct information has been provided to rate a risk on. It would be very expensive to do so. You can imagine the effect this would have on premiums. Policies are therefore issued as contracts based on trust (utmost good faith) between the policyholder, the insurer, and where one is involved, an insurance broker or agent.

Whilst you may not think that a minor detail will make any difference in how the insurer views the risk, it may do and in the event of a claim it may cause you considerable financial hardship. If you are not sure if something should be disclosed, you should tell your broker or insurer. 

The law relating to duties of the insured changed in January 2013, under the Consumer Insurance (Disclosure and Representations) Act 2012 relating to consumers buying insurance for personal and private use. The new Act puts a duty on the private individual to take reasonable care to be truthful in response to questions asked by the insurer, and not misrepresent the facts relating to the risk before the policy begins. Insurers can avoid paying for claims where the policyholder has not been truthful.

Letting property is a business. This means that as a landlord owning one or multiple properties, the new Act does not apply. As a commercial policyholder you have a duty to provide any information that would influence an underwriter, to be open and honest, and provide all the necessary information relating to the risk, even if the information has not been asked for.

For example, the construction of a let property is important relating to the risk of fire and water damage. A flat roof for example, is more prone to water leaks compared to a pitched roof, and more likely if it is near the end of its life. The premium will reflect the increased risk, and the insurer may also apply additional requirements such as regular inspections, and maintenance. The cost of insurance may be more, but it will be significantly less than that of meeting the cost of damage when an insurer refuses to pay due to ‘misrepresentation’. 

If you think you need to tell your insurer about a change, pick up the phone now to ensure your insurance will protect you in the event of a claim. NW Brown provides quotations for landlords, tenants and home owners. Please call our team on 01223 720350 for a quote.


Points of View: IPOs

My focus this week is on the recent glut of IPOs (initial public offerings) being floated on the stockmarket.  Whilst in themselves they are no bad thing (IPOs are of course are why stockmarkets exist), they are essentially the opposite of share buy-backs, absorbing cash at opportune moments and helping to hold down prices.  Moreover, increasing investor interest in IPOs is usually a contrarian signal of overenthusiasm.  Specifically, it is hard not to notice particular enthusiasm for technology and ecommerce IPOs.  As an example, new shares in online white goods seller closed up 33% on its first day of trading in February, giving the company a market value of £1.6bn – almost 150 times its underlying earnings.  However, whilst such offerings can do well in the short term, buying into companies at such exorbitant multiples leaves little margin for error and risks permanent loss of capital in the long term.  This offers a good example of areas of the market we are giving a wide berth at the moment.  In our view it is not the right environment to be paying up for the promise of “growth” stocks that have a small market share and may or may not be able to grow in the future.  Instead, we retain conservative stance and continue to prefer steadily growing companies with strong balance sheets and large market shares that offer relative certainty of cash flow and the flexibility to weather out any storms.

The Budget Changes for Pensions

What do they mean?

The biggest change in the budget is that from 2015 you are likely to be able to take what you want when you want from your pension pot. Subject to relevant income taxes, and almost certainly complex anti avoidance rules, this will allow you access to your money for the first time since 1921. This change is proposed for 6 April 2015. Most publicity has focussed on not having to buy an annuity – but upon reaching minimum pension age, clients can elect to take their whole pension pot as they wish, including taking all of it immediately. It will of course be subject to income tax on everything apart from the 25% tax free lump sum where current restrictions will continue. The caps on contributions and the restrictions on the total size of the pot continue and the complexity of the issues around protection is unchanged.

On balance these measures should increase the attractiveness of saving via pensions as it increases the ability to withdraw funds should they be needed.

There are several changes which take immediate effect and these are explained below:

  • cut the income requirement for flexible drawdown from £20,000 to £12,000 per annum.  If you can show that you have £12,000 of guaranteed retirement income you can elect for flexible drawdown and make unlimited withdrawals (subject to income tax)
  • raise the capped drawdown limit from 120% To 150% of the Government Actuaries Dept.(GAD) tables. Thus pensioners can now withdraw approximately 150% of a comparable annuity from a drawdown plan per annum
  • increase the size of the lump sum small pot fivefold to £10,000.  Small pension pots of up to £10,000 can be taken as a lump sum (subject to income tax on 75% of it) – this can be done on up to 3 pension pots.
  • and almost double the total pension savings you can take as a lump sum to £30,000.  If the total value of your pension pots is less than £30,000 (excluding very small pots under £10,000), they can be taken as a lump sum (subject to 75% being taxed as income).

There is a proposal for all Pension Schemes to be given the hugely onerous responsibility of ensuring all members receive impartial advice about their options at retirement. Our experience suggests even the simplest transfers or retirements carry very significant risk for the person giving them, and therefore a significant cost of delivery, purely because the full requirements of the FCA for demonstrating and recording suitability apply. It seems unlikely this can ever be delivered at less than a cost of about £1,000 per head and so the costs for existing schemes may rise greatly.

