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| Share Name | Share Symbol | Market | Type | Share ISIN | Share Description |
|---|---|---|---|---|---|
| Just Group Plc | LSE:JUST | 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 | |
|---|---|---|---|---|---|---|---|---|---|---|
| 1.80 | 1.78% | 103.00 | 102.40 | 102.80 | 103.40 | 100.60 | 101.60 | 1,497,175 | 16:35:09 |
| Industry Sector | Turnover | Profit | EPS - Basic | PE Ratio | Market Cap |
|---|---|---|---|---|---|
| Life Insurance | 2.24B | 129M | 0.1242 | 8.26 | 1.07B |
From Apr 2019 to Apr 2024
TIDMJUST
RNS Number : 8522F
Just Group PLC
12 March 2020
Click on, or paste the following link into your web browser, to view the associated PDF document.
http://www.rns-pdf.londonstockexchange.com/rns/8522F_1-2020-3-12.pdf
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NEWS RELEASE www.justgroupplc.co.uk
12 March 2020
JUST GROUP PLC
RESULTS FOR THE YEARED 31 DECEMBER 2019
POSITIVE ORGANIC CAPITAL GENERATION AND ACCELERATED REGULATORY ALIGNMENT
Just Group plc (the "Group", "Just") announces its results for the year ended 31 December 2019.
Key Points: Capital generation and balance sheet
-- Organic capital generation(1,3) . A halving of new business strain,
improved in-force surplus generation and positive management actions
including Defined Benefit reinsurance, have helped to produce organic
capital generation of GBP36m (FY18 - organic capital consumption
of GBP165m)
-- Just Group expects to be organically capital generative in 2020
& thereafter . Further management actions will support this as
well as continued underlying improvement in capital generation
-- Increased clarity on impact of regulatory change with a capital
coverage ratio of 141% (31 December 2018: 136%(2) ). The Group
has chosen to restructure its Lifetime Mortgage notes to accelerate
alignment with the new regulatory requirements. This has resulted
in a GBP219m regulatory capital cost in H219, which together with
the estimated GBP80m future cost of full compliance with SS3/17
and PS19/19 is within the guidance of GBP350m provided at the 2019
half year
Key Points: IFRS profits
-- IFRS profit before tax was GBP369m (FY18: GBP86m loss) , with
the turnaround due to the improved operating result and positive
economic variances
-- Adjusted operating profit(3) was 4% higher at GBP219m in FY19,
as positive operating variances and operating assumption changes
offset lower new business profits
-- New business operating profit(3) was down 25% to GBP182m in FY19.
Lower new business margins were in line with expectations on lower
volumes, reflecting our focus on capital discipline
Key Points: Developments since year-end
-- We have entered into our second NNEG hedging transaction covering
GBP670m of LTMs
-- Completion of our first DB partnering deal of c.GBP250m
-- The Group's capital coverage ratio has not been significantly affected
by recent financial market volatility helped by increased interest
rate hedging . Our capital coverage ratio at 10 March 2020 is estimated
to have been 141% including management actions(4)
David Richardson, Group Chief Executive Officer, said:
" We have a clear focus on improving the Group's capital position and are making good progress. Despite operating in a tough environment we took big strides in 2019 to improve our organic capital generation and to reduce balance sheet risk. We achieved organic capital generation in the second half of the year and at the same time have accelerated our adoption of the new regulatory requirements at a lower cost than previously expected. Our capital coverage ratio would have grown to 156% if we had not recognised the GBP219m of regulatory capital strengthening. In the absence of any significant unhedged market movements, we would expect the capital coverage ratio to grow gradually from the 141% year-end level.
Although the focus since my appointment has been on capital, I have not lost sight of the key strengths which make Just such a great place to work. Our competitive advantage is underpinned by our deep understanding of customer needs in retirement. I have been hugely impressed by the commitment of the whole team.
Our preparations continue to ensure that we can serve our customers through the potential disruption if Coronavirus spreads more widely across the UK.
We have made significant progress in adapting the business model during 2019 and will continue this transformation during 2020. We are focussed on managing the business to maximise shareholder value and remain open to all options that will achieve this. I am hugely energised after my first nine months as CEO, and am determined that Just's strengths will be recognised in full by customers, intermediaries, colleagues and shareholders."
Notes
1 Organic capital generation/consumption includes surplus from in-force,
new business strain, cost overruns and other expenses, interest
and other operating items. It excludes economic variances, regulatory
adjustments, accelerated transitional measures for technical provisions
("TMTP") amortisation and capital raising
2 Comparative figure is adjusted for notional TMTP recalculation
3 Alternative performance measure ("APM") - In addition to statutory
IFRS performance measures, the Group has presented a number of
non-statutory alternative performance measures. The Board believes
that the APMs used give a more representative view of the underlying
performance of the Group. APMs are identified in the glossary at
the end of this announcement. Underlying operating profit and new
business operating profit are reconciled to IFRS profit before
tax in the Financial Review
4 Management actions completed since year-end include the notice
to call Partnership Life Assurance Company Limited ("PLACL") debt,
NNEG hedging and DB partnering
Enquiries
Investors / Analysts Media
James Pearce, Director of Group Stephen Lowe, Group Communications
Finance Director
Telephone: +44 (0) 7715 085 099 Telephone: +44 (0) 1737 827 301
james.pearce@wearejust.co.uk press.office@wearejust.co.uk
Alistair Smith, Investor Relations Temple Bar Advisory
Manager Alex Child-Villiers
Telephone: +44 (0) 1737 232 792 William Barker
alistair.smith@wearejust.co.uk Telephone: +44 (0) 20 7975 1415
Paul Kelly, Investor Relations
Manager
Telephone: +44 (0) 20 7444 8127
paul.kelly@wearejust.co.uk
A presentation for analysts will take place at 9.30am today at Deutsche Bank's offices at 75 London Wall (Auditorium), London, EC2N 2DB. A live webcast will also be available on www.justgroupplc.co.uk at 9:30am.
Due to security restrictions at the venue attendance is limited to those who have registered.
A copy of this announcement, the presentation slides and transcript will be available on the Group's website www.justgroupplc.co.uk
JUST GROUP PLC
GROUP COMMUNICATIONS
Vale House, Roebuck Close
Bancroft Road, Reigate
Surrey RH2 7RU
Forward-looking statements disclaimer:
This announcement in relation to Just Group plc and its subsidiaries (the "Group") contains, and we may make other statements (verbal or otherwise) containing, forward-looking statements in relation to the current plans, goals and expectations of the Group relating to its or their future financial condition , performance, results, strategy and/or objectives.
Statements containing the words: 'believes', 'intends', 'expects', 'plans', 'seeks', 'targets', 'continues' and 'anticipates' or other words of similar meaning are forward-looking (although their absence does not mean that a statement is not forward-looking). Forward-looking statements involve risk and uncertainty because they are based on information available at the time they are made, on assumptions and assessments made by the Company in light of its experience and its perception of historical trends, current conditions, future developments and other factors which the Company believes are appropriate, and relate to future events and depend on circumstances which may be or are beyond the Group's control. For example, certain insurance risk disclosures are dependent on the Group's choices about assumptions and models, which by their nature are estimates. As such, although the Group believes its expectations are based on reasonable assumptions, actual future gains and losses could differ materially from those that we have estimated.
Other factors which could cause actual results to differ materially from those estimated by forward-looking statements include but are not limited to: domestic and global political, economic and business conditions (such as the UK's exit from the EU and the terms of any trade deal which may be negotiated between the UK and the EU ; or arising from the Coronavirus (COVID-19) outbreak or other infectious diseases ); asset prices; market-related risks such as fluctuations in interest rates and exchange rates, and the performance of financial markets generally; the policies and actions of governmental and/or regulatory authorities including, for example, new government initiatives related to the provision of retirement benefits or the costs of social care; the impact of inflation and deflation; market competition; changes in assumptions in pricing and reserving for insurance business (particularly with regard to mortality and morbidity trends, gender pricing and lapse rates); risks associated with arrangements with third parties, including joint ventures and distribution partners and the timing, impact and other uncertainties associated with future acquisitions, disposals or other corporate activity undertaken by the Group and/or within relevant industries ; inability of reinsurers to meet obligations or unavailability of reinsurance coverage ; default of counterparties; information technology or data security breaches; the impact of changes in capital, solvency or accounting standards; and tax and other legislation and regulations in the jurisdictions in which the Group operates (including changes in the regulatory capital requirements which the Company and its subsidiaries are subject to).
As a result, the Group's actual future financial condition, performance and results may differ materially from the plans, goals and expectations set out in the forward-looking statements within this announcement. The forward-looking statements only speak as at the date of this document and reflect knowledge and information available at the date of preparation of this announcement. The Group undertakes no obligation to update or change any of the forward-looking statements contained within this announcement or any other forward-looking statements it may make (whether as a result of new information, future events or otherwise), except as may be required by law. Past performance is not an indicator of future results. The results of the Company and the Group in this announcement may not be indicative of, and are not an estimate, forecast or projection of, the Groups future results. Nothing in this announcement should be construed as a profit forecast.
Chief Executive Officer's statement
Focussing on capital and value
Capital is the group's number one priority
The changes we made to our business model have delivered positive organic capital generation in 2019 - a significant milestone on our journey to build a sustainable capital trajectory for the Group
I am delighted to present my first Chief Executive Officer's Statement, since I assumed the role in May 2019.
CAPITAL
We have a clear strategy focussed on improving the Group's capital position and we are making good progress in adapting our business model to achieve our strategic goals. Despite operating in a tough environment we took big strides in improving our organic capital generation and reducing balance sheet risks in 2019. We have halved the new business capital strain, reduced our property sensitivity, signed our first DB partnering deal and released capital through longevity reinsurance.
We achieved organic capital generation in the second half of the year and at the same time accelerated our adoption of the new regulatory requirements on LTMs. We recognised GBP219m of regulatory strengthening, sooner than we previously indicated.
The Solvency II capital coverage ratio has grown from 136% in 2018 to 141% in 2019 due to a significant boost from the GBP400m of new capital raised during the year. This more than offset the effect of the regulatory changes relating to LTMs. The ratio would have grown to 156%, if we had not recognised the GBP219m of regulatory capital strengthening. We estimate the remaining cost of fully implementing the revised regulatory requirements for LTMs by 2021 to be GBP80m.
We are committed to creating a sustainable capital trajectory, and during 2019 we have taken decisive action to help achieve this. We have taken steps to reduce our cost base, including reducing our property footprint and simplifying our senior management structure. We have outsourced our UK income drawdown service and closed our loss making US care unit. We are also working hard to improve results from our other Group companies, such as HUB.
We have now executed two pioneering property risk transactions which provide protection against prolonged, long term property underperformance. This reduces the amount of regulatory capital we hold for the LTMs covered by the transactions. These two transactions reduce our property risk on c. GBP900m of LTMs. We have a range of further capital tools to use, including additional de-risking through reinsurance and NNEG hedging, as well as utilising our debt capacity in due course, and increasingly from retaining the capital we are beginning to generate organically.
We are also making progress in creating a capital-light partnering model for DB de-risking transactions larger than GBP250m. Writing these larger transactions using mainly external capital provided by reinsurers enables us to play a part in this huge market and take fuller advantage of the strength of our award winning new business franchise. We have completed our first such transaction with the AA pension scheme.
During the year we restructured our internal LTM securitisation to meet the revised regulatory requirements of PS19/19 and PS31/18.
We are working closely with the PRA and although our regulatory position is much clearer than a year ago, regulatory scrutiny remains high and some uncertainty and risk remains.
PERFORMANCE REVIEW
We took decisive action to moderate and refocus sales in 2019, in order to reduce new business strain. Retirement Income sales for 2019 were GBP1,918.1m, a reduction of 12% from the prior year (2018: GBP2,173.5m). This led to a corresponding decrease in new business operating profit, from GBP243.7m to GBP182.0m.
The IFRS profit before tax for 2019 was GBP368.6m (2018: IFRS loss before tax of GBP85.5m) helped by falls in interest rates. Capital is our focus, but this is a strong IFRS result.
Our new business pricing discipline, the decision to reduce new business volumes and a focus on more capital efficient products more than halved our new business capital strain from GBP160m in 2018 to GBP74m in 2019.
The significant reduction in new business strain helped the Group to achieve positive organic capital generation of GBP36m in 2019. This is an excellent achievement, that I am committed to building on in future periods.
OUR CUSTOMERS
We are reviewing and adapting our business model to ensure that we continue to provide value to our customers, with appropriate levels of capital security. During 2019 we helped more than 70,000 new customers achieve a better later life.
We continue to view LTMs as a highly valuable product for borrowers who want to use the value of their house to support a higher standard of living in retirement. They also remain an important component of the assets that we invest in, enabling us to provide competitive pricing to our GIfL and DB De-risking customers.
We are delighted that our innovative customer focussed solutions and excellent customer service was again recognised in 2019. In the defined benefit market we were named "Risk Management Provider of the Year" at the Pensions Age Awards, and "Pensions Insurance Firm of the Year" at the European Pensions Awards. In the retail market we were awarded the outstanding achievement award and we achieved 5 stars in both the "Life & Pensions" and "Mortgage Lenders & Packagers" categories at the Financial Adviser Service Awards. Our new "Just for You" mortgage product was awarded "Best Innovation in Retail Finance" at the Retail Asset Management Awards.
Innovation
Although we are managing our costs carefully, we continue to invest selectively in developing new disruptive solutions that meet customer needs. We are piloting two exciting developments in 2020; one is to help close the financial advice gap for people in middle Britain with more modest pension savings; and the second is a highly innovative solution to deliver guaranteed income to retail investors who manage their portfolios on modern investment platforms.
COLLEAGUES
We are rightly proud of our award-winning service, and of our strong social purpose, which together deliver a "Just" experience to our customers day after day. Our colleagues are at the heart of this and I am grateful for the immense contribution they make to our business.
Coronavirus
Just Group is paying close attention to the epidemiology of the COVID-19 outbreak, which is now spreading in countries outside of China. If this occurs in the UK, we anticipate widespread disruption, which may affect our ability to deliver services from our existing office space. We are therefore upscaling our ability to deliver core business services from home, reducing the possibility of staff-to-staff transmission. We are also making plans to minimise the likelihood of transmission within our office space. Although the virus has not yet become widespread across the UK, it has already had a significant impact on financial markets. The impact on the Group's financial and capital position to date has been limited as we do not hold equity investments and the Solvency II capital position is actively hedged to minimise the impact of movements in long-term interest rates.
AND FINALLY...
During 2019 we have prioritised capital, particularly our goal of achieving organic capital generation. We recognise that the regulatory landscape will continue to evolve and remain committed to ensuring that our business model continues to adapt to deliver optimum results for our customers and shareholders. In parallel, we remain open to all options that maximise shareholder value.
On a personal note, I was delighted to be asked to lead the Just Group at this challenging but exciting time.
DAVID RICHARDSON
Group Chief Executive Officer
Financial review
Delivering results
The Financial Review presents the results of the Group for the year ended 31 December 2019, including IFRS and Solvency II information
I am pleased to present my first Financial Review since joining the Group in January.
Capital management
Just Group plc estimated Solvency II capital position
The Group's solvency coverage ratio was estimated at 141% at 31 December 2019, after recalculation of transitional measures on technical provisions ("TMTP") (2018: 136% including notional recalculation of TMTP). Steps taken by the Group during the year to reduce new business strain and expenses and identify management actions to de-risk the balance sheet have led to positive organic capital generated of GBP36m. The new equity, Restricted Tier 1 and Tier 2 capital raised during the year benefitted capital resources by a net amount of GBP452m.
31 December 31 December
2019 2018(1)
Unaudited GBPm GBPm
============================= =========== ===========
Capital resources
============================= =========== ===========
Own funds 2,562 2,172
============================= =========== ===========
Solvency Capital Requirement (1,814) (1,595) ============================= =========== =========== Excess own funds 748 577 ============================= =========== =========== Solvency coverage ratio 141% 136% ============================= =========== =========== 1 These figures allow for a notional recalculation of TMTP as at 31 December 2018.
The Group has approval to apply the matching adjustment, volatility adjustment and TMTP in its calculation of technical provisions and uses a combination of an internal model and the standard formula to calculate its Group Solvency Capital Requirement ("SCR").
Movement in excess own funds(1)
The table below analyses the movement in the capital growth over 2019.
2019 2018
Unaudited GBPm GBPm
================================================== ===== =====
Excess own funds at 1 January 577 596
================================================== ===== =====
Operating
================================================== ===== =====
In-force surplus net of TMTP amortisation(3) 150 125
================================================== ===== =====
New business strain (74) (160)
================================================== ===== =====
Finance cost (47) (31)
================================================== ===== =====
Expenses (44) (45)
================================================== ===== =====
Other 51 (54)
================================================== ===== =====
Total organic capital generation/(consumption)(2) 36 (165)
================================================== ===== =====
Non-operating
================================================== ===== =====
Accelerated TMTP amortisation (42) (58)
================================================== ===== =====
Regulatory changes (219) -
================================================== ===== =====
Economic movements (56) (2)
================================================== ===== =====
RT1, T2 and equity issuance, net of costs(4) 452 230
================================================== ===== =====
Ordinary dividend - (24)
================================================== ===== =====
Excess own funds at 31 December 748 577
================================================== ===== =====
1 All figures are net of tax, and assumptions allow for a notional recalculation of TMTP as at 31 December 2018.
2 Organic capital generation/(consumption) includes surplus from in-force, new business strain, overrun and other expenses, interest and other operating items. It excludes economic variances, regulatory changes, accelerated TMTP amortisation, and capital issuance.
3 The in-force line excludes the accelerated amortisation of a portion of TMTP which has been shown separately.
4 2019 figure is net of GBP37m repayment in respect of PLACL's Tier 2 bond tender in October 2019.
Organic capital generation
Positive GBP36m of organic capital generation is a significant improvement on the GBP165m of capital consumption in 2018. This reflects focussed new business pricing discipline, cost reductions and reinsurance which have halved new business strain. In-force surplus has continued to increase as the size of the in-force book grows, more than offsetting the increase in finance cost from the new debt instruments issued in the year. "Other" activities in the movement in excess own funds table includes the impact of basis changes, the expansion of DB reinsurance completed in August 2019, and internal model changes.
Regulatory Changes
The updated regulatory expectations for equity release mortgages set out in SS3/17 and PS19/19 have had a significant impact on the Group's capital position. Overall, the impact of these regulatory changes was a reduction in capital resources of GBP219m in 2019 with a further cost of GBP80m envisaged to fully meet the new requirements by end 2021.
Just has restructured and updated its internal Lifetime Mortgage ("LTM") securitisation to meet better the revised regulatory framework. The restructure was effected on 31 December 2019, and involved the redemption of existing notes and issuance of new LTM notes. The restructure removes much of the uncertainty on the level of matching adjustment ("MA") relating to LTMs in the regulatory balance sheet. Following the restructure Just passes the PRA effective value test ("EVT") with a material buffer (0.67%) over the minimum deferment rate of zero required at 31 December 2019. The SCR at the end of 2019 is also sufficient to cover our estimate of the impact of EVT in stress under PS19/19.
Our expectation for the future cost of moving by the end of 2021 to a MA position meeting the EVT with a volatility of 13% and deferment rate of 1%, is GBP80m. The GBP219m 2019 cost and GBP80m envisaged future cost compares to our GBP350m estimate at 30 June 2019. The regulatory changes of GBP219m in 2019 have had a negative impact of 15% on the Group's capital coverage ratio.
Whilst the Group continues to experience a high level of regulatory supervision, there is a risk of further negative impacts on the Group's capital position. We continue to work closely with the PRA on various aspects of our capital model, in particular as we apply the new regulatory requirements for LTMs.
Post year end actions
The impact on the Group's solvency position from actions since 31 December 2019 relate to calling the remaining GBP63m 9.5% PLACL Tier 2 debt, which will take place on 24 March 2020, and from the new no-negative equity guarantee ("NNEG") hedge and the DB partnering deals entered into since year-end.
%
============================================ ===
Solvency coverage ratio at 31 December 2019 141
============================================= ===
PLACL debt call (3)
============================================= ===
Management actions since 31 December 2019 4
============================================= ===
After post year-end adjustments 142
============================================= ===
Sensitivities to economic and other key metrics are shown in the table below.
Estimated Group Solvency II sensitivities
Unaudited % GBPm ======================================================== ==== ===== Solvency coverage ratio/excess own funds at 31 December 2019 141 748 ======================================================== ==== ===== -50 bps fall in interest rates (3) 5 ======================================================== ==== ===== +100 bps credit spreads 1 10 ======================================================== ==== ===== +10% LTM early redemption 2 21 ======================================================== ==== ===== -10% property values(1) (15) (256) ======================================================== ==== ===== -5% mortality (10) (183) ======================================================== ==== ===== 1 Pro forma after application of NNEG reinsurance.
The property sensitivity has reduced to 15% (2018: 17%) following the LTM notes restructuring and reflecting the impact of NNEG hedging. The Group aims to minimise its sensitivity to interest rates through the active use of hedges. For more significant movements some exposure remains. The interest rate and property sensitivities allow for a partial offset from a notional TMTP recalculation.
Reconciliation of IFRS shareholders' net equity to Solvency II own funds
31 December 31 December
2019 2018(1)
Unaudited GBPm GBPm
======================================================= =========== ===========
Shareholders' net equity on IFRS basis 2,321 1,664
======================================================= =========== ===========
Goodwill (34) (34)
======================================================= =========== ===========
Intangibles (120) (137)
======================================================= =========== ===========
Solvency II risk margin (873) (851)
======================================================= =========== ===========
Solvency II TMTP 1,891 1,738
======================================================= =========== ===========
Other valuation differences and impact on deferred tax (1,271) (793)
======================================================= =========== ===========
Ineligible items (35) (6)
======================================================= =========== ===========
Subordinated debt 684 590
======================================================= =========== ===========
Group adjustments (1) 1 ======================================================= =========== =========== Solvency II own funds 2,562 2,172 ======================================================= =========== =========== Solvency II SCR (1,814) (1,595) ======================================================= =========== =========== Solvency II excess own funds 748 577 ======================================================= =========== =========== 1 These figures allow for a notional recalculation of TMTP as at 31 December 2018.
Alternative performance measures
Within the Financial Review, the Group has presented a number of alternative performance measures ("APM"), which are used in addition to IFRS statutory performance measures. The Board believes that the use of APMs gives a more representative view of the underlying performance of the Group. The APMs used by the Group are: organic capital generation, new business operating profit, in-force operating profit, underlying operating profit, adjusted operating profit, Retirement Income sales and adjusted earnings per share. Further information on our APMs can be found in the glossary, together with a reference to where the APM has been reconciled to the nearest statutory equivalent.
Adjusted operating profit
Year ended Year ended
31 December 31 December
2019 2018 change
GBPm GBPm %
============================================ ============ ============ ======
New business operating profit 182.0 243.7 (25)
============================================ ============ ============ ======
In-force operating profit 84.4 71.7 18
============================================ ============ ============ ======
Underlying operating profit 266.4 315.4 (16)
============================================ ============ ============ ======
Operating experience and assumption changes 42.2 (33.5) N/A
============================================ ============ ============ ======
Other Group companies' operating results (13.1) (14.6) (10)
============================================ ============ ============ ======
Development expenditure (10.3) (8.7) 18
============================================ ============ ============ ======
Reinsurance and finance costs (66.6) (48.3) 38
============================================ ============ ============ ======
Adjusted operating profit before tax(1) 218.6 210.3 4
============================================ ============ ============ ======
1 See reconciliation to IFRS profit before tax in the IFRS results section of this Financial Review.
Adjusted operating profit BEFORE TAX
Adjusted operating profit before tax of GBP218.6m increased by 4% in 2019 with continued growth in in-force operating profit and positive operating experience and assumption changes more than offsetting the reduced new business operating profit and higher financing costs.
New business operating profit
New business operating profit has decreased by 25%, from GBP243.7m in 2018 to GBP182.0m in 2019. This mainly reflects the planned decrease in the level of Retirement Income sales written, in order to reduce new business strain as part of the Group's commitment to improving capital efficiency. Retirement Income sales for 2019 were GBP1,918.1m (year ended 31 December 2018: GBP2,173.5m). The overall margin achieved on Retirement Income sales in 2019 was 9.5%, down from 11.2% in 2018. The reduction in margin for 2019 was expected, following the changes to IFRS property assumptions made at 31 December 2018, and the reduction in the LTM backing ratio for new business in order to reduce capital strain. Margins have improved slightly over the course of the year, with good resilience shown in light of the price increases to accommodate the LTM regulatory changes.
In-force operating profit
In-force operating profit has increased by 18% compared to the prior year, from GBP71.7m to GBP84.4m, reflecting growth in profit from the Group's growing in-force book of business, and the return on the Group's surplus assets.
Operating experience and assumption changes
Operating experience and assumption changes contributed a positive variance of GBP42.2m for 2019, compared to a negative variance of GBP33.5m in the prior year.
Operating experience variances resulted in a charge of GBP8.9m for 2019 (2018: GBP1.4m charge), of which GBP8.4m has arisen from adverse mortality and redemption experience on mortgages (after allowance for early redemption charges).
Operating assumption changes and other operating items were GBP51.1m positive overall. The Group has updated its maintenance and investment expense assumptions, leading to a positive contribution at 31 December 2019 of GBP55.4m, of which GBP26.1m relates to maintenance expense assumptions. The Group has also modelled allowances for LT M early redemption charges, which has given rise to a further positive contribution of GBP97.0m. These have been offset by a strengthening of the Group's LTM voluntary redemption assumptions to reflect recent adverse experience which has led to a GBP116.5m charge at 31 December 2019. Other items include improvements made to data, models and minor assumptions.
The prior year operating experience and assumption changes charge of GBP33.5m was mainly in relation to updates to the Group's mortality assumptions and mortgage voluntary redemptions assumptions at 31 December 2018.
Other Group companies' operating results
The operating result for other Group companies was a loss of GBP13.1m in 2019 compared to a loss of GBP14.6m in 2018. The benefit of actions taken during 2019 to reduce our cost base is starting to come through, with the full run-rate benefit expected in 2020. Included within this line item is the operating result for the HUB group of companies which generated a loss of GBP3.9m in 2019 but has made significant progress towards profitability during the year.
Development expenditure
Development expenditure mainly relates to product development and new initiatives. These include the Just for You Lifetime Mortgage range, which gives additional flexibility to take a cash lump sum, or release cash as and when it is needed from a pre-agreed facility, or to choose to service some or all of the monthly interest. The Secure Lifetime Income solution for investment platforms enables financial advisers to offer their clients a guaranteed income for life solution within a self invested personal pension. Both of these are now available to new customers. The development costs of less capital-intensive products, such as our new DB De-risking partnership business is also included here.
Reinsurance and finance costs
The increase in reinsurance and finance costs for the period relates to the coupon on the Group's GBP300m Restricted Tier 1 notes issued in March 2019, and the coupon on the Group's GBP125m Tier 2 notes. On a statutory IFRS basis the Restricted Tier 1 coupon is accounted for as a distribution of capital, consistent with the classification of the Restricted Tier 1 notes as equity, but the coupon is included as an interest cost on an adjusted operating profit basis.
Retirement income sales
Year ended Year ended
31 December 31 December
2019 2018 change
GBPm GBPm %
============================================== ============ ============ ======
Defined Benefit De-risking Solutions ("DB") 1,231.3 1,314.2 (6)
============================================== ============ ============ ======
Guaranteed Income for Life Solutions ("GIfL") 615.7 786.5 (22)
============================================== ============ ============ ======
Care Plans ("CP") 71.1 72.8 (2)
============================================== ============ ============ ======
Retirement Income sales 1,918.1 2,173.5 (12)
============================================== ============ ============ ======
As part of the Group's commitment to achieving organic capital generation, during 2019 we chose to write less new business in order to reduce new business capital strain. Retirement Income sales decreased by 12%, from GBP2,173.5m in 2018 to GBP1,918.1m in 2019, with reductions across all lines.
The defined benefit de-risking market remains strong and almost doubled in 2019, being estimated to exceed GBP40bn (2018: GBP24.2bn), driven by a number of very large transactions.
The Group closed its US care business during 2019, which had been loss-making.
Other new business sales
Lifetime Mortgage advances were GBP415.8m in 2019 (2018: GBP602.1m), a decrease of 31%. We chose to write less new business to conserve capital. In 2019, there was a reduction in the amount of new business advanced in the lifetime mortgage market compared to 2018. We believe some customers deferred their decisions to use a lifetime mortgage until the Brexit uncertainty was brought to a conclusion. We also observed increased competition in the first half of the year as market participants sought to secure new business volumes.
Following the publication of PS13/18, we chose to be more selective in the mortgages we advanced during 2019, with a focus on shorter duration loans to older borrowers, lower LTV business and on customers with sufficient income to service interest on their borrowings.
Drawdown sales were GBP26.7m for the year (2018: GBP51.0m) and represented sales of the Group's Flexible Pension Plan ("FPP"). The FPP product was closed to new business from July 2019 and existing customers have been migrated to a third party platform.
Adjusted Earnings per share
Although total earnings were higher in 2019, share capital increased by 9.9% following the Group's capital raise in March. As a result, adjusted EPS (based on adjusted operating profit after attributed tax) has decreased slightly by 4% to 17.6 pence compared to the prior year.
Year ended Year ended
31 December 31 December
2019 2018
============================================ ============ ============
Adjusted earnings (GBPm) 177.1 170.3
============================================ ============ ============
Weighted average number of shares (million) 1,007.5 932.7
============================================ ============ ============
Adjusted EPS (pence) 17.6 18.3
============================================ ============ ============
Earnings per share
Year ended Year ended
31 December 31 December
2019 2018
============================================ ============ ============
Earnings (GBPm) 285.8 (63.7)
============================================ ============ ============
Weighted average number of shares (million) 1,007.5 932.7
============================================ ============ ============
EPS (pence) 28.4 (6.8)
============================================ ============ ============
Reconciliation of operating to statutory IFRS results
The following tables present the Group's results on a statutory IFRS basis.
31 December 31 December
2019 2018
GBPm GBPm
======================================================== =========== ===========
Adjusted operating profit before tax 218.6 210.3
======================================================== =========== ===========
Non-recurring and project expenditure (8.3) (19.6)
======================================================== =========== ===========
Implementation of cost saving initiatives (13.5) -
======================================================== =========== ===========
Investment and economic profits/(losses) 173.8 (252.0)
======================================================== =========== ===========
Interest adjustment to reflect IFRS accounting for Tier
1 notes as equity 16.8 -
======================================================== =========== ===========
Amortisation costs (18.8) (24.2)
======================================================== =========== ===========
IFRS profit/(loss) before tax 368.6 (85.5)
======================================================== =========== ===========
Non-recurring and project expenditure
Non-recurring and project expenditure, which includes significant one-off project spend associated with restructuring the Group's securitisation to meet the recent regulatory changes and to meet major new financial reporting requirements, was GBP8.3m for 2019 (2018: GBP19.6m). Non-recurring expenditure for 2019 includes costs associated with the equity placing, Restricted Tier 1 notes issuance, new Tier 2 notes issue and the tender for existing Tier 2 notes which were all undertaken during the year. Other project expenditure included in this category includes preparations for the new insurance accounting standard, IFRS 17, restructuring of the Group's internal LTM notes, and the costs of responding to the requirements of SS3/17, PS31/18 and PS19/19.
The costs of ongoing interaction with our regulators and the costs of implementing less significant regulatory changes are included in operating costs.
Implementation of cost saving initiatives
These costs are in respect of the significant cost savings initiated during the year to optimise the Group's business model and prioritise capital efficiency. During the year the Group rationalised its property footprint, reducing its Reigate office locations from three to two, and moved to more cost efficient London premises. We simplified our senior management structure and made improvements to our business processes to create long-term savings. As previously mentioned, we have also closed our US care business and outsourced our drawdown service. These actions have resulted in a 10% reduction in our full year 2019 recurring core management expenses, with a total saving of GBP16m. These savings are expected to reduce both acquisition and maintenance costs. We expect ongoing savings as new cost initiatives in 2020 drive further cost savings across the business.
Investment and economic profits/losses
Investment and economic profits for 2019 were GBP173.8m (2018: losses of GBP252.0m).
Investment and economic profits for 2019 include the benefit of a decrease in risk-free rates and a narrowing of credit spreads, partly offset by an actual property growth rate lower than the long-term expected rate. In contrast, during 2018, we experienced IFRS losses from increases in risk-free rates and widening credit spreads.
Investment and economic losses for 2018 included the impact of changes to the Group's IFRS property growth and volatility assumption, in particular the reduction of the property growth assumption from 4.25% to 3.8% and an increase in volatility assumptions from 12% to 13%, which gave rise to a GBP211m loss reported through this line in the prior period.
