TIDMJUST
RNS Number : 3814S
Just Group PLC
16 March 2021
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NEWS RELEASE www.justgroupplc.co.uk
16 March 2021
JUST GROUP PLC
RESULTS FOR THE YEARED 31 DECEMBER 2020
FOUNDATIONS FOR GROWTH IN PLACE
Just Group plc (the "Group", "Just") announces its results for
the year ended 31 December 2020.
Key points: capital and balance sheet
-- Improved capital coverage ratio of 156% (1) (31 December 2019:
141%). Organic capital generation driven by management actions
has added 12 percentage points to the ratio and capital raising
-- a further 6 percentage points. Shareholders Solvency II own funds
(2) per share has risen to 187p (FY19: 153p per share)
Continuing balance sheet de-risking . Ongoing progress to reduce
exposure to UK residential property in December 2020 through
the sale of a GBP540m portfolio of Lifetime Mortgages ("LTM")
and completion of a third no-negative equity guarantee hedge
-- Underlying organic capital generation of GBP18m(2,4) driven by
reduced new business strain of 2.2% and improved in-force surplus
generation (FY19 - underlying organic capital consumption of
GBP(15)m)
-- Organic capital generation of GBP221m(2,3) (FY19: GBP36m), as
a result of significant positive management actions and much
improved underlying organic capital generation
-- Reached capital self-sufficiency goal a year earlier than planned.
Establishing the foundation to pursue growth opportunities available
in our markets
Key points: IFRS and operating performance
-- Adjusted operating profit(2) was 9% higher at GBP239m (FY19: GBP219m),
as higher new business profit and improved in-force return has
offset higher finance charges
-- IFRS profit before tax was GBP237m (FY19: GBP369m), as higher
operating profit was more than offset by lower investment and economic
profits, due to the property growth assumption change and the sale
of an LTM portfolio
-- Retirement Income sales for 2020 up 12% to GBP2.1bn. Defined Benefit
De-risking ("DB") sales were up 22% during the year to GBP1.5bn.
Well positioned for attractive growth in 2021
-- Tangible net assets per share(2) 199p (FY19: 181p per share)
David Richardson, Group Chief Executive Officer, said:
"I want to recognise and thank all our colleagues across the
Group for the outstanding contribution they have made in the last
year. They have shown immense agility and determination to
accommodate a very challenging personal and professional period to
ensure the service we provide to our customers has not missed a
beat.
I am proud of the scale of change we have achieved over the past
two years since we commenced the transformation of our business. We
now have a strong and resilient capital base and the business is
organically capital generative on an underlying basis. The
combination of these two factors means that we have achieved our
goal of capital self-sufficiency over a year earlier than
originally planned. This gives us the platform to take advantage of
the attractive growth opportunities in our markets.
Whilst short-term uncertainties exist, the long-term
opportunities and structural growth drivers remain clear. With a
higher capital base and more resilient balance sheet, we are better
able to navigate the uncertain macro environment, while continuing
to write new business at attractive margins.
We have achieved a major landmark in the Group's history by
achieving capital self-sufficiency. We now have strong foundations
in place to continue to grow profits and deliver attractive returns
for shareholders. We have the capabilities to innovate and ensure
we help more people achieve a better later life".
FINANCIAL CALAR DATE
Results for the six months ended 12 August 2021
30 June 2021
===============
Notes
(1) This figure is an estimate and allows for a notional recalculation
of transitional measures for technical provisions ("TMTP") as at
31 December 2020
(2) Alternative performance measure ("APM") - In addition to statutory
IFRS performance measures, the Group has presented a number of non-statutory
alternative performance measures. The Board believes that the APMs
used give a more representative view of the underlying performance
of the Group. APMs are identified in the glossary at the end of
this announcement. Underlying operating profit and new business
operating profit are reconciled to IFRS profit before tax in the
Financial Review
(3) Organic capital generation/consumption includes surplus from in-force,
new business strain, cost overruns and other expenses, interest
and other operating items. It excludes economic variances, regulatory
adjustments, accelerated TMTP amortisation and capital raising or
repayment
(4) Underlying organic capital generation/(consumption) is organic capital
generation/(consumption) , but excludes other operating items
Enquiries
Investors / Analysts Media
Alistair Smith, Investor Relations Stephen Lowe, Group Communications
Telephone: +44 (0) 1737 232 792 Director
alistair.smith@wearejust.co.uk Telephone: +44 (0) 1737 827 301
press.office@wearejust.co.uk
Paul Kelly, Investor Relations
Telephone: +44 (0) 20 7444 8127 Temple Bar Advisory
paul.kelly@wearejust.co.uk Alex Child-Villiers
William Barker
Telephone: +44 (0) 20 7183 1190
An analyst presentation for those who have registered will take
place via a live webcast at 10:00am.
A copy of this announcement, the presentation slides and
transcript will be available on the Group's website
justgroupplc.co.uk
JUST GROUP PLC
GROUP COMMUNICATIONS
Enterprise House
Bancroft Road
Reigate
Surrey RH2 7RP
Forward-looking statements disclaimer:
This announcement in relation to Just Group plc and its
subsidiaries (the "Group") contains, and we may make other
statements (verbal or otherwise) containing, forward-looking
statements in relation to the current plans, goals and expectations
of the Group relating to its or their future financial conditions,
performance, results, strategy and/or objectives.
Statements containing the words: 'believes', 'intends',
'expects', 'plans', 'seeks', 'targets', 'continues' and
'anticipates' or other words of similar meaning are forward-looking
(although their absence does not mean that a statement is not
forward-looking). Forward-looking statements involve risk and
uncertainty because they are based on information available at the
time they are made, on assumptions and assessments made by the
Company in light of its experience and its perception of historical
trends, current conditions, future developments and other factors
which the Company believes are appropriate, and relate to future
events and depend on circumstances which may be or are beyond the
Group's control. For example, certain insurance risk disclosures
are dependent on the Group's choices about assumptions and models,
which by their nature are estimates. As such, although the Group
believes its expectations are based on reasonable assumptions,
actual future gains and losses could differ materially from those
that we have estimated.
Other factors which could cause actual results to differ
materially from those estimated by forward-looking statements
include but are not limited to: domestic and global political,
economic and business conditions (such as the UK's exit from the EU
and the terms of any trade deal which may be negotiated between the
UK and the EU ; or arising from the Coronavirus (Covid-19) outbreak
or other infectious diseases ); asset prices; market-related risks
such as fluctuations in interest rates and exchange rates, and the
performance of financial markets generally; the policies and
actions of governmental and/or regulatory authorities including,
for example, new government initiatives related to the provision of
retirement benefits or the costs of social care; the impact of
inflation and deflation; market competition; changes in assumptions
in pricing and reserving for insurance business (particularly with
regard to mortality and morbidity trends, gender pricing and lapse
rates); risks associated with arrangements with third parties,
including joint ventures and distribution partners and the timing,
impact and other uncertainties associated with future acquisitions,
disposals or other corporate activity undertaken by the Group
and/or within relevant industries ; inability of reinsurers to meet
obligations or unavailability of reinsurance coverage ; default of
counterparties; information technology or data security breaches;
the impact of changes in capital, solvency or accounting standards;
and tax and other legislation and regulations in the jurisdictions
in which the Group operates (including changes in the regulatory
capital requirements which the Company and its subsidiaries are
subject to).
As a result, the Group's actual future financial condition,
performance and results may differ materially from the plans, goals
and expectations set out in the forward-looking statements within
this announcement. The forward-looking statements only speak as at
the date of this document and reflect knowledge and information
available at the date of preparation of this announcement. The
Group undertakes no obligation to update or change any of the
forward-looking statements contained within this announcement or
any other forward-looking statements it may make (whether as a
result of new information, future events or otherwise), except as
may be required by law. Past performance is not an indicator of
future results. The results of the Company and the Group in this
announcement may not be indicative of, and are not an estimate,
forecast or projection of, the Groups future results. Nothing in
this announcement should be construed as a profit forecast.
Chief executive officer's statement
Focusing on capital, sustainability and purpose
2020 was a major landmark in the Group's history. We achieved
our goal of becoming capital self-sufficient and we now have more
choices in how we deploy our resources. We have a resilient,
sustainable business and are well placed to help even more people
achieve a better later life
I am delighted to present my Chief Executive Officer's Statement
for the 2020 financial year.
Capital
Our priority has been to deliver a sustainable capital model and
2020 was an important year in the attainment of that goal, as we
achieved capital self-sufficiency more than a year earlier than
originally planned. Our Solvency II capital coverage ratio has
grown to 156% (estimated, post notional TMTP recalculation) from
141% at the end of 2019, an exceptional achievement given the
particularly difficult economic environment. The increase reflects
a sustained improvement in organic capital generation and the
benefits arising from the successful execution of a range of
management actions.
Increasing the organic capital generation has been a key focus
of the whole leadership team. Underlying organic capital generation
was positive for the first time in 2020, with management actions
adding further to the surplus. Our increased focus on reducing
costs and new business strain is helping to increase the underlying
capital generation which provides a sustainable foundation for the
future.
We have taken action to introduce significant de-risking
initiatives over the year which have helped to increase the
resilience of the balance sheet and to reduce the sensitivity of
our capital position to economic factors. We have entered into our
second and third no-negative equity guarantee ("NNEG") hedging
transactions, sold a portion of our lifetime mortgages portfolio,
released capital through more longevity reinsurance, this time on
the GIfL portfolio and, as previously announced, signed our first
DB partnering deal.
We have successfully hedged against interest rate movements and
proactively managed our credit portfolio to positively contribute
to our solvency capital despite credit downgrades.
The UK property market has been resilient since the start of the
COVID-19 pandemic. We recognise that the uncertainty over the
health of the UK economy makes it more difficult to predict the
future trajectory of UK property prices to which our solvency
position is exposed, as shown in the Solvency II property
sensitivities included in the Business Review. The sensitivity has
reduced due to the significant management actions we have executed
over the year - both in further NNEG hedges, which partially
protect around 20% of our LTM book against adverse future property
performance, and in the sale of around 8% of the mortgage book. We
expect further management actions will be implemented to reduce
risk and boost the Group's capital position.
Regulatory engagement has remained high, as we have taken action
to strengthen our capital position and reduce our property
exposure. Some uncertainty and risks remain with further details in
the principal risks and uncertainties section, and in note 35,
Capital.
Growth and Innovation
The retirement markets we participate in provide long-term
structural growth opportunities and we are able to achieve high
levels of return on the capital we invest in those markets. In the
second half of 2020 we started to take more of those opportunities
and we will be building on those foundations in 2021.
We are investing for growth by developing new solutions to
positively disrupt our markets and deliver better outcomes for
customers. This year we announced our first defined benefit
partnering transaction, a capital light model for DB de-risking
transactions which exceed GBP250m in size. In our retail markets we
have introduced Destination Retirement, our unique automated advice
service which has been developed to help close the financial advice
gap for people in middle Britain with more modest pension
savings.
Our Purpose and sustainability
Just has a strong social purpose: we help people achieve a
better later life. We help our customers achieve security,
certainty and peace of mind. During 2020, we have further
strengthened our sustainability credentials as we became the first
UK insurer to issue a Green Bond and the first to provide a green
lifetime mortgage. The Green Bond enshrines our commitment to
supporting the transition to a low-carbon global economy as all the
proceeds are earmarked to be invested in green infrastructure
projects. In 2019 our carbon intensity per employee was already the
lowest in the FTSE 350 life insurance sector and in 2020 we have
achieved further dramatic reductions. However this is a long-term
journey and we will continue to work hard to improve all aspects of
sustainability that we touch as a business.
Customers
The needs of our customers are forefront when setting our goals.
Many of our customers are in vulnerable groups and so we are proud
that we have maintained the delivery of all the Group's services to
customers during the disruption caused by the pandemic. In
addition, we made a number of changes to our products and services
to help support our customers through this difficult period where
many household services have been impacted by the pandemic.
Colleagues and culture
Protecting the welfare of our colleagues across the Group and
ensuring the delivery of critical services to customers have been
clear priorities driving our response to the pandemic. We are very
aware of the challenges colleagues face when working from home and
particularly for those with additional caring responsibilities.
We are rightly proud of our award-winning service, and of our
strong social purpose, which together deliver a "Just" experience
to our customers. Our colleagues are at the heart of this and I am
grateful for the immense contribution they make to our business and
for the way they have adapted so positively and with such agility
to our new way of working during the pandemic.
Building a diverse workforce and strengthening our inclusive
culture is a key priority for Just. It's the right thing to do and
it helps us to succeed, innovate and better serve our customers. I
am proud that we have increased gender diversity across senior
roles by 5 percentage points in 2020 and we are on track to achieve
our pledge as a signatory to the Women in Finance Charter that 33%
of our senior leaders will be female by 2023.
Performance Review
I am very pleased that, as our capital position has improved
over the year and after taking decisive action to reduce new
business strain, we have been able to return to new business growth
in the second half of the year. For the whole year, Retirement
Income sales were GBP2,145m, an increase of 12% from the prior
year.
The DB market has been very resilient throughout the crisis. DB
sales were up 22% to GBP1,508m which is testament to how well both
trustees and employee benefit consultants have adapted to working
remotely.
The retail business was initially more affected but adapted
swiftly and by the second half of 2020 GIfL and LTM sales were
similar to those in the second half of 2019.
IFRS profit before tax for 2020 was GBP237m (2019: GBP369m) due
to lower economic profits in 2020. Adjusted operating profit before
tax rose to GBP239m (2019: GBP219m), as higher sales and new
business profit, together with improved in-force earnings, have
helped to offset higher finance costs.
The attention to capital discipline has resulted in a further
fall in our new business strain to GBP48m (2019: GBP74m) and helped
to achieve a very pleasing positive organic capital generation of
GBP221m. We are building a strong, sustainable track record in
capital generation, something that we are all committed to
continuing.
In Conclusion
These are extraordinary times and we are doing all we can to
ensure we live up to our purpose to help people achieve a better
later life. I am very grateful to my colleagues for their
resilience, commitment and adaptability during this challenging
period. We are pleased that our relentless focus on our key goal of
strengthening the Group's capital has resulted in a much improved
position that will allow us to make more positive choices around
growth, innovation and shareholder returns in 2021 and beyond.
DAVID RICHARDSON
Group Chief Executive Officer
Business review
Delivering results
The Board is focused on building a more resilient capital base
and delivering value for customers and shareholders
The Business Review presents the results of the Group for the
year ended 31 December 2020, including IFRS and Solvency II
information.
The business has made strong positive progress over 2020,
despite the considerable impact from COVID-19 on daily life and the
economy. Our core products have proved resilient, with the DB
market continuing to remain active throughout lockdown and the
retail market building steadily after an initial slowdown. Advisers
and customers have adapted well to new virtual ways of doing
business.
Most importantly, the capital position of the Group has
strengthened during the year as we have built the Solvency II
capital coverage ratio ("coverage ratio") to 156% as at 31 December
2020(1) from 141% at the end of 2019, and 136% at the end of
2018(1) . This strong result has been enabled by the completion of
significant management actions, successful capital raising and the
impressive improvement in underlying capital generation. All of
this combined has improved the capital coverage ratio, and at the
same time offset the various negative regulatory costs including
accelerated TMTP amortisation.
We have delivered consistently on management actions that
improve the solvency capital position and reduce the sensitivity of
the solvency balance sheet to UK house prices. During 2020 we have
completed two NNEG hedges, sold a portfolio of LTMs, increased GIfL
longevity reinsurance and announced a DB partnering agreement.
Underlying organic capital generation is now in a healthy
positive position, which is an important milestone. This has been
achieved through both a further reduction in new business strain to
2.2% (from 3.9% in 2019) and a focus on costs that has reduced the
expense overrun by GBP10m year on year to GBP8m.
The balance sheet has proved extremely resilient as movements in
the financial markets have had limited impact on the Group's
capital position during the year. House price growth has been
slightly ahead of our long-term assumptions. Active hedging of the
Group's interest rate exposure has also minimised any impact from
the c.60bps reduction in long-term interest rates since the start
of the year. Credit downgrades affecting over 6% of the Group's
corporate bond portfolio have led to a c.2% reduction in the
coverage ratio, but were more than offset by the positive capital
impacts from portfolio management. The Green Bond issue underscores
the Group's commitment to diversifying our illiquid portfolio as
the proceeds are earmarked for investment in renewable energy and
green infrastructure projects. At this time, the outlook for the
economy and continued progress of the COVID-19 pandemic both
continue to be uncertain, but the position has improved
substantially from the initial impact felt in the first half of
2020. The longer-term impact from the pandemic on policyholder
mortality is still unknown. The Group remains exposed to the impact
of further downgrades and future defaults on its corporate bond
portfolio as well as to a potential fall in UK house prices. The
impacts over 2020 have been minimal compared to initial market
fears. The key sensitivities of the Group's capital and financial
position to future economic and demographic factors are set out
below and in notes 17 and 23 of these financial statements.
1 These figures allow for a notional recalculation of TMTP as at 31 December 2018 and 2020.
Capital management
Just Group plc estimated Solvency II capital position
The Group's coverage ratio was estimated at 156% at 31 December
2020, after notional recalculation of transitional measures on
technical provisions ("TMTP") (31 December 2019: 141%). Steps taken
by the Group during the period to reduce new business strain and
expenses and implement management actions to de-risk the balance
sheet have led to positive organic capital generated of GBP221m. In
addition the Group has raised a net GBP113m of subordinated debt,
which has added 6 percentage points to the coverage ratio. The
Solvency II capital coverage ratio is a key metric and is
considered to be one of the Group's key performance indicators
("KPIs").
31 December 31 December
2020(1) 2019
Unaudited GBPm GBPm
============================= =========== ===========
Own funds 3,014 2,562
============================= =========== ===========
Solvency Capital Requirement (1,938) (1,814)
============================= =========== ===========
Excess own funds 1,076 748
============================= =========== ===========
Solvency coverage ratio 156% 141%
============================= =========== ===========
1 These figures allow for a notional recalculation of TMTP as at 31 December 2020. Without this recalculation, the Group's regulatory solvency capital ratio as at 31 December 2020 was estimated at 155%. See also note 35, Capital.
The Group has approval to apply the matching adjustment,
volatility adjustment and TMTP in its calculation of technical
provisions and uses a combination of an internal model and the
standard formula to calculate its Group Solvency Capital
Requirement ("SCR").
Movement in excess own funds(1)
The table below analyses the movement in the capital growth over
2020.
2020 2019
Unaudited GBPm GBPm
==================================================== ===== =====
Excess own funds at 1 January 748 577
==================================================== ===== =====
Operating
==================================================== ===== =====
In-force surplus net of TMTP amortisation(3) 164 150
==================================================== ===== =====
New business strain (48) (74)
==================================================== ===== =====
Finance cost (66) (47)
==================================================== ===== =====
Expenses (32) (44)
==================================================== ===== =====
Underlying organic capital generation/(consumption) 18 (15)
==================================================== ===== =====
Other 203 51
==================================================== ===== =====
Total organic capital generation(2) 221 36
==================================================== ===== =====
Non-operating
==================================================== ===== =====
Accelerated TMTP amortisation (24) (42)
==================================================== ===== =====
Regulatory changes (19) (219)
==================================================== ===== =====
Economic movements 37 (56)
==================================================== ===== =====
RT1, T2 and equity issuance, net of costs(4) 113 452
==================================================== ===== =====
Excess own funds at 31 December 1,076 748
==================================================== ===== =====
1 All figures are net of tax, and assumptions allow for a
notional recalculation of TMTP as at 31 December 2020.
2 Organic capital generation/(consumption) includes surplus from
in-force, new business strain, overrun and other expenses, interest
and other operating items. It excludes economic variances,
regulatory changes, accelerated TMTP amortisation, and capital
issuance.
3 The in-force line excludes the accelerated amortisation of a
portion of TMTP which has been shown separately.
4 2020 figure is GBP250m new Tier 2 capital raised in October
2020, net of tender for GBP75m of the Group's Tier 3 loan notes,
and net of the repayment of PLACL's Tier 2 bond which was called in
March 2020. 2019 figure is net of GBP37m repayment in respect of
PLACL's Tier 2 bond tender in October 2019.
Organic capital generation
Positive GBP221m of organic capital generation is a very
significant improvement on the GBP36m of capital generation in
2019.
During 2020, the Group reached an inflection point as we became
organically capital generative on an underlying basis for the first
time, an important milestone for the Group. The improvement to an
underlying organic capital generation of GBP18m (2019: GBP15m
consumption) was as a result of a number of initiatives. New
business strain is down, which reflects a focus on new business
pricing discipline, capital optimisation and further longevity
reinsurance. In-force surplus has continued to increase as the size
of the in-force book grows, offsetting the increase in finance cost
from the new debt instrument issued. Continued focus on costs has
reduced expense overruns by GBP10m when compared to 2019. We remain
confident that the 2020 overruns of GBP8m will be eliminated by the
end of 2021.
In addition, we have executed a number of management actions
over the period and these are included in the "other" activities.
This includes capital generation of GBP104m from the expansion of
GIfL reinsurance completed in June 2020, the second and third
no-negative equity guarantee ("NNEG") hedges entered into during
the year and the DB partnering deal entered into in March.
Furthermore, positive mortality experience contributed GBP25m and
modelling changes added a further GBP54m benefit from the adoption
of CMI 2019. Other modelling changes added a further GBP19m.
Non-operating items
Economic movements of GBP37m resulted from the positive effect
from portfolio management and hedging profits arising from lower
interest rates more than offsetting the negative property variances
and credit migration effects. The small positive property variance
of GBP3m reflected a growth in house prices over 2020 of 3.9%,
which was just above our long-term assumption. The cost of credit
migration during the year was GBP42m, or a 2% reduction in our
coverage ratio. Since the start of the pandemic over 17% of our
issuers, by market value, have been downgraded, GBP730m of our
portfolio has been downgraded by at least one letter, and of this,
GBP167m has been downgraded to sub-investment grade. The credit
migration cost was much more than offset by GBP88m of positive
capital impacts from management of the credit portfolio.
There is a small negative from regulatory changes in 2020,
primarily arising from the strengthening of the valuation of LTM
notes in light of the fall in risk-free rates over the period which
was partially offset by the increase in future corporation tax rate
to 19%, which has increased own funds and decreased the SCR due to
its effect on deferred tax.
As a result of additional NNEG hedges and the sale of an LTM
portfolio, the property sensitivity has reduced to 14% (2019: 15%).
We anticipate that additional management actions will reduce this
sensitivity further. Note that the credit quality step downgrade
sensitivity below, as well as being a severe stress requiring a
significant downgrade in credit quality for 20% of our credit
portfolio, also does not allow for the positive impact from credit
portfolio management during a time of stress.
Sensitivities to economic and other key metrics are shown in the
table below.
Estimated Group Solvency II sensitivities(1)
Unaudited % GBPm
============================================================= ==== =====
Solvency coverage ratio/excess own funds at 31 December 2020 156 1,076
============================================================= ==== =====
-50 bps fall in interest rates (with TMTP recalculation) 1 94
============================================================= ==== =====
+100 bps credit spreads 1 21
============================================================= ==== =====
Credit quality step downgrade (with TMTP recalculation)(2) (13) (201)
============================================================= ==== =====
+10% LTM early redemption 2 21
============================================================= ==== =====
-10% property values (with TMTP recalculation)(3) (14) (247)
============================================================= ==== =====
-5% mortality (13) (236)
============================================================= ==== =====
1 In all sensitivities the EVT deferment rate is maintained at
the level consistent with base balance sheet, except for the
interest rate sensitivity where the deferment rate reduces in line
with the reduction in risk free rates but is subject to the minimum
deferment rate floor (0% as at 31 December 2020).
2 Sensitivity shows the impact of an immediate full letter
downgrade on 20% of assets where the capital treatment depends on a
credit rating (including corporate bonds, commercial mortgages and
infrastructure loans), but excludes lifetime mortgage senior notes.
All credit assets were grouped into rating class, then 20% of each
group were downgraded.
3 After application of NNEG hedges.
Reconciliation of IFRS shareholders' net equity to Solvency II
own funds
31 December 31 December
2020(1) 2019
Unaudited GBPm GBPm
======================================================= =========== ===========
Shareholders' net equity on IFRS basis 2,490 2,321
======================================================= =========== ===========
Goodwill (34) (34)
======================================================= =========== ===========
Intangibles (100) (120)
======================================================= =========== ===========
Solvency II risk margin (846) (873)
======================================================= =========== ===========
Solvency II TMTP 2,106 1,891
======================================================= =========== ===========
Other valuation differences and impact on deferred tax (1,391) (1,271)
======================================================= =========== ===========
Ineligible items (5) (35)
======================================================= =========== ===========
Subordinated debt 795 684
======================================================= =========== ===========
Group adjustments (1) (1)
======================================================= =========== ===========
Solvency II own funds 3,014 2,562
======================================================= =========== ===========
Solvency II SCR (1,938) (1,814)
======================================================= =========== ===========
Solvency II excess own funds 1,076 748
======================================================= =========== ===========
1 These figures allow for a notional recalculation of TMTP as at 31 December 2020.
ALTERNATIVE PERFORMANCE MEASURES AND KEY PERFORMANCE
INDICATORS
Within the Business Review, the Group has presented a number of
alternative performance measures ("APMs"), which are used in
addition to IFRS statutory performance measures. The Board believes
that the use of APMs gives a more representative view of the
underlying performance of the Group. The APMs used by the Group
are: organic capital generation, underlying organic capital
generation, new business operating profit, in-force operating
profit, underlying operating profit, adjusted operating profit,
Retirement Income sales, management expenses and adjusted earnings
per share. Further information on our APMs can be found in the
glossary, together with a reference to where the APM has been
reconciled to the nearest statutory equivalent.
The Board has also adopted a number of key performance
indicators ("KPIs"), which include certain APMs, and which are
considered to give an understanding of the Group's underlying
performance drivers. KPIs are regularly reviewed against the
Group's strategic objectives to ensure that we continue to have the
appropriate set of measures in place to assess and report on our
progress. During 2020 the Group introduced two new KPIs, management
expenses, and underlying organic capital generation/(consumption).
In-force operating profit has been discontinued as a KPI. These
changes reflect the Group's focus on monitoring and controlling its
costs and growing capital, and provide a balance of KPIs across
capital, sales, expenses, profit and net assets. The Group's KPIs
are discussed in more detail within the capital management section
above, and on the following pages.
The Group's KPIs are shown below:
Year ended Year ended
31 December 31 December
2020 2019 Change
GBPm GBPm %
======================================================= ============ ============ ======
Underlying organic capital generation/(consumption)(1) 18 (15)
======================================================= ============ ============ ======
Organic capital generation(1) 221.0 36.0
======================================================= ============ ============ ======
Retirement Income sales(1) 2,145.3 1,918.1 12
======================================================= ============ ============ ======
New business operating profit(1) 199.2 182.0 9
======================================================= ============ ============ ======
Adjusted operating profit before tax(1) 239.3 218.6 9
======================================================= ============ ============ ======
Management expenses(1) 159.3 169.0 (6)
======================================================= ============ ============ ======
IFRS profit before tax 236.7 368.6 (36)
======================================================= ============ ============ ======
31 December 31 December
2020 2019 Change
GBPm GBPm %
====================================== =========== =========== ======
Solvency II capital coverage ratio(2) 156% 141%
====================================== =========== =========== ======
IFRS net assets 2,490.4 2,321.0 7
====================================== =========== =========== ======
1 Alternative performance measure, see glossary for definition.
2 Estimated, after allowing for a notional recalculation of TMTP as at 31 December 2020.
ADJUSTED OPERATING PROFIT
Year ended Year ended
31 December 31 December
2020 2019 Change
GBPm GBPm %
============================================ ============ ============ ======
New business operating profit 199.2 182.0 9
============================================ ============ ============ ======
In-force operating profit 97.8 84.4 16
============================================ ============ ============ ======
Underlying operating profit 297.0 266.4 11
============================================ ============ ============ ======
Operating experience and assumption changes 46.2 42.2 9
============================================ ============ ============ ======
Other Group companies' operating results (17.1) (13.1) (31)
============================================ ============ ============ ======
Development expenditure (7.3) (10.3) 29
============================================ ============ ============ ======
Reinsurance and finance costs (79.5) (66.6) (19)
============================================ ============ ============ ======
Adjusted operating profit before tax(1) 239.3 218.6 9
============================================ ============ ============ ======
1 See reconciliation in the section "Reconciliation of operating
profit to statutory IFRS results" of this Business Review.
Adjusted operating profit before tax
Adjusted operating profit before tax of GBP239.3m increased by
9% in 2020 (2019: GBP218.6m). Within this, underlying operating
profit, the sum of new business operating profit and in-force
operating profit, rose 11% to GBP297.0m. Operating experience
variance and assumption changes increased to GBP46.2m in 2020
(2019: GBP42.2m) and were broadly in-line with the previous year.
Finance costs increased by 19% to GBP79.5m, driven by a full 12
month run-rate from the Restricted Tier 1 notes issued in March
2019.
New business operating profit
New business operating profit has increased by 9% to GBP199.2m
(2019: GBP182.0m). This reflects a 12% increase in Retirement
Income sales to GBP2,145.3m (2019: GBP1,918.1m), with a strong
performance in the second half of the year, particularly in DB,
while GIfL/Care sales returned to a normalised run-rate following
the easing of lockdown restrictions in June. The new business
margin achieved on Retirement Income sales during the period was
9.3% (2019: 9.5%), reflecting adjustments made to the asset mix
backing the new business and increased longevity reinsurance as
part of the Group's capital self-sufficiency objective. The Group
continues to focus on pricing discipline and risk selection, and is
benefiting from lower acquisition costs due to business mix and
cost reductions.
Management expenses
Management expenses have decreased by 6% to GBP159.3m (2019:
GBP169.0m). This is due to strengthened procurement and cost
controls, elimination of certain vacant roles, selective hiring and
lower marketing and distribution costs due to the effect of remote
working and social distancing. Furthermore, previous property
rationalisation savings have come through for the full twelve
months.
In-force operating profit
In-force operating profit increased by 16% to GBP97.8m (2019:
GBP84.4m), reflecting growth in profit from the Group's growing
in-force book of business and higher surplus assets, while
maintaining control of policy maintenance costs. The effect of
widening credit spreads and downgrades during the year further
added to in-force operating profit.
Operating experience and assumption changes
The Group has paid close attention to developments as the
COVID-19 vaccine programme rolls out across the population, which
began with its customer base, many of whom are in the most
vulnerable category. However, the long-term impact of the COVID-19
pandemic on those who recovered from the disease, the efficacy of
the various vaccines and secondary impacts such as delayed
diagnosis for other illnesses or behavioural changes need to be
considered when reviewing long-term assumptions, in particular in
respect of property and mortality.
The Group considered the early experience of the COVID-19
pandemic as part of the annual basis review in December 2020, and
will continue to assess its long-term assumptions during 2021.
Sensitivity analyses are shown in notes 17 and 23 which set out the
impact on the IFRS results from changes to key assumptions,
including property and mortality.
Overall, positive operating experience and assumption changes of
GBP46.2m were reported in 2020 (2019: GBP42.2m). Within this
GBP46.2m figure, operating experience was GBP20.1m, primarily due
to data and modelling updates, offset by the reinsurance changes
applied during 2020, specifically, the increased reinsurance
coverage on GIfL business and the reinsurance implementation for
our first DB partnering scheme. These combined to a net positive
GBP15.7m. Positive mortality experience for guaranteed income due
to higher than expected deaths during the period was offset by a
negative LTM experience in relation to early redemptions arising
from both mortality and also moves into long-term care and
voluntary redemptions, resulting in a net positive GBP6.8m. Various
other items totalled a negative GBP2.4m. There were a number of
assumption changes including the adoption of CMI 2019 across our
product range, which led to a net GBP61.9m longevity reserve
release as the guaranteed income release outweighed LTM
strengthening. Offsetting this release, calibration and other
modelling refinements led to a GBP31.7m strengthening. The review
of other assumptions led to a GBP4.0m reserve strengthening,
resulting in net assumption changes of GBP26.2m.
Other Group companies' operating results
The operating result for other Group companies was a loss of
GBP17.1m in 2020 compared to a loss of GBP13.1m in 2019.
Development expenditure
Development expenditure mainly relates to product development
and new initiatives, such as new capital light products.
Development expenditure also relates to distribution improvements
such as online capability and digital access. Development
expenditure has fallen as project expenditure concludes.
Reinsurance and finance costs
Reinsurance and finance costs include the coupon on the Group's
Restricted Tier 1 notes, as well as the interest payable on the
Group's Tier 2 and Tier 3 notes. The increase for the period is due
to a full 12 month run-rate from the Restricted Tier 1 notes issued
in March 2019 and the GBP125m Tier 2 notes issued in October 2019.
It also includes the coupon from the Green GBP250m Tier 2 notes
issued in October 2020.
On a statutory IFRS basis, the Restricted Tier 1 coupon is
accounted for as a distribution of capital, consistent with the
classification of the Restricted Tier 1 notes as equity, but the
coupon is included as an interest cost on an adjusted operating
profit basis.
Retirement income sales
Year ended Year ended
31 December 31 December
2020 2019 Change
GBPm GBPm %
============================================== ============ ============ ======
Defined Benefit De-risking Solutions ("DB") 1,507.9 1,231.3 22
============================================== ============ ============ ======
Guaranteed Income for Life Solutions ("GIfL") 585.9 615.7 (5)
============================================== ============ ============ ======
Care Plans ("CP") 51.5 71.1 (28)
============================================== ============ ============ ======
Retirement Income sales 2,145.3 1,918.1 12
============================================== ============ ============ ======
The Group's key focus is capital self-sufficiency, resilience,
and providing optionality to deploy surplus capital. As part of
this commitment, in 2019, we wrote less new business in order to
reduce new business capital strain. During 2020, as the first half
COVID-19 related disruption subsided, we executed our business plan
by selectively increasing volumes at attractive margins. Our chosen
markets have proven resilient in the face of considerable
challenges, as the structural growth drivers that underpin our
markets are unchanged. Retirement Income sales for 2020 increased
by 12% to GBP2,145.3m (2019: GBP1,918.1m).
DB sales for the year were GBP1,507.9m, an increase of 22%.
Transactions are lumpy in nature and subject to timing differences,
with a number of transactions postponed due to COVID-19 disruption
subsequently completing. DB sales in the second half of the year
were over GBP1bn, a record for the Group. We completed 23
transactions during 2020 (2019: 23 transactions). The defined
benefit de-risking market continues to be buoyant. We estimate that
the DB market was c.GBP30bn in 2020, the second highest on record,
after an exceptional year in 2019 (GBP43.8bn). In 2021, we expect
to participate more fully in the deferred liabilities market, thus
improving our Buy-out proposition, and to actively quote on larger
case sizes including those suitable for DB partnering.
2020 GIfL sales decreased by 5% to GBP585.9m (2019: GBP615.7m).
COVID-19 introduced challenges given the inherent face-to-face
advice process; however, advisers responded quickly by utilising
virtual means. In June, GIfL sales returned to their normal
run-rate, demonstrating that disruption was only temporary.
Volatile investment markets and economic uncertainty have
demonstrated to customers the importance and security of a
guaranteed income. Care sales were most impacted by COVID-19
disruption, but only represent 2% of Retirement Income sales.
Other new business sales
Lifetime Mortgage advances were GBP511.7m for 2020 (2019:
GBP415.8m), an increase of 23%. 2020 includes GBP36m of LTM
origination on behalf of a third party. The Group does not hold an
economic exposure for these assets, it earns a fee for originating
and administering these loans. LTM spreads were relatively stable
during the year as risk free rates fell, whereas in 2019, there was
increased competition, particularly in the first half of the year,
which resulted in lower volumes that year.
We continue to be more selective in the mortgages we advance,
with a focus on shorter duration loans to older borrowers, lower
LTV business and on customers with sufficient income to service
interest on their borrowings. In future, we expect to gradually
taper the proportion of LTMs backing new business towards 20%.
During 2019, the Flexible Pension Plan drawdown closed to new
business and existing customers were migrated to a third party
platform. The Group also closed its US Care unit, which had been
loss making.
Adjusted Earnings per share
Adjusted EPS (based on adjusted operating profit after
attributed tax) has increased from 17.6 pence for 2019, to 18.8
pence for 2020.
Year ended Year ended
31 December 31 December
2020 2019
============================================ ============ ============
Adjusted earnings (GBPm) 193.8 177.1
============================================ ============ ============
Weighted average number of shares (million) 1,030.7 1,007.5
============================================ ============ ============
Adjusted EPS (pence) 18.8 17.6
============================================ ============ ============
Earnings per share
Year ended Year ended
31 December 31 December
2020 2019
============================================ ============ ============
Earnings (GBPm) 165.5 285.8
============================================ ============ ============
Weighted average number of shares (million) 1,030.7 1,007.5
============================================ ============ ============
EPS (pence) 16.1 28.4
============================================ ============ ============
Reconciliation of operating profit to statutory IFRS results
The following tables present the Group's results on a statutory
IFRS basis.
Year ended Year ended
31 December 31 December
2020 2019
GBPm GBPm
========================================================================== ============ ============
Adjusted operating profit before tax 239.3 218.6
========================================================================== ============ ============
Non-recurring and project expenditure (12.7) (8.3)
========================================================================== ============ ============
Implementation of cost saving initiatives (8.5) (13.5)
========================================================================== ============ ============
Investment and economic profits 8.5 173.8
========================================================================== ============ ============
Interest adjustment to reflect IFRS accounting for Tier 1 notes as equity 28.1 16.8
========================================================================== ============ ============
Amortisation costs (18.0) (18.8)
========================================================================== ============ ============
IFRS profit before tax 236.7 368.6
========================================================================== ============ ============
Non-recurring and project expenditure
Non-recurring and project expenditure was GBP12.7m (2019:
GBP8.3m) and includes preparations for the new insurance accounting
standard, IFRS 17, the costs associated with Green Tier 2
bond/concurrent Tier 3 tender, preparations for an internal model
change to incorporate the recent regulatory changes and to move
PLACL from standard formula to a Group internal model, and a number
of smaller project costs. It also includes a significant upgrade to
our hardware systems, the roll out of which was accelerated to
enable our colleagues to work remotely to support the business
during the COVID-19 pandemic. The costs of on-going interaction
with our regulators and the costs of implementing less significant
regulatory changes are included in operating costs.
