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Share Name | Share Symbol | Market | Type | Share ISIN | Share Description |
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JRP Group | LSE:JRP | London | Ordinary Share | GB00BCRX1J15 | ORD 10P |
Price Change | % Change | Share Price | Bid Price | Offer Price | High Price | Low Price | Open Price | Shares Traded | Last Trade | |
---|---|---|---|---|---|---|---|---|---|---|
0.00 | 0.00% | 135.10 | 0.00 | 01:00:00 |
Industry Sector | Turnover | Profit | EPS - Basic | PE Ratio | Market Cap |
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0 | 0 | N/A | 0 |
TIDMJRG TIDMPA.
RNS Number : 7718R
Just Retirement Group PLC
11 March 2016
NEWS RELEASE JUST RETIREMENT GROUP PLC
www.justretirementgroup.com
11 March 2016
JUST RETIREMENT GROUP PLC
INTERIM RESULTS FOR THE SIX MONTHS ENDED 31 DECEMBER 2015
DELIVERING GROWTH AND ACCELERATING DIVERSIFICATION
Just Retirement Group plc ("the Group") announces its interim results for the six months ended 31 December 2015.
Highlights
-- Total new business sales up 50%. A 98% increase in Defined Benefit De-risking ("DB") sales and a 2% increase in Guaranteed Income for Life ("GIfL") sales drove strong overall growth in premiums.
-- Lifetime mortgage advances of GBP237m, up 49% on the same period in 2014/15, in line with our 25% target of Retirement Income sales.
-- Operating profit increased by 43%, driven by a 153% rise in new business profit, partly offset by lower in--force returns. The increase in new business profit reflected strong volumes, but also margin expansion due to an improving sales mix and helpful asset yields.
-- Record EV GBP1,144m (203p per share). Interim dividend of 1.1p. Group economic capital ratio 180%, Group Solvency II capital ratio 133% (capital comprised entirely of Tier 1), providing comfort to enable the Group to meet its growth plans.
-- Merger with Partnership Assurance Group plc due to complete in early April 2016. We remain confident of achieving at least GBP40m of cost savings, with the full run-rate being achieved in 2018.
Commenting on the results Rodney Cook, Group Chief Executive, said:
"The Group demonstrated further positive momentum in the second half of 2015, with a 50% increase in sales and a 43% increase in operating profit. In addition to this strong performance we are about to complete our merger with Partnership Assurance.
We are pleased with our progress to date in the evolving pensions landscape and changing regulatory environment. For the future, the DB market offers significant potential and today's figures show that we have real traction in this area. Meanwhile, the individual GIfL market has stabilised and we expect to see a return to longer-term growth here too.
The merger with Partnership provides us with a further source of earnings growth, and it will enable us to drive significant cost efficiencies, underpinning our value-for-money products. The integration planning we are doing confirms our confidence in achieving at least GBP40m of cost savings.
I also want to thank our colleagues once again, not just for delivering these record results, but also for coping with a period of uncertainty and for maintaining a strong focus on delivering for our customers which has been demonstrated by winning the UK's top Quality Service Provider Award from the Institute of Customer Service. The resilience of our colleagues is confirmed by our ranking once again among The Sunday Times 100 Best Companies to Work For.
I am pleased that the Just Retirement chapter is ending on a high note and these results give me confidence as to the future for the Combined Group."
Enquiries
Investors / Analysts Media James Pearce, Group Director Stephen Lowe, Group Communications of Strategy and Investor Director Relations Telephone: +44 (0) 7715 Telephone: +44 (0) 1737 085 099 827 301 james.pearce@justretirement.com press.office@justretirement.com Temple Bar Advisory Alex Child-Villiers William Barker Telephone: +44 (0) 20 7002 1080
A presentation for analysts will take place at 9.00am today at Nomura, 1 Angel Lane, London EC4R 3AB
UK FreeCall: 08082380673
United States FreeCall: 18666551591
Std International Dial-In: +44 (0) 1452 541003
Conference ID: 52567060
A copy of this announcement, the presentation slides and a transcript of the conference call will be available on Just Retirement's website www.justretirementgroup.com
JUST RETIREMENT GROUP PLC
GROUP COMMUNICATIONS
Vale House, Roebuck Close
Bancroft Road, Reigate
Surrey RH2 7RU
FINANCIAL CALENDAR:
Date --------------------------------- ------------- Record date for interim dividend 6 May 2016 Business update for the period 11 May 2016 ending 31 March 2016 Payment of interim dividend 20 May 2016 --------------------------------- -------------
Forward-looking statements disclaimer:
This announcement in relation to Just Retirement Group plc and its subsidiaries (the "Group") contains, and we may make other statements (verbal or otherwise) containing, forward-looking statements about the Group's current plans, goals and expectations relating to 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 relate to future events and circumstances that 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 economic and business conditions; 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 and the effect of the European Union's Solvency II requirements on the Group's capital maintenance requirements; 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; inability of reinsurers to meet obligations or unavailability of reinsurance coverage; 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.
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 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. Nothing in this announcement should be construed as a profit forecast.
Chief Executive Officer's Report
Introduction
The first half of 2015/16 has been another period of significant change for Just Retirement, during which we have continued to demonstrate our ability to adapt to the evolving pensions landscape and changing regulatory environment.
We have achieved notable successes including further significant sales growth in the DB De-risking market, raising GBP97m of new equity (net of issue costs), and approval by the Prudential Regulation Authority ("PRA") of our internal model application for use in the new Solvency II capital regime.
In August 2015 we announced our intention to merge with Partnership Assurance Group plc to create JRP Group plc. On 10 March 2016 we announced that the PRA and the Financial Conduct Authority have each approved the change in control applications. We have previously received regulatory clearance from the Competition and Markets Authority and the merger is expected to complete in early April 2016. The completion of the merger will represent the culmination of a significant amount of hard work over the last year and I would like to thank those people who have contributed towards bringing the two groups together.
Performance review
Total Retirement sales of Defined Benefit De-risking Solutions ("DB"), Guaranteed Income for Life Solutions ("GIfL"), Care Plans and Drawdown contracts, were GBP996.2m for the half year to 31 December 2015, an increase of 51% compared to the same period the previous year. This increase once again reflects the significant growth in our DB sales, which stand at GBP701.2m for the half year to 31 December 2015, almost double the amount sold in the half year to 31 December 2014 (DB sales: GBP354.7m), which itself was a record DB result at that time. This demonstrates our expertise in the medical underwriting of smaller DB schemes, and in "top slicing" of larger schemes where we medically underwrite the "top slice" of liabilities.
During this latest half year we have also seen a stabilisation of the GIfL market, with sales slightly up compared to the same period in 2014 (GIfL sales: GBP271.2m vs GBP266.4m).
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We launched our new drawdown product, the Flexible Pension Plan ("FPP") in April 2015 which has replaced our Capped Drawdown product. FPP sales are now starting to come through, as customers adjust to the new products available to them in retirement. FPP sales for the half year to 31 December 2015 were a modest GBP4.8m, given their limited availability at that time. In addition Capped Drawdown sales were GBP2.4m (H1 2014/15: GBP35.3m).
Lifetime mortgages ("LTM") of GBP237.0m were advanced for the half year, which is in line with our c. 25% target of Retirement Income sales.
The margin achieved on new business, which is measured as the ratio of new business operating profit to Retirement Income sales (comprising DB, GIfL and Care), was 4.7% (H1 2014/15: 2.9%). The increase in margin compared to the prior period is a result of an improving business mix, higher absolute sales and helpful asset yields.
Overall, operating profit before tax increased to GBP49.8m (H1 2014/15: GBP34.9m), largely driven by the increase in new business volumes and margins.
The Group's financial investments continue to increase, from GBP8.5bn at 30 June 2015 to GBP9.5bn at 31 December 2015, mainly as a result of the new business premiums written during the period. The quality of the financial investment portfolio remains high, and is well balanced across a range of industry sectors.
The Group's total equity at 31 December 2015 was GBP921.5m (30 June 2015: GBP814.0m), and the profit after tax for the half year ended 31 December 2015 was GBP21.9m (H1 2014/15: loss of GBP8.3m), reflecting the increase in new business volumes and margins, and a slight positive overall impact in this period from investment and economic profits, compared to a significant hit in the prior period (investment and economic profits H1 2015/16: GBP2.4m; H1 2014/15 loss of GBP32.3m).
Group European Embedded Value amounted to GBP1,143.8m at 31 December 2015 (30 June 2015: GBP1,019.3m), including new business value of GBP71.0m (H1 2014/15: GBP48.6m).
In October 2015 the Group raised GBP100m of new capital (GBP97m net of issue costs) from a share placing and open offer. These funds will support the Group to cover expected non-recurring integration and transaction costs, provide further comfort over the transition to Solvency II, and support further growth initiatives and product development. The Group capital position provides comfort to enable the Group to meet its growth plans. The Group continues to explore, on an ongoing basis, a range of balance sheet options, including accessing the debt capital markets, with a view to providing further financial strength.
On 1 January 2016 the EU Solvency II regime finally came into force. Just Retirement was among only 19 insurance firms that secured PRA regulatory approval to use their bespoke Internal Models. We also secured permission to use the matching adjustment to calculate our solvency capital requirement.
Once again we are very proud to have received recognition from the industry for the quality of our service, receiving 5 star ratings at the 2015 Financial Adviser Service Awards. This continued success means that we have held 5 star ratings for an impressive 11 years for Life & Pensions and eight years for Mortgage Lenders and Packagers, demonstrating our excellent quality of support and customer focus. In addition I am delighted that Just Retirement in 2016 has been awarded the Quality Service Provider Award by the Institute of Customer Service.
I am also pleased to report that we have once again ranked within "The Sunday Times 100 Best Companies to Work For" list for 2016, achieving a rating of "Outstanding" and the ranking of 92.
Outlook
Just Retirement Group plc has had a very successful first half, and we have continued to deliver growth and embrace changes to our markets and regulatory landscape.
I am excited about the opportunities that the forthcoming merger with Partnership will open up for the new enlarged JRP Group plc, as we begin to demonstrate our combined strength and expertise in our chosen markets, and we look to the future with confidence that we can continue to deliver growth and value for our shareholders.
Rodney Cook
Group Chief Executive
Business review
Overview
The results for the six months to 31 December 2015 demonstrate a return to growth both in sales volumes and in profits for the Group.
We have again achieved significant growth in our DB business during this half year period, with DB sales almost doubling compared to the prior period. DB is now established as the Group's largest retirement income product.
April 2015 saw the implementation of the pension reforms announced in the 2014 Budget. Since this date we have seen a stabilisation of GIfL sales, with a slight increase during this half year period, and we have launched our FPP to allow customers to take advantage of the new pension freedoms.
Medical underwriting allows us to differentiate our offering for both GIfL and DB solutions and we have continued to invest in our proprietary underwriting system, PrognoSys(TM) .
The equity release lifetime mortgage market continues to grow and we manage the proportion of lifetime mortgage sales to Retirement Income sales towards a target of c.25%.
In October 2015 the Group successfully raised GBP97m of new equity capital (net of issue costs) through a placing and open offer of shares. This additional capital means we are well placed as we adapt to the needs of the Combined Group following our planned merger with Partnership Assurance Group plc.
Key performance indicators ("KPI's")
The Board has adopted the following metrics, which are considered to give an understanding of the Group's underlying performance. These measures are referred to as key performance indicators.
Half Half year year Year ended ended ended 31 December 31 December 30 June 2015 2014 2015 GBPm GBPm GBPm ================================ ============ ============ ======== New business sales 1,233.2 820.2 1,455.8 ================================= ============ ============ ======== New business operating profit 46.0 18.2 36.8 ================================= ============ ============ ======== In-force operating profit 19.2 24.4 49.6 ================================= ============ ============ ======== Underlying operating profit 65.2 42.6 86.4 ================================= ============ ============ ======== European embedded value 1,143.8 1,028.1 1,019.3 ================================= ============ ============ ======== Economic capital coverage ratio 180% 171% 176% ================================= ============ ============ ========
New business sales
GBP1,233.2m (H1 2014/15: GBP820.2m)
New business sales are a key indicator of the Group's growth and realisation of its strategic objectives. New business sales comprise Retirement Income sales, Drawdown sales and LTM advances in the reporting period.
The table below sets out a breakdown of new business sales for the half year ended 31 December 2015, the half year ended 31 December 2014 and the year ended 30 June 2015.
Half year Half year ended ended 31 December 31 December Year ended 2015 2014 30 June 2015 GBPm GBPm GBPm =========================== ============ ============ ============= Defined Benefit De-risking Solutions ("DB") 701.2 354.7 608.9 ============================ ============ ============ ============= Guaranteed Income for Life Solutions ("GIfL") 271.2 266.4 478.0 ============================ ============ ============ ============= Care Plans ("CP") 16.6 4.8 12.1 ============================ ============ ============ ============= Retirement Income sales 989.0 625.9 1,099.0 ============================ ============ ============ ============= Drawdown 7.2 35.3 48.7 ============================ ============ ============ ============= Total Retirement sales 996.2 661.2 1,147.7 ============================ ============ ============ ============= Lifetime mortgage ("LTM") loans advanced 237.0 159.0 308.1 ============================ ============ ============ ============= Total new business sales 1,233.2 820.2 1,455.8 ============================ ============ ============ =============
New business sales totalled GBP1,233.2m for the half year ended 31 December 2015, an increase of over 50% compared to the same period last year (H1 2014/15: GBP820.2m).
The key driver for this growth is DB sales, which have increased by 98% from GBP354.7m for the half year to 31 December 2014 to GBP701.2m for the half year to 31 December 2015. The medically underwritten segment of the DB market is growing strongly and we have delivered significant growth during the period, with a particularly strong quarter to 31 December 2015 (DB sales Q2 2015/16 GBP597.6m; Q2 2014/15 GBP329.9m).
The GIfL market appears to be stabilising, with H1 2015/16 sales increasing by 2% compared to the prior period (GIfL sales H1 2015/16: GBP271.2m; H1 2014/15: GBP266.4m).
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Sales of Care Plans increased by 246% from GBP4.8m for the half year to 31 December 2014 to GBP16.6m for the half year to 31 December 2015, reflecting our increased competitiveness in this growing sector.
Sales of Drawdown products - Capped Drawdown ("CD") and Flexible Pension Plan ("FPP") - fell overall from the prior period as we closed our CD to new customers and replaced it with the new Flexible Pension Plan which allows consumers to take advantage of the new pensions freedoms (CD and FPP sales H1 2015/16: GBP7.2m; H1 2014/15: GBP35.3m).
LTM sales are managed in line with our overall Retirement Income sales, and are in line with our longer-term target of c. 25% of Retirement Income sales.
New business operating profit
GBP46.0m (H1 2014/15: GBP18.2m)
New business operating profit represents the profit generated from new business written in the period after allowing for the setting up of prudent reserves and for acquisition expenses.
New business operating profit has increased compared to the prior period, reflecting both an increase in overall sales volumes and the increased proportion of DB sales, which have a closer durational fit with LTM assets and deliver slightly higher margins. The result also benefitted from higher backing asset yields.
In-force operating profit
GBP19.2m (H1 2014/15: GBP24.4m)
In-force operating profit captures the expected margin to emerge from the in-force book of business and free surplus, and results from the gradual release of product reserving margins over the lifetime of the policies.
In-force operating profit has reduced compared to the prior period. This is as a result of a change in recognition of in-force mortgage returns, although the overall size of the in-force book of business continues to grow.
Underlying operating profit
GBP65.2m (H1 2014/15: GBP42.6m)
Underlying operating profit is 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 and position.
The increase in underlying operating profit reflects the movements in new business and in-force operating profit explained above.
European embedded value ("EEV")
GBP1,143.8m (30 June 2015: GBP1,019.3m)
EEV represents the sum of the shareholders' net assets and the value of in-force business, and is a key measure in assessing the future profit streams of the Group's long-term business. It also recognises the additional value of profits in the existing book of business which have not yet been recognised under IFRS accounting.
EEV at 31 December 2015 was GBP1,143.8m, an increase of GBP124.5m compared to the closing value at 30 June 2015. The increase reflects the value of new business written in the period and the benefit of the new Group capital raised in October 2015, offset by investment variances.
Economic capital coverage ratio
180% (30 June 2015: 176%)
Economic capital is a key risk-based capital measure and expresses the Board's view of the available capital as a percentage of the required capital.
