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| Share Name | Share Symbol | Market | Type | Share ISIN | Share Description |
|---|---|---|---|---|---|
| St. James's Place Plc | LSE:STJ | London | Ordinary Share | GB0007669376 | ORD 15P |
| Price Change | % Change | Share Price | Bid Price | Offer Price | High Price | Low Price | Open Price | Shares Traded | Last Trade | |
|---|---|---|---|---|---|---|---|---|---|---|
| 5.40 | 1.29% | 423.00 | 419.60 | 419.80 | 420.40 | 406.40 | 412.80 | 2,610,562 | 16:35:07 |
| Industry Sector | Turnover | Profit | EPS - Basic | PE Ratio | Market Cap |
|---|---|---|---|---|---|
| Trust,ex Ed,religious,charty | 18.98B | -10.1M | -0.0184 | -228.15 | 2.3B |
From Apr 2021 to Apr 2024
TIDMSTJ
RNS Number : 6558G
St. James's Place PLC
28 July 2021
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ST. JAMES ' S PLACE PLC
27 St. James ' s Place, London SW1A 1NR
Telephone 020 7493 8111
PRESS RELEASE
28 July 2021
ANNOUNCEMENT OF HALF YEAR RESULTS FOR THE SIX MONTHSED 30 JUNE 2021
STRONG NEW BUSINESS AND FINANCIAL PERFORMANCE
St. James ' s Place plc ("SJP"), the wealth management group, today issues its results for the six months ended 30 June 2021:
New investment and funds under management
-- Gross inflows of GBP9.2 billion (2020: GBP7.3 billion) -- Continued strong retention of client funds - 96%
-- Net inflows of GBP5.5 billion (2020: GBP4.5 billion), representing 8.6% of opening FUM (annualised)
-- Group funds under management of GBP143.8 billion (31 December 2020: GBP129.3 billion)
Financial highlights
-- Underlying cash result GBP189.3 million (2020: GBP114.4 million) -- EEV operating profit GBP844.8 million (2020: GBP418.7 million) -- IFRS profit after tax GBP120.9 million (2020: GBP178.1 million) -- Interim dividend of 11.55 pence per share, representing 30% of prior full year dividend
Other highlights
-- We are now represented by 4,477 qualified advisers across the Partnership, an increase of 139 year to-date
-- 71 advisers graduated from our Academy programmes; 277 'students' now enrolled -- EEV net asset value per share GBP15.31 (2020: GBP12.78)
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Andrew Croft, Chief Executive Officer, commented:
"I am very pleased to report a strong set of new business and financial results for the first six months of the year.
During the first half, the Partnership attracted GBP9.2 billion of new client investments, with strong flows reflecting a combination of factors including improving client sentiment, a sharp increase in household savings rates, and high levels of client engagement. Retention has remained strong through the period, resulting in net inflows of GBP5.5 billion in the first half, equivalent to 8.6% of opening funds under management on an annualised basis. These net inflows, together with the positive impact from investment markets, has resulted in funds under management closing the half at a record GBP143.8 billion, up 11% year to-date.
Growth in new business and funds under management has resulted in strong growth in income whilst 'controllable' expenses for the six months are modestly lower than in the first half of 2020 reflecting the phasing of our planned cost growth towards the second half of the year. The combination of the income and expense outcomes has resulted in a strong financial result, with the underlying cash result of GBP189.3 million, up strongly on the prior period.
During the first half we added a net 139 advisers through resuming activity in both experienced adviser recruitment and Academy graduation. Having grown the Partnership by 3.2% during the first half, we are well positioned to support even more clients with their long-term financial planning goals going forward.
The impact of the pandemic on the timing and value of flows in 2020 and 2021 will naturally result in a variable pattern of year on year growth and normal phasing of business. Taking this into account together with a strong start to July, we anticipate a rate of gross inflow growth for the second half of around 20% despite strengthening comparatives in the latter part of the year.
Although there remains inherent uncertainty in the operating environment as the UK and the world at large continues to navigate the pandemic, the results we have announced today show we have made an encouraging start against our 2025 ambitions."
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Enquiries:
Hugh Taylor, Investor Relations Director, 07818 075143
Jamie Dunkley, External Communications Director, 07779 999651
Brunswick Group: Tel: 020 7404 5959
-- Tom Burns - Email: tburns@brunswickgroup.com
-- Eilis Murphy - Email: emurphy@brunswickgroup.com:
2021 Half Year Results Presentation
Date: 28 July 2021
Time: 08:30 BST
Duration: 2 hours
Click here to register for the webcast
Q&A session:
The event will conclude with a live Q&A session starting at 9:30am BST. The event platform will remain open to view the Q&A but if you wish to ask questions during this session please dial-in to the conference call line using the details below:
United Kingdom: 0800 640 6441
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Participant access code: 541185
Replay information:
A recording will be available until Wednesday 4 August 2021
UK: 020 3936 3001
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Access Code: 413137
Hot Features
Premium
CONTENTS
PART ONE GROSS INFLOW FIGURES
PART TWO INTERIM MANAGEMENT STATEMENT
PART THREE CONDENSED CONSOLIDATED HALF YEAR FINANCIAL STATEMENTS PREPARED UNDER INTERNATIONAL FINANCIAL
REPORTING STANDARDS (IFRS) AS ADOPTED BY THE UNITED KINGDOM (UK)
PART FOUR SUPPLEMENTARY INFORMATION: CONSOLIDATED FINANCIAL STATEMENTS ON A CASH RESULT BASIS (UNAUDITED)
PART FIVE OTHER INFORMATION
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ST. JAMES'S PLACE WEALTH MANAGEMENT
GROSS INFLOWS
FOR THE SIX MONTHS TO 30 JUNE 2021
Unaudited Unaudited
three months to six months to
30 June 30 June
2021 202 0 2021 2020
------------ ------------ ------------ ------------
GBP'Billion GBP'Billion GBP'Billion GBP'Billion
Gross inflows
Investment 0.66 0.39 1.24 0.93
Pension 2.29 1.88 4.98 4.11
Unit Trust, ISA and DFM 1.45 0.95 2.97 2.22
------------ ------------ ------------ ------------
4.40 3.22 37% 9.19 7.26 27%
============ ============ ============ ============
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INTERIM MANAGEMENT STATEMENT
CHIEF EXECUTIVE'S REPORT
I am very pleased to report a strong set of new business and financial results for the first six months of the year, reinforcing our confidence in our ability to deliver on the ambitious strategic goals we have set for our planning horizon through to 2025.
We first set out these goals at the time of the full year 2020 results announcement earlier this year, with a focus on three core ambitions:
-- First, we aim to grow new business by 10% per annum supported by a growing number of advisers and increasing productivity.
-- Second, by maintaining strong retention of client investments we will see net inflows also growing by 10% per annum. These flows, together with modest growth in investment markets, would see funds under management reach more than GBP200 billion by the end of 2025.
-- Third, while we will continue to invest in the business to support our continued growth and maintain our market leading position, the technological foundations that we have put in place over the last few years provide us with greater operating flexibility and efficiency such that our 'controllable' expense growth going forward will be around 5% per annum.
The combination of these planning assumptions, together with the increasing cash emergence from funds in gestation over time, will provide for strong growth in the underlying cash result over the coming years.
New business and funds under management
Although we have faced continued restrictions in our daily lives as a result of the COVID-19 pandemic, the St. James's Place community has continued to learn and adapt to the changing circumstances, exhibiting agility and flexibility in order to maintain our collective focus on delivering great outcomes for clients.
Consequently, the Partnership attracted GBP9.2 billion of new client investments during the first half of the year, which was 27% higher than the same period in 2020. This reflects a combination of factors including improving client sentiment, a sharp increase in household savings rates and high levels of client engagement. Retention has remained strong through the period, resulting in net inflows of GBP5.5 billion in the first half, 23% higher than the prior period and equivalent to 8.6% of opening funds under management on an annualised basis.
The strong growth in gross and net inflows compared with the first six months of 2020 should be considered in light of the particularly difficult trading conditions last year. Perhaps a better measure of our progress is growth compared with the first six months of 2019, a period where gross flows were GBP7.4 billion and net flows were GBP4.4 billion. On this basis, our gross and net inflows for the first half of 2021 represent compound growth of some 12% per annum over the two-year period.
These net inflows, together with a positive impact from investment markets, have resulted in funds under management closing the half at a record GBP143.8 billion, up 11% year to-date.
Financial performance and dividend
Growth in new business and funds under management has resulted in strong growth in income whilst 'controllable' expenses for the six months are modestly lower than in the first half of 2020 reflecting the phasing of our planned cost growth towards the second half of the year. The combination of the income and expense outcomes has resulted in a strong financial result.
Importantly, the underlying cash result for the six months was GBP189.3 million, some 65% higher than the same period last year. The significant growth in the underlying cash result should also be considered in light of the particularly difficult trading conditions we faced last year. Again, a comparison versus the first half of 2019 where the underlying cash result was GBP125.1 million, is perhaps more indicative, showing compound growth of some 23% per annum over the two-year period.
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In line with the guidance we set out in February that future interim dividends would be set at 30% of the prior full year pay-out, the Board has declared an interim dividend for 2021 of 11.55 pence per share.
Supporting clients
We continue to work hard to support clients and give them the confidence to create the futures they seek. Our advisers have been able to utilise technology to maintain service and strengthen client relationships. This shift towards more virtual interaction between advisers and clients is one that we expect to last beyond the end of the pandemic, reflecting the benefits of being able to engage with clients in a way that best suits them, whether that is through physical or virtual meetings.
Strong levels of client engagement have been a feature throughout the first half of the year, with activity accelerating ahead of the tax year-end as clients sought to commit accumulated savings into longer-term investments. With the economic outlook improving as a return to greater normality approaches, engagement has remained high and this has been reflected in our record levels of new business during the period.
Supporting the Partnership
Our advisers continue to do a fantastic job for their clients, providing them with sound advice to keep them on track to achieve their long-term financial objectives. While the first half of the year saw further challenges given ongoing COVID-19 restrictions, our advisers have continued to adapt their ways of working in order to support their existing clients and to attract new clients to their businesses.
Earlier this year we set out our ambition to grow the Partnership by 3-5% in 2021. We have made a good start against that objective having attracted a net 139 advisers to the Partnership, growth of 3.2%. This has been achieved through a combination of experienced adviser recruitment and Academy graduation and means we are well positioned to support even more clients with their long-term financial planning goals going forward. Having resumed new intakes at the start of the year, the Academy now has 277 'students' enrolled in the programme.
As a business focused on supporting clients via the Partnership, it is imperative that we continually refine and improve the way we can help our advisers. To that end, we have made further good progress in embedding Salesforce across the Partnership. This key system will, over time, enable advisers to do an even better job in servicing clients as well as manage their businesses more efficiently.
Investment markets and investment management approach
After a year that saw extreme volatility in investment markets worldwide, improving global economic confidence has resulted in equity markets performing strongly in the first half of 2021, with the MSCI World, S&P 500 and STOXX Europe 50 indices all having registered double-digit percentage gains during the period and the FSE100 having risen by some 9%. I am happy to report that on average, over the last 12 months our clients have received a return of over 15%, contributing to a 7% return net of fees per annum over a 5-year period.
We have made further progress in developing our investment proposition in pursuit of supporting great client outcomes, including the merger of several UK focused funds into a single UK fund managed by a combination of both new and existing managers. These changes are consistent with the development priorities we have recognised as part of our investment proposition 2025 strategy, including our aim to provide a dynamic, joined-up, and easy to use fund range which makes money a force for good.
In recent weeks we have published our second Value Assessment Statement which highlights the progress made, showing over 40% of our funds improving in their overall performance rating. This reflects the value offered by our range of unit trust funds to clients, as well as areas where we have more work to do. As we continue to develop our investment proposition, I am sure the value we offer clients will only increase further.
-7-
Asia
We are pleased with the strength of new business activity in the period with gross inflows of GBP185 million being some 20% higher than the prior year, contributing to funds under management at 30 June of GBP1.4 billion, up 19% since the start of the year.
Net investment in Asia during the first half of the year was lower than the prior year reflecting higher fee income from increasing funds under management together with strong expense discipline. The result is tracking our objective to see our Asian operations become cash positive by 2025.
Looking ahead to the remainder of the year, the business will continue to focus on delivering against its medium-term objective to build 100 great Partner businesses and deliver great outcomes to expatriates and high net worth individuals across our chosen markets.
Rowan Dartington
Now an integrated part of our end to end investment proposition, Rowan Dartington (RD), our discretionary fund management business, has performed well in the first half of the year attracting GBP282 million of new client investments, 33% higher than in the same period in 2020. This has contributed to funds under management of GBP3.2 billion, up 14% since the end of 2020. Net investment in RD during the half was lower than the comparative period.
The business has recently contracted with SS&C, the Group's key outsourcing supplier, to provide system and administrative services for the next 10 years. This is an important step for managing future growth and further underpins the path for the business to become cash positive by 2024.
Responsible Business
We aspire to be a leading Responsible Business, being a force for good socially and environmentally through our advice, investments and business operations.
Our excellent and long-established community programmes have continued to support disadvantaged and marginalised young people through our Charitable Foundation, strategic partnerships and Inclusion and Diversity initiatives, embracing difference and looking to ensure that inclusive practice is at the heart of what we do. To support all these objectives, we have extended our policy and have allowed employees unlimited volunteering time.
As a steward of GBP143.8 billion of client assets, we recognise our responsibility to ensure a positive impact through our range of funds and portfolios. Our commitment is demonstrated by the publication of our first Task Force on Climate-Related Financial Disclosures (TCFD) report in April and the recent announcement that we have selected Robeco as a sustainability engagement partner as we continue to integrate responsible investment across our investment proposition.