Implementation of cost saving initiatives
These costs are in respect of the cost savings initiated to
optimise the Group's business model and prioritise capital
efficiency. During the period the Group has carried out further
improvements to its business processes and management structure.
This builds on improvements made during 2019.
Investment and economic profits
Investment and economic profits for 2020 were GBP8.5m (2019:
GBP173.8m). A large gain from the fall in risk-free rates has been
largely offset by a change in the long term property growth
assumption and the sale of an LTM portfolio.
The decrease in risk-free rates during the first half of 2020,
has led to a gain of GBP360m for the year as a whole. The impact of
falling interest rates has been further amplified by additional
interest rate hedges entered into to protect the Solvency II
capital position, and which have increased the sensitivity of the
IFRS balance sheet to interest rate movements relative to prior
periods. There were small negatives from credit spreads and
downgrades (GBP14m) and property growth experience (GBP5m).
We have taken a prudent view to reduce the long term property
growth assumption by 50 basis points to 3.3% from 3.8% previously.
In updating these assumptions, the Board took into consideration
future macro-economic uncertainties including the effect of
COVID-19 and Brexit on the UK property market. The strengthening of
these assumptions has given rise to a GBP166m loss, which is the
combination of the change in lifetime mortgage asset values and the
increase to the value of insurance liabilities from the resulting
reduction to the valuation interest rate. Furthermore, in December
2020, the Group sold a portfolio of lifetime mortgages with
accumulated value of GBP540m. These LTMs were sold at a gain to the
IFRS fair value, but, we have foregone the difference in investment
yield with the replacement bonds, and hence incurred a GBP136m
pre-tax loss. Over time a proportion is planned to be allocated to
new illiquid assets reducing this initial impact.
Further details and sensitivities to changes in property
assumptions are given in notes 17 and 23 of these financial
statements.
There were no corporate bond defaults within our portfolio
during the period (2019: no defaults).
Amortisation costs
Amortisation mainly relates to the acquired in-force business
asset relating to Partnership Assurance Group plc, which is being
amortised over ten years in line with the expected run-off of the
in-force business.
Highlights from condensed consolidated statement of
comprehensive income
The table below presents the Condensed consolidated statement of
comprehensive income for the Group, with key line item
explanations.
Year ended Year ended
31 December 31 December
2020 2019
GBPm GBPm
========================================== ============ ============
Gross premiums written 2,147.8 1,921.0
========================================== ============ ============
Reinsurance premiums ceded (232.0) 2.8
========================================== ============ ============
Reinsurance recapture 940.0 436.8
========================================== ============ ============
Net premium revenue 2,855.8 2,360.6
========================================== ============ ============
Net investment income 1,777.7 1,451.7
========================================== ============ ============
Fee and commission income 11.7 12.7
========================================== ============ ============
Total revenue 4,645.2 3,825.0
========================================== ============ ============
Net claims paid (1,000.2) (861.1)
========================================== ============ ============
Change in insurance liabilities (2,983.1) (2,237.8)
========================================== ============ ============
Change in investment contract liabilities (1.8) 92.2
========================================== ============ ============
Acquisition costs (44.5) (35.2)
========================================== ============ ============
Other operating expenses (219.9) (227.8)
========================================== ============ ============
Finance costs (159.0) (186.7)
========================================== ============ ============
Total claims and expenses (4,408.5) (3,456.4)
========================================== ============ ============
Profit before tax 236.7 368.6
========================================== ============ ============
Income tax (44.2) (66.2)
========================================== ============ ============
Profit after tax 192.5 302.4
========================================== ============ ============
Gross premiums written
Gross premiums written for the year were GBP2,147.8m, an
increase of 12% compared to the prior period (2019: GBP1,921.0m).
As discussed above, the overall increase reflects a 22% increase in
DB sales, offset by a reduction in GIfL and Care sales, which were
impacted by challenges from COVID-19 in the first half of 2020.
Reinsurance premiums ceded
Reinsurance premiums ceded (expense of GBP232.0m) has increased
in 2020 as a result of reinsurance in relation to the Group's DB
partnering business. Also included within this line item are
reinsurance swap premiums and fees (2019: GBP2.8m credit).
Reinsurance recapture
During 2020 the Group recaptured all of the remaining quota
share reinsurance arrangements held by its subsidiary JRL. These
reinsurance treaties included financing arrangements, which allowed
a capital benefit under the old Solvency I regime. The treaties
allowed the recapture of business once the financing loan from the
reinsurer had been repaid, and the Group has now fully repaid all
such financing arrangements (2019: outstanding financing of
GBP14.5m). This has resulted in a decrease of reinsurance assets of
GBP940m and a reduction of equal amount in the deposits received
from reinsurers recognised within other financial liabilities in
the statement of financial position. These movements are reflected
in the statement of comprehensive income within net premium revenue
and net change in insurance liabilities respectively.
Net premium revenue
Net premium revenue increased from GBP2,360.6m to GBP2,855.8m,
driven by the increase in gross premiums written, plus the impact
of the reinsurance recaptures made during the year, offset by
reinsurance premiums ceded.
Net investment income
Net investment income increased from GBP1,451.7m to GBP1,777.7m
in 2020. The main components of investment income are interest
earned and changes in fair value of the Group's corporate bond,
mortgage and other fixed income assets. There has been a decrease
in risk-free rates during the first half of 2020 which has resulted
in unrealised gains in relation to assets held at fair value.
During 2020 this line item also includes realised gains from the
sale of GBP540m of the Group's lifetime mortgages, offset by the
change to the carrying value of mortgages from the change to the
Group's property growth assumption.
Net claims paid
Net claims paid increased to GBP1,000.2m, from GBP861.1m in
2019, reflecting the continuing growth of the in-force book.
Change in insurance liabilities
Change in insurance liabilities was GBP2,983.1m for the current
year, compared to GBP2,237.8m in 2019. The increase is principally
due to a greater fall in the valuation interest rate and a larger
reinsurance recapture.
Acquisition costs
Acquisition costs have increased from GBP35.2m in 2019 to
GBP44.5m in 2020, mainly as a result of an increase in LTM new
business compared to the prior year.
Other operating expenses
Other operating expenses decreased from GBP227.8m in 2019 to
GBP219.9m for the current year. This is driven by a reduction in
management expenses, as explained above, which has been achieved
through the cost saving initiatives entered into during 2019 and
2020.
Finance costs
The Group's overall finance costs decreased from GBP186.7m in
2019 to GBP159.0m in 2020. The main driver relates to a reduction
in reinsurance deposits, which have fallen in line with the
reinsurance recaptures made. This decrease has partly offset by
interest on the new Tier 2 loan notes issued in October 2019 and
October 2020.
Income tax
Income tax for the year ended 31 December 2020 was GBP44.2m
(2019: GBP66.2m), with an effective tax rate of 18.7% in line with
corporation tax rates (2019: effective tax rate of 18.0%).
Highlights from Condensed consolidated statement of financial
position
The following table presents selected items from the Condensed
consolidated statement of financial position, with key line item
explanations below.
31 December 31 December
2020 2019(1)
GBPm GBPm
===================================================================== =========== ===========
Assets
===================================================================== =========== ===========
Financial investments 23,269.8 21,606.0
===================================================================== =========== ===========
Reinsurance assets 3,132.6 3,860.6
===================================================================== =========== ===========
Other assets 1,771.0 555.8
===================================================================== =========== ===========
Total assets 28,173.4 26,022.4
===================================================================== =========== ===========
Share capital and share premium 198.3 198.0
===================================================================== =========== ===========
Other reserves 948.8 949.9
===================================================================== =========== ===========
Accumulated profit and other adjustments 1,051.2 879.9
===================================================================== =========== ===========
Total equity attributable to ordinary shareholders of Just Group plc 2,198.3 2,027.8
===================================================================== =========== ===========
Tier 1 notes 294.0 294.0
===================================================================== =========== ===========
Non-controlling interest (1.9) (0.8)
===================================================================== =========== ===========
Total equity 2,490.4 2,321.0
===================================================================== =========== ===========
Liabilities
===================================================================== =========== ===========
Insurance liabilities 21,118.4 19,003.7
===================================================================== =========== ===========
Reinsurance liabilities 267.1 128.6
===================================================================== =========== ===========
Other financial liabilities 3,305.1 3,678.9
===================================================================== =========== ===========
Insurance and other payables 91.6 72.6
===================================================================== =========== ===========
Other liabilities 900.8 817.6
===================================================================== =========== ===========
Total liabilities 25,683.0 23,701.4
===================================================================== =========== ===========
Total equity and liabilities 28,173.4 26,022.4
===================================================================== =========== ===========
1 Restated in relation to reinsurance assets and reinsurance
liabilities. See sections on reinsurance assets and reinsurance
liabilities below, and note 2 to the financial statements.
Financial investments
During the last 12 months, financial investments increased by
GBP1.7bn to GBP23.3bn at (2019: GBP21.6bn). The increase is mainly
due to the effect of decreases in risk-free rates during the
period, somewhat offset by credit spread widening, but also as a
result of investing the Group's new business premiums. The credit
quality of the corporate bond portfolio remains resilient, with 50%
of the Group's corporate bond and gilts portfolio rated A or above
(2019: 53%) and continues to be well balanced across a range of
industry sectors and geographies. Given the macroeconomic
uncertainty, credit rating agencies have proactively taken a
cautious approach, and have been slower to restore corporates to a
level our fundamental credit analysis supports. The Group has
limited exposure to those sectors that are most sensitive to
structural change, such as Energy, Auto manufacturers and Consumer
(cyclical), while the BBB-rated bonds are weighted towards the
sectors least at risk from uncertain macro conditions post
COVID-19/Brexit, including Utilities, Communications and
Technology, and Infrastructure. Over the past year, the Group
actively managed its portfolio and sold GBP639m of bonds, including
those that were most exposed to downgrade. We constantly review the
sector allocations, and within those, take the opportunity to trade
out of individual names to stay ahead of credit rating agency
actions, whilst maintaining diversification. From a sector
perspective, the main rotational difference during 2020 was an
increase in utilities, infrastructure and commercial mortgages and
reduced exposure to banks and basic materials. At 31 December 2020,
the Group's holding in liquidity funds was in line with
expectations, as the Group invested its excess year end cash
balances into corporate bonds and other fixed income assets, at
attractive credit spreads. Combined with an opportunity to improve
duration matching in 2020 following the LTM notes restructuring in
Q4 2019, new investments in alternative asset classes and proactive
management of the Group's bond portfolio led to a net positive
contribution of GBP46m to Solvency II surplus.
The loan-to-value ratio of the mortgage portfolio at 31 December
2020 was 36.1% (2019: 34.3%). The percentage of lifetime mortgages
decreased by 1.4 percentage points to 35.5% of financial
investments, following the sale of a GBP540m portfolio of mortgages
to a third party in December 2020. This sale was offset by an
increase in the valuation of the remaining LTMs relative to bonds,
due to the fall in interest rates as LTMs are typically longer
duration. Given the uncertain macro environment, and volatile
market conditions, the Group prudently managed its balance sheet
and exposure by increasing various hedges, which led to an increase
in derivatives and collateral.
The following table provides a breakdown by credit rating of
financial investments.
31 December 31 December 31 December 31 December
2020 2020 2019 2019
GBPm % GBPm %
=================== =========== =========== =========== ===========
AAA(1) 2,197.3 9.4 2,440.0 11.3
=================== =========== =========== =========== ===========
AA(1) and gilts 1,988.8 8.5 1,777.3 8.2
=================== =========== =========== =========== ===========
A 4,135.5 17.8 3,709.8 17.2
=================== =========== =========== =========== ===========
BBB 6,023.4 25.9 5,290.7 24.5
=================== =========== =========== =========== ===========
BB or below 408.4 1.8 194.8 0.9
=================== =========== =========== =========== ===========
Unrated/Other(2) 255.3 1.1 212.9 1.0
=================== =========== =========== =========== ===========
Lifetime mortgages 8,261.1 35.5 7,980.5 36.9
=================== =========== =========== =========== ===========
Total 23,269.8 100.0 21,606.0 100.0
=================== =========== =========== =========== ===========
1 Includes units held in liquidity funds.
2 Includes internally rated assets and own-rated assets.
December 2019 disclosures for privately rated assets have been
updated and are shown within the appropriate ratings bucket, where
such a rating exists. Previously, these privately rated assets were
classified as "Unrated/Other".
The sector analysis of the Group's financial investments
portfolio at 31 December 2020 is shown below and continues to be
well diversified across a variety of industry sectors.
31 December 31 December 31 December 31 December
2020 2020 2019 2019
GBPm % GBPm %
======================================== =========== =========== =========== ===========
Basic materials 199.9 0.9 329.8 1.5
======================================== =========== =========== =========== ===========
Communications and technology 1,188.9 5.1 1,148.2 5.3
======================================== =========== =========== =========== ===========
Auto manufacturers 385.0 1.7 446.6 2.1
======================================== =========== =========== =========== ===========
Consumer (staples including healthcare) 976.6 4.2 927.1 4.3
======================================== =========== =========== =========== ===========
Consumer (cyclical) 112.8 0.5 194.9 0.9
======================================== =========== =========== =========== ===========
Energy 462.7 2.0 422.7 2.0
======================================== =========== =========== =========== ===========
Banks 1,422.5 6.1 1,859.7 8.5
======================================== =========== =========== =========== ===========
Insurance 824.9 3.5 724.2 3.4
======================================== =========== =========== =========== ===========
Financial - other 462.5 2.0 426.6 2.0
======================================== =========== =========== =========== ===========
Real estate including REITs 771.3 3.3 450.2 2.1
======================================== =========== =========== =========== ===========
Government 1,340.4 5.8 1,128.9 5.2
======================================== =========== =========== =========== ===========
Industrial 839.6 3.6 628.6 2.9
======================================== =========== =========== =========== ===========
Utilities 2,029.9 8.7 1,708.2 7.9
======================================== =========== =========== =========== ===========
Commercial mortgages 707.0 3.0 494.5 2.3
======================================== =========== =========== =========== ===========
Infrastructure 1,220.5 5.2 892.9 4.1
======================================== =========== =========== =========== ===========
Other 38.0 0.2 76.5 0.4
======================================== =========== =========== =========== ===========
Corporate/government bond total 12,982.5 55.8 11,859.6 54.9
======================================== =========== =========== =========== ===========
Lifetime mortgages 8,261.1 35.5 7,980.5 36.9
======================================== =========== =========== =========== ===========
Liquidity funds 1,128.5 4.8 1,384.0 6.4
======================================== =========== =========== =========== ===========
Derivatives and collateral 897.7 3.9 381.9 1.8
======================================== =========== =========== =========== ===========
Total 23,269.8 100.0 21,606.0 100.0
======================================== =========== =========== =========== ===========
Environmental, Social and Governance and investing
Just Group is a signatory to the United Nations Principles for
Responsible Investment ("PRI"). We were the first UK insurer to do
this. Just Group has also been a constituent of the FTSE4Good Index
Series since December 2019. The index is designed to measure the
performance of companies demonstrating strong ESG practices. During
the 12 months to 31 December 2020, the Group increased its
investments in dedicated green and social investments to GBP1,138m,
representing 8.8% of the bond portfolio (2019: 6.6% of the bond
portfolio). This proportion does not include the Group's
substantial investment in lifetime mortgages, which help customers
achieve a better later life, through releasing equity tied up in
their home. In making investment decisions, sustainable investing
principles are formally embedded within our processes, as set out
in our Sustainable Investment Framework approved by the Board, and
which is available on our website www.justgroupplc.co.uk.
In October 2020, Just Group became the first UK and the fifth
European insurer to issue a Green Bond. The Group received a second
party opinion as part of the bond accreditation process, and has
committed to investing the bond proceeds in eligible green
investment assets, focusing on renewable energy, green buildings
and clean transportation.
Reinsurance assets
Reinsurance assets decreased to GBP3.1bn at 31 December 2020
(2019: GBP3.9bn). The decrease relates to the reinsurance
recaptures made during 2020, offset by new reinsurance arrangements
entered into for DB partnering (see reinsurance recapture section
above). Since the introduction of Solvency II in 2016, the Group
has increased its use of reinsurance swaps rather than quota share
treaties. (Note that the 2019 comparative figures have been
restated to correct for presentation of reinsurance liabilities
included within this line item, see section in reinsurance
liabilities below, and note 2 to the financial statements for
further details).
Other assets
Other assets mainly comprise cash and cash equivalents, and
intangible assets. During 2020 the Group has significantly
increased the amount of assets held in cash and cash equivalents so
as to increase protection against liquidity stresses, such as those
experienced in Q1 of 2020 as an initial market reaction to the
COVID-19 pandemic.
Insurance liabilities
Insurance liabilities increased to GBP21.1bn at 31 December 2020
(2019: GBP19.0bn). The increase in liabilities arose mainly as a
result of new insurance business written less claims paid and the
impact of changes to the valuation rate of interest over the
period.
Reinsurance liabilities
Reinsurance liabilities relate to liability balances in respect
of the Group's longevity swap arrangements. These liability
balances were previously included within the reinsurance assets
balance. (A prior period restatement has been made to present these
within the liability side of the balance sheet; further details of
this adjustment are given in note 2 to the financial
statements).
Other financial liabilities
Other financial liabilities decreased to GBP3.3bn at 31 December
2020 (2019: GBP3.7bn). These liabilities mainly relate to deposits
received from reinsurers, together with derivative liabilities and
cash collateral received. The reduction from the prior year relates
to the reinsurance recaptures in 2020.
Other liabilities
Other liability balances increased to GBP900.8m at 31 December
2020 (2019: GBP817.6m). The Group's loans and borrowings increased
by c.GBP110m as a result of the issuance of the green Tier 2 bond
in October 2020, offset by a GBP75m Tier 3 tender and the call of
the remaining amount of the PLACL bond in March 2020. This increase
has been offset by decreases in other liability balances, including
in relation to corporation tax for which there is no longer any
liability at the year end (2019: GBP10.2m liability) due to changes
to the quarterly payment regime in 2020 whereby corporation tax
payments are made in full by the end of the year.
IFRS net assets
The Group's total equity at 31 December 2020 was GBP2,490.4m,
compared to GBP2,321.0m at 31 December 2019. Total equity includes
the Restricted Tier 1 notes of GBP294m (after issue costs) issued
by the Group in March 2019. Total equity attributable to ordinary
shareholders increased from GBP2,027.8m to GBP2,198.3m resulting in
net asset value ("NAV") per ordinary share of 212p (2019:
196p).
Dividends
Whilst the Group has made significant progress to build its
capital base to accommodate the regulations on equity release
mortgages and to start to grow its underlying capital generation,
the external environment as we emerge from the pandemic continues
to be uncertain. The Board therefore considers that it would not be
appropriate to recommend recommencing dividend payments (total 2019
dividend: nil).
ANDY PARSONS
Group Chief Financial Officer
Risk management
The Group's enterprise-wide risk management strategy is to
enable all colleagues to take more effective business decisions
through a better understanding of risk
PURPOSE
We use risk management to make better informed business
decisions that generate value for shareholders while delivering
appropriate outcomes for our customers and providing confidence to
other stakeholders. Our risk management processes are designed to
ensure that our understanding of risk underpins how we run the
business.
RISK FRAMEWORK
Our risk management framework is continually developing to
reflect our risk environment and emerging best practice. The
framework, owned by the Group Board, covers all aspects of risk
management, including risk governance, reporting and policies. Our
appetite for different types of risk is embedded across the
business to create a culture of confident risk taking.
RISK EVALUATION AND REPORTING
We evaluate our principal and emerging risks and decide how best
to manage them within our risk appetite. Management regularly
reviews its risks and produces reports to provide assurance that
material risks in the business are being appropriately mitigated.
The Risk function, led by the Group Chief Risk Officer ("GCRO"),
challenges the management team on the effectiveness of its risk
evaluation and mitigation. The GCRO provides the Group Risk and
Compliance Committee ("GRCC") with his independent assessment of
the principal and emerging risks to the business.
Financial risk modelling is used to assess the amount of each
risk type against our capital risk appetite. This modelling is
principally aligned to our regulatory capital metrics. This
modelling allows the Board to understand both the risks included in
the Solvency Capital Requirement ("SCR"), and how they translate
into regulatory capital needs, and those not included in the SCR,
such as liquidity risks. By applying stress and scenario testing,
we gain insights into how risks might impact the Group in different
circumstances.
OWN RISK AND SOLVENCY ASSESSMENT
The Group's Own Risk and Solvency Assessment ("ORSA") embeds
comprehensive risk reviews into our Group management processes. Our
annual ORSA report is a key part of our business cycle and informs
strategic decision making. ORSA updates are prepared each quarter
to keep the Board appraised of the Group's evolving risk
profile.
Principal risks and uncertainties
Strategic objectives
1 Improve Our Capital Position
2 Transform How We Work
3 Get Closer To Our Customers & Partners
4 Generate Growth In New Markets
5 Be Proud To Work At Just
Risk Description and impact Mitigation and management action
====================================== ====================================== ======================================
Risk A The financial services industry We monitor and assess regulatory
Risks from regulatory changes and continues to see a high level of developments on an on-going basis. We
supervision regulatory activity and intense actively seek to participate
Strategic objective regulatory supervision. This is shown in all regulatory initiatives which
1,3,4,5 in the 2020/21 Prudential Regulation may affect or provide future
Change in the year Authority ("PRA") opportunities for the Group.
No Change/ Stable and Financial Conduct Authority Our aims are to implement any required
Risk outlook ("FCA") Business Plans. This was also changes effectively, and to deliver
No Change/ Stable highlighted as a result better outcomes
of regulatory activity relating to the for our customers and competitive
COVID-19 pandemic and the impact on advantage for the business. We develop
financial services. our strategy by giving
The PRA published PS19/19, which consideration to planned political and
follows on from PS31/18, both of which regulatory developments and allow for
updated SS3/17 in contingencies
respect of the valuation of should outcomes differ from our
no-negative equity guarantees ("NNEG") expectations. The Group also keeps
in equity release mortgages under regular review the
("ERMs"). The PRA's proposals took possible need to reduce new business
effect on 31 December 2019, subject to volumes or close to new business.
a two year phase-in A key focus for the Group has been to
period. The actions Just have taken address the expectations of the
have led to a reduction in the updates to SS3/17, whilst
Matching Adjustment ("MA") maintaining the confidence of our
available from ERMs and a stakeholders.
consequential increase in the costs of During 2020 we have completed two
the NNEG, partially offset further NNEG hedges, sold a portfolio
by an increase in TMTP. Just has also of LTMs and increased
taken action to review its ERM GIfL longevity reinsurance; this
investment limits, given improved the Group's solvency capital
the change in MA. position and reduced
There has been significant academic the sensitivity of the solvency
and market debate concerning the balance sheet to UK house prices.
methodology and models Subject to the outcome of HMT's review
for valuation of no-negative equity of Solvency II launched this autumn,
guarantees. The approach used by the it is anticipated
Group is in line that the UK's withdrawal from the EU
with common industry practice. will have limited direct impact on the
The PRA has published PS14/20 and Group from a regulatory
SS1/20 which confirms their change perspective due to the
expectations of firms' compliance on-shoring of existing EU regulatory
to the Prudent Person Principle with framework into UK law.
regard to managing investment risk. Whilst a trade deal was agreed between
The proposals took the UK and the EU before the end of
effect on 27 May 2020. The PRA has the transition
heightened their focus on the use of period, this does not address the
illiquid assets as specific issue of UK insurers
insurers expand asset allocations in continuing payments to EU/EEA
this area, clarifying the regulatory resident customers from 1 January
expectations of 2021. However, following engagement
qualitative and quantitative with EU/EEA regulators
assessments. The Group has extensively over the past 12-18 months, permanent
reviewed and is further or interim solutions are in place in
enhancing its investment strategy, jurisdictions where
including taking steps to material numbers of our customers
significantly reduce exposure reside. Just will continue to engage
to property risk through LTMs. with national regulators
In 2019 the PRA published PS11/19 and as required to ensure any further
SS3/19 requiring firms to set out measures to allow payments to
plans for identifying policyholders to continue
and managing financial risks from are completed.
climate change. In July 2020 the PRA HMT are undertaking a review of the
issued a follow up future regulatory framework in the UK
"Dear CEO" letter requiring firms to post-Brexit. This
have fully implemented these plans by covers the general regulatory
the end of 2021. framework and roles of the UK
The FCA published PS20/17 in December regulators as well as a review
2020 which sets out that specifically focused on adapting
premium-listed firms (which Solvency II to fit the UK insurance
includes Just Group plc) are expected market. Just are currently
to comply with the recommendations of reviewing the potential implications
the Financial and opportunities these reviews
Stability Board's Taskforce on present.
Climate-Related Financial Disclosures Just has an approved partial internal
("TCFD"). Climate change model to calculate the Group Solvency
could affect Just Group's financial Capital Requirement,
risks in two ways: (i) transitional which it reviews for continued
risk - the increased appropriateness. Just's regulatory
consideration of sustainability in priorities include a major
investment decisions may restrict model change application for JRL's
investment choice, including internal model, expected to be
in properties; it may also create new submitted in 2021 as well
opportunities to invest in assets that as agreeing the satisfactory
are perceived regulatory treatment for the NNEG risk
to be more sustainable; and (ii) transfer transactions
increased physical risks such as already completed.
flooding, due to severe Further actions to reduce our balance
rainfall or tidal surges, or heatwaves sheet sensitivity to UK property
leading to increased subsidence, which prices and the amount
may affect the of capital we have to hold for LTMs
value of properties not seen as having continues to be a key focus, with a
such an exposure at present. A fall in range of actions being
property values explored to build on the NNEG hedging
could affect our ability to recover and LTM portfolio sale transactions
the full balances of lifetime completed to date.
mortgages as a result of We intend to continue to actively
the NNEG. monitor the academic and market debate
The PRA and FCA have issued several concerning the valuation
consultation papers on new of no-negative equity guarantees.
requirements to strengthen Just is enhancing its ESG approach in
operational resilience in the its investment strategy as set out in
financial services sector. This is a the sustainable
key priority for the regulators. investment framework in Just's Green
Just Group is currently aligning its Bond documentation. We have identified
approach to the regulators' the potential
expectations ahead of the impacts of climate change on the
implementation deadline expected to be Group's financial risks and are
the end 2021. developing stress testing
The FCAs Mortgage Intermediaries capabilities to further improve
Portfolio Strategy and Lifetime monitoring of the potential impact of
Mortgage Providers Letters climate change on our
(published in October 2020 and investment and equity release
November 2020 respectively), set out a portfolios. The Group's risk
programme of work which management framework is being
the FCA are undertaking to assess developed
whether firms and their senior to accommodate and report on climate
managers are taking reasonable risks and appropriate disclosures in
steps to mitigate the risk of harm to line with TCFD recommendations.
customers and/or remedy harms that
have occurred. Just
has reviewed the implications of the
letters and no significant gaps have
been identified.
There is a potential risk to the
reputation of the overall LTM market.
The risk-free rate used for valuing
liabilities will be updated from 31
July 2021 to reference
SONIA as opposed to LIBOR. Any
difference between the risk-free
curves on this date will have
an impact on Excess Own Funds.
Given that the Group continues to
experience a high level of regulatory
activity and intense
regulatory supervision, there is also
the risk of PRA intervention, not
limited to the matters
described in the paragraphs above,
which could negatively impact on the
Group's capital position.
====================================== ====================================== ======================================
Risk B The premiums paid by the Group's Economic conditions are actively
Risks from the economic environment customers are invested to enable monitored and alternative scenarios
Strategic objective future benefits to be paid modelled to better understand
1,3,4,5 when expected with a high degree of the potential impacts of significant
Change in the year certainty. The economic environment economic changes on the amount of
Increasing and financial market capital required to
Risk outlook conditions have a significant be held to cover risks, and to inform
No Change/ Stable influence on the value of assets and management action plans. The Group's
liabilities and on the strategy is to
income the Group receives. A further buy and hold high-quality, lower-risk
deterioration in the economic assets in its investment portfolio to
environment (resulting, ensure that it
for example, from further outbreaks of has sufficient income to meet
COVID-19) could impact on the outgoings as they fall due. Portfolio
availability and attractiveness credit risk is managed
of certain securities and could by a combination of Just's internal
increase the risk of credit downgrades investment team and specialist
and defaults in our external fund managers,
corporate bond portfolio. overseen by Just's own credit
There remains a lack of clarity specialists, executing a diversified
regarding the UK's future trading investment strategy in
arrangements with the EU investment grade assets within
for financial services which could counterparty limits.
negatively impact the UK economy. The In a low interest rate environment,
Group remains exposed improved returns are sought by
to impacts that the UK's withdrawal diversifying the types,
has on the UK economy as a whole, geographies and industry sectors and
including residential classes of investment assets. Such
house prices, which could stagnate or diversification creates
fall. exposures to foreign exchange risk,
A fall in residential property values, which is controlled using derivative
as a result of the COVID-19 pandemic instruments. Derivative
for example, could instruments are also used to reduce
reduce the amounts received from exposures to interest rate volatility.
equity release redemptions and may The credit exposure
also affect the relative to the counterparties with whom we
attractiveness of the equity release transact these instruments is
product to customers. The regulatory mitigated by collateral arrangements.
capital needed to While the Group's capital models
support the possible shortfall on the accommodate negative interest rates,
redemption of equity release mortgages there is no historical
also increases data to validate their behaviour in
if property values drop. Conversely, such an environment.
significant future rises in property The Group's exposure to inflation risk
values could increase through the defined benefit de-risking
the incidence of early mortgage business is
redemptions, leading to an earlier managed with inflation hedges.
receipt of anticipated Liquidity risk is managed by ensuring
cash flows with the consequential that assets of a suitable maturity and
reinvestment risk. marketability
It is possible that the Bank of are held to meet liabilities as they
England could employ negative interest fall due. Sufficient liquid assets are
rates as a policy tool maintained so
to stimulate the economy. It is not the Group can readily access the cash
clear what effect this would have on it needs should business cash inflows
customer behaviour unexpectedly reduce.
or on the market for credit There can be some short-term
investments or lifetime mortgages. volatility in the Group's cash flows,
Most defined benefit pension schemes which is a consequence
link member benefits to inflation of Just's derivative hedging. Regular
through indexation. cash flow forecasts predict liquidity
As the Group's defined benefit levels over both
de-risking business volumes grow, its the short term and long term and
exposure to inflation stress tests help us understand any
risk increases. potential periods of
Market risks may affect the liquidity strain. Following the extreme market
position of the Group by, for example, volatility in March and April 2020,
having to realise Just amended its
assets to meet liabilities during ultra (one month or less) short-term
stressed market conditions or to liquidity requirements to be cash and
service collateral requirements cash equivalents
due to the changes in market value of only, and to keep reserves to cover
financial derivatives. A lack of the worst stresses that have occurred.
market liquidity is The Group's liquidity
also a risk to any need that the Group requirements have been met over the
may have to raise capital. past year and forecasting confirms
that this position
can reasonably be expected to continue
for both investments and business
operations.
====================================== ====================================== ======================================
Risk C Writing long-term DB de-risking, GIfL Longevity and other decrement
Risks from our pricing and reinsurance and equity release business requires a experience is analysed to identify any
Strategic objective range of assumptions outcomes materially different
1,3,4 to be made based on market data and from our assumptions and is used for
Change in the year historical experience, including the regular review of the reserving
No Change/ Stable customers' longevity, assumptions for all
Risk outlook corporate bond yields, interest and products.
No Change/ Stable inflation rates, property values and A significant proportion of longevity
expenses. These assumptions risk exposure is transferred to
are applied to the calculation of the reinsurers. The Group
reserves needed for future liabilities performs due diligence on our
and solvency reinsurance partners and they
margins using recognised actuarial undertake due diligence on the
approaches. Group's approach to risk selection.
Experience may differ materially from The Group monitors its exposure to
the Group's assumptions on these risk reinsurers on an on-going
factors, requiring basis. Exposure is partially mitigated
them to be recalibrated. This could through the posting and receipt of
affect the level of reserves needed, collateral into
with an impact on third party trusts or similar security
profitability and the Group's solvency arrangements, or the deposit of
position. premiums back to the
To manage the risk of our longevity Group, and is managed within the Group
assumptions being incorrect, the Group risk appetite limit.
has the benefit The Group measures its counterparty
of its extensive underwritten exposure as the change in Excess Own
mortality data, as well as external Funds above Solvency
mortality data sets, to II SCR from a default of each
provide insights and enhanced individual counterparty combined
understanding of the longevity risks simultaneously with both longevity
that the Group chooses and market stresses. The measures used
to take. include the change immediately upon
The Group has monitored experience default and after
following the outbreak of COVID-19 and the Group has re-established cover.
systematically reviewed The Group's exposure to individual
external evidence related to the counterparties is subject
potential impact on assumptions. The to limits set by the Board.
Group continues to analyse For equity release, the Group
possible direct and indirect impacts underwrites the properties against
of the pandemic, including the which it lends using valuations
possibility of an enduring from expert third parties. The Group's
effect on the longevity of customers. property risk is controlled by limits
to the initial
loan-to-property value ratio,
supported by product design features,
limiting specific property
types and exposure to each region. We
also monitor the exposure to adverse
house price movements
and the accuracy of our indexed
valuations.
====================================== ====================================== ======================================
Risk D The Group relies on its operational The Group maintains plans and controls
Risks arising from operational processes and IT systems to conduct to minimise the risk of business
processes and IT systems its business, including disruption due to
Strategic objective the pricing and sale of its products, information security or resilience
1,2,3,4,5 measuring and monitoring its related events including civil unrest
Change in the year underwriting liabilities, and pandemics. Detailed
No Change/ Stable processing applications and delivering incident and crisis management plans
Risk outlook customer service and maintaining exist to ensure effective responses,
No Change/ Stable accurate records. and these are supported
These processes and systems may not by specialist third parties, including
operate as expected, may not fulfil remote data centres. Protecting our
their intended purpose customers' interests
or may be damaged or interrupted by is our top priority. Agile working
human error, unauthorised access, arrangements enable the Group to
natural disaster or protect customers, staff
similarly disruptive events. Any and business partners from operational
failure of the Group's IT and shocks, ensuring that no one
communications systems and/or experiences any material
third party infrastructure on which it detriment.
relies could lead to costs and A formal but flexible resilience
disruptions that could framework, supplemented by our modern
adversely affect its business as well working capabilities,
as harm its reputation. enables Group continuity of service.
Large organisations continue to be Just's ability to remain operational
targets for cyber-crime, particularly is dependent upon
those organisations a resilient technology platform, which
that hold customers' personal details allows us to switch our business from
and have implemented remote working a central to
arrangements for a remote operating model. Risks
staff. The Group is no exception and a associated with remote working have
cyber-attack could affect customer been assessed and addressed
confidence, or lead on an on-going basis.
to financial losses. Privacy by design and staff awareness
of their responsibilities underpins
our commitment to
protecting our customers' data. Strong
data protection controls support this
philosophy, with
all staff trained in data handling and
the high standards that are expected
to protect it.
We operate a Group-wide network of
Data Protection Champions to promote
awareness, good practice
and identify improvements within their
teams.
To support this commitment, the Group
invests in tools to help identify,
manage and report
on data and cyber threats, including
tools to monitor user access to
sensitive data sets and
the movement of data across the
network.
Using artificial intelligence and
machine learning, these tools provide
early warning of suspicious
activity on IT systems.
In 2020 the Group continued to spend
on market leading products to protect
a mobile workforce
and to complete our multi-layered
approach to Information Security.
Further investment has
been made on core infrastructure to
help support the transition to remote
and future hybrid
working models.
====================================== ====================================== ======================================
Risk E The Group operates in a market where Our approach to legislative change is
Risks from our chosen market changes in pensions legislation can to participate actively and engage
environment have a considerable with policymakers.
Strategic objective effect on our strategy and could The Group offers a range of retirement
1,2,3,4 reduce our sales and profitability or options, allowing it to remain agile
Change in the year require us to hold in this changing
Increasing more capital. environment, and has flexed its
Risk outlook Markets have been disrupted by the offerings in response to market
No Change/ Stable COVID-19 pandemic; the full market dynamics. We believe we are
impact will not be fully well placed to adapt to changing
clear for some time. Investment customer demand, supported by our
volatility has emphasised the benefit brand promise, innovation
of a secure income in credentials and financial strength.
retirement for customers and the Group The most influential factors in the
expects that demand for guaranteed successful delivery of the Group's
income for life plans are closely monitored
solutions will continue. to help inform the business. The
The defined benefit de-risking market factors include market forecasts and
is expected to continue to grow market share, supported
strongly. by insights into customer and
The equity release market has been competitor behaviour.
dominated by a limited number of Work continues to improve the customer
specialist providers, appeal of the Group's equity release
but new entrants - both providers and products, explore
funders - have emerged along with new new product variants and meet
product launches. distributors' digital and service
The market was significantly disrupted needs.
by the COVID-19 pandemic; providers, We continue to review and enhance our
distributors, services to ensure they remain fully
solicitors, conveyancers and valuers compliant, demonstrate
have adapted processes to continue to best practices and deliver good
serve customers customer outcomes. During the COVID-19
safely. House price growth observed in pandemic, all services
the second half of 2020 is expected to were quick to adapt and continued to
slow in 2021, provide customers with products and
which may impact appetite for equity services in our chosen
release. markets. Any required operational
Customer needs and expectations changes received rigorous review ahead
continue to evolve and change in of implementation
profile, and there is a risk to ensure robust customer controls
that we fail to customise and tailor remained.
our professional services and At the start of 2020 we launched a
distribution models to new, pioneering and exciting fully
suit their specific requirements. Poor advised online financial
management of customer or distributor planning service, "Destination
relationships Retirement", targeted at people close
as well as misleading customers or to or in retirement with
misrepresenting products to customers modest pension savings. The service
are also risks which provides the opportunity to receive
could lead to regulatory censure as tailor-made regulated
well as loss of customers. financial advice without paying the
costs associated with a traditional
financial adviser.