The economic capital ratio remains in line with the ratio at the year end, and well in excess of risk appetite. The economic capital ratio reflects the benefit of the new Group capital raised in October 2015.
IFRS results
The analysis of the IFRS results for the half year ended 31 December 2015, the half year ended 31 December 2014 and the year ended 30 June 2015 is presented in the table below.
Half year Half year ended ended Year ended 31 December 31 December 30 June 2015 2014 2015 GBPm GBPm GBPm ========================================= ============ ============ ========== New business operating profit 46.0 18.2 36.8 ========================================== ============ ============ ========== In-force operating profit 19.2 24.4 49.6 ========================================== ============ ============ ========== Underlying operating profit 65.2 42.6 86.4 ========================================== ============ ============ ========== Operating experience and assumption changes (3.5) 2.7 2.4 ========================================== ============ ============ ========== Other Group companies' operating results (5.9) (3.9) (8.7) ========================================== ============ ============ ========== Reinsurance and bank finance costs (6.0) (6.5) (12.5) ========================================== ============ ============ ========== Operating profit before tax 49.8 34.9 67.6 ========================================== ============ ============ ========== Non-recurring and project expenditure (8.0) (9.9) (19.4) ========================================== ============ ============ ========== Investment and economic profits/(losses) 2.4 (32.3) (74.1) ========================================== ============ ============ ========== Profit/(loss) before merger transaction and amortisation costs, before tax 44.2 (7.3) (25.9) ========================================== ============ ============ ========== Merger transaction costs (16.3) - - ========================================== ============ ============ ========== Amortisation costs (1.8) (1.9) (3.7) ========================================== ============ ============ ========== Profit/(loss) before tax 26.1 (9.2) (29.6) ========================================== ============ ============ ==========
Operating profit before tax
Operating profit before tax represents the operating results of the Group before taking into account non-recurring and project expenditure, investment and economic profits/(losses) and amortisation costs.
Operating profit before tax for the half year ended 31 December 2015 totalled GBP49.8m, an increase of GBP14.9m compared to the half year ended 31 December 2014. The movement has been mainly driven by an increase in new business operating profit, as explained above.
New business operating profit
As discussed in "Key performance indicators" above
In-force operating profit
As discussed in "Key performance indicators" above.
Operating experience and assumption changes
Operating experience and assumption changes capture 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.
For the half year to 31 December 2015, operating experience and assumption changes amounted to a small loss of GBP3.5m, compared to a profit of GBP2.7m for the half year to 31 December 2014.
Other Group companies' operating results
Other Group companies' operating results include the results of Group companies which provide regulated advice and intermediary services, and professional services to corporates, as well as corporate costs incurred by Group holding companies. These companies reported an operating loss for the half year to 31 December 2015 of GBP5.9m (H1 2014/15: loss of GBP3.9m).
Reinsurance and bank finance costs
Reinsurance and bank finance costs include the interest charge on bank loans and reinsurance financing, together with reinsurance fees incurred in the period.
Reinsurance and bank finance costs are broadly in line with the prior period; increased bank finance costs relating to additional bank loans drawn down in the period have been offset by a reduction in reinsurance new business fees as a result of lower reinsured new individual business.
Non-recurring and project expenditure
Non-recurring and project expenditure includes any one-off regulatory, project and development costs. This line item does not include merger-related costs. These are included within merger transaction costs as explained below.
Non-recurring and project expenditure reduced from GBP9.9m for the half year to 31 December 2014, to GBP8.0m for the half year to 31 December 2015. These costs mainly relate to the costs of preparing for the new Solvency II regime, and continued product development expenditure in relation to the Flexible Pension Plan.
Investment and economic profits/(losses)
Investment and economic profits/(losses) 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/(losses) also reflect the impact of assumption changes in future expected risk-free rates, corporate bond defaults and house price inflation and volatility.
For the half year to 31 December 2015, investment and economic profits were GBP2.4m (H1 2014/15: loss of GBP32.3m), mainly reflecting the impact of widening credit spreads, offset by a positive impact from the difference between actual and expected investment returns earned.
Merger transaction costs
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Merger transaction costs reflect the one-off costs incurred or accrued during the period in relation to the planned merger between Just Retirement Group plc and Partnership Assurance Group plc.
Amortisation costs
Amortisation costs relate to the amortisation of the Group's intangible assets.
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.
Half year Half year ended ended Year ended 31 December 31 December 30 June 2015 2014 2015 GBPm GBPm GBPm ================================ ============ ============ ========== Gross premiums written 989.0 625.9 1,099.0 ================================ ============ ============ ========== Net premium revenue 737.2 512.5 1,927.0 ================================ ============ ============ ========== Net investment income 305.3 548.4 635.2 ================================ ============ ============ ========== Fee and commission income 2.8 2.4 5.1 ================================ ============ ============ ========== Total revenue 1,045.3 1,063.3 2,567.3 ================================ ============ ============ ========== Net claims paid (154.6) (119.5) (250.5) ================================ ============ ============ ========== Change in insurance liabilities (704.6) (817.2) (2,095.9) ================================ ============ ============ ========== Change in investment contract liabilities (3.8) (9.7) (3.5) ================================ ============ ============ ========== Acquisition costs (13.4) (9.6) (18.5) ================================ ============ ============ ========== Other operating expenses: ================================ ============ ============ ========== Merger transaction costs (16.3) - - ================================ ============ ============ ========== Other (64.9) (59.7) (127.6) ================================ ============ ============ ========== Finance costs (61.6) (56.8) (100.9) ================================ ============ ============ ========== Total claims and expenses (1,019.2) (1,072.5) (2,596.9) ================================ ============ ============ ========== Profit/(loss) before tax 26.1 (9.2) (29.6) ================================ ============ ============ ========== Income tax (4.2) 0.9 4.8 ================================ ============ ============ ========== Profit/(loss) after tax 21.9 (8.3) (24.8) ================================ ============ ============ ==========
Gross premiums written
Gross premiums written are the total premiums received by the Group in relation to its Retirement Income sales in the period, gross of commission paid.
Gross premiums written for the period were GBP989.0m, an increase of 58% on the prior period. In particular, DB sales have increased significantly compared to the prior period, from GBP354.7m in H1 2014/15, to GBP701.2m in H1 2015/16.
Net premium revenue
Net premium revenue represents the sum of gross premiums written and reinsurance recapture, less reinsurance premium ceded.
Net premium revenue increased from GBP512.5m in H1 2014/15 to GBP737.2m in H1 2015/16. Net premium revenue for the current period includes reinsurance recapture of GBP1.2bn offset by reinsurance premiums ceded of GBP1.4bn (H1 2014/15: no reinsurance recapture, reinsurance premiums ceded of GBP0.1bn). Reinsurance premiums ceded during the period relate to the reinsurance of certain GIfL business written in prior years, as well as continuing to reinsure a proportion of the new business written during the current period.
Net investment income
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 investment income decreased by GBP243.1m, from GBP548.4m for the half year ended 31 December 2014 to GBP305.3m for the half year ended 31 December 2015. During the prior period there were significant falls in interest rates leading to increased unrealised gains on corporate bonds and mortgages, whereas during the current period rates have been relatively stable.
Net claims paid
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 claims paid increased by GBP35.1m during the period, reflecting the continuing growth of the in-force book offset by the reinsurers' share of claims paid.
Change in insurance liabilities
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.
Change in insurance liabilities decreased from GBP817.2m for the half year ended 31 December 2014 to GBP704.6m for the half year ended 31 December 2015. The movement from the prior year was largely driven by a decrease in the change in the gross amount of insurance liabilities, which has reduced from the prior period due to less movement during the period in the valuation interest rate used to value insurance liabilities. The reinsurers' share of liabilities and movement due to recapture have largely offset one another during the current period.
Acquisition costs
Acquisition costs comprise the direct costs (such as commissions) and indirect costs of obtaining new business. Acquisition costs are not deferred.
Acquisition costs have increased by GBP3.8m from GBP9.6m for the half year ended 31 December 2014 to GBP13.4m for the half year ended 31 December 2015. This is mainly a result of the increase in LTM sales compared to the prior period.
Other operating expenses
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.
Other operating expenses increased by GBP21.5m. This line item in the Condensed consolidated statement of comprehensive income includes the GBP16.3m of costs incurred or accrued during the period relating to the planned merger between Just Retirement Group plc and Partnership Assurance Group plc. The remainder of the increase, from GBP59.7m for the half year to 31 December 2014 to GBP64.9m for the half year to 31 December 2015, is mainly due to increased headcount and related costs, including share-based payments.
Finance costs
Finance costs represent interest payable on the deposits received from reinsurers, interest on reinsurance financing and bank finance costs.
Finance costs increased by GBP4.8m during the period from GBP56.8m for the half year ended 31 December 2014 to GBP61.6m for the half year ended 31 December 2015. The increase is mainly a result of a higher interest rate on the reinsurance deposit-back arrangements, this interest rate being linked to the valuation interest rate used to value the insurance liabilities.
Income tax
There is an income tax charge of GBP4.2m for the half year ended 31 December 2015 (H1 2014/15: credit of GBP0.9m). The effective tax rate is in line with the full year to 30 June 2015, and includes the impact of certain transitional rules regarding life company taxation.
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.
As at As at As at 31 December 31 December 30 June 2015 2014 2015 GBPm GBPm GBPm ========================================= ============ ============ ======== Assets ========================================= ============ ============ ======== Financial investments 9,542.5 8,766.6 8,494.7 ========================================== ============ ============ ======== Reinsurance assets 2,546.8 4,045.3 2,477.1 ========================================== ============ ============ ======== Other assets 262.6 249.9 276.8 ========================================== ============ ============ ======== Total assets 12,351.9 13,061.8 11,248.6 ========================================== ============ ============ ======== Share capital and share premium 148.3 51.3 51.3 ========================================== ============ ============ ======== Reorganisation reserve 347.4 347.4 347.4 ========================================== ============ ============ ========
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Accumulated profit and other adjustments 425.8 435.7 415.3 ========================================== ============ ============ ======== Total equity 921.5 834.4 814.0 ========================================== ============ ============ ======== Liabilities ========================================= ============ ============ ======== Insurance liabilities 8,214.6 7,729.8 7,440.3 ========================================== ============ ============ ======== Other financial liabilities 2,718.5 4,129.7 2,643.2 ========================================== ============ ============ ======== Insurance and other payables 123.5 30.8 22.7 ========================================== ============ ============ ======== Other liabilities 373.8 337.1 328.4 ========================================== ============ ============ ======== Total liabilities 11,430.4 12,227.4 10,434.6 ========================================== ============ ============ ======== Total equity and liabilities 12,351.9 13,061.8 11,248.6 ========================================== ============ ============ ========
Financial investments
The following table provides a breakdown by credit rating of financial investments where applicable as at 31 December 2015 compared with the position as at 31 December 2014 and 30 June 2015.
As at As at As at 31 December 31 December 30 June 2015 2014 2015 GBPm GBPm GBPm =========================== ============= ============ ======== AAA* and gilts 1,507.4 1,145.2 1,045.6 =========================== ============= ============ ======== AA 317.1 298.4 241.6 =========================== ============= ============ ======== A 1,610.6 1,885.5 1,699.3 =========================== ============= ============ ======== BBB 1,963.6 1,555.1 1,707.9 =========================== ============= ============ ======== BB or below 114.8 76.4 120.6 =========================== ============= ============ ======== Unrated* 226.6 189.5 207.9 =========================== ============= ============ ======== Loans secured by mortgages 3,802.4 3,616.5 3,471.8 =========================== ============= ============ ======== Total 9,542.5 8,766.6 8,494.7 =========================== ============= ============ ======== * Includes units held in liquidity funds
Financial investments increased by GBP1.0bn from GBP8.5bn at 30 June 2015 to GBP9.5bn at 31 December 2015 mainly due to the continued investment of new business premiums into gilts, corporate bonds and LTM contracts. The quality of the corporate bond portfolio remains high. The loan to value ratio of the mortgage portfolio remained in line with the prior period at 26%.
The sector analysis of the Group's corporate bond and gilt portfolio at 31 December 2015 is shown in the table below.
Sector analysis - corporate bond % and gilt portfolio GBPm ================================= ======= ====== Basic materials 105.4 2.1% ================================= ======= ====== Communications 495.7 10.0% ================================= ======= ====== Auto manufacturers 199.9 4.0% ================================= ======= ====== Consumer 425.8 8.6% ================================= ======= ====== Energy 201.7 4.1% ================================= ======= ====== Banks 910.8 18.4% ================================= ======= ====== Insurance 385.9 7.8% ================================= ======= ====== Financial - other 165.8 3.3% ================================= ======= ====== Government 852.2 17.2% ================================= ======= ====== Industrial 267.4 5.4% ================================= ======= ====== Utilities 854.7 17.2% ================================= ======= ====== Other 94.1 1.9% ================================= ======= ====== Total 4,959.4 100.0% ================================= ======= ======
The sector analysis shows that the Group's investment portfolio is well balanced across a variety of industry sectors.
Reinsurance assets increased slightly by GBP70m from GBP2.48bn at 30 June 2015 to GBP2.55bn at 31 December 2015 relating to new business reinsured during the year, offset by claims paid and reinsurance recaptures.
Insurance liabilities increased from GBP7.4bn at 30 June 2015 to GBP8.2bn at 31 December 2015 due to liabilities arising on new insurance business written less claims paid in the period.
Other financial liabilities increased slightly from GBP2.6bn at 30 June 2015 to GBP2.7bn at 31 December 2015. These liabilities are mainly reinsurance-related and include deposits received from reinsurers, reinsurance financing and other reinsurance-related balances. The increase reflects the increased size of the reinsured book.
Insurance and other payables increased by GBP100.8m from GBP22.7m at 30 June 2015 to GBP123.5m at 31 December 2015; this increase mainly relates to timing differences on settlement of investments.
Other liability balances increased by GBP45.4m from GBP328.4m at 30 June 2015 to GBP373.8m at 31 December 2015. The increase mainly relates to the drawdown of a new GBP60m bank facility in August 2015, less amounts repaid during the period.
Total equity increased by GBP107.5m from GBP814.0m at 30 June 2015 to GBP921.5m at 31 December 2015, reflecting the profit after tax for the period of GBP21.9m, dividends paid of GBP12.4m, small adjustments for foreign exchange differences and share-based payments, and new equity raised in October 2015 of GBP97.0m (net of issue costs).
European embedded value
Group EEV increased by GBP124.5m from GBP1,019.3m at 30 June 2015 to GBP1,143.8m at 31 December 2015, due to EEV profit of GBP38.5m for the period, share-based payments of GBP1.4m, dividends paid of GBP12.4m and new equity raised in October 2015 of GBP97.0m (net of issue costs).
Half year Half year ended ended Year ended 31 December 31 December 30 June 2015 2014 2015 GBPm GBPm GBPm ============================ ============ ============ ========== JRG Group EEV at beginning of period 1,019.3 959.1 959.1 ============================= ============ ============ ========== Total comprehensive income for the period 38.5 79.1 74.0 ============================= ============ ============ ========== Share-based payments 1.4 0.9 2.7 ============================= ============ ============ ========== Dividends (12.4) (11.0) (16.5) ============================= ============ ============ ========== Shares issued (net of issue costs) 97.0 - - ============================= ============ ============ ========== JRG Group EEV at end of period 1,143.8 1,028.1 1,019.3 ============================= ============ ============ ==========
Capital management
The Group is managed on an economic capital basis, with a target to maintain minimum cover of 140% of economic capital requirements under normal circumstances.
As at 31 December As at 30 2015 June 2015 GBPm GBPm =================================== ========= ========== Total available capital 1,000 916 =================================== ========= ========== Capital required (556) (521) =================================== ========= ========== Excess available capital resources 444 395 =================================== ========= ========== Coverage ratio 180% 176% =================================== ========= ==========
The Group economic capital ratio at 31 December 2015 of 180% is in line with the ratio at 30 June 2015 of 176%. The Group economic capital ratio remains well in excess of the target ratio of 140%.
Solvency II
The Solvency II regime came into effect on 1 January 2016. The Group has received approval to use a full internal model and matching adjustment to calculate its solvency capital requirement.