Once again there were no corporate bond defaults within our portfolio during the year (2018: no defaults).
Amortisation costs
Amortisation mainly relates to the acquired in-force business asset relating to Partnership Assurance Group plc, which is being amortised over ten years in line with the expected run-off of the in-force business.
Highlights from Condensed consolidated statement of comprehensive income
The table below presents the Condensed consolidated statement of comprehensive income for the Group, with key line item explanations.
Year ended Year ended
31 December 31 December
2019 2018
GBPm GBPm
========================================== ============ ============
Gross premiums written 1,921.0 2,176.9
========================================== ============ ============
Reinsurance premiums ceded 2.8 (8.0)
========================================== ============ ============
Reinsurance recapture 436.8 543.3
========================================== ============ ============
Net premium revenue 2,360.6 2,712.2
========================================== ============ ============
Net investment income 1,451.7 142.6
========================================== ============ ============
Fee and commission income 12.7 8.2
========================================== ============ ============
Total revenue 3,825.0 2,863.0
========================================== ============ ============
Net claims paid (861.1) (749.9)
========================================== ============ ============
Change in insurance liabilities (2,237.8) (1,689.0)
========================================== ============ ============
Change in investment contract liabilities 92.2 0.4
========================================== ============ ============
Acquisition costs (35.2) (52.4)
========================================== ============ ============
Other operating expenses (227.8) (254.8)
========================================== ============ ============
Finance costs (186.7) (202.8)
========================================== ============ ============
Total claims and expenses (3,456.4) (2,948.5)
========================================== ============ ============
Profit/(loss) before tax 368.6 (85.5)
========================================== ============ ============
Income tax (66.2) 21.2
========================================== ============ ============
Profit/(loss) after tax 302.4 (64.3)
========================================== ============ ============
Gross premiums written
Gross premiums written for the year were GBP1,921.0m, a decrease of 12% compared to the prior year (2018: GBP2,176.9m). As discussed above, the year on year decrease reflects the Group's planned reduction in new business volumes in order to preserve capital.
Reinsurance recapture
The Group's subsidiary JRL has a number of quota share reinsurance treaties with financing arrangements, which allowed a capital benefit under the old Solvency I regime. These treaties were closed to new business prior to the introduction of Solvency II on 1 January 2016 but the Group retains a capital benefit under Solvency II from the financing arrangements under transitional arrangements. The treaties allow JRL to recapture business once the financing loan from the reinsurer has been repaid. During the year the Group has repaid financing and recaptured business in respect of certain underwriting years, resulting in a decrease of reinsurance assets of GBP436.8m and a reduction of equal amount in the deposits received from reinsurers recognised within other financial liabilities in the statement of financial position. These movements are reflected in the statement of comprehensive income within Net premium revenue and Net claims paid respectively.
Net premium revenue
Net premium revenue decreased from GBP2,712.2m to GBP2,360.6m, driven by the reduction in gross premiums written, plus the impact of the reinsurance recaptures made during the year, and reinsurance premiums ceded.
Net investment income
Net investment income increased from GBP142.6m to GBP1,451.7m in 2019. The main components of investment income are interest earned and changes in fair value of the Group's corporate bond, mortgage and other fixed income assets. During 2019, risk free rates have decreased and credit spreads have narrowed, giving rise to unrealised gains on the Group's mortgage and corporate bond assets. This is in contrast to the prior year, where risk free rates increased and credit spreads widened, leading to unrealised losses.
Net claims paid
Net claims paid increased to GBP861.1m, from GBP749.9m in 2018, reflecting the growth of the in-force book.
Change in insurance liabilities
Change in insurance liabilities was GBP2,237.8m for the current year, compared to GBP1,689.0m in 2018. The increase compared to 2018 mainly reflects the growth in gross insurance liabilities due to the change in valuation interest rate, driven by the fall in risk-free rates as noted above.
Acquisition costs
Acquisition costs have decreased from GBP52.4m in 2018 to GBP35.2m in 2019, mainly as a result of the planned reduction in volumes of Retirement Income sales and LTM advances.
Other operating expenses
Other operating expenses decreased from GBP254.8m in 2018 to GBP227.8m for the current year. This reduction reflects the benefit of the cost-saving initiatives carried out during the year.
Finance costs
The Group's overall finance costs decreased from GBP202.8m in 2018 to GBP186.7m in 2019. The main driver relates to a reduction in reinsurance deposits ( described in the notes ), which have fallen in line with the planned recaptures made. This decrease has been partly offset by a full year's interest on the Group's Tier 3 loan notes issued in February 2018, and interest on the new Tier 2 loan notes issued in October 2019. Note that the coupon on the Group's Restricted Tier 1 notes is recognised as a capital distribution directly within equity and not within finance costs. This includes reinsurance finance costs as well as the core expense base.
Income tax
Income tax for the year ended 31 December 2019 was GBP66.2m (2018: tax credit of GBP21.2m), with an effective tax rate of 18.0% in line with corporation tax rates (2018: effective tax rate of 24.8%). The effective tax rate for the prior year was affected by one-off adjustments relating to the recognition of deferred tax in relation to tax overpaid in prior periods.
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.
Condensed consolidated statement of financial position
31 December 31 December
2019 2018(1)
GBPm GBPm
====================================================== =========== ===========
Assets
====================================================== =========== ===========
Financial investments 21,606.0 19,252.5
====================================================== =========== ===========
Reinsurance assets 3,732.0 4,239.2
====================================================== =========== ===========
Other assets 555.8 454.1
====================================================== =========== ===========
Total assets 25,893.8 23,945.8
====================================================== =========== ===========
Share capital and share premium 198.0 188.6
====================================================== =========== ===========
Other reserves 949.9 885.5
====================================================== =========== ===========
Accumulated profit and other adjustments 879.9 590.3
====================================================== =========== ===========
Total equity attributable to ordinary shareholders of
Just Group plc 2,027.8 1,664.4
====================================================== =========== ===========
Tier 1 notes 294.0 -
====================================================== =========== ===========
Non-controlling interest (0.8) (0.6)
====================================================== =========== ===========
Total equity 2,321.0 1,663.8
====================================================== =========== ===========
Liabilities
====================================================== =========== ===========
Insurance liabilities 19,003.7 17,273.8
====================================================== =========== ===========
Other financial liabilities 3,678.9 4,063.3
====================================================== =========== ===========
Insurance and other payables 72.6 78.3
====================================================== =========== ===========
Other liabilities 817.6 866.6
====================================================== =========== ===========
Total liabilities 23,572.8 22,282.0
====================================================== =========== ===========
Total equity and liabilities 25,893.8 23,945.8
====================================================== =========== ===========
Financial investments
During the year, financial investments increased by GBP2.4bn, from GBP19.3bn at 31 December 2018 to GBP21.6bn at 31 December 2019. The increase is mainly a result of investing the Group's new business premiums. The credit quality of the corporate bond portfolio remains high, with 58% of the Group's corporate bond and gilts portfolio rated A or above (2018: 60%) and continues to be well balanced across a range of industry sectors. At 31 December 2019 the Group's holding in liquidity funds was higher than in prior periods (2019: GBP1,384.0m, 2018: GBP882.5m), awaiting investment into corporate bonds and other fixed income assets. During the year the Group continued to increase its investment in private assets, including infrastructure loans and commodity trade finance. The loan-to-value ratio of the mortgage portfolio at 31 December 2019 was 34.3% (2018: 32.5%), and the percentage of lifetime mortgages reduced marginally to 36.9% of financial investments. The following table provides a breakdown by credit rating of financial investments.
31 December 31 December 31 December 31 December
2019 2019 2018 2018
GBPm % GBPm %
=================== =========== =========== =========== ===========
AAA(1) 2,319.3 10.7 1,798.9 9.3
=================== =========== =========== =========== ===========
AA(1) and gilts 1,500.4 6.9 1,799.8 9.3
=================== =========== =========== =========== ===========
A 3,345.0 15.5 3,151.1 16.4
=================== =========== =========== =========== ===========
BBB 4,791.1 22.2 4,072.0 21.1
=================== =========== =========== =========== ===========
BB or below 156.3 0.7 208.2 1.1
=================== =========== =========== =========== ===========
Other(2) 1,513.4 7.0 1,031.0 5.4
=================== =========== =========== =========== ===========
Lifetime mortgages 7,980.5 36.9 7,191.5 37.4
=================== =========== =========== =========== ===========
Total 21,606.0 100.0 19,252.5 100.0
=================== =========== =========== =========== ===========
1 Includes units held in liquidity funds. 2 Includes private rated bonds, internally rated assets and own-rated assets.
Economic, Social and Governance and investing
Just Group is a signatory to the United Nations Principles for Responsible Investment ("PRI"). We were the first UK insurer to do this. In making investment decisions, sustainable investing principles are formally embedded within our processes, as set out in our Sustainable Investment Framework approved by the Board.
We are delighted our efforts have been recognised by satisfying the requirements to become a constituent of the FTSE4Good Index Series. The index is designed to measure the performance of companies demonstrating strong ESG practices.
Reinsurance assets
Reinsurance assets decreased from GBP4.2bn at 31 December 2018 to GBP3.7bn at 31 December 2019. The decrease relates to the impact of reinsurance recaptures made during the year, and to the receipt of reinsurers' share of claims paid during the year (see reinsurance recapture section above). Since the introduction of Solvency II in 2016, the Group has increased its use of reinsurance swaps rather than quota share treaties.
Other assets
Other assets mainly comprise cash and cash equivalents, and intangible assets.
Insurance liabilities
Insurance liabilities increased from GBP17.3bn at 31 December 2018 to GBP19.0bn at 31 December 2019. The increase in liabilities arose mainly as a result of new insurance business written less claims paid and the impact of changes to the valuation interest rate as a result of the fall in risk-free rates during the year.
The sector analysis of the Group's financial investments portfolio at 31 December 2019 is shown below and continues to be well balanced across a variety of industry sectors.
31 December 31 December 31 December 31 December
2019 2019 2018 2018
GBPm % GBPm %
=========================== =========== =========== =========== ===========
Basic materials 329.8 1.5 272.4 1.4
=========================== =========== =========== =========== ===========
Communications 1,148.2 5.3 963.8 5.0
=========================== =========== =========== =========== ===========
Auto manufacturers 446.6 2.1 319.4 1.7
=========================== =========== =========== =========== ===========
Consumer 1,122.1 5.2 878.3 4.6
=========================== =========== =========== =========== ===========
Energy 422.7 2.0 313.1 1.6
=========================== =========== =========== =========== ===========
Banks 1,859.7 8.5 1,855.7 9.5
=========================== =========== =========== =========== ===========
Derivatives and collateral 381.9 1.8 230.6 1.2
=========================== =========== =========== =========== ===========
Insurance 724.2 3.4 733.9 3.8
=========================== =========== =========== =========== ===========
Financial - other 876.7 4.1 936.3 4.9
=========================== =========== =========== =========== ===========
Government 1,128.9 5.2 1,253.3 6.5
=========================== =========== =========== =========== ===========
Industrial 628.6 2.9 447.4 2.3
=========================== =========== =========== =========== ===========
Utilities 1,708.2 7.9 1,512.1 7.9
=========================== =========== =========== =========== ===========
Liquidity funds 1,384.0 6.4 882.5 4.6
=========================== =========== =========== =========== ===========
Lifetime mortgages 7,980.5 36.9 7,191.5 37.4
=========================== =========== =========== =========== ===========
Commercial mortgages 494.5 2.3 392.3 2.0
=========================== =========== =========== =========== ===========
Infrastructure loans 892.9 4.1 858.9 4.5
=========================== =========== =========== =========== ===========
Other 76.5 0.4 211.0 1.1
=========================== =========== =========== =========== ===========
Total 21,606.0 100.0 19,252.5 100.0
=========================== =========== =========== =========== ===========
Other financial liabilities
Other financial liabilities decreased from GBP4.1bn at 31 December 2018 to GBP3.7bn at 31 December 2019. These liabilities are mainly reinsurance related and include deposits received from reinsurers, reinsurance financing and other reinsurance-related balances. The change in the financial liability balance mainly reflects the reduction in deposits received from reinsurers, due to the reinsurance recaptures made in the year.
Insurance and other payables
Insurance and other payables decreased from GBP78.3m at 31 December 2018 to GBP72.6m at 31 December 2019.
Other liabilities
Other liability balances decreased from GBP866.6m at 31 December 2018 to GBP817.6m at 31 December 2019. Other liabilities includes GBP12.4m in relation to lease liabilities which has been recognised upon adoption of IFRS 16, (Leases), and which relates to the Group's leasehold buildings. A related right of use asset of GBP11.9m is included within property, plant and equipment.
IFRS net assets
The Group's total equity at 31 December 2019 was GBP2,321.0m, compared to GBP1,663.8m at 31 December 2018. Total equity includes the Restricted Tier 1 notes of GBP294m (after issue costs) issued by the Group in March 2019. Total equity attributable to ordinary shareholders increased from GBP1,664.4m to GBP2,027.8m resulting in net asset value ("NAV") per ordinary share of 196p (2018: 177p).
Dividends
Whilst the Group continues to build its capital position following the significant regulatory changes relating to equity release mortgages the Board considers it appropriate not to pay a final year dividend for 2019 (total 2018 dividend: nil).
ANDY PARSONS
Group Chief Financial Officer
Risk management
The Group's enterprise-wide risk management strategy is to enable all colleagues to take more effective business decisions through a better understanding of risk
Purpose
We use risk management to make better informed business decisions that generate value for shareholders while delivering appropriate outcomes for our customers and providing confidence to other stakeholders. Our risk management processes are designed to ensure that our understanding of risk underpins how we run the business.
Risk framework
Our risk management framework is continually developed to reflect our risk environment and emerging best practice. The framework, owned by the Group Board, covers all aspects of risk management, including risk governance, reporting and policies. Our appetite for different types of risk is embedded across the business to create a culture of confident risk taking.
Risk evaluation and reporting
We evaluate our principal and emerging risks and decide how best to manage them within our risk appetite. Management regularly reviews its risks and produces reports to provide assurance that material risks in the business are being appropriately mitigated. The Risk function, led by the Group Chief Risk Officer ("GCRO"), challenges the management team on the effectiveness of its risk evaluation and mitigation. The GCRO provides the Group Risk and Compliance Committee ("GRCC") with his independent assessment of the principal and emerging risks to the business.
Financial risk modelling is used to assess the amount of each risk type against our capital risk appetite. This modelling is principally aligned to our regulatory capital metrics. This modelling allows the Board to understand both the risks included in the Solvency Capital Requirement ("SCR") and how they translate into regulatory capital needs and those not included in the SCR, such as liquidity and strategic risks. By applying stress and scenario testing, we gain insights into how risks might impact the Group in different circumstances.
Own Risk and Solvency Assessment
The Group's Own Risk and Solvency Assessment ("ORSA") embeds comprehensive risk reviews into our Group management 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
STRATEGIC OBJECTIVES
1 Improve our capital position
2 Transform how we work
3 Get closer to our customers & partners
4 Generate growth in new markets
5 Be proud to work at Just
Description Mitigation and
Risk and impact management action
================= ========================================== ==== ===========================================
Risk A Risks The financial services industry We monitor and assess regulatory
from regulatory continues to see a high level developments on an on-going
changes of regulatory activity and intense basis. We actively seek to participate
Strategic regulatory supervision. The in all regulatory initiatives
objective regulatory agenda for the coming which may affect or provide
1,3,4,5 year covers many areas directly future opportunities for the
Change in relevant to the Group. Group. Our aims are to implement
the year The Prudential Regulation Authority any required changes effectively,
No change ("PRA") published PS19/19, which and to deliver better outcomes
Risk outlook follows on from PS31/18, both for our customers and competitive
No change of which updated SS3/17 in respect advantage for the business.
of the valuation of no-negative We develop our strategy by giving
equity guarantees ("NNEG") in consideration to planned political
equity release mortgages ("ERMs"). and regulatory developments
The PRA's proposals took effect and allow for contingencies
on 31 December 2019, subject should outcomes differ from
to a two year phase-in period. our expectations. The Group
The PRA has published CP22/19 also keeps under regular review
which consults on their expectations the possible need to reduce
of firms' compliance to the new business volumes or close
Prudent Person Principle with to new business.
regard to managing investment A key focus for the Group is
risk. The Group are currently addressing the expectations
assessing the full implications of the updated SS3/17 which
and has responded to the consultation. came into effect on 31 December
The PRA also published CP23/19, 2019, whilst maintaining the
consulting on their expectations confidence of our stakeholders.
of firms to undertake a robust This includes using our capital
risk identification exercise wisely.
in respect of income producing Any changes to the regulatory
real estate ("IPRE") lending environment as a result of the
and for the credibility of insurance UK's withdrawal from the EU
firms' internal credit ratings are being monitored, notably
of IPRE loans and other illiquid, with regard to Solvency II,
unrated assets. The Group are although significant divergence
currently assessing the full is not expected. It is anticipated
implications and has responded that the UK's withdrawal from
to the consultation. the EU will have limited direct
There has been an increase in impact on the Group as it and
regulatory focus on the issue its customers and policyholders
of sustainable finance, particularly are predominantly UK based.
the impacts that climate change The outcome of the European
risks could have on the safety Commission's review of Solvency
and soundness of firms and stability II regulations may have an impact
of the financial system. The on how Solvency II continues
PRA Supervisory Statement SS3/19 to be applied in the UK even
set out regulatory expectations in a post-Brexit world. We are
about the management of the monitoring developments.
financial risks linked to climate Just has an approved partial
change. The related PRA Policy internal model to calculate
Statement PS11/19 requires firms the Group Solvency Capital Requirement,
to set out plans for identifying which it reviews for continued
and managing financial risks appropriateness. In 2020 it
from climate change. Climate expects to review the model
change could affect Just Group's to reflect changes in the risk
financial risks in two key ways: profile of the balance sheet
(i) as investors increasingly arising from the requirements
consider sustainability in their of PS19/19 and other business
investment choices this may developments.
restrict investment choice and We participated in the PRA's
compress yields in the existing 2019 Insurance Stress Test on
investment universe; it may our investments in publicly
also create new opportunities listed bonds in relation to
to invest in assets that are climate change and we consider
perceived to be more sustainable; Environmental, Social & Governance
and (ii) increased physical (ESG) factors in all our investment
risks such as flooding due to analysis and decisions. Just
severe rainfall or tidal surges, is enhancing its ESG approach
wildfires, extreme windstorms in its investment strategy.
or heatwaves leading to increased Just is implementing a plan
subsidence may affect the value to ensure that the potential
of properties not seen as having impacts of climate change on
such an exposure at present. the Group's financial risks
This could affect our ability are identified, assessed and
to recover the full balances monitored. The plan will also
of lifetime mortgages in light ensure the Group's risk management
of the no-negative equity guarantee. framework appropriately accommodates
The PRA and Financial Conduct and reports on climate change-related
Authority ("FCA") have issued risks.
several consultation papers We intend to continue to actively
on new requirements to strengthen monitory the academic and market
operational resilience in the debate concerning the valuation
financial services sector. This of no-negative equity guarantees.
is a key priority for the regulators
and builds on the discussion
paper issued last year. Just
Group are currently reviewing
the latest papers.
There has been significant recent
academic and market debate concerning
the methodology and models for
valuation of no-negative equity
guarantees. The approach used
by the Group is in line with
common industry practice.
Risk B Risks The premiums paid by the Group's Economic conditions are actively
from customers are invested to enable monitored and alternative scenarios
the economic future benefits to be paid when modelled to better understand
environment expected with a high degree the potential impacts of significant
Strategic of certainty. The economic environment economic changes on the amount
objective and financial market conditions of capital required to be held
1,3,4,5 have a significant influence to cover risks, and to inform
Change in on the value of assets and liabilities management action plans. The
the year and on the income the Group Group's strategy is to buy and
Increase receives. An adverse economic hold high-quality, lower-risk
Risk outlook environment (resulting, for assets in its investment portfolio
No change example, from a COVID-19 pandemic to ensure that it has sufficient
impacting the global economy) income to meet outgoings as
could impact on the availability they fall due. Portfolio credit
and attractiveness of certain risk is managed by specialist
securities and could increase fund managers executing a diversified
the risk of credit downgrades investment strategy in investment
and defaults in our corporate grade assets within counterparty
bond portfolio. limits.
The lack of clarity regarding In a low interest rate environment,
the UK's future trading arrangements improved returns are sought
with the EU has introduced material by diversifying the types, geographies
uncertainty for the UK's macro-economic and industry sectors and classes
outlook in the medium and long of investment assets. Such diversification
term. The Group remains exposed creates exposures to foreign
to impacts that the uncertainty exchange risk, which is controlled
around the UK's withdrawal has using derivative instruments.
on the UK economy as a whole, Derivative instruments are used
including residential house to reduce exposures to interest
prices - the UK's withdrawal rate volatility. The credit
from the EU could result in exposure to the counterparties
property values stagnating or with whom we transact these
falling. instruments is mitigated by
In an environment of low interest collateral arrangements.
rates, investors may be more The Group's exposure to inflation
willing to accept higher credit risk through the defined benefit
and liquidity risk to improve de-risking business is managed
investment returns. These conditions with inflation hedges.
create additional competition Liquidity risk is managed by
for assets and make it more ensuring that assets of a suitable
challenging to source sufficient maturity and marketability are
assets to offer attractive DB held to meet liabilities as
de-risking and GIfL terms. Low they fall due. Sufficient liquid
credit spreads similarly affect assets are maintained so the
the income that can be made Group can readily access the
available, although margins cash it needs should business
from our equity release portfolio cash inflows unexpectedly reduce.
help offset this risk. There is some short-term volatility
Most defined benefit pension in the Group's cash flows, which
schemes link member benefits can be reliably estimated in
to inflation through indexation. terms of timing and amount.
As the Group's defined benefit Regular cash flow forecasts
de-risking business volumes predict liquidity levels over
grow, its exposure to inflation both short term and long term
risk increases. and stress tests help us understand
A fall in residential property any potential periods of strain.
values could reduce the amounts The Group's liquidity requirements
received from equity release have been comfortably met over
redemptions and may also affect the past year and forecasting
the relative attractiveness confirms that this position
of the equity release product can be expected to continue
to customers. The regulatory for both investments and business
capital needed to support the operations.
possible shortfall on the redemption
of equity release mortgages
also increases if property values
drop. Conversely, significant
future rises in property values
could increase the incidence
of early mortgage redemptions,
leading to an earlier receipt
of anticipated cash flows with
the consequential reinvestment
risk.
Market risks may affect the
liquidity position of the Group
by, for example, having to realise
assets to meet liabilities during
stressed market conditions or
to service collateral requirements
due to the changes in market
value of financial derivatives.
A lack of market liquidity and
availability is also a risk
to any need that the Group may
have to raise capital.
================= ========================================== ==== ===========================================
Risk C Risks Writing long-term DB de-risking, To manage the risk of our longevity
from GIfL and equity release business assumptions being incorrect,
our pricing requires a range of assumptions the Group has the benefit of
assumptions to be made based on market extensive underwritten mortality
Strategic data and historical experience, data to provide insights and
objective including customers' longevity, enhanced understanding of the
1,3,4 corporate bond yields, interest longevity risks that the Group
Change in and inflation rates, property chooses to take.
the year values and expenses. These Longevity and other decrement
No change assumptions are applied to experience is analysed to identify
Risk outlook the calculation of the reserves any outcomes materially different
No change needed for future liabilities from our assumptions and is
and solvency margins using used for the regular review
recognised actuarial approaches. of the reserving assumptions
Experience may differ materially for all products.
from the Group's assumptions Some longevity risk exposure
on these risk factors, requiring is transferred to reinsurers.
them to be recalibrated. This The Group performs due diligence
could affect the level of reserves on our reinsurance partners
needed, with an impact on profitability and they undertake due diligence
and the Group's solvency position. on the Group's approach to risk
selection. The Group monitors
its exposure to reinsurers on
an ongoing basis. Exposure is
managed through the posting
and receipt of collateral into
third party trusts or similar
security arrangements, or the
deposit of premiums back to
the Group.
The Group measures its counterparty
exposure as the change in excess
own funds above Solvency II
SCR from a default of each individual
counterparty. The measures used
include the change immediately
upon default and after the Group
has re-established cover. The
Group's exposure to individual
counterparties is subject to
limits set by the Board.
For equity release, the Group
underwrites the properties against
which it lends using valuations
from expert third parties. The
Group's property risk is controlled
by limits to the initial loan-to-property
value ratio, supported by product
design features, limiting specific
property types and exposure
to each region. We also monitor
the exposure to adverse house
price movements and the accuracy
of our indexed valuations.
================= ======================================== === ==============================================
Risk D Risks The Group relies on its operational The Group maintains a suite
arising processes and IT systems to of risk management tools to
from operational conduct its business, including help identify, measure, monitor,
processes the pricing and sale of its manage and report its operational
and IT systems products, measuring and monitoring risks, including those arising
Strategic its underwriting liabilities, from operational processes and
objective processing applications and IT systems. These include a
1,2,3,4,5 delivering customer service risk management system, risk
Change in and maintaining accurate records. and control assessments, risk
the year These processes and systems event management, loss reporting,
No change may not operate as expected, scenario analysis and risk reporting
Risk outlook may not fulfil their intended through the ORSA.
No change purpose or may be damaged or The Group maintains plans and
interrupted by human error, controls to minimise the risk
unauthorised access, natural of business disruption due to
disaster or similarly disruptive information security or continuity
events. Any failure of the related events including civil
Group's IT and communications unrest and pandemics. Detailed
systems and/or third party incident and crisis management
infrastructure on which it plans exist to ensure effective
relies could lead to costs responses and these are supported
and disruptions that could by specialist third parties
adversely affect its business for our workplace recovery centre.
as well as harm its reputation. Protecting our customers' interests
Large organisations continue is our top priority. Flexing
to be targets for cyber-crime, the Group working arrangements
particularly those organisations in stressed times, such as during
that hold customers' personal a pandemic, helps to ensure
details. The Group is no exception that our customers do not experience
and a cyber-attack could affect any material detriment.
customer confidence, or lead Our approach to information
to financial losses. security is under constant review
as the cyber-threat landscape
evolves. Due diligence is performed
on all partners to ensure that
they work to the same high security
standards as the Group. Just
believes that every member of
staff has a duty of care to
protect the data that they handle.
Using federated models for data
protection, resilience (business
continuity) and information
security, we operate a Group
wide network of Data Protection
Champions to promote awareness.
The Group invests in tools to
help identify, manage and report
on data and cyber threats, including
tools to monitor user access
to sensitive data sets and the
movement of data across the
network. Using artificial intelligence
and machine learning, these
tools provide early warning
of suspicious activity on IT
systems.
In 2019 the Group committed
a significant additional spend
on upper quadrant security related
products deployed on end-points.
Further investment has been
made on core infrastructure
such as firewalls and secure
architecture, with pro-active
monitoring by our specialist
partner, responsible for managing
our Security Operations Centre.
================= ======================================== === ==============================================
Risk E Risks The Group operates in a market Our approach to legislative
from our where changes in pensions legislation change is to participate actively
chosen market can have a considerable effect and engage with policymakers.
environment on our strategy and could reduce The Group offers a range of
Strategic our sales and profitability retirement options, allowing
objective or require us to hold more it to remain agile in this changing
1,2,3,4 capital. environment, and has flexed
Change in Customers' need for a secure its offerings in response to
the year income in retirement continues market dynamics. We believe
Increase and the Group expects that we are well placed to adapt
Risk outlook demand for guaranteed income to changing customer demand,
No change for life solutions will continue. supported by our brand promise,
The availability to insurers innovation credentials and financial
of defined benefit de-risking strength.
transactions is expected to The most influential factors
continue to grow. in the successful delivery of
The equity release market has the Group's plans are closely
been dominated by a limited monitored to help inform the
number of specialist providers, business. The factors include
but new entrants - both providers market forecasts and market
and funders - have emerged share, supported by insights
along with new product launches into customer and competitor
and the intensity of competition behaviour.
has increased. The equity release Work continues to improve the
asset class provides good cash customer appeal of the Group's
flow matching for the Group's equity release products, explore
longer duration DB de-risking new product variants and meet
and GIfL liabilities, where distributors' digital and service
suitable longer duration corporate needs.
or government bonds or other We continue to gather customer
appropriate assets are less insight and enhance our distribution
readily available. services accordingly. In 2019
Customer needs and expectations we have expanded the portfolio
continue to evolve and change of partners for whom we provide
in profile, and there is a GIfL broking services as well
risk that we fail to customise as including comparisons with
and tailor our professional closed book rates where life
services and distribution models company partners offer these.
to suit their specific requirements. Recognising the increased demands
Poor management of customer for advice from members of defined
or distributor relationships benefit pension schemes, our
as well as misleading customers defined benefit member options
or misrepresenting products business purchased last year
to customers are also risks has continued its safe growth
which could lead to regulatory in a highly regulated environment.
censure as well as loss of We have developed and plan to
customers. launch in 2020 a pioneering
and exciting fully advised online
financial planning service targeted
at people close to or in-retirement
with modest pension savings.
The service will provide the
opportunity to receive tailor-made
regulated financial advice without
paying the costs associated
with a traditional financial
adviser.
================= ======================================== === ==============================================
Risk F Risks Our purpose is to help people The Group actively seeks to
to the group's achieve a better later life. differentiate its business from
reputation Our Group's brands reflect competitors by investing in
Strategic the way we intend to conduct brand-enhancing activities.
objective our business and treat our Fairness to customers and high
1,2,3,4,5 customer and wider stakeholder service standards are at the
Change in groups. heart of the Just brand, and
the year The Group's reputation could we encourage our colleagues
Increase be damaged if the Group is to take pride in the quality
Risk outlook perceived to be acting, even of service they provide to our
Increase unintentionally, below the customers. Engaging our colleagues
standards we set for ourselves. in the Just brand and its associated
Damage to our reputation may values has been, and remains,
adversely affect our underlying a critical part of our internal
profitability, through reducing activity. The Group maintains
sales volumes, restricting a system of internal control,
access to distribution channels and associated policies and
and attracting increased regulatory operational procedures, which
scrutiny. define the standards we expect
Additionally, the Group's reputation of all colleagues.
could be threatened by external
risks such as regulatory intervention
or enforcement action, either
directly or as a result of
contagion from other companies
in the sectors in which we
operate.
================= ======================================== === ==============================================
Consolidated statement of comprehensive income
for the year ended 31 December 2019
Year ended Year ended
31 December 31 December
2019 2018
Note GBPm GBPm
======================================================= ==== ============ ============
Gross premiums written 6 1,921.0 2,176.9
======================================================= ==== ============ ============
Reinsurance premiums ceded 2.8 (8.0)
======================================================= ==== ============ ============
Reinsurance recapture 436.8 543.3
======================================================= ==== ============ ============
Net premium revenue 2,360.6 2,712.2
======================================================= ==== ============ ============
Net investment income 2 1,451.7 142.6
======================================================= ==== ============ ============
Fee and commission income 6 12.7 8.2
======================================================= ==== ============ ============
Total revenue 3,825.0 2,863.0
======================================================= ==== ============ ============
Gross claims paid (1,247.5) (1,185.3)
======================================================= ==== ============ ============
Reinsurers' share of claims paid 386.4 435.4
======================================================= ==== ============ ============
Net claims paid (861.1) (749.9)
======================================================= ==== ============ ============
Change in insurance liabilities:
======================================================= ==== ============ ============ Gross amount (1,730.6) (642.9) ======================================================= ==== ============ ============ Reinsurers' share (70.4) (502.8) ======================================================= ==== ============ ============ Reinsurance recapture (436.8) (543.3) ======================================================= ==== ============ ============ Net change in insurance liabilities (2,237.8) (1,689.0) ======================================================= ==== ============ ============ Change in investment contract liabilities 23 92.2 0.4 ======================================================= ==== ============ ============ Acquisition costs 3 (35.2) (52.4) ======================================================= ==== ============ ============ Other operating expenses 4 (227.8) (254.8) ======================================================= ==== ============ ============ Finance costs 5 (186.7) (202.8) ======================================================= ==== ============ ============ Total claims and expenses (3,456.4) (2,948.5) ======================================================= ==== ============ ============ Profit/(loss) before tax 6 368.6 (85.5) ======================================================= ==== ============ ============ Income tax 7 (66.2) 21.2 ======================================================= ==== ============ ============ Profit/(loss) for the year 302.4 (64.3) ======================================================= ==== ============ ============ Other comprehensive income: ======================================================= ==== ============ ============ Items that will not be reclassified subsequently to profit or loss: ======================================================= ==== ============ ============ Revaluation of land and buildings 7,14 - 4.4 ======================================================= ==== ============ ============ Items that may be reclassified subsequently to profit or loss: ======================================================= ==== ============ ============ Exchange differences on translating foreign operations (0.2) (0.4) ======================================================= ==== ============ ============ Other comprehensive (loss)/income for the year, net of income tax (0.2) 4.0 ======================================================= ==== ============ ============ Total comprehensive income/(loss) for the year 302.2 (60.3) ======================================================= ==== ============ ============ Profit/(loss) attributable to: ======================================================= ==== ============ ============ Equity holders of Just Group plc 302.6 (63.7) ======================================================= ==== ============ ============ Non-controlling interest 35 (0.2) (0.6) ======================================================= ==== ============ ============ Profit/(loss) for the year 302.4 (64.3) ======================================================= ==== ============ ============ Total comprehensive income/(loss) attributable to: ======================================================= ==== ============ ============ Equity holders of Just Group plc 302.4 (59.7) ======================================================= ==== ============ ============ Non-controlling interest 35 (0.2) (0.6) ======================================================= ==== ============ ============ Total comprehensive income/(loss) for the year 302.2 (60.3) ======================================================= ==== ============ ============ Basic earnings per share (pence) 11 28.37 (6.83) ======================================================= ==== ============ ============ Diluted earnings per share (pence) 11 28.00 (6.83) ======================================================= ==== ============ ============
The notes are an integral part of these financial statements.