Following this launch, we successfully
joined the FCA's regulatory sandbox as
part of our
on-going close engagement with the
regulator.
The defined benefit pension transfer
advice market has remained under close
regulatory scrutiny
through the year. We continue to
operate in this market, demonstrating
the high advice standards
expected.
====================================== ====================================== ======================================
Risk F Our purpose is to help people achieve The Group actively seeks to
Risks to the Group's brand and a better later life. Our Group's differentiate its business from
reputation brands reflect the competitors by investing in
Strategic objective way we intend to conduct our business brand-enhancing
1,2,3,4,5 and treat our customers and wider activities. Fairness to customers and
Change in the year stakeholder groups. high service standards are at the
No Change/ Stable The Group's reputation could be heart of the Just
Risk outlook damaged if the Group is perceived to brand, and we encourage our colleagues
Increasing be acting, even unintentionally, to take pride in the quality of
below the standards we set for service they provide.
ourselves. This could include, for Engaging our colleagues in the Just
example, failing to achieve brand and its associated values has
the goals we have set for enhancing been, and remains,
our sustainability framework. a critical part of our internal
Additionally, the Group's activity. Just is proactive in
reputation could be threatened by pursuing its sustainability
external risks such as a cyber-attack responsibilities and recognises the
or regulatory intervention importance of its social purpose. The
or enforcement action, either directly Group maintains
or as a result of contagion from other a system of internal control, and
companies in associated policies and operational
the sectors in which we operate. procedures, which define
Damage to our reputation may adversely the standards we expect of all
affect our underlying profitability, colleagues.
through reducing
sales volumes, restricting access to
distribution channels and attracting
increased regulatory
scrutiny.
====================================== ====================================== ======================================
Consolidated statement of comprehensive income
for the year ended 31 December 2020
Year ended Year ended
31 December 31 December
2020 2019
Note GBPm GBPm
======================================================= ==== ============ ============
Gross premiums written 7 2,147.8 1,921.0
======================================================= ==== ============ ============
Reinsurance premiums ceded (232.0) 2.8
======================================================= ==== ============ ============
Reinsurance recapture 940.0 436.8
======================================================= ==== ============ ============
Net premium revenue 2,855.8 2,360.6
======================================================= ==== ============ ============
Net investment income 3 1,777.7 1,451.7
======================================================= ==== ============ ============
Fee and commission income 7 11.7 12.7
======================================================= ==== ============ ============
Total revenue 4,645.2 3,825.0
======================================================= ==== ============ ============
Gross claims paid (1,321.1) (1,247.5)
======================================================= ==== ============ ============
Reinsurers' share of claims paid 320.9 386.4
======================================================= ==== ============ ============
Net claims paid (1,000.2) (861.1)
======================================================= ==== ============ ============
Change in insurance liabilities:
======================================================= ==== ============ ============
Gross amount (2,116.6) (1,730.6)
======================================================= ==== ============ ============
Reinsurers' share 73.5 (70.4)
======================================================= ==== ============ ============
Reinsurance recapture (940.0) (436.8)
======================================================= ==== ============ ============
Net change in insurance liabilities (2,983.1) (2,237.8)
======================================================= ==== ============ ============
Change in investment contract liabilities 24 (1.8) 92.2
======================================================= ==== ============ ============
Acquisition costs 4 (44.5) (35.2)
======================================================= ==== ============ ============
Other operating expenses 5 (219.9) (227.8)
======================================================= ==== ============ ============
Finance costs 6 (159.0) (186.7)
======================================================= ==== ============ ============
Total claims and expenses (4,408.5) (3,456.4)
======================================================= ==== ============ ============
Profit before tax 7 236.7 368.6
======================================================= ==== ============ ============
Income tax 8 (44.2) (66.2)
======================================================= ==== ============ ============
Profit for the year 192.5 302.4
======================================================= ==== ============ ============
Other comprehensive income:
======================================================= ==== ============ ============
Items that will not be reclassified subsequently
to profit or loss:
======================================================= ==== ============ ============
Revaluation of land and buildings 8,15 (1.1) -
======================================================= ==== ============ ============
Items that may be reclassified subsequently to
profit or loss:
======================================================= ==== ============ ============
Exchange differences on translating foreign operations (0.6) (0.2)
======================================================= ==== ============ ============
Other comprehensive loss for the year, net of
income tax (1.7) (0.2)
======================================================= ==== ============ ============
Total comprehensive income for the year 190.8 302.2
======================================================= ==== ============ ============
Profit attributable to:
======================================================= ==== ============ ============
Equity holders of Just Group plc 193.6 302.6
======================================================= ==== ============ ============
Non-controlling interest 35 (1.1) (0.2)
======================================================= ==== ============ ============
Profit for the year 192.5 302.4
======================================================= ==== ============ ============
Total comprehensive income attributable to:
======================================================= ==== ============ ============
Equity holders of Just Group plc 191.9 302.4
======================================================= ==== ============ ============
Non-controlling interest 36 (1.1) (0.2)
======================================================= ==== ============ ============
Total comprehensive income for the year 190.8 302.2
======================================================= ==== ============ ============
Basic earnings per share (pence) 12 16.06 28.37
======================================================= ==== ============ ============
Diluted earnings per share (pence) 12 15.89 28.00
======================================================= ==== ============ ============
The notes are an integral part of these financial
statements.
Consolidated statement of changes in equity
for the year ended 31 December 2020
Shares Total
held shareholders' Tier Non-
Year ended Share Share Reorganisation Merger Revaluation by Accumulated equity 1 controlling
31 December capital premium reserve reserve reserve trusts profit(1) GBPm notes interest Total
2020 Note GBPm GBPm GBPm GBPm GBPm GBPm GBPm GBPm GBPm GBPm
============== ==== ======= ======= ============== ======= ============ ====== =========== ============= ===== =========== =======
At 1 January
2020 103.5 94.5 348.4 597.1 4.4 (6.0) 885.9 2,027.8 294.0 (0.8) 2,321.0
============== ==== ======= ======= ============== ======= ============ ====== =========== ============= ===== =========== =======
Profit for
the year - - - - - - 193.6 193.6 - (1.1) 192.5
============== ==== ======= ======= ============== ======= ============ ====== =========== ============= ===== =========== =======
Other
comprehensive
loss for
the year,
net of income
tax - - - - (1.1) - (0.6) (1.7) - - (1.7)
============== ==== ======= ======= ============== ======= ============ ====== =========== ============= ===== =========== =======
Total
comprehensive
income/(loss)
for the year - - - - (1.1) - 193.0 191.9 - (1.1) 190.8
============== ==== ======= ======= ============== ======= ============ ====== =========== ============= ===== =========== =======
Contributions
and
distributions
============== ==== ======= ======= ============== ======= ============ ====== =========== ============= ===== =========== =======
Shares issued 21 0.3 - - - - - - 0.3 - - 0.3
============== ==== ======= ======= ============== ======= ============ ====== =========== ============= ===== =========== =======
Dividends 13 - - - - - - (0.1) (0.1) - - (0.1)
============== ==== ======= ======= ============== ======= ============ ====== =========== ============= ===== =========== =======
Interest
paid on Tier
1 notes 22 - - - - - - (28.1) (28.1) - - (28.1)
============== ==== ======= ======= ============== ======= ============ ====== =========== ============= ===== =========== =======
Share-based
payments - - - - - 0.6 5.9 6.5 - - 6.5
============== ==== ======= ======= ============== ======= ============ ====== =========== ============= ===== =========== =======
Total
contributions
and
distributions 0.3 - - - - 0.6 (22.3) (21.4) - - (21.4)
============== ==== ======= ======= ============== ======= ============ ====== =========== ============= ===== =========== =======
At 31 December
2020 103.8 94.5 348.4 597.1 3.3 (5.4) 1,056.6 2,198.3 294.0 (1.9) 2,490.4
============== ==== ======= ======= ============== ======= ============ ====== =========== ============= ===== =========== =======
Shares
held Total Tier Non-
Year ended Share Share Reorganisation Merger Revaluation by Accumulated shareholders' 1 controlling
31 December capital premium reserve reserve reserve trusts profit(1) equity notes interest Total
2019 Note GBPm GBPm GBPm GBPm GBPm GBPm GBPm GBPm GBPm GBPm GBPm
============== ==== ======= ======= ============== ======= ============ ====== =========== ============= ===== =========== =======
At 1 January
2019 94.1 94.5 348.4 532.7 4.4 (6.2) 596.5 1,664.4 - (0.6) 1,663.8
============== ==== ======= ======= ============== ======= ============ ====== =========== ============= ===== =========== =======
Profit for
the year - - - - - - 302.6 302.6 - (0.2) 302.4
============== ==== ======= ======= ============== ======= ============ ====== =========== ============= ===== =========== =======
Other
comprehensive
loss for
the year,
net of income
tax - - - - - - (0.2) (0.2) - - (0.2)
============== ==== ======= ======= ============== ======= ============ ====== =========== ============= ===== =========== =======
Total
comprehensive
income/(loss)
for the year - - - - - - 302.4 302.4 - (0.2) 302.2
============== ==== ======= ======= ============== ======= ============ ====== =========== ============= ===== =========== =======
Contributions
and
distributions
============== ==== ======= ======= ============== ======= ============ ====== =========== ============= ===== =========== =======
Shares issued 21 9.4 - - 64.4 - - - 73.8 - - 73.8
============== ==== ======= ======= ============== ======= ============ ====== =========== ============= ===== =========== =======
Tier 1 notes
issued (net
of costs) 22 - - - - - - - - 294.0 - 294.0
============== ==== ======= ======= ============== ======= ============ ====== =========== ============= ===== =========== =======
Dividends 13 - - - - - - (0.2) (0.2) - - (0.2)
============== ==== ======= ======= ============== ======= ============ ====== =========== ============= ===== =========== =======
Interest
paid on Tier
1 notes - - - - - - (16.8) (16.8) - - (16.8)
============== ==== ======= ======= ============== ======= ============ ====== =========== ============= ===== =========== =======
Share-based
payments - - - - - 0.2 4.0 4.2 - - 4.2
============== ==== ======= ======= ============== ======= ============ ====== =========== ============= ===== =========== =======
Total
contributions
and
distributions 9.4 - - 64.4 - 0.2 (13.0) 61.0 294.0 - 355.0
============== ==== ======= ======= ============== ======= ============ ====== =========== ============= ===== =========== =======
At 31 December
2019 103.5 94.5 348.4 597.1 4.4 (6.0) 885.9 2,027.8 294.0 (0.8) 2,321.0
============== ==== ======= ======= ============== ======= ============ ====== =========== ============= ===== =========== =======
1 Includes currency translation reserve.
The notes are an integral part of these financial
statements.
Consolidated statement of financial position
as at 31 December 2020
31 December 1 January
2019 2019
31 December Restated (note Restated
2020 2) (note 2)
Note GBPm GBPm GBPm
============================================ ==== =========== =============== =========
Assets
============================================ ==== =========== =============== =========
Intangible assets 14 133.5 154.4 171.0
============================================ ==== =========== =============== =========
Property, plant and equipment 15 20.5 26.8 21.4
============================================ ==== =========== =============== =========
Financial investments 16 23,269.8 21,606.0 19,252.5
============================================ ==== =========== =============== =========
Investment in joint ventures and associates - - 0.3
============================================ ==== =========== =============== =========
Reinsurance assets 23 3,132.6 3,860.6 4,350.8
============================================ ==== =========== =============== =========
Deferred tax assets 18 11.5 11.5 18.6
============================================ ==== =========== =============== =========
Current tax assets 2.9 - 42.1
============================================ ==== =========== =============== =========
Prepayments and accrued income 74.3 70.6 67.9
============================================ ==== =========== =============== =========
Insurance and other receivables 19 32.0 25.5 18.9
============================================ ==== =========== =============== =========
Cash and cash equivalents 20 1,496.3 267.0 113.9
============================================ ==== =========== =============== =========
Total assets 28,173.4 26,022.4 24,057.4
============================================ ==== =========== =============== =========
Equity
============================================ ==== =========== =============== =========
Share capital 21 103.8 103.5 94.1
============================================ ==== =========== =============== =========
Share premium 21 94.5 94.5 94.5
============================================ ==== =========== =============== =========
Reorganisation reserve 348.4 348.4 348.4
============================================ ==== =========== =============== =========
Merger reserve 21 597.1 597.1 532.7
============================================ ==== =========== =============== =========
Revaluation reserve 15 3.3 4.4 4.4
============================================ ==== =========== =============== =========
Shares held by trusts (5.4) (6.0) (6.2)
============================================ ==== =========== =============== =========
Accumulated profit 1,056.6 885.9 596.5
============================================ ==== =========== =============== =========
Total equity attributable to owners of
Just Group plc 2,198.3 2,027.8 1,664.4
============================================ ==== =========== =============== =========
Tier 1 notes 22 294.0 294.0 -
============================================ ==== =========== =============== =========
Non-controlling interest 36 (1.9) (0.8) (0.6)
============================================ ==== =========== =============== =========
Total equity 2,490.4 2,321.0 1,663.8
============================================ ==== =========== =============== =========
Liabilities
============================================ ==== =========== =============== =========
Insurance liabilities 23 21,118.4 19,003.7 17,273.8
============================================ ==== =========== =============== =========
Reinsurance liabilities 23 267.1 128.6 111.6
============================================ ==== =========== =============== =========
Investment contract liabilities 24 42.8 54.0 197.8
============================================ ==== =========== =============== =========
Loans and borrowings 25 773.5 660.0 573.4
============================================ ==== =========== =============== =========
Lease liabilities 26 6.8 12.4 -
============================================ ==== =========== =============== =========
Other financial liabilities 27 3,305.1 3,678.9 4,063.3
============================================ ==== =========== =============== =========
Deferred tax liabilities 18 22.8 26.3 32.2
============================================ ==== =========== =============== =========
Other provisions 30 1.0 1.8 0.7
============================================ ==== =========== =============== =========
Current tax liabilities - 10.2 3.5
============================================ ==== =========== =============== =========
Accruals and deferred income 53.9 52.9 59.0
============================================ ==== =========== =============== =========
Insurance and other payables 31 91.6 72.6 78.3
============================================ ==== =========== =============== =========
Total liabilities 25,683.0 23,701.4 22,393.6
============================================ ==== =========== =============== =========
Total equity and liabilities 28,173.4 26,022.4 24,057.4
============================================ ==== =========== =============== =========
The notes are an integral part of these financial
statements.
The financial statements were approved by the Board of Directors
on 15 March 2021 and were signed on its behalf by:
Andy Parsons
Director
Consolidated statement of cash flows
for the year ended 31 December 2020
Year ended Year ended
31 December 31 December
2020 2019
Note GBPm GBPm
======================================================= ==== ============ ============
Cash flows from operating activities
======================================================= ==== ============ ============
Profit before tax 236.7 368.6
======================================================= ==== ============ ============
Property revaluation loss through profit and loss 15 1.2 -
======================================================= ==== ============ ============
Depreciation of property, plant and equipment 15 3.9 4.5
======================================================= ==== ============ ============
Amortisation of intangible assets 14 19.9 19.9
======================================================= ==== ============ ============
Impairment of property, plant and equipment 15 - 4.0
======================================================= ==== ============ ============
Impairment of intangible assets 14 1.1 -
======================================================= ==== ============ ============
Loss on disposal of associated undertaking 36 - 0.3
======================================================= ==== ============ ============
Share-based payments 6.5 4.2
======================================================= ==== ============ ============
Interest income 3 (631.7) (663.0)
======================================================= ==== ============ ============
Interest expense 6 159.0 186.7
======================================================= ==== ============ ============
Realised and unrealised gains on financial investments (1,039.7) (1,404.0)
======================================================= ==== ============ ============
Decrease in reinsurance assets 866.5 507.2
======================================================= ==== ============ ============
Increase in prepayments and accrued income (3.7) (2.7)
======================================================= ==== ============ ============
Increase in insurance and other receivables (6.1) (4.2)
======================================================= ==== ============ ============
Increase in insurance liabilities 2,114.7 1,729.9
======================================================= ==== ============ ============
Decrease in investment contract liabilities (11.2) (143.8)
======================================================= ==== ============ ============
Decrease in deposits received from reinsurers (775.3) (489.5)
======================================================= ==== ============ ============
Increase/(decrease) in accruals and deferred income 3.3 (5.7)
======================================================= ==== ============ ============
Increase/(decrease) in insurance and other payables 19.0 (5.7)
======================================================= ==== ============ ============
Decrease in other creditors (162.7) (44.3)
======================================================= ==== ============ ============
Interest received 314.5 364.3
======================================================= ==== ============ ============
Interest paid (107.7) (139.1)
======================================================= ==== ============ ============
Taxation paid (60.6) (14.9)
======================================================= ==== ============ ============
Net cash inflow from operating activities 947.6 272.7
======================================================= ==== ============ ============
Cash flows from investing activities
======================================================= ==== ============ ============
Additions to internally generated intangible assets 14 (0.1) (3.3)
======================================================= ==== ============ ============
Acquisition of property and equipment 15 (2.3) (1.4)
======================================================= ==== ============ ============
Net cash outflow from investing activities (2.4) (4.7)
======================================================= ==== ============ ============
Cash flows from financing activities
======================================================= ==== ============ ============
Issue of ordinary share capital (net of costs) 21 0.3 73.8
======================================================= ==== ============ ============
Proceeds from issue of Tier 1 notes (net of costs) 22 - 292.7
======================================================= ==== ============ ============
Increase in borrowings (net of costs) 25 110.6 83.9
======================================================= ==== ============ ============
Dividends paid 13 (0.1) (0.2)
======================================================= ==== ============ ============
Coupon paid on Tier 1 notes 13 (28.1) (16.8)
======================================================= ==== ============ ============
Interest paid on borrowings (49.8) (43.7)
======================================================= ==== ============ ============
Payment of lease liabilities - principal 26 (4.1) (2.8)
======================================================= ==== ============ ============
Payment of lease liabilities - interest 26 (0.2) (0.3)
======================================================= ==== ============ ============
Net cash inflow from financing activities 28.6 386.6
======================================================= ==== ============ ============
Net increase in cash and cash equivalents 973.8 654.6
======================================================= ==== ============ ============
Cash and cash equivalents at 1 January 1,651.0 996.4
======================================================= ==== ============ ============
Cash and cash equivalents at 31 December 2,624.8 1,651.0
======================================================= ==== ============ ============
Cash available on demand 1,496.3 267.0
======================================================= ==== ============ ============
Units in liquidity funds 1,128.5 1,384.0
======================================================= ==== ============ ============
Cash and cash equivalents at 31 December 20 2,624.8 1,651.0
======================================================= ==== ============ ============
The notes are an integral part of these financial
statements.
Notes to the consolidated financial statements
1 Significant accounting policies
General information
Just Group plc (formerly JRP Group plc) (the "Company") was
incorporated and registered in England and Wales on 13 June 2013 as
a public company limited by shares. The Company's registered office
is Enterprise House, Bancroft Road, Reigate, Surrey, RH2 7RP.
1.1 Basis of preparation
The consolidated financial statements have been prepared in
accordance with international accounting standards in conformity
with the requirements of the Companies Act 2006 and in accordance
with International Financial Reporting Standards ("IFRS") adopted
pursuant to Regulation (EC) No 1606/2002 as it applies in the
European Union.
The financial information set out above does not constitute the
company's statutory accounts for the years ended 31 December 2020
and 2019 but is derived from those accounts. Statutory accounts for
2019 have been delivered to the registrar of companies, and those
for 2020 will be delivered in due course. Auditors have reported on
the statutory accounts for 2019 and will be reporting on the
statutory accounts for 2020 in due course. The report of the
auditor for the year ended 31 December 2020 is likely (i) to be
unqualified, (ii) to not contain a statement under section 498 (2)
or (3) of the Companies Act 2006, and (iii) by way of emphasis of
matter, without qualifying their report, is likely to draw
attention to the capital note which discloses the matters also
covered in note 35 to this results announcement. The report of the
auditor for the year ended 31 December 2019 was (i) unqualified,
(ii) did not contain a statement under section 498 (2) or (3) of
the Companies Act 2006, and (iii) by way of emphasis of matter,
without qualifying their report, drew attention to note 34,
Capital, to the 2019 statutory accounts.
As part of their assessment of going concern, the Directors are
required to undertake an assessment of the Company and the Group's
ability to continue to adopt the going concern basis of accounting,
and to disclose any material uncertainties identified. Having
completed this assessment, which included consideration of the
possible impacts on the Group's business from the COVID-19
pandemic, the Directors are satisfied that the Group has adequate
resources to continue to operate as a going concern for a period of
not less than 12 months from the date of this report, and that
there is no material uncertainty in relation to going concern.
Accordingly, they continue to adopt the going concern basis in
preparing the financial statements.
The Directors have considered the following in their
assessment:
-- The benefit of GBP250m new Tier 2 capital raised during 2020,
GBP75m of which was used to repurchase part of the Group's Tier 3
loan notes, via a tender offer.
-- Steps taken over the last two years to improve capital
efficiency, including during the current period: increasing the
level of reinsurance for GIfL contracts, launching new more
capital-efficient products, such as our Defined Benefit De-risking
partnering deals; additional NNEG hedging and the sale of a portion
of our lifetime mortgages portfolio to further protect against UK
residential property risk; reductions in new business volumes; and
cost saving initiatives.
-- The projected liquidity position of the Company and the
Group, current financing arrangements and contingent
liabilities.
-- A range of forecast scenarios with differing levels of new
business and associated additional capital requirements to write
anticipated levels of new business.
-- Eligible own funds being in excess of minimum capital
requirements in stressed scenarios, including reduced new business
volumes.
-- The findings of the Group Own Risk and Solvency Assessment ("ORSA").
-- Risks arising from the UK's withdrawal from the European Union.
-- Scenario testing to consider the possible impacts of the
COVID-19 pandemic on the Group's business, including stresses to UK
residential property prices, house price inflation, credit quality
of assets, and risk-free rates, together with a reduction in new
business levels. In addition, the results of extreme property
stress tests were considered, including a property price fall in
excess of 40%, and a sensitivity analysis was performed to assess
the impact from falling interest rates, including an assessment of
the impact of negative interest rates. The possible impact on
liquidity from the pandemic was considered through applying
significant stresses to exchange rates and interest rates, and
assessing the impact this would have on the Group's cash collateral
requirements.
-- Scenarios, including those in the ORSA and potential
regulatory intervention, where the Group ceases to write new
business. However, in such a run-off scenario the going concern
basis would continue to be applicable because the Group would be
continuing to trade with its existing business (for example,
collect premiums and administer policies) rather than ceasing to
trade.
-- The Group Business Plan, which was approved by the Board in
November 2020, and in particular the forecast regulatory solvency
position for the period to 31 December 2022 calculated on a
Solvency II basis, which includes scenarios setting out possible
adverse trading and economic conditions as a result of the COVID-19
pandemic.
The Directors' assessment concluded that it remains appropriate
to value assets and liabilities on the assumption that there are
adequate resources to continue in business and meet obligations as
they fall due for the foreseeable future, being at least 12 months
from the date of signing this report, including in the event of the
run-off scenarios considered above. Accordingly, the going concern
basis has been adopted in the valuation of assets and
liabilities.
There are no new accounting standards or amendments to existing
accounting standards effective from 1 January 2020 that have an
impact on the Group.
The following new accounting standards, interpretations and
amendments to existing accounting standards in issue are being
assessed but have not yet been adopted by the Group:
-- IFRS 9, Financial Instruments.
Amendments to IFRS 4, Insurance Contracts, published in
September 2016 and adopted by the Group with effect from 1 January
2018, allowed the deferral of the application of IFRS 9 until
accounting periods commencing on 1 January 2021. This was intended
to align with the effective date of IFRS 17, the replacement
insurance contracts standard. In June 2020, the IASB issued a
further amendment to IFRS 4 to extend the deferral of the
application of IFRS 9 until accounting periods commencing on 1
January 2023, to align with the amended effective date of IFRS 17
also issued in June 2020. The option to defer the application of
IFRS 9, which the Group has continued to adopt for 2020, is subject
to meeting criteria relating to the predominance of insurance
activity. Eligibility for the deferral approach was based on an
assessment of the Group's liabilities as at 31 December 2016, the
end of the annual period during which the acquisition of
Partnership Assurance Group plc took place and the most recent
period of significant change in the magnitude of the Group's
activities. At this date the Group's liabilities connected with
insurance exceeded 90% of the carrying amount of the Group's total
liabilities. The Group's total liabilities were GBP22,283.9m and
liabilities connected with insurance in the statement of financial
position at this date primarily included insurance contracts within
the scope of IFRS 4 of GBP15,748.0m, investment contract
liabilities of GBP222.3m, and certain amounts within other
financial liabilities and insurance payables which arise in the
course of writing insurance business of GBP5,527.4m.
If the Group had adopted IFRS 9 it would continue to classify
financial assets at fair value through profit or loss. Therefore,
under IFRS 9 all financial assets would continue to be recognised
at fair value through profit or loss and the fair value at 31
December 2020 would be unchanged at GBP23,269.8m. As well as
financial assets, the Group also holds Insurance and other
receivables and Cash and cash equivalent assets, with contractual
terms that give rise to cash flows on specified dates; the fair
value of these investments is considered to be materially
consistent with their carrying value, as disclosed in notes 19 and
20.
IFRS 9 information relating to non-insurance entities within the
Group which have applied IFRS 9 can be found in the entities'
publicly available individual financial statements.
-- IFRS 17, Insurance Contracts (effective 1 January 2023, not yet endorsed by the EU).
IFRS 17 was issued in May 2017 with an effective date of 1
January 2021. In June 2020, the IASB issued an amended standard
which delayed the effective date to 1 January 2023. The amendments
issued in June 2020 aimed to assist entities implementing the
standard.
IFRS 17 provides a comprehensive approach for accounting for
insurance contracts including their valuation, income statement
presentation and disclosure. The Group initiated a project in 2017
to develop measurement and reporting systems and processes which
will apply to all of the Group's insurance business. The main
features of the standard applicable to annuities is the deferment
of premium revenues on the balance sheet and with revenue
recognition in the profit or loss account over the life of
contracts. The impact of IFRS 17 continues to be assessed but it is
anticipated there is likely to be a significant change relating to
the measurement and presentation of insurance contracts in the
Group's statutory reporting.
-- UK-adopted IFRS
As part of its exit from the European Union, the UK has been in
a transition period up to 31 December 2020. From 1 January 2021,
the Group is required to apply UK-adopted IFRS. In the short term,
UK and EU-adopted IFRS are expected to be identical as all existing
EU-adopted IFRS are brought into UK law and become UK-adopted IFRS
as at 31 December 2020. Going forwards any changes to IFRS will be
applied once adopted by the UK.
1.2 Significant accounting policies and the use of judgements,
estimates and assumptions
The preparation of financial statements requires the Group to
select accounting policies and make estimates and assumptions that
affect items reported in the Consolidated statement of
comprehensive income, Consolidated statement of financial position,
other primary statements and Notes to the consolidated financial
statements.
The major areas of judgement used as part of accounting policy
application are summarised below.
Accounting policy Item involving judgement Critical accounting judgement
================= ================================= =============================================
1.6 Classification of insurance Assessment of significance of insurance
and investment contracts risk transferred.
================= ================================= =============================================
1.18 Financial investments Classification of financial investments,
including assessment of market observability
of valuation inputs.
================= ================================= =============================================
1.18 Measurement of fair value The use of a variant of the Black-Scholes
of loans secured by residential option pricing formula with real world
mortgages, including measurement assumptions.
of the no-negative equity The measurement of the no-negative
guarantees equity guarantee underlying the fair
value of loans secured by mortgages
uses a variant of the Black-Scholes
option pricing formula, which has
been adapted to use real world assumptions
instead of risk neutral assumptions
due to the lack of relevant observable
market inputs to support a risk neutral
valuation approach. This approach
is in line with common industry practice
and there does not appear to be an
alternative approach that is widely
supported in the industry. We acknowledge
that there has been significant recent
academic and market debate concerning
the valuation of no-negative equity
guarantees and we intend to continue
to actively monitor this debate.
================= ================================= =============================================
All estimates are based on management's knowledge of current
facts and circumstances, assumptions based on that knowledge and
predictions of future events and actions. Actual results may differ
significantly from those estimates. Where relevant the impact of
COVID-19 has been considered and detail included in the relevant
note disclosures.
The table below sets out those items the Group considers
susceptible to changes in critical estimates and assumptions
together with the relevant accounting policy.
Accounting Item involving estimates Critical estimates and assumptions
policy and and assumptions
notes
============ ========================== ================================================
1.18, 17(a) Measurement of fair The critical estimates used in valuing
and (d) value of loans secured loans secured by residential mortgages
by residential mortgages, include the projected future receipts
including measurement of interest and loan repayments, and
of the no-negative the future costs of administering the
equity guarantees loan portfolio.
The key assumptions used as part of the
valuation calculation include future
property prices and their volatility,
mortality, the rate of voluntary redemptions
and the liquidity premium added to the
risk-free curve and used to discount
the mortgage cash flows.
Further details can be found in note
17 under 'Loans secured by residential
mortgages'.
============ ========================== ================================================
1.19, 23, 27 Measurement of reinsurance The critical estimates used in measuring
assets and deposits the value of reinsurance assets include
received from reinsurers the projected future cash flows arising
arising from reinsurance from reinsurers' share of the Group's
arrangements insurance liabilities.
The key assumptions used in the valuation
include discount rates and mortality
experience, as described below, and assumptions
around the reinsurers' ability to meet
its claim obligations.
Deposits received from reinsurers are
measured in accordance with the reinsurance
contract and taking account of an appropriate
discount rate for the timing of the expected
cash flows of the liabilities.
For deposits received from reinsurers
measured at fair value through profit
or loss, the key assumption used in the
valuation is the discount rate.
For deposits received from reinsurers
measured using insurance rules under
IFRS 4, the key assumptions used in the
valuation include discount rates and
mortality experience.
============ ========================== ================================================
1.22, 23(b) Measurement of insurance The critical estimates used in measuring
liabilities arising insurance liabilities include the projected
from writing Retirement future Retirement Income payments and
Income insurance the cost of administering payments to
policyholders.
The key assumptions are the discount
rates and mortality experience used in
the valuation of future Retirement Income
payments, and level and inflation of
costs of administration.
The valuation discount rates are derived
from yields on supporting assets after
deducting allowances for default. Mortality
assumptions are derived from the appropriate
standard mortality tables, adjusted to
reflect the future expected mortality
experience of the policyholders. Maintenance
expenses are determined from expense
analyses and are assumed to inflate at
market-implied rates.
Further detail can be found in note 23.
============ ========================== ================================================
1.3 Consolidation principles
The consolidated financial statements incorporate the assets,
liabilities, results and cash flows of the Company and its
subsidiaries.
Subsidiaries are those investees over which the Group has
control. The Group has control over an investee if all of the
following are met: (1) it has power over the investee; (2) it is
exposed, or has rights, to variable returns from its involvement
with the investee; and (3) it has the ability to use its power over
the investee to affect its own returns. Subsidiaries are
consolidated from the date on which control is transferred to the
Group and are excluded from consolidation from the date on which
control ceases. All inter-company transactions, balances and
unrealised surpluses and deficits on transactions between Group
companies are eliminated. Accounting policies of subsidiaries are
aligned on acquisition to ensure consistency with Group
policies.
The Group uses the acquisition method of accounting for business
combinations. Under this method, the cost of acquisition is
measured as the aggregate of the fair value of the consideration at
date of acquisition and the amount of any non-controlling interest
in the acquiree. The excess of the consideration transferred over
the identifiable net assets acquired is recognised as goodwill. The
Group uses the equity method to consolidate its investments in
joint ventures and associates. Under the equity method of
accounting the investment is initially recognised at fair value and
adjusted thereafter for the post-acquisition change in the Group's
share of net assets of the joint ventures and associates.
1.4 Segments
The Group's segmental results are presented on a basis
consistent with internal reporting used by the Chief Operating
Decision Maker ("CODM") to assess the performance of operating
segments and the allocation of resources. The CODM has been
identified as the Group Executive Committee.
The internal reporting used by the CODM includes product
information (which comprises analysis of product revenues, LTM
advances and amounts written under investment contracts) and
information on adjusted operating profit and profit before tax for
the Group's operating segments.
Product information is analysed by product line and includes DB,
GIfL, Care Plans, Protection, LTM and Capped Drawdown products.
An operating segment is a component of the Group that engages in
business activities from which it earns revenues and incurs
expenses.
The operating segments from which the Group derives revenues and
incurs expenses are as follows:
-- the writing of insurance products for distribution to the at-
or in-retirement market, which is undertaken through the activities
of the life company (this is referred to as the insurance segment
in note 7, Segmental reporting);
-- the arranging of guaranteed income for life contracts and
lifetime mortgages through regulated advice and intermediary
services; and
-- the provision of licensed software to financial advisers,
banks, building societies, life assurance companies and pension
trustees.
Operating segments, where certain materiality thresholds in
relation to total results from operating segments are not exceeded,
are combined when determining reportable segments. For segmental
reporting, the arranging of guaranteed income for life contracts,
providing intermediary mortgage advice and arranging, plus the
provision of licensed software, are included in the Other segment
along with Group activities, such as capital and liquidity
management, and investment activities.
The information on adjusted operating profit and profit before
tax used by the CODM is presented on a combined product basis
within the insurance operating segment and is not analysed further
by product.
1.5 Foreign currencies
Transactions in foreign currencies are translated to sterling at
the rates of exchange ruling at the date of the transaction.
Monetary assets and liabilities denominated in foreign currencies
are translated into sterling at the rates of exchange ruling at the
end of the financial year. Foreign exchange gains and losses
resulting from the settlement of such transactions and from the
translation of monetary assets and liabilities denominated in
foreign currencies are recognised in profit or loss.
The assets and liabilities of foreign operations are translated
to sterling at the rates of exchange at the reporting date. The
revenues and expenses are translated to sterling at the average
rates of exchange for the year. Foreign exchange differences
arising on translation to sterling are accounted for through other
comprehensive income.
1.6 Classification of insurance and investment contracts
The measurement and presentation of assets, liabilities, income
and expenses arising from life and pensions business contracts
issued and associated reinsurance contracts held is dependent upon
the classification of those contracts as either insurance or
investment contracts.
A contract is classified as insurance only if it transfers
significant insurance risk. Insurance risk is significant if an
insured event could cause an insurer to pay significant additional
benefits to those payable if no insured event occurred. A contract
that is classified as an insurance contract remains an insurance
contract until all rights and obligations are extinguished or
expire.
Any contracts not considered to be insurance contracts under
IFRS are classified as investment contracts. Capped Drawdown
pension business and Flexible Pension Plan contracts are classified
as investment contracts as there is no transfer of longevity risk
due to the fixed term and unit-linked natures of these respective
contracts.
1.7 Premium revenue
Premium revenue in respect of individual GIfL contracts is
accounted for when the premiums are received, which coincides with
when the liability to pay the GIfL contract is established.
Premium revenue in respect of Defined Benefit De-risking
contracts is accounted for when the Company becomes "on risk",
which is the date from which the policy is effective. If a timing
difference occurs between the date from which the policy is
effective and the receipt of payment, the amount due for payment
but not yet received is recognised as a receivable in the
Consolidated statement of financial position.
Premium revenue in respect of Care Plans and Protection policies
is recognised in the accounting period in which the insurance
contract commences.
Facilitated adviser charges are not accounted for within premium
revenue, and do not represent a charge on the Group.
Deposits collected under investment contracts are not accounted
for through the Consolidated statement of comprehensive income,
except for fee income and attributable investment income, but are
accounted for directly through the Consolidated statement of
financial position as an adjustment to the investment contract
liability.
Reinsurance premiums payable in respect of reinsurance treaties
are accounted for when the reinsurance premiums are due for payment
under the terms of the contract. Reinsurance premiums previously
incurred can be recaptured under certain conditions, notably once
reinsurance financing for an underwriting year is fully repaid.
1.8 Net investment income
Investment income consists of interest receivable for the year
and realised and unrealised gains and losses on financial assets
and liabilities at fair value through profit or loss.
Interest income is recognised as it accrues.
Realised gains and losses on financial assets and liabilities
occur on disposal or transfer and represent the difference between
the proceeds received net of transaction costs, and the original
cost.
Unrealised gains and losses arising on financial assets and
liabilities represent the difference between the carrying value at
the end of the year and the carrying value at the start of the year
or purchase value during the year, less the reversal of previously
recognised unrealised gains and losses in respect of disposals made
during the year.
1.9 Revenue from contracts with customers
The Group recognises revenue from contracts with customers in
accordance with IFRS 15, in an amount that reflects the
consideration to which the Group expects to be entitled in exchange
for the services provided. Revenue from contracts with customers
comprises fee income on initial advances made on loans secured by
residential mortgages, investment management fees, administration
fees, software licensing fees and commission.
1.10 Claims paid
Policyholder benefits are accounted for when due for payment.
Reinsurance paid claim recoveries are accounted for in the same
period as the related claim.
Death claims are accounted for when notified.
1.11 Acquisition costs
Acquisition costs comprise direct costs such as commission and
indirect costs of obtaining and processing new business.
Acquisition costs are not deferred as they relate to single premium
business.
1.12 Leases
At inception of a contract, the Group assesses whether a
contract is, or contains, a lease. A contract is, or contains, a
lease if the contract involves the use of an identified asset and
conveys the right to control the use of the asset for a period of
time in exchange for consideration.
Where the Group is a lessee, a right-of-use asset and a lease
liability are recognised at the commencement date of the lease. The
right-of-use asset is initially measured at cost, which comprises
the amount of lease liability, any lease payments made at or before
the commencement date, any initial direct costs incurred and an
estimate of the costs to dismantle and remove the underlying asset
or to restore the underlying asset or site on which it is located,
less any lease incentives received. The lease liability is
initially measured at the present value of the lease payments that
are not paid at the commencement date, discounted using the
interest rate implicit in the lease or, if that rate cannot be
readily determined, the Group's incremental borrowing rate. The
Group generally uses its incremental borrowing rate as the discount
rate.