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Summary of Group Solvency II capital position
As at 31 December 2015 GBPm ========================================= ============ Capital resources ========================================= ============ Total eligible own funds to meet the consolidated Group solvency capital requirement 1,076 ========================================= ============ Solvency capital requirement 811 ========================================= ============ Excess capital resources 265 ========================================= ============ Capital ratio 133% ========================================= ============
The Solvency II capital ratio for Just Retirement Limited would have been around 140% at 31 December 2015 had the placing and open offer proceeds been injected into the company.
Dividends
An interim dividend for the period of 1.1p per share will be paid in May 2016.
The merger with Partnership Assurance Group plc to create JRP Group plc is expected to complete in early April 2016. On this basis, Partnership Assurance shareholders in JRP Group plc at the record date of 6 May 2016 will be entitled to the Just Retirement interim dividend of 1.1p per JRP Group share, subject to the agreed exchange ratio of 0.834 new JRP Group share being issued for every one Partnership Assurance share in connection with the merger. The declaration of this interim dividend will not result in any adjustment to the exchange ratio.
Principal risks and uncertainties
Risk management
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 developed in line with the risk environment and 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 risks in our operating environment supported by scenario analysis and decide how best to manage the risks within our risk appetite. Management regularly review their risks and produce reports to provide assurance that material risks in the business are being mitigated. The Risk team, led by the Chief Risk Officer ("CRO"), challenges the management team on the effectiveness of its risk management. The CRO provides the Group Board's Risk and Compliance Committee with his independent assessment of the principal risks to the business and emerging risk themes.
Financial risk modelling is used to assess the amount of each risk type against our risk appetite. This modelling is aligned to both our economic capital and regulatory capital to allow the Board to understand the capital requirements for our principal 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 Own Risk and Solvency Assessment ("ORSA"), developed ahead of Solvency II, further embeds comprehensive risk reviews into our Group management structure. 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
Risk description and impact Mitigation and management action ===================================== ===================================== Risks from our chosen market Risk outlook - No change environment Our approach to legislative The Group operates in a change is to participate market in which changes actively and engage with in pensions legislation policy makers in the UK, can have a considerable and this will not change. effect on our strategy and could reduce our sales and The Group has responded profitability or require to the pension reforms by us to hold more capital. evolving its strategy and developing new products The pension reforms introduced and advice offerings. The in April 2015 have had a Group needs to remain agile fundamental impact on the in this changing environment retirement income market, and be prepared to flex which will continue to evolve. its offerings in response Customers have reacted to to market dynamics. We believe pension freedoms by looking we are well placed to adapt for more flexible retirement to the changing customer solutions. Customer needs demand, supported by our for an income in retirement brand promise, innovation have however not changed, credentials and financial and the Group expects that strength. a sizeable market segment for guaranteed income for The most influential factors life solutions will still in the successful delivery operate. Other changes being of the Group's plans are considered by the government closely monitored to help such as secondary annuity inform the business. The trading and new approaches factors include market forecasts to the taxation of pension and market share, supported contributions may affect by insights into customer our market. and competitor behaviour. The Group's strategy and business plans are highly sensitive to any changes in these market factors and uncertainties. ===================================== ===================================== Risks from regulatory changes Risk outlook - No change The financial services industry We monitor and assess regulatory continues to see a high developments on an ongoing level of regulatory change basis and engage fully with and much more intense regulatory the regulators. Our aims supervision. The regulatory are to implement any required agenda for the coming year changes effectively, to covers many areas directly deliver better outcomes relevant to the Group. for our customers and competitive advantage for the business. Solvency II, the new European prudential regulatory framework, Our preparations for Solvency has introduced wide-ranging II helped us to ensure compliance changes for the insurance ahead of implementation. industry in terms of governance, The Group has received regulatory risk management and solvency approval under Solvency capital requirements and II to use an internal model came into force on 1 January and a matching adjustment 2016. to calculate its solvency capital. Like other firms The impacts of Solvency successful in gaining internal II changes on pricing in model approval, we need our markets have yet to to ensure that the new approaches be fully understood. It are fully embedded in our is likely that the regulators strategy and decision-making. will continue to learn from We will continue to work experience and revise their closely with the PRA to expectations over how solvency understand and seek to influence capital is calculated. Residual their developing views on uncertainty about the application solvency capital, and to of Solvency II may impact ensure other stakeholders other stakeholders ability are kept appropriately informed to make informed judgements. of resulting changes. Any In this respect the outcome potential changes needed of the forthcoming industry-wide to our internal model, our review by the PRA of the assumptions or matching valuation and capital treatment adjustment criteria resulting of equity release mortgages from the PRA equity release under Solvency II could mortgage review will be prompt changes in the Group's carefully reviewed. approach. Our structures to meet SIMR The PRA and FCA have implemented requirements are in place, the first part of the new with training provided to Senior Insurance Managers those affected by the new Regime ("SIMR"), giving rules. We welcome moves increased accountability to improve conduct standards to directors and senior in financial services, which managers in our insurance are proportionate to the business, with full implementation risks and applied consistently from March 2016. Insurers across different sectors. may find it difficult to attract executive and non-executive The FCA consultations on directors if the regime the financial advice market is seen as imposing unreasonable and on competition in the
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expectations on individuals mortgage market will be compared with other industries. reviewed. Where appropriate, we will respond to any changes The FCA reviews underway to develop our businesses of the market for financial and protect the interests advice (jointly with HM of our customers. Treasury) and of competition in the mortgage market could The Insurance Distribution lead to outcomes which provide Directive is not expected both opportunities and threats to have a significant impact for the Group. on our business but the potential impacts on non-advised The FCA will consult on sales of pension drawdown its approach to implementation products in particular are of the new EU Insurance uncertain. The full impact Distribution Directive, will become clearer as proposals under which member states develop over the next two can opt to impose certain years. requirements. These could include no longer allowing non-advised sales of insurance-based investment products, which are deemed to be complex. ===================================== ===================================== Risks from our pricing assumptions Risk outlook - No change Writing long-term retirement To manage the risk of our income and LTM business longevity assumptions being requires a range of assumptions incorrect, the Group has to be made based on market developed its own proprietary data and historical experience, underwriting system, PrognoSys(TM) including customers' longevity, , which provides insights corporate bond yields, interest and enhanced understanding rates, property values and of the longevity risks that expenses. These assumptions the Group chooses to take. are applied to the calculation of the reserves needed for Longevity experience is future liabilities and solvency analysed to identify any margins using recognised outcomes materially different actuarial approaches. from our assumptions and is used for the regular The Group's assumptions review of the reserving on these risk factors may basis for liabilities. Some be materially inaccurate changes have been made to requiring them to be recalibrated. GIfL longevity assumptions This could affect the level and reserves during the of reserves needed with year with a minor impact an impact on profitability on overall reserving. and the Group's solvency capital. Some longevity risk exposure is shared with reinsurance partners, who perform due diligence on the Group's approach to risk selection. The related counterparty risk of a reinsurer not meeting its repayment obligations is managed by the reinsurer depositing the reinsurance premiums back to the Group for the financing treaties and by collateral arrangements for the longevity swaps. ===================================== ===================================== Risks from the economic Risk outlook - No change environment Economic conditions are The premiums paid by the actively monitored and alternative Group's customers are invested scenarios modelled to better to enable future benefits understand the potential to be paid. The economic impacts of significant economic environment and financial changes and to inform management market conditions have a action plans. significant influence on the value of assets and The Group's strategy is liabilities and on the income hold high quality, low-risk the Group receives. An adverse assets in its investment market could increase the portfolio to facilitate risk of credit downgrades management of the asset and defaults in our corporate and liability matching position. bond portfolio. Portfolio credit risk is managed by specialist fund The state of the major world managers executing a diversified economies is mixed. Troubles investment strategy in investment in emerging markets are grade assets while adhering pulling down global growth to counterparty limits. and inflation. The slowdown in the growth of the Chinese In a low interest rate environment, economy is impacting its improved returns are sought appetite for oil and commodities by diversifying the types, further depressing their geographies and industry prices. These pressures sectors of investment assets. could derail the global Such diversification can economy. Predictions of create an exposure to foreign a rise in UK interest rates exchange risk, which is have been pushed further controlled using derivative into the future. instruments. Swaps and swaptions are used to reduce exposures In an environment of very to interest rate volatility. low risk-free interest rates, The credit exposure to the investors are more willing counterparties with whom to accept higher credit we transact these instruments and liquidity risk to improve is mitigated by collateral investment returns. These arrangements. conditions could make it difficult to source sufficient The Group's exposure to assets to offer attractive inflation risk through Defined retirement income terms. Benefit De-risking business Low credit spreads similarly is managed with inflation affect the income that can hedging mechanisms. be made available, although margins from our LTM portfolio For LTMs, the Group underwrites help offset this risk. the properties against which it lends using valuations Most defined benefit pension from expert third parties. schemes link member benefits The Group's property risk to inflation through indexation. is controlled by limits As the Group's Defined Benefit to the loan to initial property De-risking business volumes value ratio supported by grow, its exposure to inflation product design features risk increases. and monitoring of the exposure to adverse house price movements. A fall in residential property values could reduce the Liquidity risk is managed amounts received from LTM by ensuring that assets redemptions and may affect of a suitable maturity and the relative attractiveness marketability are held to of the LTM product. The meet liabilities as they solvency capital needed fall due. Sufficient liquid to support the no-negative assets are maintained so equity guarantee in the the Group can readily access LTM product also increases the cash it needs should if property values drop. business cash inflows unexpectedly Significant rises in property reduce. values could increase early There is little short-term mortgage redemptions. volatility in the Group's cash flows, which can be Market risks may affect reliably estimated in terms the liquidity position of of timing and amount. Regular the Group by, for example, cash flow forecasts predict having to realise assets liquidity levels both short-term to meet liabilities during and long-term and stress stressed market conditions tests help us understand or to service collateral any potential pinch points. requirements due to the The Group's liquidity requirements changes in market value have been comfortably met of financial derivatives. over the past year and forecasting confirms that this position can be expected to continue for both investments and business operations. ===================================== ===================================== Risks to Just Retirement's Risk outlook - No change brands The Group has a low appetite The Group's vision is to for reputational damage be the leading retirement and actively seeks to differentiate brand, known and trusted its business from competitors for enriching our customers' by investing in the Group's
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lives. Damage to our brand brand-enhancing activities. or reputation may adversely Fairness to customers and affect our underlying profitability, high service standards are through reducing sales volumes, at the heart of our brand limitation of distribution promise. channels and increasing capital requirements. Risks to Just Retirement's reputation are mitigated Brand image and our reputation in part by actively engaging could be threatened by external with government policy makers risks such as regulatory and regulators to ensure intervention or enforcement the retirement needs of action, either directly customers are understood. or as a result of contagion We develop our strategy from other insurers in our by giving consideration sector. Equally large organisations to planned political and are increasingly becoming regulatory developments targets for cyber-crime, and allow for contingencies particularly those organisations should outcomes differ from that hold customers' personal our expectations. details. Just Retirement is no exception and a cyber-attack Our information security could affect customer confidence. is under constant review as the cyber-threat evolves. Due diligence is performed on all partners to ensure that they work to the same high security standards as the Group. We remain vigilant to the range of cyber-risks but recognise the speed of change in cyber-threats means that a risk exposure remains. ===================================== ===================================== Risks arising from the proposed Risk outlook - No change merger with Partnership Assurance The Group has raised GBP97m On 11 August 2015 the Group of new equity capital (net announced its intention of issue costs) to meet to merge with Partnership the one-off transaction Assurance, and in doing and integration costs, support so deliver significant strategic new business and product and financial benefits for development and add to the the Combined Group. regulatory capital strength of the new Combined Group Merger integration is a under Solvency II. complex process and it may take longer, or cost more Due to the overlapping nature than expected, to realise of the two organisations, the intended synergies or we believe that business those synergies may not as usual activity can be be fully realised. During maintained and strategic the integration process, development moved forward management could be distracted at the same time as integrating from day-to-day business the businesses. The integration resulting in missed opportunities. plans will reflect this While the capital consequences approach and be carefully of the merger have been managed. carefully assessed, it is possible that the resultant The integration philosophy position may be different that we have adopted is when the businesses are "best of both"; this will combined. set the tone for the culture of the new organisation The process of combining and will be a key focus two organisations may have for the management team. an undesirable effect on the culture of the new Group impacting its effectiveness in the short-term. ===================================== ===================================== Risks arising from the referendum on UK membership of the EU The implications of a potential decision for the UK to leave A referendum on UK membership the EU are being carefully of the EU will take place monitored. Just Retirement in June 2016. A vote in does not operate within favour of leaving the EU other EU countries so there takes the UK and the wider are no passporting issues. EU into uncharted territory. However, EU concepts are Uncertainty over the UK's woven into the UK financial future is also likely to services regulatory framework, lead to market volatility so much depends on subsequent before the referendum as exit negotiations which well as afterwards if the may be protracted. majority supports an exit. ===================================== =====================================
Statement of Directors' responsibilities
Each of the Directors of the Company confirms that to the best of their knowledge:
-- the condensed consolidated financial statements have been prepared in accordance with IAS 34: Interim financial reporting as adopted by the European Union;
-- the interim results statement includes a fair review of the information required by Disclosure and Transparency Rule 4.2.7, namely important events that have occurred during the period and their impact on the condensed consolidated financial statements, as well as a description of the principal risks and uncertainties faced by the Company and the undertakings included in the condensed consolidated financial statements taken as a whole for the remaining six months of the financial year; and
-- the interim results statement includes a fair review of material related party transactions and any material changes in the related party transactions described in the last annual report as required by Disclosure and Transparency Rule 4.2.8.
By order of the Board:
Simon Thomas
Group Finance Director
10 March 2016
Condensed consolidated statement of comprehensive income
For the half year ended 31 December 2015
Half Half year year Year ended ended ended 31 December 31 December 30 June 2015 2014 2015 Note GBPm GBPm GBPm ======================================================= ==== ============ ============ ========= Gross premiums written 989.0 625.9 1,099.0 ======================================================= ==== ============ ============ ========= Reinsurance premiums ceded (1,418.7) (113.4) (122.9) ======================================================= ==== ============ ============ ========= Reinsurance recapture 1,166.9 - 950.9 ======================================================= ==== ============ ============ ========= Net premium revenue 737.2 512.5 1,927.0 ======================================================= ==== ============ ============ ========= Net investment income 305.3 548.4 635.2 ======================================================= ==== ============ ============ ========= Fee and commission income 2.8 2.4 5.1 ======================================================= ==== ============ ============ ========= Total revenue 1,045.3 1,063.3 2,567.3 ======================================================= ==== ============ ============ ========= Gross claims paid (272.1) (242.6) (498.6) ======================================================= ==== ============ ============ ========= Reinsurers' share of claims paid 117.5 123.1 248.1 ======================================================= ==== ============ ============ ========= Net claims paid (154.6) (119.5) (250.5) ======================================================= ==== ============ ============ ========= Change in insurance liabilities: ======================================================= ==== ============ ============ ========= Gross amount (774.3) (1,246.2) (956.7) ======================================================= ==== ============ ============ ========= Reinsurers' share 1,236.6 429.0 (188.3) ======================================================= ==== ============ ============ ========= Reinsurance recapture (1,166.9) - (950.9)
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======================================================= ==== ============ ============ ========= (704.6) (817.2) (2,095.9) ======================================================= ==== ============ ============ ========= Change in investment contract liabilities (3.8) (9.7) (3.5) ======================================================= ==== ============ ============ ========= Acquisition costs (13.4) (9.6) (18.5) ======================================================= ==== ============ ============ ========= Other operating expenses (81.2) (59.7) (127.6) ======================================================= ==== ============ ============ ========= Finance costs (61.6) (56.8) (100.9) ======================================================= ==== ============ ============ ========= Total claims and expenses (1,019.2) (1,072.5) (2,596.9) ======================================================= ==== ============ ============ ========= Profit/(loss) before tax 26.1 (9.2) (29.6) ======================================================= ==== ============ ============ ========= Income tax (4.2) 0.9 4.8 ======================================================= ==== ============ ============ ========= Profit/(loss) for the period 21.9 (8.3) (24.8) ======================================================= ==== ============ ============ ========= Other comprehensive income: ======================================================= ==== ============ ============ ========= Exchange differences on translating foreign operations (0.4) - (0.2) ======================================================= ==== ============ ============ ========= Other comprehensive income for the period, net of tax (0.4) - (0.2) ======================================================= ==== ============ ============ ========= Total comprehensive income for the period 21.5 (8.3) (25.0) ======================================================= ==== ============ ============ ========= Profit/(loss) attributable to: ======================================================= ==== ============ ============ ========= Equity holders of Just Retirement Group plc 21.9 (8.3) (24.8) ======================================================= ==== ============ ============ ========= Profit/(loss) for the period 21.9 (8.3) (24.8) ======================================================= ==== ============ ============ ========= Total comprehensive income attributable to: ======================================================= ==== ============ ============ ========= Equity holders of Just Retirement Group plc 21.5 (8.3) (25.0) ======================================================= ==== ============ ============ ========= Total comprehensive income for the period 21.5 (8.3) (25.0) ======================================================= ==== ============ ============ ========= Basic earnings per share (pence) 3 4.27 (1.66) (4.96) ======================================================= ==== ============ ============ ========= Diluted earnings per share (pence) 3 4.26 (1.66) (4.96) ======================================================= ==== ============ ============ =========
The notes are an integral part of these financial statements.