Consolidated statement of changes in equity
for the year ended 31 December 2019
Shares
held Total Tier Non-
Year ended Share Share Reorganisation Merger Revaluation by Accumulated shareholders' 1 controlling
31 December capital premium reserve reserve reserve trusts profit(1) equity notes interest Total
2019 Note GBPm GBPm GBPm GBPm GBPm GBPm GBPm GBPm GBPm GBPm GBPm
============== ==== ======= ======= ============== ======= ============ ====== =========== ============= ===== =========== =======
At 1 January
2019 94.1 94.5 348.4 532.7 4.4 (6.2) 596.5 1,664.4 - (0.6) 1,663.8
============== ==== ======= ======= ============== ======= ============ ====== =========== ============= ===== =========== =======
Profit for
the year - - - - - - 302.6 302.6 - (0.2) 302.4
============== ==== ======= ======= ============== ======= ============ ====== =========== ============= ===== =========== =======
Other
comprehensive
loss for
the year,
net of income
tax - - - - - - (0.2) (0.2) - - (0.2)
============== ==== ======= ======= ============== ======= ============ ====== =========== ============= ===== =========== =======
Total
comprehensive
income/(loss)
for the year - - - - - - 302.4 302.4 - (0.2) 302.2
============== ==== ======= ======= ============== ======= ============ ====== =========== ============= ===== =========== =======
Contributions
and
distributions
============== ==== ======= ======= ============== ======= ============ ====== =========== ============= ===== =========== =======
Shares issued 20 9.4 - - 64.4 - - - 73.8 - - 73.8
============== ==== ======= ======= ============== ======= ============ ====== =========== ============= ===== =========== =======
Tier 1 notes
issued (net
of costs) 21 - - - - - - - - 294.0 - 294.0
============== ==== ======= ======= ============== ======= ============ ====== =========== ============= ===== =========== =======
Dividends 12 - - - - - - (0.2) (0.2) - - (0.2)
============== ==== ======= ======= ============== ======= ============ ====== =========== ============= ===== =========== =======
Interest
paid on Tier
1 notes - - - - - - (16.8) (16.8) - - (16.8)
============== ==== ======= ======= ============== ======= ============ ====== =========== ============= ===== =========== =======
Share-based
payments - - - - - 0.2 4.0 4.2 - - 4.2
============== ==== ======= ======= ============== ======= ============ ====== =========== ============= ===== =========== =======
Total
contributions
and
distributions 9.4 - - 64.4 - 0.2 (13.0) 61.0 294.0 - 355.0
============== ==== ======= ======= ============== ======= ============ ====== =========== ============= ===== =========== =======
At 31 December
2019 103.5 94.5 348.4 597.1 4.4 (6.0) 885.9 2,027.8 294.0 (0.8) 2,321.0
============== ==== ======= ======= ============== ======= ============ ====== =========== ============= ===== =========== =======
Shares
held Total Non-
Year ended Share Share Reorganisation Merger Revaluation by Accumulated shareholders' controlling
31 December capital premium reserve reserve reserve trusts profit(1) equity interest Total 2018 Note GBPm GBPm GBPm GBPm GBPm GBPm GBPm GBPm GBPm GBPm ============== ==== ======= ======= ============== ======= ============ ====== =========== ============= =========== ======= At 1 January 2018 93.8 94.2 348.4 532.7 - (5.0) 676.4 1,740.5 - 1,740.5 ============== ==== ======= ======= ============== ======= ============ ====== =========== ============= =========== ======= Loss for the year - - - - - - (63.7) (63.7) (0.6) (64.3) ============== ==== ======= ======= ============== ======= ============ ====== =========== ============= =========== ======= Other comprehensive income/(loss) for the year, net of income tax - - - - 4.4 - (0.4) 4.0 - 4.0 ============== ==== ======= ======= ============== ======= ============ ====== =========== ============= =========== ======= Total comprehensive income/(loss) for the year - - - - 4.4 - (64.1) (59.7) (0.6) (60.3) ============== ==== ======= ======= ============== ======= ============ ====== =========== ============= =========== ======= Contributions and distributions ============== ==== ======= ======= ============== ======= ============ ====== =========== ============= =========== ======= Shares issued 20 0.3 0.3 - - - - - 0.6 - 0.6 ============== ==== ======= ======= ============== ======= ============ ====== =========== ============= =========== ======= Dividends 12 - - - - - - (24.4) (24.4) - (24.4) ============== ==== ======= ======= ============== ======= ============ ====== =========== ============= =========== ======= Share-based payments - - - - - (1.2) 8.6 7.4 - 7.4 ============== ==== ======= ======= ============== ======= ============ ====== =========== ============= =========== ======= Total contributions and distributions 0.3 0.3 - - - (1.2) (15.8) (16.4) - (16.4) ============== ==== ======= ======= ============== ======= ============ ====== =========== ============= =========== ======= At 31 December 2018 94.1 94.5 348.4 532.7 4.4 (6.2) 596.5 1,664.4 (0.6) 1,663.8 ============== ==== ======= ======= ============== ======= ============ ====== =========== ============= =========== ======= 1 Includes currency translation reserve.
The notes are an integral part of these financial statements.
Consolidated statement of financial position
as at 31 December 2019
2019 2018
Note GBPm GBPm
================================================== ===== ======== ========
Assets
================================================== ===== ======== ========
Intangible assets 13 154.4 171.0
================================================== ===== ======== ========
Property, plant and equipment 14 26.8 21.4
================================================== ===== ======== ========
Financial investments 15 21,606.0 19,252.5
================================================== ===== ======== ========
Investment in joint ventures and associates - 0.3
================================================== ===== ======== ========
Reinsurance assets 22 3,732.0 4,239.2
================================================== ===== ======== ========
Deferred tax assets 17 11.5 18.6
================================================== ===== ======== ========
Current tax assets - 42.1
================================================== ===== ======== ========
Prepayments and accrued income 70.6 67.9
================================================== ===== ======== ========
Insurance and other receivables 18 25.5 18.9
================================================== ===== ======== ========
Cash and cash equivalents 19 267.0 113.9
================================================== ===== ======== ========
Total assets 25,893.8 23,945.8
================================================== ===== ======== ========
Equity
================================================== ===== ======== ========
Share capital 20 103.5 94.1
================================================== ===== ======== ========
Share premium 20 94.5 94.5
================================================== ===== ======== ========
Reorganisation reserve 348.4 348.4
================================================== ===== ======== ========
Merger reserve 20 597.1 532.7
================================================== ===== ======== ========
Revaluation reserve 14,17 4.4 4.4
================================================== ===== ======== ========
Shares held by trusts (6.0) (6.2)
================================================== ===== ======== ========
Accumulated profit 885.9 596.5
================================================== ===== ======== ========
Total equity attributable to owners of Just Group
plc 2,027.8 1,664.4
================================================== ===== ======== ========
Tier 1 notes 21 294.0 -
================================================== ===== ======== ========
Non-controlling interest 35 (0.8) (0.6)
================================================== ===== ======== ========
Total equity 2,321.0 1,663.8
================================================== ===== ======== ========
Liabilities
================================================== ===== ======== ========
Insurance liabilities 22 19,003.7 17,273.8
================================================== ===== ======== ========
Investment contract liabilities 23 54.0 197.8
================================================== ===== ======== ========
Loans and borrowings 24 660.0 573.4
================================================== ===== ======== ========
Lease liabilities 25 12.4 -
================================================== ===== ======== ========
Other financial liabilities 26 3,678.9 4,063.3
================================================== ===== ======== ========
Deferred tax liabilities 17 26.3 32.2
================================================== ===== ======== ========
Other provisions 29 1.8 0.7
================================================== ===== ======== ========
Current tax liabilities 10.2 3.5
================================================== ===== ======== ========
Accruals and deferred income 52.9 59.0
================================================== ===== ======== ========
Insurance and other payables 30 72.6 78.3
================================================== ===== ======== ========
Total liabilities 23,572.8 22,282.0
================================================== ===== ======== ========
Total equity and liabilities 25,893.8 23,945.8
================================================== ===== ======== ========
The notes are an integral part of these financial statements.
Consolidated statement of cash flows
for the year ended 31 December 2019
Year ended Year ended
31 December 31 December
2019 2018
Note GBPm GBPm
======================================================= ==== ============ ============
Cash flows from operating activities
======================================================= ==== ============ ============
Profit/(loss) before tax 368.6 (85.5)
======================================================= ==== ============ ============
Loss on revaluation of land and buildings 14 - 2.9
======================================================= ==== ============ ============
Depreciation of property and equipment 14 4.5 1.4
======================================================= ==== ============ ============
Impairment of property and equipment 14 4.0 -
======================================================= ==== ============ ============
Amortisation of intangible assets 13 19.9 24.7
======================================================= ==== ============ ============
Loss on disposal of associated undertaking 35 0.3 -
======================================================= ==== ============ ============
Share-based payments 4.2 7.4
======================================================= ==== ============ ============
Interest income 2 (663.0) (655.2)
======================================================= ==== ============ ============
Interest expense 5 186.7 202.8
======================================================= ==== ============ ============
Increase in financial investments (1,404.0) (720.2)
======================================================= ==== ============ ============
Decrease in reinsurance assets 507.2 1,046.1
======================================================= ==== ============ ============
Increase in prepayments and accrued income (2.7) (11.4)
======================================================= ==== ============ ============
(Increase)/decrease in insurance and other receivables (4.2) 25.1
======================================================= ==== ============ ============
Increase in insurance liabilities 1,729.9 640.8
======================================================= ==== ============ ============
Decrease in investment contract liabilities (143.8) (22.9)
======================================================= ==== ============ ============
Decrease in deposits received from reinsurers (489.5) (875.7)
======================================================= ==== ============ ============
(Decrease)/increase in accruals and deferred income (5.7) 10.4
======================================================= ==== ============ ============
Decrease in insurance and other payables (5.7) (7.2)
======================================================= ==== ============ ============
Decrease in other creditors (44.3) (91.2)
======================================================= ==== ============ ============
Interest received 364.3 375.9
======================================================= ==== ============ ============
Interest paid (139.1) (159.2)
======================================================= ==== ============ ============
Taxation paid (14.9) (36.5)
======================================================= ==== ============ ============
Net cash inflow/(outflow) from operating activities 272.7 (327.5)
======================================================= ==== ============ ============
Cash flows from investing activities
======================================================= ==== ============ ============
Additions to internally generated intangible assets 13 (3.3) (2.2)
======================================================= ==== ============ ============
Acquisition of property and equipment 14 (1.4) (0.8)
======================================================= ==== ============ ============
Net cash outflow from investing activities (4.7) (3.0)
======================================================= ==== ============ ============
Cash flows from financing activities
======================================================= ==== ============ ============
Issue of ordinary share capital (net of costs) 20 73.8 0.6
======================================================= ==== ============ ============
Proceeds from issue of Tier 1 notes (net of costs) 21 292.7 -
======================================================= ==== ============ ============
Increase in borrowings (net of costs) 24 83.9 228.5
======================================================= ==== ============ ============
Dividends paid 12 (0.2) (24.4)
======================================================= ==== ============ ============
Coupon paid on Tier 1 notes 12 (16.8) -
======================================================= ==== ============ ============
Interest paid on borrowings (43.7) (37.1)
======================================================= ==== ============ ============
Payment of lease liabilities 25 (3.1) -
======================================================= ==== ============ ============
Net cash inflow from financing activities 386.6 167.6
======================================================= ==== ============ ============
Net increase/(decrease) in cash and cash equivalents 654.6 (162.9)
======================================================= ==== ============ ============
Cash and cash equivalents at 1 January 996.4 1,159.3
======================================================= ==== ============ ============
Cash and cash equivalents at 31 December 1,651.0 996.4
======================================================= ==== ============ ============
Cash available on demand 267.0 113.9
======================================================= ==== ============ ============
Units in liquidity funds 1,384.0 882.5
======================================================= ==== ============ ============
Cash and cash equivalents at 31 December 19 1,651.0 996.4
======================================================= ==== ============ ============
The notes are an integral part of these financial statements.
Notes to the consolidated financial statements
1 Significant accounting policies
General information
Just Group plc (formerly JRP Group plc) (the "Company") was incorporated and registered in England and Wales on 13 June 2013 as a public company limited by shares. The Company's registered office is Vale House, Roebuck Close, Bancroft Road, Reigate, Surrey, RH2 7RU.
1.1 Basis of preparation
The consolidated financial statements have been prepared in accordance with International Financial Reporting Standards ("IFRS") as adopted by the European Union effective for accounting periods commencing on or before 1 January 2019 and those parts of the Companies Act 2006 applicable to companies reporting under IFRS.
The financial information set out above does not constitute the company's statutory accounts for the years ended 31 December 2019 or 2018 but is derived from those accounts. Statutory accounts for 2018 have been delivered to the registrar of companies, and those for 2019 will be delivered in due course. The auditor has reported on those accounts. Their report for the year ended 31 December 2019 was (i) unqualified, (ii) did not contain a statement under section 498 (2) or (3) of the Companies Act 2006, and (iii) by way of emphasis of matter, without qualifying their report, drew attention to the capital note which discloses the matters also covered in note 34 to this results announcement. Their report for the year ended 31 December 2018 was (i) unqualified, (ii) did not contain a statement under section 498 (2) or (3) of the Companies Act 2006, and (iii) by way of emphasis of matter, without qualifying their report, drew attention to note 34, Capital, to the 2018 statutory accounts.
As part of their assessment of going concern at 31 December 2019, the Directors have considered matters currently under development by the PRA. These include the impact of the updated regulatory expectations set out in SS3/17 "Solvency II: matching adjustment - illiquid unrated assets and equity release mortgages" and PS19/19 "Solvency II: Equity release mortgages - Part 2", under which the Group restructured and updated its internal Lifetime Mortgage ("LTM") securitisation. A restructure was effected on 31 December 2019 which involved a redemption of existing notes, and a restructuring and issuance of new LTM notes. The restructure removes much of the uncertainty on the level of matching adjustment relating to LTMs in the regulatory balance sheet. The Board considers, including having considered the matters below, that there is no material uncertainty in relation to going concern at 31 December 2019.
The Directors have considered the following in their assessment:
-- The benefit of the equity, Restricted Tier 1 and Tier 2 capital raised during 2019, a total of GBP500m new capital (before issue costs), GBP100m of which is being used to re-finance the Partnership Life Assurance Company Limited 9.5% Tier 2 loan notes.
-- Steps to improve capital efficiency during 2019, including reduction in new business volumes and cost saving initiatives.
-- The projected liquidity position of the Group, current financing arrangements and contingent liabilities.
-- A range of forecast scenarios with differing levels of new business and associated additional capital requirements to write anticipated levels of new business.
-- Eligible own funds being in excess of minimum capital requirements in stressed scenarios, including no further capital strengthening and reduced new business volumes.
-- The findings of the 2019 Group Own Risk and Solvency Assessment ("ORSA").
-- Risks arising from the UK's withdrawal from the European Union.
-- Stress and scenario testing to consider the Group's capacity to respond to a series of relevant financial, insurance, or operational shocks or changes to financial regulations should future circumstances or events differ from current assumptions. Such testing includes assessment of the impact of a property price shock on the Group, given that the Group holds a significant proportion of its assets in Lifetime Mortgages.
-- Scenarios, including those in the ORSA, where the Company ceases to write new business. However, in such a run-off scenario the going concern basis would continue to be applicable because the Group would be continuing to trade with its existing business (for example, collect premiums and administer policies) rather than ceasing to trade.
-- The Group plan, which was approved by the Board in the first quarter of 2020, and in particular the forecast regulatory solvency position calculated on a Solvency II basis, which includes the impact of SS3/17 and PS 19/19 outlined above, together with regular updates to the Group's Capital Plan.
The Directors' assessment concluded that it remains appropriate to value assets and liabilities on the assumption that there are adequate resources to continue in business and meet obligations as they fall due for the foreseeable future, being at least 12 months from the date of signing this report, including in the event of the run-off scenarios considered above. Accordingly, the going concern basis has been adopted in the valuation of assets and liabilities.
The following new accounting standards, interpretations and amendments to existing accounting standards have been adopted by the Group with effect from 1 January 2019:
-- IFRS 16, Leases (effective 1 January 2019).
The Group has adopted IFRS 16, Leases from 1 January 2019. IFRS 16 introduced a single, on-balance sheet accounting model for lessees. As a result, the Group has recognised right-of-use assets representing its rights to use the underlying assets and lease liabilities representing its obligation to make lease payments. The Group has applied IFRS 16 using the modified retrospective approach, under which the cumulative effect of initial application is recognised in retained earnings at 1 January 2019. Accordingly, the comparative information presented for 2018 has not been restated. On transition to IFRS 16, the Group elected to apply IFRS 16 only to contracts that were previously identified as leases under the previous accounting standard, IAS 17. The IFRS 16 definition of a lease will only be applied to contracts entered into on or after 1 January 2019.
The Group recognises right-of-use assets and lease liabilities for all leased assets except those of low value. Lease payments associated with low value leases are recognised as an expense on a straight-line basis over the lease term. The Group presents right-of-use assets within property, plant and equipment, and presents lease liabilities on the face of the statement of financial position.
The Group recognises a right-of-use asset and a lease liability at the lease commencement date. The right-of-use asset is initially measured at cost, and subsequently at cost less any accumulated depreciation and impairment losses. The lease liability is initially measured at the present value of the lease payments that are not paid at the commencement date, discounted using the interest rate implicit in the lease or, if that rate cannot be readily determined, the Group's incremental borrowing rate. The lease liability is subsequently increased by the interest cost on the lease liability and decreased by lease payments made.
The Group has applied judgement to determine the lease term for contracts which include renewal options or break clause options. The determined lease term reflects those options where the Group assesses the likelihood of those options being exercised to be reasonably certain.
On transition to IFRS 16, for leases classified as operating leases under IAS 17, lease liabilities were measured at the present value of the remaining lease payments, discounted at the Group's incremental borrowing rate as at 1 January 2019 of 2.5%. Right-of-use assets were measured at an amount equal to the lease liability.
The impact on transition is as follows:
1 January
2019
GBPm
=================================================================== =========
Operating lease commitment at 31 December 2018 as disclosed in the
Group's consolidated financial statements (13.3)
=================================================================== =========
Discounted at the incremental borrowing rate at 1 January 2019 (12.2)
=================================================================== =========
Break clauses reasonably certain to be exercised 2.6
=================================================================== =========
Lease liabilities recognised on transition to IFRS 16 (9.6)
=================================================================== =========
Right-of-use asset presented in property, plant and equipment on
transition to IFRS 16 9.6
=================================================================== =========
Retained earnings -
=================================================================== =========
During the year the Group has recognised GBP2.8m of depreciation charges and GBP0.3m of interest costs from these leases.
The following new accounting standards, interpretations and amendments to existing accounting standards in issue, but not yet effective, have not been early adopted by the Group. Unless stated, the new and amended standards and interpretations are being assessed but are not expected to have a significant impact on the Group's financial statements:
-- IFRS 17, Insurance Contracts (not yet endorsed by the EU).
Since May 2017, when the draft standard was issued with an effective date of 1 January 2021, the IASB has in June 2019 issued a further Exposure draft including an extension of effective date to 1 January 2022, and in March 2020, the IASB's Board will consider a further extension of the effective date.
IFRS 17 provides a comprehensive approach for accounting for insurance contracts including their valuation, income statement presentation and disclosure. The Group initiated a project in 2017 to develop measurement and reporting systems and processes which will apply to all of the Group's insurance business. The main feature of the standard applicable to annuities is the deferment of recognition of premium revenues with recognition over the life of contracts. The impact of IFRS 17 continues to be assessed but it is anticipated there is likely to be a significant change relating to the measurement and presentation of insurance contracts in the Group's statutory reporting.
The Group has not early-adopted any standard, interpretation or amendment that has been issued but is not yet effective. There are no other new accounting standards or amendments to existing accounting standards relevant to the Group effective from 1 January 2019.
1.2 Significant accounting policies and the use of judgements, estimates and assumptions
The preparation of financial statements requires the Group to select accounting policies and make estimates and assumptions that affect items reported in the Consolidated statement of comprehensive income, Consolidated statement of financial position, other primary statements and Notes to the consolidated financial statements.
The major areas of judgement used as part of accounting policy application are summarised below.
Accounting policy Item involving judgement Critical accounting judgement
================= ================================= =============================================
1.6 Classification of insurance Assessment of significance of insurance
and investment contracts risk transferred.
================= ================================= =============================================
1.18 Financial investments Classification of financial investments,
including assessment of market observability
of valuation inputs.
================= ================================= =============================================
1.18 Measurement of fair value The use of a variant of the Black-Scholes
of loans secured by residential option pricing formula with real world
mortgages, including measurement assumptions.
of the no-negative equity The measurement of the no-negative
guarantees equity guarantee underlying the fair
value of loans secured by mortgages
uses a variant of the Black-Scholes
option pricing formula, which has
been adapted to use real world assumptions
instead of risk neutral assumptions
due to the lack of relevant observable
market inputs to support a risk neutral
valuation approach. This approach
is in line with common industry practice
and there does not appear to be an
alternative approach that is widely
supported in the industry. We acknowledge
that there has been significant recent
academic and market debate concerning
the valuation of no-negative equity
guarantees and we intend to continue
to actively monitor this debate.
================= ================================= =============================================
All estimates are based on management's knowledge of current facts and circumstances, assumptions based on that knowledge and predictions of future events and actions. Actual results may differ significantly from those estimates.
The table below sets out those items the Group considers susceptible to changes in critical estimates and assumptions together with the relevant accounting policy.
Accounting Item involving estimates Critical estimates and assumptions
policy and and assumptions
notes
============ ========================== ================================================
1.18, 16(a) Measurement of fair The critical estimates used in valuing
and (d) value of loans secured loans secured by residential mortgages
by residential mortgages, include the projected future receipts
including measurement of interest and loan repayments, and
of the no-negative the future costs of administering the
equity guarantees loan portfolio.
The key assumptions used as part of the
valuation calculation include future
property prices and their volatility,
mortality, the rate of voluntary redemptions
and the liquidity premium added to the
risk-free curve and used to discount
the mortgage cash flows.
Further details can be found in Note
16 under 'Loans secured by residential
mortgages'.
============ ========================== ================================================
1.19, 22, 21 Measurement of reinsurance The critical estimates used in measuring
assets and deposits the value of reinsurance assets include
received from reinsurers the projected future cash flows arising
arising from reinsurance from reinsurers' share of the Group's
arrangements insurance liabilities.
The key assumptions used in the valuation
include discount rates and mortality
experience, as described below, and assumptions
around the reinsurers' ability to meet
its claim obligations.
Deposits received from reinsurers are
measured in accordance with the reinsurance
contract and taking account of an appropriate
discount rate for the timing of the expected
cash flows of the liabilities.
For deposits received from reinsurers
measured at fair value through profit
or loss, the key assumption used in the
valuation is the discount rate.
For deposits received from reinsurers
measured using insurance rules under
IFRS 4, the key assumptions used in the
valuation include discount rates and
mortality experience.
============ ========================== ================================================
1.21, 22(b) Measurement of insurance The critical estimates used in measuring
liabilities arising insurance liabilities include the projected
from writing Retirement future Retirement Income payments and
Income insurance the cost of administering payments to
policyholders.
The key assumptions are the discount
rates and mortality experience used in
the valuation of future Retirement Income
payments. The valuation discount rates
are derived from yields on supporting
assets after deducting allowances for
default. Mortality assumptions are derived
from the appropriate standard mortality
tables, adjusted to reflect the future
expected mortality experience of the
policyholders.
Further detail can be found in note 22.
============ ========================== ================================================
1.3 Consolidation principles
The consolidated financial statements incorporate the assets, liabilities, results and cash flows of the Company and its subsidiaries.
Subsidiaries are those investees over which the Group has control. The Group has control over an investee if all of the following are met: (1) it has power over the investee; (2) it is exposed, or has rights, to variable returns from its involvement with the investee; and (3) it has the ability to use its power over the investee to affect its own returns.
Subsidiaries are consolidated from the date on which control is transferred to the Group and are excluded from consolidation from the date on which control ceases. All inter-company transactions, balances and unrealised surpluses and deficits on transactions between Group companies are eliminated. Accounting policies of subsidiaries are aligned on acquisition to ensure consistency with Group policies.
The Group uses the acquisition method of accounting for business combinations. Under this method, the cost of acquisition is measured as the aggregate of the fair value of the consideration at date of acquisition and the amount of any non-controlling interest in the acquiree. The excess of the consideration transferred over the identifiable net assets acquired is recognised as goodwill.
The Group uses the equity method to consolidate its investments in joint ventures and associates. Under the equity method of accounting the investment is initially recognised at fair value and adjusted thereafter for the post-acquisition change in the Group's share of net assets of the joint ventures and associates.
1.4 Segments
The Group's segmental results are presented on a basis consistent with internal reporting used by the Chief Operating Decision Maker ("CODM") to assess the performance of operating segments and the allocation of resources. The CODM has been identified as the Group Executive Office Committee.
The internal reporting used by the CODM includes product information (which comprises analysis of product revenues, LTM advances and amounts written under investment contracts) and information on adjusted operating profit and profit before tax for the Group's operating segments.
Product information is analysed by product line and includes DB, GIfL, Care Plans, Protection, LTM and Capped Drawdown products.
An operating segment is a component of the Group that engages in business activities from which it earns revenues and incurs expenses.
The operating segments from which the Group derives revenues and incurs expenses are as follows:
-- the writing of insurance products for distribution to the at- or in-retirement market, which is undertaken through the activities of the life company (this is referred to as the insurance segment in note 6, Segmental reporting);
-- the arranging of guaranteed income for life contracts and lifetime mortgages through regulated advice and intermediary services; and
-- the provision of licensed software to financial advisers, banks, building societies, life assurance companies and pension trustees.
Operating segments, where certain materiality thresholds in relation to total results from operating segments are not exceeded, are combined when determining reportable segments. For segmental reporting, the arranging of guaranteed income for life contracts, providing intermediary mortgage advice and arranging, plus the provision of licensed software, are included in the Other segment along with Group activities, such as capital and liquidity management, and investment activities.
The information on adjusted operating profit and profit before tax used by the CODM is presented on a combined product basis within the insurance operating segment and is not analysed further by product.
1.5 Foreign currencies
Transactions in foreign currencies are translated to sterling at the rates of exchange ruling at the date of the transaction. Monetary assets and liabilities denominated in foreign currencies are translated into sterling at the rates of exchange ruling at the end of the financial year. Foreign exchange gains and losses resulting from the settlement of such transactions and from the translation of monetary assets and liabilities denominated in foreign currencies are recognised in profit or loss.
The assets and liabilities of foreign operations are translated to sterling at the rates of exchange at the reporting date. The revenues and expenses are translated to sterling at the average rates of exchange for the year. Foreign exchange differences arising on translation to sterling are accounted for through other comprehensive income.
1.6 Classification of insurance and investment contracts
The measurement and presentation of assets, liabilities, income and expenses arising from life and pensions business contracts is dependent upon the classification of those contracts as either insurance or investment contracts.
A contract is classified as insurance only if it transfers significant insurance risk. Insurance risk is significant if an insured event could cause an insurer to pay significant additional benefits to those payable if no insured event occurred. A contract that is classified as an insurance contract remains an insurance contract until all rights and obligations are extinguished or expire.
Any contracts not considered to be insurance contracts under IFRS are classified as investment contracts. Capped Drawdown pension business and Flexible Pension Plan contracts are classified as investment contracts as there is no transfer of longevity risk due to the fixed term and unit-linked natures of these respective contracts.
1.7 Premium revenue
Premium revenue in respect of individual GIfL contracts is accounted for when the premiums are received, which coincides with when the liability to pay the GIfL contract is established.
Premium revenue in respect of Defined Benefit De-risking contracts is accounted for when the Company becomes "on risk", which is the date from which the policy is effective. If a timing difference occurs between the date from which the policy is effective and the receipt of payment, the amount due for payment but not yet received is recognised as a receivable in the Consolidated statement of financial position.
Premium revenue in respect of Care Plans and Protection policies is recognised in the accounting period in which the insurance contract commences.
Facilitated adviser charges are not accounted for within premium revenue, and do not represent a charge on the Group.
Deposits collected under investment contracts are not accounted for through the Consolidated statement of comprehensive income, except for fee income and attributable investment income, but are accounted for directly through the Consolidated statement of financial position as an adjustment to the investment contract liability.
Reinsurance premiums payable in respect of reinsurance treaties are accounted for when the reinsurance premiums are due for payment under the terms of the contract. Reinsurance premiums previously incurred can be recaptured under certain conditions, notably once reinsurance financing for an underwriting year is fully repaid.
1.8 Net investment income
Investment income consists of interest receivable for the year and realised and unrealised gains and losses on financial assets and liabilities at fair value through profit or loss.
Interest income is recognised as it accrues.
Realised gains and losses on financial assets and liabilities occur on disposal or transfer and represent the difference between the proceeds received net of transaction costs, and the original cost.
Unrealised gains and losses arising on financial assets and liabilities represent the difference between the carrying value at the end of the year and the carrying value at the start of the year or purchase value during the year, less the reversal of previously recognised unrealised gains and losses in respect of disposals made during the year.
1.9 Revenue from contracts with customers
The Group recognises revenue from contracts with customers in accordance with IFRS 15, in an amount that reflects the consideration to which the Group expects to be entitled in exchange for the services provided. Revenue from contracts with customers comprises fee income on initial advances made on loans secured by residential mortgages, investment management fees, administration fees, software licensing fees and commission.
1.10 Claims paid
Policyholder benefits are accounted for when due for payment. Reinsurance paid claim recoveries are accounted for in the same period as the related claim.
Death claims are accounted for when notified.
1.11 Acquisition costs
Acquisition costs comprise direct costs such as commission and indirect costs of obtaining and processing new business. Acquisition costs are not deferred as they relate to single premium business.
1.12 Leases
At inception of a contract, the Group assesses whether a contract is, or contains, a lease. A contract is, or contains, a lease if the contract involves the use of an identified asset and conveys the right to control the use of the asset for a period of time in exchange for consideration.
Where the Group is a lessee, a right-of-use asset and a lease liability are recognised at the commencement date of the lease. The right-of-use asset is initially measured at cost, which comprises the amount of lease liability, any lease payments made at or before the commencement date, any initial direct costs incurred and an estimate of the costs to dismantle and remove the underlying asset or to restore the underlying asset or site on which it is located, less any lease incentives received. The lease liability is initially measured at the present value of the lease payments that are not paid at the commencement date, discounted using the interest rate implicit in the lease or, if that rate cannot be readily determined, the Group's incremental borrowing rate. The Group generally uses its incremental borrowing rate as the discount rate.
The right-of-use asset is subsequently depreciated using the straight-line method from the commencement date to the earlier of the end of the useful life of the right-of-use asset or the end of the lease term. The carrying amount of the right-of-use asset is reduced by any impairment losses and adjusted for certain remeasurements of the lease liability.
The lease liability is subsequently measured at amortised cost using the effective interest method. It is remeasured to reflect any lease modifications or reassessments.
The Group presents its right-of-use assets in "Property, plant and equipment" in the Consolidated statement of financial position.
The Group has elected not to recognise right-of-use assets and lease liabilities for short-term leases that have a lease term of 12 months or less and leases of low-value assets. The Group recognises the lease payments associated with these leases as an expense on a straight-line basis over the lease term.