Having become a signatory to the Net Zero Asset Owners Alliance in 2020, we have also recently joined the Race to Zero campaign to make clear our commitment to being a leading responsible business and acknowledge the role we can play in developing a more sustainable economy for everyone.
Our community
In difficult circumstances, the continued hard work and dedication of our Partners, their staff, our management teams and all our employees and administration support teams, has been exemplary. On behalf of the Board and shareholders, I would like to thank the entire St. James's Place community for their enormous contribution to supporting clients and driving the success of our business for the benefit of all stakeholders.
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Outlook
At the start of this statement I commented on the clear goals we have set with respect to gross and net flows which, together with modest growth in investment markets, would see funds under management exceed GBP200 billion by 2025.
We have also set a clear objective for growth in controllable expenses . The combination of these planning assumptions, together with the increasing emergence of cash from funds in gestation, means we expect to deliver strong growth in the underlying cash result over the coming years.
The impact of the pandemic on the timing and value of flows in 2020 and 2021 will naturally result in a variable pattern of year on year growth and normal phasing of business. Taking this into account together with a strong start to July, we anticipate a rate of gross inflow growth for the second half of around 20% despite strengthening comparatives in the latter part of the year.
Although there remains inherent uncertainty in the operating environment as the UK and the world at large continues to navigate the pandemic, the results we have announced today show we have made an encouraging start against our 2025 ambitions.
Andrew Croft
Chief Executive
27 July 2021
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Chief Financial Officer's report
The six months to 30 June 2021 have been a very positive period for our business, and we are pleased to be reporting a strong set of financial results.
As reported in the Chief Executive's Report our new business performance has been strong, with the Partnership attracting gross inflows of GBP9.2 billion (six months to 30 June 2020: GBP7.3 billion, year to 31 December 2020: GBP14.3 billion) and net inflows of GBP5.5 billion (six months to 30 June 2020: GBP4.5 billion, year to 31 December 2020: GBP8.2 billion). These results represent a good start to the plans we set out in February, with substantial progress towards our goals of long-term new business growth of 10% per annum, consistent retention above 95%, and our aim of reaching GBP200bn of funds under management (FUM) by 2025.
All this has been achieved with strong cost control. We continue to guide for 2021 in line with our intention set out at the start of the year as we expect to invest more in the second half into driving future new business and cost efficiencies.
Six months Six months Year
ended ended ended
30 June 2021 30 June 2020 31 December 2020
------------- -------------- -----------------
Establishment expenses 93.0 98.6 200.0
Development expenses (Operational and Strategic) 21.3 19.7 42.1
Academy 4.9 4.8 9.5
------------- -------------- -----------------
Controllable expenses 119.2 123.1 251.6
============= ============== =================
Controllable expenses, which are the categories shown in the table above (stated after tax), will be a key metric for the business over the next few years, and so we will be re-shaping our financial disclosure from this year end to aid shareholders. The changes will be incremental, but we plan to adapt our expense reporting in line with the analysis above. This would require a change to the definition of the Operating cash result, but instead we plan to remove this sub-total from our Cash Result analysis as it will no longer be an important metric for management. Examples of what the new disclosure will look like are available on the shareholders section of our website. We also plan to make full year results available in the old format on the website to provide full transparency.
Our financial results are presented in more detail on pages 16 to 43 of the Financial Review, but we provide below a summary of financial performance on a statutory IFRS basis, as well as our chosen alternative performance measures (APMs). We also summarise key developments from a balance sheet perspective and provide shareholders with an overview of capital, solvency and liquidity.
Financial results
IFRS
As a result of market volatility, our IFRS result have also been volatile over the last few periods as the following table demonstrates:
Six months Six months Year
ended ended ended
30 June 2021 30 June 2020 31 December 2020
-------------- -------------- ------------------
GBP'Million GBP'Million GBP'Million
IFRS profit/(loss) before tax 482.6 (71.9) 426.4
Policyholder tax (charge)/credit (336.1) 293.8 (98.8)
-------------- -------------- ------------------
IFRS profit before shareholder tax 146.5 221.9 327.6
Shareholder tax charge (25.6) (43.8) (65.6)
-------------- -------------- ------------------
IFRS profit after tax 120.9 178.1 262.0
============== ============== ==================
The key driver of the volatility is distortion caused by policyholder tax impacts associated with market movements on policyholder investments held on the life company balance sheet. Where markets fall (as they did in 2020), we are required to reflect refunds of Fund tax deductions to clients as if they were an expense. This expense then effectively reverses through the policyholder tax line as a credit. Where markets rise (as they have in 2021), the opposite happens
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and Fund tax deductions come through as our income. These then reverse as a policyholder tax charge. This dynamic has resulted in our IFRS result before tax moving from a loss of GBP71.9m for 2020 to a profit of GBP482.6m for 2021. The following table shows how these two items offset:
Six months Six months Year
ended ended ended
30 June 2021 30 June 2020 31 December 2020
-------------- -------------- ------------------
GBP'Million GBP'Million GBP'Million
Fund tax deductions/(refunds) (see Note 4) 336.1 (293.8) 98.8
Policyholder tax (charge)/credit (see Note 6) (336.1) 293.8 (98.8)
Fund tax deductions is a common approach to addressing the policyholder tax requirement for insurance businesses, and the charges are designed to ensure fairness to clients. However, because IAS 12 prohibits discounting of deferred tax balances with HMRC, asymmetry can arise between the theoretical Fund tax deductions and the actual policyholder charges. We describe this as Policyholder tax asymmetry (see Note 4), and whilst this would normally have limited impact, again market volatility has resulted in significant swings. A GBP98.3 million positive for the six months to 30 June 2020 unwound to a GBP61.7 million positive by 31 December 2020. This residual positive impact on reserves has further unwound by GBP29.2 million during 2021 and will continue to do so with future market growth.
The change in relative impact between the periods (GBP98.3 million positive to GBP29.2 million negative) more than offsets the positive underlying business experience of strong growth in income from FUM, and is therefore the key reason for the reduction in IFRS post tax result to GBP120.9 million (six months to 30 June 2020: GBP178.1 million, year to 31 December 2020: GBP262.0 million).
We continue to supplement our statutory reporting with the presentation of our financial performance using two APMs: the Cash result and the European Embedded Value (EEV) result. Taking each in turn:
Cash result
The Cash result, and the Underlying cash result contained within it, are based on IFRS but adjusted to exclude certain non-cash items, so therefore represent useful guides to the level of cash profit generated by the business. All items in the Cash result, and in the commentary below, are presented net of tax.
During the period, the net income from funds under management was GBP278.2 million (six months to 30 June 2020: GBP218.9 million, year to 31 December 2020: GBP455.9 million). This represented a margin on average 'mature' FUM within our range of guidance for the full year. It is only mature FUM that contributes to this net income figure and this mature stock of FUM at any given time substantially comprises all unit trust and ISA business, as well as life and pensions business written more than six years ago. The development of mature FUM year-on-year is dependent on four principal factors:
1) new unit trust and ISA flows; 2) the amount of life and pensions FUM that moves from 'gestation' into mature FUM; 3) the retention of FUM; and 4) investment returns on FUM.
Growth in gestation FUM (see page 20) has been rapid in recent years, particularly due to the strength of new pensions business. Whilst this constrains growth in net income from funds under management today, it bodes well for the future as gestation FUM matures and begins making a positive contribution. At 30 June 2021, the balance of gestation FUM stood at GBP47.3 billion (30 June 2020: GBP39.4 billion, 31 December 2020: GBP43.4 billion). Once this current stock of gestation FUM has all matured, it may start to (assuming no market movements or withdrawals, and allowing for the tax rate change) contribute nearly GBP375 million per annum to net income from funds under management and hence to the Underlying cash result.
St. James's Place also generates a margin arising from new business where initial product charges levied on gross inflows exceed new business-related expenses. The increase in margin arising from new business, from GBP58.2 million in the six months to 30 June 2020 to GBP73.8 million in the six months to 30 June 2021, reflects the significant increase in gross flows over the period although the relationship is not entirely linear.
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Establishment expenses in the period were GBP93.0 million (six months to 30 June 2020: GBP98.6 million, year to 31 December 2020: GBP200.0 million), down 6.0% from the prior period. Management still expects to deliver expense growth of 5% over the full year, in line with prior guidance.
Operational development costs were GBP15.9 million (six months to 30 June 2020: GBP14.1 million, year to 31 December 2020: GBP30.7 million) reflecting a period of considerable investment in the business, laying the foundations for long-term growth. This included developing our collaboration with Salesforce as previously announced, but also our Next Generation Client Experience. Projects planned for the rest of the year include work on intelligent automation, progressing the decommissioning of ancillary legacy systems, and more on our Salesforce journey; all projects that support a superior Partner and client experience, making SJP easier to do business with.
Our contribution to the FSCS levy continued to be high during the period at GBP28.7 million (GBP27.8 million for the six months to 30 June 2020 and GBP29.7 million for the year to 31 December 2020). We're encouraged by the commitment from the FCA, made in their recent business plan, to reduce the cost in the medium to long term.
Reflecting its critical role in providing a source of future organic growth in our adviser population, we continue to invest in our Academy programme, and in developing our presence in both Asia and DFM via Rowan Dartington. Both of these businesses have benefited from a more favourable new business environment with a consequent positive impact on revenues. Our investment for the future also extends to our strategic development costs.
The Underlying cash result , which is a key metric that provides a good indicator of underlying performance and the impact of our investment programmes, was GBP189.3 million (six months to 30 June 2020: GBP114.4 million, year to 31 December 2020: GBP264.7 million).
Previously recognised below the Underlying cash result, our back-office infrastructure activity has been a critical multi-year project. Final decommissioning expenses relating to our legacy systems were recognised last year, and these costs have now ceased (six months to 30 June 2020: GBP6.5 million, year to 31 December 2020: GBP10.0 million).
This year we are recognising the one-off cost of GBP9.0 million for a restructuring exercise associated with an employee redundancy programme in the period.
Also recognised below the Underlying cash result is the variance. In the Half-Year results this always includes a timing effect from fewer days of AMC in first half of the year, which unwinds by the year-end. Further detail explaining this can be found in the Financial Review on page 30.
The Cash result for the period was therefore GBP175.8 million (six months to 30 June 2020: GBP124.7 million, year to 31 December 2020: GBP254.7 million).
EEV
The EEV operating profit is sensitive to new business written within the period and the 27% increase in gross flows makes an important contribution to the significant increase. However, the major driver is a small improvement to persistency assumptions, which enhances new business margin, as well as contributing a one-off improvement in the period of GBP249.4 million through an operating assumption change. As a result, EEV operating profit has more than doubled to GBP844.8 million (six months to 30 June 2020: GBP418.7 million, year to 31 December 2020: GBP919.0 million).
The EEV profit before tax has also benefited from strong stock market growth during the period with a positive investment return variance of GBP593.6 million comparing to a GBP329.7 million negative impact for the comparative period.
Key financial position developments
The shareholder, or Solvency II Net Assets Balance Sheet, is one that is derived from the statutory IFRS Condensed Consolidated Statement of Financial Position and a reconciliation between the two can be found on page 31 of the Financial Review. It reflects the Group risk policy for shareholder assets, which is to minimise risk through investment in high credit quality and liquid bank and money market funds. Notes providing analytical information on the balance sheet items are included in the same place. Two areas that have been of more interest to shareholders in recent years are Borrowings, which provide liquidity to the business in addition to shareholder funds, and the use of shareholder funds to support Business loans to Partners.
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Movements in business loans to Partners
Facilitating business loans to Partners is a key way in which we are able to support growing Partner businesses. Such loans are principally used to enable Partners to take on those businesses of retiring or downsizing Partners, and this process creates broad stakeholder benefits. First, clients benefit from enhanced continuity of St. James's Place advice and service over time; second, Partners are able to build and ultimately realise value in the high quality and sustainable businesses they have created; finally, the Group and, in turn, shareholders, benefit from high levels of adviser and client retention.
In addition to recognising a strong business case for facilitating such lending, we recognise too the fundamental strength and credit quality of business loans to Partners. Over more than 10 years, cumulative write-offs have totalled less than 5bps of gross loans advanced, with such low impairment experience attributable to a number of factors that help to mitigate the inherent credit risk in lending. These include taking a cautious approach to Group credit decisions, with lending secured against prudent business valuations. Demonstrating this key loan-to-value (LTV) information is set out in the table below.
30 June 30 June 31 December
2021 2020 2020
------- ------- -----------
Aggregate LTV across the total Partner lending book 29% 35% 31%
Proportion of the book where LTV is over 75% 8% 22% 12%
Net exposure to loans where LTV is over 100% (GBP'Million) 5.5 13.7 9.2
======= ======= ===========
If FUM were to decrease by 10%, the net exposure at 30 June 2021 would increase to GBP7.7 million.
Our credit experience also benefits from the structure of business loan to Partner repayments. The Group collects advice charges from clients. Prior to making the associated payment to Partners, we deduct loan capital and interest payments from the amount due. This means the Group is able to control repayments.
During the period we have continued to facilitate business loans to Partners. As a result, the balance has increased by 5.4% from GBP476.7 million at 31 December 2020 to GBP502.6 million at 30 June 2021. The majority of this increase is in securitised business loans to Partners.