Condensed consolidated statement of changes in equity
For the half year ended 31 December 2015
Shares Total Share Share Reorganisation held Accumulated shareholders' capital premium reserve by trusts profit equity Half year ended 31 December 2015 GBPm GBPm GBPm GBPm GBPm GBPm ========================================= ======== ======== ============== ========== =========== ============== Balance at 1 July 2015 50.1 1.2 347.4 (0.7) 416.0 814.0 ========================================= ======== ======== ============== ========== =========== ============== Profit for the period - - - - 21.9 21.9 ========================================= ======== ======== ============== ========== =========== ============== Other comprehensive income for the period - - - - (0.4) (0.4) ========================================= ======== ======== ============== ========== =========== ============== Total comprehensive income for the period - - - - 21.5 21.5 ========================================= ======== ======== ============== ========== =========== ============== Contributions and distributions ========================================= ======== ======== ============== ========== =========== ============== Shares issued (net of issue costs) 6.3 90.7 - - - 97.0 ========================================= ======== ======== ============== ========== =========== ============== Dividends - - - - (12.4) (12.4) ========================================= ======== ======== ============== ========== =========== ============== Share-based payments - - - (1.1) 2.5 1.4 ========================================= ======== ======== ============== ========== =========== ============== Total contributions and distributions 6.3 90.7 - (1.1) (9.9) 86.0 ========================================= ======== ======== ============== ========== =========== ============== Balance at 31 December 2015 56.4 91.9 347.4 (1.8) 427.6 921.5 ========================================= ======== ======== ============== ========== =========== ============== Shares Total Share Share Reorganisation held Accumulated shareholders' capital premium reserve by trusts profit equity Half year ended 31 December 2014 GBPm GBPm GBPm GBPm GBPm GBPm ========================================= ======== ======== ============== ========== =========== ============== Balance at 1 July 2014 50.1 1.2 347.4 (0.1) 454.2 852.8 ========================================= ======== ======== ============== ========== =========== ============== Loss for the period - - - - (8.3) (8.3) ========================================= ======== ======== ============== ========== =========== ============== Total comprehensive income for the period - - - - (8.3) (8.3) ========================================= ======== ======== ============== ========== =========== ============== Contributions and distributions ========================================= ======== ======== ============== ========== =========== ============== Dividends - - - - (11.0) (11.0) ========================================= ======== ======== ============== ========== =========== ============== Share-based payments - - - (0.6) 1.5 0.9 ========================================= ======== ======== ============== ========== =========== ============== Total contributions and distributions - - - (0.6) (9.5) (10.1) ========================================= ======== ======== ============== ========== =========== ============== Balance at 31 December 2014 50.1 1.2 347.4 (0.7) 436.4 834.4 ========================================= ======== ======== ============== ========== =========== ============== Shares Total Share Share Reorganisation held Accumulated shareholders' capital premium reserve by trusts profit equity Year ended 30 June 2015 GBPm GBPm GBPm GBPm GBPm GBPm
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========================================= ======== ======== ============== ========== =========== ============== Balance at 1 July 2014 50.1 1.2 347.4 (0.1) 454.2 852.8 ========================================= ======== ======== ============== ========== =========== ============== Loss for the period - - - - (24.8) (24.8) ========================================= ======== ======== ============== ========== =========== ============== Other comprehensive income for the period - - - - (0.2) (0.2) ========================================= ======== ======== ============== ========== =========== ============== Total comprehensive income for the period - - - - (25.0) (25.0) ========================================= ======== ======== ============== ========== =========== ============== Contributions and distributions ========================================= ======== ======== ============== ========== =========== ============== Dividends - - - - (16.5) (16.5) ========================================= ======== ======== ============== ========== =========== ============== Share-based payments - - - (0.6) 3.3 2.7 ========================================= ======== ======== ============== ========== =========== ============== Total contributions and distributions - - - (0.6) (13.2) (13.8) ========================================= ======== ======== ============== ========== =========== ============== Balance at 30 June 2015 50.1 1.2 347.4 (0.7) 416.0 814.0 ========================================= ======== ======== ============== ========== =========== ==============
Condensed consolidated statement of financial position
As at 31 December 2015
31 December 31 30 2015 December June GBPm 2014 2015 Note GBPm GBPm ======================================================= ==== =========== ========= ======== Assets ======================================================= ==== =========== ========= ======== Intangible assets 73.1 77.4 75.2 ======================================================= ==== =========== ========= ======== Property and equipment 10.1 0.8 0.7 ======================================================= ==== =========== ========= ======== Financial investments 5 9,542.5 8,766.6 8,494.7 ======================================================= ==== =========== ========= ======== Reinsurance assets 2,546.8 4,045.3 2,477.1 ======================================================= ==== =========== ========= ======== Deferred tax assets 3.6 17.5 4.2 ======================================================= ==== =========== ========= ======== Current tax assets 20.7 0.6 17.6 ======================================================= ==== =========== ========= ======== Prepayments and accrued income 131.2 125.0 86.2 ======================================================= ==== =========== ========= ======== Insurance and other receivables 2.0 9.0 34.1 ======================================================= ==== =========== ========= ======== Cash and cash equivalents 21.9 19.6 58.8 ======================================================= ==== =========== ========= ======== Total assets 12,351.9 13,061.8 11,248.6 ======================================================= ==== =========== ========= ======== Equity ======================================================= ==== =========== ========= ======== Share capital 6 56.4 50.1 50.1 ======================================================= ==== =========== ========= ======== Share premium 6 91.9 1.2 1.2 ======================================================= ==== =========== ========= ======== Reorganisation reserve 347.4 347.4 347.4 ======================================================= ==== =========== ========= ======== Shares held by trusts (1.8) (0.7) (0.7) ======================================================= ==== =========== ========= ======== Accumulated profit 427.6 436.4 416.0 ======================================================= ==== =========== ========= ======== Total equity attributable to owners of Just Retirement Group plc 921.5 834.4 814.0 ======================================================= ==== =========== ========= ======== Liabilities ======================================================= ==== =========== ========= ======== Insurance liabilities 8,214.6 7,729.8 7,440.3 ======================================================= ==== =========== ========= ======== Investment contract liabilities 211.9 235.7 228.3 ======================================================= ==== =========== ========= ======== Loans and borrowings 7 98.1 46.9 46.9 ======================================================= ==== =========== ========= ======== Other financial liabilities 8 2,718.5 4,129.7 2,643.2 ======================================================= ==== =========== ========= ======== Deferred tax liabilities 25.1 31.4 32.9 ======================================================= ==== =========== ========= ======== Other provisions 1.5 2.8 1.5 ======================================================= ==== =========== ========= ======== Current tax liabilities 14.5 5.8 0.1 ======================================================= ==== =========== ========= ======== Accruals and deferred income 22.7 14.5 18.7 ======================================================= ==== =========== ========= ======== Insurance and other payables 123.5 30.8 22.7 ======================================================= ==== =========== ========= ======== Total liabilities 11,430.4 12,227.4 10,434.6 ======================================================= ==== =========== ========= ======== Total equity and liabilities 12,351.9 13,061.8 11,248.6 ======================================================= ==== =========== ========= ========
The notes are an integral part of these financial statements.
Condensed consolidated statement of cash flows
For the half year ended 31 December 2015
Half Half year year Year ended ended ended 31 December 31 December 30 June 2015 2014 2015 GBPm GBPm GBPm ========================================================= ============ ============ ========= Cash flows from operating activities ========================================================= ============ ============ ========= Profit/(loss) before tax 26.1 (9.2) (29.6) ========================================================= ============ ============ ========= Depreciation of equipment 0.3 0.2 0.5 ========================================================= ============ ============ ========= Amortisation of intangible assets 2.1 2.1 4.2 ========================================================= ============ ============ ========= Share-based payments 1.4 0.9 2.7 ========================================================= ============ ============ =========
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Interest income (113.1) (95.3) (196.4) ========================================================= ============ ============ ========= Interest expense 61.6 56.8 100.9 ========================================================= ============ ============ ========= Increase in financial investments (633.1) (1,386.5) (1,082.6) ========================================================= ============ ============ ========= (Increase)/decrease in reinsurance assets (69.7) (429.0) 1,139.2 ========================================================= ============ ============ ========= Increase in prepayments and accrued income (41.4) (34.7) - ========================================================= ============ ============ ========= Decrease/(increase) in insurance and other receivables 32.1 (4.0) (29.1) ========================================================= ============ ============ ========= Increase in insurance liabilities 774.3 1,246.2 956.7 ========================================================= ============ ============ ========= (Decrease)/increase in investment contract liabilities (16.4) 38.3 30.9 ========================================================= ============ ============ ========= (Decrease)/increase in deposits received from reinsurers (38.3) 392.5 (990.4) ========================================================= ============ ============ ========= Increase/(decrease) in accruals and deferred income 3.9 (2.1) 2.3 ========================================================= ============ ============ ========= Increase/(decrease) in insurance and other payables 100.8 (4.6) (12.8) ========================================================= ============ ============ ========= Increase/(decrease) in other creditors 126.6 91.8 (38.8) ========================================================= ============ ============ ========= Interest received 109.5 96.4 201.6 ========================================================= ============ ============ ========= Interest paid (56.7) (51.8) (91.8) ========================================================= ============ ============ ========= Taxation paid - (20.1) (24.1) ========================================================= ============ ============ ========= Net cash inflow/(outflow) from operating activities 270.0 (112.1) (56.6) ========================================================= ============ ============ ========= Cash flows from investing activities ========================================================= ============ ============ ========= Additions to internally generated intangible assets - (1.9) (1.8) ========================================================= ============ ============ ========= Acquisition of property and equipment (9.7) - (0.2) ========================================================= ============ ============ ========= Net cash outflow from investing activities (9.7) (1.9) (2.0) ========================================================= ============ ============ ========= Cash flows from financing activities ========================================================= ============ ============ ========= Increase/(decrease) in borrowings 51.2 (4.5) (4.5) ========================================================= ============ ============ ========= Interest paid (1.7) (1.0) (2.3) ========================================================= ============ ============ ========= Dividends paid (12.4) (11.0) (16.5) ========================================================= ============ ============ ========= Issue of ordinary share capital (net of costs) 97.0 - - ========================================================= ============ ============ ========= Net cash inflow/(outflow) from financing activities 134.1 (16.5) (23.3) ========================================================= ============ ============ ========= Net increase/(decrease) in cash and cash equivalents 394.4 (130.5) (81.9) ========================================================= ============ ============ ========= Cash and cash equivalents at start of period 313.7 395.6 395.6 ========================================================= ============ ============ ========= Cash and cash equivalents at end of period 708.1 265.1 313.7 ========================================================= ============ ============ ========= Cash available on demand 21.9 19.6 58.8 ========================================================= ============ ============ ========= Units in liquidity funds 686.2 245.5 254.9 ========================================================= ============ ============ ========= Cash and cash equivalents at end of period 708.1 265.1 313.7 ========================================================= ============ ============ =========
Notes to the condensed consolidated financial statements
1 Basis of preparation
These condensed interim financial statements comprise the condensed consolidated financial statements of Just Retirement Group plc ("the Company") and its subsidiaries, together referred to as "the Group", as at, and for the half year ended, 31 December 2015.
These condensed interim financial statements have been prepared in accordance with the Disclosure and Transparency Rules of the Financial Conduct Authority and with IAS 34, Interim Financial Reporting, as adopted by the European Union.
These condensed interim financial statements do not comprise statutory accounts within the meaning of Section 434 of the Companies Act 2006. The results for the year ended 30 June 2015 have been taken from the Group's 2015 Annual Report and Accounts, which was approved by the Board of Directors on 16 September 2015 and delivered to the Registrar of Companies. The report of the auditor on those accounts was unqualified, did not contain an emphasis of matter paragraph and did not contain any statement under Section 498 of the Companies Act 2006.
The Directors have undertaken a going concern assessment and, as a result of this assessment, are satisfied that the Group and the Company have 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. Accordingly, they continue to adopt the going concern basis in preparing the condensed interim financial statements.
The accounting policies applied are the same as those applied in the Group's 2015 Annual Report and Accounts. The Group has not early--adopted any standard, interpretation or amendment that has been issued but is not yet effective.
2 Segmental reporting
Segmental analysis of operating profit and profit before tax
The Group's insurance segment writes insurance products for the retirement market - which include Guaranteed Income for Life Solutions and Defined Benefit De-risking Solutions, Care Plans, and Drawdown contracts - and invests the premiums received from these contracts in corporate bonds, Lifetime Mortgage advances, and other financial investments.
The Group's other segments include regulated advice and intermediary services, and professional services to corporates.
The Group's corporate activities are primarily involved in managing the Group's liquidity, capital and investment activities.
During the year to 30 June 2015, the Group reviewed the presentation of its segmental reporting in relation to the operating results of those companies within the insurance segment providing non-advised services, regulated advice and intermediary services, and the provision of licensed software to financial advisers, and the operating results of the other Group companies which are included within Corporate activities. The operating results of these companies have been reclassified to a new line item within operating profit, "Other Group companies' operating result".
In the period to 31 December 2014, the operating result of these companies was included within operating profit within Operating experience and assumption changes. Accordingly, operating losses of GBP3.9m have been reclassified in the prior year segmental note from Operating experience and assumption changes to Other Group companies' operating result. Of this amount, GBP1.4m relates to the insurance segment and GBP2.5m relates to Corporate activities.
In addition, intra-Group interest on Tier 2 loans within Corporate activities has been reclassified from Operating experience and assumption changes to Reinsurance and financing costs. Accordingly, GBP7.6m of intra-Group interest income previously reported within Operating experience and assumption changes within Corporate activities for the period to 31 December 2014, has been reclassified to Reinsurance and financing costs.
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There is no net impact to Underlying operating profit, Operating profit/(loss) before tax, (Loss)/profit before amortisation costs and before tax, or (Loss)/profit before tax from these changes.
The Group operates in one material geographical segment which is the UK.