Where the Group is a lessor, which is the case when it sub-lets leased properties to a third party, the leases are classified as finance leases because substantially all the risks and rewards of ownership of the underlying assets are transferred to the third-party. The right-of-use asset is derecognised and a lease receivable from third-party is recognised. Income from the sublease and interest on the original lease are recognised in the Consolidated statement of comprehensive income.
1.13 Finance costs
Finance costs on deposits received from reinsurers are recognised as an expense in the period in which they are incurred. Interest on reinsurance financing is accrued in accordance with the terms of the financing arrangements.
Interest on loans and borrowings is accrued in accordance with the terms of the loan agreement. Loan issue costs are capitalised and amortised on a straight-line basis over the term of the loan issued. Interest expense is calculated using the effective interest rate method.
1.14 Employee benefits
Defined contribution plans
The Group operates a defined contribution pension scheme. The assets of the scheme are held separately from those of the Group in funds managed by a third party. Obligations for contributions to the defined contribution pension scheme are recognised as an expense in profit or loss when due.
Share-based payment transactions
Equity-settled share-based payments to employees are measured at the fair value of the equity instruments at grant date, determined using stochastic and scenario-based modelling techniques where appropriate. The fair value is expensed in the Consolidated statement of comprehensive income on a straight-line basis over the vesting period, with a corresponding credit to equity, based on the Group's estimate of the equity instruments that will eventually vest. At each balance sheet date, the Group revises its estimate of the number of equity instruments that will eventually vest as a result of changes in non-market-based vesting conditions, and recognises the impact of the revision of original estimates in the Consolidated statement of comprehensive income over the remaining vesting period, with a corresponding adjustment to equity. Where a leaver is entitled to their scheme benefits, this is treated as an acceleration of the vesting in the period they leave. Where a scheme is modified before it vests, any change in fair value as a result of the modification is recognised over the remaining vesting period. Where a scheme is cancelled, this is treated as an acceleration in the period of the vesting of all remaining options.
1.15 Earnings per share
Basic earnings per share is calculated by dividing the profit attributable to equity holders of the Company by the weighted-average number of ordinary shares outstanding during the year. The calculation of the weighted-average number of ordinary shares excludes ordinary shares held in trusts on behalf of employee share schemes.
For diluted earnings per share, the weighted-average number of ordinary shares outstanding during the year, excluding ordinary shares held in trusts on behalf of employee share schemes, is adjusted to assume conversion of potential ordinary shares, such as share options granted to employees, if their conversion would dilute earnings per share.
1.16 Intangible assets
Intangible assets consist of goodwill, which is deemed to have an indefinite useful life, Purchased Value of In-Force ("PVIF"), brand and purchased and internally developed software (including PrognoSys(TM)), which are deemed to have finite useful lives.
Goodwill represents the excess of the cost of an acquisition over the fair value of the Group's share of the net assets of the acquired subsidiary and represents the future economic benefit arising from assets that are not capable of being individually identified and separately recognised. Goodwill is measured at initial value less any accumulated impairment losses. Goodwill is not amortised, but assessed for impairment annually or when circumstances or events indicate there may be uncertainty over the carrying value.
For the purpose of impairment testing, goodwill has been allocated to cash-generating units and an impairment is recognised when the carrying value of the cash-generating unit exceeds its recoverable amount. Impairment losses are recognised directly in the Consolidated statement of comprehensive income and are not subsequently reversed.
Other intangible assets are recognised if it is probable that the relevant future economic benefits attributable to the asset will flow to the Group, and are measured at cost less accumulated amortisation and any impairments.
PVIF, representing the present value of future profits from the purchased in-force business, is recognised upon acquisition and is amortised over its expected remaining economic life up to 16 years on a straight-line basis.
PrognoSys(TM) is the Group's proprietary underwriting engine. The Group has over two million person-years of experience collected over 20 years of operations. It is enhanced by an extensive breadth of external primary and secondary healthcare data and medical literature.
Costs that are directly associated with the production of identifiable and unique software products controlled by the Group are capitalised and recognised as an intangible asset. Direct costs include the incremental software development team's employee costs. All other costs associated with researching or maintaining computer software programmes are recognised as an expense as incurred.
Intangible assets with finite useful lives are amortised on a straight-line basis over their useful lives, which range from two to 16 years. The useful lives are determined by considering relevant factors, such as usage of the asset, potential obsolescence, competitive position and stability of the industry.
For intangible assets with finite useful lives, impairment testing is performed where there is an indication that the carrying value of the assets may be subject to an impairment. An impairment loss is recognised where the carrying value of an intangible asset exceeds its recoverable amount.
The significant intangible assets recognised by the Group, their useful economic lives and the methods used to determine the cost of intangibles acquired in a business combination are as follows:
Estimated useful economic
Intangible asset life Valuation method
===================== ========================= =======================================
Estimated value in-force using European
PVIF Up to 16 years embedded value model
===================== ========================= =======================================
Estimated royalty stream if the rights
Brand 2 - 5 years were to be licensed
===================== ========================= =======================================
Distribution network 3 years Estimated discounted cash flow
===================== ========================= =======================================
Software 2 - 3 years Estimated replacement cost
===================== ========================= =======================================
Intellectual property 12 - 15 years Estimated replacement cost
===================== ========================= =======================================
The useful economic lives of intangible assets recognised by the Group other than those acquired in a business combination are as follows:
Intangible asset Estimated useful economic life ================ ============================== PrognoSys(TM) 12 years ================ ============================== Software 3 years ================ ==============================
1.17 Property, plant and equipment
Land and buildings are measured at their revalued amounts less subsequent depreciation, and impairment losses are recognised at the date of revaluation. Valuations are performed with sufficient frequency to ensure that the fair value of the revalued asset does not differ materially from its carrying value.
A revaluation surplus is recognised in other comprehensive income and credited to the revaluation reserve in equity. However, to the extent that it reverses a revaluation deficit of the same asset previously recognised in profit or loss, the increase is recognised in profit or loss. A revaluation deficit is recognised in profit or loss, except to the extent that it offsets an existing surplus on the same asset recognised in the revaluation reserve.
Buildings are depreciated on a straight-line basis over the estimated useful lives of the buildings of 25 years.
Equipment is stated at cost less accumulated depreciation and impairment losses. Depreciation is calculated on a straight-line basis to write down the cost to residual value over the estimated useful lives as follows:
Plant and equipment Estimated useful economic life =================== ============================== Computer equipment 3 - 4 years =================== ============================== Furniture and 2 - 10 years fittings =================== ==============================
1.18 Financial investments
Classification
The Group classifies financial investments in accordance with IAS 39 whereby, subject to specific criteria, they are accounted for at fair value through profit and loss. This comprises assets designated by management as fair value through profit or loss on inception, as they are managed on a fair value basis, and derivatives that are classified as held for trading. These investments are measured at fair value with all changes thereon being recognised in investment income in the Consolidated statement of comprehensive income.
Purchases and sales of investments are recognised on the trade date, which is the date that the Group commits to purchase or sell the assets. Amounts payable or receivable on unsettled purchases or sales are recognised in other payables or other receivables respectively. Transaction costs are expensed through profit or loss.
Loans secured by residential mortgages are recognised when cash is advanced to borrowers.
The Group receives and pledges collateral in the form of cash or gilts in respect of derivative contracts. Collateral received is recognised as an asset in the Consolidated statement of financial position with a corresponding liability for the repayment in other financial liabilities and collateral pledged is recognised in the Consolidated statement of financial position within the appropriate asset classification when the collateral is controlled by the Group and receives the economic benefit.
Derivatives are recognised at fair value through profit or loss. The fair values are obtained from quoted market prices or, if these are not available, by using standard valuation techniques based on discounted cash flow models or option pricing models. All derivatives are carried as assets when the fair value is positive and liabilities when the fair values are negative. The Group does not use hedge accounting.
The Group's policy is to derecognise financial investments when it is deemed that substantially all the risks and rewards of ownership have been transferred.
Use of fair value
The Group uses current bid prices to value its investments with quoted prices. Actively traded investments without quoted prices are valued using prices provided by third parties. If there is no active established market for an investment, the Group applies an appropriate valuation technique such as discounted cash flow analysis.
Determining the fair value of financial investments when the markets are not active
The Group holds certain financial investments for which the markets are not active. These comprise financial investments which are not quoted in active markets and include loans secured by residential mortgages, derivatives and other financial investments for which markets are not active. When the markets are not active, there is generally no or limited observable market data that can be used in the fair value measurement of the financial investments. The determination of whether an active market exists for a financial investment requires management's judgement.
If the market for a financial investment of the Group is not active, the fair value is determined using valuation techniques. The Group establishes fair value for these financial investments by using quotations from independent third parties or internally developed pricing models. The valuation technique is chosen with the objective of arriving at a fair value measurement which reflects the price at which an orderly transaction would take place between market participants on the measurement date. The valuation techniques include the use of recent arm's length transactions, reference to other instruments that are substantially the same, and discounted cash flow analysis. The valuation techniques may include a number of assumptions relating to variables such as credit risk and interest rates and, for loans secured by mortgages, mortality, future expenses, voluntary redemptions and house price assumptions. Changes in assumptions relating to these variables impact the reported fair value of these financial instruments positively or negatively.
The financial investments measured at fair value are classified into the following three-level hierarchy on the basis of the lowest level of inputs that are significant to the fair value measurement of the financial investment concerned:
Level 1: Quoted price (unadjusted) in active markets for identical assets and liabilities;
Level 2: Inputs other than quoted prices included within Level 1 that are observable either directly or indirectly (i.e. derived from prices); and
Level 3: Significant inputs for the asset or liability that are not based on observable market data (unobservable inputs).
1.19 Reinsurance
Reinsurance assets
Amounts recoverable from reinsurers are measured in a consistent manner with insurance liabilities or relevant financial liabilities and are classified as reinsurance assets. If a reinsurance asset is impaired, the carrying value is reduced accordingly and that impairment loss is recognised in the Consolidated statement of comprehensive income.
Financial liabilities
Where reinsurance contracts entered into by the Group are structured to provide financing, with financing components to be repaid in future years, such amounts are classified as "reinsurance finance" and included in other financial liabilities in the Consolidated statement of financial position.
Where reinsurance contracts entered into by the Group require deposits received from reinsurers to be repaid, such amounts are classified as "deposits received from reinsurers" and included in other financial liabilities in the Consolidated statement of financial position. Where the liability carries no insurance risk, it is initially recognised at fair value at the date the deposited asset is recognised and subsequently re-measured at fair value at each balance sheet date. The resulting gain or loss is recognised in the Consolidated statement of comprehensive income. Fair value is determined as the amount payable discounted from the first date that the amount is required to be paid.
All other deposits received from reinsurers are valued in accordance with the terms of the reinsurance contracts under IFRS 4, which take into account an appropriate discount rate for the timing of expected cash flows. It should be noted that the reinsurance recoverable amount is set equal to the value of the deposit in line with the financing nature of this reinsurance and anticipating that underwriting years will eventually be recaptured. See note 28 for further information on reinsurance recaptures.
Amounts receivable/payable
Where reinsurance contracts the Group has entered into include longevity swap arrangements, such contracts are settled on a net basis and amounts receivable from or payable to the reinsurers are included in the appropriate heading under either Insurance and other receivables or Insurance and other payables.
1.20 Cash and cash equivalents
Cash and cash equivalents consist of cash at bank and in hand, deposits held at call with banks, and other short-term highly liquid investments with less than 90 days' maturity from the date of acquisition.
1.21 Equity
The difference between the proceeds received on issue of the shares, net of share issue costs, and the nominal value of the shares issued is credited to the share premium account.
Interim dividends are recognised in equity in the year in which they are paid. Final dividends are recognised when they have been approved by shareholders.
Where the Company purchases shares for the purposes of employee incentive plans, the consideration paid, net of issue costs, is deducted from equity. Upon issue or sale, any consideration received is credited to equity net of related costs.
The reserve arising on the reorganisation of the Group represents the difference in the value of the shares in the Company and the value of shares in Just Retirement Group Holdings Limited for which they were exchanged as part of the Group reorganisation in November 2013.
1.22 Insurance liabilities
Measurement
Long-term insurance liabilities arise from the Group writing Retirement Income contracts, including Defined Benefit De-risking Solutions, long-term care insurance, and whole of life and term protection insurance. Their measurement uses estimates of projected future cash flows arising from payments to policyholders plus the costs of administering them. Valuation of insurance liabilities is derived using discount rates, adjusted for default allowance, and mortality assumptions, taken from the appropriate mortality tables and adjusted to reflect actual and expected experience.
Liability adequacy test
The Group performs adequacy testing on its insurance liabilities to ensure the carrying amount is sufficient to cover the current estimate of future cash flows. Any deficiency is immediately charged to the Consolidated statement of comprehensive income.
1.23 Investment contract liabilities
Investment contracts are measured at fair value through profit or loss in accordance with IAS 39. The fair value of investment contracts is estimated using an internal model and determined on a policy-by-policy basis using a prospective valuation of future Retirement Income benefit and expense cash flows.
1.24 Loans and borrowings
Loans and borrowings are initially recognised at fair value, net of transaction costs, and subsequently amortised through profit or loss over the period to maturity at the effective rate of interest required to recognise the discounted estimated cash flows to maturity.
1.25 Other provisions
Provisions are recognised when the Group has a present legal or constructive obligation as a result of past events, it is probable that an outflow of economic benefits will be required to settle the obligation, and a reliable estimate of the amount of the obligation can be made. The amount recorded as a provision is the best estimate of the expenditure required to settle the obligation at the balance sheet date. Where the effect of the time value of money is material, the provision is the present value of the expected expenditure.
1.26 Taxation
The current tax expense is based on the taxable profits for the year, using tax rates substantively enacted at the Consolidated statement of financial position date, and after any adjustments in respect of prior years. Tax, including tax relief for losses if applicable, is allocated over profits before taxation and amounts charged or credited to components of other comprehensive income and equity as appropriate.
Provision is made for deferred tax liabilities, or credit taken for deferred tax assets, using the liability method, on all material temporary differences between the tax bases of assets and liabilities and their carrying amounts in the consolidated financial statements. The principal temporary differences arise from the revaluation of certain financial assets and liabilities, including technical provisions and other insurance items and tax losses carried forward, and include amortised transitional tax adjustments resulting from changes in tax basis.
Deferred tax assets are recognised to the extent that it is probable that future taxable profit will be available against which the temporary differences can be utilised.
2 Net investment income
Year ended Year ended
31 December 31 December
2019 2018
GBPm GBPm
======================================================= ============ ============
Interest income:
======================================================= ============ ============
Assets at fair value through profit or loss 663.0 655.2
======================================================= ============ ============
Movement in fair value:
======================================================= ============ ============
Financial assets and liabilities designated on initial
recognition at fair value through profit or loss 658.8 (447.3)
======================================================= ============ ============
Derivative financial instruments (note 27) 129.9 (65.3)
======================================================= ============ ============
Total net investment income 1,451.7 142.6
======================================================= ============ ============
3 Acquisition costs
Year ended Year ended
31 December 31 December
2019 2018
GBPm GBPm
=========================== ============ ============
Commission 14.8 19.2
=========================== ============ ============
Other acquisition expenses 20.4 33.2
=========================== ============ ============
Total acquisition costs 35.2 52.4
=========================== ============ ============
4 Other operating expenses
Year ended Year ended
31 December 31 December
2019 2018
GBPm GBPm
============================================ ============ ============
Personnel costs (note 9) 108.0 118.7
============================================ ============ ============
Investment expenses and charges 13.9 16.3
============================================ ============ ============
Depreciation of equipment 4.5 1.4
============================================ ============ ============
Operating lease rentals: land and buildings - 2.4
============================================ ============ ============
Amortisation of intangible assets 19.9 24.7
============================================ ============ ============
Impairment of property, plant and equipment 4.0 -
============================================ ============ ============
Other costs 77.5 91.3
============================================ ============ ============
Total other operating expenses 227.8 254.8
============================================ ============ ============
During the year the following services were provided by the Group's auditor at costs as detailed below:
Year ended Year ended
31 December 31 December
2019 2018
GBP000 GBP000
===================================================== ============ ============
Fees payable for the audit of the Parent Company and
consolidated accounts 250 125
===================================================== ============ ============
Fees payable for other services:
===================================================== ============ ============
The audit of the Company's subsidiaries pursuant to
legislation 950 885
===================================================== ============ ============
Corporate finance services 95 1,155
===================================================== ============ ============
Audit-related assurance services 710 653
===================================================== ============ ============
Other assurance services 218 222
===================================================== ============ ============
Auditor remuneration 2,223 3,040
===================================================== ============ ============
Audit-related assurance services mainly include fees relating to the audit of the Group's Solvency II regulatory returns. Other assurance services mainly include fees relating to review procedures in relation to the Group's interim results. Corporate finance services relate to due diligence and reporting accountant services.
5 Finance costs
Year ended Year ended
31 December 31 December
2019 2018
GBPm GBPm
====================================================== ============ ============
Interest payable on deposits received from reinsurers 139.0 159.2
====================================================== ============ ============
Interest payable on subordinated debt 44.0 39.9
====================================================== ============ ============
Other interest payable 3.7 3.7
====================================================== ============ ============
Total finance costs 186.7 202.8
====================================================== ============ ============
The interest payable on deposits received from reinsurers is as defined by the respective reinsurance treaties and calculated with reference to the risk-adjusted yield on the relevant backing asset portfolio.
6 Segmental reporting
Adjusted operating profit
The Group reports adjusted operating profit as an alternative measure of profit which is used for decision making and performance measurement. The Board believes that adjusted operating profit, which excludes effects of short-term economic and investment changes, provides a better view of the longer-term performance and development of the business and aligns with the longer-term nature of the products. The underlying operating profit represents a combination of both the profit generated from new business written in the year and profit expected to emerge from the in-force book of business based on current assumptions. Actual operating experience, where different from that assumed at the start of the year, and the impacts of changes to future operating assumptions applied in the year, are then also included in arriving at adjusted operating profit.
New business profits represent expected investment returns on financial instruments backing shareholder and policyholder funds after allowances for expected movements in liabilities and acquisition costs. Profits arising from the in-force book of business represent the expected return on surplus assets, the expected unwind of prudent reserves above best estimates for mortality, expenses, corporate bond defaults and, with respect to lifetime mortgages, no-negative equity guarantee and early redemptions.
Adjusted operating profit excludes the impairment and amortisation of goodwill and other intangible assets arising on consolidation, non-recurring and project expenditure, implementation costs for cost-saving initiatives, and investment and economic profits, since these items arise outside the normal course of business in the year. Adjusted operating profit also excludes exceptional items. Exceptional items are those items that, in the Directors' view, are required to be separately disclosed by virtue of their nature or incidence to enable a full understanding of the Group's financial performance.
Variances between actual and expected investment returns due to economic and market changes, and gains and losses on the revaluation of land and buildings (including the properties underlying the LTMs), are also disclosed outside adjusted operating profit.
Segmental analysis
The insurance segment writes insurance products for the retirement market - which include Guaranteed Income for Life Solutions, Defined Benefit De-risking Solutions, Care Plans, Flexible Pension Plans and Protection - and invests the premiums received from these contracts in debt securities, gilts, liquidity funds and Lifetime Mortgage advances.
The professional services business, HUB, is included with other corporate companies in the Other segment. This business is not currently sufficiently significant to separate from other companies' results. The Other segment also includes the Group's corporate activities that are primarily involved in managing the Group's liquidity, capital and investment activities.
The Group operates in one material geographical segment, which is the United Kingdom.
Segmental reporting and reconciliation to financial information
Year ended 31 December Year ended 31 December
2019 2018
========================================== =========================== ===========================
Insurance Other Total Insurance Other Total
GBPm GBPm GBPm GBPm GBPm GBPm
========================================== ========== ======= ====== ========== ====== =======
New business operating profit 182.0 - 182.0 243.7 - 243.7
========================================== ========== ======= ====== ========== ====== =======
In-force operating profit 82.6 1.8 84.4 69.2 2.5 71.7
========================================== ========== ======= ====== ========== ====== =======
Underlying operating profit 264.6 1.8 266.4 312.9 2.5 315.4
========================================== ========== ======= ====== ========== ====== =======
Operating experience and assumption
changes 42.2 - 42.2 (33.5) - (33.5)
========================================== ========== ======= ====== ========== ====== =======
Other Group companies' operating
results - (13.1) (13.1) - (14.6) (14.6)
========================================== ========== ======= ====== ========== ====== =======
Development expenditure (7.1) (3.2) (10.3) (6.4) (2.3) (8.7)
========================================== ========== ======= ====== ========== ====== =======
Reinsurance and financing costs (61.5) (5.1) (66.6) (45.8) (2.5) (48.3)
========================================== ========== ======= ====== ========== ====== =======
Adjusted operating profit before
tax 238.2 (19.6) 218.6 227.2 (16.9) 210.3
========================================== ========== ======= ====== ========== ====== =======
Non-recurring and project expenditure (3.8) (4.5) (8.3) (4.3) (15.3) (19.6)
========================================== ========== ======= ====== ========== ====== =======
Implementation of cost saving initiatives (13.3) (0.2) (13.5) - - -
========================================== ========== ======= ====== ========== ====== =======
Investment and economic profits/(losses) 173.7 0.1 173.8 (251.0) (1.0) (252.0)
========================================== ========== ======= ====== ========== ====== =======
Interest adjustment to reflect
IFRS accounting for Tier 1 notes
as equity 14.0 2.8 16.8 - - -
========================================== ========== ======= ====== ========== ====== =======
Profit/(loss) before amortisation
costs and tax 408.8 (21.4) 387.4 (28.1) (33.2) (61.3)
========================================== ========== ======= ====== ========== ====== =======
Amortisation costs (18.8) (24.2)
========================================== ========== ======= ====== ========== ====== =======
Profit/(loss) before tax 368.6 (85.5)
========================================== ========== ======= ====== ========== ====== =======
Segmental revenue
All net premium revenue arises from the Group's insurance segment. Net investment income of GBP1,450.2m arose from the insurance segment and GBP1.5m arose from other segments (2018: GBP141.3m and GBP1.3m respectively). Segmental fee and commission income is presented in the disaggregation of revenue from contracts with customers below.
Product information analysis
Additional analysis relating to the Group's products is presented below. The Group's products are from one material geographical segment, which is the United Kingdom. The Group's gross premiums written, as shown in the Consolidated statement of comprehensive income, is analysed by product below:
Year ended Year ended
31 December 31 December
2019 2018
GBPm GBPm
============================================== ============ ============
Defined Benefit De-risking Solutions ("DB") 1,231.3 1,314.2
============================================== ============ ============
Guaranteed Income for Life contracts ("GIfL") 615.7 786.5
============================================== ============ ============
Care Plans ("CP") 71.1 72.8
============================================== ============ ============
Protection 2.9 3.4
============================================== ============ ============
Gross premiums written 1,921.0 2,176.9
============================================== ============ ============
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:
Year ended Year ended
31 December 31 December
2019 2018
GBPm GBPm
=================== ============ ============
Drawdown 26.7 51.0
=================== ============ ============
LTM loans advanced 415.8 602.1
=================== ============ ============
Reconciliation of gross premiums written to Retirement Income sales
Year ended Year ended
31 December 31 December
2019 2018
GBPm GBPm
========================================================= ============ ============
Gross premiums written 1,921.0 2,176.9
========================================================= ============ ============
Protection sales not included in Retirement Income sales (2.9) (3.4)
========================================================= ============ ============
Retirement Income sales 1,918.1 2,173.5
========================================================= ============ ============
Disaggregation of revenue from contracts with customers
Year ended 31 December Year ended 31 December
2019 2018
====================================== =========================== ===========================
Insurance Other Total Insurance Other Total
GBPm GBPm GBPm GBPm GBPm GBPm
====================================== =========== ====== ====== =========== ====== ======
Product/service
====================================== =========== ====== ====== =========== ====== ======
LTM set-up fees 0.2 - 0.2 0.5 - 0.5
====================================== =========== ====== ====== =========== ====== ======
LTM commission and advice fees - 1.7 1.7 - 1.7 1.7
====================================== =========== ====== ====== =========== ====== ======
GIfL commission - 4.4 4.4 - 1.8 1.8
====================================== =========== ====== ====== =========== ====== ======
FPP fees 0.7 0.2 0.9 0.6 0.1 0.7
====================================== =========== ====== ====== =========== ====== ======
DB fees 0.6 - 0.6 - - -
====================================== =========== ====== ====== =========== ====== ======
Other 0.5 4.4 4.9 0.4 3.1 3.5
====================================== =========== ====== ====== =========== ====== ======
2.0 10.7 12.7 1.5 6.7 8.2
====================================== =========== ====== ====== =========== ====== ======
Timing of revenue recognition
====================================== =========== ====== ====== =========== ====== ======
Products transferred at point
in time 1.3 10.3 11.6 0.9 6.4 7.3
====================================== =========== ====== ====== =========== ====== ======
Products and services transferred
over time 0.7 0.4 1.1 0.6 0.3 0.9
====================================== =========== ====== ====== =========== ====== ======
Revenue from contracts with customers 2.0 10.7 12.7 1.5 6.7 8.2
====================================== =========== ====== ====== =========== ====== ======
All revenue from contracts with customers is from the UK.
7 Income tax
Income tax recognised in profit or loss
Year ended Year ended
31 December 31 December
2019 2018
GBPm GBPm
================================================== ============ ============
Current taxation
================================================== ============ ============
Current year 67.9 (9.8)
================================================== ============ ============
Adjustments in respect of prior periods (2.9) 2.1
================================================== ============ ============
Total current tax 65.0 (7.7)
================================================== ============ ============
Deferred taxation
================================================== ============ ============
Origination and reversal of temporary differences 1.8 (12.9)
================================================== ============ ============
Adjustments in respect of prior periods (0.5) (0.9)
================================================== ============ ============
Rate change (0.1) 0.3
================================================== ============ ============
Total deferred tax 1.2 (13.5)
================================================== ============ ============
Total income tax recognised in profit or loss 66.2 (21.2)
================================================== ============ ============
Changes to the UK corporation tax rates reducing the main rate to 17% from 1 April 2020 were substantively enacted on 6 September 2016. This change will reduce the Group's future tax charge accordingly. Deferred taxes have been measured using the enacted tax rates at the balance sheet date.
The deferred tax assets and liabilities at 31 December 2019 have been calculated based on the rate at which they are expected to reverse.
Reconciliation of total income tax to the applicable tax rate
Year ended Year ended
31 December 31 December
2019 2018
GBPm GBPm
================================================ ============ ============
Profit/(loss) on ordinary activities before tax 368.6 (85.5)
================================================ ============ ============
Income tax at 19% (2018: 19%) 70.0 (16.2)
================================================ ============ ============
Effects of:
================================================ ============ ============
Expenses not deductible for tax purposes 1.1 1.0
================================================ ============ ============
Rate change (0.2) 0.1
================================================ ============ ============
Higher rate for overseas income (0.3) (0.3)
================================================ ============ ============
Unrecognised deferred tax asset 1.8 1.3
================================================ ============ ============
Losses utilised/carried back - (0.1)
================================================ ============ ============
Adjustments in respect of prior periods (3.4) 1.2
================================================ ============ ============
Deferred tax not previously recognised - (9.1)
================================================ ============ ============
Relief on Tier 1 interest included in equity (3.2) -
================================================ ============ ============
Other 0.4 0.9
================================================ ============ ============
Total income tax recognised in profit or loss 66.2 (21.2)
================================================ ============ ============
Income tax recognised in other comprehensive income
Year ended Year ended
31 December 31 December
2019 2018
GBPm GBPm
========================================================== ============ ============
Deferred taxation
========================================================== ============ ============
Revaluation of land and buildings - 0.9
========================================================== ============ ============
Total deferred tax - 0.9
========================================================== ============ ============
Total income tax recognised in other comprehensive income - 0.9
========================================================== ============ ============
The tax adjustments in respect of prior periods represent agreements with HMRC in respect of prior years' enquiries.
Taxation of life insurance companies was fundamentally changed following the publication of the Finance Act 2012. Since 1 January 2013, life insurance tax has been based on financial statements; prior to this date, the basis for profits chargeable to corporation tax was surplus arising within the Pillar 1 regulatory regime. Cumulative differences arising between the two bases, which represent the differences in retained profits and taxable surplus which are not excluded items for taxation, are brought back into the computation of taxable profits. However, legislation provides for transitional arrangements whereby such differences are amortised on a straight-line basis over a ten year period from 1 January 2013. Similarly, the resulting cumulative transitional adjustments for tax purposes in adoption of IFRS will be amortised on a straight-line basis over a ten year period from 1 January 2016. The tax charge for the year to 31 December 2019 includes profits chargeable to corporation tax arising from amortisation of transitional balances of GBP2.5m (2018: GBP2.5m).
Tax balances included within these financial statements include the use of estimates and assumptions which are based on management's best knowledge of current circumstances and future events and actions. This includes the determination of tax liabilities and recoverables for uncertain tax positions. The actual outcome may differ from the estimated position.
8 Remuneration of Directors
Information concerning individual Directors' emoluments, interests and transactions is given in the Directors' Remuneration Report. For the purposes of the disclosure required by Schedule 5 to the Companies Act 2006, the total aggregate emoluments of the Directors in the year was GBP2.7m (2018: GBP4.4m). Employer contributions to pensions for Executive Directors for qualifying periods were GBPnil (2018: GBPnil). The aggregate net value of share awards granted to the Directors in the year was GBP1.1m (2018: GBP2.7m). The net value has been calculated by reference to the closing middle-market price of an ordinary share at the date of grant. Two Directors exercised share options during the year with an aggregate gain of GBP0.3m (2018: two Directors exercised options with an aggregate gain of GBP5k).
9 Staff numbers and costs
The average number of persons employed by the Group (including Directors) during the financial year, analysed by category, was as follows:
Year ended Year ended
31 December 31 December
2019 2018
Number Number
======================== ============ ============
Directors 7 9
======================== ============ ============
Senior management 118 120
======================== ============ ============
Staff 955 1,007
======================== ============ ============
Average number of staff 1,080 1,136
======================== ============ ============
The aggregate personnel costs were as follows:
Year ended Year ended
31 December 31 December
2019 2018
GBPm GBPm
============================ ============ ============
Wages and salaries 89.7 96.6
============================ ============ ============
Social security costs 8.9 9.0
============================ ============ ============
Other pension costs 4.2 4.3
============================ ============ ============
Share-based payment expense 5.2 8.8
============================ ============ ============
Total personnel costs 108.0 118.7
============================ ============ ============
The Company does not have any employees.
10 Employee benefits
Defined contribution pension scheme
The Group operates a defined contribution pension scheme. The pension cost charge for the year represents contributions payable to the fund and amounted to GBP4.2m (2018: GBP4.3m).
Employee share plans
The Group operates a number of employee share option and share award plans. Details of those plans are as follows:
Share options
Just Retirement Group plc 2013 Long Term Incentive Plan ("LTIP")
The Group has made awards under the LTIP to Executive Directors and other senior managers. Awards are made in the form of nil-cost options which become exercisable on the third anniversary of the grant date, subject to the satisfaction of service and performance conditions set out in the Directors' Remuneration Report. Options are exercisable until the tenth anniversary of the grant date. Options granted since 2018 are subject to a two year holding period after the options have been exercised.
The options are accounted for as equity-settled schemes.
The number and weighted-average remaining contractual life of outstanding options under the LTIP are as follows:
Year ended Year ended
31 December 31 December
2019 2018
Number Number
of options of options
==================================================== ============ ============
Outstanding at 1 January 17,595,308 15,736,774
==================================================== ============ ============
Granted 4,755,178 4,498,115
==================================================== ============ ============
Forfeited (2,402,172) (23,303)
==================================================== ============ ============
Exercised (2,567,282) (357,912)
==================================================== ============ ============
Expired (2,184,689) (2,258,366)
==================================================== ============ ============
Outstanding at 31 December 15,196,343 17,595,308
==================================================== ============ ============
Exercisable at 31 December 3,255,678 3,203,315
==================================================== ============ ============
Weighted-average share price at exercise (GBP) 0.54 1.11
==================================================== ============ ============
Weighted-average remaining contractual life (years) 1.15 1.13
==================================================== ============ ============
The exercise price for options granted under the LTIP is nil.
During the year to 31 December 2019, awards of LTIPs were made on 16 May 2019. The weighted-average fair value and assumptions used to determine the fair value of options granted during the year under the LTIP are as follows:
Fair value at grant date GBP0.51 ========================================== =================================== Option pricing models used Black-Scholes, Stochastic, Finnerty ========================================== =================================== Share price at grant date GBP0.60 ========================================== =================================== Exercise price Nil ========================================== =================================== Expected volatility - TSR performance 40.03% ========================================== =================================== Expected volatility - holding period 43.48% ========================================== =================================== Option life 2-3 years + 2 year holding period ========================================== =================================== Dividends Nil ========================================== =================================== Risk-free interest rate - TSR performance 0.70% ========================================== =================================== Risk-free interest rate - holding period 0.81% ========================================== ===================================
A Black-Scholes option pricing model is used where vesting is related to an earnings per share target, a Stochastic model is used where vesting is related to a total shareholder return target, and a Finnerty model is used to model the holding period.