The right-of-use asset is subsequently depreciated using the
straight-line method from the commencement date to the earlier of
the end of the useful life of the right-of-use asset or the end of
the lease term. The carrying amount of the right-of-use asset is
reduced by any impairment losses and adjusted for certain
remeasurements of the lease liability.
The lease liability is subsequently measured at amortised cost
using the effective interest method. It is remeasured to reflect
any lease modifications or reassessments.
The Group presents its right-of-use assets in "Property, plant
and equipment" in the Consolidated statement of financial
position.
The Group has elected not to recognise right-of-use assets and
lease liabilities for short-term leases that have a lease term of
12 months or less and leases of low-value assets. The Group
recognises the lease payments associated with these leases as an
expense on a straight-line basis over the lease term.
Where the Group is a lessor, which is the case when it sub-lets
leased properties to a third party, the leases are classified as
finance leases because substantially all the risks and rewards of
ownership of the underlying assets are transferred to the third
party. The right-of-use asset is derecognised and a lease
receivable from the third party is recognised. Income from the
sublease and interest on the original lease are recognised in the
Consolidated statement of comprehensive income.
1.13 Finance costs
Finance costs on deposits received from reinsurers are
recognised as an expense in the period in which they are incurred.
Interest on reinsurance financing is accrued in accordance with the
terms of the financing arrangements.
Interest on loans and borrowings is accrued in accordance with
the terms of the loan agreement. Loan issue costs are capitalised
and amortised on a straight-line basis over the term of the loan
issued. Interest expense is calculated using the effective interest
rate method.
1.14 Employee benefits
Defined contribution plans
The Group operates a defined contribution pension scheme. The
assets of the scheme are held separately from those of the Group in
funds managed by a third party. Obligations for contributions to
the defined contribution pension scheme are recognised as an
expense in profit or loss when due.
Share-based payment transactions
Equity-settled share-based payments to employees are measured at
the fair value of the equity instruments at grant date, determined
using stochastic and scenario-based modelling techniques where
appropriate. The fair value is expensed in the Consolidated
statement of comprehensive income on a straight-line basis over the
vesting period, with a corresponding credit to equity, based on the
Group's estimate of the equity instruments that will eventually
vest. At each balance sheet date, the Group revises its estimate of
the number of equity instruments that will eventually vest as a
result of changes in non-market-based vesting conditions, and
recognises the impact of the revision of original estimates in the
Consolidated statement of comprehensive income over the remaining
vesting period, with a corresponding adjustment to equity. Where a
leaver is entitled to their scheme benefits, this is treated as an
acceleration of the vesting in the period they leave. Where a
scheme is modified before it vests, any change in fair value as a
result of the modification is recognised over the remaining vesting
period. Where a scheme is cancelled, this is treated as an
acceleration in the period of the vesting of all remaining
options.
1.15 Earnings per share
Basic earnings per share is calculated by dividing the profit
attributable to equity holders of the Company by the
weighted-average number of ordinary shares outstanding during the
year. The calculation of the weighted-average number of ordinary
shares excludes ordinary shares held in trusts on behalf of
employee share schemes.
For diluted earnings per share, the weighted-average number of
ordinary shares outstanding during the year, excluding ordinary
shares held in trusts on behalf of employee share schemes, is
adjusted to assume conversion of potential ordinary shares, such as
share options granted to employees, if their conversion would
dilute earnings per share.
1.16 Intangible assets
Intangible assets consist of goodwill, which is deemed to have
an indefinite useful life, Purchased Value of In-Force ("PVIF"),
brand and purchased and internally developed software (including
PrognoSys(TM)), which are deemed to have finite useful lives.
Goodwill represents the excess of the cost of an acquisition
over the fair value of the Group's share of the net assets of the
acquired subsidiary and represents the future economic benefit
arising from assets that are not capable of being individually
identified and separately recognised. Goodwill is measured at
initial value less any accumulated impairment losses. Goodwill is
not amortised, but assessed for impairment annually or when
circumstances or events indicate there may be uncertainty over the
carrying value.
For the purpose of impairment testing, goodwill has been
allocated to cash-generating units and an impairment is recognised
when the carrying value of the cash-generating unit exceeds its
recoverable amount. Impairment losses are recognised directly in
the Consolidated statement of comprehensive income and are not
subsequently reversed.
Other intangible assets are recognised if it is probable that
the relevant future economic benefits attributable to the asset
will flow to the Group, and are measured at cost less accumulated
amortisation and any impairments.
PVIF, representing the present value of future profits from the
purchased in-force business, is recognised upon acquisition and is
amortised over its expected remaining economic life up to 16 years
on a straight-line basis. PVIF is within the scope of IFRS 4.
PrognoSys(TM) is the Group's proprietary underwriting engine.
The Group has over two million person-years of experience collected
over 20 years of operations. It is enhanced by an extensive breadth
of external primary and secondary healthcare data and medical
literature.
Costs that are directly associated with the production of
identifiable and unique software products controlled by the Group
are capitalised and recognised as an intangible asset. Direct costs
include the incremental software development team's employee costs.
All other costs associated with researching or maintaining computer
software programmes are recognised as an expense as incurred.
Intangible assets with finite useful lives are amortised on a
straight-line basis over their useful lives, which range from two
to 16 years. The useful lives are determined by considering
relevant factors, such as usage of the asset, potential
obsolescence, competitive position and stability of the
industry.
For intangible assets with finite useful lives, impairment
testing is performed where there is an indication that the carrying
value of the assets may be subject to an impairment. An impairment
loss is recognised where the carrying value of an intangible asset
exceeds its recoverable amount.
The significant intangible assets recognised by the Group, their
useful economic lives and the methods used to determine the cost of
intangibles acquired in a business combination are as follows:
Estimated useful Valuation method
Intangible asset economic life
===================== ================ =======================================
PVIF Up to 16 years Estimated value in-force using European
embedded value model
===================== ================ =======================================
Brand 2 - 5 years Estimated royalty stream if the rights
were to be licensed
===================== ================ =======================================
Distribution network 3 years Estimated discounted cash flow
===================== ================ =======================================
Software 2 - 3 years Estimated replacement cost
===================== ================ =======================================
Intellectual property 12 - 15 years Estimated replacement cost
===================== ================ =======================================
The useful economic lives of intangible assets recognised by the
Group other than those acquired in a business combination are as
follows:
Intangible asset Estimated useful economic life
================ ==============================
PrognoSys(TM) 12 years
================ ==============================
Software 3 years
================ ==============================
1.17 Property, plant and equipment
Land and buildings are measured at their revalued amounts less
subsequent depreciation, and impairment losses are recognised at
the date of revaluation. Valuations are performed with sufficient
frequency to ensure that the fair value of the revalued asset does
not differ materially from its carrying value.
A revaluation surplus is recognised in other comprehensive
income and credited to the revaluation reserve in equity. However,
to the extent that it reverses a revaluation deficit of the same
asset previously recognised in profit or loss, the increase is
recognised in profit or loss. A revaluation deficit is recognised
in profit or loss, except to the extent that it offsets an existing
surplus on the same asset recognised in the revaluation
reserve.
Buildings are depreciated on a straight-line basis over the
estimated useful lives of the buildings of 25 years.
Equipment is stated at cost less accumulated depreciation and
impairment losses. Depreciation is calculated on a straight-line
basis to write down the cost to residual value over the estimated
useful lives as follows:
Plant and equipment Estimated useful economic life
====================== ==============================
Computer equipment 3 - 4 years
====================== ==============================
Furniture and fittings 2 - 10 years
====================== ==============================
1.18 Financial investments
Classification
The Group classifies financial investments in accordance with
IAS 39 whereby, subject to specific criteria, they are accounted
for at fair value through profit and loss. This comprises assets
designated by management as fair value through profit or loss on
inception, as they are managed on a fair value basis, and
derivatives that are classified as held for trading. These
investments are measured at fair value with all changes thereon
being recognised in investment income in the Consolidated statement
of comprehensive income.
Purchases and sales of investments are recognised on the trade
date, which is the date that the Group commits to purchase or sell
the assets. Amounts payable or receivable on unsettled purchases or
sales are recognised in other payables or other receivables
respectively. Transaction costs are expensed through profit or
loss.
Loans secured by residential mortgages are recognised when cash
is advanced to borrowers.
The Group receives and pledges collateral in the form of cash or
securities in respect of derivative, reinsurance or other contracts
such as securities lending. Collateral received is recognised as an
asset in the Consolidated statement of financial position with a
corresponding liability for the repayment in other financial
liabilities and collateral pledged is recognised in the
Consolidated statement of financial position within the appropriate
asset classification when the collateral is controlled by the Group
and receives the economic benefit.
Derivatives are recognised at fair value through profit or loss.
All derivatives are carried as assets when the fair value is
positive and liabilities when the fair values are negative. The
Group does not use hedge accounting.
The Group's policy is to derecognise financial investments when
it is deemed that substantially all the risks and rewards of
ownership have been transferred.
Use of fair value
The Group uses current bid prices to value its investments with
quoted prices. Actively traded investments without quoted prices
are valued using prices provided by third parties. If there is no
active established market for an investment, the Group applies an
appropriate valuation technique such as discounted cash flow
analysis, or option pricing models for derivatives.
Determining the fair value of financial investments when the
markets are not active
The Group holds certain financial investments for which the
markets are not active. These comprise financial investments which
are not quoted in active markets and include loans secured by
residential mortgages, derivatives and other financial investments
for which markets are not active. When the markets are not active,
there is generally no or limited observable market data that can be
used in the fair value measurement of the financial investments.
The determination of whether an active market exists for a
financial investment requires management's judgement.
If the market for a financial investment of the Group is not
active, the fair value is determined using valuation techniques.
The Group establishes fair value for these financial investments by
using quotations from independent third parties or internally
developed pricing models. The valuation technique is chosen with
the objective of arriving at a fair value measurement which
reflects the price at which an orderly transaction would take place
between market participants on the measurement date. The valuation
techniques include the use of recent arm's length transactions,
reference to other instruments that are substantially the same, and
discounted cash flow analysis. The valuation techniques may include
a number of assumptions relating to variables such as credit risk
and interest rates and, for loans secured by mortgages, mortality,
future expenses, voluntary redemptions and house price assumptions.
Changes in assumptions relating to these variables impact the
reported fair value of these financial instruments positively or
negatively.
The financial investments measured at fair value are classified
into the following three-level hierarchy on the basis of the lowest
level of inputs that are significant to the fair value measurement
of the financial investment concerned:
Level 1: Quoted price (unadjusted) in active markets for
identical assets and liabilities;
Level 2: Inputs other than quoted prices included within Level 1
that are observable either directly or indirectly (i.e. derived
from prices); and
Level 3: Significant inputs for the asset or liability that are
not based on observable market data (unobservable inputs).
1.19 Reinsurance
Reinsurance assets
Amounts recoverable from reinsurers are measured in a consistent
manner with insurance liabilities or relevant financial liabilities
and are classified as reinsurance assets. If a reinsurance asset is
impaired, the carrying value is reduced accordingly and that
impairment loss is recognised in the Consolidated statement of
comprehensive income.
Financial liabilities
Where reinsurance contracts entered into by the Group are
structured to provide financing, with financing components to be
repaid in future years, such amounts are classified as "reinsurance
finance" and included in other financial liabilities in the
Consolidated statement of financial position.
Where reinsurance contracts entered into by the Group require
deposits received from reinsurers to be repaid, such amounts are
classified as "deposits received from reinsurers" and included in
other financial liabilities in the Consolidated statement of
financial position. Where the liability carries no insurance risk,
it is initially recognised at fair value at the date the deposited
asset is recognised and subsequently re-measured at fair value at
each balance sheet date. The resulting gain or loss is recognised
in the Consolidated statement of comprehensive income. Fair value
is determined as the amount payable discounted from the first date
that the amount is required to be paid.
All other deposits received from reinsurers are valued in
accordance with the terms of the reinsurance contracts under IFRS
4, which take into account an appropriate discount rate for the
timing of expected cash flows. It should be noted that the
reinsurance recoverable amount is set equal to the value of the
deposit in line with the financing nature of this reinsurance and
anticipating that underwriting years will eventually be recaptured.
See note 29 for further information on reinsurance recaptures.
Amounts receivable/payable
Where reinsurance contracts the Group has entered into include
longevity swap arrangements, such contracts are settled on a net
basis and amounts receivable from or payable to the reinsurers are
included in the appropriate heading under either Insurance and
other receivables or Insurance and other payables.
1.20 Cash and cash equivalents
Cash and cash equivalents consist of cash at bank and in hand,
deposits held at call with banks, and other short-term highly
liquid investments with less than 90 days' maturity from the date
of acquisition.
1.21 Equity
The difference between the proceeds received on issue of the
shares, net of share issue costs, and the nominal value of the
shares issued is credited to the share premium account.
Interim dividends are recognised in equity in the year in which
they are paid. Final dividends are recognised when they have been
approved by shareholders.
Where the Company purchases shares for the purposes of employee
incentive plans, the consideration paid, net of issue costs, is
deducted from equity. Upon issue or sale, any consideration
received is credited to equity net of related costs.
The reserve arising on the reorganisation of the Group
represents the difference in the value of the shares in the Company
and the value of shares in Just Retirement Group Holdings Limited
for which they were exchanged as part of the Group reorganisation
in November 2013.
1.22 Insurance liabilities
Measurement
Long-term insurance liabilities arise from the Group writing
Retirement Income contracts, including Defined Benefit De-risking
Solutions, long-term care insurance, and whole of life and term
protection insurance. Their measurement uses estimates of projected
future cash flows arising from payments to policyholders plus the
costs of administering them. This is in accordance with the SORP on
Accounting for Insurance Business issued by the ABI in December
2005 (amended in December 2006) and withdrawn with effect for
accounting periods beginning on or after 1 January 2015, but which
continues to apply to the Group as the grandfathered existing
accounting policy under IFRS 4. Valuation of insurance liabilities
is derived using discount rates, adjusted for default allowance,
and mortality assumptions, taken from the appropriate mortality
tables and adjusted to reflect actual and expected experience. The
assumptions in the valuation are set on a prudent basis.
Liability adequacy test
The Group performs adequacy testing on its insurance liabilities
to ensure the carrying amount is sufficient to cover the current
estimate of future cash flows. Any deficiency is immediately
charged to the Consolidated statement of comprehensive income.
1.23 Investment contract liabilities
Investment contracts are measured at fair value through profit
or loss in accordance with IAS 39. The fair value of investment
contracts is estimated using an internal model and determined on a
policy-by-policy basis using a prospective valuation of future
Retirement Income benefit and expense cash flows.
1.24 Loans and borrowings
Loans and borrowings are initially recognised at fair value, net
of transaction costs, and subsequently amortised through profit or
loss over the period to maturity at the effective rate of interest
required to recognise the discounted estimated cash flows to
maturity.
1.25 Other provisions
Provisions are recognised when the Group has a present legal or
constructive obligation as a result of past events, it is probable
that an outflow of economic benefits will be required to settle the
obligation, and a reliable estimate of the amount of the obligation
can be made. The amount recorded as a provision is the best
estimate of the expenditure required to settle the obligation at
the balance sheet date. Where the effect of the time value of money
is material, the provision is the present value of the expected
expenditure.
1.26 Taxation
The current tax expense is based on the taxable profits for the
year, using tax rates substantively enacted at the Consolidated
statement of financial position date, and after any adjustments in
respect of prior years. Tax, including tax relief for losses if
applicable, is allocated over profits before taxation and amounts
charged or credited to components of other comprehensive income and
equity as appropriate.
Provision is made for deferred tax liabilities, or credit taken
for deferred tax assets, using the liability method, on all
material temporary differences between the tax bases of assets and
liabilities and their carrying amounts in the consolidated
financial statements. The principal temporary differences arise
from the revaluation of certain financial assets and liabilities,
including technical provisions and other insurance items and tax
losses carried forward, and include amortised transitional tax
adjustments resulting from changes in tax basis.
Deferred tax assets are recognised to the extent that it is
probable that future taxable profit will be available against which
the temporary differences can be utilised.
2 Prior year Restatement
A reclassification has been made regarding the presentation of
the Group's longevity reinsurance swaps at 31 December 2019 and 1
January 2019. The longevity swaps relate to DB, GIfL and Care
business in Just Retirement Limited. Under the swap arrangements
the Group is committed to pay the reinsurer a schedule of fixed
payments for each relevant scheme and the reinsurer undertakes to
reimburse the actual cost of the claims to the Group. The Group's
policy is to recognise claim recoveries on longevity swap contracts
as the net amounts due as a result of comparing the actual payments
made to policyholders with the fixed contractual payments where
settlement of the contract is on a net basis. Reinsurance premium
expenses represent swap management fees and are included under
Outward reinsurance premiums. Reinsurance assets and Reinsurance
liabilities are recognised on a net basis where the Group has legal
right of set-off. Amounts receivable from or payable to reinsurers
are recognised on a net basis and included under the appropriate
heading under Insurance and other receivables or Insurance and
other payables. At 31 December 2019 and 1 January 2019 the
longevity swaps showed a liability position which was reported as a
reduction to reinsurance assets. However, the Group does not have a
legal right of set-off against other reinsurance assets in respect
of these liabilities, since the longevity reinsurance swaps are
held with different counterparties to those of the reinsurance
assets. Accordingly, in line with the requirements of IAS 32,
Financial instruments: Presentation, these balances have been
reclassified to reinsurance liabilities on the face of the
Statement of Financial Position at 31 December 2019 and at 1
January 2019. The impact of this reclassification at 31 December
2019 is an increase to reinsurance assets of GBP128.6m and an
increase to reinsurance liabilities of the same amount. There is no
impact to total equity or to comprehensive income (1 January 2019:
increase to reinsurance assets of GBP111.6m and increase to
reinsurance liabilities of the same amount, no impact to total
equity or to comprehensive income).
3 Net investment income
Year ended Year ended
31 December 31 December
2020 2019
GBPm GBPm
======================================================= ============ ============
Interest income:
======================================================= ============ ============
Assets at fair value through profit or loss 631.7 663.0
======================================================= ============ ============
Movement in fair value:
======================================================= ============ ============
Financial assets and liabilities designated on initial
recognition at fair value through profit or loss 818.3 658.8
======================================================= ============ ============
Derivative financial instruments (note 28) 327.7 129.9
======================================================= ============ ============
Total net investment income 1,777.7 1,451.7
======================================================= ============ ============
4 Acquisition costs
Year ended Year ended
31 December 31 December
2020 2019
GBPm GBPm
=========================== ============ ============
Commission 14.9 14.8
=========================== ============ ============
Other acquisition expenses 29.6 20.4
=========================== ============ ============
Total acquisition costs 44.5 35.2
=========================== ============ ============
5 Other operating expenses
Year ended Year ended
31 December 31 December
2020 2019
GBPm GBPm
============================================== ============ ============
Personnel costs (note 10) 107.5 108.0
============================================== ============ ============
Investment expenses and charges 17.5 13.9
============================================== ============ ============
Depreciation of property, plant and equipment 3.9 4.5
============================================== ============ ============
Amortisation of intangible assets 19.9 19.9
============================================== ============ ============
Impairment of property, plant and equipment - 4.0
============================================== ============ ============
Impairment of intangible assets 1.1 -
============================================== ============ ============
Other costs 70.0 77.5
============================================== ============ ============
Total other operating expenses 219.9 227.8
============================================== ============ ============
Other costs include reassurance management fees, professional
fees, IT and marketing costs.
Reconciliation of Other operating expenses to Management
expenses
Year ended Year ended
31 December 31 December
2020 2019
GBPm GBPm
=========================================== ============ ============
Total other operating expenses 219.9 227.8
=========================================== ============ ============
Investment expenses and charges (17.5) (13.9)
=========================================== ============ ============
Reassurance management fees (22.2) (26.1)
=========================================== ============ ============
Amortisation of acquired intangible assets (18.0) (18.8)
=========================================== ============ ============
Other costs (2.9) -
=========================================== ============ ============
Total management expenses 159.3 169.0
=========================================== ============ ============
During the year the following services were provided by the
Group's auditor at costs as detailed below:
Year ended Year ended
31 December 31 December
2020 2019
GBP000 GBP000
================================================================== ============ ============
Fees payable for the audit of the Parent Company and consolidated
accounts 540 250
================================================================== ============ ============
Fees payable for other services:
================================================================== ============ ============
The audit of the Company's subsidiaries pursuant to legislation 1,618 950
================================================================== ============ ============
Corporate finance services - 95
================================================================== ============ ============
Audit-related assurance services 842 710
================================================================== ============ ============
Other assurance services 65 218
================================================================== ============ ============
Other non-audit services not covered above 1 -
================================================================== ============ ============
Auditor remuneration 3,066 2,223
================================================================== ============ ============
Fees payable to other audit firms:
================================================================== ============ ============
The audit of the Company's subsidiaries pursuant to legislation 60 -
================================================================== ============ ============
Corporate finance services 146 -
================================================================== ============ ============
Total 3,272 2,223
================================================================== ============ ============
Audit-related assurance services mainly include fees relating to
the audit of the Group's Solvency II regulatory returns. Other
assurance services mainly include fees relating to review
procedures in relation to the Group's interim results. Corporate
finance services relate to due diligence and reporting accountant
services. The fees payable to other audit firms during 2020 noted
above relate to GBP60,000 paid to KPMG in relation to the 2020
audit of the Group's South African subsidiaries and GBP146,000 paid
to KPMG in relation to corporate finance services carried out
during 2019.
6 Finance costs
Year ended Year ended
31 December 31 December
2020 2019
GBPm GBPm
====================================================== ============ ============
Interest payable on deposits received from reinsurers 107.7 139.0
====================================================== ============ ============
Interest payable on subordinated debt 47.3 44.0
====================================================== ============ ============
Other interest payable 4.0 3.7
====================================================== ============ ============
Total finance costs 159.0 186.7
====================================================== ============ ============
The interest payable on deposits received from reinsurers is as
defined by the respective reinsurance treaties and calculated with
reference to the risk-adjusted yield on the relevant backing asset
portfolio.
7 Segmental reporting
Adjusted operating profit
The Group reports adjusted operating profit as an alternative
measure of profit which is used for decision making and performance
measurement. The Board believes that adjusted operating profit,
which excludes effects of short-term economic and investment
changes, provides a better view of the longer-term performance and
development of the business and aligns with the longer-term nature
of the products. The underlying operating profit represents a
combination of both the profit generated from new business written
in the year and profit expected to emerge from the in-force book of
business based on current assumptions. Actual operating experience,
where different from that assumed at the start of the year, and the
impacts of changes to future operating assumptions applied in the
year, are then also included in arriving at adjusted operating
profit.
New business profits represent expected investment returns on
financial instruments backing shareholder and policyholder funds
after allowances for expected movements in liabilities and
acquisition costs. Profits arising from the in-force book of
business represent the expected return on surplus assets, the
expected unwind of prudent reserves above best estimates for
mortality, expenses, corporate bond defaults and, with respect to
lifetime mortgages, no-negative equity guarantee and early
redemptions.
Adjusted operating profit excludes the impairment and
amortisation of goodwill and other intangible assets arising on
consolidation, non-recurring and project expenditure,
implementation costs for cost-saving initiatives, and investment
and economic profits, since these items arise outside the normal
course of business in the year. Adjusted operating profit also
excludes exceptional items. Exceptional items are those items that,
in the Directors' view, are required to be separately disclosed by
virtue of their nature or incidence to enable a full understanding
of the Group's financial performance.
Variances between actual and expected investment returns due to
economic and market changes, and gains and losses on the
revaluation of land and buildings, are also disclosed outside
adjusted operating profit.
Segmental analysis
The insurance segment writes insurance products for the
retirement market - which include Guaranteed Income for Life
Solutions, Defined Benefit De-risking Solutions, Care Plans,
Flexible Pension Plans and Protection - and invests the premiums
received from these contracts in debt securities, gilts, liquidity
funds and Lifetime Mortgage advances.
The professional services business, HUB, is included with other
corporate companies in the Other segment. This business is not
currently sufficiently significant to separate from other
companies' results. The Other segment also includes the Group's
corporate activities that are primarily involved in managing the
Group's liquidity, capital and investment activities.
The Group operates in one material geographical segment, which
is the United Kingdom.
Segmental reporting and reconciliation to financial
information
Year ended 31 December Year ended 31 December
2020 2019
========================================= ========================== ==========================
Insurance Other Total Insurance Other Total
GBPm GBPm GBPm GBPm GBPm GBPm
========================================= ========== ====== ====== ========== ====== ======
New business operating profit 199.2 - 199.2 182.0 - 182.0
========================================= ========== ====== ====== ========== ====== ======
In-force operating profit 96.8 1.0 97.8 82.6 1.8 84.4
========================================= ========== ====== ====== ========== ====== ======
Underlying operating profit 296.0 1.0 297.0 264.6 1.8 266.4
========================================= ========== ====== ====== ========== ====== ======
Operating experience and assumption
changes 46.2 - 46.2 42.2 - 42.2
========================================= ========== ====== ====== ========== ====== ======
Other Group companies' operating
results - (17.1) (17.1) - (13.1) (13.1)
========================================= ========== ====== ====== ========== ====== ======
Development expenditure (5.9) (1.4) (7.3) (7.1) (3.2) (10.3)
========================================= ========== ====== ====== ========== ====== ======
Reinsurance and financing costs (79.5) - (79.5) (61.5) (5.1) (66.6)
========================================= ========== ====== ====== ========== ====== ======
Adjusted operating profit before
tax 256.8 (17.5) 239.3 238.2 (19.6) 218.6
========================================= ========== ====== ====== ========== ====== ======
Non-recurring and project expenditure (7.1) (5.6) (12.7) (3.8) (4.5) (8.3)
========================================= ========== ====== ====== ========== ====== ======
Implementation of cost saving
initiatives (7.8) (0.7) (8.5) (13.3) (0.2) (13.5)
========================================= ========== ====== ====== ========== ====== ======
Investment and economic profits/(losses) 9.4 (0.9) 8.5 173.7 0.1 173.8
========================================= ========== ====== ====== ========== ====== ======
Interest adjustment to reflect
IFRS accounting for Tier 1 notes
as equity 28.1 - 28.1 14.0 2.8 16.8
========================================= ========== ====== ====== ========== ====== ======
Profit/(loss) before amortisation
costs and tax 279.4 (24.7) 254.7 408.8 (21.4) 387.4
========================================= ========== ====== ====== ========== ====== ======
Amortisation costs (18.0) (18.8)
========================================= ========== ====== ====== ========== ====== ======
Profit/(loss) before tax 236.7 368.6
========================================= ========== ====== ====== ========== ====== ======
Segmental revenue
All net premium revenue arises from the Group's insurance
segment. Net investment income of GBP1,777.6m arose from the
insurance segment and GBP0.1m arose from other segments (2019:
GBP1,450.2m and GBP1.5m respectively). Segmental fee and commission
income is presented in the disaggregation of fees and other income
below.
Product information analysis
Additional analysis relating to the Group's products is
presented below. The Group's products are from one material
geographical segment, which is the United Kingdom. The Group's
gross premiums written, as shown in the Consolidated statement of
comprehensive income, is analysed by product below:
Year ended Year ended
31 December 31 December
2020 2019
GBPm GBPm
============================================== ============ ============
Defined Benefit De-risking Solutions ("DB") 1,507.9 1,231.3
============================================== ============ ============
Guaranteed Income for Life contracts ("GIfL") 585.9 615.7
============================================== ============ ============
Care Plans ("CP") 51.5 71.1
============================================== ============ ============
Protection 2.5 2.9
============================================== ============ ============
Gross premiums written 2,147.8 1,921.0
============================================== ============ ============
Drawdown and Lifetime Mortgages ("LTM") products are accounted
for as investment contracts and financial investments respectively
in the statement of financial position. An analysis of the amounts
advanced during the year for these products is shown below:
Year ended Year ended
31 December 31 December
2020 2019
GBPm GBPm
================================================ ============ ============
Drawdown deposits and other investment products 1.0 26.7
================================================ ============ ============
LTM loans advanced 511.7 415.8
================================================ ============ ============
Reconciliation of gross premiums written to Retirement Income
sales
Year ended Year ended
31 December 31 December
2020 2019
GBPm GBPm
========================================================= ============ ============
Gross premiums written 2,147.8 1,921.0
========================================================= ============ ============
Protection sales not included in Retirement Income sales (2.5) (2.9)
========================================================= ============ ============
Retirement Income sales 2,145.3 1,918.1
========================================================= ============ ============
Disaggregation of fees and other income
Year ended 31 December Year ended 31 December
2020 2019
====================================== =========================== ===========================
Insurance Other Total Insurance Other Total
GBPm GBPm GBPm GBPm GBPm GBPm
====================================== =========== ====== ====== =========== ====== ======
Product/service
====================================== =========== ====== ====== =========== ====== ======
LTM set-up fees - - - 0.2 - 0.2
====================================== =========== ====== ====== =========== ====== ======
LTM commission and advice fees - 2.1 2.1 - 1.7 1.7
====================================== =========== ====== ====== =========== ====== ======
GIfL commission - 4.5 4.5 - 4.4 4.4
====================================== =========== ====== ====== =========== ====== ======
FPP fees - - - 0.7 0.2 0.9
====================================== =========== ====== ====== =========== ====== ======
DB fees - - - 0.6 - 0.6
====================================== =========== ====== ====== =========== ====== ======
Other 2.3 2.8 5.1 0.5 4.4 4.9
====================================== =========== ====== ====== =========== ====== ======
2.3 9.4 11.7 2.0 10.7 12.7
====================================== =========== ====== ====== =========== ====== ======
Timing of revenue recognition
====================================== =========== ====== ====== =========== ====== ======
Products transferred at point in
time 2.3 9.0 11.3 1.3 10.3 11.6
====================================== =========== ====== ====== =========== ====== ======
Products and services transferred
over time - 0.4 0.4 0.7 0.4 1.1
====================================== =========== ====== ====== =========== ====== ======
Revenue from contracts with customers 2.3 9.4 11.7 2.0 10.7 12.7
====================================== =========== ====== ====== =========== ====== ======
All revenue from contracts with customers is from the UK.
8 Income tax
Income tax recognised in profit or loss
Year ended Year ended
31 December 31 December
2020 2019
GBPm GBPm
================================================== ============ ============
Current taxation
================================================== ============ ============
Current year 46.6 67.9
================================================== ============ ============
Adjustments in respect of prior periods 1.0 (2.9)
================================================== ============ ============
Total current tax 47.6 65.0
================================================== ============ ============
Deferred taxation
================================================== ============ ============
Origination and reversal of temporary differences (4.0) 1.8
================================================== ============ ============
Adjustments in respect of prior periods (0.9) (0.5)
================================================== ============ ============
Rate change 1.5 (0.1)
================================================== ============ ============
Total deferred tax (3.4) 1.2
================================================== ============ ============
Total income tax recognised in profit or loss 44.2 66.2
================================================== ============ ============
The current taxation adjustment in respect of prior periods
relates to the conclusion of the transfer pricing enquiry with
HMRC.
A change to the main UK corporation tax rate, announced in the
Budget on 11 March 2020, was substantively enacted on 17 March
2020. The rate applicable from 1 April 2020 now remains at 19%,
rather than the previously enacted reduction to 17%. The effect of
this change is that the net deferred tax balances carried forward
increased by GBP1.5m. On 3 March 2021, the Government announced an
increase in the rate of corporation tax rate to 25% from 1 April
2023. The change in rate has yet to be substantively enacted, and
the impact of the rate change will not be material for the
financial statements.
The deferred tax assets and liabilities at 31 December 2020 have
been calculated based on the rate at which they are expected to
reverse.
Reconciliation of total income tax to the applicable tax
rate
Year ended Year ended
31 December 31 December
2020 2019
GBPm GBPm
================================================ ============ ============
Profit/(loss) on ordinary activities before tax 236.7 368.6
================================================ ============ ============
Income tax at 19% (2019: 19%) 45.0 70.0
================================================ ============ ============
Effects of:
================================================ ============ ============
Expenses not deductible for tax purposes 2.0 1.1
================================================ ============ ============
Rate change 1.5 (0.2)
================================================ ============ ============
Higher rate for overseas income (0.1) (0.3)
================================================ ============ ============
Unrecognised deferred tax asset 1.3 1.8
================================================ ============ ============
Adjustments in respect of prior periods 0.1 (3.4)
================================================ ============ ============
Relief on Tier 1 interest included in equity (5.3) (3.2)
================================================ ============ ============
Other (0.3) 0.4
================================================ ============ ============
Total income tax recognised in profit or loss 44.2 66.2
================================================ ============ ============
Income tax recognised in other comprehensive income
Year ended Year ended
31 December 31 December
2020 2019
GBPm GBPm
========================================================== ============ ============
Deferred taxation
========================================================== ============ ============
Revaluation of land and buildings (0.1) -
========================================================== ============ ============
Total deferred tax (0.1) -
========================================================== ============ ============
Total income tax recognised in other comprehensive income (0.1) -
========================================================== ============ ============
Taxation of life insurance companies was fundamentally changed
following the publication of the Finance Act 2012. Since 1 January
2013, life insurance tax has been based on financial statements;
prior to this date, the basis for profits chargeable to corporation
tax was surplus arising within the Pillar 1 regulatory regime.
Cumulative differences arising between the two bases, which
represent the differences in retained profits and taxable surplus
which are not excluded items for taxation, are brought back into
the computation of taxable profits. However, legislation provides
for transitional arrangements whereby such differences are
amortised on a straight-line basis over a ten year period from 1
January 2013. Similarly, the resulting cumulative transitional
adjustments for tax purposes in adoption of IFRS will be amortised
on a straight-line basis over a ten year period from 1 January
2016. The tax charge for the year to 31 December 2020 includes
profits chargeable to corporation tax arising from amortisation of
transitional balances of GBP2.5m (2019: GBP2.5m).
Tax balances included within these financial statements include
the use of estimates and assumptions which are based on
management's best knowledge of current circumstances and future
events and actions. This includes the determination of tax
liabilities and recoverables for uncertain tax positions. The
actual outcome may differ from the estimated position.
9 Remuneration of Directors
Information concerning individual Directors' emoluments,
interests and transactions is given in the Directors' Remuneration
Report. For the purposes of the disclosure required by Schedule 5
to the Companies Act 2006, the total aggregate emoluments of the
Directors in the year was GBP3.6m (2019: GBP2.7m). Employer
contributions to pensions for Executive Directors for qualifying
periods were GBPnil (2019: GBPnil). The aggregate net value of
share awards granted to the Directors in the year was GBP2.2m
(2019: GBP1.1m). The net value has been calculated by reference to
the closing middle-market price of an ordinary share at the date of
grant. Two Directors exercised share options during the year with
an aggregate gain of GBP0.3m (2019: two Directors exercised options
with an aggregate gain of GBP0.3m).
10 Staff numbers and costs
The average number of persons employed by the Group (including
Directors) during the financial year, analysed by category, was as
follows:
Year ended Year ended
31 December 31 December
2020 2019
Number Number
======================== ============ ============
Directors 9 7
======================== ============ ============
Senior management 119 118
======================== ============ ============
Staff 949 955
======================== ============ ============
Average number of staff 1,077 1,080
======================== ============ ============
The aggregate personnel costs were as follows:
Year ended Year ended
31 December 31 December
2020 2019
GBPm GBPm
============================ ============ ============
Wages and salaries 87.2 89.7
============================ ============ ============
Social security costs 9.2 8.9
============================ ============ ============
Other pension costs 4.3 4.2
============================ ============ ============
Share-based payment expense 6.8 5.2
============================ ============ ============
Total personnel costs 107.5 108.0
============================ ============ ============
The Company does not have any employees.
11 Employee benefits
Defined contribution pension scheme
The Group operates a defined contribution pension scheme. The
pension cost charge for the year represents contributions payable
to the fund and amounted to GBP4.3m (2019: GBP4.2m).
Employee share plans
The Group operates a number of employee share option and share
award plans. Details of those plans are as follows:
Share options
Just Retirement Group plc 2013 Long Term Incentive Plan
("LTIP")
The Group has made awards under the LTIP to Executive Directors
and other senior managers. Awards are made in the form of nil-cost
options which become exercisable on the third anniversary of the
grant date, subject to the satisfaction of service and performance
conditions set out in the Directors' Remuneration Report. Options
are exercisable until the tenth anniversary of the grant date.
Options granted since 2018 are subject to a two year holding period
after the options have been exercised.
The options are accounted for as equity-settled schemes.
The number and weighted-average remaining contractual life of
outstanding options under the LTIP are as follows:
Year ended Year ended
31 December 31 December
2020 2019
Number Number
of of
Options options
==================================================== ============ ============
Outstanding at 1 January 15,196,343 17,595,308
==================================================== ============ ============
Granted 8,951,149 4,755,178
==================================================== ============ ============
Forfeited (941,906) (2,402,172)
==================================================== ============ ============
Exercised (2,261,267) (2,567,282)
==================================================== ============ ============
Expired (1,679,813) (2,184,689)
==================================================== ============ ============
Outstanding at 31 December 19,264,506 15,196,343
==================================================== ============ ============
Exercisable at 31 December 3,119,248 3,255,678
==================================================== ============ ============
Weighted-average share price at exercise (GBP) 0.57 0.54
==================================================== ============ ============
Weighted-average remaining contractual life (years) 1.36 1.15
==================================================== ============ ============
The exercise price for options granted under the LTIP is
nil.