Segmental reporting and reconciliation to financial information
Other Corporate Insurance segments activities Total Half year ended 31 December 2015 GBPm GBPm GBPm GBPm ========================================================= ========= ========= =========== ====== New business operating profit 46.0 - - 46.0 ========================================================= ========= ========= =========== ====== In-force operating profit 18.8 - 0.4 19.2 ========================================================= ========= ========= =========== ====== Underlying operating profit 64.8 - 0.4 65.2 ========================================================= ========= ========= =========== ====== Operating experience and assumption changes (3.5) - - (3.5) ========================================================= ========= ========= =========== ====== Other Group companies' operating result - (3.0) (2.9) (5.9) ========================================================= ========= ========= =========== ====== Reinsurance and financing costs (14.3) - 8.3 (6.0) ========================================================= ========= ========= =========== ====== Operating profit/(loss) before tax 47.0 (3.0) 5.8 49.8 ========================================================= ========= ========= =========== ====== Non-recurring and project expenditure (7.0) - (1.0) (8.0) ========================================================= ========= ========= =========== ====== Investment and economic profits/(losses) 2.8 - (0.4) 2.4 ========================================================= ========= ========= =========== ====== Profit/(loss) before merger transaction and amortisation costs, before tax 42.8 (3.0) 4.4 44.2 ========================================================= ========= ========= =========== ====== Merger transaction costs - - (16.3) (16.3) ========================================================= ========= ========= =========== ====== Amortisation costs - - (1.8) (1.8) ========================================================= ========= ========= =========== ====== Profit/(loss) before tax 42.8 (3.0) (13.7) 26.1 ========================================================= ========= ========= =========== ====== Other Corporate Insurance segments activities Total Half year ended 31 December 2014 GBPm GBPm GBPm GBPm ======================================== ========= ========= =========== ====== New business operating profit 18.2 - - 18.2 ======================================== ========= ========= =========== ====== In-force operating profit 24.0 - 0.4 24.4 ======================================== ========= ========= =========== ====== Underlying operating profit 42.2 - 0.4 42.6 ======================================== ========= ========= =========== ====== Operating experience and assumption changes 2.7 - - 2.7 ======================================== ========= ========= =========== ====== Other Group companies' operating result - (1.4) (2.5) (3.9) ======================================== ========= ========= =========== ====== Reinsurance and financing costs (14.1) - 7.6 (6.5) ======================================== ========= ========= =========== ====== Operating profit/(loss) before tax 30.8 (1.4) 5.5 34.9 ======================================== ========= ========= =========== ====== Non-recurring and project expenditure (8.3) - (1.6) (9.9) ======================================== ========= ========= =========== ====== Investment and economic losses (31.6) - (0.7) (32.3) ======================================== ========= ========= =========== ====== (Loss)/profit before amortisation costs and before tax (9.1) (1.4) 3.2 (7.3) ======================================== ========= ========= =========== ====== Amortisation costs - - (1.9) (1.9) ======================================== ========= ========= =========== ====== (Loss)/profit before tax (9.1) (1.4) 1.3 (9.2) ======================================== ========= ========= =========== ====== Other Corporate Insurance segments activities Total Year ended 30 June 2015 GBPm GBPm GBPm GBPm ======================================================= ========= ========= =========== ====== New business operating profit 36.8 - - 36.8 ======================================================= ========= ========= =========== ====== In-force operating profit 48.8 - 0.8 49.6 ======================================================= ========= ========= =========== ====== Underlying operating profit 85.6 - 0.8 86.4 ======================================================= ========= ========= =========== ====== Operating experience and assumption changes 2.4 - - 2.4 ======================================================= ========= ========= =========== ====== Other Group companies' operating result - (3.3) (5.4) (8.7) ======================================================= ========= ========= =========== ====== Reinsurance and financing costs (28.7) - 16.2 (12.5) ======================================================= ========= ========= =========== ====== Operating profit/(loss) before tax 59.3 (3.3) 11.6 67.6 ======================================================= ========= ========= =========== ====== Non-recurring and project expenditure (16.8) - (2.6) (19.4) ======================================================= ========= ========= =========== ====== Investment and economic (losses)/profits (74.2) - 0.1 (74.1) ======================================================= ========= ========= =========== ====== (Loss)/profit before amortisation costs and before tax (31.7) (3.3) 9.1 (25.9) ======================================================= ========= ========= =========== ====== Amortisation costs - - (3.7) (3.7) ======================================================= ========= ========= =========== ====== (Loss)/profit before tax (31.7) (3.3) 5.4 (29.6) ======================================================= ========= ========= =========== ======
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 UK.
The Group's gross premiums written, as shown in the Condensed consolidated statement of comprehensive income, is analysed by product below.
Half Half year year Year ended ended ended 31 31 30 December December June 2015 2014 2015 GBPm GBPm GBPm ===================================== ========= ========= ======= Defined Benefit De-risking Solutions ("DB") 701.2 354.7 608.9 ===================================== ========= ========= ======= Guaranteed Income for Life contracts ("GIfL") 271.2 266.4 478.0 ===================================== ========= ========= ======= Care Plans ("CP") 16.6 4.8 12.1 ===================================== ========= ========= ======= Gross premiums written 989.0 625.9 1,099.0
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===================================== ========= ========= =======
Drawdown and 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.
Half Half year year Year ended ended ended 31 31 30 December December June 2015 2014 2015 GBPm GBPm GBPm =================== ========= ========= ====== Drawdown 7.2 35.3 48.7 =================== ========= ========= ====== LTM loans advanced 237.0 159.0 308.1 =================== ========= ========= ======
3 Earnings per share
Half year ended Half year ended Year ended 30 31 December 31 December June 2015 2015 2014 ------------------------------ ------------------------------ ------------------------------ Weighted Weighted Weighted average Earnings average Earnings average Earnings number per number per number per Earnings of shares share Earnings of shares share Earnings of shares share GBPm million pence GBPm million pence GBPm million pence ================= ======== ========== ======== ======== ========== ======== ======== ========== ======== Basic earnings 21.9 512.6 4.27 (8.3) 499.9 (1.66) (24.8) 499.7 (4.96) ================= ======== ========== ======== ======== ========== ======== ======== ========== ======== Diluted earnings 21.9 514.1 4.26 (8.3) 499.9 (1.66) (24.8) 499.7 (4.96) ================= ======== ========== ======== ======== ========== ======== ======== ========== ========
The calculation of basic and diluted earnings per share is based on dividing the profit attributable to equity holders of the Company of GBP21.9m (HY 2014: loss of GBP8.3m; FY 2015: loss of GBP24.8m) 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 period, calculated as follows.
Half year Half Year ended year ended 31 ended 30 December 31 December June 2015 2014 2015 million million million ============================================ ========= ============ ======== Weighted average number of ordinary shares 512.6 499.9 499.7 ============================================ ========= ============ ======== Effect of dilutive potential ordinary shares: ============================================ ========= ============ ======== Share options 1.5 - - ============================================ ========= ============ ======== Diluted weighted average number of ordinary shares 514.1 499.9 499.7 ============================================ ========= ============ ========
4 Dividends
Dividends paid were as follows.
Half Half year year Year ended ended ended 31 31 30 December December June 2015 2014 2015 GBPm GBPm GBPm ============================================================= ========= ========= ====== Final dividend: * in respect of the year ended 30 June 2015 - 2.2 pence per share, paid on 7 December 2015 * in respect of the year ended 30 June 2014 - 2.2 pence 12.4 - - per share, paid on 8 December 2014 - 11.0 11.0 ============================================================= ========= ========= ====== Interim dividend: * in respect of the year ended 30 June 2015 - 1.1 pence per share, paid on 14 May 2015 - - 5.5 ============================================================= ========= ========= ====== Total dividends paid 12.4 11.0 16.5 ============================================================= ========= ========= ======
The Directors proposed an interim dividend of 1.1 pence per share in respect of the current period.
5 Financial investments
This note explains the methodology for valuing the Group's financial assets and liabilities measured at fair value, including financial investments, and provides disclosures in accordance with IFRS 13, Fair value measurement, including an analysis of such assets and liabilities categorised in a fair value hierarchy based on market observability of valuation inputs.
The Group's financial investments are summarised by measurement category as follows.
31 December 31 December 30 June 2015 2014 2015 GBPm GBPm GBPm ================================== =========== =========== ======= Fair value through profit or loss ================================== =========== =========== ======= Loans secured by mortgages 3,802.4 3,616.5 3,471.8 ================================== =========== =========== ======= Other financial investments 5,740.1 5,150.1 5,022.9 ================================== =========== =========== ======= Total financial investments 9,542.5 8,766.6 8,494.7 ================================== =========== =========== =======
All financial investments measured at fair value through the profit or loss are designated as such on initial recognition or, in the case of derivative financial assets, are classified as held for trading.
Other financial investments
31 December 31 December 30 June 2015 2014 2015 GBPm GBPm GBPm ================================================ =========== =========== ======= Fair value ================================================ =========== =========== ======= Units in liquidity funds 712.1 270.6 280.2 ================================================ =========== =========== ======= Debt securities and other fixed income securities 4,857.8 4,819.4 4,673.8 ================================================ =========== =========== ======= Deposits with credit institutions 29.1 32.0 18.0 ================================================ =========== =========== ======= Derivative financial assets 34.7 28.1 50.9 ================================================ =========== =========== ======= Infrastructure loans 101.6 - - ================================================ =========== =========== ======= Recoveries from reinsurers on investment contracts 4.8 - - ================================================ =========== =========== ======= Total fair value of other financial investments 5,740.1 5,150.1 5,022.9 ================================================ =========== =========== ======= Cost ================================================ =========== =========== ======= Units in liquidity funds 711.8 270.5 279.9 ================================================ =========== =========== ======= Debt securities and other fixed income securities 4,792.7 4,540.2 4,536.2 ================================================ =========== =========== ======= Deposits with credit institutions 29.1 32.0 18.0 ================================================ =========== =========== ======= Derivative financial assets 8.2 1.7 8.2 ================================================ =========== =========== ======= Infrastructure loans 100.0 - - ================================================ =========== =========== =======
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Recoveries from reinsurers on investment contracts 4.7 - - ================================================ =========== =========== ======= Total cost of other financial investments 5,646.5 4,844.4 4,842.3 ================================================ =========== =========== =======
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 GBP28.7m (31 Dec 2014: GBP29.5m; 30 Jun 2015: GBP17.2m) have been pledged as collateral in respect of the Group's derivative financial instruments. Amounts pledged as collateral are deposited with the derivative counterparty.
(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.
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, and investment contract liabilities.
The valuation of loans secured by mortgages is determined using an internal model which projects future cash flows expected to arise from each loan. Future cash flows allow for assumptions relating to future expenses, future mortality experience, costs arising from no-negative equity guarantees and voluntary redemptions. The fair value is calculated by discounting the future cash flows at a swap rate plus a liquidity premium.
During the prior year the internal model used to value the loans secured by mortgages was recalibrated in respect of the liquidity premium added to the swap rate. Previously the liquidity premium was considered to be unobservable and was therefore set at zero. This gave rise to a day-one gain which was deferred and recognised over the expected life of the loan.
The recalibration process reassessed the level of the liquidity premium and this is now considered to be an observable input to the internal model. As a result of the recalibration, a day-one gain no longer arises, and profit is recognised over the term of the contract. There is no longer any aggregate difference yet to be recognised in profit or loss between the fair value of the mortgages at initial recognition and the amount that would have been determined at that date using the valuation technique.
The Level 3 bonds are either infrastructure private placement bonds or asset-backed securities. Such securities are valued using discounted cash flow analyses using prudent assumptions based on the repayment of the underlying loan.
Investment contract liabilities are calculated on a policy-by-policy basis using a prospective valuation of future retirement income benefits and expense cash flows, but with an adjustment to amortise any day-one gain over the life of the contract.
There are no non-recurring fair value measurements as at 31 December 2015 (31 Dec 2014: nil; 30 Jun 2015: nil).
(b) Analysis of assets and liabilities held at fair value according to fair value hierarchy
Level Level Level 1 2 3 Total 31 December 2015 GBPm GBPm GBPm GBPm ========================================= ======= ======= ======= ======= Assets held at fair value ========================================= ======= ======= ======= ======= Units in liquidity funds 712.1 - - 712.1 ========================================= ======= ======= ======= ======= Debt securities and other fixed income securities 668.0 4,124.8 65.0 4,857.8 ========================================= ======= ======= ======= ======= Deposits with credit institutions 28.7 0.4 - 29.1 ========================================= ======= ======= ======= ======= Derivative financial assets - 34.7 - 34.7 ========================================= ======= ======= ======= ======= Loans secured by mortgages - - 3,802.4 3,802.4 ========================================= ======= ======= ======= ======= Infrastructure loans - - 101.6 101.6 ========================================= ======= ======= ======= ======= Recoveries from reinsurers on investment contracts - - 4.8 4.8 ========================================= ======= ======= ======= ======= Total assets held at fair value 1,408.8 4,159.9 3,973.8 9,542.5 ========================================= ======= ======= ======= ======= Liabilities held at fair value ========================================= ======= ======= ======= ======= Investment contract liabilities - - 211.9 211.9 ========================================= ======= ======= ======= ======= Derivative financial liabilities - 89.9 - 89.9 ========================================= ======= ======= ======= ======= Obligations for repayment of cash collateral received 5.6 - - 5.6 ========================================= ======= ======= ======= ======= Total liabilities held at fair value 5.6 89.9 211.9 307.4 ========================================= ======= ======= ======= ======= Level Level Level 1 2 3 Total 31 December 2014 GBPm GBPm GBPm GBPm ======================================= ======= ======= ======= ======= Assets held at fair value ======================================= ======= ======= ======= ======= Units in liquidity funds 245.5 25.1 - 270.6 ======================================= ======= ======= ======= ======= Debt securities and other fixed income securities 740.4 4,062.9 16.1 4,819.4 ======================================= ======= ======= ======= ======= Deposits with credit institutions 32.0 - - 32.0 ======================================= ======= ======= ======= ======= Derivative financial assets - 28.1 - 28.1 ======================================= ======= ======= ======= ======= Loans secured by mortgages - - 3,616.5 3,616.5 ======================================= ======= ======= ======= ======= Total assets held at fair value 1,017.9 4,116.1 3,632.6 8,766.6 ======================================= ======= ======= ======= ======= Liabilities held at fair value ======================================= ======= ======= ======= ======= Investment contract liabilities - - 235.7 235.7 ======================================= ======= ======= ======= =======
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Derivative financial liabilities - 187.9 - 187.9 ======================================= ======= ======= ======= ======= Total liabilities held at fair value - 187.9 235.7 423.6 ======================================= ======= ======= ======= ======= Level Level Level 1 2 3 Total 30 June 2015 GBPm GBPm GBPm GBPm ======================================= ======= ======= ======= ======= Assets held at fair value ======================================= ======= ======= ======= ======= Units in liquidity funds 280.2 - - 280.2 ======================================= ======= ======= ======= ======= Debt securities and other fixed income securities 710.3 3,945.0 18.5 4,673.8 ======================================= ======= ======= ======= ======= Deposits with credit institutions 17.2 0.8 - 18.0 ======================================= ======= ======= ======= ======= Derivative financial assets - 50.9 - 50.9 ======================================= ======= ======= ======= ======= Loans secured by mortgages - - 3,471.8 3,471.8 ======================================= ======= ======= ======= ======= Total assets held at fair value 1,007.7 3,996.7 3,490.3 8,494.7 ======================================= ======= ======= ======= ======= Liabilities held at fair value ======================================= ======= ======= ======= ======= Investment contract liabilities - - 228.3 228.3 ======================================= ======= ======= ======= ======= Derivative financial liabilities - 74.3 - 74.3 ======================================= ======= ======= ======= ======= Obligations for repayment of cash collateral received 18.6 - - 18.6 ======================================= ======= ======= ======= ======= Total liabilities held at fair value 18.6 74.3 228.3 321.2 ======================================= ======= ======= ======= =======
(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 period there were no transfers between Level 1 and Level 2.
(d) Level 3 assets and liabilities measured at fair value
Debt securities and other fixed income securities
Debt securities classified as Level 3 are either infrastructure private placement bonds or asset-backed securities.
Reconciliation of the opening and closing recorded amount of Level 3 debt securities and other fixed income securities
Half Year Half year year ended ended 31 ended 30 December 31 December June 2015 2014 2015 GBPm GBPm GBPm ================================= ========= ============ ====== At start of period 18.5 15.5 15.5 ================================= ========= ============ ====== (Losses)/gains in profit or loss (0.6) 0.6 (0.1) ================================= ========= ============ ====== Purchases 50.0 - - ================================= ========= ============ ====== Transfers from Level 2 - - 3.5 ================================= ========= ============ ====== Sales/maturities (2.8) - - ================================= ========= ============ ====== Amortisation (0.1) - (0.4) ================================= ========= ============ ====== At end of period 65.0 16.1 18.5 ================================= ========= ============ ======
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. They have additional covenants which provide greater security but these are not quantified in the valuation.
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
The sensitivity of profit before tax to changes in default assumptions and redemption profiles in respect of Level 3 debt securities is not material.
Loans secured by mortgages
31 December 31 December 30 June 2015 2014 2015 GBPm GBPm GBPm =========== =========== =========== ======= Fair value 3,802.4 3,616.5 3,471.8 =========== =========== =========== ======= At cost(1) 2,263.2 1,961.9 2,073.3 =========== =========== =========== =======
(1) Includes advances and further advances, less redemptions
Reconciliation of the opening and closing recorded amount of Level 3 loans secured by mortgages
Half Half Year year year ended ended ended 30 31 December 31 December June 2015 2014 2015 GBPm GBPm GBPm ================================= ============ ============ ======= At start of period 3,471.8 2,749.4 2,749.4 ================================= ============ ============ ======= Total gains in profit or loss(1) 162.5 765.9 523.9 ================================= ============ ============ ======= Loans advanced 237.0 159.0 308.1 ================================= ============ ============ ======= Redemptions (68.9) (57.8) (109.6) ================================= ============ ============ ======= At end of period 3,802.4 3,616.5 3,471.8 ================================= ============ ============ =======
(1) All gains and losses are included in Net investment income in profit or loss
Principal assumptions underlying the calculation of loans secured by 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 following:
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 3.8% (31 Dec 2014: 3.9%; 30 Jun 2015: 3.8%).