Deferred share bonus plan ("DSBP")
The DSBP is operated in conjunction with the Group's short-term incentive plan for Executive Directors and other senior managers of the Company or any of its subsidiaries, as explained in the Directors' Remuneration Report. Awards are made in the form of nil-cost options which become exercisable on the third anniversary, and until the tenth anniversary, of the grant date.
The options are accounted for as equity-settled schemes.
The number and weighted-average remaining contractual life of outstanding options under the DSBP are as follows:
Year ended Year ended
31 December 31 December
2019 2018
Number Number
of options of options
==================================================== ============ ============
Outstanding at 1 January 3,864,558 2,959,716
==================================================== ============ ============
Granted 1,635,528 925,734
==================================================== ============ ============
Forfeited (503,412) -
==================================================== ============ ============
Exercised (708,981) (20,892)
==================================================== ============ ============
Outstanding at 31 December 4,287,693 3,864,558
==================================================== ============ ============
Exercisable at 31 December 1,656,365 1,641,831
==================================================== ============ ============
Weighted-average share price at exercise (GBP) 0.60 0.74
==================================================== ============ ============
Weighted-average remaining contractual life (years) 0.94 1.02
==================================================== ============ ============
The exercise price for options granted under the DSBP is nil.
During the year to 31 December 2019, awards of DSBPs were made on 28 March 2019. The weighted-average fair value and assumptions used to determine the fair value of options granted during the year under the DSBP are as follows:
Fair value at grant date GBP0.62 ========================= ============= Option pricing model used Black-Scholes ========================= ============= Share price at grant date GBP0.62 ========================= ============= Exercise price Nil ========================= ============= Expected volatility Nil ========================= ============= Option life 3 years ========================= ============= Dividends Nil ========================= ============= Risk-free interest rate Nil ========================= =============
Save As You Earn ("SAYE") scheme
The Group operates SAYE plans for all employees, allowing a monthly amount to be saved from salaries over either a three or five year period which can be used to purchase shares in the Company at a predetermined price. The employee must remain in employment for the duration of the saving period and satisfy the monthly savings requirement (except in "good leaver" circumstances). Options are exercisable for up to six months after the saving period.
The options are accounted for as equity-settled schemes.
The number, weighted-average exercise price, weighted-average share price at exercise, and weighted-average remaining contractual life of outstanding options under the SAYE are as follows:
Year ended 31 December Year ended 31 December
2019 2018
========================================= ============================= =============================
Weighted-average Weighted-average
exercise exercise
Number price Number price
of options GBP of options GBP
========================================= =========== ================ =========== ================
Outstanding at 1 January 4,556,383 1.12 4,401,381 1.12
========================================= =========== ================ =========== ================
Granted 10,313,555 0.52 1,544,255 1.18
========================================= =========== ================ =========== ================
Forfeited (366,991) 0.74 (348,098) 1.13
========================================= =========== ================ =========== ================
Cancelled (4,146,082) 0.99 (632,207) 1.13
========================================= =========== ================ =========== ================
Exercised - - (285,347) 1.24
========================================= =========== ================ =========== ================
Expired (403,677) 1.20 (123,601) 1.25
========================================= =========== ================ =========== ================
Outstanding at 31 December 9,953,188 0.56 4,556,383 1.12
========================================= =========== ================ =========== ================
Exercisable at 31 December 189,815 0.73 69,981 1.36
========================================= =========== ================ =========== ================
Weighted-average share price at exercise - 1.42
========================================= =========== ================ =========== ================
Weighted-average remaining contractual
life (years) 2.61 2.01
========================================= =========== ================ =========== ================
The range of exercise prices of options outstanding at the end of the year are as follows:
2018
2019 Number
Number of
of options options
outstanding outstanding
======== ============ ============
GBP0.52 9,242,042 -
======== ============ ============
GBP1.07 387,498 2,581,382
======== ============ ============
GBP1.13 36,135 81,640
======== ============ ============
GBP1.18 268,604 1,335,184
======== ============ ============
GBP1.20 - 445,922
======== ============ ============
GBP1.27 12,791 61,973
======== ============ ============
GBP1.47 6,118 50,282
======== ============ ============
Total 9,953,188 4,556,383
======== ============ ============
During the year to 31 December 2019, awards of SAYEs were made on 8 May 2019. The weighted-average fair value and assumptions used to determine the fair value of options granted during the year under the SAYE are as follows:
Fair value at grant date GBP0.26 ======================================== ================== Option pricing model used Black-Scholes ======================================== ================== Share price at grant date GBP0.66 ======================================== ================== Exercise price GBP0.52 ======================================== ================== Expected volatility - 3 year scheme 44.64% ======================================== ================== Expected volatility - 5 year scheme 40.56% ======================================== ================== Option life 3.32 or 5.32 years ======================================== ================== Dividends Nil ======================================== ================== Risk-free interest rate - 3 year scheme 0.74% ======================================== ================== Risk-free interest rate - 5 year scheme 0.84% ======================================== ================== Saving forfeit discounts 5% ======================================== ==================
Share-based payment expense
The share-based payment expense recognised in the Consolidated statement of comprehensive income for employee services receivable during the year is as follows:
Year ended Year ended
31 December 31 December
2019 2018
GBPm GBPm
======================= ============ ============
Equity-settled schemes 5.2 8.8
======================= ============ ============
Total expense 5.2 8.8
======================= ============ ============
11 Earnings per share
The calculation of basic and diluted earnings per share is based on dividing the profit or loss attributable to equity holders of the Company by the weighted-average number of ordinary shares outstanding, and by the diluted weighted-average number of ordinary shares potentially outstanding at the end of the year. The weighted-average number of ordinary shares excludes shares held by the Employee Benefit Trust on behalf of the Company to satisfy future exercises of employee share scheme awards.
Year ended 31 December Year ended 31 December
2019 2018
================================ ================================ ================================
Weighted Weighted
average average
number Earnings number Earnings
Earnings of shares per share Earnings of shares per share
GBPm million pence GBPm million pence
================================ ======== ========== ========== ======== ========== ==========
Profit attributable to equity
holders of Just Group plc 302.6 (63.7)
================================ ======== ========== ========== ======== ========== ==========
Coupon payments in respect of
Tier 1 notes (net of tax) (16.8) -
================================ ======== ========== ========== ======== ========== ==========
Profit attributable to ordinary
equity holders of Just Group
plc (Basic)(1) 285.8 1,007.5 28.37 (63.7) 932.7 (6.83)
================================ ======== ========== ========== ======== ========== ==========
Effect of potentially dilutive
share options - 13.1 (0.37) - - -
================================ ======== ========== ========== ======== ========== ==========
Diluted 285.8 1,020.6 28.00 (63.7) 932.7 (6.83) ================================ ======== ========== ========== ======== ========== ==========
1 The weighted-average number of share options in 2018 that could potentially dilute basic earnings per share in the future but are not included in diluted EPS because they would be antidilutive was 12.9 million share options.
12 Dividends
Dividends paid in the year were as follows:
Year ended Year ended
31 December 31 December
2019 2018
GBPm GBPm
======================================================== ============ ============
Final dividend:
======================================================== ============ ============
- in respect of the year ended 31 December 2017 (2.55
pence per share, paid on 25 May 2018) - 23.8
======================================================== ============ ============
Dividends paid on the vesting of employee share schemes 0.2 0.6
======================================================== ============ ============
Total dividends paid 0.2 24.4
======================================================== ============ ============
Coupon payments in respect of Tier 1 notes(1) 16.8 -
======================================================== ============ ============
Total distributions to equity holders in the period 17.0 24.4
======================================================== ============ ============
1 Coupon payments on Tier 1 notes issued in March 2019 are treated as an appropriation of retained profits and, accordingly, are accounted for when paid.
The Board considers it appropriate not to pay a final year dividend for 2019 (2018: nil)
13 Intangible assets
Year ended 31 December Present PrognoSys(TM)
2019 value and other
of in-force Distribution intellectual
Goodwill business network Brand property Software Leases Total
GBPm GBPm GBPm GBPm GBPm GBPm GBPm GBPm
============================ ======== ============ ============ ===== ============= ======== ====== =======
Cost
============================ ======== ============ ============ ===== ============= ======== ====== =======
At 1 January 2019 34.9 200.0 26.6 5.6 7.9 26.1 2.0 303.1
============================ ======== ============ ============ ===== ============= ======== ====== =======
Additions - - - - - 3.3 - 3.3
============================ ======== ============ ============ ===== ============= ======== ====== =======
At 31 December 2019 34.9 200.0 26.6 5.6 7.9 29.4 2.0 306.4
============================ ======== ============ ============ ===== ============= ======== ====== =======
Amortisation and impairment
============================ ======== ============ ============ ===== ============= ======== ====== =======
At 1 January 2019 (0.8) (71.9) (25.7) (5.6) (2.0) (24.1) (2.0) (132.1)
============================ ======== ============ ============ ===== ============= ======== ====== =======
Charge for the year - (17.8) (0.9) - (0.6) (0.6) - (19.9)
============================ ======== ============ ============ ===== ============= ======== ====== =======
At 31 December 2019 (0.8) (89.7) (26.6) (5.6) (2.6) (24.7) (2.0) (152.0)
============================ ======== ============ ============ ===== ============= ======== ====== =======
Net book value at 31
December 2019 34.1 110.3 - - 5.3 4.7 - 154.4
============================ ======== ============ ============ ===== ============= ======== ====== =======
Net book value at 31
December 2018 34.1 128.1 0.9 - 5.9 2.0 - 171.0
============================ ======== ============ ============ ===== ============= ======== ====== =======
Present PrognoSys(TM)
value and other
of in-force Distribution intellectual
Year ended 31 December Goodwill business network Brand property Software Leases Total
2018 GBPm GBPm GBPm GBPm GBPm GBPm GBPm GBPm
============================ ======== ============ ============ ===== ============= ======== ====== =======
Cost
============================ ======== ============ ============ ===== ============= ======== ====== =======
At 1 January 2018 33.9 200.0 26.6 5.6 7.4 25.4 2.0 300.9
============================ ======== ============ ============ ===== ============= ======== ====== =======
Additions 1.0 - - - 0.5 0.7 - 2.2
============================ ======== ============ ============ ===== ============= ======== ====== =======
At 31 December 2018 34.9 200.0 26.6 5.6 7.9 26.1 2.0 303.1
============================ ======== ============ ============ ===== ============= ======== ====== =======
Amortisation and impairment
============================ ======== ============ ============ ===== ============= ======== ====== =======
At 1 January 2018 (0.8) (54.0) (22.4) (5.6) (1.4) (21.2) (2.0) (107.4)
============================ ======== ============ ============ ===== ============= ======== ====== =======
Charge for the year - (17.9) (3.3) - (0.6) (2.9) - (24.7)
============================ ======== ============ ============ ===== ============= ======== ====== =======
At 31 December 2018 (0.8) (71.9) (25.7) (5.6) (2.0) (24.1) (2.0) (132.1)
============================ ======== ============ ============ ===== ============= ======== ====== =======
Net book value at 31
December 2018 34.1 128.1 0.9 - 5.9 2.0 - 171.0
============================ ======== ============ ============ ===== ============= ======== ====== =======
Net book value at 31
December 2017 33.1 146.0 4.2 - 6.0 4.2 - 193.5
============================ ======== ============ ============ ===== ============= ======== ====== =======
Amortisation and impairment charge
The amortisation and impairment charge is recognised in other operating expenses in profit or loss.
Impairment testing
Goodwill is tested for impairment in accordance with IAS 36, Impairment of Assets, at least annually.
The Group's goodwill of GBP34.1m at 31 December 2019 represents GBP1.0m recognised on the 2018 acquisition of Corinthian Group Limited, GBP0.3m recognised on the 2016 acquisition of the Partnership Assurance Group and GBP32.8m on the 2009 acquisition by Just Retirement Group Holdings Limited of Just Retirement (Holdings) Limited, the holding company of Just Retirement Limited ("JRL").
The existing goodwill has been allocated to the insurance segment as the cash-generating unit. The recoverable amounts of goodwill have been determined from value-in-use. The key assumptions of this calculation are noted below:
2019 2018
======================================================== ======= =======
Period on which management approved forecasts are based 5 years 5 years
======================================================== ======= =======
Discount rate (pre-tax) 10.3% 10.0%
======================================================== ======= =======
The value-in-use of the insurance operating segment is considered by reference to latest business plans over the next five years, which reflect management's best estimate of future profits based on historical experience, expected growth rates and assumptions around market share, customer numbers, expense inflation and mortality rates. A stressed scenario that assumes no growth in sales for the next five years and discount rate of 20% is also considered. The outcome of the impairment assessment under both scenarios is that the goodwill in respect of the insurance operating segment is not impaired and that the value-in-use is higher than the carrying value of goodwill and net assets.
Any reasonably possible changes in assumption will not cause the carrying value of the goodwill to exceed the recoverable amounts.
14 Property, plant and equipment
Freehold
land and Computer Furniture Right-of-use
buildings equipment and fittings assets Total
Year ended 31 December 2019 GBPm GBPm GBPm GBPm GBPm
=================================== ========== ========== ============= ============ ======
Cost or valuation
=================================== ========== ========== ============= ============ ======
At 1 January 2019 17.9 6.8 5.7 - 30.4
=================================== ========== ========== ============= ============ ======
Recognition of right-of-use assets
on initial application of IFRS 16 - - - 9.6 9.6
=================================== ========== ========== ============= ============ ======
Adjusted balance at 1 January 2019 17.9 6.8 5.7 9.6 40.0
=================================== ========== ========== ============= ============ ======
Acquired during the year - 0.9 0.5 5.7 7.1
=================================== ========== ========== ============= ============ ======
Disposal cost - - - (3.4) (3.4)
=================================== ========== ========== ============= ============ ======
At 31 December 2019 17.9 7.7 6.2 11.9 43.7
=================================== ========== ========== ============= ============ ======
Depreciation and impairment
=================================== ========== ========== ============= ============ ======
At 1 January 2019 (0.1) (5.6) (3.3) - (9.0)
=================================== ========== ========== ============= ============ ======
Disposal - - - 0.6 0.6
=================================== ========== ========== ============= ============ ======
Impairment - - (1.9) (2.1) (4.0)
=================================== ========== ========== ============= ============ ======
Depreciation charge of the year (0.6) (0.6) (0.5) (2.8) (4.5)
=================================== ========== ========== ============= ============ ======
At 31 December 2019 (0.7) (6.2) (5.7) (4.3) (16.9)
=================================== ========== ========== ============= ============ ======
Net book value at 31 December 2019 17.2 1.5 0.5 7.6 26.8
=================================== ========== ========== ============= ============ ======
Net book value at 31 December 2018 17.8 1.2 2.4 - 21.4
=================================== ========== ========== ============= ============ ======
Freehold
land and Computer Furniture Right-of-use
buildings equipment and fittings assets Total
Year ended 31 December 2018 GBPm GBPm GBPm GBPm GBPm
=================================== ========== ========== ============= ============ =====
Cost or valuation
=================================== ========== ========== ============= ============ =====
At 1 January 2018 16.6 6.0 5.7 - 28.3
=================================== ========== ========== ============= ============ =====
Acquired during the year - 0.8 - - 0.8
=================================== ========== ========== ============= ============ =====
Disposed of during the year 1.3 - - - 1.3
=================================== ========== ========== ============= ============ =====
At 31 December 2018 17.9 6.8 5.7 - 30.4
=================================== ========== ========== ============= ============ =====
Depreciation -
=================================== ========== ========== ============= ============ =====
At 1 January 2018 (0.7) (5.1) (2.9) - (8.7)
=================================== ========== ========== ============= ============ =====
Eliminated on revaluation 1.1 - - - 1.1
=================================== ========== ========== ============= ============ =====
Charge for the year (0.5) (0.5) (0.4) - (1.4)
=================================== ========== ========== ============= ============ =====
At 31 December 2018 (0.1) (5.6) (3.3) - (9.0)
=================================== ========== ========== ============= ============ =====
Net book value at 31 December 2018 17.8 1.2 2.4 - 21.4
=================================== ========== ========== ============= ============ =====
Net book value at 31 December 2017 15.9 0.9 2.8 - 19.6
=================================== ========== ========== ============= ============ =====
Included in freehold land and buildings is land of value GBP4.4m (2018: GBP4.4m).
The Company's freehold land and buildings are stated at their revalued amounts, being the fair value at the date of revaluation less any subsequent accumulated depreciation and subsequent accumulated impairment losses. The fair value measurements of the Company's freehold land and buildings as at 15 November 2018 were performed by Hurst Warne & Partners Surveyors Ltd, independent valuers not related to the Company. Hurst Warne & Partners Surveyors Ltd is registered for regulation by the Royal Institution of Chartered Surveyors ("RICS"). The valuation was undertaken by a RICS registered valuer. The valuer has sufficient current local knowledge of the particular market, and the knowledge, skills and understanding to undertake the valuation competently. The fair value of the freehold land was undertaken using a residual valuation assuming a new build office on each site to an exact equivalent size as currently and disregarding the possibility of developing any alternative uses or possible enhancements. The fair value of the buildings was determined based on open market comparable evidence of market rent. The fair value measurement of revalued land and buildings has been categorised as Level 3 within the fair value hierarchy based on the non-observable inputs to the valuation technique used.
Revaluations during 2018 comprise a loss of GBP2.9m recognised in profit or loss, a gain of GBP5.3m recognised in other comprehensive income (gross of tax of GBP0.9m), and the elimination of depreciation on the revaluations of GBP1.1m.
Right-of-use assets are property assets leased by the Group (see note 25). Impairments arising in the year relate to onerous property leases resulting from the Group's rationalisation of its office locations.
15 Financial investments
All of the Group's financial investments are measured at fair value through the profit or loss, and are either designated as such on initial recognition or, in the case of derivative financial assets, classified as held for trading.
Fair value Cost
=================================================== ================== ==================
2019 2018 2019 2018
GBPm GBPm GBPm GBPm
=================================================== ======== ======== ======== ========
Units in liquidity funds 1,384.0 882.5 1,384.0 882.5
=================================================== ======== ======== ======== ========
Investment funds 137.3 182.0 137.2 182.8
=================================================== ======== ======== ======== ========
Debt securities and other fixed income securities 10,387.8 9,518.3 9,696.8 8,858.5
=================================================== ======== ======== ======== ========
Deposits with credit institutions 104.6 153.4 104.6 153.4
=================================================== ======== ======== ======== ========
Derivative financial assets 237.0 81.2 - -
=================================================== ======== ======== ======== ========
Loans secured by residential mortgages 7,980.5 7,191.5 4,778.3 4,847.6
=================================================== ======== ======== ======== ========
Loans secured by commercial mortgages 494.5 392.3 477.8 385.9
=================================================== ======== ======== ======== ========
Other loans 880.3 749.1 795.0 711.8
=================================================== ======== ======== ======== ========
Recoveries from reinsurers on investment contracts - 102.2 - 101.2
=================================================== ======== ======== ======== ======== Total 21,606.0 19,252.5 17,373.7 16,123.7 =================================================== ======== ======== ======== ========
The majority of investments included in debt securities and other fixed income securities are listed investments.
Units in liquidity funds comprise wholly of units in funds which invest in cash and cash equivalents.
Deposits with credit institutions with a carrying value of GBP103.1m (2018: GBP152.6m) have been pledged as collateral in respect of the Group's derivative financial instruments. Amounts pledged as collateral are deposited with the derivative counterparty.
16 FAIR VALUE
(a) Determination of fair value and fair value hierarchy
All assets and liabilities for which fair value is measured or disclosed in the financial statements are categorised within the fair value hierarchy described as follows, based on the lowest level input that is significant to the fair value measurement as a whole.
Level 1
Inputs to Level 1 fair values are unadjusted quoted prices in active markets for identical assets and liabilities that the entity can access at the measurement date.
Level 2
Inputs to Level 2 fair values are inputs other than quoted prices included within Level 1 that are observable for the asset or liability, either directly or indirectly. If the asset or liability has a specified (contractual) term, a Level 2 input must be observable for substantially the full term of the instrument. Level 2 inputs include the following:
-- quoted prices for similar assets and liabilities in active markets;
-- quoted prices for identical assets or similar assets in markets that are not active, the prices are not current, or price quotations vary substantially either over time or among market makers, or in which very little information is released publicly;
-- inputs other than quoted prices that are observable for the asset or liability; and -- market-corroborated inputs.
Where the Group uses broker/asset manager quotes and no information as to observability of inputs is provided by the broker/asset manager, the investments are classified as follows:
-- where the broker/asset manager price is validated by using internal models with market-observable inputs and the values are similar, the investment is classified as Level 2; and
-- in circumstances where internal models are not used to validate broker/asset manager prices, or the observability of inputs used by brokers/asset managers is unavailable, the investment is classified as Level 3.
The majority of the Group's debt securities held at fair value and financial derivatives are valued using independent pricing services or third party broker quotes, and therefore classified as Level 2.
Level 3
Inputs to Level 3 fair values are unobservable inputs for the asset or liability. Unobservable inputs may have been used to measure fair value to the extent that observable inputs are not available, thereby allowing for situations in which there is little, if any, market activity for the asset or liability at the measurement date. However, the fair value measurement objective remains the same, i.e. an exit price at the measurement date from the perspective of a market participant that holds the asset or owes the liability. Unobservable inputs reflect the same assumptions as those that the market participant would use in pricing the asset or liability.
The Group's assets and liabilities held at fair value which are valued using valuation techniques for which significant observable market data is not available and classified as Level 3 include loans secured by mortgages, asset-backed securities, investment contract liabilities, and deposits received from reinsurers. There are no non-recurring fair value measurements as at 31 December 2019 (2018: nil).
(b) Analysis of assets and liabilities held at fair value according to fair value hierarchy
2019 2018
============================= ==================================== ===================================
Level Level Level Level Level Level
1 2 3 Total 1 2 3 Total
GBPm GBPm GBPm GBPm GBPm GBPm GBPm GBPm
============================= ======= ======= ======== ======== ======= ======= ======= ========
Assets held at fair
value
============================= ======= ======= ======== ======== ======= ======= ======= ========
Units in liquidity
funds 1,378.0 6.0 - 1,384.0 877.7 4.8 - 882.5
============================= ======= ======= ======== ======== ======= ======= ======= ========
Investment funds - 25.5 111.8 137.3 - 112.2 69.8 182.0
============================= ======= ======= ======== ======== ======= ======= ======= ========
Debt securities and
other fixed income
securities 984.5 8,674.1 729.2 10,387.8 918.0 7,984.3 616.0 9,518.3
============================= ======= ======= ======== ======== ======= ======= ======= ========
Deposits with credit
institutions 103.1 1.5 - 104.6 152.6 0.8 - 153.4
============================= ======= ======= ======== ======== ======= ======= ======= ========
Derivative financial
assets - 233.0 4.0 237.0 1.8 79.4 - 81.2
============================= ======= ======= ======== ======== ======= ======= ======= ========
Loans secured by residential
mortgages - - 7,980.5 7,980.5 - - 7,191.5 7,191.5
============================= ======= ======= ======== ======== ======= ======= ======= ========
Loans secured by commercial
mortgages - - 494.5 494.5 - - 392.3 392.3
============================= ======= ======= ======== ======== ======= ======= ======= ========
Other loans 4.1 40.3 835.9 880.3 - 25.9 723.2 749.1
============================= ======= ======= ======== ======== ======= ======= ======= ========
Recoveries from reinsurers
on investment contracts - - - - - - 102.2 102.2
============================= ======= ======= ======== ======== ======= ======= ======= ========
Total 2,469.7 8,980.4 10,155.9 21,606.0 1,950.1 8,207.4 9,095.0 19,252.5
============================= ======= ======= ======== ======== ======= ======= ======= ========
Liabilities held at
fair value
============================= ======= ======= ======== ======== ======= ======= ======= ========
Investment contract
liabilities - - 54.0 54.0 - - 197.8 197.8
============================= ======= ======= ======== ======== ======= ======= ======= ========
Derivative financial
liabilities - 248.4 - 248.4 - 178.3 - 178.3
============================= ======= ======= ======== ======== ======= ======= ======= ========
Obligations for repayment
of cash collateral
received 62.8 - - 62.8 3.2 0.2 - 3.4
============================= ======= ======= ======== ======== ======= ======= ======= ========
Deposits received
from reinsurers - - 2,417.7 2,417.7 - - 2,443.5 2,443.5
============================= ======= ======= ======== ======== ======= ======= ======= ========
Other financial liabilities 62.8 248.4 2,471.7 2,782.9
============================= ======= ======= ======== ======== ======= ======= ======= ========
Loans and borrowings
at amortised cost - 998.2 - 998.2 - 618.1 - 618.1
============================= ======= ======= ======== ======== ======= ======= ======= ========
Total 62.8 1,246.6 2,471.7 3,781.1 3.2 796.6 2,641.3 3,441.1
============================= ======= ======= ======== ======== ======= ======= ======= ========
(c) Transfers between levels
The Group's policy is to assess pricing source changes and determine transfers between levels as of the end of each half-yearly reporting period. During the year transfers from Level 2 to Level 1 were GBP570.7m (2018: GBP485.7m). Transfers from Level 2 to Level 3 include debt securities for which there is no longer observable prices and derivative financial assets for which current market values after the initial trade are not available. The transfer from Level 3 to Level 2 in the year ended 31 December 2018 followed a change in the availability of market prices for specific bonds.
(d) Level 3 assets and liabilities measured at fair value
Reconciliation of the opening and closing recorded amount of Level 3 assets and liabilities held at fair value.
Debt Recoveries
securities Loans Loans from
and other secured secured reinsurers Deposits
fixed Derivative by by on Investment received
Investment income financial residential commercial Other investment contract from
Year ended 31 funds securities assets mortgages mortgages loans contracts liabilities reinsurers
December 2019 GBPm GBPm GBPm GBPm GBPm GBPm GBPm GBPm GBPm
============================ ========== ========== ========== =========== ========== ====== ========== =========== ==========
At 1 January
2019 69.8 616.0 - 7,191.5 392.3 723.2 102.2 (197.8) (2,443.5)
============================ ========== ========== ========== =========== ========== ====== ========== =========== ==========
Purchases/advances/deposits 68.2 72.7 415.8 97.7 76.7 51.3 (26.7) (1.5)
============================ ========== ========== ========== =========== ========== ====== ========== =========== ==========
Transfers from
Level 2 - 50.4 3.3 - - - - - -
============================ ========== ========== ========== =========== ========== ====== ========== =========== ==========
Sales/redemptions/payments (26.0) (4.3) - (337.9) (5.8) (11.0) (160.4) 78.3 221.1
============================ ========== ========== ========== =========== ========== ====== ========== =========== ==========
Realised gains
and losses recognised
in profit or
loss within
net investment
income 0.1 0.3 - 102.1 - - - - -
============================ ========== ========== ========== =========== ========== ====== ========== =========== ==========
Unrealised gains
and losses recognised
in profit or
loss within
net investment
income(1) (0.3) (1.4) 0.7 338.1 9.8 47.0 6.9 - (107.3)
============================ ========== ========== ========== =========== ========== ====== ========== =========== ==========
Interest accrued - (4.5) - 270.9 0.5 - - - (86.5)
============================ ========== ========== ========== =========== ========== ====== ========== =========== ==========
Change in fair
value of liabilities
recognised in
profit or loss - - - - - - - 92.2 -
============================ ========== ========== ========== =========== ========== ====== ========== =========== ==========
At 31 December
2019 111.8 729.2 4.0 7,980.5 494.5 835.9 - (54.0) (2,417.7)
============================ ========== ========== ========== =========== ========== ====== ========== =========== ==========
1 Includes the impact of property growth experience changes, a charge of GBP33m.
Debt Recoveries
securities Loans Loans from
and other secured secured reinsurers Deposits
fixed Derivative by by on Investment received
Year ended Investment income financial residential commercial Other investment contract from
31 December funds securities assets mortgages mortgages loans contracts liabilities reinsurers
2018 GBPm GBPm GBPm GBPm GBPm GBPm GBPm GBPm GBPm
============================ ========== ========== ========== =========== ========== ===== ========== =========== ==========
At 1 January
2018 - 740.5 - 6,833.3 215.4 433.3 72.3 (220.7) (2,654.1)
============================ ========== ========== ========== =========== ========== ===== ========== =========== ==========
Purchases/advances/deposits 79.0 78.1 - 602.1 177.8 295.5 54.6 (51.0) (20.2)
============================ ========== ========== ========== =========== ========== ===== ========== =========== ==========
Transfers
to Level
2 - (158.3) - - - - - - -
============================ ========== ========== ========== =========== ========== ===== ========== =========== ==========
Sales/redemptions/payments (9.7) (26.6) - (297.2) (18.0) (4.7) (24.5) 73.5 227.7
============================ ========== ========== ========== =========== ========== ===== ========== =========== ==========
Realised
gains and
losses recognised
in profit
or loss within
net investment
income - (2.4) - 78.7 - - - - -
============================ ========== ========== ========== =========== ========== ===== ========== =========== ==========
Unrealised
gains and
losses recognised
in profit
or loss within
net investment
income(1) - (9.7) - (291.4) 27.1 (0.9) (0.2) - 92.0
============================ ========== ========== ========== =========== ========== ===== ========== =========== ==========
Interest
accrued 0.5 (5.6) - 266.0 (10.0) - - - (88.9)
============================ ========== ========== ========== =========== ========== ===== ========== =========== ==========
Change in
fair value
of liabilities
recognised
in profit
or loss - - - - - - - 0.4 -
============================ ========== ========== ========== =========== ========== ===== ========== =========== ==========
At 31 December
2018 69.8 616.0 - 7,191.5 392.3 723.2 102.2 (197.8) (2,443.5)
============================ ========== ========== ========== =========== ========== ===== ========== =========== ==========
1 Includes the impact of changes in assumptions in respect of the valuation of loans secured by residential mortgages of GBP112m, which includes GBP61m in relation to property growth assumptions and GBP51m in relation to property volatility assumptions.
For Level 1 and Level 2 assets measured at fair value, unrealised gains during the year were gains of GBP15.7m and GBP284.8m respectively (year ended 31 December 2018: losses of GBP66.3m and GBP181.0m respectively).
Investment funds
Investment funds classified as Level 3 are structured entities that operate under contractual arrangements which allow a group of investors to invest in a pool of corporate loans without any one investor having overall control of the entity.
Principal assumptions underlying the calculation of investment funds classified as Level 3
Discount rate
Discount rates are the most significant assumption applied in calculating the fair value of investment funds. The average discount rate used is 7.0%.
Sensitivity analysis
Reasonable possible alternative assumptions for unobservable inputs used in the valuation model could give rise to significant changes in the fair value of the assets. The Group has estimated the impact on fair value to changes to these inputs as follows:
Credit
Investment funds spreads
net increase/(decrease) in fair value (GBPm) +100bps
============================================== ========
2019 (3.9)
============================================== ========
2018 (3.1)
============================================== ========
Debt securities and other fixed income securities
Debt securities classified as Level 3 are either 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 bond.
Principal assumptions underlying the calculation of the debt securities and other fixed income securities classified as Level 3
Redemption and defaults
The redemption and default assumptions used in the valuation of infrastructure private placement bonds are similar to the rest of the Group's bond portfolio.
For asset-backed securities, the assumptions are that the underlying loans supporting the securities are redeemed in the future in a similar profile to the existing redemptions on an average rate of 3% per annum, and that default levels on the underlying basis remain at the current level of the Group's bond portfolio.
Sensitivity analysis
Reasonable possible alternative assumptions for unobservable inputs used in the valuation model could give rise to significant changes in the fair value of the assets. The sensitivity of the valuation of bonds to the default assumption is determined by reference to movement in credit spreads. The Group has estimated the impact on fair value to changes to these inputs as follows:
Credit
Debt securities and other fixed income securities spreads
net increase/(decrease) in fair value (GBPm) +100bps
================================================== ========
2019 (52.5)
================================================== ========
2018 (28.9)
================================================== ========
Derivative financial assets
Derivative financial assets classified as Level 3 is the put option on property index.
Principal assumptions underlying the calculation of the derivative financial assets classified as Level 3
Property prices and interest rates are the most significant assumption applied in calculating the fair value of the derivative financial assets.