30 June 30 June 31 December
2021 2020 2020
----------- ----------- -----------
GBP'Million GBP'Million GBP'Million
Total business loans to Partners 502.6 498.9 476.7
----------- ----------- -----------
Split by funding type:
Business loans to Partners directly funded by the Group 322.2 325.0 319.6
Securitised business loans to Partners 180.4 173.9 157.1
=========== =========== ===========
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Movements in borrowings
St. James's Place continues to pursue a strategy of diversifying and broadening its access to debt finance. We have done this successfully over time, including the creation and execution of the securitisation vehicle in the past two years. For accounting purposes, we are obliged to disclose in our Condensed Consolidated Statement of Financial Position the value of loan notes relating to the securitisation, which has the effect of inflating the reported level of borrowings. However, these are secured only on the securitised portfolio of business loans to Partners, and hence are non-recourse to the Group's other assets.
30 June 30 June 31 December
2021 2020 2020
----------- ----------- -----------
GBP'Million GBP'Million GBP'Million
Total borrowing 478.2 435.8 341.8
----------- ----------- -----------
Split by borrowing type:
Senior unsecured corporate borrowings 343.3 306.7 226.5
Senior tranche of non-recourse securitisation loan notes 134.9 129.1 115.3
=========== =========== ===========
After adjusting for this non-recourse debt, borrowings have increased broadly in line with the scale of the business over time and we remain comfortable not only with our level of borrowings, but also the headroom we have within our range of facilities.
Solvency, capital and liquidity
We continue to manage the balance sheet prudently to ensure the Group's solvency is safely maintained.
Given the simplicity of our business model, our approach to managing solvency remains to hold assets to match client unit-linked liabilities plus a Management Solvency Buffer (MSB). At 30 June 2021 we held surplus assets over the MSB of GBP607.2 million (30 June 2020: GBP661.2 million, 31 December 2020: GBP717.3 million). We also ensure that our approach meets with the requirements of the Solvency II regime where we have an approach, agreed with the Prudential Regulatory Authority (PRA) since 2017, for our largest insurance company, the UK Life company, that targets capital equal to 110% of the standard formula requirement. This is a prudent and sustainable policy given the risk profile of our business which is largely operational.
Market volatility in recent periods has impacted the equity dampener factor in the Solvency II standard formula, and hence the solvency ratio for our Life businesses. Nevertheless, strong business performance and a review of our approach to modelling Market Risk Capital underpins the improvement to 119% (30 June 2020: 124%, 31 December 2020: 112%). See also page 43.
Taking into account entities in the rest of the Group, the Group solvency ratio at 30 June 2021 was 130% (30 June 2020: 140% and 31 December 2020: 132%).
The Group has GBP1,601.2 million of liquid assets (30 June 2020: GBP1,108.0 million, 31 December 2020: GBP1,527.1 million) largely comprising investments in AAA-rated money market funds and investment grade deposits, as demonstrated in the table below. This continues to represent a considerable stock of liquidity and excludes the additional headroom that we have in our borrowing facilities.
30 June 30 June 31 December
2021 2020 2020
----------- ----------- -----------
GBP'Million GBP'Million GBP'Million
Fixed interest securities 7.8 7.6 7.4
Investment in Collective Investment Schemes
(AAA-rated money market funds) 1,295.3 810.5 1,264.8
Cash and cash equivalents 298.1 289.9 254.9
----------- ----------- -----------
Total liquid assets 1,601.2 1,108.0 1,527.1
=========== =========== ===========
-14-
Dividend and concluding remarks
As noted above, we are very pleased to be reporting a strong set of results. Whilst concerns remain about the future direction of the pandemic, particularly globally, and the consequences for economies across the world, St. James's Place has demonstrated the resilience of its financial model over recent years and is well-placed for whatever may come.
At the full-year 2020 results, guidance was provided about how dividends would be set in future, with the full-year dividend being based on 70% of Underlying Cash and the Interim dividend being calculated as 30% of the prior full year dividend. The Board is therefore declaring an Interim Dividend of 11.55p equal to 30% of the prior year dividend per share of 38.49p.
Craig Gentle
Chief Financial Officer
27 July 2021
-15-
Key financial information
Six months Six months Year ended
Page ended ended 31 December
reference 30 June 2021 30 June 2020 2020
--------------
FUM-based metrics
Gross inflows (GBP'Billion) 18 9.2 7.3 14.3
Net inflows (GBP'Billion) 18 5.5 4.5 8.2
Total FUM (GBP'Billion) 18 143.8 115.7 129.3
Total FUM in gestation (GBP'Billion) 20 47.3 39.4 43.4
IFRS-based metrics
IFRS profit after tax (GBP'Million) 22 120.9 178.1 262.0
IFRS profit before shareholder tax (GBP'Million) 22 146.5 221.9 327.6
Underlying profit before shareholder tax
(GBP'Million) 23 166.0 236.3 359.9
IFRS basic earnings per share (EPS) (Pence) 84 22.5 33.4 49.1
IFRS diluted EPS (Pence) 84 22.2 33.0 48.6
IFRS net asset value per share (Pence) 184.6 189.9 207.0
Dividend per share (Pence) 11.55 - 38.49
Cash result-based metrics
Operating cash result (GBP'Million) 26 204.6 134.7 302.7
Underlying cash result (GBP'Million) 26 189.3 114.4 264.7
Cash result (GBP'Million) 26 175.8 124.7 254.7
Underlying cash result basic EPS (Pence) 35.3 21.4 49.6
Underlying cash result diluted EPS (Pence) 34.8 21.2 49.1
EEV-based metrics
EEV operating profit (GBP'Million) 36 844.8 418.7 919.0
EEV operating profit after tax basic EPS (Pence) 121.6 62.9 139.0
EEV operating profit after tax diluted EPS (Pence) 119.9 62.3 137.5
EEV net asset value per share (Pence) 41 1,531.4 1,277.8 1,448.8
Solvency-based metrics
Solvency II net assets (GBP'Million) 42 1,113.3 1,135.1 1,218.6
Management solvency buffer (GBP'Million) 42 506.1 473.9 501.3
Solvency II free assets (GBP'Million) 43 1,128.5 1,159.4 1,110.8
Solvency ratio (Percentage) 43 130% 140% 132%
The Cash result should not be confused with the IFRS Condensed Consolidated Statement of Cash Flows which is prepared in accordance with IAS 7.
-16-
FINANCIAL REVIEW
This Financial Review provides analysis of the Group's financial position and performance. The Review is split into the following sections:
Section 1: Funds under Management (FUM)
1.1 FUM analysis
1.2 Gestation
FUM is a key driver of ongoing profitability on all measures, and so information on growth in FUM is provided in Section 1.
Find out more on pages 18 to 20.
Section 2: Performance measurement
2.1 International Financial Reporting Standards (IFRS)
2.2 Cash result
2.3 European Embedded Value (EEV)
Section 2 analyses the performance of the business using three different bases: IFRS, the Cash result, and EEV.
Find out more on pages 21 to 41.
Section 3: Solvency
Section 3 addresses Solvency, which is an important area given the multiple regulated activities carried out within the Group.
Find out more on pages 42 and 43.
Our financial business model
Our financial business model is straightforward. We generate revenue by attracting clients through the value of our proposition, who trust us with their investments and then stay with us. This grows our funds under management (FUM), on which we receive:
-- advice charges for the provision of valuable, face-to-face advice; and
-- product charges for our manufactured investment, pension and ISA/unit trust products.
Further information on our charges can be found on our website www.sjp.co.uk/charges . A breakdown of our fee and commission income, our primary source of revenue under IFRS, is set out in Note 4 on page 57.
The primary source of the Group's profit is the income we receive from annual product management charges on FUM. As a result, growth in FUM is a strong positive indicator of future growth in profits. However, most of our investment and pension products are structured so that annual product management charges are not levied for the first six years after the business is written, so the ongoing benefit of these gross inflows into FUM for a given year will not be seen until six years later. This means that the Group always has six years' worth of FUM in the 'gestation' period. FUM subject to annual product management charges is known 'mature' FUM. More information about our FUM and the fees we earn on it can be found in Sections 1 and 2 of this Financial Review.
Initial and ongoing advice charges, and initial product charges levied when a client first invests into one of our products, are not major drivers of the Group's profitability, because:
-- most advice charges received are offset by corresponding remuneration for Partners, and so an increase in these revenue streams will correspond with an increase in the associated expense, and vice versa.
-- under IFRS initial product charges are spread over the expected life of the investment through deferred income (DIR - see pages 23 and 24 for further detail). The contribution to the IFRS result from spreading these historic charges can be seen in Note 4 as amortisation of DIR. Initial product charges contribute immediately to our Cash result through margin arising on new business.
-17-
Our income is used to meet overheads, pay the ongoing product expenses and to invest in the business. Overhead expenditure is carefully managed with clear targets set for growth in the core costs of running the Group's infrastructure, which are known as 'establishment expenses'. Other ongoing expenses, including payments to Partners, increase with business levels and are generally aligned with product charges.
The Group invests in order to:
-- continue building adviser capacity and attract new funds;
-- enhance the Group's future capability to grow over the long term through the Academy, our discretionary fund management proposition and St. James's Place Asia; and
-- develop administration systems and processes that will accommodate growth, contribute to future improvements in Partner and client experience, and reduce the cost of business processing.
Related Party Transactions
The related party transactions during the six-month period to 30 June 2021 are set out in Note 16 to the Condensed Consolidated Half-Year Financial Statements.
-18-
SECTION 1: FUNDS UNDER MANAGEMENT
1.1 FUM analysis
Our financial business model is to attract and retain FUM on which we receive an annual management fee. As a result, the level of income we receive is ultimately dependent on the value of our FUM, and so its growth is a clear driver of future growth in profits. The key drivers for FUM are:
-- our ability to attract new funds in the form of gross inflows; -- our ability to retain FUM by keeping unplanned withdrawals at a low level; and -- net investment returns.
The following table shows how FUM evolved during the six months to 30 June 2021 and 30 June 2020, and the year to 31 December 2020. Investment return is presented net of charges.
Six months ended 30 June 2021
--------------------------------------------------------- ------------
UT/ISA and 30 June 31 December
Investment Pension DFM Total 2020 2020
------------ ------------ ------------ ------------ ------------ ------------
GBP'Billion GBP'Billion GBP'Billion GBP'Billion GBP'Billion GBP'Billion
Opening FUM 32.22 61.31 35.81 129.34 116.99 116.99
Gross inflows 1.24 4.98 2.97 9.19 7.26 14.33
Net investment
return 1.91 4.46 2.52 8.89 (5.83) 4.10
Regular income
withdrawals and
maturities (0.12) (0.85) - (0.97) (0.72) (1.62)
Surrenders and
part surrenders (0.79) (0.75) (1.14) (2.68) (2.02) (4.46)
------------ ------------
Closing FUM 34.46 69.15 40.16 143.77 115.68 129.34
============ ============ ============ ============ ============ ============
Net inflows 0.33 3.38 1.83 5.54 4.52 8.25
============ ============ ============ ============ ============ ============
Implied surrender
rate as a
percentage of
average FUM 4.7 % 2.3 % 6.0 % 3.9 % 3.5% 3.6%
============ ============ ============ ============ ============ ============
Included in the above table is Rowan Dartington Group and SJP Asia FUM of GBP4.65 billion at 30 June 2021 (30 June 2020: GBP3.60 billion, 31 December 2020: GBP4.03 billion), gross inflows of GBP0.47 billion for the period (six months to 30 June 2020: GBP0.36 billion, year to 31 December 2020: GBP0.74 billion) and outflows of GBP0.12 billion (six months to 30 June 2020: GBP0.12 billion, year to 31 December 2020: GBP0.21 billion).
-19-
The following table shows the robust growth in net inflows over the past six years, which combined with strong retention has resulted in consistent growth in FUM. FUM has more than doubled over the last five years:
Investment Other Closing
Opening FUM Net inflows return movements(1) FUM
--------------- --------------
GBP'Billion GBP'Billion GBP'Billion GBP'Billion GBP'Billion
30 June 2021 129.3 5.5 9.0 - 143.8
30 December 2020 117.0 8.2 4.1 - 129.3
31 December 2019 95.6 9.0 12.4 - 117.0
31 December 2018 90.7 10.3 (5.4) - 95.6
31 December 2017 75.3 9.5 6.2 (0.3) 90.7
31 December 2016 58.6 6.8 8.7 1.2 75.3
1. Other movements in 2017 related to the matching strategy disinvestment, and in 2016 related to the acquisition of the Rowan Dartington Group.
The table below provides a geographical and investment type analysis of FUM at the end of each period:
30 June 2021 30 June 2020 31 December 2020
------------------- ------------------- -------------------
GBP'Billion % GBP'Billion % GBP'Billion %
North American Equities 39.0 27 % 25.0 22% 31.3 24%
Fixed Income Securities 23.6 16 % 20.6 18% 22.7 18%
Asia and Pacific Equities 21.2 15% 14.9 13% 19.9 15%
UK Equities 20.2 14 % 17.3 15% 18.7 14%
European Equities 17.0 12 % 13.4 11% 13.9 11%
Alternative Investments 11.0 8 % 9.9 9% 10.3 8%
Cash 5.9 4 % 8.9 8% 7.0 5%
Property 2.5 2 % 2.8 2% 2.5 2%
Other 3.4 2 % 2.9 2% 3.0 3%
------------ ----- ------------ ----- ------------ -----
Total 143.8 100% 115.7 100% 129.3 100%
============ ===== ============ ===== ============ =====
-20-
1.2 Gestation
As explained in our financial business model on page 16, due to our product structure, at any given time there is a significant amount of FUM that has not yet started to contribute to the Cash result.
When we attract new FUM there is a margin arising on new business that emerges at the point of investment, which is a surplus of income over and above the initial costs incurred at the outset. Within our Cash result presentation this is recognised as it arises, but it is deferred under IFRS.