Mortality
Mortality assumptions have been derived by reference to appropriate standard mortality tables. These 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, input from the Group's lead reinsurer and management's own experience.
Property prices
The value of a property at the date of valuation is calculated by taking the latest valuation for that property and indexing this value using the Nationwide quarterly index for the property's region.
Voluntary redemptions
Assumptions for future voluntary redemption levels are based on the Group's recent analyses and external benchmarking, and the assumed redemption rate for policies in their first year is 0.6% (31 Dec 2014: 0.6%; 30 Jun 2015: 0.6%).
Sensitivity analysis
Changes to unobservable inputs used in the valuation technique could give rise to significant changes in the fair value of the assets. The Group has estimated the impact on profit for the period in changes to these inputs as follows.
Loans secured by mortgages valuation assumptions ---------------------------------------------- Maintenance Property Voluntary Net increase/(decrease) in profit expenses Mortality prices redemptions before tax (GBPm) +10% -5% -10% -10% ================================== =========== ========= ======== ============ 31 December 2015 (4.4) 17.0 (29.5) 15.6 ================================== =========== ========= ======== ============ 31 December 2014 (0.7) 3.3 (5.6) 3.2
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================================== =========== ========= ======== ============ 30 June 2015 (4.1) 15.3 (26.1) 14.3 ================================== =========== ========= ======== ============
The sensitivity factors are applied via actuarial 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 be interpolated or extrapolated from these results.
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.
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, and the assumption that there is a parallel shift in interest rates at all durations.
Infrastructure loans
Reconciliation of the opening and closing recorded amount of Level 3 infrastructure loans
Half year ended 31 December 2015 GBPm ======================== =============== At start of period - ======================== =============== Gains in profit or loss 1.6 ======================== =============== Loans advanced 100.0 ======================== =============== Redemptions - ======================== =============== At end of period 101.6 ======================== ===============
Principal assumptions underlying the calculation of infrastructure loans classified as Level 3
Redemption and defaults
The redemption and default assumptions used in the valuation of infrastructure loans are similar to the Group's bond portfolio. They have additional covenants which provide greater security but these are not quantified in the valuation.
Sensitivity analysis
The sensitivity of profit before tax to changes in default assumptions and redemption profiles in respect of Level 3 infrastructure loans is not material.
Recoveries from reinsurers on investment contracts
Recoveries from reinsurers on investment contracts represent fully reinsured funds invested under the Flexible Pension Plan. The linked liabilities are included in Level 3 investment contract liabilities.
Reconciliation of the opening and closing recorded amount of Level 3 recoveries from reinsurers on investment contracts
Half year ended 31 December 2015 GBPm ===================================== ============ At start of period - ===================================== ============ Gains in profit or loss 0.3 ======================================= ============ Deposits received from policyholders 4.8 ======================================= ============ Payments made to policyholders and fees deducted (0.3) ======================================= ============ At end of period 4.8 ======================================= ============
Principal assumptions and sensitivity of profit before tax
Recoveries from reinsurers on investment contracts are valued based on the price of the reinsured underlying funds determined by the asset managers. The assets are classified as Level 3 because the prices are not validated by internal models or the observable inputs used by the asset managers are not available. Therefore, there are no principal assumptions used in the valuation of these Level 3 assets.
Investment contract liabilities
Reconciliation of the opening and closing recorded amount of Level 3 investment contract liabilities
Half Half Year year year ended ended ended 30 31 December 31 December June 2015 2014 2015 GBPm GBPm GBPm ========================================== ============ ============ ====== At start of period 228.3 197.4 197.4 ========================================== ============ ============ ====== Deposits received from policyholders 7.2 35.3 49.1 ========================================== ============ ============ ====== Payments made to policyholders (27.4) (6.7) (21.7) ========================================== ============ ============ ====== Change in contract liabilities recognised in profit or loss 3.8 9.7 3.5 ========================================== ============ ============ ====== At end of period 211.9 235.7 228.3 ========================================== ============ ============ ======
Principal assumption underlying the calculation of investment contract liabilities
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 4.1% (31 Dec 2014: 4.2%; 30 Jun 2015: 4.1%).
Sensitivity analysis
The sensitivity of profit before tax to changes in maintenance expense assumptions in respect of investment contract liabilities is not material.
6 Share capital
The allotted and issued ordinary share capital of Just Retirement Group plc at 31 December 2015 is detailed below.
Number of GBP0.10 Share Share Total ordinary capital premium GBPm shares GBPm GBPm ===================================== =========== ======== ======== ======= At 1 July 2015 500,864,706 50.1 1.2 51.3 ===================================== =========== ======== ======== ======= Shares issued under capital placing and open offer 63,525,672 6.3 90.7 97.0 ===================================== =========== ======== ======== ======= In respect of employee share schemes 7,024 - - - ===================================== =========== ======== ======== ======= At 31 December 2015 564,397,402 56.4 91.9 148.3 ===================================== =========== ======== ======== ======= Number of GBP0.10 Share Share Total ordinary capital premium GBPm shares GBPm GBPm ===================================== =========== ======== ======== ======= At 1 July 2014 500,831,070 50.1 1.2 51.3 ===================================== =========== ======== ======== ======= In respect of employee share schemes 4,891 - - - ===================================== =========== ======== ======== ======= At 31 December 2014 500,835,961 50.1 1.2 51.3 ===================================== =========== ======== ======== ======= Number of GBP0.10 Share Share Total ordinary capital premium GBPm shares GBPm GBPm ===================================== =========== ======== ======== ======= At 1 July 2014 500,831,070 50.1 1.2 51.3 ===================================== =========== ======== ======== ======= In respect of employee share schemes 33,636 - - - ===================================== =========== ======== ======== ======= At 30 June 2015 500,864,706 50.1 1.2 51.3 ===================================== =========== ======== ======== =======
7 Loans and borrowings
31 December 31 December 30 June 2015 2014 2015 GBPm GBPm GBPm ================ =========== =========== ======= Bank borrowings 98.1 46.9 46.9 ================ =========== =========== =======
On 25 September 2012, Just Retirement (Holdings) Limited entered into a GBP35m five-year term loan agreement provided by Royal Bank of Scotland plc.
On 9 May 2013, Deutsche Bank AG and Nomura International plc acceded to the loan agreement under the terms of an accordion feature, with each providing loans of GBP10m to Just Retirement (Holdings) Limited.
On 7 August 2015, Just Retirement (Holdings) Limited entered into an amendment to the original loan agreement and on 10 August 2015 drew down a further GBP30m from each of Royal Bank of Scotland plc and Barclays Bank plc.
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GBP3.6m of the loan was repaid on 11 October 2013, GBP4.5m was repaid on 11 October 2014, and GBP8.8m was repaid on 11 October 2015.
The fair value of the bank borrowings is the same as the carrying value.
8 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.
31 December 31 December 30 June 2015 2014 2015 Note GBPm GBPm GBPm ====================================================== ===== =========== =========== ======= Fair value through profit or loss ====================================================== ===== =========== =========== ======= Derivative financial liabilities (a) 89.9 187.9 74.3 ====================================================== ===== =========== =========== ======= Obligations for repayment of cash collateral received (a) 5.6 - 18.6 ====================================================== ===== =========== =========== ======= Liabilities measured using insurance rules ====================================================== ===== =========== =========== ======= Deposits received from reinsurers (b) 2,435.3 3,856.5 2,473.6 ====================================================== ===== =========== =========== ======= Reinsurance finance (c) 85.4 85.3 76.7 ====================================================== ===== =========== =========== ======= Reinsurance funds withheld (d) 102.3 - - ====================================================== ===== =========== =========== ======= Total other liabilities 2,718.5 4,129.7 2,643.2 ============================================================= =========== =========== =======
The liabilities above, which are measured at fair value through profit or loss, are designated as such on initial recognition.
(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 measured and valued in accordance with the reinsurance contract, which takes into account an appropriate discount rate for the timing of expected cash flows.
(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 the Pillar 1 valuation rules.
(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.
9 Derivative financial instruments
The Company uses various derivative financial instruments to manage its exposure to interest rates and foreign exchange risk, including interest rate swaps, interest rate swaptions and foreign currency asset swaps.
Asset Liability fair fair Notional value value amount Derivatives GBPm GBPm GBPm ================================= ====== ========= ======== GBP and USD/EUR asset swaps 17.3 16.6 368.4 ================================= ====== ========= ======== Sterling interest rate swaps 16.4 66.4 247.3 ================================= ====== ========= ======== Sterling interest rate swaptions 1.0 - 1,140.0 ================================= ====== ========= ======== Inflation swap - 6.9 256.2 ================================= ====== ========= ======== Total at 31 December 2015 34.7 89.9 2,011.9 ================================= ====== ========= ======== Asset Liability fair fair Notional value value amount Derivatives GBPm GBPm GBPm ================================= ====== ========= ======== GBP and USD asset swaps 11.3 4.3 361.8 ================================= ====== ========= ======== Sterling interest rate swaps 16.8 183.6 442.0 ================================= ====== ========= ======== Sterling interest rate swaptions - - 200.0 ================================= ====== ========= ======== Total at 31 December 2014 28.1 187.9 1,003.8 ================================= ====== ========= ======== Asset Liability fair fair Notional value value amount Derivatives GBPm GBPm GBPm ================================= ====== ========= ======== GBP and USD asset swaps 29.7 4.0 368.4 ================================= ====== ========= ======== Sterling interest rate swaps 15.1 70.3 314.0 ================================= ====== ========= ======== Sterling interest rate swaptions 6.1 - 1,140.0 ================================= ====== ========= ======== Inflation swap - - 6.5 ================================= ====== ========= ======== Total at 30 June 2015 50.9 74.3 1,828.9 ================================= ====== ========= ========
The interest rate swaps are not designated as a hedge and changes in their fair value are included in profit or loss. Derivatives are used to manage the Group's European embedded value and regulatory capital, which is affected by a surplus of long-dated fixed interest securities when liabilities are measured on a realistic basis.
All over-the-counter derivative transactions are conducted under standardised International Swaps and Derivatives Association Inc. ("ISDA") 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 2015, the Company had pledged collateral of GBP82.4m (31 Dec 2014: GBP128.8m; 30 Jun 2015: GBP55.6m) of which GBP53.7m were gilts (31 Dec 2014: GBP133.8m; 30 Jun 2015: GBP38.4m) and had received cash collateral of GBP5.6m (31 Dec 2014: nil; 30 Jun 2015: GBP18.6m).
Amounts recognised in profit or loss in respect of derivative financial instruments are as follows.
Half Half year year ended ended Year 31 31 December ended December 2014 30 June 2015 GBPm 2015 GBPm GBPm ======================================= ========= ============ ======== Movement in fair value of swaps (31.8) (112.5) 15.7 ======================================= ========= ============ ======== Realised losses on interest rate swaps closed (14.1) (16.3) (145.0) ======================================= ========= ============ ======== Total amounts recognised in profit or loss (45.9) (128.8) (129.3) ======================================= ========= ============ ========
10 Related parties
The Group has related party relationships with its ultimate parent company and key management personnel. 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.
Half Half year year Year ended ended ended 31 31 December 30 December 2014 June 2015 GBPm 2015 GBPm GBPm ================================== ========= ============ ====== Short-term employee benefits 2.1 2.7 7.0 ================================== ========= ============ ====== Share-based payments 0.7 0.5 1.2 ================================== ========= ============ ====== Total key management compensation 2.8 3.2 8.2 ================================== ========= ============ ======
11 Post balance sheet events
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There have been no material events between 31 December 2015 and the date of this report that are required to be brought to the attention of shareholders.
European embedded value ("EEV")
Supplementary financial statements
Just Retirement Group plc has prepared supplementary financial statements for the Group on an EEV basis. The Embedded Value has been prepared in accordance with the CFO Forum's Principles and additional guidance on EV reporting in advance of Solvency II issued in October 2015. As such these statements do not reflect the impact of Solvency II on the results.
Life insurance products are, by their nature, long-term and the profit on this business is generated over a significant number of years. Accounting under IFRS alone does not, in the Group's opinion, fully reflect the value of future cash flows. The Group considers that embedded value reporting provides investors with a measure of the future profit streams of the Group's in-force long-term business and is a valuable supplement to statutory accounts.
Summarised statement of comprehensive income
For the half year ended 31 December 2015
Half Half Year year year ended ended ended 30 31 December 31 December June 2015 2014 2015 Note GBPm GBPm GBPm ======================================= ==== ============ ============ ====== Operating profit for covered business 6 109.8 65.8 112.3 ======================================= ==== ============ ============ ====== Operating loss of distribution company (1.6) (0.2) (0.7) ======================================= ==== ============ ============ ====== Operating (loss)/profit from other Group companies ======================================= ==== ============ ============ ====== Merger transaction costs (16.3) - - ======================================= ==== ============ ============ ====== Other 1.6 3.7 6.5 ======================================= ==== ============ ============ ====== Operating profit 93.5 69.3 118.1 ======================================= ==== ============ ============ ====== Economic variance 6 (42.5) 32.2 (23.4) ======================================= ==== ============ ============ ====== Profit before tax 51.0 101.5 94.7 ======================================= ==== ============ ============ ====== Tax ======================================= ==== ============ ============ ====== Covered business 6 (13.5) (20.7) (16.7) ======================================= ==== ============ ============ ====== Other 1.4 (1.7) (3.8) ======================================= ==== ============ ============ ====== Profit after tax 38.9 79.1 74.2 ======================================= ==== ============ ============ ====== Other comprehensive income ======================================= ==== ============ ============ ====== Exchange differences on translating foreign operations (0.4) - (0.2) ======================================= ==== ============ ============ ====== Total other comprehensive income, net of tax (0.4) - (0.2) ======================================= ==== ============ ============ ====== Total comprehensive income 38.5 79.1 74.0 ======================================= ==== ============ ============ ======
For the purposes of EEV reporting, the distribution company is considered to be a stand-alone business and its activities do not relate to the sale of Just Retirement Limited products alone. Therefore its losses have not been included on a look-through basis as expenses of the covered business.
Group statement of changes in equity
For the half year ended 31 December 2015
Half year ended 31 December 2015 =============================== ============ ======== Half year Year ended ended Covered Non-covered 31 December 30 June business business Total 2014 2015 GBPm GBPm GBPm GBPm GBPm =================================== ========= =========== ======= ============ ======== Opening Group EEV 782.8 236.5 1,019.3 959.1 959.1 =================================== ========= =========== ======= ============ ======== Total comprehensive income for the period 53.9 (15.4) 38.5 79.1 74.0 =================================== ========= =========== ======= ============ ======== Shares issued (net of issue costs) - 97.0 97.0 - - =================================== ========= =========== ======= ============ ======== Capital injections 30.0 (30.0) - - - =================================== ========= =========== ======= ============ ======== Dividends - (12.4) (12.4) (11.0) (16.5) =================================== ========= =========== ======= ============ ======== Share-based payments - 1.4 1.4 0.9 2.7 =================================== ========= =========== ======= ============ ======== Closing Group EEV 866.7 277.1 1,143.8 1,028.1 1,019.3 =================================== ========= =========== ======= ============ ========
Group statement of financial position
As at 31 December 2015
31 December 31 December 30 June 2015 2014 2015 GBPm GBPm GBPm ================================ =========== =========== ======== Assets ================================ =========== =========== ======== Value of in-force business 554.4 399.6 417.9 ================================ =========== =========== ======== Intangible assets 4.8 5.5 5.1 ================================ =========== =========== ======== Property and equipment 10.1 0.8 0.7 ================================ =========== =========== ======== Financial investments 9,542.5 9,339.3 8,494.7 ================================ =========== =========== ======== Reinsurance assets 2,676.3 4,131.0 2,645.0 ================================ =========== =========== ======== Deferred tax assets 3.6 4.4 4.2 ================================ =========== =========== ======== Current tax assets 20.7 0.6 17.6 ================================ =========== =========== ======== Prepayments and accrued income 131.2 125.0 86.2 ================================ =========== =========== ======== Insurance and other receivables 2.0 9.0 34.1 ================================ =========== =========== ======== Cash and cash equivalents 21.9 19.6 58.8 ================================ =========== =========== ======== Total assets 12,967.5 14,034.8 11,764.3 ================================ =========== =========== ======== Equity 1,143.8 1,028.1 1,019.3 ================================ =========== =========== ======== Liabilities ================================ =========== =========== ======== Insurance liabilities 8,716.8 8,624.5 7,859.0 ================================ =========== =========== ======== Loans and borrowings 98.1 46.9 46.9 ================================ =========== =========== ======== Other liabilities 2,844.9 4,280.1 2,794.7 ================================ =========== =========== ======== Other provisions 5.0 6.2 4.8 ================================ =========== =========== ======== Current tax liabilities 14.5 5.8 0.1 ================================ =========== =========== ======== Accruals and deferred income 22.7 14.5 18.7 ================================ =========== =========== ======== Insurance and other payables 121.7 28.7 20.8 ================================ =========== =========== ======== Total liabilities 11,823.7 13,006.7 10,745.0
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================================ =========== =========== ======== Total equity and liabilities 12,967.5 14,034.8 11,764.3 ================================ =========== =========== ========
The notes form an integral part of these supplementary financial statements.