Sensitivity analysis
Reasonable possible alternative assumptions for unobservable inputs used in the valuation model could give rise to significant changes in the fair value of the assets. The Group has estimated the impact on fair value to changes to these inputs as follows:
Immediate Future
property property Future
Interest price price property
Derivative financial assets rates fall growth price volatility
net increase/(decrease) in fair value (GBPm) +100bps -10% -0.5% +1%
============================================== ======== ========= ========= =================
2019 (1.9) 5.9 6.4 2.2
============================================== ======== ========= ========= =================
Loans secured by residential mortgages
Methodology and judgement underlying the calculation of loans secured by residential mortgages
The valuation of loans secured by mortgages is determined using internal models which project future cash flows expected to arise from each loan. Future cash flows allow for assumptions relating to future expenses, future mortality experience, voluntary redemptions and repayment shortfalls on redemption of the mortgages due to the no-negative equity guarantee ("NNEG"). The fair value is calculated by discounting the future cash flows at a swap rate plus a liquidity premium.
Under the NNEG, the amount recoverable by the Group on eligible termination of mortgages is generally capped at the net sale proceeds of the property. A key judgement is with regards to the calculation approach used. We have used the Black 76 variant of the Black-Scholes option pricing model in conjunction with an approach using best estimate future house price growth assumptions. There has been significant academic and market debate concerning the valuation of no negative equity guarantees in recent years, including proposals to use risk-free based methods rather than best estimate assumptions to project future house price growth. We continue to actively monitor this debate. In the absence of any widely supported alternative approach, we have continued in line with the common industry practice to value no-negative equity guarantees using best estimate assumptions.
The real world assumptions used include future property growth and future property price volatility.
Principal assumptions underlying the calculation of loans secured by residential mortgages
All gains and losses arising from loans secured by mortgages are largely dependent on the term of the mortgage, which in turn is determined by the longevity of the customer. Principal assumptions underlying the calculation of loans secured by mortgages include the following items. These assumptions are also used to provide the expected cash flows from the loans secured by residential mortgages which determine the yield on this asset. This yield is used for the purpose of setting valuation discount rates on the liabilities supported, as described in note 22(b).
Maintenance expenses
Assumptions for future policy expense levels are based on the Group's recent expense analyses. The assumed future expense levels incorporate an annual inflation rate allowance of 3.9% (2018: 4.1%).
Mortality
Mortality assumptions have been derived with reference to England & Wales population mortality using the CMI 2017 dataset and model mortality tables for both base table rates and mortality improvements (2018: CMI 2017 mortality tables for both base table rates and mortality improvements). These base mortality and improvement tables have been adjusted to reflect the expected future mortality experience of mortgage contract holders, taking into account the medical and lifestyle evidence collected during the sales process and the Group's assessment of how this experience will develop in the future. This assessment takes into consideration relevant industry and population studies, published research materials and management's own experience.
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 Office for National Statistics monthly index for the property's location. The appropriateness of this valuation basis is regularly tested on the event of redemption of mortgages.
Future property prices
In the absence of a reliable long-term forward curve for UK residential property price inflation, the Group has made an assumption about future residential property price inflation based upon available market and industry data. These assumptions have been derived with reference to the long-term expectation of the UK retail price inflation, "RPI", plus an allowance for the expectation of house price growth above RPI (property risk premium) less a margin for a combination of risks including property dilapidation and basis risk. An additional allowance is made for the volatility of future property prices. This results in a single rate of future house price growth of 3.8% (2018: 3.8%), with a volatility assumption of 13% per annum (2018: 13%). The derivation of these assumptions includes consideration of future long and short term forecasts, the Group's historical experience, benchmarking data, and future uncertainties including the possible impact of Brexit on the UK property market.
Voluntary redemptions
Assumptions for future voluntary redemption levels are based on the Group's recent analyses and external benchmarking. The assumed redemption rate varies by duration and product line between 0.5% and 4.1% for loans written by JRL (2018: 0.7% and 3.8%) and between 0.6% and 2.0% for loans written by PLACL (2018: 0.9% and 3.2%).
Liquidity premium
The liquidity premium at initial recognition is set such that the fair value of each loan is equal to the face value of the loan. The liquidity premium partly reflects the illiquidity of the loan and also spreads the recognition of profit over the lifetime of the loan. The liquidity premiums are determined at an individual loan level. Once calculated, the liquidity premium remains unchanged at future valuations except when further advances are taken out. In this situation, the single liquidity premium to apply to that loan is recalculated allowing for all advances. The average liquidity premium for loans held within JRL is 2.85% (2018: 2.75%) and for loans held within PLACL is 3.21% (2018: 3.20%). The movement over the period observed in JRL is driven by new loan originations having a higher liquidity premium than the average spread on the back book of business.
Sensitivity analysis
Reasonable possible alternative assumptions for unobservable inputs used in the valuation model could give rise to significant changes in the fair value of the assets. The Group has estimated the impact on fair value to changes to these inputs as follows:
Loans secured by residential Immediate Future Future mortgages property property property net Maintenance Base Mortality price price price Voluntary Liquidity increase/(decrease) expenses mortality improvement fall growth volatility redemptions premium in fair value (GBPm) +10% -5% +0.25% -10% -0.5% +1% +10% +10bps ==================== =========== =========== =========== ========= ========= =========== =========== ========= 2019 (6.6) 28.7 14.0 (110.4) (86.6) (57.7) (11.7) (91.5) ==================== =========== =========== =========== ========= ========= =========== =========== ========= 2018 (7.1) 22.4 10.9 (97.1) (79.4) (53.2) (15.1) (86.0) ==================== =========== =========== =========== ========= ========= =========== =========== =========
These sensitivity factors are determined via financial models. The analysis has been prepared for a change in each variable with other assumptions remaining constant. In reality such an occurrence is unlikely due to correlation between the assumptions and other factors. It should also be noted that these sensitivities are non-linear and larger or smaller impacts cannot be interpolated or extrapolated from these results.
The sensitivities above only consider the impact of the change in these assumptions on the fair value of the asset. Some of these sensitivities would also impact the yield on these assets and hence the valuation discount rates used to determine liabilities. For these sensitivities, the impact on the value of insurance liabilities and hence profit before tax is included in note 22(e).
Other limitations in the above sensitivity analysis include the use of hypothetical market movements to demonstrate potential risk that only represents the Group's view of reasonably possible near-term market changes that cannot be predicted with any certainty.
Loans secured by commercial mortgages
Principal assumption underlying the calculation of loans secured by commercial mortgages
Redemption and defaults
The redemption and default assumptions used in the valuation of loans secured by commercial mortgages are similar to the Group's bond portfolio.
Sensitivity analysis
Reasonable possible alternative assumptions for unobservable inputs used in the valuation model could give rise to significant changes in the fair value of the assets. Interest rates are the most significant assumption applied in calculating the fair value of the loans secured by commercial mortgages. The Group has estimated the impact on fair value to changes to these inputs as follows:
Interest
Loans secured by commercial mortgages rates
net increase/(decrease) in fair value (GBPm) +100bps
============================================== ========
2019 (22.9)
============================================== ========
2018 (19.8)
============================================== ========
Other loans
Other loans classified as Level 3 are infrastructure loans and commodity trade finance loans. These are valued using discounted cash flow analysis using prudent assumptions based on the repayment of the underlying loan.
Principal assumptions underlying the calculation of other loans classified as Level 3
Redemption and defaults
The redemption and default assumptions used in the valuation of Level 3 loans are similar to the Group's bond portfolio.
Sensitivity analysis
Reasonable possible alternative assumptions for unobservable inputs used in the valuation model could give rise to significant changes in the fair value of the assets. The sensitivity of the valuation of other loans to the default assumption is determined by reference to movement in credit spreads. The Group has estimated the impact on fair value to changes to these inputs as follows:
Credit
Other loans spreads
net increase/(decrease) in fair value (GBPm) +100bps
============================================== ========
2019 (75.7)
============================================== ========
2018 (73.4)
============================================== ========
Recoveries from reinsurers on investment contracts
Recoveries from reinsurers on investment contracts represent fully reinsured funds invested under the Flexible Pension Plan. During 2019 the Group closed its Flexible Pension Plan product to new business and completed the transfer of the business to an external provider.
Investment contract liabilities
These are valued using discounted cash flow analysis using prudent assumptions based on the repayment of the underlying loan.
Principal assumptions 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 4.4% (2018: 4.6%).
Sensitivity analysis
The sensitivity of fair value to changes in maintenance expense assumptions in respect of investment contract liabilities is not material.
Deposits received from reinsurers
These are measured in accordance with the reinsurance contract and taking into account an appropriate discount rate for the timing of expected cash flows of the liabilities.
Principal assumptions underlying the calculation of deposits received from reinsurers
Discount rate
The valuation model discounts the expected future cash flows using a contractual discount rate derived from the assets hypothecated to back the liabilities at a product level. The discount rates used for individual retirement and individual care annuities were 2.89% and 0.92% respectively (2018: 3.47% and 1.32% respectively).
Credit spreads
The valuation of deposits received from reinsurers includes a credit spread applied by the individual reinsurer. A credit spread of 82bps (2018: 142bps) was applied in respect of the most significant reinsurance contract.
Sensitivity analysis
Reasonable possible alternative assumptions for unobservable inputs used in the valuation model could give rise to significant changes in the fair value of the liabilities (see note 26 (b)). The Group has estimated the impact on fair value to changes to these inputs as follows:
Credit Interest
Deposits received from reinsurers spreads rates
net increase/(decrease) in fair value (GBPm) +100bps +100bps
============================================== ======== ========
2019 (81.2) (200.9)
============================================== ======== ========
2018 (75.8) (196.4)
============================================== ======== ========
17 Deferred tax
2019 2018
=================== ======================== ========================
Asset Liability Total Asset Liability Total
GBPm GBPm GBPm GBPm GBPm GBPm
=================== ===== ========= ====== ===== ========= ======
Transitional tax - (6.0) (6.0) - (8.5) (8.5)
=================== ===== ========= ====== ===== ========= ======
Intangible assets - (19.0) (19.0) - (22.1) (22.1)
=================== ===== ========= ====== ===== ========= ======
Land and buildings - (0.9) (0.9) - (0.9) (0.9)
=================== ===== ========= ====== ===== ========= ======
Other provisions 11.5 (0.4) 11.1 18.6 (0.7) 17.9
=================== ===== ========= ====== ===== ========= ======
Total deferred tax 11.5 (26.3) (14.8) 18.6 (32.2) (13.6)
=================== ===== ========= ====== ===== ========= ======
The transitional tax liability of GBP6.0m (2018: GBP8.5m) represents the adjustment arising from the change in the tax rules for life insurance companies which is amortised over ten years from 1 January 2013 and the transitional adjustments for tax purposes in adopting IFRS which is amortised over ten years from 1 January 2016.
Other provisions principally relate to temporary differences between the IFRS financial statements and tax deductions for statutory insurance liabilities.
The movement in the net deferred tax balance was as follows:
Year ended Year ended
31 December 31 December
2019 2018
GBPm GBPm
========================================= ============ ============
Net balance at 1 January (13.6) (26.2)
========================================= ============ ============
Recognised in profit or loss (1.2) 13.5
========================================= ============ ============
Recognised in other comprehensive income - (0.9)
========================================= ============ ============
Net balance at 31 December (14.8) (13.6)
========================================= ============ ============
The Group has unrecognised deferred tax assets of GBP3.9m (2018: GBP4.2m).
18 Insurance and other receivables
2019 2018
GBPm GBPm
============================================================= ===== =====
Receivables arising from insurance and reinsurance contracts 11.1 14.1
============================================================= ===== =====
Finance lease receivables 2.7 -
============================================================= ===== =====
Other receivables 11.7 4.8
============================================================= ===== =====
Total insurance and other receivables 25.5 18.9
============================================================= ===== =====
Finance lease receivables are due as follows:
2019 2018
GBPm GBPm
============================================= ===== =====
Less than one year 0.8 -
============================================= ===== =====
Between one and two years 0.8 -
============================================= ===== =====
Between two and three years 0.8 -
============================================= ===== =====
Between three and four years 0.4 -
============================================= ===== =====
Total undiscounted lease payments receivable 2.8 -
============================================= ===== =====
Unearned finance income (0.1) -
============================================= ===== =====
Net investment in leases 2.7 -
============================================= ===== =====
Other than finance lease receivables, insurance and other receivables of GBPnil (2018: GBPnil) are expected to be recovered more than one year after the Consolidated statement of financial position date.
19 Cash and cash equivalents
2019 2018
GBPm GBPm
======================================================== ======= =====
Cash available on demand 267.0 113.9
======================================================== ======= =====
Units in liquidity funds 1,384.0 882.5
======================================================== ======= =====
Cash and cash equivalents in the Consolidated statement
of cash flows 1,651.0 996.4
======================================================== ======= =====
20 Share capital
The allotted and issued ordinary share capital of the Group at 31 December 2019 is detailed below:
Number of Share Share Merger
GBP0.10 ordinary capital premium reserve Total
shares GBPm GBPm GBPm GBPm
===================================== ================= ======== ======== ======== =====
At 1 January 2019 941,068,882 94.1 94.5 532.7 721.3
===================================== ================= ======== ======== ======== =====
Shares issued 94,012,782 9.4 - 64.4 73.8
===================================== ================= ======== ======== ======== =====
At 31 December 2019 1,035,081,664 103.5 94.5 597.1 795.1
===================================== ================= ======== ======== ======== =====
At 1 January 2018 938,308,340 93.8 94.2 532.7 720.7
===================================== ================= ======== ======== ======== =====
In respect of employee share schemes 2,760,542 0.3 0.3 - 0.6
===================================== ================= ======== ======== ======== =====
At 31 December 2018 941,068,882 94.1 94.5 532.7 721.3
===================================== ================= ======== ======== ======== =====
On 14 March 2019, the Company completed the placing of 94,012,782 ordinary shares of 10 pence each at a price of 80 pence per share to both existing and new ordinary equity shareholders, raising gross proceeds of GBP75m. The placing price represents a discount of 6.7% on the market price of 85.3 pence per share at the time of the placing. The placing was achieved by the Company acquiring 100% of the equity of a limited company for consideration of the 94,012,782 new ordinary shares issued. Accordingly, merger relief under section 612 of the Companies Act 2006 applies, and share premium has not been recognised in respect of this issue of shares. A merger reserve has been recognised representing the premium over the nominal value of the shares issued.
Consideration for the acquisition of 100% of the equity shares of Partnership Assurance Group plc in 2016 consisted of a new issue of shares in the Company. Accordingly, merger relief under section 612 of the Companies Act 2006 applies, and share premium has not been recognised in respect of this issue of shares. A merger reserve has been recognised representing the difference between the nominal value of the shares issued and the net assets of Partnership Assurance Group plc acquired.
21 Tier 1 notes
Year ended Year ended
31 December 31 December
2019 2018
GBPm GBPm
======================== ============ ============
At 1 January - -
======================== ============ ============
Issued in the period 300.0 -
======================== ============ ============
Issue costs, net of tax (6.0) -
======================== ============ ============
At 31 December 294.0 -
======================== ============ ============
In March 2019, the Group completed the issue of GBP300m fixed rate perpetual restricted Tier 1 contingent convertible notes, incurring issue costs of GBP6.0m, net of tax.
The notes bear interest on the principal amount up to 26 April 2024 (the first call date) at the rate of 9.375% per annum, and thereafter at a fixed rate of interest reset on the first call date and on each fifth anniversary thereafter. Interest is payable on the notes semi-annually in arrears on 26 April and 26 October each year, commencing on 26 April 2019. During the year, interest of GBP16.8m was paid to note holders.
The Group has the option to cancel the coupon payment at its discretion and cancellation of the coupon payment becomes mandatory upon non-compliance with the solvency capital requirement or minimum capital requirement or where the Group has insufficient distributable items. Cancelled coupon payments do not accumulate or become payable at a later date and do not constitute a default. In the event of non-compliance with specific solvency requirements, the conversion of the Tier 1 notes into Ordinary Shares could be triggered.
The Tier 1 notes are treated as a separate category within equity and the coupon payments are recognised outside of the profit after tax result and directly in shareholders' equity.
22 Insurance contracts and related reinsurance
Insurance liabilities
2019 2018
GBPm GBPm
============================ ========= =========
Gross insurance liabilities 19,003.7 17,273.8
============================ ========= =========
Reinsurance (3,732.0) (4,239.2)
============================ ========= =========
Net insurance liabilities 15,271.7 13,034.6
============================ ========= =========
(a) Terms and conditions of insurance contracts
The Group's long-term insurance contracts include Retirement Income (Guaranteed Income for Life ("GIfL"), Defined Benefit ("DB"), and immediate needs and deferred Care Plans), and whole of life and term protection insurance.
The insurance liabilities are agreed by the Board using recognised actuarial valuation methods proposed by the Group's Actuarial Reporting Function. In particular, a prospective gross premium valuation method has been adopted for major classes of business.
Although the process for the establishment of insurance liabilities follows specified rules and guidelines, the provisions that result from the process remain uncertain. As a consequence of this uncertainty, the eventual value of claims could vary from the amounts provided to cover future claims. The Group seeks to provide for appropriate levels of contract liabilities taking known facts and experiences into account but nevertheless such provisions remain uncertain.
The estimation process used in determining insurance liabilities involves projecting future annuity payments and the cost of maintaining the contracts. For non-annuity contracts, the liability is determined as the sum of the discounted value of future benefit payments and future administration expenses less the expected value of premiums payable under the contract. The key sensitivities are the assumed level of interest rates and the mortality experience.
(b) Principal assumptions underlying the calculation of insurance contracts
The principal assumptions underlying the calculation of insurance contracts are as follows:
Mortality assumptions
Mortality assumptions have been set by reference to appropriate standard mortality tables. These tables have been adjusted to reflect the future mortality experience of the policyholders, taking into account the medical and lifestyle evidence collected during the underwriting process, premium size, gender and the Group's assessment of how this experience will develop in the future. The assessment takes into consideration relevant industry and population studies, published research materials, input from the Group's lead reinsurer and management's own industry experience.
The standard tables which underpin the mortality assumptions are summarised in the table below.
2019 2018
========================= ================================= =================================
Individually underwritten Modified E&W Population Modified E&W Population
Guaranteed Income for mortality, with modified mortality, with modified
Life Solutions (JRL) CMI 2017 model mortality CMI 2017 model mortality
improvements for both Merica improvements for both Merica
and PrognoSys(TM) underwritten and PrognoSys(TM) underwritten
business business
========================= ================================= =================================
Individually underwritten Modified E&W Population Modified E&W Population
Guaranteed Income for mortality, with modified mortality, with modified
Life Solutions (PLACL) CMI 2017 model mortality CMI 2017 model mortality
improvements improvements
========================= ================================= =================================
Defined Benefit (JRL) Modified E&W Population Modified E&W Population
mortality, with modified mortality, with modified
CMI 2017 model mortality CMI 2017 model mortality
improvements for standard improvements for standard
underwritten business; Reinsurer underwritten business; Reinsurer
supplied tables underpinned supplied tables underpinned
by the Self-Administered by the Self-Administered
Pension Scheme ("SAPS") Pension Scheme ("SAPS")
S1 tables, with CMI 2009 S1 tables, with CMI 2009
model mortality improvements model mortality improvements
for medically underwritten for medically underwritten
business business
========================= ================================= =================================
Defined Benefit (PLACL) Modified E&W Population Modified E&W Population
mortality, with modified mortality, with modified
CMI 2017 model mortality CMI 2017 model mortality
improvements improvements
========================= ================================= =================================
Care plans and other Modified PCMA/PCFA and with Modified PCMA/PCFA and with
annuity products (PLACL) modified CMI 2017 model modified CMI 2017 model
mortality improvements for mortality improvements for
Care Plans; Care Plans;
Modified PCMA/PCFA or modified Modified PCMA/PCFA or modified
E&W Population mortality E&W Population mortality
with modified CMI 2017 model with modified CMI 2017 model
mortality improvements for mortality improvements for
other annuity products other annuity products
========================= ================================= =================================
Protection (PLACL) TM/TF00 Select TM/TF00 Select
========================= ================================= =================================
The long term improvement rates in the modified CMI 2017 model are 2.0% for males and 1.75% for females (2018: 2.0% for males and 1.75% for females). The period smoothing parameter in the modified CMI 2017 model has been set to 7.25 (2018: 7.25).
Valuation discount rates
Valuation discount rate assumptions are set by considering the yields on the assets available to back the liabilities. The yields on lifetime mortgage assets are derived using the assumptions described in note 16 with allowance for risk through the deductions related to the NNEG. An explicit allowance for credit risk is included by making an explicit deduction from the yields on debt and other fixed income securities based on a prudent expectation of default experience of each asset class. An additional allowance is made for voluntary redemptions.
2019 2018
Valuation discount rates - gross liabilities % %
=============================================================== ==== ====
Individually underwritten Guaranteed Income for Life Solutions
(JRL) 3.01 3.51
=============================================================== ==== ====
Individually underwritten Guaranteed Income for Life Solutions
(PLACL) 2.89 3.47
=============================================================== ==== ====
Defined Benefit (JRL) 3.01 3.51
=============================================================== ==== ====
Defined Benefit (PLACL) 2.89 3.47
=============================================================== ==== ====
Other annuity products (PLACL) 0.92 1.32
=============================================================== ==== ====
Term and whole of life products (PLACL) 0.98 1.54
=============================================================== ==== ====
Future expenses
Assumptions for future policy expense levels are determined from the Group's recent expense analyses. The assumed future policy expense levels incorporate an annual inflation rate allowance of 4.4% (2018: 4.6%) derived from the expected retail price index implied by inflation swap rates and an additional allowance for earnings inflation.
(c) Movements
The following movements have occurred in the insurance contract balances for Retirement Income products during the year.
Gross Reinsurance Net
Year ended 31 December 2019 GBPm GBPm GBPm
============================================ ========= =========== ========
At 1 January 2019 17,273.8 (4,239.2) 13,034.6
============================================ ========= =========== ========
Increase in liability from premiums 1,586.2 8.4 1,594.6
============================================ ========= =========== ========
Release of liability due to recorded claims (1,265.1) 354.1 (911.0)
============================================ ========= =========== ========
Unwinding of discount 599.7 (138.2) 461.5
============================================ ========= =========== ========
Changes in economic assumptions 886.5 (193.1) 693.4
============================================ ========= =========== ========
Changes in non-economic assumptions (44.3) 14.6 (29.7)
============================================ ========= =========== ========
Other movements(1) (33.1) 461.4 428.3
============================================ ========= =========== ========
At 31 December 2019 19,003.7 (3,732.0) 15,271.7
============================================ ========= =========== ========
Gross Reinsurance Net
Year ended 31 December 2018 GBPm GBPm GBPm
============================================ ========= =========== ========
At 1 January 2018 16,633.0 (5,285.3) 11,347.7
============================================ ========= =========== ========
Increase in liability from premiums 1,735.4 2.2 1,737.6
============================================ ========= =========== ========
Release of liability due to recorded claims (1,213.2) 419.8 (793.4)
============================================ ========= =========== ========
Unwinding of discount 547.4 (154.9) 392.5
============================================ ========= =========== ========
Changes in economic assumptions (286.6) 136.4 (150.2)
============================================ ========= =========== ========
Changes in non-economic assumptions (128.8) 98.1 (30.7)
============================================ ========= =========== ========
Other movements(1) (13.4) 544.5 531.1
============================================ ========= =========== ========
At 31 December 2018 17,273.8 (4,239.2) 13,034.6
============================================ ========= =========== ========
1 Includes the impact of reinsurance recapture.
Effect of changes in assumptions and estimates during the year
Economic assumption changes
The principal economic assumption change impacting the movement in insurance liabilities during the year relates to discount rates for both JRL and PLACL.
Discount rates
The movement in the valuation interest rate captures the impact of underlying changes in risk-free curves and spreads and cashflows on backing assets. The principal assumption changes impacting the cashflows on backing assets during the year relate to voluntary redemptions on Lifetime Mortgages. Both existing in-force assets and new assets purchased during the year contribute to the movement in the discount rate. Differences between the discount rates recognised on new business written during the year and the prevailing discount rates on the entire portfolio of business also contribute to the movement in insurance liabilities.
Non-economic assumption changes
The principal non-economic assumption changes impacting the movement in insurance liabilities during the year relate to maintenance expenses and investment expenses for both JRL and PLACL.
Expense assumption
Cost reductions achieved within the Group have given rise to an overall reduction in maintenance expense and investment expense assumptions. This has resulted in a decrease in the carrying value of the Group's insurance liabilities.
The JRL GIfL maintenance expense assumption used at 31 December 2019 was GBP28.50 per plan (2018: GBP30.29), whilst the JRL DB maintenance assumption used at 31 December 2019 was GBP112.71 per scheme member (2018: GBP118.75). The PLACL GIfL maintenance expense assumption used at 31 December 2019 was GBP28.50 per plan (2018: GBP29.30), whilst the PLACL DB maintenance assumption used at 31 December 2019 was GBP175.40 per scheme member (2018: GBP161.40).
Investment expenses refer to the fees incurred in the management of the Group's debt and other fixed income securities. Investment expenses are allowed for via a reduction in the yield on those assets. The JRL investment expenses assumption used at 31 December 2019 was 6.7bps (2018: 6.8bps). The PL ACL investment expense assumption used at 31 December 2019 was 4.3bps (2018: 9.7bps).
(d) Estimated timing of net cash outflows from insurance contract liabilities
The following table shows the insurance contract balances analysed by duration. The total balances are split by duration of Retirement Income payments in proportion to the policy cash flows estimated to arise during the year.
Expected cash flows (undiscounted)
============ ==================================================== =============
Within Carrying
1 Over value
year 1-5 years 5-10 years 10 years Total (discounted)
2019 GBPm GBPm GBPm GBPm GBPm GBPm
============ ======= ========= ========== ========= ========= =============
Gross 1,303.4 4,929.4 5,620.4 14,945.3 26,798.5 19,003.7
============ ======= ========= ========== ========= ========= =============
Reinsurance (295.9) (1,085.2) (1,152.5) (2,474.4) (5,008.0) (3,732.0)
============ ======= ========= ========== ========= ========= =============
Net 1,007.5 3,844.2 4,467.9 12,470.9 21,790.5 15,271.7
============ ======= ========= ========== ========= ========= =============
Expected cash flows (undiscounted)
============ ==================================================== =============
Within Carrying
1 Over value
year 1-5 years 5-10 years 10 years Total (discounted)
2018 GBPm GBPm GBPm GBPm GBPm GBPm
============ ======= ========= ========== ========= ========= =============
Gross 1,243.2 4,715.5 5,353.2 14,667.9 25,979.8 17,273.8
============ ======= ========= ========== ========= ========= =============
Reinsurance (358.3) (1,320.8) (1,399.0) (2,998.7) (6,076.8) (4,239.2)
============ ======= ========= ========== ========= ========= =============
Net 884.9 3,394.7 3,954.2 11,669.2 19,903.0 13,034.6
============ ======= ========= ========== ========= ========= =============
(e) Sensitivity analysis
The Group has estimated the impact on profit before tax for the year in relation to insurance contracts and related reinsurance from reasonably possible changes in key assumptions relating to financial assets and liabilities. The sensitivities capture the liability impacts arising from the impact on the yields of the assets backing liabilities in each sensitivity. The impact of changes in the value of assets and liabilities has been shown separately to aid the comparison with the change in value of assets for the relevant sensitivities in note 16. To further assist with this comparison, any impact on reinsurance assets has been included within the liabilities line item.
The sensitivity factors are applied via financial models. The analysis has been prepared for a change in each variable with other assumptions remaining constant. In reality, such an occurrence is unlikely, due to correlation between the assumptions and other factors. It should also be noted that these sensitivities are non-linear, and larger or smaller impacts cannot 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. The impacts indicated below for insurance contracts also reflect movements in financial derivatives, which are impacted by movements in interest rates. Related reinsurance assets are not impacted by financial derivatives. The sensitivities below cover the changes on all assets and liabilities from the given stress. The impact of these sensitivities on IFRS net equity is the impact on profit before tax as set out in the table below less tax at the current tax rate.
Sensitivity factor Description of sensitivity factor applied
===================== =============================================================
Interest rate and The impact of a change in the market interest rates
investment return by +/- 1% (e.g. if a current interest rate is 5%, the
impact of an immediate change to 4% and 6% respectively).
The test consistently allows for similar changes to
both assets and liabilities
===================== =============================================================
Expenses The impact of an increase in maintenance expenses by
10%
===================== =============================================================
Base mortality rates The impact of a decrease in base table mortality rates
by 5% applied to both Retirement Income liabilities
and loans secured by residential mortgages
===================== =============================================================
Mortality improvement The impact of a level increase in mortality improvement
rates rates of 0.25% for both Retirement Income liabilities
and loans secured by residential mortgages
===================== =============================================================
Immediate property The impact of an immediate decrease in the value of
price fall properties by 10%.
===================== =============================================================
Future property price The impact of a reduction in future property price growth
growth by 0.5%
===================== =============================================================
Future property price The impact of an increase in future property price volatility
volatility by 1%
===================== =============================================================
Voluntary redemptions The impact of an increase in voluntary redemption rates
on loans secured by residential mortgages by 10%.
===================== =============================================================
Credit defaults The impact of an increase in the credit default assumption
of 10bps
===================== =============================================================
Impact on profit before tax (GBPm)
Immediate Future Future
property property property
Interest Interest Maintenance Base Mortality price price price Voluntary Credit
rates rates expenses mortality improvement fall growth volatility redemptions defaults
+1% -1% +10% -5% +0.25% -10% -0.5% +1% +10% +10bps
============ ========= ========= =========== ========= =========== ========= ======== ========== =========== ========
2019
============ ========= ========= =========== ========= =========== ========= ======== ========== =========== ========
Assets (2,139.5) 2,551.3 (6.6) 29.8 14.0 (104.5) (80.2) (55.6) (12.8) -
============ ========= ========= =========== ========= =========== ========= ======== ========== =========== ========
Liabilities 1,744.3 (2,077.5) (42.9) (128.0) (78.5) (76.8) (72.7) (38.3) (87.7) (85.8)
============ ========= ========= =========== ========= =========== ========= ======== ========== =========== ======== Total (395.2) 473.8 (49.5) (98.2) (64.5) (181.3) (152.9) (93.9) (100.5) (85.8) ============ ========= ========= =========== ========= =========== ========= ======== ========== =========== ======== 2018 ============ ========= ========= =========== ========= =========== ========= ======== ========== =========== ======== Assets (1,710.2) 2,042.2 (7.1) 22.4 10.9 (97.1) (79.4) (53.2) (15.1) - ============ ========= ========= =========== ========= =========== ========= ======== ========== =========== ======== Liabilities 1,553.9 (1,842.5) (30.5) (139.0) (97.7) (64.2) (64.2) (30.0) (73.2) (60.0) ============ ========= ========= =========== ========= =========== ========= ======== ========== =========== ======== Total (156.3) 199.7 (37.6) (116.6) (86.8) (161.3) (143.6) (83.2) (88.3) (60.0) ============ ========= ========= =========== ========= =========== ========= ======== ========== =========== ========
23 Investment contract liabilities
Year ended Year ended
31 December 31 December
2019 2018
GBPm GBPm
======================================================= ============ ============
At 1 January 197.8 220.7
======================================================= ============ ============
Deposits received from policyholders 26.7 51.0
======================================================= ============ ============
Payments made to policyholders (78.3) (73.5)
======================================================= ============ ============
Change in contract liabilities recognised in profit or
loss (92.2) (0.4)
======================================================= ============ ============
At 31 December 54.0 197.8
======================================================= ============ ============
In 2018, investment contract liabilities include the linked liabilities of reinsured funds invested under the Flexible Pension Plan. During 2019 the Group closed its Flexible Pension Plan product to new business and completed the transfer of the business to an external provider.
(a) Terms and conditions of investment contracts
The Group has written Capped Drawdown products for the at-retirement market. These products are no longer available to new customers. In return for a single premium, these contracts pay a guaranteed lump sum on survival to the end of the fixed term. There is an option at outset to select a lower sum at maturity and regular income until the earlier of death or maturity. Upon death of the policyholder and subject to the option selected at the outset, there may be a return of premium less income received or income payable to a dependant until the death of that dependant.
(b) Principal assumptions underlying the calculation of investment contracts
Valuation discount rates
Valuation discount rate assumptions for investment contracts are set with regard to yields on supporting assets. The yields on lifetime mortgage assets are derived using the assumptions described in note 16 with allowance for risk through the deductions related to the NNEG. An explicit allowance for credit risk is included by making an explicit deduction from the yields on debt and other fixed income securities based on historical default experience of each asset class.