Once the margin arising on new business has been recognised, the pattern of future emergence of cash from ongoing annual product management charges differs by product. Broadly, annual product management charges from unit trust and ISA business begin contributing positively to the Cash result from day one, whilst investment and pensions business enter a six-year gestation period during which no net income from FUM is included in the Cash result. Once this business has reached its six-year maturity point, it starts contributing positively to the Cash result, and will continue to do so in each year that it remains with the Group. Approximately 51% of gross inflows for 2021 to date, after initial charges, move into gestation FUM (six months to 30 June 2020: 54%, year to 31 December 2020: 55%).
The following table shows an analysis of FUM, after initial charges, split between mature FUM that is contributing net income to the Cash result and FUM in gestation which is not yet contributing as at 30 June 2021, as well as at the year-end for the past five years. The value of both mature and gestation FUM is impacted by investment return as well as net inflows:
Gestation FUM that
Mature FUM contributing to will contribute to the
the Cash result Cash result in the future Total FUM
Position as at: GBP'Billion GBP'Billion GBP'Billion
30 June 2021 96.5 47.3 143.8
30 December 2020 85.9 43.4 129.3
31 December 2019 76.8 40.2 117.0
31 December 2018 62.1 33.5 95.6
31 December 2017 60.1 30.6 90.7
31 December 2016 50.2 25.1 75.3
The following table gives an indication, for illustrative purposes, of the way in which the reduction in fees in the gestation period element of the Cash result could unwind, and so how the gestation balance of GBP47.3 billion at 30 June 2021 may start to contribute to the Cash result over the next six years and beyond. For simplicity it assumes that FUM values remain unchanged, that there are no surrenders and that business is written at the start of the year. The tax rate change is incorporated from 2023, which results in a slightly lower total of GBP374.6 million compared to the current full year run rate of GBP403.2 million. Actual cash emergence will reflect varying business mix of the relevant cohort and business experience.
Gestation FUM future contribution to the Cash result
GBP'Million
2021 22.2
2022 69.8
2023 126.6 2024 198.8 2025 269.6 2026 337.3 2027 onwards 374.6
-21-
SECTION 2: PERFORMANCE MEASUREMENT
In line with statutory reporting requirements we report profits assessed on an IFRS basis. The presence of a significant life insurance company within the Group means that, although we are a wealth management Group in substance with a simple business model, we apply IFRS accounting requirements for insurance companies. These requirements lead to Financial Statements which are more complex than those of a typical wealth manager and so our IFRS results may not provide the clearest presentation for users who are trying to understand our wealth management business. Key examples of this include the following:
-- our IFRS Condensed Consolidated Statement of Comprehensive Income includes policyholder tax balances, which we are required to recognise as part of our corporation tax arrangements. This means that our Group IFRS profit before tax includes amounts charged to clients to meet policyholder tax expenses, which are unrelated to the underlying performance of our business; and
-- our policy is to fully match our liabilities to clients, and so policyholder liabilities increase or decrease to match increases or decreases experienced on the assets held to cover them. This means that shareholders are not exposed to any gains or losses on the GBP141.1 billion of policyholder assets and liabilities recognised in our IFRS Condensed Consolidated Statement of Financial Position, which represented over 97% of our IFRS total assets and liabilities at 30 June 2021.
To address this, we developed APMs with the objective of stripping out the policyholder element to present solely shareholder impacting balances, as well as removing items such as deferred acquisition costs and deferred income to reflect Solvency II recognition requirements and to better match the way in which cash emerges from the business. We therefore present our financial performance and position under three different bases, using a range of APMs to supplement our IFRS reporting. The three different bases, which are consistent with those presented last year, are:
-- International Financial Reporting Standards (IFRS); -- Cash result; and -- European Embedded Value (EEV).
APMs are not defined by the relevant financial reporting framework (which for the Group is IFRS), but we use them to provide greater insight into the financial performance, financial position and cash flows of the Group, and the way it is managed. A complete Glossary of Alternative Performance Measures is set out on pages 99 to 102, in which we define each APM used in our Financial Review, explain why it is used and, if applicable, explain how the measure can be reconciled to the IFRS Financial Statements.
-22-
2.1 International Financial Reporting Standards (IFRS)
IFRS profit after tax was GBP120.9 million for the period (six months to 30 June 2020: GBP178.1 million, year to 31 December 2020: GBP262.0 million), with the result significantly lower period-on-period due to the volatile experience of Policyholder tax asymmetry between the periods. This more than offset strong underlying business performance. Policyholder tax asymmetry is described further in the following paragraphs.
Life insurance tax incorporates a policyholder tax element, and the financial statements of a life insurance group need to reflect the liability to HMRC and the corresponding deductions incorporated into policy charges. In particular, the tax liability to HMRC is assessed using IAS 12 Income Taxes, which does not allow discounting, whereas the policy charges are designed to ensure fair outcomes between clients and so reflect a wide range of possible outcomes. This gives rise to different assessments of the current value of future cash flows and hence an asymmetry in the Condensed Consolidated Statement of Financial Position between the deferred tax position and the offsetting client balance. This net balance reflects a temporary position, and in the absence of market volatility we expect it will unwind as future cash flows become less uncertain and are ultimately realised. Movement in the asymmetry is recognised in the Condensed Consolidated Statement of Comprehensive Income, and analysed in Note 4 Fee and commission income. We refer to it in this Report as the impact of Policyholder tax asymmetry.
Under normal conditions this asymmetry is small, but the market falls in early 2020 resulted in a positive movement of GBP98.3 million to 30 June 2020. This unwound partially during the rest of 2020 to a positive movement of GBP61.7 million at 31 December 2020. Strong market growth in the current period has resulted in a further unwind movement of GBP29.2 million for the six months to 30 June 2021. This movement decreases both IFRS profit after tax and IFRS profit before shareholder tax. Currently a cumulative positive effect, over time this balance will reduce in the Condensed Consolidated Statement of Financial Position as markets increase.
To address the challenge of policyholder tax being included in the IFRS results we focus on the following two APMs, based on IFRS, as our pre-tax metrics:
-- Profit before shareholder tax; and -- Underlying profit.
Further information on these IFRS-based measures is set out below, on page 23.
Profit before shareholder tax
This is a profit measure based on IFRS which aims to remove the impact of policyholder tax. The policyholder tax expense or credit is generally matched by an equivalent fund tax deduction or credit from the relevant funds, which is recorded within fee and commission income in the IFRS Condensed Consolidated Statement of Comprehensive Income. Policyholder tax does not therefore normally impact the Group's overall profit after tax. As a result, profit before shareholder tax, but after policyholder tax, is typically a useful metric, although it has been distorted by Policyholder tax asymmetry in 2020 and in the first half of 2021.
The following table demonstrates the way in which profit before shareholder tax is presented in the IFRS Condensed Consolidated Statement of Comprehensive Income on page 47.
Six months Six months Year
ended ended ended
30 June 2021 30 June 2020 31 December 2020
-------------- -------------- ------------------
GBP'Million GBP'Million GBP'Million
IFRS profit/(loss) before tax 482.6 (71.9) 426.4
Policyholder tax (charge)/credit (336.1) 293.8 (98.8)
-------------- -------------- ------------------
IFRS profit before shareholder tax 146.5 221.9 327.6
Shareholder tax charge (25.6) (43.8) (65.6)
-------------- -------------- ------------------
IFRS profit after tax 120.9 178.1 262.0
============== ============== ==================
-23-
Profit before shareholder tax has decreased period-on-period. As with the decrease in profit after tax, this reflects the impact of Policyholder tax asymmetry.
Shareholder tax reflects the tax charge attributable to shareholders and is closely related to the performance of the business. However, it can vary period-on-period due to several factors: further detail is set out in Note 6 Income and deferred taxes.
Underlying profit
This is profit before shareholder tax (as calculated above) adjusted to remove the impact of accounting for deferred acquisition costs (DAC), deferred income (DIR) and the purchased value of in-force business (PVIF).
IFRS requires certain up-front expenses incurred, and income received, to be deferred. The deferred amounts are initially recognised on the Condensed Consolidated Statement of Financial Position as a DAC asset and DIR liability, which are subsequently amortised to the Condensed Consolidated Statement of Comprehensive Income over a future period. Substantially all of the Group's deferred expenses are amortised over a 14-year period, and substantially all deferred income is amortised over a six-year period.
The impact of accounting for DAC, DIR and PVIF in the IFRS result is that there is a significant accounting timing difference between the emergence of accounting profits and actual cash-flows. For this reason, Underlying profit is considered to be a helpful metric. The following table demonstrates the way in which IFRS profit reconciles to Underlying profit.
Six months Six months Year
ended ended ended
30 June 2021 30 June 2020 31 December 2020
-------------- -------------- ------------------
GBP'Million GBP'Million GBP'Million
IFRS profit before shareholder tax 146.5 221.9 327.6
Remove the impact of DAC/DIR/PVIF 19.5 14.4 32.3
-------------- -------------- ------------------
Underlying profit before shareholder tax 166.0 236.3 359.9
============== ============== ==================
The impact of movements in DAC, DIR and PVIF on IFRS profit before shareholder tax is further analysed as follows. Due to policyholder tax on DIR, the amortisation of DIR and DIR on new business for the period set out below cannot be agreed to those provided in Note 7, which is presented before both policyholder and shareholder tax:
Six months Six months Year
ended ended ended
30 June 2021 30 June 2020 31 December 2020
-------------- -------------- ------------------
GBP'Million GBP'Million GBP'Million
Amortisation of DAC (43.0) (46.3) (92.6)
DAC on new business for the period 19.3 14.9 27.1
-------------- -------------- ------------------
Net impact of DAC (23.7) (31.4) (65.5)
-------------- -------------- ------------------
Amortisation of DIR 82.4 80.3 160.5
DIR on new business for the period (76.6) (61.7) (124.1)
-------------- -------------- ------------------
Net impact of DIR 5.8 18.6 36.4
-------------- -------------- ------------------
Amortisation of PVIF (1.6) (1.6) (3.2)
Movement in the period (19.5) (14.4) (32.3)
============== ============== ==================
-24-
Net impact of DAC
The scale of the GBP23.7 million negative overall impact of DAC on the IFRS result is largely due to changes arising from the 2013 Retail Distribution Review (RDR). After this change, the level of expenses that qualified for deferral reduced significantly, but the large balance accrued previously is still being amortised. As deferred expenses are amortised over a 14-year period there is a significant transition period, which could last for another five to six years. During this time the amortisation of pre-RDR expenses previously deferred will significantly outweigh new post-RDR expenses deferred, despite significant business growth, resulting in a net negative impact on IFRS profits.
Net impact of DIR
An increase in new business in the period means income deferred in 2021 is higher than the equivalent period last year. Income released from the deferred income liability has remained largely static. Together, these effects mean that DIR has had a positive GBP5.8 million impact on the IFRS result in the six months to 30 June 2021 (six months to 30 June 2020: GBP18.6 million positive, year to 31 December 2020: GBP36.4 million positive).
-25-
2.2 Cash result
The Cash result is used by the Board to assess and monitor the level of cash profit (net of tax) generated by the business. It is based on IFRS with adjustments made to exclude certain non-cash items, such as DAC, DIR, deferred tax and non-cash-settled share option costs. Further details, including the full definition of the Cash result, can be found in the Glossary of Alternative Performance Measures on pages 99 to 102. Although the Cash result should not be confused with the IAS 7 Consolidated Statement of Cash Flows, it provides a helpful supplementary view of the way in which cash is generated and emerges within the Group.
The Cash result reconciles to Underlying profit, as presented in Section 2.1, as follows:
Six months ended Six months ended Year ended
30 June 2021 30 June 2020 31 December 2020
------------------------------- --------------------------- ---------------------------
Before After tax Before After tax Before After tax
shareholder tax shareholder shareholder
tax tax
----------------- ------------ ------------- ------------ ------------- ------------
GBP'Million GBP'Million GBP'Million GBP'Million GBP'Million GBP'Million
Underlying profit 166.0 139.5 236.3 193.1 359.9 291.6
Non-cash-settled
share-based payments 9.0 9.0 3.7 3.7 10.6 10.6
Impact of deferred tax - (2.4) - 23.5 - 8.2
Impact of policyholder
tax asymmetry 29.2 29.2 (98.3) (98.3) (61.7) (61.7)
Other 1.5 0.5 4.9 2.7 10.0 6.0
----------------- ------------ ------------- ------------ ------------- ------------
Cash result 205.7 175.8 146.6 124.7 318.8 254.7
================= ============ ============= ============ ============= ============
The increase in non-cash-settled share-based payments reflects the increase in expense from the impact on employee schemes of the Group's performance during the period.
The most significant impact of deferred tax in all periods presented is recognition in the Cash result of the benefit from realising tax relief. This has already been recognised under IFRS, and hence Underlying profit, through the establishment of deferred tax assets. More information can be found in Note 6 on pages 60 to 64.
The impact of policyholder tax asymmetry is a temporary effect caused by asymmetries between Fund tax deductions and the policyholder tax due to HMRC. Movement in the asymmetry can be significant in volatile markets such as were experienced during the prior period, and which have partially reversed in the current period. For further explanation, refer to page 22.
Other represents a number of other small items, including the difference between the lease expense recognised under IFRS 16 Leases and lease payments made.
-26-
The following table shows an analysis of the Cash result using three different measures:
-- Operating cash result
This measure represents the regular emergence of cash from day-to-day business operations.
-- Underlying cash result
This measure includes the cost of a number of strategic investments which are being incurred and expensed in the period, but which are expected to create long-term value.
-- Cash result
This measure includes other items of a one-off nature, and has previously reflected the short-term costs associated with the back-office infrastructure project - now completed.