During the year to 31 December 2020, awards of LTIPs were made
on 23 March 2020. In addition, one-off awards with similar features
to LTIPs were made on 20 March 2020 to the incoming Group Chief
Financial Officer to compensate him for incentive awards forfeited
on leaving his previous employer. The weighted-average fair value
and assumptions used to determine the fair value of the LTIPs and
the buy-out options granted during the year are as follows:
Fair value at grant date GBP0.39
========================================== ===================================
Option pricing models used Black-Scholes, Stochastic, Finnerty
========================================== ===================================
Share price at grant date GBP0.44
========================================== ===================================
Exercise price Nil
========================================== ===================================
Expected volatility - TSR performance 53.20-62.82%
========================================== ===================================
Expected volatility - holding period 60.44%
========================================== ===================================
Option life 2-3 years + 2 year holding period
========================================== ===================================
Dividends Nil
========================================== ===================================
Risk-free interest rate - TSR performance 0.05-0.11%
========================================== ===================================
Risk-free interest rate - holding period 0.17%
========================================== ===================================
A Black-Scholes option pricing model is used where vesting is
related to an earnings per share target, a Stochastic model is used
where vesting is related to a total shareholder return target, and
a Finnerty model is used to model the holding period.
Deferred share bonus plan ("DSBP")
The DSBP is operated in conjunction with the Group's short-term
incentive plan for Executive Directors and other senior managers of
the Company or any of its subsidiaries, as explained in the
Directors' Remuneration Report. Awards are made in the form of
nil-cost options which become exercisable on the third anniversary,
and until the tenth anniversary, of the grant date.
The options are accounted for as equity-settled schemes.
The number and weighted-average remaining contractual life of
outstanding options under the DSBP are as follows:
Year ended Year ended
31 December 31 December
2020 2019
Number Number
of of
options options
==================================================== ============ ============
Outstanding at 1 January 4,287,693 3,864,558
==================================================== ============ ============
Granted 1,882,472 1,635,528
==================================================== ============ ============
Forfeited (15,004) (503,412)
==================================================== ============ ============
Exercised (1,060,240) (708,981)
==================================================== ============ ============
Outstanding at 31 December 5,094,921 4,287,693
==================================================== ============ ============
Exercisable at 31 December 1,716,596 1,656,365
==================================================== ============ ============
Weighted-average share price at exercise (GBP) 0.54 0.60
==================================================== ============ ============
Weighted-average remaining contractual life (years) 1.10 0.94
==================================================== ============ ============
The exercise price for options granted under the DSBP is
nil.
During the year to 31 December 2020, awards of DSBPs were made
on 23 March 2020. The weighted-average fair value and assumptions
used to determine the fair value of options granted during the year
under the DSBP are as follows:
Fair value at grant date GBP0.44
========================= =============
Option pricing model used Black-Scholes
========================= =============
Share price at grant date GBP0.44
========================= =============
Exercise price Nil
========================= =============
Expected volatility Nil
========================= =============
Option life 3 years
========================= =============
Dividends Nil
========================= =============
Risk-free interest rate Nil
========================= =============
Save As You Earn ("SAYE") scheme
The Group operates SAYE plans for all employees, allowing a
monthly amount to be saved from salaries over either a three or
five year period which can be used to purchase shares in the
Company at a predetermined price. The employee must remain in
employment for the duration of the saving period and satisfy the
monthly savings requirement (except in "good leaver"
circumstances). Options are exercisable for up to six months after
the saving period.
The options are accounted for as equity-settled schemes.
The number, weighted-average exercise price, weighted-average
share price at exercise, and weighted-average remaining contractual
life of outstanding options under the SAYE are as follows:
Year ended 31 December Year ended 31 December
2020 2019
========================================= ============================= =============================
Weighted-average Weighted-average
exercise exercise
Number Price Number price
of options GBP of options GBP
========================================= =========== ================ =========== ================
Outstanding at 1 January 9,953,188 0.56 4,556,383 1.12
========================================= =========== ================ =========== ================
Granted 13,031,462 0.38 10,313,555 0.52
========================================= =========== ================ =========== ================
Forfeited (603,970) 0.57 (366,991) 0.74
========================================= =========== ================ =========== ================
Cancelled (6,609,575) 0.54 (4,146,082) 0.99
========================================= =========== ================ =========== ================
Exercised (46,892) 0.52 - -
========================================= =========== ================ =========== ================
Expired (208,210) 1.03 (403,677) 1.20
========================================= =========== ================ =========== ================
Outstanding at 31 December 15,516,003 0.41 9,953,188 0.56
========================================= =========== ================ =========== ================
Exercisable at 31 December 58,930 0.46 189,815 0.73
========================================= =========== ================ =========== ================
Weighted-average share price at exercise 0.60 -
========================================= =========== ================ =========== ================
Weighted-average remaining contractual
life (years) 2.56 2.61
========================================= =========== ================ =========== ================
The range of exercise prices of options outstanding at the end
of the year are as follows:
2020 2019
Number Number
of of
options options
outstanding outstanding
======== ============ ============
GBP0.38 12,476,881 -
======== ============ ============
GBP0.52 2,870,402 9,242,042
======== ============ ============
GBP1.07 66,166 387,498
======== ============ ============
GBP1.13 - 36,135
======== ============ ============
GBP1.18 102,554 268,604
======== ============ ============
GBP1.27 - 12,791
======== ============ ============
GBP1.47 - 6,118
======== ============ ============
Total 15,516,003 9,953,188
======== ============ ============
During the year to 31 December 2020, awards of SAYEs were made
on 22 April 2020. The weighted-average fair value and assumptions
used to determine the fair value of options granted during the year
under the SAYE are as follows:
Fair value at grant date GBP0.25
======================================== ==================
Option pricing model used Black-Scholes
======================================== ==================
Share price at grant date GBP0.55
======================================== ==================
Exercise price GBP0.38
======================================== ==================
Expected volatility - 3 year scheme 51.70%
======================================== ==================
Expected volatility - 5 year scheme 37.48%
======================================== ==================
Option life 3.36 or 5.36 years
======================================== ==================
Dividends Nil
======================================== ==================
Risk-free interest rate - 3 year scheme 0.10%
======================================== ==================
Risk-free interest rate - 5 year scheme 0.16%
======================================== ==================
Saving forfeit discounts 5%
======================================== ==================
Share-based payment expense
The share-based payment expense recognised in the Consolidated
statement of comprehensive income for employee services receivable
during the year is as follows:
Year ended Year ended
31 December 31 December
2020 2019
GBPm GBPm
======================= ============ ============
Equity-settled schemes 6.8 5.2
======================= ============ ============
Total expense 6.8 5.2
======================= ============ ============
12 Earnings per share
The calculation of basic and diluted earnings per share is based
on dividing the profit or loss attributable to equity holders of
the Company by the weighted-average number of ordinary shares
outstanding, and by the diluted weighted-average number of ordinary
shares potentially outstanding at the end of the year. The
weighted-average number of ordinary shares excludes shares held by
the Employee Benefit Trust on behalf of the Company to satisfy
future exercises of employee share scheme awards.
Year ended 31 December Year ended 31 December
2020 2019
====================================== ====================================== ======================================
Weighted-average Weighted-average
number Earnings number Earnings
Earnings of shares per share Earnings of shares per share
GBPm million pence GBPm million pence
====================================== ======== ================ ========== ======== ================ ==========
Profit attributable to equity holders
of Just Group plc 193.6 302.6
====================================== ======== ================ ========== ======== ================ ==========
Coupon payments in respect of Tier
1 notes (net of tax) (28.1) (16.8)
====================================== ======== ================ ========== ======== ================ ==========
Profit attributable to ordinary equity
holders of Just Group plc (basic) 165.5 1,030.7 16.06 285.8 1,007.5 28.37
====================================== ======== ================ ========== ======== ================ ==========
Effect of potentially dilutive share
options - 11.1 (0.17) - 13.1 (0.37)
====================================== ======== ================ ========== ======== ================ ==========
Diluted 165.5 1,041.8 15.89 285.8 1,020.6 28.00
====================================== ======== ================ ========== ======== ================ ==========
13 Dividends
Dividends paid in the year were as follows:
Year ended Year ended
31 December 31 December
2020 2019
GBPm GBPm
======================================================== ============ ============
Dividends paid on the vesting of employee share schemes 0.1 0.2
======================================================== ============ ============
Total dividends paid 0.1 0.2
======================================================== ============ ============
Coupon payments in respect of Tier 1 notes(1) 28.1 16.8
======================================================== ============ ============
Total distributions to equity holders in the period 28.2 17.0
======================================================== ============ ============
1 Coupon payments on Tier 1 notes issued in March 2019 are
treated as an appropriation of retained profits and, accordingly,
are accounted for when paid.
The Board considers that it is not appropriate to recommend
paying a dividend for 2020 (2019: nil).
14 Intangible assets
Present PrognoSys(TM)
value and other
of in-force Distribution intellectual
Year ended 31 December Goodwill business network Brand property Software Leases Total
2020 GBPm GBPm GBPm GBPm GBPm GBPm GBPm GBPm
============================ ======== ============ ============ ===== ============= ======== ====== =======
Cost
============================ ======== ============ ============ ===== ============= ======== ====== =======
At 1 January 2020 34.9 200.0 26.6 5.6 7.9 29.4 2.0 306.4
============================ ======== ============ ============ ===== ============= ======== ====== =======
Additions - - - - - 0.1 - 0.1
============================ ======== ============ ============ ===== ============= ======== ====== =======
At 31 December 2020 34.9 200.0 26.6 5.6 7.9 29.5 2.0 306.5
============================ ======== ============ ============ ===== ============= ======== ====== =======
Amortisation and impairment
============================ ======== ============ ============ ===== ============= ======== ====== =======
At 1 January 2020 (0.8) (89.7) (26.6) (5.6) (2.6) (24.7) (2.0) (152.0)
============================ ======== ============ ============ ===== ============= ======== ====== =======
Impairment - - - - - (1.1) - (1.1)
============================ ======== ============ ============ ===== ============= ======== ====== =======
Charge for the year - (17.9) - - (0.6) (1.4) - (19.9)
============================ ======== ============ ============ ===== ============= ======== ====== =======
At 31 December 2020 (0.8) (107.6) (26.6) (5.6) (3.2) (27.2) (2.0) (173.0)
============================ ======== ============ ============ ===== ============= ======== ====== =======
Net book value at 31
December 2020 34.1 92.4 - - 4.7 2.3 - 133.5
============================ ======== ============ ============ ===== ============= ======== ====== =======
Net book value at 31
December 2019 34.1 110.3 - - 5.3 4.7 - 154.4
============================ ======== ============ ============ ===== ============= ======== ====== =======
Present PrognoSys(TM)
value and other
of in-force Distribution intellectual
Year ended 31 December Goodwill business network Brand property Software Leases Total
2019 GBPm GBPm GBPm GBPm GBPm GBPm GBPm GBPm
============================ ======== ============ ============ ===== ============= ======== ====== =======
Cost
============================ ======== ============ ============ ===== ============= ======== ====== =======
At 1 January 2019 34.9 200.0 26.6 5.6 7.9 26.1 2.0 303.1
============================ ======== ============ ============ ===== ============= ======== ====== =======
Additions - - - - - 3.3 - 3.3
============================ ======== ============ ============ ===== ============= ======== ====== =======
At 31 December 2019 34.9 200.0 26.6 5.6 7.9 29.4 2.0 306.4
============================ ======== ============ ============ ===== ============= ======== ====== =======
Amortisation and impairment
============================ ======== ============ ============ ===== ============= ======== ====== =======
At 1 January 2019 (0.8) (71.9) (25.7) (5.6) (2.0) (24.1) (2.0) (132.1)
============================ ======== ============ ============ ===== ============= ======== ====== =======
Charge for the year - (17.8) (0.9) - (0.6) (0.6) - (19.9)
============================ ======== ============ ============ ===== ============= ======== ====== =======
At 31 December 2019 (0.8) (89.7) (26.6) (5.6) (2.6) (24.7) (2.0) (152.0)
============================ ======== ============ ============ ===== ============= ======== ====== =======
Net book value at 31
December 2019 34.1 110.3 - - 5.3 4.7 - 154.4
============================ ======== ============ ============ ===== ============= ======== ====== =======
Net book value at 31
December 2018 34.1 128.1 0.9 - 5.9 2.0 - 171.0
============================ ======== ============ ============ ===== ============= ======== ====== =======
Amortisation and impairment charge
The amortisation and impairment charge is recognised in other
operating expenses in profit or loss.
Impairment testing
Goodwill is tested for impairment in accordance with IAS 36,
Impairment of Assets, at least annually.
The Group's goodwill of GBP34.1m at 31 December 2020 represents
GBP1.0m recognised on the 2018 acquisition of Corinthian Group
Limited, GBP0.3m recognised on the 2016 acquisition of the
Partnership Assurance Group and GBP32.8m on the 2009 acquisition by
Just Retirement Group Holdings Limited of Just Retirement
(Holdings) Limited, the holding company of Just Retirement Limited
("JRL").
The existing goodwill has been allocated to the insurance
segment as the cash-generating unit. The recoverable amounts of
goodwill have been determined from value-in-use. The key
assumptions of this calculation are noted below:
2020 2019
======================================================== ======= =======
Period on which management approved forecasts are based 5 years 5 years
======================================================== ======= =======
Discount rate (pre-tax) 11.7% 10.3%
======================================================== ======= =======
The value-in-use of the insurance operating segment is
considered by reference to latest business plans over the next five
years, which reflect management's best estimate of future cash
flows based on historical experience, expected growth rates and
assumptions around market share, customer numbers, expense
inflation and mortality rates. The discount rate was determined
using a weighted average cost of capital approach, adjusted for
specific risks attributable to the business. The outcome of the
impairment assessment is that the goodwill in respect of the
insurance operating segment is not impaired and that the
value-in-use is higher than the carrying value of goodwill.
Any reasonably possible changes in assumption will not cause the
carrying value of the goodwill to exceed the recoverable
amounts.
15 Property, plant and equipment
Freehold
land and Computer Furniture Right-of-use
buildings equipment and fittings assets Total
Year ended 31 December 2020 GBPm GBPm GBPm GBPm GBPm
=================================== ========== ========== ============= ============ ======
Cost or valuation
=================================== ========== ========== ============= ============ ======
At 1 January 2020 17.9 7.7 6.2 11.9 43.7
=================================== ========== ========== ============= ============ ======
Acquired during the year - 2.2 0.1 - 2.3
=================================== ========== ========== ============= ============ ======
Revaluations (3.6) - - - (3.6)
=================================== ========== ========== ============= ============ ======
Disposal cost - - - (5.8) (5.8)
=================================== ========== ========== ============= ============ ======
At 31 December 2020 14.3 9.9 6.3 6.1 36.6
=================================== ========== ========== ============= ============ ======
Depreciation and impairment
=================================== ========== ========== ============= ============ ======
At 1 January 2020 (0.7) (6.2) (5.7) (4.3) (16.9)
=================================== ========== ========== ============= ============ ======
Eliminated on revaluation 1.2 - - - 1.2
=================================== ========== ========== ============= ============ ======
Disposal - - - 3.5 3.5
=================================== ========== ========== ============= ============ ======
Depreciation charge for the year (0.6) (1.0) (0.2) (2.1) (3.9)
=================================== ========== ========== ============= ============ ======
At 31 December 2020 (0.1) (7.2) (5.9) (2.9) (16.1)
=================================== ========== ========== ============= ============ ======
Net book value at 31 December 2020 14.2 2.7 0.4 3.2 20.5
=================================== ========== ========== ============= ============ ======
Net book value at 31 December 2019 17.2 1.5 0.5 7.6 26.8
=================================== ========== ========== ============= ============ ======
Freehold
land and Computer Furniture Right-of-use
buildings equipment and fittings assets Total
Year ended 31 December 2019 GBPm GBPm GBPm GBPm GBPm
=================================== ========== ========== ============= ============ ======
Cost or valuation
=================================== ========== ========== ============= ============ ======
At 1 January 2019 17.9 6.8 5.7 - 30.4
=================================== ========== ========== ============= ============ ======
Recognition of right-of-use assets
on initial application of IFRS 16 - - - 9.6 9.6
=================================== ========== ========== ============= ============ ======
Adjusted balance at 1 January 2019 17.9 6.8 5.7 9.6 40.0
=================================== ========== ========== ============= ============ ======
Acquired during the year - 0.9 0.5 5.7 7.1
=================================== ========== ========== ============= ============ ======
Disposal cost - - - (3.4) (3.4)
=================================== ========== ========== ============= ============ ======
At 31 December 2019 17.9 7.7 6.2 11.9 43.7
=================================== ========== ========== ============= ============ ======
Depreciation
=================================== ========== ========== ============= ============ ======
At 1 January 2019 (0.1) (5.6) (3.3) - (9.0)
=================================== ========== ========== ============= ============ ======
Disposal - - - 0.6 0.6
=================================== ========== ========== ============= ============ ======
Impairment - - (1.9) (2.1) (4.0)
=================================== ========== ========== ============= ============ ======
Depreciation charge for the year (0.6) (0.6) (0.5) (2.8) (4.5)
=================================== ========== ========== ============= ============ ======
At 31 December 2019 (0.7) (6.2) (5.7) (4.3) (16.9)
=================================== ========== ========== ============= ============ ======
Net book value at 31 December 2019 17.2 1.5 0.5 7.6 26.8
=================================== ========== ========== ============= ============ ======
Net book value at 31 December 2018 17.8 1.2 2.4 - 21.4
=================================== ========== ========== ============= ============ ======
Included in freehold land and buildings is land of value GBP4.0m
(2019: GBP4.4m).
The Company's freehold land and buildings are stated at their
revalued amounts, being the fair value at the date of revaluation
less any subsequent accumulated depreciation and subsequent
accumulated impairment losses. The fair value measurements of the
Company's freehold land and buildings as at 5 October 2020 were
performed by Hurst Warne & Partners Surveyors Ltd, independent
valuers not related to the Company. Hurst Warne & Partners
Surveyors Ltd is registered for regulation by the Royal Institution
of Chartered Surveyors ("RICS"). The valuation process relies on
expert judgement which is heightened due to the macroeconomic
related COVID-19 uncertainty. The valuer has sufficient current
local knowledge of the particular market, and the knowledge, skills
and understanding to undertake the valuation competently. The fair
value of the freehold land was undertaken using a residual
valuation assuming a new build office on each site to an exact
equivalent size as currently and disregarding the possibility of
developing any alternative uses or possible enhancements. The fair
value of the buildings was determined based on open market
comparable evidence of market rent. The fair value measurement of
revalued land and buildings has been categorised as Level 3 within
the fair value hierarchy based on the non-observable inputs to the
valuation technique used.
Revaluations during 2020 comprise a loss of GBP1.2m recognised
in profit or loss, a loss of GBP1.2m recognised in other
comprehensive income (gross of tax of GBP0.1m) partially reversing
previously recognised gains of GBP5.3m (gross of tax of GBP0.9m),
and the elimination of depreciation on the revaluations of
GBP1.2m.
If freehold land and buildings were stated on the historical
cost basis, the carrying values would be land of GBP4.3m (2019:
GBP4.3m) and buildings of GBP10.2m (2019: GBP10.6m).
Right-of-use assets are property assets leased by the Group (see
note 26). Impairments arising in the prior year relate to onerous
property leases resulting from the Group's rationalisation of its
office locations.
16 Financial investments
All of the Group's financial investments are measured at fair
value through the profit or loss, and are either designated as such
on initial recognition or, in the case of derivative financial
assets, classified as held for trading.
Fair value Cost
======================================= ================== ==================
2020 2019 2020 2019
GBPm GBPm GBPm GBPm
======================================= ======== ======== ======== ========
Units in liquidity funds 1,128.5 1,384.0 1,128.5 1,384.0
======================================= ======== ======== ======== ========
Investment funds 176.1 137.3 175.2 137.2
======================================= ======== ======== ======== ========
Debt securities and other fixed income
securities 11,061.4 10,387.8 10,001.9 9,696.8
======================================= ======== ======== ======== ========
Deposits with credit institutions 99.7 104.6 99.7 104.6
======================================= ======== ======== ======== ========
Derivative financial assets 800.0 237.0 - -
======================================= ======== ======== ======== ========
Loans secured by residential mortgages 8,261.1 7,980.5 4,535.7 4,778.3
======================================= ======== ======== ======== ========
Loans secured by commercial mortgages 707.0 494.5 680.1 477.8
======================================= ======== ======== ======== ========
Other loans 1,036.0 880.3 885.5 795.0
======================================= ======== ======== ======== ========
Total 23,269.8 21,606.0 17,506.6 17,373.7
======================================= ======== ======== ======== ========
The majority of investments included in debt securities and
other fixed income securities are listed investments.
Units in liquidity funds comprise wholly of units in funds which
invest in cash and cash equivalents.
Deposits with credit institutions with a carrying value of
GBP97.8m (2019: GBP103.1m) have been pledged as collateral in
respect of the Group's derivative financial instruments. Amounts
pledged as collateral are deposited with the derivative
counterparty.
17 FAIR VALUE
(a) Determination of fair value and fair value hierarchy
All assets and liabilities for which fair value is measured or
disclosed in the financial statements are categorised within the
fair value hierarchy described as follows, based on the lowest
level input that is significant to the fair value measurement as a
whole.
In determining the assessment of the fair value hierarchy at 31
December 2020, the impact of COVID-19 on market activity and on the
availability of actively quoted prices has been taken into
consideration, since a lack of availability of quoted prices or
other observable market data might necessitate a transfer of assets
from Level 1 to Level 2, or from Level 2 to Level 3. Although
market disruption was experienced at the end of the first quarter
and the beginning of the second quarter of 2020 as a result of the
development of the COVID-19 pandemic in the UK and globally, there
has subsequently been a return to pre-COVID-19 levels of market
activity and therefore we have maintained valuation methodologies.
There have been no changes to hierarchy levels at 31 December 2020
as a result of considering the impacts from COVID-19.
All Level 1 and 2 assets continue to have pricing available from
actively quoted prices and observable market data.
Level 1
Inputs to Level 1 fair values are unadjusted quoted prices in
active markets for identical assets and liabilities that the entity
can access at the measurement date.
Level 2
Inputs to Level 2 fair values are inputs other than quoted
prices included within Level 1 that are observable for the asset or
liability, either directly or indirectly. If the asset or liability
has a specified (contractual) term, a Level 2 input must be
observable for substantially the full term of the instrument. Level
2 inputs include the following:
-- quoted prices for similar assets and liabilities in active markets;
-- quoted prices for identical assets or similar assets in
markets that are not active, the prices are not current, or price
quotations vary substantially either over time or among market
makers, or in which very little information is released
publicly;
-- inputs other than quoted prices that are observable for the asset or liability; and
-- market-corroborated inputs.
Where the Group uses broker/asset manager quotes and no
information as to observability of inputs is provided by the
broker/asset manager, the investments are classified as
follows:
-- where the broker/asset manager price is validated by using
internal models with market-observable inputs and the values are
similar, the investment is classified as Level 2; and
-- in circumstances where internal models are not used to
validate broker/asset manager prices, or the observability of
inputs used by brokers/asset managers is unavailable, the
investment is classified as Level 3.
The majority of the Group's debt securities held at fair value
and financial derivatives are valued using independent pricing
services or third party broker quotes, and therefore classified as
Level 2.
Level 3
Inputs to Level 3 fair values are unobservable inputs for the
asset or liability. Unobservable inputs may have been used to
measure fair value to the extent that observable inputs are not
available, thereby allowing for situations in which there is
little, if any, market activity for the asset or liability at the
measurement date. However, the fair value measurement objective
remains the same, i.e. an exit price at the measurement date from
the perspective of a market participant that holds the asset or
owes the liability. Unobservable inputs reflect the same
assumptions as those that the market participant would use in
pricing the asset or liability.
The Group's assets and liabilities held at fair value which are
valued using valuation techniques for which significant observable
market data is not available and classified as Level 3 include
loans secured by mortgages, asset-backed securities, investment
contract liabilities, and deposits received from reinsurers. There
are no non-recurring fair value measurements as at 31 December 2020
(2019: nil).
(b) Analysis of assets and liabilities held at fair value
according to fair value hierarchy
2020 2019
================================== ==================================== ====================================
Level Level Level Level Level Level
1 2 3 Total 1 2 3 Total
GBPm GBPm GBPm GBPm GBPm GBPm GBPm GBPm
================================== ======= ======= ======== ======== ======= ======= ======== ========
Assets held at fair value
================================== ======= ======= ======== ======== ======= ======= ======== ========
Units in liquidity funds 1,123.2 5.3 - 1,128.5 1,378.0 6.0 - 1,384.0
================================== ======= ======= ======== ======== ======= ======= ======== ========
Investment funds - 37.1 139.0 176.1 - 25.5 111.8 137.3
================================== ======= ======= ======== ======== ======= ======= ======== ========
Debt securities and other
fixed income securities 809.3 8,995.3 1,256.8 11,061.4 984.5 8,674.1 729.2 10,387.8
================================== ======= ======= ======== ======== ======= ======= ======== ========
Deposits with credit institutions 97.7 2.0 - 99.7 103.1 1.5 - 104.6
================================== ======= ======= ======== ======== ======= ======= ======== ========
Derivative financial assets - 796.4 3.6 800.0 - 233.0 4.0 237.0
================================== ======= ======= ======== ======== ======= ======= ======== ========
Loans secured by residential
mortgages - - 8,261.1 8,261.1 - - 7,980.5 7,980.5
================================== ======= ======= ======== ======== ======= ======= ======== ========
Loans secured by commercial
mortgages - - 707.0 707.0 - - 494.5 494.5
================================== ======= ======= ======== ======== ======= ======= ======== ========
Other loans 13.1 11.8 1,011.1 1,036.0 4.1 40.3 835.9 880.3
================================== ======= ======= ======== ======== ======= ======= ======== ========
Total 2,043.3 9,847.9 11,378.6 23,269.8 2,469.7 8,980.4 10,155.9 21,606.0
================================== ======= ======= ======== ======== ======= ======= ======== ========
Liabilities held at fair
value
================================== ======= ======= ======== ======== ======= ======= ======== ========
Investment contract liabilities - - 42.8 42.8 - - 54.0 54.0
================================== ======= ======= ======== ======== ======= ======= ======== ========
Derivative financial liabilities - 509.4 3.3 512.7 - 248.4 - 248.4
================================== ======= ======= ======== ======== ======= ======= ======== ========
Obligations for repayment
of cash collateral received 351.3 26.1 - 377.4 62.8 - - 62.8
================================== ======= ======= ======== ======== ======= ======= ======== ========
Deposits received from reinsurers - - 2,415.0 2,415.0 - - 2,417.7 2,417.7
================================== ======= ======= ======== ======== ======= ======= ======== ========
Other financial liabilities
================================== ======= ======= ======== ======== ======= ======= ======== ========
Loans and borrowings at
amortised cost - 802.0 - 802.0 - 690.2 - 690.2
================================== ======= ======= ======== ======== ======= ======= ======== ========
Total 351.3 1,337.5 2,461.1 4,149.9 62.8 938.6 2,471.7 3,473.1
================================== ======= ======= ======== ======== ======= ======= ======== ========
(c) Transfers between levels
The Group's policy is to assess pricing source changes and
determine transfers between levels as of the end of each
half-yearly reporting period. During the year there were no
transfers from Level 2 to Level 1 (2019: GBP570.7m). Transfers from
Level 2 to Level 3 include debt securities for which there are no
longer observable prices and, in 2019, derivative financial assets
for which current market values after the initial trade were not
available.
(d) Level 3 assets and liabilities measured at fair value
Reconciliation of the opening and closing recorded amount of
Level 3 assets and liabilities held at fair value.
Debt
securities Loans Loans
and other secured secured Deposits
fixed Derivative by by Investment Derivative received
Year ended 31 Investment income financial residential commercial Other contract financial from
December funds securities assets mortgages mortgages loans(2) liabilities liabilities reinsurers
2020 GBPm GBPm GBPm GBPm GBPm GBPm GBPm GBPm GBPm
==================== ========== ========== ========== =========== ========== ======== =========== =========== ==========
At 1 January 2020 111.8 729.2 4.0 7,980.5 494.5 835.9 (54.0) - (2,417.7)
==================== ========== ========== ========== =========== ========== ======== =========== =========== ==========
Purchases/advances/
deposits 27.1 418.9 - 511.7 211.1 173.0 (1.0) 5.0 (1.4)
==================== ========== ========== ========== =========== ========== ======== =========== =========== ==========
Transfers from
Level 2 - 62.2 - - - - - - -
==================== ========== ========== ========== =========== ========== ======== =========== =========== ==========
Sales/redemptions/
payments - (29.4) - (380.9) (8.7) (68.2) 14.0 - 212.2
==================== ========== ========== ========== =========== ========== ======== =========== =========== ==========
Disposal of a
portfolio
of LTMs(1) - - - (600.8) - - - - -
==================== ========== ========== ========== =========== ========== ======== =========== =========== ==========
Realised gains
and losses
recognised
in profit or loss
within net
investment
income (0.2) (0.2) - 111.6 - - - - -
==================== ========== ========== ========== =========== ========== ======== =========== =========== ==========
Unrealised gains
and losses
recognised
in profit or loss
within net
investment
income 0.3 80.6 (0.4) 356.3 9.3 69.1 - (8.3) (125.3)
==================== ========== ========== ========== =========== ========== ======== =========== =========== ==========
Interest accrued - (4.5) - 282.7 0.8 1.3 - - (82.8)
==================== ========== ========== ========== =========== ========== ======== =========== =========== ==========
Change in fair
value of
liabilities
recognised in
profit
or loss - - - - - - (1.8) - -
==================== ========== ========== ========== =========== ========== ======== =========== =========== ==========
At 31 December
2020 139.0 1,256.8 3.6 8,261.1 707.0 1,011.1 (42.8) (3.3) (2,415.0)
==================== ========== ========== ========== =========== ========== ======== =========== =========== ==========
1 In December 2020 the Group disposed of a portfolio of loans
secured by residential mortgages with a fair value of GBP600.8m.
The transaction is part of the Group's strategy to reduce exposure
and sensitivity of the balance sheet to the UK property market
following changes in the regulatory environment in 2018.
2 Includes GBP945.0m of infrastructure loans (2019: GBP787.3m)
Debt Recoveries
securities Loans Loans from
and other secured secured reinsurers Deposits
fixed Derivative by by on Investment received
Investment income financial residential commercial Other investment contract from
Year ended 31 December funds securities assets mortgages mortgages loans contracts liabilities reinsurers
2019 GBPm GBPm GBPm GBPm GBPm GBPm GBPm GBPm GBPm
============================ ========== ========== ========== =========== ========== ====== ========== =========== ==========
At 1 January 2019 69.8 616.0 - 7,191.5 392.3 723.2 102.2 (197.8) (2,443.5)
============================ ========== ========== ========== =========== ========== ====== ========== =========== ==========
Purchases/advances/deposits 68.2 72.7 - 415.8 97.7 76.7 51.3 (26.7) (1.5)
============================ ========== ========== ========== =========== ========== ====== ========== =========== ==========
Transfers from Level
2 - 50.4 3.3 - - - - - -
============================ ========== ========== ========== =========== ========== ====== ========== =========== ==========
Sales/redemptions/payments (26.0) (4.3) - (337.9) (5.8) (11.0) (160.4) 78.3 221.1
============================ ========== ========== ========== =========== ========== ====== ========== =========== ==========
Realised gains and
losses recognised
in profit or loss
within net investment
income 0.1 0.3 - 102.1 - - - - -
============================ ========== ========== ========== =========== ========== ====== ========== =========== ==========
Unrealised gains and
losses recognised
in profit or loss
within net investment
income(1) (0.3) (1.4) 0.7 338.1 9.8 47.0 6.9 - (107.3)
============================ ========== ========== ========== =========== ========== ====== ========== =========== ==========
Interest accrued - (4.5) - 270.9 0.5 - - - (86.5)
============================ ========== ========== ========== =========== ========== ====== ========== =========== ==========
Change in fair value
of liabilities recognised
in profit or loss - - - - - - - 92.2 -
============================ ========== ========== ========== =========== ========== ====== ========== =========== ==========
At 31 December 2019 111.8 729.2 4.0 7,980.5 494.5 835.9 - (54.0) (2,417.7)
============================ ========== ========== ========== =========== ========== ====== ========== =========== ==========
1 Includes the impact of property growth experience changes, a charge of GBP33m.
For Level 1 and Level 2 assets measured at fair value,
unrealised gains during the year were gains of GBP23.2m and
GBP241.1m respectively (2019: gains of GBP15.7m and GBP284.8m
respectively).
Investment funds
Investment funds classified as Level 3 are structured entities
that operate under contractual arrangements which allow a group of
investors to invest in a pool of corporate loans without any one
investor having overall control of the entity. There have not been
any significant impacts to these investments in relation to
COVID-19.
Principal assumptions underlying the calculation of investment
funds classified as Level 3
Discount rate
Discount rates are the most significant assumption applied in
calculating the fair value of investment funds. The average
discount rate used is 7.0% (2019: 7.0%).
Sensitivity analysis
Reasonable possible alternative assumptions for unobservable
inputs used in the valuation model could give rise to significant
changes in the fair value of the assets. The sensitivity of the
valuation of bonds to the default assumption is determined by
reference to movement in credit spreads. The Group has estimated
the impact on fair value to changes to these inputs as follows:
Investment funds Credit
net increase/(decrease) in fair value (GBPm) spreads
+100bps
=============================================== ========
2020 (4.9)
=============================================== ========
2019 (3.9)
=============================================== ========
Debt securities and other fixed income securities
Debt securities classified as Level 3 are infrastructure private
placement bonds and asset-backed securities. Such securities are
valued using discounted cash flow analyses. The impact of COVID-19
has been taken into account in the assessment of the future cash
flows default risk at 31 December 2020. Due to the nature of these
assets and the sectors in which they operate, being primarily
utilities and universities sectors, the Group has assessed that
there is no significant impact from COVID-19 on the valuation at 31
December 2020.
Principal assumptions underlying the calculation of the debt
securities and other fixed income securities classified as Level
3
Redemption and defaults
The redemption and default assumptions used in the valuation of
infrastructure private placement bonds are similar to the rest of
the Group's bond portfolio.
For asset-backed securities, the assumptions are that the
underlying loans supporting the securities are redeemed in the
future in a similar profile to the existing redemptions on an
average rate of 3% per annum, and that default levels on the
underlying basis remain at the current level of the Group's bond
portfolio.
Sensitivity analysis
Reasonable possible alternative assumptions for unobservable
inputs used in the valuation model could give rise to significant
changes in the fair value of the assets. The sensitivity of the
valuation of bonds to the default assumption is determined by
reference to movement in credit spreads. The Group has estimated
the impact on fair value to changes to these inputs as follows:
Debt securities and other fixed income securities Credit
net increase/(decrease) in fair value (GBPm) spreads
+100bps
=================================================== ========
2020 (109.2)
=================================================== ========
2019 (52.5)
=================================================== ========
Derivative financial assets and liabilities
Derivative financial assets and liabilities classified as Level
3 are the put options on property index (also referred to as
no-negative equity guarantee ("NNEG") hedges). The value of each
NNEG hedge is made up of premiums payable to the counterparty less
expected claims back from the option where losses are made. The
expected claims are calculated through the Black-Scholes framework,
with parameters set such that at outset the fair value of the NNEG
hedge is zero.
Principal assumptions underlying the calculation of the
derivative financial assets and liabilities classified as Level
3
Property prices and interest rates are the most significant
assumption applied in calculating the fair value of the derivative
financial assets and liabilities. The Group has assessed the
possible impact of COVID-19 restrictions and economic uncertainty
on current property assumptions, and has retained its existing
property valuation assumptions at 31 December 2020. Details of the
matters considered in relation to property assumptions at 31
December 2020 are noted in the section on Loans secured by
residential mortgages further below. The impact on derivative
financial assets and liabilities from changes to property
assumptions are noted in the sensitivity analysis below.
Sensitivity analysis
Reasonable possible alternative assumptions for unobservable
inputs used in the valuation model could give rise to significant
changes in the fair value of the assets and liabilities. The Group
has estimated the impact on fair value to changes to these inputs
as follows:
Immediate Future Future
property property property
Interest price fall price growth price volatility
net increase/(decrease) in fair value (GBPm) rates +100bps -10% -0.5% +1%
============================================== ============== =========== ============= =================
Derivative financial assets
============================================== ============== =========== ============= =================
2020 (6.5) 24.0 24.1 10.2
============================================== ============== =========== ============= =================
2019 (1.9) 5.9 6.4 2.2
============================================== ============== =========== ============= =================
Derivative financial liabilities
============================================== ============== =========== ============= =================
2020 (1.8) 6.3 6.8 2.8
============================================== ============== =========== ============= =================
2019 n/a n/a n/a n/a
============================================== ============== =========== ============= =================
Loans secured by residential mortgages
Methodology and judgement underlying the calculation of loans
secured by residential mortgages
The valuation of loans secured by mortgages is determined using
internal models which project future cash flows expected to arise
from each loan. Future cash flows allow for assumptions relating to
future expenses, future mortality experience, voluntary redemptions
and repayment shortfalls on redemption of the mortgages due to the
no-negative equity guarantee ("NNEG"). The fair value is calculated
by discounting the future cash flows at a swap rate plus a
liquidity premium.
Under the NNEG, the amount recoverable by the Group on eligible
termination of mortgages is generally capped at the net sale
proceeds of the property. A key judgement is with regard to the
calculation approach used. We have used the Black 76 variant of the
Black-Scholes option pricing model in conjunction with an approach
using best estimate future house price growth assumptions. There
has been significant academic and market debate concerning the
valuation of no-negative equity guarantees in recent years,
including proposals to use risk-free based methods rather than best
estimate assumptions to project future house price growth. We
continue to actively monitor this debate. In the absence of any
widely supported alternative approach, we have continued in line
with the common industry practice to value no-negative equity
guarantees using best estimate assumptions.
The real world assumptions used include future property growth
and future property price volatility.
Cash flow models are used in the absence of a deep and liquid
market for loans secured by residential mortgages. The sale of the
portfolio of LTMs represents a single market price but this is
insufficient to affect the judgement of the appropriateness of the
methodology and assumptions used by the cash flow approach for
individual loans.