2019 2018
Valuation discount rates % %
========================= ==== ====
Investment contracts 3.01 3.51
========================= ==== ====
24 Loans and borrowings
Carrying value Fair value
===================================================== ================= =============
2019 2018 2019 2018
GBPm GBPm GBPm GBPm
===================================================== ======== ======= ====== =====
GBP100m 9.5% 10 year subordinated debt 2025
non-callable 5 years (Tier 2) issued by Partnership
Life Assurance Company Limited (call option
in March 2020) 60.7 95.9 67.2 113.5
===================================================== ======== ======= ====== =====
GBP250m 9.0% 10 year subordinated debt 2026
(Tier 2) issued by Just Group plc 248.9 248.8 255.8 289.9
===================================================== ======== ======= ====== =====
GBP125m 8.125% 10 year subordinated debt 2029
(Tier 2) issued by Just Group plc 121.4 - 127.5 -
===================================================== ======== ======= ====== =====
GBP230m 3.5% 7 year subordinated debt 2025
(Tier 3) issued by Just Group plc 229.0 228.7 239.7 214.7
===================================================== ======== ======= ====== =====
Total loans and borrowings 660.0 573.4 690.2 618.1
===================================================== ======== ======= ====== =====
On 2 October 2019, the Group completed the issue of GBP125m Tier 2 capital via an 8.125% sterling denominated BBB rated 10 year bonds issue, interest payable semi-annually in arrear. The proceeds of the issue will be used mainly to refinance the GBP100m 9.5% Partnership Life Assurance Company Limited subordinated notes due 2025 ("PLACL notes"). On 25 September 2019, a tender offer for the PLACL notes was announced resulting in GBP37.48m of the notes being called on 2 October 2019.
The Group also has an undrawn revolving credit facility of up to GBP200m for general corporate and working capital purposes available until 15 May 2022. Interest is payable on any drawdown loans at a rate of Libor plus a margin of between 1.50% and 2.75% per annum depending on the Group's ratio of net debt to net assets.
Movements in borrowings during the year were as follows:
Year ended Year ended
31 December 31 December
2019 2018
GBPm GBPm
========================================================== ============ ============
At 1 January 573.4 343.9
========================================================== ============ ============
Proceeds from issue of Just Group plc Tier 2 subordinated
debt 125.0 230.0
========================================================== ============ ============
Issue costs (3.6) (1.5)
========================================================== ============ ============
Repayment of Partnership Life Assurance Company Limited
Tier 2 subordinated debt (37.5) -
========================================================== ============ ============
Financing cash flows 83.9 228.5
========================================================== ============ ============
Amortisation of issue costs 2.7 1.0
========================================================== ============ ============
Non-cash movements 2.7 1.0
========================================================== ============ ============
At 31 December 660.0 573.4
========================================================== ============ ============
25 Lease liabilities
Lease liabilities are in respect of property assets leased by the Group recognised as right-of-use assets within Property, plant and equipment on the Consolidated statement of financial position.
Movements in lease liabilities during the year were as follows:
Year ended Year ended
31 December 31 December
2019 2018
GBPm GBPm
======================================================== ============ ============
At 1 January - -
======================================================== ============ ============
Recognition of lease liabilities on initial application
of IFRS 16 9.6 -
======================================================== ============ ============
Lease payments (3.1) -
======================================================== ============ ============
Financing cash flows (3.1) - ======================================================== ============ ============ New lease 5.6 - ======================================================== ============ ============ Interest 0.3 - ======================================================== ============ ============ Non-cash movements 5.9 - ======================================================== ============ ============ At 31 December 12.4 - ======================================================== ============ ============
During the year the Group entered into a new three year lease on the relocation of its London office.
Lease liabilities are payable as follows:
Present
Future value of
minimum minimum
lease payments Interest lease payments
At 31 December 2019 GBPm GBPm GBPm
=========================== =============== ======== ===============
Less than one year 4.4 (0.2) 4.2
=========================== =============== ======== ===============
Between one and five years 8.4 (0.2) 8.2
=========================== =============== ======== ===============
Total 12.8 (0.4) 12.4
=========================== =============== ======== ===============
26 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:
Note 2019 2018
GBPm GBPm
====================================================== ===== ======= =======
Fair value through profit or loss
====================================================== ===== ======= =======
Derivative financial liabilities (a) 248.4 178.3
====================================================== ===== ======= =======
Obligations for repayment of cash collateral received (a) 62.8 3.4
====================================================== ===== ======= =======
Deposits received from reinsurers (b) 2,417.7 2,443.5
====================================================== ===== ======= =======
Liabilities measured using insurance rules under
IFRS 4
====================================================== ===== ======= =======
Deposits received from reinsurers (b) 772.6 1,236.3
====================================================== ===== ======= =======
Reinsurance finance (c) 14.5 30.6
====================================================== ===== ======= =======
Reinsurance funds withheld (d) 162.9 171.2
====================================================== ===== ======= =======
Total other liabilities 3,678.9 4,063.3
============================================================= ======= =======
The amount of deposits received from reinsurers and reinsurance funds withheld that is expected to be settled more than one year after the Consolidated statement of financial position date is GBP3,068.0m (2018: GBP3,730.4m).
(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 in accordance with the reinsurance contract and taking into account an appropriate discount rate for the timing of expected cash flows of the liabilities.
(c) Reinsurance finance
The reinsurance finance has been established in recognition of the loan obligation to the reinsurers under the Group's reinsurance financing arrangements, the repayment of which are contingent upon the emergence of surplus under either the old Solvency I or IFRS valuation rules.
(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.
27 Derivative financial instruments
The Group uses various derivative financial instruments to manage its exposure to interest rates, counterparty credit risk, property risk, inflation and foreign exchange risk.
2019 2018
============================= ================================== ==================================
Asset Liability Notional Asset Liability Notional
fair value fair value amount fair value fair value amount
Derivatives GBPm GBPm GBPm GBPm GBPm GBPm
============================= =========== =========== ======== =========== =========== ========
Foreign currency swaps 54.8 96.3 2,035.1 1.3 131.8 1,186.5
============================= =========== =========== ======== =========== =========== ========
Interest rate swaps 157.3 30.7 3,644.8 36.2 9.5 2,131.8
============================= =========== =========== ======== =========== =========== ========
Inflation swaps 10.7 120.6 2,165.8 38.0 27.6 1,879.3
============================= =========== =========== ======== =========== =========== ========
Forward swaps 10.1 0.8 612.4 0.6 9.4 927.6
============================= =========== =========== ======== =========== =========== ========
Put option on property index 4.0 - 80.0 3.3 - 80.0
============================= =========== =========== ======== =========== =========== ========
Total return swaps 0.1 - 66.9 - - -
============================= =========== =========== ======== =========== =========== ========
Interest rate futures - - - 1.8 - 186.0
============================= =========== =========== ======== =========== =========== ========
Total 237.0 248.4 8,605.0 81.2 178.3 6,391.2
============================= =========== =========== ======== =========== =========== ========
The Group's derivative financial instruments are not designated as hedging instruments and changes in their fair value are included in profit or loss.
All over-the-counter derivative transactions are conducted under standardised International Swaps and Derivatives Association Inc. master agreements, and the Group has collateral agreements between the individual Group entities and relevant counterparties in place under each of these market master agreements.
As at 31 December 2019, the Company had pledged collateral of GBP103.1m (2018: GBP152.6m) of which GBPnil were gilts and European Investment Bank bonds (2018: GBPnil) and had received cash collateral of GBP62.8m (2018: GBP3.4m). In addition to the cash collateral received recognised within other financial liabilities (see note 26), certain collateral arrangements within the Group's subsidiary, PLACL, give rise to collateral of GBP17.9m (2018: GBP10.4m) which is not included in the Consolidated statement of financial position of the Group because it is deposited into a ringfenced collateral account that the Group has no control over and does not accrue any of the economic benefit.
Amounts recognised in profit or loss in respect of derivative financial instruments are as follows:
Year ended Year ended
31 December 31 December
2019 2018
GBPm GBPm
================================================= ============ ============
Movement in fair value of derivative instruments 85.2 (49.0)
================================================= ============ ============
Realised losses on interest rate swaps closed 44.7 (16.3)
================================================= ============ ============
Total amounts recognised in profit or loss 129.9 (65.3)
================================================= ============ ============
28 Reinsurance
The Group uses reinsurance as an integral part of its risk and capital management activities. New business was reinsured via longevity swap arrangements as follows:
-- DB: from 1 January to 30 June 2019 (and the whole of 2018), DB was 55% reinsured for underwritten schemes, and 75% for non-underwritten schemes. From 1 July the reinsurance was increased to 75% for underwritten schemes, and 90% for non-underwritten schemes.
-- GIfL was 75% reinsured during 2019 and 2018.
-- Care was not reinsured in 2019 but was 42.5% reinsured in 2018 until closure of the treaty in October 2018.
In-force business is reinsured under longevity swap and quota share treaties. The quota share reinsurance treaties have deposit back or premium withheld arrangements to remove the majority of the reinsurer credit risk. The Group increased the reinsurance on JRL DB inforce business during the year to 100% (from 55% for underwritten schemes and 75% for non-underwritten schemes) for all schemes written between 1 January 2016 and 30 June 2019. The increased cover was effective from 1 July 2019.
Within the Group's subsidiary, JRL, there are a number of quota share treaties with financing arrangements, which were originally entered into for the capital benefits under the old Solvency I regime (the financing formed part of available capital). The repayment of this financing is contingent upon the emergence of surplus under the Solvency I or IFRS valuation rules. These treaties were closed to new business prior to the introduction of Solvency II on 1 January 2016 but the Group retains a capital benefit under Solvency II from the financing arrangements as these form part of the transitional calculations. Under IFRS the financing element is included within other financial liabilities (see note 26 (c)). These treaties also allow JRL to recapture business once the financing loan from the reinsurer has been fully repaid. Once a recapture becomes effective, JRL retains 100% of the risk on business recaptured. During the year the Group fully repaid financing loans and recaptured business in respect of certain underwriting years that resulted in a decrease of reinsurance assets of GBP436.8m and a reduction of equal amount in the deposits received from reinsurers recognised within other financial liabilities.
In addition to the deposits received from reinsurers recognised within other financial liabilities (see note 26(b)), certain reinsurance arrangements within the Group's subsidiary, PLACL, give rise to deposits from reinsurers that are not included in the Consolidated statement of financial position of the Group as described below:
-- The Group has an agreement with two reinsurers whereby financial assets arising from the payment of reinsurance premiums, less the repayment of claims, in relation to specific treaties, are legally and physically deposited back with the Group. Although the funds are managed by the Group (as the Group controls the investment of the asset), no future benefits accrue to the Group as any returns on the deposits are paid to reinsurers. Consequently, the deposits are not recognised as assets of the Group and the investment income they produce does not accrue to the Group.
-- The Group has an agreement with one reinsurer whereby assets equal to the reinsurer's full obligation under the treaty are deposited into a ringfenced collateral account. The Group has first claim over these assets should the reinsurer default, but as the Group has no control over these funds and does not accrue any future benefit, this fund is not recognised as an asset of the Group.
2019 2018
GBPm GBPm
========================================================== ===== =====
Deposits managed by the Group 194.5 191.6
========================================================== ===== =====
Deposits held in trust 283.4 272.8
========================================================== ===== =====
Total deposits not included in the Consolidated statement
of financial position 477.9 464.4
========================================================== ===== =====
The Group is exposed to a minimal amount of reinsurance counterparty default risk in respect of the above arrangements and calculates a counterparty default reserve accordingly. At 31 December 2019, this reserve totalled GBP2.5m (2018: GBP2.3m) and largely relates to the Hannover Re and Pacific Life Re reinsurance treaties in PLACL.
29 Other provisions
Year ended Year ended
31 December 31 December
2019 2018
GBPm GBPm
=================================== ============ ============
At 1 January 0.7 2.1
=================================== ============ ============
Amounts utilised (1.7) (1.4)
=================================== ============ ============
Amounts charged to profit and loss 2.8 -
=================================== ============ ============
At 31 December 1.8 0.7
=================================== ============ ============
The amount of provisions that is expected to be settled more than 12 months after the Consolidated statement of financial position date is GBP1.2m (2018: GBP0.5m).
30 Insurance and other payables
2019 2018
GBPm GBPm
========================================================== ===== =====
Payables arising from insurance and reinsurance contracts 22.4 21.2
========================================================== ===== =====
Other payables 50.2 57.1
========================================================== ===== =====
Total insurance and other payables 72.6 78.3
========================================================== ===== =====
Insurance and other payables due in more than one year are GBPnil (2018: GBPnil).
31 Commitments
Capital commitments
The Group had no capital commitments as at 31 December 2019 (2018: GBPnil).
32 Contingent liabilities
Contingent liabilities at 31 December 2019 represent the outstanding contingent consideration on the acquisition of Corinthian Group Limited in 2018 of GBP0.2m (2018: GBP0.3m). The Group has received an enquiry from HMRC with respect to the withholding tax treatment of amounts associated with financial reinsurance. While the outcome of such enquiries cannot be predicted with certainty, the Group believes the ultimate outcome will not have a material adverse effect on the Group's financial condition, results of operations, or cash flows.
33 Financial and insurance risk management
This note presents information about the major financial and insurance risks to which the Group is exposed, and its objectives, policies and processes for their measurement and management. Financial risk comprises exposure to market, credit and liquidity risk.
(a) Insurance risk
The writing of long-term insurance contracts requires a range of assumptions to be made and risk arises from these assumptions being materially inaccurate.
The Group's main insurance risk arises from adverse experience compared with the assumptions used in pricing products and valuing insurance liabilities, and in addition its reinsurance treaties may be terminated, not renewed, or renewed on terms less favourable than those under existing treaties.
Insurance risk arises through exposure to longevity, mortality and morbidity and exposure to factors such as withdrawal levels and management and administration expenses.
Individually underwritten GIfL are priced using assumptions about future longevity that are based on historic experience information, lifestyle and medical factors relevant to individual customers, and judgements about the future development of longevity improvements. In the event of an increase in longevity, the actuarial reserve required to make future payments to customers may increase.
Loans secured by mortgages are used to match some of the liabilities arising from the sale of GIfL and DB business. In the event that early repayments in a given period are higher than anticipated, less interest will have accrued on the mortgages and the amount repayable will be less than assumed at the time of sale. In the event of an increase in longevity, although more interest will have accrued and the amount repayable will be greater than assumed at the time of the sale, the associated cash flows will be received later than had originally been anticipated. In addition, a general increase in longevity would have the effect of increasing the total amount repayable, which would increase the LTV ratio and could increase the risk of failing to be repaid in full as a consequence of the no-negative equity guarantee. There is also morbidity risk exposure as the contract ends when the customer moves into long-term care.
Underpinning the management of insurance risk are:
-- the development and use of medical information including PrognoSys(TM) for both pricing and reserving to provide detailed insight into longevity risk;
-- adherence to approved underwriting requirements; -- controls around the development of suitable products and their pricing; -- review and approval of assumptions used by the Board; -- regular monitoring and analysis of actual experience; -- use of reinsurance to minimise volatility of capital requirement and profit; and -- monitoring of expense levels.
Concentrations of insurance risk
Concentration of insurance risk comes from improving longevity. Improved longevity arises from enhanced medical treatment and improved life circumstances. Concentration risk is managed by writing business across a wide range of different medical and lifestyle conditions to avoid excessive exposure.
(b) Market risk
Market risk is the risk of loss or of adverse change in the financial situation resulting, directly or indirectly, from fluctuations in the level and in the volatility of market prices of assets, liabilities and financial instruments, together with the impact of changes in interest rates.
Significant market risk is implicit in the insurance business and arises from exposure to interest rate risk, property risk, inflation risk and currency risk. The Group is not exposed to any equity risk or material currency risk.
Market risk represents both upside and downside impacts but the Group's policy to manage market risk is to limit downside risk. Falls in the financial markets can reduce the value of pension funds available to purchase Retirement Income products and changes in interest rates can affect the relative attractiveness of Retirement Income products. Changes in the value of the Group's investment portfolio will also affect the Group's financial position.
In mitigation, Retirement Income product monies are invested to match the asset and liability cash flows as closely as practicable. In practice, it is not possible to eliminate market risk fully as there are inherent uncertainties surrounding many of the assumptions underlying the projected asset and liability cash flows.
For each of the material components of market risk, described in more detail below, the market risk policy sets out the risk appetite and management processes governing how each risk should be measured, managed, monitored and reported.
(i) Interest rate risk
The Group is exposed to interest rate risk through its impact on the value of, or income from, specific assets, liabilities or both. It seeks to limit its exposure through appropriate asset and liability matching and hedging strategies.
The Group's exposure to changes in interest rates is concentrated in the investment portfolio, loans secured by mortgages and its insurance obligations. Changes in investment and loan values attributable to interest rate changes are mitigated by corresponding and partially offsetting changes in the value of insurance liabilities. The Group monitors this exposure through regular reviews of the asset and liability position, capital modelling, sensitivity testing and scenario analyses. Interest rate risk is also managed using derivative instruments e.g. swaps.
The following table indicates the earlier of contractual repricing or maturity dates for the Group's significant financial assets.
Less than One to Five to Over ten No fixed Total
one year five years ten years years term GBPm
2019 GBPm GBPm GBPm GBPm GBPm
================================== ========= =========== ========== ======== ======== ========
Units in liquidity funds 1,384.0 - - - - 1,384.0
================================== ========= =========== ========== ======== ======== ========
Investment funds 25.5 111.8 - - - 137.3
================================== ========= =========== ========== ======== ======== ========
Debt securities and other
fixed income securities 950.3 2,734.4 2,819.3 3,883.8 - 10,387.8
================================== ========= =========== ========== ======== ======== ========
Deposits with credit institutions 104.6 - - - - 104.6
================================== ========= =========== ========== ======== ======== ========
Derivative financial assets 10.9 15.3 63.8 147.0 - 237.0
================================== ========= =========== ========== ======== ======== ========
Loans secured by residential
mortgages - - - - 7,980.5 7,980.5
================================== ========= =========== ========== ======== ======== ========
Loans secured by commercial
mortgages 29.0 202.5 198.0 65.0 - 494.5
================================== ========= =========== ========== ======== ======== ========
Other loans 55.9 13.8 133.5 677.1 - 880.3
================================== ========= =========== ========== ======== ======== ========
Total 2,560.2 3,077.8 3,214.6 4,772.9 7,980.5 21,606.0
================================== ========= =========== ========== ======== ======== ========
Less than One to Five to Over ten No fixed Total
one year five years ten years years term GBPm
2018 GBPm GBPm GBPm GBPm GBPm
================================== ========= =========== ========== ======== ======== ========
Units in liquidity funds 882.5 - - - - 882.5
================================== ========= =========== ========== ======== ======== ========
Investment funds 112.2 69.8 - - - 182.0
================================== ========= =========== ========== ======== ======== ========
Debt securities and other
fixed income securities 829.6 2,732.8 2,514.9 3,441.0 - 9,518.3
================================== ========= =========== ========== ======== ======== ========
Deposits with credit institutions 153.4 - - - - 153.4
================================== ========= =========== ========== ======== ======== ========
Derivative financial assets 3.5 13.7 5.2 58.8 - 81.2
================================== ========= =========== ========== ======== ======== ========
Loans secured by residential
mortgages - - - - 7,191.5 7,191.5
================================== ========= =========== ========== ======== ======== ========
Loans secured by commercial
mortgages 12.3 173.5 142.4 64.1 - 392.3
================================== ========= =========== ========== ======== ======== ========
Other loans 2.7 8.3 62.3 675.8 - 749.1
================================== ========= =========== ========== ======== ======== ========
Amounts recoverable from
reinsurers on investment
contracts 102.2 - - - - 102.2
================================== ========= =========== ========== ======== ======== ========
Total 2,098.4 2,998.1 2,724.8 4,239.7 7,191.5 19,252.5
================================== ========= =========== ========== ======== ======== ========
A sensitivity analysis of the impact of interest rate movements on profit before tax is included in note 22(e).
(ii) Property risk
The Group's exposure to property risk arises from indirect exposure to the UK residential property market through the provision of lifetime mortgages. A substantial decline or sustained underperformance in UK residential property prices, against which the Group's lifetime mortgages are secured, could result in proceeds on sale being exceeded by the mortgage debt at the date of redemption. Demand may also reduce for lifetime mortgage products through reducing consumers' propensity to borrow and by reducing the amount they are able to borrow due to reductions in property values and the impact on loan-to-value limits.
The risk is mitigated by ensuring that the advance represents a low proportion of the property's value at outset and independent third party valuations are undertaken on each property before initial mortgages are advanced. Lifetime mortgage contracts are also monitored through dilapidation reviews. House prices are monitored and the impact of exposure to adverse house prices (both regionally and nationally) is regularly reviewed.
A sensitivity analysis of the impact of property price movements on profit before tax is included in note 16 and note 22(e).
(iii) Inflation risk
Inflation risk is the risk of fluctuations in the value of, or income from, specific assets or liabilities or both in combination, arising from relative or absolute changes in inflation or in the volatility of inflation.
Exposure to inflation occurs in relation to the Group's own management expenses and its matching of index-linked Retirement Income products. Its impact is managed through the application of disciplined cost control over its management expenses and through matching its index-linked assets and index-linked liabilities for the inflation risk associated with its index-linked Retirement Income products.
(iv) Currency risk
Currency risk arises from fluctuations in the value of, or income from, assets denominated in foreign currencies, from relative or absolute changes in foreign exchange rates or in the volatility of exchange rates.
Exposure to currency risk could arise from the Group's investment in non-sterling denominated assets. From time to time, the Group acquires fixed income securities denominated in US dollars or other foreign currencies for its financial asset portfolio. All material Group liabilities are in sterling. As the Group does not wish to introduce foreign exchange risk into its investment portfolio, derivative or quasi-derivative contracts are entered into to eliminate the foreign exchange exposure as far as possible.
(c) Credit risk
Credit risk arises if another party fails to perform its financial obligations to the Group, including failing to perform them in a timely manner.
Credit risk exposures arise from:
-- Holding fixed income investments where the main risks are default and market risk. The risk of default (where the counterparty fails to pay back the capital and/or interest on a corporate bond) is mitigated by investing only in higher quality or investment grade assets. Market risk is the risk of bond prices falling as a result of concerns over the counterparty, or over the market or economy in which the issuing company operates. This leads to wider spreads (the difference between redemption yields and a risk-free return), the impact of which is mitigated through the use of a "hold to maturity" strategy. Concentration of credit risk exposures is managed by placing limits on exposures to individual counterparties and limits on exposures to credit rating levels.
-- The Group also manages credit risk on its corporate bond portfolio through the appointment of specialist fund managers, who execute a diversified investment strategy, investing in investment-grade assets and imposing individual counterparty limits. Current economic and market conditions are closely monitored, as are spreads on the bond portfolio in comparison with benchmark data.
-- Counterparties in derivative contracts - the Group uses financial instruments to mitigate interest rate and currency risk exposures. It therefore has credit exposure to various counterparties through which it transacts these instruments, although this is usually mitigated by collateral arrangements (see note 27).
-- Reinsurance - reinsurance is used to manage longevity risk but, as a consequence, credit risk exposure arises should a reinsurer fail to meet its claim repayment obligations. Credit risk on reinsurance balances is mitigated by the reinsurer depositing back more than 100% of premiums ceded under the reinsurance agreement.
-- Cash balances - credit risk on cash assets is managed by imposing restrictions over the credit ratings of third parties with whom cash is deposited.
-- Credit risk - credit risk for loans secured by mortgages has been considered within "property risk" above.
The following table provides information regarding the credit risk exposure for financial assets of the Group, which are neither past due nor impaired at 31 December:
BB or
UK gilts AAA AA A BBB below Unrated Total
2019 GBPm GBPm GBPm GBPm GBPm GBPm GBPm GBPm
================================== ======== ======= ======= ======= ======= ====== ======= ========
Units in liquidity funds - 1,378.0 6.0 - - - - 1,384.0
================================== ======== ======= ======= ======= ======= ====== ======= ========
Investment funds - - - - - - 137.3 137.3
================================== ======== ======= ======= ======= ======= ====== ======= ========
Debt securities and other
fixed income securities 198.1 941.3 1,254.0 3,058.4 4,293.5 156.3 486.2 10,387.8
================================== ======== ======= ======= ======= ======= ====== ======= ========
Deposits with credit institutions - - 1.5 63.9 39.2 - - 104.6
================================== ======== ======= ======= ======= ======= ====== ======= ========
Derivative financial assets - - 0.4 152.0 38.7 - 45.9 237.0
================================== ======== ======= ======= ======= ======= ====== ======= ========
Loans secured by residential
mortgages - - - - - - 7,980.5 7,980.5
================================== ======== ======= ======= ======= ======= ====== ======= ========
Loans secured by commercial
mortgages - - - - - - 494.5 494.5
================================== ======== ======= ======= ======= ======= ====== ======= ========
Other loans - - 40.4 70.7 419.7 - 349.5 880.3
================================== ======== ======= ======= ======= ======= ====== ======= ========
Reinsurance - - 69.5 303.3 5.5 - 0.5 378.8
================================== ======== ======= ======= ======= ======= ====== ======= ========
Insurance and other receivables - - - - - - 25.5 25.5
================================== ======== ======= ======= ======= ======= ====== ======= ========
Total 198.1 2,319.3 1,371.8 3,648.3 4,796.6 156.3 9,519.9 22,010.3
================================== ======== ======= ======= ======= ======= ====== ======= ========
BB or
UK gilts AAA AA A BBB below Unrated Total
2018 GBPm GBPm GBPm GBPm GBPm GBPm GBPm GBPm
================================== ======== ======= ======= ======= ======= ====== ======= ========
Units in liquidity funds - 877.7 4.8 - - - - 882.5
================================== ======== ======= ======= ======= ======= ====== ======= ========
Investment funds - - 13.7 - - - 168.3 182.0
================================== ======== ======= ======= ======= ======= ====== ======= ========
Debt securities and other
fixed income securities 623.4 832.1 938.3 2,916.7 3,555.9 208.2 443.7 9,518.3
================================== ======== ======= ======= ======= ======= ====== ======= ========
Deposits with credit institutions - - - 111.0 41.6 - 0.8 153.4
================================== ======== ======= ======= ======= ======= ====== ======= ========
Derivative financial assets - - 0.3 30.1 50.8 - - 81.2
================================== ======== ======= ======= ======= ======= ====== ======= ========
Loans secured by residential
mortgages - - - - - - 7,191.5 7,191.5
================================== ======== ======= ======= ======= ======= ====== ======= ========
Loans secured by commercial
mortgages - - - - - - 392.3 392.3
================================== ======== ======= ======= ======= ======= ====== ======= ========
Other loans - 89.1 117.1 93.3 423.7 - 25.9 749.1
================================== ======== ======= ======= ======= ======= ====== ======= ========
Reinsurance - - 189.3 294.2 - - 6.9 490.4
================================== ======== ======= ======= ======= ======= ====== ======= ========
Insurance and other receivables - - - - - - 18.9 18.9
================================== ======== ======= ======= ======= ======= ====== ======= ========
Total 623.4 1,798.9 1,263.5 3,445.3 4,072.0 208.2 8,248.3 19,659.6
================================== ======== ======= ======= ======= ======= ====== ======= ========
The credit rating for Cash and cash equivalents assets at 31 December 2019 was between a range of AA and BB.
The carrying amount of those assets subject to credit risk represents the maximum credit risk exposure.
(d) Liquidity risk
The investment of Retirement Income cash in corporate bonds, gilts and lifetime mortgages, and commitments to pay policyholders and other obligations, requires liquidity risks to be taken.
Liquidity risk is the risk of loss because the Group, although solvent, either does not have sufficient financial resources available to it in order to meet its obligations as they fall due, or can secure them only at excessive cost.
Exposure to liquidity risk arises from:
-- deterioration in the external environment caused by economic shocks, regulatory changes, reputational damage, or an economic shock resulting
from Brexit;
-- realising assets to meet liabilities during stressed market conditions;
-- increasing cash flow volatility in the short term giving rise to mismatches between cash flows from assets and requirements from liabilities;
-- needing to support liquidity requirements for day-to-day operations; -- ensuring financial support can be provided across the Group; and
-- maintaining and servicing collateral requirements arising from the changes in market value of financial derivatives used by the Group.
Liquidity risk is managed by ensuring that assets of a suitable maturity and marketability are held to meet liabilities as they fall due. The Group's short-term liquidity requirements are predominantly funded by advance Retirement Income premium payments, investment coupon receipts, and bond principal repayments out of which contractual payments need to be made. There are significant barriers for policyholders to withdraw funds that have already been paid to the Group in the form of premiums. Cash outflows associated with Retirement Income liabilities can be reasonably estimated and liquidity can be arranged to meet this expected outflow through asset-liability matching and new business premiums.
The cash flow characteristics of the lifetime mortgages are reversed when compared with Retirement Income products, with cash flows effectively representing an advance payment, which is eventually funded by repayment of principal plus accrued interest. Policyholders are able to redeem mortgages, albeit at a cost. The mortgage assets are considered illiquid, as they are not readily saleable due to the uncertainty about their value and the lack of a market in which to trade them.
Cash flow forecasts over the short, medium and long term are regularly prepared to predict and monitor liquidity levels in line with limits set on the minimum amount of liquid assets required.
The table below summarises the maturity profile of the financial liabilities, including both principal and interest payments, of the Group based on remaining undiscounted contractual obligations:
Within
one
year or
payable
on One to More than No fixed
demand five years five years term
2019 GBPm GBPm GBPm GBPm
============================================= ======== =========== =========== ========
Subordinated debt 74.8 585.0 773.3 -
============================================= ======== =========== =========== ========
Derivative financial liabilities 10.2 115.0 871.2 -
============================================= ======== =========== =========== ========
Obligations for repayment of cash collateral
received 62.8 - - -
============================================= ======== =========== =========== ========
Deposits received from reinsurers 270.5 975.3 3,002.7 -
============================================= ======== =========== =========== ========
Reinsurance finance - - - 14.5
============================================= ======== =========== =========== ========
Reinsurance funds withheld 15.7 57.3 134.9 -
============================================= ======== =========== =========== ========
Within
one
year or
payable
on One to More than No fixed
demand five years five years term
2018 GBPm GBPm GBPm GBPm
============================================= ======== =========== =========== ========
Subordinated debt 40.8 203.8 672.0 -
============================================= ======== =========== =========== ========
Derivative financial liabilities 10.4 86.1 486.9 -
============================================= ======== =========== =========== ========
Obligations for repayment of cash collateral
received 3.4 - - -
============================================= ======== =========== =========== ========
Deposits received from reinsurers 316.6 1,156.4 3,675.6 -
============================================= ======== =========== =========== ========
Reinsurance finance - - - 30.6
============================================= ======== =========== =========== ========
Reinsurance funds withheld 16.3 59.9 148.8 -
============================================= ======== =========== =========== ========
34 Capital
The net assets of the Group at 31 December 2019 on an IFRS basis were GBP2,321.0m (2018: GBP1,663.8m). The Group manages capital on a regulatory basis. Since 1 January 2016, the Group has been required to comply with the requirements established by the Solvency II Framework directive as adopted by the Prudential Regulation Authority ("PRA") in the UK, and to measure and monitor its capital resources on this basis. The Group and its regulated subsidiaries are required to maintain eligible capital, or "Own Funds", in excess of the value of their Solvency Capital Requirements ("SCR"). The SCR represents the risk capital required to be set aside to absorb 1 in 200 year stress tests of each risk type that the Group is exposed to, including longevity risk, property risk, credit risk and interest rate risk. These risks are all aggregated with appropriate allowance for diversification benefits.
In December 2015, Just Retirement Group plc and JRL received approval to calculate their Solvency II capital requirements using a full internal model. The capital requirement for the ex-Partnership business is assessed using the standard formula. Following the merger of Just Retirement and Partnership, the capital requirement for Just Group plc is calculated using a partial internal model.
The surplus of Own Funds over the SCR is called "Excess Own Funds" and this effectively acts as working capital for the Group. The overriding objective of the Solvency II capital framework is to ensure there is sufficient capital within the insurance company to protect policyholders and meet their payments when due.
In managing its capital the Group undertakes stress and scenario testing to consider the Group's capacity to respond to a series of relevant financial, insurance, or operational shocks or changes to financial regulations should future circumstances or events differ from current assumptions. The review also considers mitigating actions available to the Group should a severe stress scenario occur, such as raising capital, varying the volumes of new business written and a scenario where the Group does not write new business.
The Group's capital position can be adversely affected by a number of factors, in particular factors that erode the Group's capital resources and/or which impact the quantum of risk to which the Group is exposed. In addition, any event which erodes current profitability and is expected to reduce future profitability and/or make profitability more volatile could impact the Group's capital position, which in turn could have a negative effect on the Group's results of operations.
In assessing the Group's capital position, matters currently under development by the PRA have been taken into account.
In order to allow a Matching Adjustment ("MA") under Solvency II on Lifetime Mortgage ("LTM") assets, Just Retirement Limited ("JRL") restructures its LTMs through a Special Purpose Entity ("SPE"). This SPE issues LTM notes to JRL that are MA-eligible due to their fixed cash flows ("the Senior Notes"). The equity tranche of this restructuring ("the Junior Note") is not MA-eligible.