Consolidated Cash result (presented post-tax)
Six months
ended Year
30 June ended
Six months ended 30 June 2021 2020 31 December 2020
----------------------------------------- ------------ ------------------
Note In-force New business Total Total Total
------------ ------------- ------------ ------------ ------------------
GBP'Million GBP'Million GBP'Million GBP'Million GBP'Million
Operational
Net annual management
fee 1 460.2 19.6 479.8 393.4 822.8
Reduction in fees in
gestation period 1 (201.6) - (201.6) (174.5) (366.9)
------------ ------------- ------------ ------------ ------------------
Net income from FUM 1 258.6 19.6 278.2 218.9 455.9
Margin arising from
new business 2 - 73.8 73.8 58.2 116.8
Establishment
expenses 3 (9.3) (83.7) (93.0) (98.6) (200.0)
Operational
development expenses 3 - (15.9) (15.9) (14.1) (30.7)
Regulatory fees and
FSCS levy 3 (3.3) (29.9) (33.2) (32.3) (38.9)
Academy 3 - (4.9) (4.9) (4.8) (9.5)
Shareholder interest 5 3.0 - 3.0 5.4 8.7
Tax relief from
capital losses 6 4.3 - 4.3 10.0 13.7
Miscellaneous 7 (7.7) - (7.7) (8.0) (13.3)
------------ ------------- ------------ ------------ ------------------
Operating cash result 245.6 (41.0) 204.6 134.7 302.7
Investment
Asia 8 - (5.2) (5.2) (9.5) (17.4)
DFM 8 - (4.7) (4.7) (5.2) (9.2)
Strategic development
costs 3 - (5.4) (5.4) (5.6) (11.4)
Underlying cash
result 245.6 (56.3) 189.3 114.4 264.7
Restructuring 3 (9.0) - -
Back-office
infrastructure
development 3 - (6.5) (10.0)
Variance 9 (4.5) 16.8 -
Cash result 175.8 124.7 254.7
============ ============ ==================
-27-
Notes to the Cash result
1. Net income from FUM
The net annual management fee is the net manufacturing margin that the Group retains from FUM after payment of the associated costs, for example, investment advisory fees and Partner remuneration. Each product has standard fees, but they vary between products. Overall post-tax margin on FUM reflects business mix but also the different tax treatment, particularly Life tax on onshore investment business.
As noted on page 16 however, our investment and pension business product structure means that these products do not generate net Cash result after the margin arising from new business, during the first six years (the gestation period). This is reflected in the reduction in fees in gestation period line. Further information is provided on page 20.
Net income from FUM reflects Cash result income from FUM that has reached maturity and this line is the focus of our explanatory analysis. As with net annual management fees, the average rate can vary between time periods with business mix and tax. For the six months to 30 June 2021 it represented a margin on average mature FUM that was within our range of guidance for the full year of 0.63% - 0.65%.
Net income from Asia and DFM FUM is not included in this line. Instead, this is included in the net Cash result presented separately for Asia and DFM.
2. Margin arising from new business
This is the net positive Cash result impact of new business in the period, reflecting initial charges levied on gross inflows and new business-related expenses. The majority of these expenses vary with new business levels, such as the incremental third-party administration costs of setting up a new policy on our back-office systems and payments to Partners for the initial advice provided to secure the clients' investment. As a result, gross inflows are a key driver behind this line.
However, the margin arising from new business also contains some fixed expenses, and elements which do not vary exactly in line with gross inflows. For example, our third-party administration tariff structure includes a fixed fee, and to provide some stability for Partner businesses, elements of our support for them are linked to prior-year new business levels.
Therefore, whilst the margin rising from new business tends to move directionally with the scale of gross inflows generated during the year, the relationship between the two is not entirely linear.
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3. Overhead expenses and development expenses
Expenses are treated in two different ways in the Cash result depending on their type:
i. Overhead expenses, such as establishment expenses, and development expenses, including those related to the Group's core business such as back-office infrastructure costs, are presented in separate lines on the face of the Cash result.
ii. Expenses which vary with business volumes, such as payments to Partners and third-party administration expenses, and expenses which relate to investment in specific areas of the business such as DFM are netted from the relevant income lines rather than presented separately.
The table below provides a breakdown of the Group's overhead and development expenses as presented in separate lines in the Cash result. The tax rate for all items presented in all periods is 19.0%.
Six months ended Six months ended Year ended
30 June 2021 30 June 2020 31 December 2020
------------------------ ------------------------ ------------------------
Before tax After tax Before tax After tax Before tax After tax
----------- ----------- ----------- ----------- ----------- -----------
GBP'Million GBP'Million GBP'Million GBP'Million GBP'Million GBP'Million
Overhead expenses
Establishment expenses 114.8 93.0 121.7 98.6 247.0 200.0
Regulatory fees and FSCS levy 41.0 33.2 39.8 32.3 47.9 38.9
Academy 6.1 4.9 5.9 4.8 11.8 9.5
----------- ----------- ----------- ----------- ----------- -----------
Total overhead expenses 161.9 131.1 167.4 135.7 306.7 248.4
----------- ----------- ----------- ----------- ----------- -----------
Development expenses
Operational development costs 19.6 15.9 17.4 14.1 37.7 30.7
Strategic development costs 6.7 5.4 6.9 5.6 14.0 11.4
Back-office infrastructure costs - - 8.0 6.5 12.4 10.0
----------- ----------- ----------- ----------- ----------- -----------
Total development expenses 26.3 21.3 32.3 26.2 64.1 52.1
----------- ----------- ----------- ----------- ----------- -----------
Restructuring costs 11.1 9.0 - - - -
----------- ----------- ----------- ----------- ----------- -----------
Total expenses presented separately on
the face of the Cash result 199.3 161.4 199.7 161.9 370.8 300.5
=========== =========== =========== =========== =========== ===========
Overhead expenses
Overhead expenses represent the costs of running the Group.
Although establishment costs have decreased in the period, we are still targeting growth in controllable expenses of 5% over the full year, within which we expect establishment costs will be broadly flat, as per prior guidance.
The costs of operating in a regulated sector include regulatory fees and the Financial Services Compensation Scheme (FSCS) levy. On a post-tax basis, these are as follows:
Six months ended 30 June 2021 Year ended
31 December
Six months ended 30 June 2020 2020
----------------------------- ----------------------------- ------------
GBP'Million GBP'Million GBP'Million
FSCS levy 28.7 27.8 29.7
Regulatory fees 4.5 4.5 9.2
----------------------------- ----------------------------- ------------
FSCS levy and regulatory fees 33.2 32.3 38.9
============================= ============================= ============
-29-
Our position as a market-leading provider of advice means we make a very substantial contribution to supporting the FSCS, thereby providing protection for clients of other businesses in the sector that fail. We believe that the cost to the sector remains unsustainably high, and so we're encouraged by the commitment from the FCA, made in their recent business plan, to reduce the cost in the medium to long-term.
Academy expenses represent the cost of running our Academy and Next Generation Academy, which remains an important area of investment.
Development expenses
Operational and strategic development costs have increased in 2021, due to further investment laying the foundations for long-term growth. This included developing our collaboration with Salesforce as previously announced, but also our Next Generation Client Experience. Projects planned for the rest of the year include work on intelligent automation, progressing the decommissioning of ancillary legacy systems, and more on our Salesforce journey; all projects that support a superior Partner and client experience, making SJP easier to do business with.
Costs associated with our Bluedoor back-office infrastructure programme in 2020 related to final decommissioning work of the legacy system, following the final smooth migration of our core business in 2019.
The GBP9.0 million restructuring charge relates to the one-off costs associated with an employee redundancy programme that was completed during the first half of the year.
4. Reconciliation to IFRS expenses
In order to reconcile the overhead and development expenses presented on separate lines in the Cash result to the total IFRS expenses set out in the Condensed Consolidated Statement of Comprehensive Income on page 47, the expenses which vary with business volumes and those which relate to investment in specific areas of the business, both of which are included in the Cash result but are netted against the relevant income lines and so cannot be seen explicitly, and certain IFRS expenses which by definition are not included in the Cash result, need to be added in:
Six months Year ended
ended Six months ended 31 December
30 June 2021 30 June 2020 2020
------------- ---------------- ------------
GBP'Million GBP'Million GBP'Million
Total expenses presented separately on the face of the Cash result
before tax 199.3 199.7 370.8
Expenses which vary with business volumes
Other performance related costs 71.5 57.3 107.5
Payments to Partners 491.0 390.6 827.0
Investment expenses 44.8 44.4 90.1
Third-party administration 66.1 61.1 119.7
Other 19.2 20.4 37.4
Expenses relating to investment in specific areas of the business
Asia expenses 8.8 10.4 22.1
DFM expenses 15.0 14.1 26.7
------------- ---------------- ------------
Total expenses included in the Cash result 915.7 798.0 1,601.3
------------- ---------------- ------------
Expenses which are not included in the Cash result
Amortisation of DAC and PVIF, net of additions 25.3 33.0 68.8
Non-cash-settled share-based payments expenses 9.0 3.7 10.6
Other 2.3 2.9 7.3
------------- ---------------- ------------
Total IFRS Group expenses before tax 952.3 837.6 1,688.0
============= ================ ============
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Expenses which vary with business volumes
Other performance related costs , for both Partners and employees, vary with the level of new business and the operating profit performance of the business. Payments to Partners, investment expenses and third-party administration costs are met through charges to clients, and so any variation in them from changes in the volumes of new business or the level of the stock markets does not impact Group profitability significantly.
Each of these items are recognised within the net annual management fee or margin arising from new business lines of the Cash result, depending on the nature of the expense.
Other expenses include interest expense and bank charges, operating costs of acquired independent financial advisers (IFAs) and donations to the St. James's Place Charitable Foundation. They are recognised across various lines in the Cash result, including shareholder interest and miscellaneous.
Expenses relating to investment in specific areas of the business
Asia expenses have been subject to strong cost control, whilst DFM expenses have marginally increased during the period only because investment is being made in future proofing the operations, including outsourcing the back-office.
In the Cash result, Asia and DFM expenses are presented net of the income they generate.
Expenses which are not included in the Cash result
DAC amortisation, net of additions, PVIF amortisation and non-cash-settled share-based payment expenses are the primary expenses which are recognised under IFRS but are excluded from the Cash result.
5. Shareholder interest
This is the income accruing on the investments and cash held for regulatory purposes together with the interest received on the surplus capital held by the Group. It is presented net of funding-related expenses, including interest paid on borrowings and securitisation costs.
6. Tax relief from capital losses
In recent years, a deferred tax asset has been established in IFRS for historic capital losses which are regarded as being capable of utilisation over the medium term. The tax asset is ignored for Cash result purposes as it is not fungible, but instead the cash benefit realised when losses are utilised is shown in the tax relief from capital losses line.
Utilisation is determined on an annual basis based on the market conditions prevailing at 31 December each year. We expect utilisation for the full year to be in the range of GBP8 - GBP10 million, with utilisation then moderating over time. However, Half-Year reporting requires an assessment based on market conditions at 30 June 2021 and experience over the six-month period. This leads to a level of utilisation of GBP4.3 million tax value, much in line with expectation (six months to 30 June 2020: GBP28.0 million, year to 31 December 2020: GBP13.7 million). In the prior period to 30 June 2020, there was an exceptional level of utilisation of capital losses resulting from the prevailing market conditions at the time. Accordingly, we presented the 'excess' of GBP18.0 million over the expected utilisation of c.GBP10 million tax value within variances rather than tax relief from capital losses.
7 . Miscellaneous
This category represents the cash flow of the business not covered in any of the other categories. It includes ongoing administration expenses and associated policy charges, utilisation of the deferred tax asset in respect of prior years' unrelieved expenses (due to structural timing differences in the life company tax computation) and movements in the fair value of renewal income assets.
8. Asia and DFM
These lines represent the net income from Asia and DFM FUM, including the Asia and DFM expenses set out in point 4 above. Both of these businesses have seen strong growth in revenue during the first half of 2021 and are making good progress towards break-even.
9. Variance
At the Half-Year this includes an allowance for fewer days of AMC income in the first half compared to the second half (181 v 184). In the prior period to 30 June 2020, the variance also included the 'excess' utilisation of tax relief from capital losses of GBP18.0 million. For further information see point 6 above.
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Derivation of the Cash result
The Cash result is derived from the IFRS Condensed Consolidated Statement of Financial Position in a two-stage process:
Stage 1: Solvency II Net Assets Balance Sheet
Firstly, the IFRS Condensed Consolidated Statement of Financial Position is adjusted for a number of material balances that reflect policyholder interests in unit-linked liabilities together with the underlying assets that are held to match them. Secondly, it is adjusted for a number of non-cash 'accounting' balances such as DIR, DAC and associated deferred tax. The result of these adjustments is the Solvency II Net Assets Balance Sheet and the following table shows the way in which it has been calculated at 30 June 2021.