Principal assumptions underlying the calculation of loans
secured by residential mortgages
All gains and losses arising from loans secured by mortgages are
largely dependent on the term of the mortgage, which in turn is
determined by the longevity of the customer. Principal assumptions
underlying the calculation of loans secured by mortgages include
the items set out below. These assumptions are also used to provide
the expected cash flows from the loans secured by residential
mortgages which determines the yield on this asset. This yield is
used for the purpose of setting valuation discount rates on the
liabilities supported, as described in note 23(b).
Maintenance expenses
Assumptions for future policy expense levels are based on the
Group's recent expense analyses. The assumed future expense levels
incorporate an annual inflation rate allowance of 3.6% (2019:
3.9%).
Mortality
Mortality assumptions have been derived with reference to
England & Wales population mortality using the CMI 2017 data
set and model mortality tables for base table rates and
improvements for years up to 2019 and CMI 2019 for mortality
improvements for calendar year 2020 onwards (2019: CMI 2017
mortality tables for both base table rates and mortality
improvements). These base mortality and improvement tables have
been adjusted to reflect the expected future mortality experience
of mortgage contract holders, taking into account the medical and
lifestyle evidence collected during the sales process and the
Group's assessment of how this experience will develop in the
future. This assessment takes into consideration relevant industry
and population studies, published research materials and
management's own experience. The Group has considered the possible
impact of the COVID-19 pandemic on its mortality assumptions, but
has kept these unchanged at 31 December 2020 save for the change in
underlying reference tables to CMI 2019. Further details of the
matters considered in relation to mortality assumptions at 31
December 2020 are set out in note 23(b).
Property prices
The COVID-19 pandemic has had a very significant impact on the
UK economy during 2020, and has created uncertainty in the UK
property market, which was effectively closed to transactions
through a period in quarters one and two of the year.
The Group's policy is to calculate the value of a property by
taking the latest valuation and indexing this value using the
Office for National Statistics ("ONS") monthly index for the
property's location. As a result of COVID-19, the publication of
these indices was temporarily suspended in the early part of 2020.
However, this was resumed in the second half of 2020 such that the
approach in place at 31 December 2020 is unchanged from previous
periods.
In addition, the Group applies adjustments to allow for
potential underperformance of individual properties relative to the
indexed valuation.
The appropriateness of this valuation basis is regularly tested
on the event of redemption of mortgages. The sensitivity of loans
secured by mortgages to a fall in property prices is included in
the table of sensitivities below.
Future property prices
In the absence of a reliable long-term forward curve for UK
residential property price inflation, the Group has made an
assumption about future residential property price inflation based
upon available market and industry data. These assumptions have
been derived with reference to the long-term expectation of the UK
consumer price inflation, "CPI", plus an allowance for the
expectation of house price growth above CPI (property risk premium)
less a margin for a combination of risks including property
dilapidation and basis risk. An additional allowance is made for
the volatility of future property prices. This results in a single
rate of future house price growth of 3.3% (2019: 3.8%), with a
volatility assumption of 13% per annum (2019: 13%). The setting of
these assumptions includes consideration of future long and
short-term forecasts, the Group's historical experience,
benchmarking data, and future uncertainties including the possible
impact of Brexit on the UK property market. As noted above, the
Group has considered the uncertainties in relation to the property
market as a result of the COVID-19 pandemic. The impact of the
pandemic on long-term property prices is uncertain at the current
time without consensus that the pandemic will alter the long-term
prospects of the housing market. However, in light of the
additional short-term uncertainty introduced and having considered
the available benchmarking data available over 2020, the Group has
reduced its future house price growth assumption by 0.5% at 31
December 2020 compared to previous periods. The property volatility
assumption has been maintained at the same level as assumed at 31
December 2019. The sensitivity of loans secured by mortgages to
changes in future property price growth, and to future property
price volatility, are included in the table of sensitivities
below.
Voluntary redemptions
Assumptions for future voluntary redemption levels are based on
the Group's recent analyses and external benchmarking. The assumed
redemption rate varies by duration and product line between 0.5%
and 4.1% for loans in JRL (2019: 0.5% and 4.1%) and between 0.6%
and 6.8% for loans in PLACL (2019: 0.6% and 6.8%). No changes are
assumed with regard to the COVID-19 experience.
Liquidity premium
The liquidity premium at initial recognition is set such that
the fair value of each loan is equal to the face value of the loan.
The liquidity premium partly reflects the illiquidity of the loan
and also spreads the recognition of profit over the lifetime of the
loan. The liquidity premiums are determined at an individual loan
level. Once calculated, the liquidity premium remains unchanged at
future valuations except when further advances are taken out. In
this situation, the single liquidity premium to apply to that loan
is recalculated allowing for all advances. The average liquidity
premium for loans held within JRL is 2.87% (2019: 2.85%) and for
loans held within PLACL is 3.20% (2019: 3.21%). The movement over
the period observed in JRL is driven by new loan originations more
than offsetting the sold portfolio, both having a higher liquidity
premium than the average spread on the back book of business.
Sensitivity analysis
Reasonable possible alternative assumptions for unobservable
inputs used in the valuation model could give rise to significant
changes in the fair value of the assets. The Group has estimated
the impact on fair value to changes to these inputs as follows:
Loans secured by Immediate Future Future
residential property property property
mortgages net Maintenance Base Mortality price price price Voluntary Liquidity
increase/(decrease) expenses mortality improvement fall growth volatility redemptions premium
in fair value (GBPm) +10% -5% +0.25% -10% -0.5% +1% +10% +10bps
==================== =========== ========== =========== ========= ========= =========== ============ =========
2020 (5.9) 34.3 15.6 (136.1) (103.7) (64.5) (13.2) (93.1)
==================== =========== ========== =========== ========= ========= =========== ============ =========
2019 (6.6) 28.7 14.0 (110.4) (86.6) (57.7) (11.7) (91.5)
==================== =========== ========== =========== ========= ========= =========== ============ =========
These sensitivity factors are determined via financial models.
The analysis has been prepared for a change in each variable with
other assumptions remaining constant. In reality such an occurrence
is unlikely due to correlation between the assumptions and other
factors. It should be noted that some of these sensitivities are
non-linear and larger or smaller impacts should not be simply
interpolated or extrapolated from these results. For example, the
impact from a 5% fall in property prices would be slightly less
than half of that disclosed in the table above.
The sensitivities above only consider the impact of the change
in these assumptions on the fair value of the asset. Some of these
sensitivities would also impact the yield on this asset and hence
the valuation discount rate used to determine liabilities. For
these sensitivities, the impact on the value of insurance
liabilities and hence profit before tax is included in note
23(e).
Other limitations in the above sensitivity analysis include the
use of hypothetical market movements to demonstrate potential risk
that only represents the Group's view of reasonably possible
near-term market changes that cannot be predicted with any
certainty.
Loans secured by commercial mortgages
Loans secured by commercial mortgages are valued using
discounted cash flow analysis using assumptions based on the
repayment of the underlying loan.
Principal assumption underlying the calculation of loans secured
by commercial mortgages
Redemption and defaults
The redemption and default assumptions used in the valuation of
loans secured by commercial mortgages are derived from the
assumptions for the Group's bond portfolio. The impact of COVID-19
on the timing of future cash flows, and on expected defaults, has
been taken into account in the calculation of fair value at 31
December 2020, with no significant impacts noted to fair
values.
Sensitivity analysis
Reasonable possible alternative assumptions for unobservable
inputs used in the valuation model could give rise to significant
changes in the fair value of the assets. Interest rates are the
most significant assumption applied in calculating the fair value
of the loans secured by commercial mortgages. The sensitivity of
the valuation of commercial mortgages to changes in interest rates
is determined by reference to the movement in credit spreads. The
Group has estimated the impact on fair value to changes to these
inputs as follows:
Credit
Loans secured by commercial mortgages spreads
net increase/(decrease) in fair value (GBPm) +100bps
============================================== ========
2020 (52.9)
============================================== ========
2019 (22.9)
============================================== ========
Other loans
Other loans classified as Level 3 are infrastructure loans and
commodity trade finance loans. These are valued using discounted
cash flow analyses.
Principal assumptions underlying the calculation of other loans
classified as Level 3
Redemption and defaults
The redemption and default assumptions used in the valuation of
Level 3 loans are similar to the Group's bond portfolio. Due to the
nature of these assets and the sectors in which they operate, being
primarily local authorities, renewable energy generation and
Housing Associations sectors, the Group has assessed that there is
no significant impact from COVID-19 on the valuation at 31 December
2020.
Sensitivity analysis
Reasonable possible alternative assumptions for unobservable
inputs used in the valuation model could give rise to significant
changes in the fair value of the assets. The sensitivity of the
valuation of other loans to the default assumption is determined by
reference to movement in credit spreads.
The Group has estimated the impact on fair value to changes to
these inputs as follows:
Credit
Other loans spreads
net increase/(decrease) in fair value (GBPm) +100bps
============================================== ========
2020 (91.5)
============================================== ========
2019 (75.7)
============================================== ========
Recoveries from reinsurers on investment contracts
Recoveries from reinsurers on investment contracts represent
fully reinsured funds invested under the Flexible Pension Plan.
During 2019 the Group closed its Flexible Pension Plan product to
new business and completed the transfer of the business to an
external provider.
Investment contract liabilities
Principal assumptions underlying the calculation of investment
contract liabilities
Valuation discount rates
The valuation model discounts the expected future cash flows
using a contractual discount rate derived from the assets
hypothecated to back the liabilities. The discount rate used for
the fixed term annuity product treated as investment business is
2.34% (2019: 3.01%).
Sensitivity analysis
The sensitivity of fair value to changes in the discount rate
assumptions in respect of investment contract liabilities is not
material.
Deposits received from reinsurers
Deposits from reinsurers which have been unbundled from their
reinsurance contract and recognised at fair value through profit or
loss are measured in accordance with the reinsurance contract and
taking into account an appropriate discount rate for the timing of
expected cash flows of the liabilities.
Principal assumptions underlying the calculation of deposits
received from reinsurers
Discount rate
The valuation model discounts the expected future cash flows
using a contractual discount rate derived from the assets
hypothecated to back the liabilities at a product level. The
discount rates used for individual retirement and individual care
annuities were 2.21% and 0.06% respectively (2019: 2.89% and 0.92%
respectively).
Credit spreads
The valuation of deposits received from reinsurers includes a
credit spread derived from the assets hypothecated to back these
liabilities. A credit spread of 205bps (2019: 181ps) was applied in
respect of the most significant reinsurance contract.
Sensitivity analysis
Reasonable possible alternative assumptions for unobservable
inputs used in the valuation model could give rise to significant
changes in the fair value of the liabilities (see note 27 (b)). The
Group has estimated the impact on fair value to changes to these
inputs as follows:
Credit Interest
Deposits received from reinsurers spreads rates
net increase/(decrease) in fair value (GBPm) +100bps +100bps
============================================== ======== ========
2020 (80.1) (218.6)
============================================== ======== ========
2019 (81.2) (200.9)
============================================== ======== ========
18 Deferred tax
2020 2019
=================== ======================== ========================
Asset Liability Total Asset Liability Total
GBPm GBPm GBPm GBPm GBPm GBPm
=================== ===== ========= ====== ===== ========= ======
Transitional tax - (4.2) (4.2) - (6.0) (6.0)
=================== ===== ========= ====== ===== ========= ======
Intangible assets - (17.8) (17.8) - (19.0) (19.0)
=================== ===== ========= ====== ===== ========= ======
Land and buildings - (0.8) (0.8) - (0.9) (0.9)
=================== ===== ========= ====== ===== ========= ======
Other provisions 11.5 - 11.5 11.5 (0.4) 11.1
=================== ===== ========= ====== ===== ========= ======
Total deferred tax 11.5 (22.8) (11.3) 11.5 (26.3) (14.8)
=================== ===== ========= ====== ===== ========= ======
The transitional tax liability of GBP4.2m (2019: GBP6.0m)
represents the adjustment arising from the change in the tax rules
for life insurance companies which is amortised over ten years from
1 January 2013 and the transitional adjustments for tax purposes in
adopting IFRS which is amortised over ten years from 1 January
2016.
Other provisions principally relate to temporary differences
between the IFRS financial statements and tax deductions for
statutory insurance liabilities.
The movement in the net deferred tax balance was as follows:
Year ended Year ended
31 December 31 December
2020 2019
GBPm GBPm
========================================= ============ ============
Net balance at 1 January (14.8) (13.6)
========================================= ============ ============
Recognised in profit or loss 3.4 (1.2)
========================================= ============ ============
Recognised in other comprehensive income 0.1 -
========================================= ============ ============
Net balance at 31 December (11.3) (14.8)
========================================= ============ ============
The Group has unrecognised deferred tax assets of GBP5.3m (2019:
GBP3.9m).
19 Insurance and other receivables
2020 2019
GBPm GBPm
============================================================= ===== =====
Receivables arising from insurance and reinsurance contracts 21.0 11.1
============================================================= ===== =====
Finance lease receivables 3.8 2.7
============================================================= ===== =====
Other receivables 7.2 11.7
============================================================= ===== =====
Total insurance and other receivables 32.0 25.5
============================================================= ===== =====
Finance lease receivables are due as follows:
2020 2019
GBPm GBPm
============================================= ===== =====
Less than one year 1.6 0.8
============================================= ===== =====
Between one and two years 1.6 0.8
============================================= ===== =====
Between two and three years 0.7 0.8
============================================= ===== =====
Between three and four years - 0.4
============================================= ===== =====
Total undiscounted lease payments receivable 3.9 2.8
============================================= ===== =====
Unearned finance income (0.1) (0.1)
============================================= ===== =====
Net investment in leases 3.8 2.7
============================================= ===== =====
Other than finance lease receivables, insurance and other
receivables of GBPnil (2019: GBPnil) are expected to be recovered
more than one year after the Consolidated statement of financial
position date.
20 Cash and cash equivalents
2020 2019
GBPm GBPm
=========================================================== ======= =======
Cash available on demand 1,496.3 267.0
=========================================================== ======= =======
Units in liquidity funds 1,128.5 1,384.0
=========================================================== ======= =======
Cash and cash equivalents in the Consolidated statement of
cash flows 2,624.8 1,651.0
=========================================================== ======= =======
21 Share capital
The allotted and issued ordinary share capital of the Group at
31 December 2020 is detailed below:
Number of Share Share Merger
GBP0.10 ordinary capital premium reserve Total
shares GBPm GBPm GBPm GBPm
===================================== ================= ======== ======== ======== =====
At 1 January 2020 1,035,081,664 103.5 94.5 597.1 795.1
===================================== ================= ======== ======== ======== =====
Shares issued in respect of employee
share schemes 3,046,892 0.3 - - 0.3
===================================== ================= ======== ======== ======== =====
At 31 December 2020 1,038,128,556 103.8 94.5 597.1 795.4
===================================== ================= ======== ======== ======== =====
At 1 January 2019 941,068,882 94.1 94.5 532.7 721.3
===================================== ================= ======== ======== ======== =====
Shares issued 94,012,782 9.4 - 64.4 73.8
===================================== ================= ======== ======== ======== =====
At 31 December 2019 1,035,081,664 103.5 94.5 597.1 795.1
===================================== ================= ======== ======== ======== =====
On 14 March 2019, the Company completed the placing of
94,012,782 ordinary shares of 10 pence each at a price of 80 pence
per share to both existing and new ordinary equity shareholders,
raising gross proceeds of GBP75m. The placing price represents a
discount of 6.7% on the market price of 85.3 pence per share at the
time of the placing. The placing was achieved by the Company
acquiring 100% of the equity of a limited company for consideration
of the 94,012,782 new ordinary shares issued. Accordingly, merger
relief under section 612 of the Companies Act 2006 applies, and
share premium has not been recognised in respect of this issue of
shares. A merger reserve has been recognised representing the
premium over the nominal value of the shares issued.
Consideration for the acquisition of 100% of the equity shares
of Partnership Assurance Group plc in 2016 consisted of a new issue
of shares in the Company. Accordingly, merger relief under section
612 of the Companies Act 2006 applies, and share premium has not
been recognised in respect of this issue of shares. A merger
reserve has been recognised representing the difference between the
nominal value of the shares issued and the net assets of
Partnership Assurance Group plc acquired.
22 Tier 1 notes
Year ended Year ended
31 December 31 December
2020 2019
GBPm GBPm
======================== ============ ============
At 1 January 294.0 -
======================== ============ ============
Issued in the period - 300.0
======================== ============ ============
Issue costs, net of tax - (6.0)
======================== ============ ============
At 31 December 294.0 294.0
======================== ============ ============
In March 2019, the Group completed the issue of GBP300m fixed
rate perpetual restricted Tier 1 contingent convertible notes,
incurring issue costs of GBP6.0m, net of tax.
The notes bear interest on the principal amount up to 26 April
2024 (the first call date) at the rate of 9.375% per annum, and
thereafter at a fixed rate of interest reset on the first call date
and on each fifth anniversary thereafter. Interest is payable on
the notes semi-annually in arrears on 26 April and 26 October each
year, commencing on 26 April 2019. During the year, interest of
GBP28.1m (2019: GBP16.8m) was paid to noteholders.
The Group has the option to cancel the coupon payment at its
discretion and cancellation of the coupon payment becomes mandatory
upon non-compliance with the solvency capital requirement or
minimum capital requirement or where the Group has insufficient
distributable items. Cancelled coupon payments do not accumulate or
become payable at a later date and do not constitute a default. In
the event of non-compliance with specific solvency requirements,
the conversion of the Tier 1 notes into ordinary shares could be
triggered.
The Tier 1 notes are treated as a separate category within
equity and the coupon payments are recognised outside of the profit
after tax result and directly in shareholders' equity.
23 Insurance contracts and related reinsurance
Insurance liabilities
2020 2019
GBPm GBPm
============================ ========= =========
Gross insurance liabilities 21,118.4 19,003.7
============================ ========= =========
Net reinsurance assets (2,865.5) (3,732.0)
============================ ========= =========
Net insurance liabilities 18,252.9 15,271.7
============================ ========= =========
(a) Terms and conditions of insurance contracts
The Group's long-term insurance contracts include Retirement
Income (Guaranteed Income for Life ("GIfL"), Defined Benefit
("DB"), and immediate needs and deferred Care Plans), and whole of
life and term protection insurance.
The insurance liabilities are agreed by the Board using
recognised actuarial valuation methods proposed by the Group's
Actuarial Reporting Function. In particular, a prospective gross
premium valuation method has been adopted for major classes of
business.
Although the process for the establishment of insurance
liabilities follows specified rules and guidelines, the provisions
that result from the process remain uncertain. As a consequence of
this uncertainty, the eventual value of claims could vary from the
amounts provided to cover future claims. The Group seeks to provide
for appropriate levels of contract liabilities taking known facts
and experiences into account but nevertheless such provisions
remain uncertain.
The estimation process used in determining insurance liabilities
involves projecting future annuity payments and the cost of
maintaining the contracts. For non-annuity contracts, the liability
is determined as the sum of the discounted value of future benefit
payments and future administration expenses less the expected value
of premiums payable under the contract. The key sensitivities are
the assumed level of interest rates and the mortality
experience.
(b) Principal assumptions underlying the calculation of
insurance contracts
The principal assumptions underlying the calculation of
insurance contracts are explained below. This includes any areas
sensitive to COVID-19 effects or other economic downturn.
Mortality assumptions
The impact of the COVID-19 pandemic on UK mortality has been
significant, and the understanding of excess deaths continues to
develop as more data becomes available and is analysed.
The Group experienced mortality levels in 2020 which were around
10% higher than expected. This was broadly in line with the wider
UK experience (adjusted for the demographic profile of our
customers relative to the population as a whole) and primarily
reflects the impact of COVID-19. This contributed to the GBP21.7m
of positive mortality experience variance for GIfL, Care and DB
reported in 2020, which was partly offset by the negative mortality
experience variance for LTM business.
The total number of registered deaths in the UK in January and
February 2021 has been much higher than normal for the time of
year. However, we note that the weekly total has reduced
significantly in recent weeks and the number of non-COVID deaths
has remained relatively low despite the drop in COVID deaths. At
this stage, there is considerable uncertainty as to the degree to
which mortality rates might exceed current expectations over the
course of 2021. The scale of the variance will depend on factors
such as the effectiveness of the vaccine programme and the
potential emergence of new variants. However, the experience
variance noted for 2020 is a reference point for the potential
impact of elevated mortality experience in the short-term.
The Group considers that it is still too early to judge the
longer-term impact of COVID-19 on mortality and therefore no
explicit allowance for the pandemic has been included in future
mortality assumptions as at 31 December 2020. The Group will
continue to follow closely the actual and potential future impact
of COVID-19 on mortality as further information becomes available,
and will review its mortality assumptions should credible evidence
emerge. In particular, the Group continues to analyse possible
direct and indirect impacts of the pandemic, including the
possibility there will be enduring influences on the longevity of
customers.
Mortality assumptions have been set by reference to appropriate
standard mortality tables. These tables have been adjusted to
reflect the future mortality experience of the policyholders,
taking into account the medical and lifestyle evidence collected
during the underwriting process, premium size, gender and the
Group's assessment of how this experience will develop in the
future. The assessment takes into consideration relevant industry
and population studies, published research materials, input from
the Group's lead reinsurer and management's own industry
experience.
The standard tables which underpin the mortality assumptions are
summarised in the table below.
2020 2019
========================= ====================================== =====================================
Individually underwritten Modified E&W Population mortality, Modified E&W Population mortality,
Guaranteed Income with CMI 2019 model mortality with modified CMI 2017 model
for Life Solutions improvements for both Merica mortality improvements for
(JRL) and PrognoSys(TM) underwritten both Merica and PrognoSys(TM)
business underwritten business
========================= ====================================== =====================================
Individually underwritten Modified E&W Population mortality, Modified E&W Population mortality,
Guaranteed Income with CMI 2019 model mortality with modified CMI 2017 model
for Life Solutions improvements mortality improvements
(PLACL)
========================= ====================================== =====================================
Defined Benefit (JRL) Modified E&W Population mortality, Modified E&W Population mortality,
with CMI 2019 model mortality with modified CMI 2017 model
improvements for standard mortality improvements for
underwritten business; Reinsurer standard underwritten business;
supplied tables underpinned Reinsurer supplied tables
by the Self-Administered Pension underpinned by the Self-Administered
Scheme ("SAPS") S1 tables, Pension Scheme ("SAPS") S1
with modified CMI 2009 model tables, with modified CMI
mortality improvements for 2009 model mortality improvements
medically underwritten business for medically underwritten
business
========================= ====================================== =====================================
Defined Benefit (PLACL) Modified E&W Population mortality, Modified E&W Population mortality,
with CMI 2019 model mortality with modified CMI 2017 model
improvements mortality improvements
========================= ====================================== =====================================
Care Plans and other Modified PCMA/PCFA and with Modified PCMA/PCFA and with
annuity products (PLACL) CMI 2019 model mortality improvements modified CMI 2017 model mortality
for Care Plans; improvements for Care Plans;
Modified PCMA/PCFA or modified Modified PCMA/PCFA or modified
E&W Population mortality with E&W Population mortality
CMI 2019 model mortality improvements with modified CMI 2017 model
for other annuity products mortality improvements for
other annuity products
========================= ====================================== =====================================
Protection (PLACL) TM/TF00 Select TM/TF00 Select
========================= ====================================== =====================================
All references to the use of the CMI 2019 model relate to
improvements for calendar year 2020 onwards. The modified CMI 2017
model has been used to derive base mortality rates and improvements
for years up to and including 2019.
The long-term improvement rates in the CMI 2019 model are 2.0%
for males and 1.75% for females (2019: 2.0% for males and 1.75% for
females). The period smoothing parameter in the modified CMI 2019
model has been set to 7.00 (2019: 7.25). The addition to initial
rates ('A') parameter in the model varies between 0% and 0.25%
depending on product (2019: n/a). All other CMI model parameters
are the defaults (2019: other parameters set to defaults). For 31
December 2020, full mortality improvements have been applied to all
components of the mortality basis for Merica GIfL business in JRL.
Previously a proportion of full improvements was applied to excess
mortality. This strengthening of the assumption ensures the
application of improvements for Merica is aligned with the approach
more generally used for other products.
Valuation discount rates
Valuation discount rate assumptions are set by considering the
yields on the assets available to back the liabilities. The yields
on lifetime mortgage assets are derived using the assumptions
described in note 17 with allowance for risk through the deductions
related to the NNEG. An explicit allowance for credit risk is
included by making an explicit deduction from the yields on debt
and other fixed income securities, loans secured by commercial
mortgages, and other loans based on an expectation of default
experience of each asset class and application of a prudent
loading. Allowances vary by asset category and by rating. Economic
uncertainty surrounding COVID-19 increases the risk of credit
defaults. Our underlying default methodology allows for the impact
of credit rating downgrades and spread widening and hence we have
maintained the same methodology at 31 December 2020. The
considerations around COVID-19 for property prices affecting the
NNEG and corresponding changed to assumption for the valuation
discount rate are as described in note 17.
2020 2019
Valuation discount rates - gross liabilities % %
=============================================================== ==== ====
Individually underwritten Guaranteed Income for Life Solutions
(JRL) 2.34 3.01
=============================================================== ==== ====
Individually underwritten Guaranteed Income for Life Solutions
(PLACL) 2.21 2.89
=============================================================== ==== ====
Defined Benefit (JRL) 2.34 3.01
=============================================================== ==== ====
Defined Benefit (PLACL) 2.21 2.89
=============================================================== ==== ====
Other annuity products (PLACL) 0.06 0.92
=============================================================== ==== ====
Term and whole of life products (PLACL) 0.28 0.98
=============================================================== ==== ====
The overall reduction in yield to allow for the risk of default
from all non-LTM assets (gilts, corporate bonds, infrastructure
loans, private placements and commercial mortgages) and the NNEG
from LTMs was in aggregate 69bps in JRL and 65bps in PLACL (2019:
58bps and 60bps respectively).
Future expenses
Assumptions for future policy expense levels are determined from
the Group's recent expense analyses. The JRL GIfL maintenance
expense assumption used at 31 December 2020 was GBP28.58 per plan
(2019: GBP28.50), whilst the JRL DB maintenance assumption used at
31 December 2020 was GBP111.64 per scheme member (2019: GBP112.71).
The PLACL GIfL maintenance expense assumption used at 31 December
2020 was GBP32.70 per plan (2019: GBP28.50), whilst the PLACL DB
maintenance assumption used at 31 December 2020 was GBP220.70 per
scheme member (2019: GBP175.40). The assumed future policy expense
levels incorporate an annual inflation rate allowance of 3.85%
(2019: 4.4%) derived from the expected retail price and consumer
price indices implied by inflation swap rates and an additional
allowance for earnings inflation. The assumption change includes
the revision to the proportions assumed to increase at each RPI,
CPI and earnings and reduction in the prudent margin applied.
(c) Movements
The following movements have occurred in the insurance contract
balances for Retirement Income products during the year.
Year ended 31 December 2020 Gross Reinsurance Net
GBPm GBPm GBPm
============================================ ========= =========== =========
At 1 January 2020 19,003.7 (3,732.0) 15,271.7
============================================ ========= =========== =========
Increase in liability from premiums 1,803.0 14.1 1,817.1
============================================ ========= =========== =========
Release of liability due to recorded claims (1,397.5) 323.9 (1,073.6)
============================================ ========= =========== =========
Unwinding of discount 565.6 (103.0) 462.6
============================================ ========= =========== =========
Changes in economic assumptions 1,360.3 (252.8) 1,107.5
============================================ ========= =========== =========
Changes in non-economic assumptions (142.2) 96.9 (45.3)
============================================ ========= =========== =========
Other movements(1) (74.5) 787.4 712.9
============================================ ========= =========== =========
At 31 December 2020 21,118.4 (2,865.5) 18,252.9
============================================ ========= =========== =========
1 Includes the impact of reinsurance recapture (see note 29).
Year ended 31 December 2019 Gross Reinsurance Net
GBPm GBPm GBPm
============================================ ========= =========== ========
At 1 January 2019 17,273.8 (4,239.2) 13,034.6
============================================ ========= =========== ========
Increase in liability from premiums 1,586.2 8.4 1,594.6
============================================ ========= =========== ========
Release of liability due to recorded claims (1,265.1) 354.1 (911.0)
============================================ ========= =========== ========
Unwinding of discount 599.7 (138.2) 461.5
============================================ ========= =========== ========
Changes in economic assumptions 886.5 (193.1) 693.4
============================================ ========= =========== ========
Changes in non-economic assumptions (44.3) 14.6 (29.7)
============================================ ========= =========== ========
Other movements(1) (33.1) 461.4 428.3
============================================ ========= =========== ========
At 31 December 2019 19,003.7 (3,732.0) 15,271.7
============================================ ========= =========== ========
1 Includes the impact of reinsurance recapture (see note 29).
Reinsurance in the tables above is the net position of
reinsurance assets and reinsurance liabilities. There is no impact
on the analysis above of the restatement of reinsurance asset and
reinsurance liability comparatives discussed in note 2.
Effect of changes in assumptions and estimates during the
year
Economic assumption changes
The principal economic assumption changes impacting the movement
in insurance liabilities during the year relates to discount rates
and inflation for both JRL and PLACL.
Discount rates
The movement in the valuation interest rate captures the impact
of underlying changes in risk-free curves and spreads and cash
flows arising on backing assets held over the course of the year.
This includes the effect of the reduced property growth rate
assumed for lifetime mortgages. The movement of the discount rate
includes purchases to support new business and trading for risk
management purposes. For the year to 31 December 2020, the
contribution from the decrease in discount rate of GBP1,189m was
largely due to falls in the risk free rate and changes to the
backing asset portfolio including the lifetime mortgage portfolio
sale.
Inflation
Insurance liabilities for inflation-linked products, most
notably Defined Benefit business and expenses on all products are
impacted by changes in future expectations of RPI, CPI and earnings
inflation. For the year to 31 December the contribution was
GBP(81)m from changes in market-implied inflation. A fall in
inflation reduces the carrying value of the Group's insurance
liabilities.
Non-economic assumption changes
The principal non-economic assumption changes impacting the
movement in insurance liabilities during the year relate to
mortality and maintenance expense assumptions for both JRL and
PLACL. Note that impacts quoted below relate specifically to the
liability cashflow impact of these changes; any resulting change to
the discount rate is captured above.
Mortality
The mortality bases applied are outlined above in note 23(b).
For the year to 31 December 2020, this resulted in a net reduction
in insurance liabilities of GBP(27)m. A decrease in future
expectations of longevity reduces the carrying value of the Group's
insurance liabilities.
Maintenance expenses and inflation methodology
This item primarily includes a reduction in the expense
inflation arising from the changes to the calculation method of
expense inflation, which included a reduction in the margin over
the best estimate. For the year to 31 December 2020 this resulted
in a net reduction in insurance liabilities of GBP(19)m. A decrease
in maintenance expense assumptions decreases the carrying value of
the Group's insurance liabilities.
(d) Estimated timing of net cash outflows from insurance
contract liabilities
The following table shows the insurance contract balances
analysed by duration. The total balances are split by duration of
Retirement Income payments in proportion to the policy cash flows
estimated to arise during the year.
Expected cash flows (undiscounted)
============ =============================================== ===================
Within 1-5 5-10 Over Carrying
1 year years years 10 years Total value (discounted)
2020 GBPm GBPm GBPm GBPm GBPm GBPm
============ ======= ======= ======= ========= ========= ===================
Gross 1,356.5 5,139.3 5,893.8 15,250.4 27,640.0 21,118.4
============ ======= ======= ======= ========= ========= ===================
Reinsurance (211.6) (766.6) (818.8) (1,815.6) (3,612.6) (2,865.5)
============ ======= ======= ======= ========= ========= ===================
Net 1,144.9 4,372.7 5,075.0 13,434.8 24,027.4 18,252.9
============ ======= ======= ======= ========= ========= ===================
Expected cash flows (undiscounted)
============ =================================================== ===================
Within 1-5 5-10 Over Carrying
1 year years years 10 years Total value (discounted)
2019 GBPm GBPm GBPm GBPm GBPm GBPm
============ ======= ========= ========= ========= ========= ===================
Gross 1,303.4 4,929.4 5,620.4 14,945.3 26,798.5 19,003.7
============ ======= ========= ========= ========= ========= ===================
Reinsurance (295.9) (1,085.2) (1,152.5) (2,474.4) (5,008.0) (3,732.0)
============ ======= ========= ========= ========= ========= ===================
Net 1,007.5 3,844.2 4,467.9 12,470.9 21,790.5 15,271.7
============ ======= ========= ========= ========= ========= ===================
(e) Sensitivity analysis
The Group has estimated the impact on profit before tax for the
year in relation to insurance contracts and related reinsurance
from reasonably possible changes in key assumptions relating to
financial assets and liabilities. The sensitivities capture the
liability impacts arising from the impact on the yields of the
assets backing liabilities in each sensitivity. The impact of
changes in the value of assets and liabilities has been shown
separately to aid the comparison with the change in value of assets
for the relevant sensitivities in note 17. To further assist with
this comparison, any impact on reinsurance assets has been included
within the liabilities line item.
The sensitivity factors are applied via financial models. The
analysis has been prepared for a change in each variable with other
assumptions remaining constant. In reality, such an occurrence is
unlikely, due to correlation between the assumptions and other
factors. It should also be noted that these sensitivities are
non-linear, and larger or smaller impacts cannot necessarily be
interpolated or extrapolated from these results. The extent of
non-linearity grows as the severity of any sensitivity is
increased. For example, in the specific scenario of property price
falls, the impact on IFRS profit before tax from a 5% fall in
property prices would be slightly less than half of that disclosed
in the table below. Furthermore, in the specific scenario of a
mortality reduction, a smaller fall than disclosed in the table
below or a similar increase in mortality may be expected to result
in broadly linear impacts. However, it becomes less appropriate to
extrapolate the expected impact for more severe scenarios. The
sensitivity factors take into consideration that the Group's assets
and liabilities are actively managed and may vary at the time that
any actual market movement occurs. The impacts indicated below for
insurance contracts also reflect movements in financial
derivatives, which are impacted by movements in interest rates.
Related reinsurance assets are not impacted by financial
derivatives. The sensitivities below cover the changes on all
assets and liabilities from the given stress. The impact of these
sensitivities on IFRS net equity is the impact on profit before tax
as set out in the table below less tax at the current tax rate.
Sensitivity factor Description of sensitivity factor applied
===================== ==============================================================
Interest rate and The impact of a change in the market interest rates by
investment return +/- 1% (e.g. if a current interest rate is 5%, the impact
of an immediate change to 4% and 6% respectively). The
test consistently allows for similar changes to both assets
and liabilities
===================== ==============================================================
Expenses The impact of an increase in maintenance expenses by 10%
===================== ==============================================================
Base mortality The impact of a decrease in base table mortality rates
rates by 5% applied to both Retirement Income liabilities and
loans secured by residential mortgages
===================== ==============================================================
Mortality improvement The impact of a level increase in mortality improvement
rates rates of 0.25% for both Retirement Income liabilities
and loans secured by residential mortgages
===================== ==============================================================
Immediate property The impact of an immediate decrease in the value of properties
price fall by 10%
===================== ==============================================================
Future property The impact of a reduction in future property price growth
price growth by 0.5%
===================== ==============================================================
Future property The impact of an increase in future property price volatility
price volatility by 1%
===================== ==============================================================
Voluntary redemptions The impact of an increase in voluntary redemption rates
on loans secured by residential mortgages by 10%
===================== ==============================================================
Credit defaults The impact of an increase in the credit default assumption
of 10bps
===================== ==============================================================
Impact on profit before tax (GBPm)
Immediate Future Future
property property property
Interest Interest Maintenance Base Mortality price price price Voluntary Credit
rates rates expenses mortality improvement fall growth volatility redemptions defaults
+1% -1% +10% -5% +0.25% -10% -0.5% +1% +10% +10bps
===== ============ ========= ========= =========== ========= =========== ========= ======== ========== =========== ========
2020 Assets (2,471.3) 2,955.9 (5.9) 35.3 15.6 (105.8) (72.8) (51.5) (14.5) -
===== ============ ========= ========= =========== ========= =========== ========= ======== ========== =========== ========
Liabilities 1,974.6 (2,369.9) (50.5) (149.6) (109.4) (88.0) (83.8) (43.9) (83.8) (150.6)
================== ========= ========= =========== ========= =========== ========= ======== ========== =========== ========
Total (496.7) 586.0 (56.4) (114.3) (93.8) (193.8) (156.6) (95.4) (98.3) (150.6)
================== ========= ========= =========== ========= =========== ========= ======== ========== =========== ========
2019 Assets (2,139.5) 2,551.3 (6.6) 29.8 14.0 (104.5) (80.2) (55.6) (12.8) -
===== ============ ========= ========= =========== ========= =========== ========= ======== ========== =========== ========
Liabilities 1,744.3 (2,077.5) (42.9) (128.0) (78.5) (76.8) (72.7) (38.3) (87.7) (85.8)
================== ========= ========= =========== ========= =========== ========= ======== ========== =========== ========
Total (395.2) 473.8 (49.5) (98.2) (64.5) (181.3) (152.9) (93.9) (100.5) (85.8)
================== ========= ========= =========== ========= =========== ========= ======== ========== =========== ========
24 Investment contract liabilities
Year ended Year ended
31 December 31 December
2020 2019
GBPm GBPm
======================================================= ============ ============
At 1 January 54.0 197.8
======================================================= ============ ============
Deposits received from policyholders 1.0 26.7
======================================================= ============ ============
Payments made to policyholders (14.0) (78.3)
======================================================= ============ ============
Change in contract liabilities recognised in profit or
loss 1.8 (92.2)
======================================================= ============ ============
At 31 December 42.8 54.0
======================================================= ============ ============
During 2019 the Group closed its Flexible Pension Plan product
to new business and completed the transfer of the business to an
external provider.
(a) Terms and conditions of investment contracts
The Group has written Capped Drawdown products for the
at-retirement market. These products are no longer available to new
customers. In return for a single premium, these contracts pay a
guaranteed lump sum on survival to the end of the fixed term. There
is an option at outset to select a lower sum at maturity and
regular income until the earlier of death or maturity. Upon death
of the policyholder and subject to the option selected at the
outset, there may be a return of premium less income received or
income payable to a dependant until the death of that
dependant.