Reconciliation of shareholders' equity on IFRS basis to shareholders' equity on EEV basis
Half Half year year Year ended ended ended 31 December 31 December 30 June 2015 2014 2015 GBPm GBPm GBPm =========================================== ============ ============ ======== Shareholders' equity on IFRS basis 921.5 834.4 814.0 =========================================== ============ ============ ======== Asset valuation differences 57.7 583.3 94.5 =========================================== ============ ============ ======== Liability valuation differences (414.9) (807.5) (340.0) =========================================== ============ ============ ======== Deferred tax 25.1 18.3 32.9 =========================================== ============ ============ ======== Value of in-force business 554.4 399.6 417.9 =========================================== ============ ============ ======== Shareholders' equity on EEV basis 1,143.8 1,028.1 1,019.3 =========================================== ============ ============ ======== Analysis of ordinary shareholders' equity =========================================== ============ ============ ======== IFRS-basis ordinary shareholders' equity 921.5 834.4 814.0 =========================================== ============ ============ ======== Additional retained profit on an EEV basis 222.3 193.7 205.3 =========================================== ============ ============ ======== Shareholders' equity on EEV basis 1,143.8 1,028.1 1,019.3 =========================================== ============ ============ ========
The asset valuation differences of GBP57.7m (31 Dec 2014: GBP583.3m; 30 Jun 2015: GBP94.5m) are caused largely by the different valuation placed on reinsurance assets under regulatory accounting, and the removal of intangible assets recorded under IFRS, which are not recognised on the EEV basis. The liability valuation differences of GBP414.9m (31 Dec 2014: GBP807.5m; 30 Jun 2015: GBP340.0m) are caused largely by the different discount rates used to value the retirement income customer liabilities in regulatory accounting (resulting from additional margins for prudence) and additional margins in the longevity assumptions.
Notes to the European embedded value
Supplementary financial statements
1) Basis of presentation
The Group's primary financial statements have been prepared in accordance with International Financial Reporting Standards ("IFRS") as adopted by the European Union. The Group has also prepared these supplementary financial statements in accordance with the European Embedded Value Principles.
The EEV basis results have been prepared in accordance with the EEV Principles issued in May 2004 by the European Insurance CFO Forum ("CFO Forum"), and supplemented by the Additional Guidance on EEV Disclosures published in October 2005. The EEV basis results have not made any allowance for the impact of Solvency II, in line with the CFO Forum guidance issued in October 2015. The Directors believe that the supplementary statements appropriately reflect its underlying profitability whilst continuing to adhere to EEV Principles.
The Directors' view is that embedded value reporting provides shareholders with additional information on the financial position and current performance of the Group to that otherwise provided in the primary financial statements. Under the EEV method, the total profit recognised over the lifetime of a policy is the same as that recognised under alternative reporting bases, but the timing of recognition is different.
The Group uses EEV methodology to value all lines of insurance business within Just Retirement Limited ("JRL" or "the Company"), the covered business of the Group. No other Group companies contain any covered business and the value of these companies has been included in the Group EEV at IFRS net asset value less the value of goodwill and intangibles to the extent that their recovery is supported by future profits.
The Directors of the Group are responsible for the preparation of these supplementary financial statements.
2) Methodology
The following methodology applies to the covered business of the Group.
A. Embedded value overview
In reporting under the EEV Principles, the Group has chosen to adopt a "bottom-up" approach to the allowance for risk. The approach makes an explicit allowance for part of the spread (that part being referred to as "liquidity premium") expected to be earned on corporate bonds and lifetime mortgages. This has been achieved by increasing the discount rate used for valuing retirement income liabilities by that liquidity premium.
The embedded value is the sum of adjusted net worth of the Group companies, plus the value of in-force covered business, this being the present value of profits that will emerge over time.
The net worth is the market value of the shareholders' funds and the shareholders' interest in the surplus held in the long-term business fund. The shareholders' net assets in respect of the life company have been calculated in line with those that would be derived from the annual regulatory returns submitted to the PRA. The net worth represents the market value of the assets of the life company in excess of the insurance and non-insurance liabilities of the life company as assessed on the regulatory basis. For other Group companies, the net worth is the IFRS net asset value less the value of goodwill and intangibles to the extent that their recovery is supported by future profits.
The value of in-force business is the present value of projected after-tax profits emerging in future from the current in-force business less the cost arising from holding the required capital to support the in-force business. The future cash flows are projected using best estimate assumptions for each component of the cash flow.
The value of new business is the present value of projected after-tax profits emerging in future from new business sold in the period less the cost arising from holding additional capital to support this business. The figures shown also include the additional expected return between the point of sale and the reporting date.
B. Covered business
The business to which the EEV Principles have been applied is defined as the covered business. The covered business includes all business written by the life company. In particular:
-- Long-term business operations. This is business falling under the definition of long-term insurance business for UK regulatory purposes and principally comprises:
o Pension Guaranteed Income for Life Solutions ("GIfL");
o Defined Benefit De-risking contracts ("DB");
o Drawdown pension business contracts; and
o Care Plans.
In addition, some purchased life annuity business has been written, but this has not been written in significant volumes. Although it has been allowed for in the calculations, it has not been explicitly modelled. The impact of this approximate treatment is not material.
-- Lifetime mortgages. These are held as investments to back the pension GIfL and DB contracts.
C. New business
All of the covered business is written on a single premium basis. New business is defined to be all single premiums received in the period in respect of retirement income policies completed in the period and all cash advances made during the period in respect of lifetime mortgages. No allowance is made in the embedded value for the value of any future new business written after the reporting date.
For the value of new business, the Group has used economic assumptions determined at point of sale and has generally used opening period non-economic assumptions. The Group considers point-of-sale economic assumptions, rather than economic assumptions determined at either the opening or closing dates, to be more appropriate given the nature of its business.
Any changes to non-economic assumptions and methodology in respect of new business are introduced at the reporting date. The impact of these changes on the value of new business at the end of the year is therefore included within the analysis of the embedded value profit in the operating assumption changes.
D. Components of value
The values of in-force business and new business each comprise four components:
(i) Certainty equivalent value; less (ii) Time value of financial options and guarantees; less (iii) Allowance for non-market risk; less (iv) Cost of capital.
(i) Certainty equivalent value
The certainty equivalent value is the value of the future cash flows, excluding the time value of financial options and guarantees. It is calculated assuming assets earn the reference rate and the cash flows are discounted at the reference rate.
The future cash flows are those arising from the assets backing the liabilities as assessed on a regulatory basis and from the liabilities themselves. The projection of the regulatory liabilities assumes the continuation of the bases used to calculate the liabilities at the valuation date.
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The regulatory value of the provision for the guarantee described in (ii) below is included in the shareholders' net assets and this is reversed out in the certainty equivalent value.
(ii) Time value of financial options and guarantees
The only material financial options and guarantees within the covered business arise from the no-negative equity guarantee under the lifetime mortgage business. Under this guarantee, the amount recoverable by the Group on termination of the mortgage is generally capped at the net sale proceeds of the property. Circumstances where this guarantee does not apply are those where the mortgage redemption is not accompanied by a sale of the underlying property. This could occur when, for example, the property is remortgaged with another provider.
This guarantee is explicitly allowed for in the calculations. The value of this guarantee has been estimated using a variant of the Black-Scholes option pricing formula. The formula incorporates a number of assumptions, including those for risk-free rates, future property growth and property volatility.
The value of the financial options and guarantee shown in the presentation is the total value of this guarantee, net of tax, assessed on a realistic basis (it includes any intrinsic value in the option).
(iii) Allowance for non-market risks
The key non-market (or diversifiable) risks faced by the Company are mortality (including longevity), early redemptions on lifetime mortgages and operational risks. In principle no explicit adjustment is required for non-market risks because the capital markets do not require an additional return for risks which can be diversified away. However, this is only true if the assumptions made as regards future experience are set so as to give the mean of the expected outcome (including allowing for the tails of the distribution) and that all cash flows have been allowed for.
The Company has set the assumptions in respect of mortality and lifetime mortgage early redemptions with the intention that they give the mean of the expected outcome, including allowing for the tails of the distribution. As such, no further adjustment has been made in respect of these risks.
However, the certainty equivalent value and the time value of financial options and guarantees make no allowance for the cost of possible operational risks and the Company has made an explicit allowance for these risks.
In the valuation approach used, the market (or non-diversifiable) risks faced by the Company are allowed for directly in the valuation of the cash flows.
(iv) Cost of capital
In addition to holding assets to back the covered business, the Company also has to hold additional shareholder capital to support the business. The amount of capital has been assessed taking into account the Company's own internal assessment of its capital requirements and the amount required under the UK Solvency I regulatory environment.
The cost of capital represents the frictional costs of having to retain this capital. The Group has taken these frictional costs to be any tax payable in respect of future investment returns earned on this capital and the associated investment management costs.
The required capital is provided by the retained surplus in the long-term business fund and the retained earnings and issued share capital in the shareholder fund.
E. Valuation of cash flows
Within the calculation of the value of in-force business, the reference rate used for valuing the retirement income cash flows has been set equal to the mid-market swap rate, plus a liquidity premium adjustment. From June 2015 the mortgage asset values used in the embedded value have been brought into line with the IFRS fair values calculated by discounting the future cash flows at a swap rate plus a liquidity premium. To be consistent with the mortgage asset values, the calculation of the liquidity premium adjustment in the value of in-force has changed and is calculated separately for both corporate bonds and lifetime mortgages backing the retirement income liabilities. For corporate bonds the liquidity premium is calculated by deducting a prudent allowance for credit default risk from the overall average spread to swaps on the whole corporate bond portfolio. For lifetime mortgages the liquidity premium is calculated by equating the present value of all the matching cash flows discounted at the swap rate plus the liquidity premium to the IFRS asset value of the matching mortgages. The same approach has been used to value the lifetime mortgage cash flows that are not deemed to back the retirement income business.
(i) In-force business
For the in-force business the liquidity premium adjustment has been derived using the method described above.
(ii) New business
For new business written during the financial year the liquidity premium varies by the month of policy inception. The liquidity premium adjustment applied to each month's new retirement income business is consistent with the method used to value the in-force business described above. For corporate bonds assumed to back the new business, the liquidity premium is calculated by deducting a prudent allowance for credit default risk from the estimated spread for new bond purchases in the period. The estimated spread uses the daily iBOXX Z-spread adjusted for differences between the spreads on bond purchases and the index. For lifetime mortgages the liquidity premium is calculated by equating the present value of all the matching cash flows for new lifetime mortgages discounted at the swap rate plus the liquidity premium to the point-of-sale IFRS asset value of the new matching mortgages. This calculation is done separately for each month's new business, assuming each month's lifetime mortgages are 25% of the backing asset mix and the remaining new retirement income cash flows are backed by bonds. The value of each month's new retirement income business is calculated by discounting the cash flows using point-of-sale mid--market swap rates plus the level monthly liquidity premium calculated as described here.
F. Reinsurance
The Group has put in place reinsurance arrangements in respect of the GIfL business, whereby part of the mortality risk is transferred to the reinsurers. In addition the Group receives an initial financing payment which is repayable out of future surplus emerging. Some associated initial and renewal fees are also payable to the reinsurers.
The face value of the amount owed to the reinsurers at the relevant reporting date together with all management fees expected to be paid in the future has been explicitly allowed for in the value of the in-force business at the reporting date.
The risk transfer is not reflected in the EEV because, on the assumptions used, the Group expects to recapture the business once remaining financing has been repaid.
The Group has put in place separate reinsurance arrangements for the DB and Care Plan business. Part of the mortality risk is transferred to the reinsurers by means of a mortality swap arrangement where JRL will pay reinsurance premiums equal to their share of expected claims according to the reinsurers' mortality assessment, and the reinsurers will pay reinsurance claims equal to their share of actual payments made.
G. Taxation
The projected cash flows take into account all tax which the Company expects to pay. The calculations are undertaken assuming current tax legislation and rates continue unaltered.
Embedded value profits have been calculated on an after-tax basis and have then been grossed up at the full corporation tax rate to arrive at a pre-tax level for reporting in the Summarised statement of comprehensive income.
3) Assumptions
A. Economic assumptions
Reference rates
The term structure of the reference rates has been derived from mid-market swap rates. The resulting rates reflect the shape of the swap rate curve. For new business the rates have been derived from the swap rates applicable on the date each payment was received for retirement income policies or the date each mortgage advance was completed as appropriate.
Sample mid-market swap rates at 31 December 2015, 31 December 2014 and 30 June 2015 are shown in the following table.
Term (years) Swap rates (at sample terms, %) 1 5 10 20 30 ============================= === === === === === 31 December 2015 0.8 1.6 2.0 2.2 2.2 ============================= === === === === === 31 December 2014 1.0 1.5 1.9 2.3 2.3 ============================= === === === === === 30 June 2015 0.8 1.7 2.2 2.4 2.4 ============================= === === === === ===
The average in-force liquidity premium adjustment as at 31 December 2015 was 192bp (31 Dec 2014: 69bp; 30 Jun 2015: 178bp). The liquidity premium adjustment for each month's new business has varied over the financial year but the effect is equivalent to an average adjustment of 226bp (30 Jun 2015: 61bp on the previous methodology) for each month's new business.
Residential property assumptions
When calculating the value of the no-negative equity guarantee on the lifetime mortgages certain economic assumptions are required within the variant of the Black-Scholes formula.
The market, against which these assumptions have been assessed and the cost of the no-negative equity guarantee has been calibrated at any point in time, is neither deep nor liquid. The Group has therefore set these assumptions taking into account information available to it from within the capital markets linked to the assessment of the indicative costs of hedging out such exposures and published UK residential property historic price movements.
In the formula the risk-free rate used is the mid-market swap rate.
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In the absence of a reliable long-term forward curve for UK residential property price inflation, the Group has assumed that residential property will grow in line with a bespoke house price inflation curve. This has been derived by reference to mid-market UK retail price inflation swap rates together with an explicit house price inflation spread.
Sample mid-market house price inflation rates at 31 December 2015, 31 December 2014 and 30 June 2015 are shown in the following table.
Term (years) House price inflation rates (at sample terms, %) 1 5 10 20 30 ================================ ===== === === === === 31 December 2015 2.6 3.4 3.7 4.0 4.0 ================================ ===== === === === === 31 December 2014 2.9 2.0 3.5 3.9 4.0 ================================ ===== === === === === 30 June 2015 (3.7) 0.9 3.2 4.1 4.1 ================================ ===== === === === ===
In deriving an assessment of long-term UK residential property price volatility, the Group has used house price data published by the Nationwide Building Society. The Group has adjusted the derived value to allow for the additional volatility expected to be observed in the Company's portfolio compared with the market as a whole. The volatility assumption used at 31 December 2015 was 9.6% p.a. (31 Dec 2014: 9.7% p.a.; 30 Jun 2015: 9.7% p.a.). The volatility assumption used for new business was 9.7% p.a.
Expense inflation
For the retirement income products, the assumed future rate of increases in per policy maintenance expenses is 3.6% p.a. (31 Dec 2014: 3.7% p.a.; 30 Jun 2015: 3.6% p.a.).
For the lifetime mortgages, the assumed future rate of increases in maintenance expenses is 3.8% p.a. (31 Dec 2014: 3.9% p.a.; 30 Jun 2015: 3.8% p.a.).