Solvency II Net
Assets Balance
Sheet
--------------------------
Solvency
II
30 June 2021 IFRS Net Assets
Balance Adjustment Adjustment Balance 30 June 31 December
Sheet 1 2 Sheet 2020 2020
------------ ------------- ------------- ------------ ------------ ------------
Note GBP'Million GBP'Million GBP'Million GBP'Million GBP'Million GBP'Million
Assets
Goodwill 32.5 - (32.5) - - -
Deferred acquisition
costs 400.8 - (400.8) - - -
Purchased value
of in-force business 16.0 - (16.0) - - -
Computer software 28.1 - (28.1) - - -
Property and equipment 1 162.6 - - 162.6 172.9 174.4
Deferred tax assets 2 13.7 - (13.7) - 74.7 0.7
Reinsurance assets 85.1 - (85.1) - - -
Other receivables 3 2,271.6 (576.2) (2.8) 1,692.6 1,563.0 1,546.2
Investment property 1,495.5 (1,495.5) - - - -
Equities 97,862.3 (97,862.3) - - - -
Fixed income
securities 4 29,668.3 (29,660.5) - 7.8 7.6 7.4
Investment in -
Collective
Investment Schemes 4 5,157.1 (3,861.8) - 1,295.3 810.5 1,264.8
Derivative financial
instruments 838.0 (838.0) - - - -
Cash and cash
equivalents 4 7,089.9 (6,791.8) - 298.1 289.9 254.9
Total assets 145,121.5 (141,086.1) (579.0) 3,456.4 2,918.6 3,248.4
Liabilities
Borrowings 5 478.2 - - 478.2 435.8 341.8
Deferred tax
liabilities 2 529.7 - (23.0) 506.7 191.3 378.0
Insurance contract
liabilities 571.8 (483.3) (88.5) - - -
Deferred income 574.4 - (574.4) - - -
Other provisions 6 37.6 - - 37.6 38.6 34.3
Other payables 1,3 2,233.5 (986.3) (10.3) 1,236.9 1,097.9 1,242.9
Investment contract
benefits 102,930.3 (102,930.3) - - - -
Derivative financial
instruments 1,014.6 (1,014.6) - - - -
Net asset value
attributable to
unit holders 35,671.6 (35,671.6) - - - -
Income tax liabilities 7 83.6 - - 83.6 19.8 32.7
Preference shares 0.1 - - 0.1 0.1 0.1
------------ ------------- ------------- ------------ ------------ ------------
Total liabilities 144,125.4 (141,086.1) (696.2) 2,343.1 1,783.5 2,029.8
Net assets 996.1 - 117.2 1,113.3 1,135.1 1,218.6
===== ============ ============= ============= ============ ============ ============
Adjustment 1 nets out the policyholder interest in unit-linked assets and liabilities. For further information, refer to Note 8 of the IFRS Financial Statements.
Adjustment 2 removes items such as DAC, DIR, PVIF and their associated deferred tax balances from the IFRS Condensed Consolidated Statement of Financial Position to bring it in line with Solvency II recognition requirements.
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Notes to the Solvency II Net Assets Balance Sheet
1. Property and equipment
GBP125.2 million (30 June 2020: GBP133.0 million, 31 December 2020: GBP133.7 million) of the property and equipment balance represents the right to use leased properties. It has decreased period-on-period as a result of the amortisation charge. Lease liabilities of GBP126.5 million are recognised within the other payables line (30 June 2020: GBP130.0 million, 31 December 2020: GBP132.7 million).
2. Deferred tax assets and liabilities
Analysis of deferred tax assets and liabilities, including how they have moved period-on-period, is set out in Note 6 Income and deferred taxes. The current period and last year end presentation of deferred tax assets and liabilities reflects a reassessment of the requirements of IAS 12 Income Taxes, with reference to the netting of certain deferred tax balances. This has resulted in some reallocation of balances between deferred tax assets and liabilities. The prior period comparatives have not been restated, as the changes are not material. Further information is set out in Note 6 of the IFRS Financial Statements.
3. Other receivables and other payables
Detailed breakdowns of other receivables and other payables can be found in Note 9 Other receivables and Note 10 Other payables of the IFRS Financial Statements.
Other receivables on the Solvency II Net Assets Balance Sheet have increased from GBP1,546.2 million at 31 December 2020 to GBP1,692.6 million at 30 June 2021, principally reflecting an increase in outstanding market trade settlements in the life unit-linked funds and the consolidated unit trusts due to increased volumes of business.
One of the items within other receivables is the operational readiness prepayment asset. This arose from the investment we made into our back-office infrastructure project, which was a complex, multi-year programme. In addition to expensing our internal project costs through the IFRS Statement of Comprehensive Income and Cash result as incurred, we have been capitalising Bluedoor development costs as a prepayment asset on the Statement of Financial Position. The asset, which stood at GBP305.8 million at 30 June 2021 (30 June 2020: GBP310.8 million, 31 December 2020: GBP313.9 million) has been amortising through the IFRS Statement of Comprehensive Income and the Cash result since 2017 and will continue to do so over the remaining life of the contract, which at 30 June 2021 is 12.5 years, following a five-year contract extension agreed with our back-office administration provider during 2020.
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The movement schedule below demonstrates how the operational readiness prepayment has built up since 1 January 2020.
GBP'Million
Cost
At 1 January 2020 360.1
Additions during the period 29.3
-----------
At 30 June 2020 389.4
Additions during the period 17.2
-----------
At 31 December 2020 406.6
Additions during the period 4.1
-----------
At 30 June 2021 410.7
Accumulated amortisation
At 1 January 2020 (60.9)
Amortisation during the period (17.7)
-----------
At 30 June 2020 (78.6)
Amortisation during the period (14.1)
-----------
At 31 December 2020 (92.7)
Amortisation during the period (12.2)
-----------
At 30 June 2021 (104.9)
Net book value
At 30 June 2020 310.8
===========
At 31 December 2020 313.9
===========
At 30 June 2021 305.8
===========
The amortisation expense is recognised within third-party administration expenses in the IFRS result, and within the net annual management fee line of the Cash result. It is offset by the lower tariff charges on Bluedoor compared to the previous system. The monthly amortisation charge decreased period on period following the agreement of the five-year extension with our back-office administration provider. Going forwards, the charge will remain constant year-on-year following the final operational readiness spend, however the tariff saving benefits will grow as the business grows, benefiting both the IFRS and Cash results.
4. Liquidity
Cash generated by the business is held in highly rated government securities, AAA-rated money market funds, and investment grade bank accounts. Although these are all highly liquid, only the latter are classified as cash and cash equivalents on the Solvency II Net Assets Balance Sheet. The total liquid assets held are as follows.
30 June 30 June 31 December
2021 2020 2020
----------- ----------- -----------
GBP'Million GBP'Million GBP'Million
Fixed interest securities 7.8 7.6 7.4
Investment in Collective Investment Schemes
(AAA-rated money market funds) 1,295.3 810.5 1,264.8
Cash and cash equivalents 298.1 289.9 254.9
----------- ----------- -----------
Total liquid assets 1,601.2 1,108.0 1,527.1
=========== =========== ===========
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The Group's primary source of net cash generation is product charges. In line with profit generation, as most of our investment and pension business enters a gestation period, there is no cash generated (apart from initial charges) for the first six years of an investment. This means that the amount of cash generated will increase year-on-year as FUM in the gestation period becomes mature and is subject to annual product management charges. Unit trust and ISA business does not enter the gestation period, and so generates cash immediately from the point of investment.
Cash is used to invest in the business and to pay the Group dividend. Our dividend policy is set such that appropriate cash is retained in the business to support the investment needed to meet our future growth aspirations.
5. Borrowings
The Group has two different types of borrowings: senior unsecured corporate borrowings, which are used to manage working capital and to fund investment in the business; and a senior tranche of non-recourse securitisation loan notes, which is secured on a legally segregated portfolio of the Group's business loans to Partners. Holders of the senior tranche of non-recourse securitisation loan notes have no recourse to the assets held by any other entity within the Group.
30 June 30 June 31 December
2021 2020 2020
----------- ----------- -----------
GBP'Million GBP'Million GBP'Million
Corporate borrowings: bank loans 229.5 193.0 112.7
Corporate borrowings: loan notes 113.8 113.7 113.8
----------- ----------- -----------
Senior unsecured corporate borrowings 343.3 306.7 226.5
Senior tranche of non-recourse securitisation loan notes 134.9 129.1 115.3
----------- ----------- -----------
Total borrowings 478.2 435.8 341.8
=========== =========== ===========
Further information is provided in Note 12 Borrowings and financial commitments of the IFRS Financial Statements.
6. Other provisions
Further information on other provisions, including how the balance has moved period-on-period, is set out in Note 11 Other provisions and contingent liabilities.
7. Income tax liabilities
The Group has an income tax liability of GBP83.6 million at 30 June 2021 compared to GBP32.7 million at 31 December 2020. This is due to a current tax charge of GBP213.6 million and tax paid of GBP162.0 million during the period . Further detail on the current tax charge and tax paid is provided in Note 6 Income and deferred taxes.
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Stage 2: Movement in Solvency II Net Assets Balance Sheet
After the Solvency II Net Asset Balance Sheet has been determined, the second stage in the derivation of the Cash result identified a number of movements in that balance sheet which do not represent cash flows for inclusion within the Cash result. The following table explains how the overall Cash result reconciles into the total movement.
Year ended
Six months ended 30 June 2021 Six months ended 30 June 2020 31 December 2020
------------------------------ ------------------------------ ------------------
GBP'Million GBP'Million GBP'Million
Opening Solvency II Net
Assets 1,218.6 1,056.8 1,056.8
Dividend paid in period (267.5) (107.1) (107.1)
Issue of share capital and
exercise of options 21.6 1.1 3.3
Consideration paid for own
shares - (3.8) (3.9)
Change in deferred tax 2.4 (23.5) (8.2)
Impact of policyholder tax
asymmetry (29.2) 98.3 61.7
Change in goodwill,
intangibles and other
non-cash movements (8.4) (11.4) (38.7)
Cash result 175.8 124.7 254.7
------------------------------ ------------------------------ ------------------
Closing Solvency II Net
Assets 1,113.3 1,135.1 1,218.6
============================== ============================== ==================
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2.3 European embedded value (EEV)
Wealth management differs from most other businesses, in that the expected shareholder income from client investment activity emerges over a long period in the future. We therefore supplement the IFRS and Cash results by providing additional disclosure on an EEV basis, which brings into account the net present value of the expected future cash flows. We believe that a measure of total economic value of the Group's operating performance is useful to investors.
As in previous reporting, our EEV continues to be calculated on a basis determined in accordance with the EEV principles originally issued in May 2004 by the Chief Financial Officers Forum (CFO Forum) and supplemented in both October 2005 and, following the introduction of Solvency II, in April 2016.
Many of the principles and practices underlying EEV are similar to the requirements of Solvency II. Our EEV methods and assumptions are aligned as closely as possible to Solvency II.
The table below and accompanying notes summarise the profit before tax of the combined business.
Six months ended Six months ended Year ended
30 June 2021 30 June 2020 31 December 2020
----------------- ----------------- ------------------
GBP'Million GBP'Million GBP'Million
Funds management business 915.6 506.2 1,077.8
Distribution business (34.2) (45.6) (75.7)
Back-office infrastructure development - (8.0) (12.4)
Other (36.6) (33.9) (70.7)
----------------- ----------------- ------------------
EEV operating profit 844.8 418.7 919.0
Investment return variance 593.6 (329.7) 304.4
Economic assumption changes 22.8 (44.0) (47.4)
----------------- ----------------- ------------------
EEV profit before tax 1,461.2 45.0 1,176.0
Tax (338.0) (13.1) (226.6)
Corporation tax rate change (408.5) (126.2) (126.9)
----------------- ----------------- ------------------
EEV profit/(loss) after tax 714.7 (94.3) 822.5
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Notes to the EEV result
1. Funds management business EEV operating profit
The funds management business operating profit has increased to GBP915.6 million (six months to 30 June 2020: GBP506.2 million, year to 31 December 2020: GBP1,077.8 million) and a full analysis of the result is shown below.
Six months ended Six months ended Year ended
30 June 2021 30 June 2020 31 December 2020
----------------- ----------------- ------------------
GBP'Million GBP'Million GBP'Million
New business contribution 525.6 365.3 766.3
Profit from existing business
- unwind of the discount rate 138.5 139.0 279.6
- experience variance 1.1 0.1 16.9
- operating assumption change 249.4 - 10.5
Investment income 1.0 1.8 4.5
Fund management business
EEV operating profit 915.6 506.2 1,077.8
================= ================= ==================
The new business contribution for the period at GBP525.6 million (six months to 30 June 2020: GBP365.3 million, year to 31 December 2020: GBP766.3 million) was 44% higher than the prior period, primarily reflecting the increase in new business but also benefitting from the improvement in persistency assumptions (see operating assumption change below).
The unwind of the discount rate for the period remained pretty stable at GBP138.5 million (six months to 30 June 2020: GBP139.0 million, year to 31 December 2020: GBP279.6 million). This reflects a higher opening value of in-force business, but a slightly lower discount rate for the period (3.4% in 2021 versus 4.0% in 2020).
The experience variance during the period was GBP1.1 million (six months to 30 June 2020: GBP0.1 million, year to 31 December 2020: GBP16.9 million). This principally reflects positive retention experience offset by development expenses.
The operating assumption change during the period was GBP249.4 million (six months to 30 June 2020: GBPnil, year to 31 December 2020: GBP10.5 million). The increase in EEV arises from a small improvement to the persistency assumptions for onshore bond and pension business. This reflects positive experience over recent years.
2. Distribution business
The distribution loss includes the positive gross margin arising from advice income less payments to advisers, offset by the costs of investment in growing the Partnership and building the distribution capabilities in Asia. Whilst the FSCS Levy is a significant charge which has increased slightly to GBP25.9 million in the period (six months to 30 June 2020: GBP23.8 million, year to 31 December 2020: GBP25.2 million), the overall reported loss has decreased in the period, principally due to increased new business levels.
3. Investment return variance
The investment return variance reflects the capitalised impact on the future annual management fees resulting from the difference between the actual and assumed investment returns. Given the size of our FUM, a small difference can result in a large positive or negative variance.
The typical investment return on our funds during the period was 7.3% after charges, compared to the assumed investment return of 0.9%. This resulted in a positive investment return variance of GBP593.6 million (six months to 30 June 2020: negative GBP329.7 million, year to 31 December 2020: positive GBP304.4 million).