(b) Principal assumptions underlying the calculation of
investment contracts
Valuation discount rates
Valuation discount rate assumptions for investment contracts are
set with regard to yields on supporting assets. The yields on
lifetime mortgage assets are derived using the assumptions
described in note 17 with allowance for risk through the deductions
related to the NNEG. An explicit allowance for credit risk is
included by making an explicit deduction from the yields on debt
and other fixed income securities based on historical default
experience of each asset class.
2020 2019
Valuation discount rates % %
========================= ==== ====
Investment contracts 2.34 3.01
========================= ==== ====
25 Loans and borrowings
Carrying value Fair value
=========================================================== ================= =============
2020 2019 2020 2019
% % % %
=========================================================== ======== ======= ====== =====
GBP100m 9.5% 10 year subordinated debt 2025 non-callable
5 years (Tier 2) issued by Partnership Life Assurance
Company Limited (call option in March 2020) - 60.7 - 67.2
=========================================================== ======== ======= ====== =====
GBP250m 9.0% 10 year subordinated debt 2026 (Tier
2) issued by Just Group plc 249.1 248.9 260.0 255.8
=========================================================== ======== ======= ====== =====
GBP125m 8.125% 10 year subordinated debt 2029 (Tier
2) issued by Just Group plc 121.8 121.4 127.0 127.5
=========================================================== ======== ======= ====== =====
GBP250m 7.0% 10.5 year subordinated debt 2013 non-callable
5.5 years (Green Tier 2) issued by Just Group plc 248.2 - 253.9 -
=========================================================== ======== ======= ====== =====
GBP230m 3.5% 7 year subordinated debt 2025 (Tier
3) issued by Just Group plc 154.4 229.0 161.1 239.7
=========================================================== ======== ======= ====== =====
Total loans and borrowings 773.5 660.0 802.0 690.2
=========================================================== ======== ======= ====== =====
On 2 October 2019, the Group completed the issue of GBP125m Tier
2 capital via an 8.125% sterling denominated BBB rated 10 year
bonds issue, interest payable semi-annually in arrears. The
proceeds of the issue have been used to refinance the GBP100m 9.5%
Partnership Life Assurance Company Limited subordinated notes due
2025 ("PLACL notes"), a proportion of which were tendered for and
subsequently cancelled in October 2019, the remainder being called
at the first call option date in March 2020.
On 15 October 2020, the Group completed the issue of GBP250m
Green Tier 2 capital via a 7.0% sterling denominated BBB rated 10.5
year, non-callable 5.5 year bonds issue, interest payable
semi-annually in arrears. The bonds have a reset date of 15 April
2026 with optional redemption any time from 15 October 2025 up to
the reset date. The proceeds of the issue have been used in part to
finance the purchase of GBP75m of the GBP230m 3.5% 7 year
subordinated debt 2025 (Tier 3) issued by the Group in 2018.
The Group also has an undrawn revolving credit facility of up to
GBP200m for general corporate and working capital purposes
available until 15 May 2022. Interest is payable on any drawdown
loans at a rate of Libor plus a margin of between 1.50% and 2.75%
per annum depending on the Group's ratio of net debt to net
assets.
Movements in borrowings during the year were as follows:
Year ended Year ended
31 December 31 December
2020 2019
GBPm GBPm
========================================================== ============ ============
At 1 January 660.0 573.4
========================================================== ============ ============
Proceeds from issue of Just Group plc Tier 2 subordinated
debt 250.0 125.0
========================================================== ============ ============
Issue costs (1.9) (3.6)
========================================================== ============ ============
Repayment of Partnership Life Assurance Company Limited
Tier 2 subordinated debt (62.5) (37.5)
========================================================== ============ ============
Repayment of Just Group plc Tier 3 subordinated debt (75.0) -
========================================================== ============ ============
Financing cash flows 110.6 83.9
========================================================== ============ ============
Amortisation of issue costs 2.9 2.7
========================================================== ============ ============
Non-cash movements 2.9 2.7
========================================================== ============ ============
At 31 December 773.5 660.0
========================================================== ============ ============
26 Lease liabilities
Lease liabilities are in respect of property assets leased by
the Group recognised as right-of-use assets within Property, plant
and equipment on the Consolidated statement of financial
position.
Movements in lease liabilities during the year were as
follows:
Year ended Year ended
31 December 31 December
2020 2019
GBPm GBPm
======================================================== ============ ============
At 1 January 12.4 -
======================================================== ============ ============
Recognition of lease liabilities on initial application
of IFRS 16 - 9.6
======================================================== ============ ============
Lease payments (4.3) (3.1)
======================================================== ============ ============
Financing cash flows (4.3) (3.1)
======================================================== ============ ============
New lease - 5.6
======================================================== ============ ============
Disposal (1.5) -
======================================================== ============ ============
Interest 0.2 0.3
======================================================== ============ ============
Non-cash movements (1.3) 5.9
======================================================== ============ ============
At 31 December 6.8 12.4
======================================================== ============ ============
Lease liabilities are payable as follows:
Present
Future value
minimum of minimum
lease lease
payments Interest payments
GBPm GBPm GBPm
=========================== ========= ======== ===========
At 31 December 2020
=========================== ========= ======== ===========
Less than one year 3.4 (0.1) 3.3
=========================== ========= ======== ===========
Between one and five years 3.6 (0.1) 3.5
=========================== ========= ======== ===========
Total 7.0 (0.2) 6.8
=========================== ========= ======== ===========
At 31 December 2019
=========================== ========= ======== ===========
Less than one year 4.4 (0.2) 4.2
=========================== ========= ======== ===========
Between one and five years 8.4 (0.2) 8.2
=========================== ========= ======== ===========
Total 12.8 (0.4) 12.4
=========================== ========= ======== ===========
27 Other financial liabilities
The Group has other financial liabilities which are measured at
either amortised cost, fair value through profit or loss, or in
accordance with relevant underlying contracts ("insurance rules"),
summarised as follows:
2020 2019
Note GBPm GBPm
====================================================== ===== ======= =======
Fair value through profit or loss
====================================================== ===== ======= =======
Derivative financial liabilities (a) 512.7 248.4
====================================================== ===== ======= =======
Obligations for repayment of cash collateral received (a) 377.4 62.8
====================================================== ===== ======= =======
Deposits received from reinsurers (b) 2,415.0 2,417.7
====================================================== ===== ======= =======
Liabilities measured using insurance rules under IFRS
4
====================================================== ===== ======= =======
Deposits received from reinsurers (b) - 772.6
====================================================== ===== ======= =======
Reinsurance finance (c) - 14.5
====================================================== ===== ======= =======
Reinsurance funds withheld (d) - 162.9
====================================================== ===== ======= =======
Total other liabilities 3,305.1 3,678.9
============================================================= ======= =======
The amount of deposits received from reinsurers and reinsurance
funds withheld that is expected to be settled more than one year
after the Consolidated statement of financial position date is
GBP2,213.4m (2019: GBP3,068.0m).
(a) Derivative financial liabilities and obligations for
repayment of cash collateral received
The derivative financial liabilities are classified at fair
value through profit or loss. All financial liabilities at fair
value through profit or loss are designated as such on initial
recognition or, in the case of derivative financial liabilities,
are classified as held for trading.
(b) Deposits received from reinsurers
Deposits received from reinsurers are either unbundled from
their reinsurance contract and recognised at fair value through
profit or loss in accordance with IAS 39, Financial instruments:
measurement and recognition; or they are recognised in accordance
with IFRS 4, Insurance contracts. All deposits received from
reinsurers are measured in accordance with the reinsurance contract
and taking into account an appropriate discount rate for the timing
of expected cash flows of the liabilities. During the year the
Group recaptured all of the business recognised in accordance with
IFRS 4 resulting in a nil balance at the end of the year (see note
29).
(c) Reinsurance finance
The reinsurance finance has been established in recognition of
the loan obligation to the reinsurers under the Group's reinsurance
financing arrangements, the repayment of which are contingent upon
the emergence of surplus under either the old Solvency I or IFRS
valuation rules. During the year the Group repaid all of the
outstanding loan obligation under the reinsurance financing
arrangements (see note 29).
(d) Reinsurance funds withheld
Reinsurance funds withheld are measured and valued in accordance
with the reinsurance contract, which takes into account an
appropriate discount rate for the timing of expected cash flows.
During the year the Group recaptured all of the business reinsured
on a funds withheld basis resulting in a nil balance at the end of
the year (see note 29).
28 Derivative financial instruments
The Group uses various derivative financial instruments to
manage its exposure to interest rates, counterparty credit risk,
property risk, inflation and foreign exchange risk.
2020 2019
=================================== =========================== ===========================
Asset Liability Asset Liability
fair fair Notional fair fair Notional
value value amount value value amount
Derivatives GBPm GBPm GBPm GBPm GBPm GBPm
=================================== ====== ========= ======== ====== ========= ========
Foreign currency swaps 267.7 194.5 4,557.5 54.8 96.3 2,035.1
=================================== ====== ========= ======== ====== ========= ========
Interest rate swaps 484.3 76.8 6,798.5 157.3 30.7 3,644.8
=================================== ====== ========= ======== ====== ========= ========
Inflation swaps 25.6 228.2 3,238.4 10.7 120.6 2,165.8
=================================== ====== ========= ======== ====== ========= ========
Forward swaps 8.9 0.1 93.8 10.1 0.8 612.4
=================================== ====== ========= ======== ====== ========= ========
Put option on property index (NNEG
hedge) 3.6 3.3 730.0 4.0 - 80.0
=================================== ====== ========= ======== ====== ========= ========
Total return swaps 9.9 9.8 - 0.1 - 66.9
=================================== ====== ========= ======== ====== ========= ========
Total 800.0 512.7 15,418.2 237.0 248.4 8,605.0
=================================== ====== ========= ======== ====== ========= ========
The Group's derivative financial instruments are not designated
as hedging instruments and changes in their fair value are included
in profit or loss.
All over-the-counter derivative transactions are conducted under
standardised International Swaps and Derivatives Association Inc.
master agreements, and the Group has collateral agreements between
the individual Group entities and relevant counterparties in place
under each of these market master agreements.
As at 31 December 2020, the Company had pledged collateral of
GBP97.8m (2019: GBP103.1m) of which GBPnil were gilts and European
Investment Bank bonds (2019: GBPnil) and had received cash
collateral of GBP377.4m (2019: GBP62.8m).
Amounts recognised in profit or loss in respect of derivative
financial instruments are as follows:
Year ended Year ended
31 December 31 December
2020 2019
GBPm GBPm
================================================= ============ ============
Movement in fair value of derivative instruments 298.7 85.2
================================================= ============ ============
Realised losses on interest rate swaps closed 29.0 44.7
================================================= ============ ============
Total amounts recognised in profit or loss 327.7 129.9
================================================= ============ ============
29 Reinsurance
The Group uses reinsurance as an integral part of its risk and
capital management activities. New business is reinsured via
longevity swap arrangements for DB and GIfL business and quota
share for DB partnering business, as follows:
-- DB was reinsured at 75% for underwritten schemes, and 90% for
non-underwritten schemes during 2020. From 1 January to 30 June
2019, DB was initially reinsured at 55% for underwritten schemes,
and 75% for non-underwritten schemes and was part of a subsequent
increase in reinsurance on 1 July 2019, as detailed below. From 1
July 2019 the reinsurance share for new business was increased to
75% for underwritten schemes, and 90% for non-underwritten
schemes.
-- DB Partnering: The Group completed its first DB partnering
transaction during 2020 which was 100% reinsured.
-- GIfL was reinsured at 90% during 2020. New business in 2019
was reinsured at 75% but was part of a subsequent increase in
reinsurance on 30 June 2020, as detailed below.
-- Care new business was not reinsured in 2020 or 2019.
In-force business is reinsured under longevity swap and quota
share treaties. The quota share reinsurance treaties have deposit
back or premium withheld arrangements to remove the majority of the
reinsurer credit risk. During 2020 the Group increased the
reinsurance on JRL GIfL business written between 1 January 2016 and
31 December 2019 from 75% to 100%. The increased cover was
effective from 30 June 2020. In 2019 the Group increased the
reinsurance on JRL DB in-force business to 100% (from 55% for
underwritten schemes and 75% for non-underwritten schemes) for all
schemes written between 1 January 2016 and 30 June 2019. The
increased cover was effective from 1 July 2019. Within the Group's
subsidiary, JRL, there are a number of quota share treaties with
financing arrangements, which were originally entered into for the
capital benefits under the old Solvency I regime (the financing
formed part of available capital). The repayment of this financing
is contingent upon the emergence of surplus under the Solvency I or
IFRS valuation rules. These treaties were closed to new business
prior to the introduction of Solvency II on 1 January 2016 but the
Group retained a capital benefit under Solvency II from the
financing arrangements as these form part of the transitional
calculations. Under IFRS the financing element is included within
other financial liabilities (see note 27(c)). These treaties also
allow JRL to recapture business once the financing loan from the
reinsurer has been fully repaid. Once a recapture becomes
effective, JRL retains 100% of the risk on business recaptured.
During the year the Group made additional repayments so as to fully
repay all financing loans and trigger the recapture of all
remaining financing treaties. In aggregate, recaptures during the
year (including those occurring as a result of these additional
repayments) resulted in a decrease of reinsurance assets of
GBP940.0m and a reduction of equal amount in the deposits received
from reinsurers recognised within other financial liabilities.
In addition to the deposits received from reinsurers recognised
within other financial liabilities (see note 27(b)), certain
reinsurance arrangements give rise to deposits from reinsurers that
are not included in the Consolidated statement of financial
position of the Group as described below:
-- The Group has an agreement with two reinsurers whereby
financial assets arising from the payment of reinsurance premiums,
less the repayment of claims, in relation to specific treaties, are
legally and physically deposited back with the Group. Although the
funds are managed by the Group (as the Group controls the
investment of the asset), no future benefits accrue to the Group as
any returns on the deposits are paid to reinsurers. Consequently,
the deposits are not recognised as assets of the Group and the
investment income they produce does not accrue to the Group.
-- The Group has an agreement with one reinsurer whereby assets
equal to the reinsurer's full obligation under the treaty are
deposited into a ringfenced collateral account. The Group has first
claim over these assets should the reinsurer default, but as the
Group has no control over these funds and does not accrue any
future benefit, this fund is not recognised as an asset of the
Group.
-- The Group has an agreement with one reinsurer whereby assets
equal to the reinsurers full obligation under the treaty are either
deposited into a ringfenced collateral account if corporate bonds
or held under a funds withheld structure if Lifetime Mortgages. The
latter are legally and physically held by the Group. Although the
funds are managed by the Group (as the Group controls the
investment of the asset), no future benefits accrue to the Group as
returns on the assets are paid to reinsurers. Consequently, the
lifetime mortgages are not recognised as assets of the Group and
the investment income they produce does not accrue to the Group.
The reinsurer also deposits cash into a bank account held legally
by the Group to fund future lifetime mortgages but as this cash is
ringfenced for issued lifetime mortgage quotes agreed by the
reinsurer, it is also recognised as an asset by the Group.
2020 2019
GBPm GBPm
========================================================== ===== =====
Deposits managed by the Group 249.0 194.5
========================================================== ===== =====
Deposits held in trust 492.0 283.4
========================================================== ===== =====
Total deposits not included in the Consolidated statement
of financial position 741.0 477.9
========================================================== ===== =====
The Group is exposed to a minimal amount of reinsurance
counterparty default risk in respect of the above arrangements and
calculates a counterparty default reserve accordingly. At 31
December 2020, this reserve totalled GBP3.6m (2019: GBP2.5m) and
largely relates to the Hannover Re and Pacific Life Re reinsurance
treaties in PLACL.
30 Other provisions
Year ended Year ended
31 December 31 December
2020 2019
GBPm GBPm
=================================== ============ ============
At 1 January 1.8 0.7
=================================== ============ ============
Amounts utilised (1.1) (1.7)
=================================== ============ ============
Amounts charged to profit and loss 0.3 2.8
=================================== ============ ============
At 31 December 1.0 1.8
=================================== ============ ============
The amount of provisions that is expected to be settled more
than 12 months after the Consolidated statement of financial
position date is GBP0.5m (2019: GBP1.2m).
31 Insurance and other payables
2020 2019
GBPm GBPm
========================================================== ===== =====
Payables arising from insurance and reinsurance contracts 24.6 22.4
========================================================== ===== =====
Other payables 67.0 50.2
========================================================== ===== =====
Total insurance and other payables 91.6 72.6
========================================================== ===== =====
Other payables includes unsettled investment purchases.
Insurance and other payables due in more than one year are GBPnil
(2019: GBPnil).
32 Commitments
Capital commitments
The Group had no capital commitments as at 31 December 2020
(2019: GBPnil).
33 Contingent liabilities
There are no contingent liabilities as at 31 December 2020.
34 Financial and insurance risk management
This note presents information about the major financial and
insurance risks to which the Group is exposed, and its objectives,
policies and processes for their measurement and management.
Financial risk comprises exposure to market, credit and liquidity
risk.
(a) Insurance risk
The writing of long-term insurance contracts requires a range of
assumptions to be made and risk arises from these assumptions being
materially inaccurate.
The Group's main insurance risk arises from adverse experience
compared with the assumptions used in pricing products and valuing
insurance liabilities, and in addition its reinsurance treaties may
be terminated, not renewed, or renewed on terms less favourable
than those under existing treaties.
Insurance risk arises through exposure to longevity, mortality
and morbidity and exposure to factors such as withdrawal levels and
management and administration expenses.
Individually underwritten GIfL are priced using assumptions
about future longevity that are based on historic experience
information, lifestyle and medical factors relevant to individual
customers, and judgements about the future development of longevity
improvements. In the event of an increase in longevity, the
actuarial reserve required to make future payments to customers may
increase.
Loans secured by mortgages are used to match some of the
liabilities arising from the sale of GIfL and DB business. In the
event that early repayments in a given period are higher than
anticipated, less interest will have accrued on the mortgages and
the amount repayable will be less than assumed at the time of sale.
In the event of an increase in longevity, although more interest
will have accrued and the amount repayable will be greater than
assumed at the time of the sale, the associated cash flows will be
received later than had originally been anticipated. In addition, a
general increase in longevity would have the effect of increasing
the total amount repayable, which would increase the LTV ratio and
could increase the risk of failing to be repaid in full as a
consequence of the no-negative equity guarantee. There is also
morbidity risk exposure as the contract ends when the customer
moves into long-term care.
Underpinning the management of insurance risk are:
-- the development and use of medical information including
PrognoSys(TM) for both pricing and reserving to provide detailed
insight into longevity risk;
-- adherence to approved underwriting requirements;
-- controls around the development of suitable products and their pricing;
-- review and approval of assumptions used by the Board;
-- regular monitoring and analysis of actual experience;
-- use of reinsurance to minimise volatility of capital requirement and profit; and
-- monitoring of expense levels.
Concentrations of insurance risk
Concentration of insurance risk comes from improving longevity.
Improved longevity arises from enhanced medical treatment and
improved life circumstances. Concentration risk is managed by
writing business across a wide range of different medical and
lifestyle conditions to avoid excessive exposure.
(b) Market risk
Market risk is the risk of loss or of adverse change in the
financial situation resulting, directly or indirectly, from
fluctuations in the level and in the volatility of market prices of
assets, liabilities and financial instruments, together with the
impact of changes in interest rates. Significant market risk is
implicit in the insurance business and arises from exposure to
interest rate risk, property risk, inflation risk and currency
risk. The Group is not exposed to any equity risk or material
currency risk. Market risk represents both upside and downside
impacts but the Group's policy to manage market risk is to limit
downside risk. Falls in the financial markets can reduce the value
of pension funds available to purchase Retirement Income products
and changes in interest rates can affect the relative
attractiveness of Retirement Income products. Changes in the value
of the Group's investment portfolio will also affect the Group's
financial position.
In mitigation, Retirement Income product monies are invested to
match the asset and liability cash flows as closely as practicable.
In practice, it is not possible to eliminate market risk fully as
there are inherent uncertainties surrounding many of the
assumptions underlying the projected asset and liability cash
flows.
For each of the material components of market risk, described in
more detail below, the market risk policy sets out the risk
appetite and management processes governing how each risk should be
measured, managed, monitored and reported.
(i) Interest rate risk
The Group is exposed to interest rate risk through its impact on
the value of, or income from, specific assets, liabilities or both.
It seeks to limit its exposure through appropriate asset and
liability matching and hedging strategies. The Group's strategy is
to actively hedge the interest rate risk to which its Solvency II
balance sheet is exposed; some exposure remains on an IFRS
basis.
The Group's exposure to changes in interest rates is
concentrated in the investment portfolio, loans secured by
mortgages and its insurance obligations. Changes in investment and
loan values attributable to interest rate changes are mitigated by
corresponding and partially offsetting changes in the value of
insurance liabilities. The Group monitors this exposure through
regular reviews of the asset and liability position, capital
modelling, sensitivity testing and scenario analyses. Interest rate
risk is also managed using derivative instruments e.g. swaps.
The following table indicates the earlier of contractual
repricing or maturity dates for the Group's significant financial
assets.
Less One to Five
than five to ten Over No fixed
one year years years ten years term Total
2020 GBPm GBPm GBPm GBPm GBPm GBPm
======================================= ========= ======= ======= ========== ======== ========
Units in liquidity funds 1,128.5 - - - - 1,128.5
======================================= ========= ======= ======= ========== ======== ========
Investment funds 37.0 139.1 - - - 176.1
======================================= ========= ======= ======= ========== ======== ========
Debt securities and other fixed income
securities 789.3 1,823.4 2,322.7 6,126.0 - 11,061.4
======================================= ========= ======= ======= ========== ======== ========
Deposits with credit institutions 99.7 - - - - 99.7
======================================= ========= ======= ======= ========== ======== ========
Derivative financial assets 11.1 35.0 84.9 669.0 - 800.0
======================================= ========= ======= ======= ========== ======== ========
Loans secured by residential mortgages - - - - 8,261.1 8,261.1
======================================= ========= ======= ======= ========== ======== ========
Loans secured by commercial mortgages 36.0 270.5 221.2 179.3 - 707.0
======================================= ========= ======= ======= ========== ======== ========
Other loans 0.4 81.7 157.1 796.8 - 1,036.0
======================================= ========= ======= ======= ========== ======== ========
Total 2,102.0 2,349.7 2,785.9 7,771.1 8,261.1 23,269.8
======================================= ========= ======= ======= ========== ======== ========
Less One to Five
than five to ten Over No fixed
one year years years ten years term Total
2019 GBPm GBPm GBPm GBPm GBPm GBPm
======================================= ========= ======= ======= ========== ======== ========
Units in liquidity funds 1,384.0 - - - - 1,384.0
======================================= ========= ======= ======= ========== ======== ========
Investment funds 25.5 111.8 - - - 137.3
======================================= ========= ======= ======= ========== ======== ========
Debt securities and other fixed income
securities 950.3 2,734.4 2,819.3 3,883.8 - 10,387.8
======================================= ========= ======= ======= ========== ======== ========
Deposits with credit institutions 104.6 - - - - 104.6
======================================= ========= ======= ======= ========== ======== ========
Derivative financial assets 10.9 15.3 63.8 147.0 - 237.0
======================================= ========= ======= ======= ========== ======== ========
Loans secured by residential mortgages - - - - 7,980.5 7,980.5
======================================= ========= ======= ======= ========== ======== ========
Loans secured by commercial mortgages 29.0 202.5 198.0 65.0 - 494.5
======================================= ========= ======= ======= ========== ======== ========
Other loans 55.9 13.8 133.5 677.1 - 880.3
======================================= ========= ======= ======= ========== ======== ========
Total 2,560.2 3,077.8 3,214.6 4,772.9 7,980.5 21,606.0
======================================= ========= ======= ======= ========== ======== ========
A sensitivity analysis of the impact of interest rate movements
on profit before tax is included in note 23(e).
(ii) Property risk
The Group's exposure to property risk arises from indirect
exposure to the UK residential property market through the
provision of lifetime mortgages. A substantial decline or sustained
underperformance in UK residential property prices, against which
the Group's lifetime mortgages are secured, could result in
proceeds on sale being exceeded by the mortgage debt at the date of
redemption. Demand may also reduce for lifetime mortgage products
through reducing consumers' propensity to borrow and by reducing
the amount they are able to borrow due to reductions in property
values and the impact on loan-to-value limits.
The risk is mitigated by ensuring that the advance represents a
low proportion of the property's value at outset and independent
third party valuations are undertaken on each property before
initial mortgages are advanced. Lifetime mortgage contracts are
also monitored through dilapidation reviews. House prices are
monitored and the impact of exposure to adverse house prices (both
regionally and nationally) is regularly reviewed. Further
mitigation is through management of the volume of lifetime
mortgages in the portfolio and the establishment of the NNEG
hedges.
A sensitivity analysis of the impact of property price movements
is included in note 17 and note 23(e). These notes also discuss the
Group's consideration of the impact of COVID-19 on property
assumptions at 31 December 2020.
(iii) Inflation risk
Inflation risk is the risk of fluctuations in the value of, or
income from, specific assets or liabilities or both in combination,
arising from relative or absolute changes in inflation or in the
volatility of inflation.
Exposure to inflation occurs in relation to the Group's own
management expenses and its matching of index-linked Retirement
Income products. Its impact is managed through the application of
disciplined cost control over its management expenses and through
matching its index-linked assets and index-linked liabilities for
the inflation risk associated with its index-linked Retirement
Income products.
(iv) Currency risk
Currency risk arises from fluctuations in the value of, or
income from, assets denominated in foreign currencies, from
relative or absolute changes in foreign exchange rates or in the
volatility of exchange rates.
Exposure to currency risk could arise from the Group's
investment in non-sterling denominated assets. From time to time,
the Group acquires fixed income securities denominated in US
dollars or other foreign currencies for its financial asset
portfolio. All material Group liabilities are in sterling. As the
Group does not wish to introduce foreign exchange risk into its
investment portfolio, derivative or quasi-derivative contracts are
entered into to eliminate the foreign exchange exposure as far as
possible.
(c) Credit risk
Credit risk arises if another party fails to perform its
financial obligations to the Group, including failing to perform
them in a timely manner.
Credit risk exposures arise from:
-- Holding fixed income investments where the main risks are
default and market risk. The risk of default (where the
counterparty fails to pay back the capital and/or interest on a
corporate bond) is mitigated by investing only in higher quality or
investment grade assets. Market risk is the risk of bond prices
falling as a result of concerns over the counterparty, or over the
market or economy in which the issuing company operates. This leads
to wider spreads (the difference between redemption yields and a
risk-free return), the impact of which is mitigated through the use
of a "hold to maturity" strategy. Concentration of credit risk
exposures is managed by placing limits on exposures to individual
counterparties and limits on exposures to credit rating levels.
-- The Group also manages credit risk on its corporate bond
portfolio through the appointment of specialist fund managers, who
execute a diversified investment strategy, investing in
investment-grade assets and imposing individual counterparty
limits. Current economic and market conditions are closely
monitored, as are spreads on the bond portfolio in comparison with
benchmark data.
-- Counterparties in derivative contracts - the Group uses
financial instruments to mitigate interest rate and currency risk
exposures. It therefore has credit exposure to various
counterparties through which it transacts these instruments,
although this is usually mitigated by collateral arrangements (see
note 27).
-- Reinsurance - reinsurance is used to manage longevity risk
but, as a consequence, credit risk exposure arises should a
reinsurer fail to meet its claim repayment obligations. Credit risk
on reinsurance balances is mitigated by the reinsurer depositing
back more than 100% of premiums ceded under the reinsurance
agreement.
-- Cash balances - credit risk on cash assets is managed by
imposing restrictions over the credit ratings of third parties with
whom cash is deposited.
-- Credit risk - credit risk for loans secured by mortgages has
been considered within "property risk" above.
The following table provides information regarding the credit
risk exposure for financial assets of the Group, which are neither
past due nor impaired at 31 December:
BB or
UK gilts AAA AA A BBB below Unrated Total
2020 GBPm GBPm GBPm GBPm GBPm GBPm GBPm GBPm
================================== ======== ======= ======= ======= ======= ====== ======= ========
Units in liquidity funds - 1,123.2 - - - 5.3 - 1,128.5
================================== ======== ======= ======= ======= ======= ====== ======= ========
Investment funds - - - - - - 176.1 176.1
================================== ======== ======= ======= ======= ======= ====== ======= ========
Debt securities and other
fixed income securities 205.6 838.8 1,519.3 3,030.5 5,124.4 342.8 - 11,061.4
================================== ======== ======= ======= ======= ======= ====== ======= ========
Deposits with credit institutions - - - 58.6 39.2 1.9 - 99.7
================================== ======== ======= ======= ======= ======= ====== ======= ========
Derivative financial assets - - - 594.2 205.8 - - 800.0
================================== ======== ======= ======= ======= ======= ====== ======= ========
Loans secured by residential
mortgages - - - - - - 8,261.1 8,261.1
================================== ======== ======= ======= ======= ======= ====== ======= ========
Loans secured by commercial
mortgages - - - - - - 707.0 707.0
================================== ======== ======= ======= ======= ======= ====== ======= ========
Other loans - 87.2 125.8 176.0 509.4 58.4 79.2 1,036.0
================================== ======== ======= ======= ======= ======= ====== ======= ========
Reinsurance - - 273.0 309.1 6.2 - 0.5 588.8
================================== ======== ======= ======= ======= ======= ====== ======= ========
Insurance and other receivables - - - - - - 32.0 32.0
================================== ======== ======= ======= ======= ======= ====== ======= ========
Total 205.6 2,049.2 1,918.1 4,168.4 5,885.0 408.4 9,255.9 23,890.6
================================== ======== ======= ======= ======= ======= ====== ======= ========
BB or
UK gilts AAA AA A BBB below Unrated Total
2019 GBPm GBPm GBPm GBPm GBPm GBPm GBPm GBPm
================================== ======== ======= ======= ======= ======= ====== ======= ========
Units in liquidity funds - 1,378.0 6.0 - - - - 1,384.0
================================== ======== ======= ======= ======= ======= ====== ======= ========
Investment funds - - - - - - 137.3 137.3
================================== ======== ======= ======= ======= ======= ====== ======= ========
Debt securities and other
fixed income securities 198.1 941.3 1,254.0 3,058.4 4,293.5 156.3 486.2 10,387.8
================================== ======== ======= ======= ======= ======= ====== ======= ========
Deposits with credit institutions - - 1.5 63.9 39.2 - - 104.6
================================== ======== ======= ======= ======= ======= ====== ======= ========
Derivative financial assets - - 0.4 152.0 38.7 - 45.9 237.0
================================== ======== ======= ======= ======= ======= ====== ======= ========
Loans secured by residential
mortgages - - - - - - 7,980.5 7,980.5
================================== ======== ======= ======= ======= ======= ====== ======= ========
Loans secured by commercial
mortgages - - - - - - 494.5 494.5
================================== ======== ======= ======= ======= ======= ====== ======= ========
Other loans - - 40.4 70.7 419.7 - 349.5 880.3
================================== ======== ======= ======= ======= ======= ====== ======= ========
Reinsurance - - 69.5 303.3 5.5 - 0.5 378.8
================================== ======== ======= ======= ======= ======= ====== ======= ========
Insurance and other receivables - - - - - - 25.5 25.5
================================== ======== ======= ======= ======= ======= ====== ======= ========
Total 198.1 2,319.3 1,371.8 3,648.3 4,796.6 156.3 9,519.9 22,010.3
================================== ======== ======= ======= ======= ======= ====== ======= ========
The credit rating for Cash and cash equivalents assets at 31
December 2020 was between a range of AA and BB.
The carrying amount of those assets subject to credit risk
represents the maximum credit risk exposure.
(d) Liquidity risk
The investment of Retirement Income cash in corporate bonds,
gilts and lifetime mortgages, and commitments to pay policyholders
and other obligations, requires liquidity risks to be taken.
Liquidity risk is the risk of loss because the Group, although
solvent, either does not have sufficient financial resources
available to it in order to meet its obligations as they fall due,
or can secure them only at excessive cost.
Exposure to liquidity risk arises from:
-- deterioration in the external environment caused by economic
shocks, regulatory changes, reputational damage, or an economic
shock resulting from the COVID-19 pandemic or from Brexit;
-- realising assets to meet liabilities during stressed market conditions;
-- increasing cash flow volatility in the short term giving rise
to mismatches between cash flows from assets and requirements from
liabilities;
-- needing to support liquidity requirements for day-to-day operations;
-- ensuring financial support can be provided across the Group; and
-- maintaining and servicing collateral requirements arising
from the changes in market value of financial derivatives used by
the Group.
Liquidity risk is managed by ensuring that assets of a suitable
maturity and marketability are held to meet liabilities as they
fall due. The Group's short-term liquidity requirements are
predominantly funded by advance Retirement Income premium payments,
investment coupon receipts, and bond principal repayments out of
which contractual payments need to be made. There are significant
barriers for policyholders to withdraw funds that have already been
paid to the Group in the form of premiums. Cash outflows associated
with Retirement Income liabilities can be reasonably estimated and
liquidity can be arranged to meet this expected outflow through
asset-liability matching and new business premiums.
The cash flow characteristics of the lifetime mortgages are
reversed when compared with Retirement Income products, with cash
flows effectively representing an advance payment, which is
eventually funded by repayment of principal plus accrued interest.
Policyholders are able to redeem mortgages, albeit at a cost. The
mortgage assets are considered illiquid, as they are not readily
saleable due to the uncertainty about their value and the lack of a
market in which to trade them.
Cash flow forecasts over the short, medium and long term are
regularly prepared to predict and monitor liquidity levels in line
with limits set on the minimum amount of liquid assets required.
Cash flow forecasts have been updated to take into account the
possible impacts from COVID-19 on the Group's liquidity position
and include assessing the impact of a 1 in 200 year event on the
Group's liquidity. Updates to cash flow forecasting include
amending projected inflows based on revised GIfL and DB volumes,
reducing LTM volumes and redemptions, and increasing the minimum
cash and cash equivalent levels to cover enhanced stresses.
Derivative stresses have been revised to take into account the
market volatility caused by COVID-19, and focus on the worst
observed movements in shorter periods up to and including one
month.
Market volatility in the second half of March 2020, in reaction
to the developing COVID-19 pandemic situation in the UK, led to a
significant temporary increase in the Group's collateral
requirements, which have subsequently reversed. The Group
experienced collateral calls for an additional c.GBP500m, which it
was able to meet from existing available liquidity balances and
facilities.
The table below summarises the maturity profile of the financial
liabilities, including both principal and interest payments, of the
Group based on remaining undiscounted contractual obligations:
2020 Within
one
year or
payable
on One to More than No fixed
demand five years five years term
GBPm GBPm GBPm GBPm
============================================= ======== =========== =========== ========
Subordinated debt 66.2 674.9 595.8 -
============================================= ======== =========== =========== ========
Derivative financial liabilities 53.3 189.0 1,408.6 -
============================================= ======== =========== =========== ========
Obligations for repayment of cash collateral
received 377.4 - - -
============================================= ======== =========== =========== ========
Deposits received from reinsurers 201.7 712.0 2,073.3 -
============================================= ======== =========== =========== ========
Reinsurance finance - - - -
============================================= ======== =========== =========== ========
Reinsurance funds withheld - - - -
============================================= ======== =========== =========== ========
2019 Within
one
year or
payable
on One to More than No fixed
demand five years five years term
GBPm GBPm GBPm GBPm
============================================= ======== =========== =========== ========
Subordinated debt 74.8 585.0 773.3 -
============================================= ======== =========== =========== ========
Derivative financial liabilities 10.2 115.0 871.2 -
============================================= ======== =========== =========== ========
Obligations for repayment of cash collateral
received 62.8 - - -
============================================= ======== =========== =========== ========
Deposits received from reinsurers 270.5 975.3 3,002.7 -
============================================= ======== =========== =========== ========
Reinsurance finance - - - 14.5
============================================= ======== =========== =========== ========
Reinsurance funds withheld 15.7 57.3 134.9 -
============================================= ======== =========== =========== ========
35 Capital
The net assets of the Group at 31 December 2020 on an IFRS basis
were GBP2,490.4m (2019: GBP2,321.0m). The Group manages capital on
a regulatory basis. Since 1 January 2016, the Group has been
required to comply with the requirements established by the
Solvency II Framework directive as adopted by the Prudential
Regulation Authority ("PRA") in the UK, and to measure and monitor
its capital resources on this basis. The Group and its regulated
subsidiaries are required to maintain eligible capital, or "Own
Funds", in excess of the value of their Solvency Capital
Requirements ("SCR"). The SCR represents the risk capital required
to be set aside to absorb 1 in 200 year stress tests of each risk
type that the Group is exposed to, including longevity risk,
property risk, credit risk and interest rate risk. These risks are
all aggregated with appropriate allowance for diversification
benefits.
In December 2015, Just Retirement Group plc and JRL received
approval to calculate their Solvency II capital requirements using
a full internal model. The capital requirement for the
ex-Partnership business is assessed using the standard formula.
Following the merger of Just Retirement and Partnership, the
capital requirement for Just Group plc is calculated using a
partial internal model.
The surplus of Own Funds over the SCR is called "Excess Own
Funds" and this effectively acts as working capital for the Group.
The overriding objective of the Solvency II capital framework is to
ensure there is sufficient capital within the insurance company to
protect policyholders and meet their payments when due.
In managing its capital the Group undertakes stress and scenario
testing to consider the Group's capacity to respond to a series of
relevant financial, insurance, or operational shocks or changes to
financial regulations should future circumstances or events differ
from current assumptions. These include scenarios and shocks due to
possible impacts from the COVID-19 pandemic. The review also
considers mitigating actions available to the Group should a severe
stress scenario occur, such as raising capital, varying the volumes
of new business written and a scenario where the Group does not
write new business. The Group's capital position can be adversely
affected by a number of factors, in particular factors that erode
the Group's capital resources and/or which impact the quantum of
risk to which the Group is exposed. In addition, any event which
erodes current profitability and is expected to reduce future
profitability and/or make profitability more volatile could impact
the Group's capital position, which in turn could have a negative
effect on the Group's results of operations.