The difference reflects the difference in average duration of the cash flows and the shape of the RPI curve at the valuation date.
Taxation
The rate of corporation tax assumed is 20% throughout being the effective tax rate at the valuation date (31 Dec 2014: 22.5%; 30 Jun 2015: 20%).
B. Operating assumptions
Operating assumptions have been reviewed as part of the reporting process.
Mortality
The mortality assumptions have been set by the Group taking into account the Company's own mortality experience together with relevant studies undertaken by the Continuous Mortality Investigation Bureau of the Institute and Faculty of Actuaries ("CMI"), population studies undertaken by offices of the UK government, published research materials, input from the Group's lead reinsurer and management's own industry experience.
For the GIfL policies the mortality assumptions are based on the PCMA00 (males) and PCFA00 (females) mortality tables and the CMI 2014 model improvement factors. These base factors are overlaid by a series of underwriting factors applied to the base mortality rates. These adjustments are made to reflect the nature and likely incidence of the underlying risks inherent within the business written. These assumptions are unchanged from those used at 30 June 2015.
For DB policies the mortality basis is set with reference to the base table and mortality improvement rates provided by RGA (i.e. the reinsurer with whom each DB scheme is reinsured). These assumptions are unchanged from those used at 30 June 2015.
For Care Plan policies the mortality basis is set with reference to the table provided by Gen Re (i.e. the reinsurer with whom each Care Plan policy is individually underwritten). These assumptions are unchanged from those used at 30 June 2015.
For the lifetime mortgages the mortality assumptions are based on the PCMA00 and PCFA00 mortality tables and the CMI 2012 model improvement factors. These assumptions are unchanged from those used at 30 June 2015.
For Lump Sum Plus mortgages on standard terms the same mortality basis applies as used for the normal roll-up business. The underlying basis for the mortgages is the same, with adjustments applied to reflect the nature and likely incidence of the underlying risks.
Mortgage repayments
Assumptions are made about the number of future mortgage repayments resulting from individuals moving into long-term care or through voluntary repayments. When deriving appropriate assumptions the Group has taken into account its own experience together with other relevant available information.
The decrement for moving into long-term care is expressed as a proportion of the underlying mortality assumption for the relevant lives. The decrement for voluntary repayments is expressed as annual percentages of the portfolio in force and exhibits a term structure based on duration in force. These assumptions are unchanged from those used at 30 June 2015.
Expenses
The expense levels are based on internal expense analysis investigations and are appropriately allocated to the new business and policy maintenance functions. Acquisition expenses have been fully allocated to the values of new business for each product.
The Group has set maintenance expense allowances for each product which it considers to be realistic.
In calculating the embedded value, an adjustment has been made equal to the net present value of any expected future maintenance expense overruns.
Investment expenses have been set by reference to the expenses payable under the investment management arrangements.
Some of the expenses incurred in the financial period to 31 December 2015 have been considered exceptional and one-off in nature. These non--recurring expenses have been identified separately and have not been included in the calculation of the value of in-force business or in the value of new business although they have been reflected in the operating profit. Total non-recurring expenses for the period ended 31 December 2015 were GBP7.0m (31 Dec 2014: GBP8.3m; 30 Jun 2015: GBP16.8m).
The look-through principle has not been applied to the losses in the distribution company arising from the sale of products arising from the covered business, and so these losses have not been included as a deduction against the value of new business. The distribution company is considered to be a stand-alone business and its activities do not relate solely to the sale of JRL products. The recognised loss in the distribution company has been accounted for on an IFRS basis, separately to the results of the covered business.
The remaining expenses are included within operating results of the distribution and other Group companies and have been accounted for on an IFRS basis.
Non-market risk
At 31 December 2015 the provision for non-market risk has been established as 0.18% of the best estimate reserves in respect of retirement income business. This assumption is unchanged from that used as at 30 June 2015. For the value of new business in the period to 31 December 2015, a deduction of 0.18% of best estimate reserves at point of sale has been applied.
Required capital
At 31 December 2015 the assumed level of required capital to support the business represents 175% of JRL's long-term insurance capital requirement ("LTICR") together with 175% of the resilience capital requirement ("RCR"), as set out in PRA regulations. This assumption is unchanged from that used as at 30 June 2015.
4) Group embedded value
The following table sets out the Group embedded value as at the current and previous reporting dates.
Half Half year year Year ended ended ended 31 December 31 December 30 June 2015 2014 2015 GBPm GBPm GBPm =============================================== ============ ============ ======== Just Retirement Limited =============================================== ============ ============ ======== Shareholders' net assets 312.3 389.0 364.9 =============================================== ============ ============ ======== Value of in-force business =============================================== ============ ============ ======== Certainty equivalent value 624.4 496.2 525.8 =============================================== ============ ============ ======== Deferred tax asset 31.1 22.8 8.7 =============================================== ============ ============ ======== Time value of financial options and guarantees (56.5) (79.0) (76.1) =============================================== ============ ============ ======== Allowance for non-market risk (13.4) (11.5) (11.9) =============================================== ============ ============ ======== Cost of capital (31.2) (28.9) (28.6) =============================================== ============ ============ ======== Value of in-force business 554.4 399.6 417.9 =============================================== ============ ============ ======== Embedded value of Just Retirement Limited 866.7 788.6 782.8 =============================================== ============ ============ ======== Net assets of other Group companies 277.1 239.5 236.5 =============================================== ============ ============ ======== Group embedded value 1,143.8 1,028.1 1,019.3 =============================================== ============ ============ ========
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5) After-tax value of new covered business of JRL
The following table sets out the after-tax value of the new business for the financial periods ended 31 December 2015, 31 December 2014 and 30 June 2015.
Half Half year year Year ended ended ended 31 December 31 December 30 June 2015 2014 2015 GBPm GBPm GBPm =============================================== ============ ============ ======== Certainty equivalent value 81.8 59.7 119.2 =============================================== ============ ============ ======== Time value of financial options and guarantees (5.0) (7.1) (14.3) =============================================== ============ ============ ======== Allowance for non-market risk (1.1) (0.4) (1.4) =============================================== ============ ============ ======== Cost of capital (4.7) (3.6) (5.4) =============================================== ============ ============ ======== Value of new business 71.0 48.6 98.1 =============================================== ============ ============ ========
6) Covered business analysis of movement in embedded value of JRL
The following table sets out an analysis of the embedded value profit for the period ended 31 December 2015 together with the comparative figures for the period ended 31 December 2014 and the year ended 30 June 2015. In order to explain better the movement in capital flows, the composition of the embedded value profit for the current year is shown separately between the movement in shareholders' net assets and the value of in-force business.
Total Total for for Total half half for year year year ended ended ended Shareholders' Value 31 31 December 30 net of in-force December 2014 June assets business 2015 GBPm 2015 GBPm GBPm GBPm GBPm =============================== ============= ============ ========= ============ ====== Opening embedded value 364.9 417.9 782.8 699.1 699.1 ================================ ============= ============ ========= ============ ====== Expected return on opening embedded value 2.1 19.5 21.6 17.3 37.7 ================================ ============= ============ ========= ============ ====== Expected surplus from in-force business 31.8 (31.8) - - - ================================ ============= ============ ========= ============ ====== New business contribution (43.5) 132.3 88.8 61.3 122.7 ================================ ============= ============ ========= ============ ====== Operating experience variance (65.7) 61.4 (4.3) (12.8) (29.2) ================================ ============= ============ ========= ============ ====== Operating assumption changes (33.5) 47.2 13.7 8.7 (0.6) ================================ ============= ============ ========= ============ ====== Interest on Tier 2 loan (10.0) - (10.0) (8.7) (18.3) ================================ ============= ============ ========= ============ ====== Operating profit for covered business (118.8) 228.6 109.8 65.8 112.3 ================================ ============= ============ ========= ============ ====== Economic variance(1) 15.5 (57.9) (42.4) 34.4 (21.9) ================================ ============= ============ ========= ============ ====== Embedded value profit before tax (103.3) 170.7 67.4 100.2 90.4 ================================ ============= ============ ========= ============ ====== Tax 20.7 (34.2) (13.5) (20.7) (16.7) ================================ ============= ============ ========= ============ ====== Profit after tax (82.6) 136.5 53.9 79.5 73.7 ================================ ============= ============ ========= ============ ====== New capital 30.0 - 30.0 10.0 10.0 ================================ ============= ============ ========= ============ ====== Closing embedded value 312.3 554.4 866.7 788.6 782.8 ================================ ============= ============ ========= ============ ======
(1) The economic variance of GBP(42.5)m (Dec 2014: GBP32.2m; Jun 2015: GBP(23.4)m) reported in the Summarised statement of comprehensive income includes GBP(0.1)m (Dec 2014: GBP(2.2)m; Jun 2015: GBP(1.5)m) in respect of the fair value movement on the interest rate swap derivatives held by Just Retirement (Holdings) Limited.
The "expected return on opening embedded value" is the expected change in the embedded value resulting from a projection of the assets and liabilities over the period using expected "real world" investment returns.
The "expected surplus from in-force business" represents the surplus expected to emerge during the period from business that was in force at the beginning of that period. The effect is a transfer of value between the value of in-force business and shareholders' net assets, with the overall effect on the embedded value being zero.
The "new business contribution" is the value of new business at the point of sale, together with the expected return on this value between the point of sale and the end of the period.
The "operating experience variance" represents the profits and losses caused by differences between the actual experience during the period and that expected on the operating assumptions, relating to both the business in force at the start of the period and new business written.
The "operating assumption changes" reflect changes in the assumptions in respect of future operating experience between the start and end of the period.
The "economic variance" arises from the impact of differences between the actual investment returns in the period and the expected investment returns, and the impact of the change to the end of period future economic assumptions. Further impacts have arisen between the shareholders' net assets and value of in-force business figures due to changes in the economic assumptions used in the regulatory reserving bases. All of these impacts are calculated in relation to the start of period economic assumptions for business in force at the start of the period and point--of--sale economic assumptions for new business sold in the period.
7) Operating experience variances before tax for JRL
An analysis of the key operating experience variances before tax is set out in more detail in the following table.
Total Total for for Total half half for Value year year year Shareholders' of ended ended ended net in-force 31 December 31 December 30 June assets business 2015 2014 2015 GBPm GBPm GBPm GBPm GBPm ===================================== ============= ========= ============ ============ ======== Reinsurance arrangements (16.1) 28.8 12.7 2.6 5.1 ===================================== ============= ========= ============ ============ ======== Maintenance and investment expenses (1.6) - (1.6) (0.7) (0.3) ===================================== ============= ========= ============ ============ ======== Non-recurring expenses (7.0) - (7.0) (8.3) (16.8) ===================================== ============= ========= ============ ============ ======== Strategic investment expenses (0.9) - (0.9) (1.1) (1.5) ===================================== ============= ========= ============ ============ ======== Tax variances (36.7) 28.0 (8.7) (4.2) (2.5)
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===================================== ============= ========= ============ ============ ======== Experience variances (3.4) 4.6 1.2 (1.1) (13.2) ===================================== ============= ========= ============ ============ ======== Total operating experience variances (65.7) 61.4 (4.3) (12.8) (29.2) ===================================== ============= ========= ============ ============ ========
8) Operating assumption changes before tax for JRL
An analysis of the operating assumption changes item before tax is set out in more detail in the following table.
Total Total for for Total half half for Value year year year Shareholders' of ended ended ended net in-force 31 December 31 December 30 June assets business 2015 2014 2015 GBPm GBPm GBPm GBPm GBPm =================================== ============= ========= ============ ============ ======== Maintenance expenses - - - - (1.9) =================================== ============= ========= ============ ============ ======== Tax - - - 10.4 16.1 =================================== ============= ========= ============ ============ ======== Reinsurance changes - - - (0.7) 1.0 =================================== ============= ========= ============ ============ ======== IFRS mortgage valuation - - - - (16.6) =================================== ============= ========= ============ ============ ======== Model changes (33.2) 47.2 14.0 0.4 (0.1) =================================== ============= ========= ============ ============ ======== Other (0.3) - (0.3) (1.4) 0.9 =================================== ============= ========= ============ ============ ======== Total operating assumption changes (33.5) 47.2 13.7 8.7 (0.6) =================================== ============= ========= ============ ============ ========
The tax items at 30 June 2015 and 31 December 2014 reflect the change from the effective tax rate used at the previous reporting date (June 2014: 22.5%) to the rate used at the respective reporting date (December 2014: 20.75%; June 2015: 20%).
The IFRS mortgage valuation item at 30 June 2015 includes the change to the liquidity premium methodology.
9) Sensitivities
The Group embedded value at 31 December 2015 and the value of new business for the period to 31 December 2015 have been recalculated to show the sensitivity of the results to changes in certain of the assumptions discussed above.
Most of the sensitivities are as prescribed by the additional guidance provided by the CFO Forum in October 2005. There is no lapse/surrender risk for the retirement income products and so no sensitivity to this assumption has been shown for this business. The sensitivities chosen do not represent the boundaries of possible outcomes, nor are they intended to represent events of equal likelihood, but rather illustrate how certain alternative assumptions would affect the results.
For each of the sensitivities all the other assumptions remain unchanged, unless otherwise stated. In all of the sensitivities, the statutory reserving basis was left unchanged, except for the first two where the valuation rate of interest was changed to reflect the sudden change in economic conditions.
The sensitivities tested were:
-- Interest rates 1% lower than in the central case with resulting changes in asset values and reference rates. The impact for the values of new business has not been calculated for this sensitivity as the Group actively reviews its premium rates and in the event of such a sudden change in economic conditions the Group would change its rates.
-- Interest rates 1% higher than in the central case with resulting changes in asset values and reference rates.
-- Reference rates 10bp lower than in the central case, with no change in asset values. The purpose of this sensitivity is to illustrate the impact of using a different definition of the reference rate than basing it on mid-market swap rates.
-- Credit spreads (represented by the difference between corporate bond yields and swap rates) 10bp narrower than in the central case. For this sensitivity there is no change to the liquidity premium.
-- Credit spreads 10bp wider than in the central case. For this sensitivity there is no change to the liquidity premium.
-- Liquidity premium 10bp lower than in the central case (in relation to the corporate bond element only).
-- Property market values 10% lower than in the central case. -- Implied property volatility assumption 125% of the assumption in the central case. -- Implied property volatility assumption 75% of the assumption in the central case.
-- Retirement income customer base mortality 5% lower than in the central case (i.e. 95% of the central mortality rates).
-- Lifetime mortgage base mortality 5% lower than in the central case (i.e. 95% of the central mortality rates). For this sensitivity, the allowance for moving into long-term care is also assumed to be 5% lower.
-- Lifetime mortgage voluntary redemption assumption 10% lower than in the central case (i.e. 90% of the base case assumption).
-- Maintenance expenses 10% lower than in the central case (i.e. 90% of base case costs) including the resulting reduction in the maintenance expense overrun.
-- Corporation tax rate set to 19% (i.e. 1% lower than in the central case). -- Required capital equal to 100% of the LTICR plus 100% of the RCR.
Sensitivity of values to changes in assumptions
Value of new business Embedded for value period at 31 ended December 31 December 2015 2015 GBPm GBPm ============================================================ ========= ============ Central value 1,143.8 71.0 ============================================================ ========= ============ Impact of: ============================================================ ========= ============ * 1% reduction in yield curves 87.1 n/a ============================================================ ========= ============ * 1% increase in yield curves (38.7) n/a ============================================================ ========= ============ * 10bp reduction in reference rate (15.3) (4.0) ============================================================ ========= ============ * 10bp reduction in credit spreads 4.9 n/a ============================================================ ========= ============ * 10bp increase in credit spreads (5.7) n/a ============================================================ ========= ============ * 10bp reduction in liquidity premium (21.0) (3.9) ============================================================ ========= ============ * 10% reduction in property values (24.2) (0.8) ============================================================ ========= ============ * 125% of implied property volatilities (43.1) (1.3) ============================================================ ========= ============ * 75% of implied property volatilities 29.9 1.8 ============================================================ ========= ============ * 5% reduction in retirement income customer base mortality (95.8) (5.2) ============================================================ ========= ============ * 5% reduction in lifetime mortgage base mortality 12.5 0.8 ============================================================ ========= ============ * 10% reduction in lifetime mortgage voluntary redemptions 12.8 1.4 ============================================================ ========= ============
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