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4. Economic assumption changes
The positive variance of GBP22.8 million arising in the period (six months to 30 June 2020: negative GBP44.0 million, year to 31 December 2020: negative GBP47.4 million) reflects the positive effect from the increase in gilt yields, offset by an increase in the expected rate of inflation, reversing some of the effect experienced in the prior year.
New business margin
The largest single element of the EEV operating profit (analysed in the previous section) is the new business contribution. The level of new business contribution generally moves in line with new business levels. To demonstrate this link, and aid understanding of the results, we provide additional analysis of the new business margin (the margin). This is calculated as the new business contribution divided by the gross inflows, and is expressed as a percentage.
The table below presents the margin before tax from our manufactured business.
Six months ended Six months ended Year ended
30 June 2021 30 June 2020 31 December 2020
----------------- ----------------- ------------------
Life business
Investment
New business contribution (GBP'Million) 73.1 49.8 104.1
Gross inflows (GBP'Billion) 1.24 0.93 1.77
Margin (%) 5.9 5.4 5.9
Pension
New business contribution (GBP'Million) 277.9 199.3 439.6
Gross inflows (GBP'Billion) 4.98 4.11 8.44
Margin (%) 5.6 4.8 5.2
----------------- ----------------- ------------------
Unit Trust and DFM business
New business contribution (GBP'Million) 174.6 116.2 222.6
Gross inflows (GBP'Billion) 2.97 2.22 4.12
Margin (%) 5.9 5.2 5.4
Total business
New business contribution (GBP'Million) 525.6 365.3 766.3
Gross inflows (GBP'Billion) 9.19 7.26 14.33
Margin (%) 5.7 5.0 5.3
Post-tax margin (%) 4.4 4.1 4.3
----------------- ----------------- ------------------
The overall margin for the period was higher at 5.7% (six months to 30 June 2020: 5.0%, year to 31 December 2020: 5.3%) reflecting higher new business and the benefit of the persistency assumptions changes. Higher new business also results in a gearing effect with expenses, which is enhanced by the expense control during the period. Much of the improvement is offset in the post-tax margin through recognition of the corporation tax rate change from 19% to 25% in 2023.
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Economic assumptions
The principal economic assumptions used within the cash flows are set out below.
Six months ended Six months ended Year ended
30 June 2021 30 June 2020 31 December 2020
----------------- ----------------- ------------------
Risk free rate 0.9% 0.3% 0.3%
Inflation rate 3.6% 3.2% 3.3%
Risk discount rate (net of tax) 4.0% 3.4% 3.4%
Future investment returns:
- Gilts 0.9% 0.3% 0.3%
- Equities 3.9% 3.3% 3.3%
- Unit-linked funds 3.2% 2.6% 2.6%
Expense inflation 4.0% 3.6% 3.7%
The risk-free rate is set by reference to the yield on ten-year gilts. Other investment returns are set by reference to the risk-free rate.
The inflation rate is derived from the implicit inflation in the valuation of ten-year index-linked gilts. This rate is increased to reflect the potential for higher increases in earnings-related expenses.
-40-
EEV sensitivities
The table below shows the estimated impact on the reported value of new business and EEV to changes in various EEV calculated assumptions. The sensitivities are specified by the EEV principles and reflect reasonably possible levels of change. In each case, only the indicated item is varied relative to the restated values.
Change in
Change in new business contribution European
Embedded Value
Note Pre-tax Post-tax Post-tax
------------------- ------------------- ----------------
GBP'Million GBP'Million GBP'Million
Value at 30 June 2021 525.6 401.0 8,263.0
100bp reduction in risk-free rates, with
corresponding change in fixed interest asset
values 1 (18.6) (14.4) (145.3)
10% increase in withdrawal rates 2 (36.0) (27.4) (448.6)
10% reduction in market value of equity assets 3 - - (834.9)
10% increase in expenses 4 (10.4) (8.1) (95.2)
100bp increase in assumed inflation 5 (17.9) (13.9) (147.3)
Notes to the EEV sensitivities
1. This is the key economic basis change sensitivity. The business model is relatively insensitive to change in economic basis. Note that the sensitivity assumes a corresponding change in all investment returns but no change in inflation.
2. The 10% increase is applied to the withdrawal rate. For instance, if the withdrawal rate is 8% then a 10% increase would reflect a change to 8.8%.
3. For the purposes of this sensitivity all unit-linked funds are assumed to be invested in equities. The actual mix of assets varies and in recent years the proportion invested directly in UK and overseas equities has exceeded 70%.
4. For the purposes of this sensitivity only non-fixed elements of the expenses are increased by 10%.
5. This reflects a 100bp increase in the assumed RPI underlying the expense inflation calculation.
Change in new business Change in European
contribution Embedded Value
Pre-tax Post-tax Post-tax
------------ ------------ -------------------
GBP'Million GBP'Million GBP'Million
100bp reduction in risk discount rate 63.6 48.3 641.6
Although not directly relevant under a market-consistent valuation, this sensitivity shows the level of adjustment which would be required to reflect differing investor views of risk.
-41-
Analysis of the EEV result
The table below provides a summarised breakdown of the embedded value position at the reporting dates:
30 June 2021 30 June 2020 31 December 2020
------------- ------------- -----------------
GBP'Million GBP'Million GBP'Million
Value of in-force business 7,149.7 5,724.3 6,566.6
Solvency II net assets 1,113.3 1,135.1 1,218.6
------------- ------------- -----------------
Total embedded value 8,263.0 6,859.4 7,785.2
============= ============= =================
30 June 2021 30 June 2020 31 December 2020
------------- ------------- -----------------
Pence Pence Pence
Net asset value per share 1,531.4 1,277.8 1,448.8
The EEV result above reflects the specific terms and conditions of our products. Our pension business is split between two portfolios. Our current product, the Retirement Account, was launched in 2016 and incorporates both pre-retirement and post-retirement phases of this investment in the same product. Earlier business, written in our separate Retirement Plan and Drawdown Plan products, targeted each of the two phases separately and therefore has slightly shorter terms.
Our experience is that much of our Retirement Plan business converts into Drawdown business at retirement, but, in line with the EEV guidelines, we are required to defer recognition of the additional value from the Drawdown Plan until it is crystallised. If instead we were to assess the future value of Retirement Plan business (beyond the immediate contract boundary) in a more holistic fashion, in line with Retirement Account business, this would result in an increase of approximately GBP400 million to our embedded value (30 June 2020: approximately GBP343 million, 31 December 2020: approximately GBP385 million).
-42-
SECTION 3: SOLVENCY
St. James's Place has a business model and risk appetite that results in underlying assets being held that fully match with our obligations to clients. Our clients can access their investments 'on demand' and because the encashment value is matched, movements in equity markets, currency markets, interest rates, mortality, morbidity and longevity have very little impact on our ability to meet liabilities. We also have a prudent approach to investing shareholder funds and surplus assets in cash, AAA-rated money market funds and highly rated government securities. The overall effect of the business model and risk appetite is a resilient solvency position capable of enabling liabilities to be met even through adverse market conditions.
Our Life businesses are subject to the Solvency II capital regime which applied for the first time in 2016. Given the relative simplicity of our business compared to many, if not most, other organisations that fall within the scope of Solvency II, we have continued to manage the solvency of the business on the basis of holding assets to match client unit-linked liabilities plus a management solvency buffer (MSB). This has ensured that, not only can we meet client liabilities on a standardised basis at all times (beyond the Solvency II requirement of a '1 in 200 years' event), but we also have a prudent level of protection against other risks to the business. At the same time, we have ensured that the resulting capital held meets with the requirements of the Solvency II regime, to which we are ultimately accountable.
For the year ended 31 December 2020 we reviewed the level of our MSB and increased the MSB for the Life businesses to GBP345.0 million, reflecting business growth and market conditions. It remains at this level for 30 June 2021.
The Group's overall Solvency II net assets position, MSB and management solvency ratios are as follows:
30 June 2021 30 June 31 December 2020
Other 2020 Total
Life regulated Other Total Total
------------ ------------ ------------ ------------ ------------ -----------------
GBP'Million GBP'Million GBP'Million GBP'Million GBP'Million GBP'Million
Solvency II net
assets 552.2 306.8 254.3 1,113.3 1,135.1 1,218.6
------------ ------------
Management
solvency buffer
(MSB) 345.0 161.1 - 506.1 473.9 501.3
Management
solvency ratio 160 % 190 %
-43-
Solvency II Balance Sheet
Whilst we focus on Solvency II net assets and the MSB to manage solvency, we provide additional information about the Solvency II free asset position for information. The presentation starts from the same Solvency II net assets, but includes recognition of an asset in respect of the expected value of in-force cash flows (VIF) and a risk margin (RM) reflecting the potential cost to secure the transfer of the business to a third party. The Solvency II net assets, VIF and RM comprise the 'own funds', which is assessed against a solvency capital requirement (SCR), reflecting the capital required to protect against a range of '1 in 200' stresses. The SCR is calculated on the standard formula approach. No allowance has been made for transitional provisions in the calculation of technical provisions or the SCR.
An analysis of the Solvency II position for our Group, split by regulated and non-regulated entities at the period-end is presented in the table below:
30 June 31 December
Other 2020 2020
30 June 2021 Life regulated Other Total Total Total
------------ ------------ ------------ ------------ ------------ -------------
GBP'Million GBP'Million GBP'Million GBP'Million GBP'Million GBP'Million
Solvency II net
assets 552.2 306.8 254.3 1,113.3 1,135.1 1,218.6
Value of
in-force (VIF) 5,315.5 - - 5,315.5 4,126.1 4,756.3
Risk Margin (RM) (1,578.1) - - (1,578.1) (1,222.1) (1,357.5)
Own Funds (A) 4,289.6 306.8 254.3 4,850.7 4,039.1 4,617.4
------------ ------------ ------------ ------------ ------------ ------------
Solvency capital
requirement (B) (3,619.9) (102.3) - (3,722.2) (2,879.7) (3,506.6)
Solvency II free
assets 669.7 204.5 254.3 1,128.5 1,159.4 1,110.8
------------ ------------ ------------ ------------ ------------ ------------
Solvency ratio
(A/B) 119 % 300 % 130 % 140% 132%
------------ ------------ ------------ ------------ ------------
The solvency ratio after payment of the proposed Group interim dividend is 129 % at 30 June 2021 (30 June 2020: 140% (no interim dividend proposed), 31 December 2020: 124% (after payment of the second interim dividend)).
We continue to target a solvency ratio of 110% for SJPUK, our largest insurance subsidiary, as agreed with our regulator, the PRA. As the business grows, the weighting of the balance sheet towards SJPUK will result in a gradual dilution of the Group solvency ratio, but this will not reflect any change in risk appetite, nor risk inherent in the business.
-44-
PRINCIPAL RISKS AND UNCERTAINTIES
Through our approach to the fundamentals of risk management the Group has been able to remain confident in our resilience, from a financial and operational perspective, including against the challenges associated with COVID-19.
The Risk and Risk Management section on pages 73 to 80 of the 2020 Annual Report and Accounts provides a comprehensive review of the principal risks facing the business, and the Group's approach to managing these risks. The section below highlights the key developments in the risk environment since the year-end Annual Report and Accounts.
Risk environment
It is expected that current or emerging mutations of COVID-19 are likely to be prevalent for some time and that it may indeed become a virus to be managed in similar ways to influenza. As society adapts in response, this could lead to further economic disruption and uncertainty for investors. The UK and international financial ramifications of the COVID-19 pandemic will also persist for some time as government financial support is reduced and as efforts to manage national debt begin, including through the taxation system. Depending on how this set of circumstances unfolds over time, this has the potential to impact SJP through market volatility and possible reductions in new business.
Reflecting the stability, resilience and consistency of the Group's business model, COVID-19 has impacted the business in ways which are familiar to our risk framework, for example through market volatility and in 2020 through a reduction in new business which has subsequently reversed in 2021.
We expect and have shown in the stress and scenario testing carried out as part our Own Risk and Solvency Assessment (ORSA) and Group dividend assessment, that the Group continues to remain resilient to macro-economic shocks (including inflation and interest rate shifts) as well as more extreme events.
The Board has been and continues to be actively involved in defining the Group's strategic response to COVID-19. Timely and targeted risk-based information has been provided to the Board to continue to support decision making and help understanding of key issues. The stress and scenario testing work (including capital and liquidity projections, as well as operational risk events) was considered by the Board when deciding to pay the Year-end 2020 final dividend and the retained amount of the Year-end 2019 dividend.
We remain confident in our ability to withstand further challenges that may or may not emerge in relation to COVID-19. We also highlight that our key third party outsourcers have proven to be operationally and financially resilient in the face of COVID-19.
A summary of the principal risks and uncertainties which could impact the Group for the remainder of the current financial year, either as a result of COVID-19 or independently, have been provided in the table below.
-45-
Risk Strategy Key risks Example controls
description
-------------- ---------------- ------------- -------------------------------------------------------------- --------------------------------------------------------------
Administration We fail Deliver
service to deliver positive * Clients and advisers receive poor policy * Management of administration centres to ensure key
good quality outcomes administration service standards are met
administration to clients
services
to clients * Failure of key administration system change projects * Continuous development of technology
and advisers.