The Group has a significant investment in LTMs, in particular in
JRL. The regulatory environment for LTMs has evolved since the
adoption of Solvency II, primarily through the publication of
SS3/17 "Solvency II: Equity Release Mortgages" in July 2017 (and
subsequent revisions in December 2018, December 2019 and April
2020). SS3/17 introduced the Effective Value Test ("EVT"), a
regulatory diagnostic validation test, which the PRA expects firms
to conduct as a means of monitoring compliance with Solvency II
requirements relating to the Matching Adjustment ("MA") for
liabilities that are matched with restructured LTMs. In 2019 JRL
updated the LTM note valuation and rating methodology and
restructured the internal LTM securitisation to better meet the
revised regulatory expectations. The restructure was effected on 31
December 2019. The internal securitisation was restructured at 31
December 2020 to remove the sold block of LTMs.
At 31 December 2020, Just passed the PRA EVT with a buffer
(0.63%) (unaudited) (2019: 0.67%) over the current minimum
deferment rate of zero (allowing for a volatility of 13%, in line
with the requirement for the EVT). From 31 December 2021, when
SS3/17 is fully phased-in, firms will be expected to meet the EVT
with a deferment rate above 0%, as specified by the PRA and
reviewed twice a year. The minimum deferment rate (to apply from 31
December 2021) was 0.5% at 31 December 2020 (as published by the
PRA on 30 September 2020). As at the end of February, we estimate
that Just passed the PRA EVT with a buffer of more than 1%
(unaudited) over a deferment rate of zero. The increase in buffer
from year end is driven by the increase in long-term rates since 31
December 2020. We note that the increase in real rates could lead
the PRA to increase the minimum deferment rate when it is reviewed.
JRL received PRA approval for an updated MA application in December
2020. The updated approval captures changes since our original
application in 2015 and provides greater flexibility to invest a
wider range of asset classes going forward.
The Group is exploring ways to reduce its exposure to UK
residential property risk, with hedging transactions and a sale of
a portfolio of LTMs completed during 2020 and further action
anticipated in the future.
There are remaining areas of uncertainty that could impact the
capital position of the Firm:
-- The PRA has published PS 14/20 and SS 1/20 which confirms
their expectations of firms' compliance to the Prudent Person
Principle with regard to managing investment risk. The proposals
took effect on 27 May 2020. The Group has reviewed and is further
enhancing its investment strategy, including taking steps to reduce
exposure to property risk through LTMs.
-- The minimum deferment rate within the EVT, published by the
PRA, could increase from 0.5%. The PRA reviews the minimum
deferment rate every 6 months and publishes the result of the
review in March and September. Increasing JRL's deferment rate by
0.5% would lead to a c.6 percentage point (unaudited) reduction in
the solvency coverage ratio.
-- JRL is preparing a major model change application for updates
to its internal model. We plan to submit this to the PRA for
approval in 2021. The purpose of model change is to ensure that the
capital requirement produced from the model remains appropriate for
the risk profile of the business and is in line with latest
regulatory expectations and emerging best practice. At this stage,
we do not expect that the internal model change will have a
significant impact on the capital requirement. However, we note
there is uncertainty on the final outcome. In particular, the
approach to assessing the EVT in stress, as required from 31
December 2021, and agreeing appropriate treatment of NNEG risk
transfer transactions remain uncertain.
-- The PRA issued CP 1/21 - Solvency II: Deep, liquid and
transparent assessments, and GBP transition to SONIA, on 7 January
2021. This proposes that the change in the reference rate used for
valuing liabilities, from LIBOR to SONIA, is implemented on 31 July
2021. Any difference between the risk-free curves on this date will
have an impact on excess Own Funds.
-- The PRA published a Dear Chief Actuary letter in February
2021 setting out the application of the EVT, in particular setting
expectations of current balance sheet values of property and
allowance for other risks. The recommendations should be
incorporated by 31 December 2021.
Given that the Group continues to experience a high level of
regulatory activity and intense regulatory supervision, there is
also the risk of PRA intervention, not limited to the matters
described in the paragraphs above, which could negatively impact on
the Group's capital position.
The Group has completed a number of actions in relation to
capital during the year:
-- Continued reduction in new business strain through a planned
reduction in new business volumes, re-pricing and cost
reductions.
-- Launch of DB partner business which is much less capital intensive.
-- Completion of additional reinsurance of existing GIfL
business to release risk margin and SCR in respect of that
business, and to increase resilience to future variations in
longevity experience.
-- Completion of the second and third NNEG hedges in March and
December 2020 and a sale of GBP540m of LTMs to increase the firm's
resilience to adverse property market events.
-- Increased interest rate hedging early in 2020, helping to
protect the Group from the adverse impact of falling interest
rates, particularly the impact on the value of MA derived from LTMs
given the EVT's sensitivity to nominal interest rates.
-- In October 2020, the Group raised GBP175m of net new capital,
through the issue of GBP250m 7% Tier 2 loan notes (before issue
costs) and tender for GBP75m of its existing GBP230m 3.5% Tier 3
loan notes.
The Group has planned actions to improve the resilience of the
balance sheet. These include:
-- On-going cost savings with a target to eliminate expense overruns by the end of 2021.
-- Further NNEG hedging transactions and continuing review of
opportunities to dispose of blocks of LTMs, aligned to the strategy
to increase the resilience of the Solvency II balance sheet to
property risk.
-- Additional reinsurance or longevity swaps on the Group's existing book of GIfL business.
-- New business strain could be further reduced by limiting the
volume of new business written or by changing the mix of new
business.
-- The Board continues to review the optimal capital mix,
subject to market liquidity and availability.
The Board recognises that the successful implementation of some
of these potential or planned actions are not wholly within the
control of the Group.
In June 2020, the Government announced that it would review
certain features of Solvency II. The review will ensure that
Solvency II properly reflects the specific features of the UK
insurance sector. The call for evidence to support the review,
issued by HM Treasury in October 2020, states that 'The Government
intends to work with the PRA to reform the risk margin. Reform
could reduce the volatility and pro-cyclicality of insurance firms'
balance sheets'. The PRA has indicated that the risk margin is too
sensitive to interest rates and higher than needed in the current
interest rate environment (letter from Sam Woods to the Chair of
the Treasury Committee, June 2018, reiterated in Anna Sweeney
speech given at the Westminster Business Forum, February 2021). Any
reduction in magnitude or volatility in the risk margin would be
expected to support the Group's capital position. The Group's risk
margin was GBP846m (unaudited) at 31 December 2020, of which
GBP762m (unaudited) is backed by TMTP.
Further information on the matters considered by the Directors
at 31 December 2020 in relation to capital and going concern is
included in note 1.1, Basis of preparation.
The Group's objectives when managing capital for all
subsidiaries are:
-- to comply with the insurance capital requirements required by
the regulators of the insurance markets where the Group operates.
The Group's policy is to manage its capital in line with its risk
appetite and in accordance with regulatory requirements;
-- to safeguard the Group's ability to continue as a going concern;
-- to ensure that in all reasonable foreseeable circumstances,
the Group is able to fulfil its commitment over the short term and
long term to pay policyholders benefits;
-- to continue to provide returns for shareholders and benefits for other stakeholders; and
-- to provide an adequate return to shareholders by pricing insurance and investment contracts commensurately with the level of risk.
Group entities that are under supervisory regulation and are
required to maintain a minimum level of regulatory capital
include:
-- Just Retirement Limited and Partnership Life Assurance
Company Limited - authorised by the PRA, and regulated by the PRA
and FCA.
-- HUB Financial Solutions Limited, Just Retirement Money
Limited and Partnership Home Loans Limited - authorised and
regulated by the FCA.
The Group and its regulated subsidiaries complied with their
regulatory capital requirements throughout the year.
Group capital position (unaudited)
The Group's estimated capital surplus position at 31 December
2020, which is unaudited, was as follows:
Minimum Group
Solvency Solvency Capital
Capital Requirement Requirement
============================= ======================= ====================
2020(1) 2019(2) 2020 2019
GBPm GBPm GBPm GBPm
============================= =========== ========== ========= =========
Eligible Own Funds 3,009 2,562 2,262 1,928
============================= =========== ========== ========= =========
Solvency Capital Requirement (1,938) (1,814) (476) (444)
============================= =========== ========== ========= =========
Excess Own Funds 1,071 748 1,786 1,484
============================= =========== ========== ========= =========
Solvency coverage ratio 155% 141% 475% 434%
============================= =========== ========== ========= =========
1 Estimated regulatory position. These figures do not allow for
any notional recalculation of TMTP as at 31 December 2020. The
estimated solvency coverage ratio including a notional
recalculation of TMTP as at 31 December 2020 is 156%.
2 As reported in the Group's Solvency and Financial Condition Report as at 31 December 2019.
36 Group entities
The Group holds investment in the ordinary shares (unless
otherwise stated) of the following subsidiary undertakings and
associate undertakings, which are all consolidated in these Group
accounts. All subsidiary undertakings have a financial year end at
31 December (unless otherwise stated).
Percentage
of nominal
share capital
and voting
Registered rights
Principal activity office held
======================================= ====================== ============= ==============
Direct subsidiary
======================================= ====================== ============= ==============
Just Retirement Group Holdings
Limited Holding company Reigate 100%
======================================= ====================== ============= ==============
Partnership Assurance Group Limited Holding company Reigate 100%
======================================= ====================== ============= ==============
Indirect subsidiary
======================================= ====================== ============= ==============
HUB Acquisitions Limited(1,5) Holding company Reigate 100%
======================================= ====================== ============= ==============
HUB Financial Solutions Limited Distribution Reigate 100%
======================================= ====================== ============= ==============
HUB Pension Solutions Limited Software development Belfast 100%
======================================= ====================== ============= ==============
Just Re 1 Limited(5) Investment activity Reigate 100%
======================================= ====================== ============= ==============
Just Re 2 Limited(5) Investment activity Reigate 100%
======================================= ====================== ============= ==============
Just Retirement (Holdings) Limited Holding company Reigate 100%
======================================= ====================== ============= ==============
Just Retirement (South Africa)
Holdings (Pty) Limited Holding company South Africa 100%
======================================= ====================== ============= ==============
Just Retirement Life (South Africa)
Limited Life assurance South Africa 100%
======================================= ====================== ============= ==============
Just Retirement Limited Life assurance Reigate 100%
======================================= ====================== ============= ==============
Just Retirement Management Services
Limited Management services Reigate 100%
======================================= ====================== ============= ==============
Provision of lifetime
Just Retirement Money Limited mortgage products Reigate 100%
======================================= ====================== ============= ==============
Partnership Group Holdings Limited Holding company Reigate 100%
======================================= ====================== ============= ==============
Partnership Holdings Limited Holding company Reigate 100%
======================================= ====================== ============= ==============
Provision of lifetime
Partnership Home Loans Limited mortgage products Reigate 100%
======================================= ====================== ============= ==============
Partnership Life Assurance Company
Limited Life assurance Reigate 100%
======================================= ====================== ============= ==============
Partnership Life US Company Management services USA 100%
======================================= ====================== ============= ==============
Partnership Services Limited(5) Management services Reigate 100%
======================================= ====================== ============= ==============
The Open Market Annuity Service
Limited(5) Software solutions Reigate 100%
======================================= ====================== ============= ==============
TOMAS Online Development Limited(5) Software development Belfast 100%
======================================= ====================== ============= ==============
Enhanced Retirement Limited Dormant Reigate 100%
======================================= ====================== ============= ==============
HUB Digital Solutions Limited Dormant Reigate 100%
======================================= ====================== ============= ==============
HUB Online Development Limited Dormant Belfast 100%
======================================= ====================== ============= ==============
HUB Transfer Solutions Limited Dormant Reigate 100%
======================================= ====================== ============= ==============
JRP Group Limited Dormant Reigate 100%
======================================= ====================== ============= ==============
JRP Nominees Limited Dormant Reigate 100%
======================================= ====================== ============= ==============
Just Annuities Limited Dormant Reigate 100%
======================================= ====================== ============= ==============
Just Equity Release Limited Dormant Reigate 100%
======================================= ====================== ============= ==============
Just Incorporated Limited Dormant Reigate 100%
======================================= ====================== ============= ==============
Just Management Services (Proprietary)
Limited Dormant South Africa 100%
======================================= ====================== ============= ==============
Just Protection Limited Dormant Reigate 100%
======================================= ====================== ============= ==============
Just Retirement Finance plc Dormant Reigate 100%
======================================= ====================== ============= ==============
Just Retirement Nominees Limited Dormant Reigate 100%
======================================= ====================== ============= ==============
Just Retirement Solutions Limited Dormant Reigate 100%
======================================= ====================== ============= ==============
PAG Finance Limited Dormant Jersey 100%
======================================= ====================== ============= ==============
PAG Holdings Limited Dormant Jersey 100%
======================================= ====================== ============= ==============
PASPV Limited Dormant Reigate 100%
======================================= ====================== ============= ==============
PayingForCare Limited Dormant Reigate 100%
======================================= ====================== ============= ==============
PLACL RE 1 Limited Dormant Reigate 100%
======================================= ====================== ============= ==============
PLACL RE 2 Limited Dormant Reigate 100%
======================================= ====================== ============= ==============
TOMAS Acquisitions Limited Dormant Reigate 100%
======================================= ====================== ============= ==============
Corinthian Group Limited Holding company Reigate 75%
======================================= ====================== ============= ==============
HUB Pension Consulting Limited Pension consulting Reigate 75%
======================================= ====================== ============= ==============
Spire Platform Solutions Limited(2,3) Software development Portsmouth 33%(4)
======================================= ====================== ============= ==============
1 Class "A" and Class "B" ordinary shares.
2 Class "B" ordinary shares.
3 30 June year end.
4 Control is based on Board representation rather than
percentage holding.
5 The financial statements of these subsidiary undertakings have
not been audited for the year ended 31 December 2020. These
subsidiary undertakings are exempt from the requirements of the
Companies Act 2006 relating to the audit of individual financial
statements by virtue of Section 479A of the Companies Act 2006.
Registered offices
Reigate office: Belfast office: South Africa office:
======================= ========================= ==========================
Office G01, Big Bay Office
Enterprise House 3rd Floor, Arena Building Park
======================= ========================= ==========================
16 Beach Estate Boulevard,
Bancroft Road Ormeau Road Big Bay
======================= ========================= ==========================
Reigate, Surrey RH2 7RU Belfast BT7 1SH Western Cape 7441
======================= ========================= ==========================
Jersey office: United States office: Portsmouth office:
======================= ========================= ==========================
2711 Centerville Road, Building 3000, Lakeside
44 Esplanade Suite 400 North Harbour
======================= ========================= ==========================
St Helier Wilmington Portsmouth
======================= ========================= ==========================
Jersey JE4 9WG Delaware Hampshire PO6 3EN
======================= ========================= ==========================
On 25 November 2020 the Parent Company invested in a cell of a
Protected Cell Company, White Rock Insurance (Gibraltar) PCC
Limited. Financial support provided by the Group is limited to
amounts required to cover transactions between the cell and the
Group. At 31 December 2020 the Group had provided GBP10m financial
support in the form of a letter of credit.
On 24 July 2019 the Group disposed of its 33% interest in
associated undertaking Eldercare Group Limited. At disposal, the
Group's share of the net assets of Eldercare Group Limited
recognised on the Consolidated statement of financial position
under the equity method of accounting was GBP0.3m.
On 4 July 2018 the Group subscribed to 33% of the ordinary share
capital of Spire Platform Solutions Limited. The Group has majority
representation on the Board of the company, giving it effective
control, and therefore consolidates the company in full in the
results of the Group.
On 17 August 2018 the Group acquired 75% of the ordinary share
capital of Corinthian Group Limited.
The non-controlling interests of the minority shareholders of
Spire Platform Solutions Limited and Corinthian Group Limited
totalling GBP(0.2)m have been recognised in the year.
37 Related parties
The Group has related party relationships with its key
management personnel and associated undertakings. All transactions
with related parties are carried out on an arm's length basis.
Key management personnel comprise the Directors of the Company.
There were no material transactions between the Group and its key
management personnel other than those disclosed below.
Key management compensation is as follows:
Year ended Year ended
31 December 31 December
2020 2019
GBPm GBPm
================================== ============ ============
Short-term employee benefits 3.6 2.2
================================== ============ ============
Share-based payments 1.2 1.0
================================== ============ ============
Total key management compensation 4.8 3.2
================================== ============ ============
Loans owed by Directors 0.4 0.4
================================== ============ ============
The loan advances to Directors accrue interest fixed at 4% per
annum and are repayable in whole or in part at any time.
38 Ultimate Parent Company and ultimate controlling party
The Company is the ultimate Parent Company of the Group and has
no controlling interest.
39 Post balance sheet events
There are no material post balance sheet events that have taken
place between 31 December 2020 and the date of this report.
Additional Financial Information
The following additional financial information is unaudited.
Solvency II surplus generation
The table below shows the expected future emergence of Solvency
II surplus from the in-force book in excess of 100% of SCR over the
next 35 years. The amounts are shown undiscounted and exclude
Excess Own Funds at 31 December 2020 of GBP1,076m.
The core surplus generation assumes that future property growth
is in line with the best estimate assumption of 3.8%. The cash flow
amounts shown are before the interest and principal payments on all
debt obligations.
The projection does not allow for the impact of future new
business, and return on surplus assets held or dividends from 31
December 2020. This is a change from prior year disclosure that had
any surplus emerging assumed to roll up and earn an investment
return, contributing to further surplus, which reduces the surplus
emerging presented below.
Core surplus Surplus
generation TMTP amortisation generation
Year GBPm GBPm GBPm
============ ============ ================= ===========
2021 319 (155) 164
============ ============ ================= ===========
2022 319 (157) 162
============ ============ ================= ===========
2023 303 (157) 146
============ ============ ================= ===========
2024 283 (157) 126
============ ============ ================= ===========
2025 273 (157) 116
============ ============ ================= ===========
2026 270 (157) 113
============ ============ ================= ===========
2027 253 (157) 96
============ ============ ================= ===========
2028 245 (157) 88
============ ============ ================= ===========
2029 242 (157) 85
============ ============ ================= ===========
2030 227 (157) 70
============ ============ ================= ===========
2031 222 (157) 65
============ ============ ================= ===========
2032 210 - 210
============ ============ ================= ===========
2033 199 - 199
============ ============ ================= ===========
2034 194 - 194
============ ============ ================= ===========
2035 180 - 180
============ ============ ================= ===========
2036 177 - 177
============ ============ ================= ===========
2037 162 - 162
============ ============ ================= ===========
2038 152 - 152
============ ============ ================= ===========
2039 144 - 144
============ ============ ================= ===========
2040 135 - 135
============ ============ ================= ===========
2041 - 2045 498 - 498
============ ============ ================= ===========
2046 - 2050 265 - 265
============ ============ ================= ===========
2051 - 2055 92 - 92
============ ============ ================= ===========
New business contribution
The table below shows the expected future emergence of Solvency
II surplus arising from 2020 new business in excess of 100% of SCR
over 35 years from the point of sale. It shows the initial Solvency
II capital strain in 2020. The amounts are shown undiscounted.
Surplus
generation
Year GBPm
=============== ===========
Point of sale (48.0)
================== ===========
Year 1 15.3
================== ===========
Year 2 14.9
================== ===========
Year 3 14.5
================== ===========
Year 4 14.4
================== ===========
Year 5 13.1
================== ===========
Year 6 12.9
================== ===========
Year 7 12.3
================== ===========
Year 8 12.2
================== ===========
Year 9 12.0
================== ===========
Year 10 12.2
================== ===========
Year 11 10.7
================== ===========
Year 12 10.8
================== ===========
Year 13 10.5
================== ===========
Year 14 10.1
================== ===========
Year 15 9.6
================== ===========
Year 16 10.3
================== ===========
Year 17 9.9
================== ===========
Year 18 9.5
================== ===========
Year 19 8.8
================== ===========
Year 20 8.5
================== ===========
Years 21 to 25 35.4
================== ===========
Years 26 to 30 20.0
================== ===========
Years 31 to 35 6.5
================== ===========
Financial investments credit ratings
The sector analysis of the Group's financial investments
portfolio by credit rating is shown below:
BB or
Total AAA AA A BBB below Unrated
GBPm % GBPm GBPm GBPm GBPm GBPm GBPm
============================== ======== ===== ======= ======= ======= ======= ====== =======
Basic materials 199.9 0.9 - - 104.7 90.6 4.6 -
============================== ======== ===== ======= ======= ======= ======= ====== =======
Communications and technology 1,188.9 5.1 37.6 82.9 179.6 850.8 38.0 -
============================== ======== ===== ======= ======= ======= ======= ====== =======
Auto manufacturers 385.0 1.7 - 43.3 84.1 234.9 22.7 -
============================== ======== ===== ======= ======= ======= ======= ====== =======
Consumer (staples including
healthcare) 976.6 4.2 77.2 261.2 238.7 334.1 43.5 21.9
============================== ======== ===== ======= ======= ======= ======= ====== =======
Consumer (cyclical) 112.8 0.5 - - 3.1 80.8 0.5 28.4
============================== ======== ===== ======= ======= ======= ======= ====== =======
Energy 462.7 2.0 - 167.4 93.0 132.1 70.2 -
============================== ======== ===== ======= ======= ======= ======= ====== =======
Banks 1,422.5 6.1 158.0 150.3 568.1 455.8 85.4 4.9
============================== ======== ===== ======= ======= ======= ======= ====== =======
Insurance 824.9 3.5 - 109.6 184.9 530.4 - -
============================== ======== ===== ======= ======= ======= ======= ====== =======
Financial - other 462.5 2.0 80.2 140.9 58.1 111.8 12.7 58.8
============================== ======== ===== ======= ======= ======= ======= ====== =======
Real estate including REITs 771.3 3.3 43.5 18.0 353.9 301.0 54.9 -
============================== ======== ===== ======= ======= ======= ======= ====== =======
Government 1,340.4 5.8 442.2 687.1 132.0 79.1 - -
============================== ======== ===== ======= ======= ======= ======= ====== =======
Industrial 839.6 3.6 - 35.0 100.7 538.1 24.1 141.7
============================== ======== ===== ======= ======= ======= ======= ====== =======
Utilities 2,029.9 8.7 - 29.3 837.2 1,163.4 - -
============================== ======== ===== ======= ======= ======= ======= ====== =======
Commercial mortgages 707.0 3.0 148.1 138.1 276.2 144.6 - -
============================== ======== ===== ======= ======= ======= ======= ====== =======
Infrastructure loans 1,220.5 5.2 87.2 125.8 230.1 730.8 46.6 -
============================== ======== ===== ======= ======= ======= ======= ====== =======
Other 38.0 0.2 - - 38.0 - - -
============================== ======== ===== ======= ======= ======= ======= ====== =======
Corporate/government bond
total 12,982.5 55.8 1,074.0 1,988.9 3,482.4 5,778.3 403.2 255.7
============================== ======== ===== ======= ======= ======= ======= ====== =======
Lifetime mortgages 8,261.1 35.5
============================== ======== ===== ======= ======= ======= ======= ====== =======
Liquidity funds 1,128.5 4.8
============================== ======== ===== ======= ======= ======= ======= ====== =======
Derivatives and collateral 897.7 3.9
============================== ======== ===== ======= ======= ======= ======= ====== =======
Total 23,269.8 100.0
============================== ======== ===== ======= ======= ======= ======= ====== =======
Glossary
Acquisition costs - comprise the direct costs (such as
commissions) of obtaining new business.
Adjusted earnings per share (adjusted EPS) - an APM, this
measures earnings per share based on adjusted operating profit
after attributed tax, rather than IFRS profit before tax. This
measure is calculated by taking the adjusted operating profit APM,
reduced for the effective tax rate (19% for 2020), and dividing
this result by the weighted average number of shares in issue by
the Group for the period. For remuneration purposes (see Directors
Remuneration Report), the measure is calculated as adjusted
operating profit before tax divided by the weighted average number
of shares in issue by the Group for the period.
Adjusted operating profit before tax - an APM and one of the
Group's KPIs, this is the sum of the new business operating profit
and in-force operating profit, operating experience and assumption
changes, other Group companies' operating results, development
expenditure and reinsurance and financing costs. The Board believes
it provides a better view of the longer-term performance of the
business than profit before tax because it excludes the impact of
short-term economic variances and other one-off items. It excludes
the following items that are included in profit before tax:
non-recurring and project expenditure, implementation costs for
cost-saving initiatives, investment and economic profits and
amortisation and impairment costs. In addition, it includes Tier 1
interest (as part of financing costs) which is not included in
profit before tax (because the Tier 1 notes are treated as equity
rather than debt in the IFRS financial statements). Adjusted
operating profit is reconciled to IFRS profit before tax in the
Business Review.
Alternative performance measure ("APM") - in addition to
statutory IFRS performance measures, the Group has presented a
number of non-statutory alternative performance measures ("APMs")
within the Annual Report and Accounts. The Board believes that the
APMs used give a more representative view of the underlying
performance of the Group. APMs are identified in this glossary
together with a reference to where the APM has been reconciled to
its nearest statutory equivalent. APMs which are also KPIs are
indicated as such.
Amortisation and impairment of intangible assets - relate to the
amortisation of the Group's intangible assets, including the
amortisation of intangible assets recognised in relation to the
acquisition of Partnership Assurance Group plc by Just Retirement
Group plc.
Auto-enrolment - new legal duties being phased in that require
employers to automatically enrol workers into a workplace
pension.
Buy-in - an exercise enabling a pension scheme to obtain an
insurance contract that pays a guaranteed stream of income
sufficient to cover the liabilities of a group of the scheme's
members.
Buy-out - an exercise that wholly transfers the liability for
paying member benefits from the pension scheme to an insurer which
then becomes responsible for paying the members directly.
Capped Drawdown - a non-marketed product from Just Group
previously described as Fixed Term Annuity. Capped Drawdown
products ceased to be available to new customers when the tax
legislation changed for pensions in April 2015.
Care Plan - a specialist insurance contract contributing to the
costs of long-term care by paying a guaranteed income to a
registered care provider for the remainder of a person's life.
Change in insurance liabilities - represents the difference
between the year-on-year change in the carrying value of the
Group's insurance liabilities and the year-on-year change in the
carrying value of the Group's reinsurance assets including the
effect of the impact of reinsurance recaptures.
Combined Group/Just Group - following completion of the merger
with Partnership Assurance Group plc, Just Group plc and each of
its consolidated subsidiaries and subsidiary undertakings
comprising the Just Retirement Group and the Partnership Assurance
Group.
Defined benefit de-risking partnering ("DB partnering") - a DB
de-risking transaction in which a reinsurer has provided
reinsurance in respect of the asset and liability side risks
associated with one of our DB Buy-in transactions.
Defined benefit ("DB") pension scheme - a pension scheme,
usually backed or sponsored by an employer, that pays members a
guaranteed level of retirement income based on length of membership
and earnings.
Defined contribution ("DC") pension scheme - a work-based or
personal pension scheme in which contributions are invested to
build up a fund that can be used by the individual member to
provide retirement benefits.
De-risk/de-risking - an action carried out by the trustees of a
pension scheme with the aim of transferring investment, inflation
and longevity risk from the sponsoring employer and scheme to a
third party such as an insurer.
Development expenditure - captures costs relating to the
development of new products and new initiatives, and is included
within adjusted operating profit.
Drawdown (in reference to Just Group sales or products) -
collective term for Flexible Pension Plan and Capped Drawdown.
Employee benefits consultant - an adviser offering specialist
knowledge to employers on the legal, regulatory and practical
issues of rewarding staff, including non-wage compensation such as
pensions, health and life insurance and profit sharing.
Equity release - products and services enabling homeowners to
generate income or lump sums by accessing some of the value of the
home while continuing to live in it.
Finance costs - represent interest payable on reinsurance
deposits and financing, the interest on the Group's Tier 2 debt,
and, in the prior year, bank finance costs.
Flexi-access drawdown - the option introduced in April 2015 for
DC pension savers who have taken tax-free cash to take a taxable
income directly from their remaining pension with no limit on
withdrawals.
Gross premiums written - total premiums received by the Group in
relation to its Retirement Income and Protection sales in the
period, gross of commission paid.
Guaranteed Guidance - see Pensions Wise.
Guaranteed Income for life ("GIfL") - retirement income products
which transfer the investment and longevity risk to the company and
provide the retiree a guarantee to pay an agreed level of income
for as long as a retiree lives. On a "joint-life" basis, continues
to pay a guaranteed income to a surviving spouse/partner. Just
provides modern individually underwritten GIfL solutions.
IFRS net assets - one of the Group's KPIs, representing the
assets attributable to equity holders.
IFRS profit before tax - one of the Group's KPIs, representing
the profit before tax attributable to equity holders.
In-force operating profit - an APM capturing the expected margin
to emerge from the in-force book of business and free surplus, and
results from the gradual release of prudent reserving margins over
the lifetime of the policies. In-force operating profit is
reconciled to adjusted operating profit before tax, and adjusted
operating profit before tax is reconciled to IFRS profit before tax
in the Business Review.
Investment and economic profits - reflect the difference in the
period between expected investment returns, based on investment and
economic assumptions at the start of the period, and the actual
returns earned. Investment and economic profits also reflect the
impact of assumption changes in future expected risk-free rates,
corporate bond defaults and house price inflation and
volatility.
Key performance indicators ("KPIs") - KPIs are metrics adopted
by the Board which are considered to give an understanding of the
Group's underlying performance drivers. The Group's KPIs are
Solvency II capital coverage ratio, Organic capital generation,
Underlying organic capital generation, Retirement Income sales, New
business operating profit, Management expenses, Adjusted operating
profit, IFRS profit before tax and IFRS net assets.
Lifetime mortgage ("LTM") - an equity release product that
allows homeowners to take out a loan secured on the value of their
home, typically with the loan plus interest repaid when the
homeowner has passed away or moved into long-term care.
LTM notes - structured assets issued by a wholly owned special
purpose entity, Just Re1 Ltd. Just Re1 Ltd holds two pools of
lifetime mortgages, each of which provides the collateral for
issuance of senior and mezzanine notes to Just Retirement Ltd,
eligible for inclusion in its matching portfolio.
Management expenses - an APM and one of the Group's KPIs, and
are business as usual costs incurred in running the business,
including all operational overheads. Management expenses are other
operating expenses excluding investment expenses and charges;
reassurance management fees which are largely driven by strategic
decisions; amortisation of acquired intangible assets relating to
merger and acquisition activity; and other costs consisting of
movements in the value of property owned by the Group and SAYE
cancellation charges as both of these are impacted by external
factors. Management expenses are reconciled to IFRS other operating
expenses in note 5 to the consolidated financial statements.
Medical underwriting - the process of evaluating an individual's
current health, medical history and lifestyle factors, such as
smoking, when pricing an insurance contract.
Net claims paid - represents the total payments due to
policyholders during the accounting period, less the reinsurers'
share of such claims which are payable back to the Group under the
terms of the reinsurance treaties.
Net investment income - comprises interest received on financial
assets and the net gains and losses on financial assets designated
at fair value through profit or loss upon initial recognition and
on financial derivatives.
Net premium revenue - represents the sum of gross premiums
written and reinsurance recapture, less reinsurance premium
ceded.
New business margin - the new business operating profit divided
by Retirement Income sales. It provides a measure of the
profitability of Retirement Income sales.
New business operating profit - an APM and one of the Group's
KPIs, representing the profit generated from new business written
in the year after allowing for the establishment of prudent
reserves and for acquisition expenses. New business operating
profit is reconciled to adjusted operating profit before tax, and
adjusted operating profit before tax is reconciled to IFRS profit
before tax in the Business Review.
New business strain - represents the capital strain on new
business written in the year after allowing for acquisition expense
allowances and the establishment of Solvency II technical
provisions and solvency capital requirements.
No-negative equity guarantee ("NNEG") hedge - a derivative
instrument designed to mitigate the impact of changes in property
growth rates on both the regulatory and IFRS balance sheets arising
from the guarantees on lifetime mortgages provided by the Group
which restrict the repayment amounts to the net sales proceeds of
the property on which the loan is secured.
Non-recurring and project expenditure - includes any one-off
regulatory, project and development costs. This line item does not
include acquisition integration, or acquisition transaction costs,
which are shown as separate line items.
Operating experience and assumption changes - captures the
impact of the actual operating experience differing from that
assumed at the start of the period, plus the impact of changes to
future operating assumptions applied during the period. It also
includes the impact of any expense reserve movements, and other
sundry operating items.
Organic capital generation/(consumption) - an APM and one of the
Group's KPIs. Organic capital generation/(consumption) is the net
increase/(decrease) in Solvency II excess own funds over the year,
and includes surplus from in-force, new business strain, costs
overruns and other expenses, interest and other operating items. It
excludes economic variances, regulatory adjustments, accelerated
TMTP amortisation and capital raising or repayment. The Board
believes that this measure provides good insight into our objective
to improve our capital position. Organic capital
generation/(consumption) is reconciled to Solvency II excess own
funds, and Solvency II excess own funds is reconciled to
shareholders' net equity on an IFRS basis in the Business
Review.
Other Group companies' operating results - the results of Group
companies including our HUB group of companies, which provides
regulated advice and intermediary services, and professional
services to corporates, and corporate costs incurred by Group
holding companies and the overseas start-ups.
Other operating expenses - represent the Group's operational
overheads, including personnel expenses, investment expenses and
charges, depreciation of equipment, reinsurance fees, operating
leases, amortisation of intangibles, and other expenses incurred in
running the Group's operations.
Pension Freedoms/Pension Freedom and Choice/Pension Reforms -
the UK Government's pension reforms, implemented in April 2015.
Pensions Wise - the free and impartial service introduced in
April 2015 to provide "Guaranteed Guidance" to defined contribution
pension savers considering taking money from their pensions.
PrognoSys(TM) - a next generation underwriting system, which is
based on individual mortality curves derived from Just Group's own
data collected since its launch in 2004.
Regulated financial advice - personalised financial advice for
retail customers by qualified advisers who are regulated by the
Financial Conduct Authority.
Reinsurance and finance costs - the interest on subordinated
debt, bank loans and reinsurance financing, together with
reinsurance fees incurred.
Retirement Income sales (in reference to Just Group sales or
products) - an APM and one of the Group's KPIs and a collective
term for GIfL, DB and Care Plan. Retirement Income sales are
reconciled to IFRS gross premiums in note 7 to the consolidated
financial statements.
Retirement sales (in reference to Just Group sales or products)
- collective term for Retirement Income sales and Drawdown.
Solvency II - an EU Directive that codifies and harmonises the
EU insurance regulation. Primarily this concerns the amount of
capital that EU insurance companies must hold to reduce the risk of
insolvency.
Solvency II capital coverage ratio - one of the Group's KPIs.
Solvency II capital is the regulatory capital measure and is
focused on by the Board in capital planning and business planning
alongside the economic capital measure. It expresses the regulatory
view of the available capital as a percentage of the required
capital.
Trustees - individuals with the legal powers to hold, control
and administer the property of a trust such as a pension scheme for
the purposes specified in the trust deed. Pension scheme trustees
are obliged to act in the best interests of the scheme's
members.
Underlying operating profit - an APM and the sum of the new
business operating profit and in-force operating profit. As this
measure excludes the impact of one-off assumption changes and
investment variances, the Board considers it to be a key indicator
of the progress of the business and a useful measure for investors
and analysts when assessing the Group's financial performance.
Underlying operating profit is reconciled to adjusted operating
profit before tax, and adjusted operating profit before tax is
reconciled to IFRS profit before tax in the Business Review.
Underlying organic capital generation/(consumption) - an APM and
one of the Group's KPIs. Underlying organic capital
generation/(consumption) is calculated in the same way as Organic
capital generation/(consumption), but also excludes other operating
items.
Abbreviations
ABI - Association of British Insurers
AGM - Annual General Meeting
APM - alternative performance measure
Articles - Articles of Association
CMI - Continuous Mortality Investigation
Code - UK Corporate Governance Code
CP - Care Plans
DB - Defined Benefit De-risking Solutions
DC - defined contribution
DSBP - deferred share bonus plan
EBT - employee benefit trust
EPS - earnings per share
ERM - equity release mortgage
ESG - environment, social and governance
EVT - effective value test
FCA - Financial Conduct Authority
FPP - Flexible Pension Plan
FRC - Financial Reporting Council
GDPR - General Data Protection Regulation
GHG - greenhouse gas
GIfL - Guaranteed Income for Life
Hannover - Hannover Life Reassurance Bermuda Ltd
IFRS - International Financial Reporting Standards
IP - intellectual property
ISA - International Standards on Auditing
JRL - Just Retirement Limited
KPI - key performance indicator
LCP - Lane Clark & Peacock LLP
LTIP - Long Term Incentive Plan
LTM - lifetime mortgage
MA - matching adjustment
MAR - Market Abuse Regulation
NAV - net asset value
NNEG - no-negative equity guarantee
ORSA - Own Risk and Solvency Assessment
PAG - Partnership Assurance Group
PILON - payment in lieu of notice
PLACL - Partnership Life Assurance Company Limited
PPF - Pension Protection Fund
PRA - Prudential Regulation Authority
PRI - United Nations Principles for Responsible Investment
PVIF - purchased value of in-force
PwC - PricewaterhouseCoopers LLP
RICS - The Royal Institution of Chartered Surveyors
RPI - retail price inflation
SAPS - Self-Administered Pension Scheme
SAYE - Save As You Earn
SCR - Solvency Capital Requirement
SFCR - Solvency and Financial Condition Report
SID - Senior Independent Director
SIP - Share Incentive Plan
SLI - Secure Lifetime Income
SME - small and medium-sized enterprise
STIP - Short Term Incentive Plan
tCO2e - tonnes of carbon dioxide equivalent
TMTP - transitional measures on technical provisions
TSR - Total shareholder return
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END
FR MZGMFKVZGMZG
(END) Dow Jones Newswires
March 16, 2021 03:02 ET (07:02 GMT)
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