The regulatory environment for LTMs has evolved since the adoption of Solvency II through the publication of SS3/17 "Solvency II: Equity Release Mortgages", and PS19/19 "Solvency II: Equity Release Mortgages - Part 2". SS3/17, originally issued in July 2017 and subsequently updated by PS31/18 "Solvency II: Equity Release Mortgages" issued in December 2018, became effective in December 2019 and introduced a new key element, the effective value test ("EVT"). This acts as a regulatory diagnostic validation test which the PRA expects firms to conduct as a means of monitoring compliance with Solvency II requirements relating to the calculation of the Fundamental Spread ("FS") and thus the MA in the case where MA liabilities are matched with restructured ERMs.
The minimum EVT parameters applicable at December 2021 were published in September 2019: 13% volatility and a 0.5% deferment rate. The PRA will update the minimum parameterisation every 6 months (in March and September) and PS19/19 confirmed the link between the deferment rate and long-term real interest rates. This link helps remove some of the potential interest rate volatility introduced by the EVT although in practice there will be exposure to the lag from the half yearly updates. An additional source of uncertainty arises from the PRA's judgment over the parameterisation. For example the PRA has indicated that they would normally expect to update the deferment rate in 50bp steps and they would not expect the deferment rate to be negative so the link with real interest rates is not absolute. PS19/19 established that firms could use a phasing-in period, whereby a minimum deferment rate of 0% could be used until 31 December 2021 with no PRA approval required to do so.
The Group regularly engages with the PRA on these regulatory developments. The updated regulatory framework set out in SS3/17 and PS19/19 prompted Just to restructure and update its internal LTM securitisation (which had been designed prior to SS3/17) to better meet the revised regulatory expectations. This included a significant undertaking in the second half of 2019 to update the methodology used to determine the internal rating, amount and spread on the LTM notes used to enable LTM assets to be eligible for matching adjustment. A restructure was effected on 31 December 2019 which involved a redemption of existing notes, a restructuring and an issuance of new LTM notes. JRL now maintains a single pool of LTMs tranched into eleven internally-rated and MA-eligible securitised Senior notes held within JRL's MA portfolio, and one enlarged non-MA-eligible Junior note held in JRL's non-MA portfolio. These notes will be regularly incremented for new LTM originations.
The restructure removes much of the uncertainty on the level of MA relating to LTMs in the regulatory balance sheet. Following the restructure Just passes the PRA EVT with a material buffer (0.67%) over the minimum deferment rate of zero required at 31 December 2019 and volatility of 13% in line with the requirement. The restructuring has led to a reduction in MA which has resulted in an increase in technical provisions of approximately GBP300m of which approximately 44% relates to pre-2016 business and hence is partly offset by an increase in the TMTP and tax effects. The restructure has effectively accelerated recognition of some of the expected impact of complying with the new regulations applicable in 2021. The expected cost of satisfying the EVT at a parameterisation of 13%/1% (which includes a 0.5% buffer over the PRA's ultimate expectations of 0.5% as published in September 2019) rather than our current level of 13%/0.67% depends on economic conditions but would have been GBP80m at 31 December 2019, after allowing for the TMTP and tax offset.
The Group continues to engage in discussion with the PRA around its SCR methodology treatment, including the requirements for how the EVT would be applied in stress scenarios as set out in PS19/19. The PRA expects firms' SCR treatments to be updated for EVT under stress by 2021. At year-end 2019, our calculations indicate that the SCR currently held should be sufficient to pass an EVT in stress validation test. Therefore our previous planning assumption, of an increase in SCR of cGBP130m (unaudited) to allow for EVT under stress by 2021, has been removed. Uncertainty remains as to how the introduction of an EVT in stress will ultimately be implemented by the industry and Just. The ultimate impact will also depend on the economic conditions at the time.
Although there is still more work to do to fully adopt the 2021 regulatory requirements, the restructuring of the mortgage notes represents a significant step towards ensuring the continuing compliance of our matching adjustment approach with the PRA's framework in a post EVT world. It also provides a basis for discussion with the PRA on the potential MA benefit of the NNEG risk transfer transactions.
Just has an approved partial internal model to calculate the Group Solvency Capital Requirement, which it reviews for continued appropriateness. In 2020 it expects to review the model to reflect changes in the risk profile of the balance sheet arising from the requirements of PS19/19 and other business developments.
Given that the Group continues to experience a high level of regulatory activity and intense regulatory supervision, there is also the risk of PRA intervention, not limited to the matters described in the paragraphs above, which could negatively impact on the Group's capital position.
As a result of the matters described above, a risk remains that the Group could, in order to better manage its capital position, further reduce new business volumes or close to new business. These are decisions that the Board keeps under regular review as it continuously monitors the impact of new business on the firm's actual and future expected capital position.
The Group has completed a number of actions in relation to capital during the year:
-- In March 2019 the Group raised a total of GBP375m new capital (before issue costs), through a GBP300m Restricted Tier 1 notes issuance and through a GBP75m equity placing, which can be used to support the Group's capital requirements.
-- In August 2019 the Group entered into a reinsurance transaction with RGA to reduce Just Retirement Limited's exposure to longevity risk (and the associated capital requirements) for DB business written since the implementation of Solvency II, which is effective from 1 July 2019.
-- In October 2019 the Group raised further new capital through the issue of GBP125m 8.125% Tier 2 loan notes (before issue costs) and completed a tender for GBP37m of the existing GBP100m 9.5% Partnership Tier 2 notes. The Group has announced that it will call the remaining GBP67m Partnership Tier 2 notes at their first call date in March 2020, resulting in a net increase in Tier 2 capital of GBP25m (before costs) once the redemption of the PLACL notes is completed.
-- The Group has significantly reduced new business strain through a planned reduction in new business volumes, re-pricing and cost reductions.
The Group also recognises the need to continue to strengthen its capital position and has a range of potential actions available. These include:
-- Reduction to new business strain is planned through DB partner business which is much less capital intensive.
-- Additional reinsurance of existing business to release risk margin and SC R in respect of that business.
-- Ongoing cost savings are planned with a target to eliminate expense overruns by the end of 2021.
-- The Group remains in discussion with the PRA to establish satisfactory regulatory treatment for the NNEG risk transfer transactions already completed.
-- New business strain could be further reduced by reducing the volume of new nosiness written or by changing the mix of new business.
-- The Board continues to review the optimal capital mix, subject to market liquidity and availability. For example, the Group currently has a material amount of unutilised Tier 2 debt capacity.
The Board recognises that the successful implementation of some of these potential or planned actions are not wholly within the control of the Group.
Further information on the matters considered by the Directors at 31 December 2019 in relation to capital and going concern is included in note 1.1, Basis of preparation.
The Group's objectives when managing capital for all subsidiaries are:
-- to comply with the insurance capital requirements required by the regulators of the insurance markets where the Group operates. The Group's policy is to manage its capital in line with its risk appetite and in accordance with regulatory requirements;
-- to safeguard the Group's ability to continue as a going concern; -- to continue to provide returns for shareholders and benefits for other stakeholders; and -- to provide an adequate return to shareholders by pricing insurance and investment contracts commensurately with the level of risk.
Group entities that are under supervisory regulation and are required to maintain a minimum level of regulatory capital include:
-- Just Retirement Limited and Partnership Life Assurance Company Limited - authorised by the PRA, and regulated by the PRA and FCA.
-- HUB Financial Solutions Limited, Just Retirement Money Limited and Partnership Home Loans Limited - authorised and regulated by the FCA.
The Group and its regulated subsidiaries complied with their regulatory capital requirements throughout the year.
Group capital position (unaudited)
The Group's estimated capital surplus position at 31 December 2019, which is unaudited, and is stated after including 12 months' amortisation of transitional relief, was as follows:
Minimum Group
Solvency Solvency Capital
Capital Requirement Requirement
==================== ======================= ====================
2019(1) 2018(2) 2019 2018
GBPm GBPm GBPm GBPm
==================== =========== ========== ========= =========
Eligible Own Funds 2,562 2,284 1,928 1,763
==================== =========== ========== ========= =========
Capital Requirement (1,814) (1,589) (444) (393)
==================== =========== ========== ========= =========
Excess Own Funds 748 695 1,484 1,370
==================== =========== ========== ========= =========
Coverage ratio 141% 144% 434% 449%
==================== =========== ========== ========= =========
1 Estimated regulatory position.
2 As reported in the Group's Solvency and Financial Condition Report as at 31 December 2018.
35 Group entities
The Group holds investment in the ordinary shares (unless otherwise stated) of the following subsidiary undertakings and associate undertakings, which are all consolidated in these Group accounts. All subsidiary undertakings have a financial year end at 31 December (unless otherwise stated).
Percentage
of nominal
share capital
and voting
Registered rights
Principal activity office held
======================================= ====================== ============== ==============
Direct subsidiary
======================================= ======================= ============= ==============
Just Retirement Group Holdings
Limited Holding company Reigate 100%
======================================= ======================= ============= ==============
Partnership Assurance Group Limited Holding company London 100%
======================================= ======================= ============= ==============
Indirect subsidiary
======================================= ======================= ============= ==============
HUB Acquisitions Limited(1) Holding company Reigate 100%
======================================= ======================= ============= ==============
HUB Financial Solutions Limited Distribution Reigate 100%
======================================= ======================= ============= ==============
HUB Online Development Limited Software development Belfast 100%
======================================= ======================= ============= ==============
Just Management Services (Proprietary)
Limited Management services South Africa 100%
======================================= ======================= ============= ==============
Just Re 1 Limited Investment activity Reigate 100%
======================================= ======================= ============= ==============
Just Re 2 Limited Investment activity Reigate 100%
======================================= ======================= ============= ==============
Just Retirement (Holdings) Limited Holding company Reigate 100%
======================================= ======================= ============= ==============
Just Retirement (South Africa)
Holdings (Pty) Limited Holding company South Africa 100%
======================================= ======================= ============= ==============
Just Retirement Life (South Africa)
Limited Life assurance South Africa 100%
======================================= ======================= ============= ==============
Just Retirement Limited Life assurance Reigate 100%
======================================= ======================= ============= ==============
Just Retirement Management Services
Limited Management services Reigate 100%
======================================= ======================= ============= ==============
Provision of lifetime
Just Retirement Money Limited mortgage products Reigate 100%
======================================= ======================= ============= ==============
Partnership Group Holdings Limited Holding company London 100%
======================================= ======================= ============= ==============
Partnership Holdings Limited Holding company London 100%
======================================= ======================= ============= ==============
Provision of lifetime
Partnership Home Loans Limited mortgage products London 100%
======================================= ======================= ============= ==============
Partnership Life Assurance Company
Limited Life assurance London 100%
======================================= ======================= ============= ==============
Partnership Life US Company Management services USA 100%
======================================= ======================= ============= ==============
Partnership Services Limited Management services London 100%
======================================= ======================= ============= ==============
PASPV Limited Investment activity London 100%
======================================= ======================= ============= ==============
PayingForCare Limited Website Reigate 100%
======================================= ======================= ============= ==============
PLACL RE 1 Limited Investment activity Reigate 100%
======================================= ======================= ============= ==============
PLACL RE 2 Limited Investment activity Reigate 100%
======================================= ======================= ============= ==============
The Open Market Annuity Service
Limited Software solutions Belfast 100%
======================================= ======================= ============= ==============
TOMAS Online Development Limited Software development Belfast 100%
======================================= ======================= ============= ==============
Enhanced Retirement Limited Dormant Reigate 100%
======================================= ======================= ============= ==============
HUB Pension Consulting Limited Dormant Reigate 100%
======================================= ======================= ============= ==============
HUB Pension Solutions Limited Software solutions Reigate 100%
======================================= ======================= ============= ==============
HUB Transfer Solutions Limited Dormant Reigate 100%
======================================= ======================= ============= ==============
JRP Group Limited Dormant Reigate 100%
======================================= ======================= ============= ==============
JRP Nominees Limited Dormant Reigate 100%
======================================= ======================= ============= ==============
Just Annuities Limited Dormant Reigate 100%
======================================= ======================= ============= ==============
Just Equity Release Limited Dormant Reigate 100%
======================================= ======================= ============= ==============
Just Incorporated Limited Dormant Reigate 100%
======================================= ======================= ============= ==============
Just Protection Limited Dormant Reigate 100%
======================================= ======================= ============= ==============
Just Retirement Finance plc Dormant Reigate 100%
======================================= ======================= ============= ==============
Just Retirement Nominees Limited Dormant Reigate 100%
======================================= ======================= ============= ==============
Just Retirement Solutions Limited Dormant Reigate 100%
======================================= ======================= ============= ==============
PAG Finance Limited Dormant Jersey 100%
======================================= ======================= ============= ==============
PAG Holdings Limited Dormant Jersey 100%
======================================= ======================= ============= ==============
TOMAS Acquisitions Limited Dormant Reigate 100%
======================================= ======================= ============= ==============
Corinthian Group Limited Holding company Reigate 75%
======================================= ======================= ============= ==============
Corinthian Pension Consulting
Limited Pension consulting Reigate 75%
======================================= ======================= ============= ==============
Spire Platform Solutions Limited(2,3) Software development Portsmouth 33%(4) ======================================= ======================= ============= ============== 1 Class "A" and Class "B" ordinary shares. 2 Class "B" ordinary shares. 3 30 June year end. 4 Control is based on Board representation rather than percentage holding.
Registered offices
Reigate office: London office: Belfast office: South Africa office:
================ ========================== ========================= ==========================
Vale House 5th Floor, 110 Bishopsgate 3rd Floor, Arena Building Office G01, Big Bay
Roebuck Close London EC2N 4AY Ormeau Road Office Park
Bancroft Road Belfast BT7 1SH 16 Beach Estate Boulevard
Reigate, Surrey Big Bay
RH2 7RU Western Cape 7441
================ ========================== ========================= ==========================
Jersey office: United States office: Portsmouth office:
================ ========================== ========================= ==========================
2711 Centerville
Road Building 3000
44 Esplanade Suite 400 Lakeside North Harbour
St Helier Wilmington Portsmouth
Jersey JE4 9WG Delaware Hampshire PO6 3EN
================ ========================== ========================= ==========================
On 24 July 2019 the Group disposed of its 33% interest in associated undertaking Eldercare Group Limited. At disposal, the Group's share of the net assets of Eldercare Group Limited recognised on the Consolidated statement of financial position under the equity method of accounting was GBP0.3m.
On 4 July 2018 the Group subscribed to 33% of the ordinary share capital of Spire Platform Solutions Limited. The Group has majority representation on the Board of the company, giving it effective control, and therefore consolidates the company in full in the results of the Group.
On 17 August 2018 the Group acquired 75% of the ordinary share capital of Corinthian Group Limited.
The non-controlling interests of the minority shareholders of Spire Platform Solutions Limited and Corinthian Group Limited totalling GBP(0.2)m have been recognised in the year.
36 Related parties
The Group has related party relationships with its key management personnel and associated undertakings. All transactions with related parties are carried out on an arm's length basis.
Key management personnel comprise the Directors of the Company.
There were no material transactions between the Group and its key management personnel other than those disclosed below.
Key management compensation is as follows:
Year ended Year ended
31 December 31 December
2019 2018
GBPm GBPm
================================== ============ ============
Short-term employee benefits 2.2 4.4
================================== ============ ============
Share-based payments 1.0 2.7
================================== ============ ============
Total key management compensation 3.2 7.1
================================== ============ ============
Loans owed by Directors 0.4 0.4
================================== ============ ============
The loan advances to Directors accrue interest fixed at 4% per annum and are repayable in whole or in part at any time.
37 Ultimate Parent Company and ultimate controlling party
The Company is the ultimate Parent Company of the Group and has no controlling interest.
38 Post balance sheet events
On 25 February 2020 the Group announced that the remaining GBP62.5m 9.5% 10 year subordinated debt issued by PLACL in 2015 will be called on 24 March 2020, the first call date.
On 11 March 2020 the Group signed an NNEG risk transfer transaction with an AA rated counterparty. The transaction protects the Group from NNEG risk caused by a fall in UK house prices in relation to an insured portfolio of GBP670m of LTMs.
On 11 March 2020 the Group signed a 100% quota share reinsurance treaty with a leading reinsurer covering c.GBP250m of liabilities in respect of a Defined Benefit De-risking Solutions policy.
There are no other post balance sheet events that have taken place between 31 December 2019 and the date of this report.
Additional Financial Information
The following additional financial information is unaudited.
Solvency II surplus generation
The table below shows the expected future emergence of Solvency II surplus from the in-force book in excess of 100% of SCR over the next 35 years. The amounts are shown undiscounted and exclude Excess Own Funds at 31 December 2019 of GBP748m.
The core surplus generation assumes that future property growth is in line with the best estimate assumption of 3.8%. The projection does not allow for the impact of future new business or dividends from 31 December 2019. Therefore any surplus emerging is assumed to roll up and earn an investment return, contributing to further surplus. The cashflow amounts shown are before the interest and principal payments on all debt obligations.
The TMTP amortisation shown includes the impact of the accelerated TMTP amortisation. The impact of the regulatory changes shown are the costs of phasing in the changes arising from SS3/17 to meet a 13% volatility and 1% deferment rate in the Effective Value Test by 31 December 2021.
Core surplus Regulatory TMTP amortisation Surplus
generation changes GBPm generation
Year GBPm GBPm GBPm
============ ============ ========== ================= ===========
2020 294 - (154) 139
============ ============ ========== ================= ===========
2021 309 (68) (126) 115
============ ============ ========== ================= ===========
2022 307 - (131) 176
============ ============ ========== ================= ===========
2023 294 - (131) 163
============ ============ ========== ================= ===========
2024 286 - (131) 156
============ ============ ========== ================= ===========
2025 278 - (131) 147
============ ============ ========== ================= ===========
2026 271 - (131) 140
============ ============ ========== ================= ===========
2027 255 - (131) 124
============ ============ ========== ================= ===========
2028 250 - (131) 119
============ ============ ========== ================= ===========
2029 245 - (131) 115
============ ============ ========== ================= ===========
2030 233 - (131) 102
============ ============ ========== ================= ===========
2031 229 - (131) 98
============ ============ ========== ================= ===========
2032 220 - - 220
============ ============ ========== ================= ===========
2033 215 - - 215
============ ============ ========== ================= ===========
2034 208 - - 208
============ ============ ========== ================= ===========
2035 196 - - 196
============ ============ ========== ================= ===========
2036 193 - - 193
============ ============ ========== ================= ===========
2037 181 - - 181
============ ============ ========== ================= ===========
2038 172 - - 172
============ ============ ========== ================= ===========
2039 169 - - 169
============ ============ ========== ================= ===========
2040 - 2044 669 - - 669
============ ============ ========== ================= ===========
2045 - 2049 447 - - 447
============ ============ ========== ================= ===========
2050 - 2054 292 - - 292
============ ============ ========== ================= ===========
New business contribution
The table below shows the expected future emergence of SII surplus arising from 2019 new business in excess of 100% of SCR over 35 years from the point of sale. It shows the initial Solvency II capital strain in 2019. The amounts are shown undiscounted.
Surplus
generation
Year GBPm
=============== ============
Point of sale (74.0)
================== ============
Year 1 14.7
================== ============
Year 2 14.8
================== ============
Year 3 14.8
================== ============
Year 4 14.5
================== ============
Year 5 13.9
================== ============
Year 6 13.6
================== ============
Year 7 13.1
================== ============
Year 8 12.6
================== ============
Year 9 12.1
================== ============
Year 10 12.5
================== ============
Year 11 12.4
================== ============
Year 12 12.6
================== ============
Year 13 12.9
================== ============
Year 14 13.0
================== ============
Year 15 12.6
================== ============
Year 16 12.3
================== ============
Year 17 11.9
================== ============
Year 18 11.5
================== ============
Year 19 10.4
================== ============
Year 20 10.0
================== ============
Years 21 to 25 40.4
================== ============
Years 26 to 30 21.6
================== ============
Years 31 to 35 4.4
================== ============
Glossary
Acquisition costs - acquisition costs comprise the direct costs (such as commissions) of obtaining new business.
Adjusted earnings per share - an APM, this measures earnings per share based on adjusted operating profit after attributed tax, rather than IFRS profit before tax. This measure is calculated by taking the adjusted operating profit APM, reduced for the effective tax rate (19% for 2019), and dividing this result by the weighted average number of shares in issue by the Group for the year.
Adjusted operating profit before tax - an APM and one of the Group's KPIs, this is the sum of new business operating profit, in-force operating profit together, operating experience and assumption changes, other Group companies' operating results, development expenditure and reinsurance and financing costs. The Board believes it provides a better view of the longer term performance of the business than profit before tax because it excludes the impact of short-term economic variances and other one-off items. It excludes the following items that are included in profit before tax: non-recurring and project expenditure, implementation costs for cost-saving initiatives, investment and economic profits and amortisation and impairment costs. In addition it includes Tier 1 interest (as part of financing costs) which is not included in profit before tax (because the Tier 1 notes are treated as equity rather than debt in the IFRS financial statements). Adjusted operating profit is reconciled to IFRS profit before tax in the Financial Review.
Alternative performance measure ("APM") - in addition to statutory IFRS performance measures, the Group has presented a number of non-statutory alternative performance measures ("APMs") within the Annual Report and Accounts. The Board believes that the APMs used give a more representative view of the underlying performance of the Group. APMs are identified in this glossary together with a reference to where the APM has been reconciled to its nearest statutory equivalent. APMs which are also KPIs are indicated as such.
Amortisation and impairment of intangible assets - amortisation costs relate to the amortisation of the Group's intangible assets, including the amortisation of intangible assets recognised in relation to the acquisition of Partnership Assurance Group plc by Just Retirement Group plc.
Auto-enrolment - new legal duties being phased in that require employers to automatically enrol workers into a workplace pension.
Buy-in - an exercise enabling a pension scheme to obtain an insurance contract that pays a guaranteed stream of income sufficient to cover the liabilities of a group of the scheme's members.
Buy-out - an exercise that wholly transfers the liability for paying member benefits from the pension scheme to an insurer which then becomes responsible for paying the members directly.
Capped Drawdown - a non-marketed product from Just Group previously described as Fixed Term Annuity. Capped Drawdown products ceased to be available to new customers when the tax legislation changed for pensions in April 2015.
Care Plan - a specialist insurance contract contributing to the costs of long-term care by paying a guaranteed income to a registered care provider for the remainder of a person's life.
Change in insurance liabilities - change in insurance liabilities represents the difference between the year-on-year change in the carrying value of the Group's insurance liabilities and the year-on-year change in the carrying value of the Group's reinsurance assets including the effect of the impact of reinsurance recaptures.
Combined Group/Just Group - following completion of the merger with Partnership Assurance Group plc, Just Group plc and each of its consolidated subsidiaries and subsidiary undertakings comprising the Just Retirement Group and the Partnership Assurance Group.
Defined benefit pension scheme - a pension scheme, usually backed or sponsored by an employer, that pays members a guaranteed level of retirement income based on length of membership and earnings.
Defined contribution ("DC") pension scheme - a work-based or personal pension scheme in which contributions are invested to build up a fund that can be used by the individual member to provide retirement benefits.
De-risk/de-risking - an action carried out by the trustees of a pension scheme with the aim of transferring investment, inflation and longevity risk from the sponsoring employer and scheme to a third party such as an insurer.
Development expenditure - development expenditure captures costs relating to the development of new products and new initiatives, and is included within adjusted operating profit.
Drawdown (in reference to Just Group sales or products) - collective term for Flexible Pension Plan and Capped Drawdown.
Economic capital coverage ratio - an APM and one of the Group's KPIs, economic capital is a risk-based capital measure and expresses the Board's view of the available capital as a percentage of the required capital.
Embedded value -this represents the sum of shareholders' net assets and the value of in-force business, and is a measure in assessing the future profit streams of the Group's long-term business. It also recognises the additional value of profits in the business that has been written but not yet recognised under IFRS accounting.
Employee benefits consultant - an adviser offering specialist knowledge to employers on the legal, regulatory and practical issues of rewarding staff including non-wage compensation such as pensions, health and life insurance and profit sharing.
Equity release - products and services enabling homeowners to generate income or lump sums by accessing some of the value of the home while continuing to live in it.
Finance costs - finance costs represent interest payable on reinsurance deposits and financing, the interest on the Group's Tier 2 Debt, and, in the prior year, bank finance costs.
Flexi-access drawdown - the option introduced in April 2015 for DC pension savers who have taken tax-free cash to take a taxable income directly from their remaining pension with no limit on withdrawals.
Gross premiums written - gross premiums written are the total premiums received by the Group in relation to its Retirement Income and Protection sales in the year, gross of commission paid.
Guaranteed Guidance - see Pensions Wise.
Guaranteed Income for Life ("GIfL") - retirement income products which transfer the investment and longevity risk to the Company and provide the retiree a guarantee to pay an agreed level of income for as long as a retiree lives. On a "joint-life" basis, continues to pay a guaranteed income to a surviving spouse/partner. Just provides modern individually underwritten GIfL solutions.
IFRS net assets - one of the Group's KPIs, representing the assets attributable to equity holders.
IFRS profit before tax - one of the Group's KPIs, representing the profit before tax attributable to equity holders.
In-force operating profit - an APM and one of the Group's KPIs, capturing the expected margin to emerge from the in-force book of business and free surplus, and results from the gradual release of prudent reserving margins over the lifetime of the policies. In-force operating profit is reconciled to IFRS profit before tax in the financial review.
Investment and economic profits - investment and economic profits reflect the difference in the year between expected investment returns, based on investment and economic assumptions at the start of the year, and the actual returns earned. Investment and economic profits also reflect the impact of assumption changes in future expected risk-free rates, corporate bond defaults and house price inflation and volatility.
Key performance indicators ("KPIs") - KPIs are metrics adopted by the Board which are considered to give an understanding of the Group's underlying performance drivers. The Group's KPIs are Retirement Income sales, new business operating profit, in-force operating profit, adjusted operating profit, IFRS profit before tax, IFRS net assets, Solvency II capital coverage ratio and economic capital coverage ratio.
Lifetime mortgage ("LTM") - an equity release product that allows homeowners to take out a loan secured on the value of their home, typically with the loan plus interest repaid when the home is no longer needed.
LTM notes - structured assets issued by a wholly owned special purpose entity, Just Re1 Ltd. Just Re1 Ltd holds two pools of lifetime mortgages, each of which provides the collateral for issuance of senior and mezzanine notes to Just Retirement Ltd, eligible for inclusion in its matching portfolio.
Medical underwriting - the process of evaluating an individual's current health, medical history and lifestyle factors, such as smoking, when pricing an insurance contract.
Net claims paid - net claims paid represents the total payments due to policyholders during the accounting period, less the reinsurers' share of such claims which are payable back to the Group under the terms of the reinsurance treaties.
Net investment income - net investment income comprises interest received on financial assets and the net gains and losses on financial assets designated at fair value through profit or loss upon initial recognition and on financial derivatives.
Net premium revenue - net premium revenue represents the sum of gross premiums written and reinsurance recapture, less reinsurance premium ceded.
New business margin - new business margin is the new business operating profit divided by retirement income
sales. It provides a measure of the profitability of new business sales.
New business strain - represents the capital strain on new business written in the year after allowing for acquisition expense allowances and the establishment of Solvency II technical provisions and solvency capital requirements.
New business operating profit - an APM and one of the Group's KPIs, representing the profit generated from new business written in the year after allowing for the establishment of reserves and for acquisition expenses. New business operating profit is reconciled to IFRS profit before tax in the Financial Review.
New business sales - an APM and an indicator of the Group's growth and realisation of its strategic objectives. New business sales include DB, GIfL, Care, FPP and protection premiums written combined with LTM advances in the year. New business sales are reconciled to IFRS gross premiums in note 6 to the consolidated financial statements.
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 acquisition integration, or acquisition transaction costs, which are shown as separate line items.
Operating experience and assumption changes - captures the impact of the actual operating experience differing from that assumed at the start of the year, plus the impact of changes to future operating assumptions applied during the year. It also includes the impact of any expense reserve movements, and other sundry operating items.
Other Group companies' operating results - the results of Group companies including our HUB group of companies, which provides regulated advice and intermediary services, and professional services to corporates, and corporate costs incurred by Group holding companies and the overseas start-ups.
Other operating expenses - 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.
Organic capital generation - an APM and one of the Group's KPIs. Organic capital generation is the net increase in Solvency II excess own funds over the year, excluding the impacts of equity and debt capital raised, economic variances and regulatory changes. The Board believes that this measure provides a good view of the progress made towards achieving a sustainable capital model. Organic capital generation is reconciled to Solvency II excess own funds in the Financial Review.
Pension Freedoms/Pension Freedom and Choice/Pension Reforms - the UK Government's pension reforms, implemented in April 2015.
Pensions Wise - the free and impartial service introduced in April 2015 to provide "Guaranteed Guidance" to defined contribution pension savers considering taking money from their pensions.
PrognoSys(TM) - a next generation underwriting system, which is based on individual mortality curves derived from Just Group's own data collected since its launch in 2004.
Regulated financial advice - personalised financial advice for retail customers by qualified advisers who are regulated by the Financial Conduct Authority.
Reinsurance and finance costs - the interest on subordinated debt, bank loans and reinsurance financing, together with reinsurance fees incurred.
Retirement Income sales (in reference to Just Group sales or products) - an APM and one of the Group's KPIs and collective term for GIfL, DB and Care Plan. Retirement Income sales are reconciled to IFRS gross premiums in note 2 to the consolidated financial statements.
Retirement sales (in reference to Just Group sales or products) - collective term for Retirement Income sales and Drawdown.
Solvency II - an EU Directive that codifies and harmonises the EU insurance regulation. Primarily this concerns the amount of capital that EU insurance companies must hold to reduce the risk of insolvency.
Solvency II capital coverage ratio - one of the Group's KPIs. Solvency II capital is the regulatory capital measure and is focused on by the Board in capital planning and business planning alongside the economic capital measure. It expresses the regulatory view of the available capital as a percentage of the required capital.
Trustees - individuals with the legal powers to hold, control and administer the property of a trust such as a pension scheme for the purposes specified in the trust deed. Pension scheme trustees are obliged to act in the best interests of the scheme's members.
Underlying operating profit - an APM and the sum of the new business operating profit and in-force operating profit. As this measure excludes the impact of one-off assumption changes and investment variances, the Board considers it to be a key indicator of the progress of the business and a useful measure for investors and analysts when assessing the Group's financial performance. Underlying operating profit is reconciled to IFRS profit before tax in the Financial Review.
ABBREVIATIONS
AGM - Annual General Meeting PRI - United Nations Principles APM - alternative performance measure for Responsible Investment Articles - Articles of Association PVIF - purchased value of in-force CMI - Continuous Mortality Investigation PwC - PricewaterhouseCoopers LLP Code - UK Corporate Governance RICS - The Royal Institution of Code Chartered Surveyors CP - Care Plans RPI - retail price inflation DB - Defined Benefit De-risking SAPS - Self-Administered Pension Solutions Scheme DC - defined contribution SAYE - Save As You Earn DSBP - deferred share bonus plan SCR - Solvency Capital Requirement EBT - employee benefit trust SFCR - Solvency and Financial Condition EPS - earnings per share Report ERM - equity release mortgage SID - Senior Independent Director ESG - environment, social and governance SIP - Share Incentive Plan EVT - effective value test SLI - Secure Lifetime Income FCA - Financial Conduct Authority SME - small and medium-sized enterprise FPP - Flexible Pension Plan STIP - Short Term Incentive Plan FRC - Financial Reporting Council tCO 2 e - tonnes of carbon dioxide GDPR - General Data Protection equivalent Regulation TMTP - transitional measures on GHG - greenhouse gas technical provisions GIfL - Guaranteed Income for Life TSR - Total Shareholder Return Hannover - Hannover Life Reassurance Bermuda Ltd IFRS - International Financial Reporting Standards IP - intellectual property ISA - International Standards on Auditing JRL - Just Retirement Limited KPI - key performance indicator LTIP - Long Term Incentive Plan LTM - lifetime mortgage MA -matching adjustment MAR - Market Abuse Regulation NAV - net asset value NNEG - no-negative equity guarantee ORSA - Own Risk and Solvency Assessment PAG - Partnership Assurance Group PILON - payment in lieu of notice PLACL - Partnership Life Assurance Company Limited PRA - Prudential Regulation Authority
This information is provided by RNS, the news service of the London Stock Exchange. RNS is approved by the Financial Conduct Authority to act as a Primary Information Provider in the United Kingdom. Terms and conditions relating to the use and distribution of this information may apply. For further information, please contact rns@lseg.com or visit www.rns.com.
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