2014 Budget

Marcus Johnson, Chief Executive of NW Brown commented on the changes as follows:

These changes are one of those revelations where you think this is so sensible why was it not done years ago?  The thousands of pages of legislation on pensions are completely impenetrable and require real expertise to understand but this seems like a true simplification. The removal of the need to buy an annuity is brilliant news for many of our clients and the greater freedom to utilise your funds when you want to will be good for Cambridge as it will allow innovators to use their own money to support new ventures. Most of the other changes in pensions are also sensible but the whole system is still too complex. I have argued before and will continue to argue for a merging of the ISA and Pensions regimes and yesterday brought the day when this will happen closer. The increase in the ISA allowance should assist all savers to make sensible provision for their future and ultimately I believe this will be the route whereby most people invest for retirement.

The worst aspects of the budget were the things which were not in it. Firstly there is no excuse, four years into recovery, for the government to run a huge and unsustainable budget deficit and the absence of measures, other than pensions reform, which will increase revenues was inexcusable. The housing boom is similarly not dealt with, and if anything the extension of subsidies for house purchase means a greater misallocation of resources and more house price inflation. Interest rates have been held too low for too long and threaten future financial stability more than even the budget deficit. The other huge missed opportunity is the amalgamation of the National Insurance and Income Tax systems. To have two separate systems each taxing the same income but with two sets of rules is just bonkers and the Chancellor knows it. In common with all his predecessors he has failed again to do anything about it.

Points of View: China suffers first corporate bond default

China experienced its first domestic bond default in recent history earlier this month when Chaori Solar, a privately owned solar-panel maker, failed to repay RMB1bn (£163m) of interest payments on bonds issued 2 years ago.  The default is seen as a test case for the Chinese government, which had until now helped bail out or provide last-minute loans to firms in trouble.  Indeed, Beijing’s new leadership has signalled it wishes to change the bailout pattern and impose a degree of market discipline rather than incentivising investors to park their money in high yielding company bonds in the belief that the government would bail them out if need be.

Some analysts have suggested Chaori’s default could create a domino effect where investors quit the Chinese bond market altogether, sparking a liquidity squeeze or a credit crunch.  However, the domestic bond market has thus far treated the default as a non-event, seeing it as a well-flagged trial balloon being floated by the authorities as they seek ways to cut overcapacity in certain sectors of the economy.

In many ways Chaori seems the perfect example to set precedence insofar as the default of this small privately owned company is unlikely to carry significant ramifications.  In the meantime, though, the potential default of Haixin Steel has had broader ramifications.  China’s steel mills are struggling with debt and rumours of defaults in this sector caused the spot price of onshore iron ore to fall 10%.

Stocks in Focus for Week Ending 07/03/2014

This week Oliver Phillips focuses on Russia and Ukraine…

The dominant force affecting global markets in the last week or two has inevitably been the events occurring in Russia and Ukraine. The goings-on in the Crimean region have been much documented, and this week I will have a look at the impact on stock markets of such tensions.

Stock Markets do not like uncertainty. At the beginning of this month it appeared to the world that Russia had issued an ultimatum to the Ukrainian military and hostilities seemed a possible outcome, as a result the rouble fell to an all-time low and there was 10% decimation of the Moscow Stock Exchange. The FTSE 100 fell 101 points on Monday 3rd March before rising 115 points the following day as tensions seemed to ease.

The most affected sectors were oil and gas companies, and given that Europe is dependent on Russia for 30% of its gas supply, half of which is delivered via Ukraine, this did not come as a huge surprise. Perhaps less obviously, Baring Emerging Europe fell 9.2% at its low on Monday reflecting the collective investment’s 69% exposure to Russia – this highlights the importance of knowing the underlying assets of investments.

Although the FTSE 100 very swiftly corrected itself after a day of uncertainty the region’s future remains undetermined and this serves as an example of how a geopolitical event can have such a significant impact on investor confidence. The fear of war in Europe obviously spooked investors, but providing that this does not occur, the dampened sentiment provides a dip in the market and a buying opportunity for some investments. 

Stocks in Focus for Week Ending 28/02/2014

This week Oliver Phillips focuses on Alliance Trust…

Alliance Trust caught my eye this week following news that a sizeable proportion of the investment trust’s shares are now in the hands of activist investor Elliott Associates, a US hedge fund.

Alliance Trust is an investment company that itself invests in a portfolio of globally-listed equities with the aim of increasing value for shareholders over the long term. The company has previously come under scrutiny for consistently trading at a significant discount relative to the value of its underlying assets (NAV), which has ranged from 10% to 21% over the past five years. However, CEO Katherine Garrett-Cox has been making positive changes since her appointment in August 2008, including a shake-up of the management team and implementing other changes aimed at putting the company on a strong footing going forward. This has contributed to the discount narrowing to its present level of 10.5%.

Despite this, Alliance Trust has been subject to hostility from activist investors before. In 2011 Laxey Partners, who at the time had a 2% stake, called for the Board to give shareholders the ability to sell their shares closer to NAV, and to reduce certain investors’ voting rights. In order for resolutions to be passed, 50% of the votes are required at the AGM; Laxey was defeated by a considerable margin, and nothing came to fruition.

Fast forward to the present and US hedge fund Elliott Associates has just declared it has a 10% stake in Alliance Trust’s shares. Elliott has gained itself a reputation over the past decade as being one of the most active investors in the investment companies sector, and analysts are commenting that its deep pockets provide Elliott with the necessary resources to fight the Alliance Trust Board.

The company’s next AGM will be held in May 2014, and this will likely be monitored closely by analysts and investors with an interest in the company.