* Administrative complexity * Effective planning of large-scale change projects
* Ongoing activity to reduce administrative complexity
and ensure operational resilience
-------------- ------------------ ----------- -------------------------------------------------------------- --------------------------------------------------------------
Client Our product Deliver
proposition proposition positive * Investments provide poor returns relative to their * Regular monitoring of manufactured products'
fails to outcomes benchmarks and/or do not deliver expected client performance
meet the to clients outcomes
needs,
objectives * Monitoring of investment performance and selection of
and expectations * Range of solutions does not align with the product the most appropriate funds from a risk/net return
of our clients. and service requirements of our current and potential perspective
This includes future clients
poor relative
investment * Continuous development of the range of services
performance * Failure to meet client expectations of a sustainable offered to clients
and poor business, not least in respect of responsible
product investing
design. * Engagement with fund managers around principles of
responsible investment
-------------- ------------------ ----------- -------------------------------------------------------------- --------------------------------------------------------------
Conduct We fail Deliver
to provide positive * Advisers deliver poor quality or unsuitable advice * Licensing programme ensuring appropriate standard of
quality, outcomes advice and service from advisers
suitable to clients
advice or * Failure to evidence the provision of quality service
service and advice * Technical support helplines for advisers
to clients.
* Timely and clear responses to client complaints
* Robust oversight process of the advice provided to
clients delivered by Business Assurance, Compliance
Assurance, Field Risk and Advice Guidance teams
-------------- ------------------ ----------- -------------------------------------------------------------- --------------------------------------------------------------
Financial We fail Achieve
to effectively sustainable * Failure to meet client liabilities * Policyholder liabilities are fully matched
manage the growth
business in profits
finances. * Market risk * Excess assets generally invested in high-quality,
high-liquidity cash and cash equivalents
* Credit risk
* Lending to the Partnership is secured
* Liquidity risk
* Reinsurance of insurance risks
* Insurance risk
* Ongoing monitoring of all risk exposures and
experiences
* Expense risk
* Acceptance of market and persistency risk impact on
profit
* Setting and monitoring budgets
* Implementing new systems to allow for future cost
reductions
* Monitoring and management of individual entities'
solvency to minimise Group interdependency
-------------- ------------------ ----------- -------------------------------------------------------------- --------------------------------------------------------------
Outsourcing Third party Deliver
outsourcers' positive * Operational failures by material outsourcers * Oversight regime in place to identify prudent steps
activities outcomes to reduce risk of operational failures by material
impact our to clients third-party providers
performance * Failure of critical service, significant areas
and risk include:
management. * Ongoing monitoring, including assessments of
operational resilience
* Investment administration
* Due diligence on key suppliers
* Fund management
* Custody
* Policy administration
* Cloud services
-------------- ------------------ ----------- -------------------------------------------------------------- --------------------------------------------------------------
-46-
Risk Strategy Key risks Example controls
description
----------- --------------- ----------- ------------------------------------------------------------ ---------------------------------------------------------------
Partner Our Grow and
proposition proposition develop * Failure to attract new members to the Partnership * Focus on providing a market-leading adviser
solution the proposition
fails to Partnership
meet the * Failure to retain advisers/Partners
needs, * Adequately skilled and resourced population of
objectives supporting Field managers
and * Failure to increase adviser productivity
expectations
of our * Reliable systems and administration support
current * Available technology falls short of client and
and potential Partner expectations and fails to support growth
future objectives * Expanding the Academy capacity and supporting
Partners. recruits through the Academy and beyond
* The Academy does not adequately support adviser
growth * Market-leading support to Partners' businesses
----------- --------------- ----------- ------------------------------------------------------------ ---------------------------------------------------------------
People We are unable Attract,
to attract, retain * Loss of key personnel * Measures to maintain a stable population of employees,
retain and and develop including competitive total reward packages
organise talent
the right * Poor employee morale
people to * Monitoring of employee engagement and satisfaction
run the
business. * Lack of inclusion and diversity in our business
* Corporate incentives to encourage social value
engagement, including matching of employee charitable
* Our culture of supporting social value is eroded giving to the Charitable Foundation
* Whistleblowing hotline
----------- --------------- ----------- ------------------------------------------------------------ ---------------------------------------------------------------
Regulatory We fail Achieve
to meet sustainable * Failure to comply with changing regulation * Compliance functions provide expert guidance and
current, growth carry out extensive assurance work
changing in profits
or new * Inadequate internal controls
regulatory * Strict controls are maintained in highly regulated
and areas
legislative * Failure to respond to regulatory-driven changes to
expectations. the industry in which we operate
* Maintenance of appropriate solvency capital buffers,
and continuous monitoring of solvency experience
* Solvency risk
* Fostering of positive regulatory relationships
----------- --------------- ----------- ------------------------------------------------------------ ---------------------------------------------------------------
Security We fail Achieve
and to adequately sustainable * Internal or external fraud * Business continuity planning for St. James's Place
resilience secure our growth and its key suppliers
physical in profits
assets, * Core system failure
systems * Identification, communication, and response planning
and/or for the event of cyber crime
sensitive * Corporate, Partnership, or third-party information
information, security and cyber risks
or to deliver * Data leakage detection technology and incident
critical reporting systems
business * Disruption in key business services to our clients
services
to our * Internal awareness programmes
clients.
* Identification and assessment of critical business
services
----------- --------------- ----------- ------------------------------------------------------------ ---------------------------------------------------------------
Strategy, Challenge Enhance
competition from our * Increased competitive pressure from traditional and * Clear demonstration of value delivered to clients
and brand competitors investment disruptive (non-traditional) competitors through advice, service and products
and the proposition
impact of
reputational * Cost and charges pressure * Investment in improving positive brand recognition
damage.
* Negative media coverage * Ongoing development of client and Partner
propositions
* Proactive engagement with external agencies including
media, industry groups and regulators
----------- --------------- ----------- ------------------------------------------------------------ ---------------------------------------------------------------
-47-
FINANCIAL STATEMENTS
CONDENSED CONSOLIDATED STATEMENT OF COMPREHENSIVE INCOME
Six months Six months Year ended
ended ended 31 December
Note 30 June 2021 30 June 2020 2020
-------------- -------------- -------------
GBP'Million GBP'Million GBP'Million
Insurance premium income 17.1 18.9 40.1
Less premiums ceded to reinsurers (11.0) (11.9) (25.1)
-------------- --------------
Net insurance premium income 6.1 7.0 15.0
Fee and commission income 4 1,424.2 785.4 2,096.4
Investment return 5 9,560.5 (5,051.7) 5,949.6
Net income/(expense) 10,990.8 (4,259.3) 8,061.0
Policy claims and benefits
- Gross amount (24.8) (22.8) (54.0)
- Reinsurers' share 12.6 8.1 20.4
-------------- --------------
Net policyholder claims and benefits incurred (12.2) (14.7) (33.6)
Change in insurance contract liabilities
- Gross amount (9.2) 17.9 (5.9)
- Reinsurers' share (7.1) 7.2 3.6
-------------- --------------
Net change in insurance contract liabilities (16.3) 25.1 (2.3)
Movement in investment contract benefits (9,527.4) 5,014.6 (5,910.7)
Expenses (952.3) (837.6) (1,688.0)
Profit/(loss) before tax 3 482.6 (71.9) 426.4
Tax attributable to policyholders' returns 6 (336.1) 293.8 ( 98.8)
Profit before tax attributable to shareholders' returns 146.5 221.9 327.6
Total tax (expense)/credit (361.7) 250.0 (164.4)
Less: tax attributable to policyholders' returns 6 336.1 (293.8) 98.8
-------------- -------------- -------------
Tax attributable to shareholders' returns 6 (25.6) (43.8) (65.6)
-------------- -------------- -------------
Profit and total comprehensive income for the period 6 120.9 178.1 262.0
============== ============== =============
Profit/(loss) attributable to non-controlling interests - - -
Profit attributable to equity shareholders 120.9 178.1 262.0
-------------- -------------- -------------
Profit and total comprehensive income for the period 6 120.9 178.1 262.0
============== ============== =============
Pence Pence Pence
-------------- -------------- -------------
Basic earnings per share 14 22.5 33.4 49.1
Diluted earnings per share 14 22.2 33.0 48.6
The results relate to continuing operations.
The Notes and information below and on pages 51 to 87 form part of these Condensed Consolidated Financial Statements.
-48-
CONDENSED CONSOLIDATED STATEMENT OF CHANGES IN EQUITY
Attributable to equity shareholders
---------------------------------------------------------------------------------------
Shares
in Non-
Share Share trust Misc Retained controlling Total
Note capital premium reserve reserves earnings Total interests equity
------------ ------------ ------------ ------------ ------------ ------------ ------------ ------------
GBP'Million GBP'Million GBP'Million GBP'Million GBP'Million GBP'Million GBP'Million GBP'Million
At 1 January
2020 80.2 182.4 (16.4) 2.5 699.4 948.1 (0.9) 947.2
Profit and
total
comprehensive
income
for the
period 178.1 178.1 178.1
Dividends 14 (107.1) (107.1) (107.1)
Exercise of
options 0.3 0.8 1.1 1.1
Consideration
paid
for own
shares (3.8) (3.8) (3.8)
Shares sold
during the
period 4.1 (4.1) - -
Retained
earnings
credit in
respect
of share
option
charges 3.7 3.7 3.7
At 30 June
2020 80.5 183.2 (16.1) 2.5 770.0 1,020.1 (0.9) 1,019.2
------------ ------------ ------------ ------------ ------------ ------------ ------------ ------------
At 1 January
2021 80.6 185.3 (14.8) 2.5 859.4 1,113.0 (0.9) 1,112.1
Profit and
total
comprehensive
income
for the
period 120.9 120.9 120.9
Dividends 14 (267.5) (267.5) (267.5)
Issue of share
capital 14 0.1 10.2 10.3 10.3
Exercise of
options 0.2 11.1 11.3 11.3
Shares sold
during the
period 6.4 (6.4) - -
Retained
earnings
credit in
respect
of share
option
charges 9.0 9.0 9.0
At 30 June
2021 80.9 206.6 (8.4) 2.5 715.4 997.0 (0.9) 996.1
============ ============ ============ ============ ============ ============ ============ ============
Miscellaneous reserves represent other non-distributable reserves.
-49-
CONDENSED CONSOLIDATED STATEMENT OF FINANCIAL POSITION
30 June 30 June 31 December
Note 2021 2020 2020
------------ ------------ ------------
GBP'Million GBP'Million GBP'Million
Assets
Goodwill 7 32.5 15.6 31.0
Deferred acquisition costs 7 400.8 458.6 424.5
Intangible assets
- Purchased value of in-force business 7 16.0 19.2 17.6
- Computer software 7 28.1 15.2 23.5
Property and equipment 162.6 172.9 174.4
Deferred tax assets 6 13.7 109.2 14.4
Reinsurance assets 85.1 95.8 92.3
Other receivables 9 2,271.6 2,816.7 2,579.2
Investments
- Investment property 8 1,495.5 1,626.1 1,526.7
- Equities 8 97,862.3 70,758.6 83,359.2
- Fixed income securities 8 29,668.3 26,372.9 27,701.4
- Investment in Collective Investment Schemes 8 5,157.1 5,891.4 5,890.2
- Derivative financial instruments 8 838.0 1,228.2 1,386.8
Cash and cash equivalents 7,089.9 7,488.2 6,660.1
------------ ------------ ------------
Total assets 3 145,121.5 117,068.6 129,881.3
============ ============ ============
Liabilities
Borrowings 12 478.2 435.8 341.8
Deferred tax liabilities 6 529.7 195.7 378.1
Insurance contract liabilities 571.8 538.8 562.6
Deferred income 7 574.4 596.8 579.9
Other provisions 11 37.6 38.6 34.3
Other payables 10 2,233.5 2,160.8 2,038.0
Investment contract benefits 102,930.3 82,735.1 93,132.7
Derivative financial instruments 8 1,014.6 1,422.0 749.9
Net asset value attributable to unit holders 8 35,671.6 27,905.9 30,919.1
Income tax liabilities 83.6 19.8 32.7
Preference shares 0.1 0.1 0.1
------------ ------------
Total liabilities 144,125.4 116,049.4 128,769.2
============ ============ ============
Net assets 996.1 1,019.2 1,112.1
============ ============ ============
Shareholders' equity
Share capital 14 80.9 80.5 80.6
Share premium 206.6 183.2 185.3
Shares in trust reserve (8.4) (16.1) (14.8)
Miscellaneous reserves 2.5 2.5 2.5
Retained earnings 715.4 770.0 859.4
------------ ------------ ------------
Equity attributable to owners of the Parent 997.0 1,020.1 1,113.0
Non-controlling interests (0.9) (0.9) (0.9)
------------ ------------ ------------
Total equity 996.1 1,019.2 1,112.1
============ ============ ============
Pence Pence Pence
------------ ------------ ------------
Net assets per share 184.6 189.9 207.0
============ ============ ============
-50-
CONDENSED CONSOLIDATED STATEMENT OF CASH FLOWS
Six months Six months Year ended
ended ended 31 December
30 June 2021 30 June 2020 2020
-------------- -------------- -------------
GBP'Million GBP'Million GBP'Million
Cash flows from operating activities
Profit/(loss) before tax for the period 482.6 (71.9) 426.4
Adjustments for:
Amortisation of purchased value of in-force business 1.6 1.6 3.2
Amortisation of computer software and software developments 3.7 1.6 4.2
Depreciation of property and equipment 11.0 13.0 24.1
Loss on disposal of property and equipment, including leased
assets 0.4 - 1.9
Share-based payment charge 9.0 3.0 10.6
Interest income (8.3) (19.9) (33.1)
Interest expense 4.6 6.5 11.6
Increase/(decrease) in provisions 3.3 (2.0) (6.3)
Exchange rate losses/(gains) 0.2 (0.5) -
Changes in operating assets and liabilities
Decrease in deferred acquisition costs 23.7 31.4 65.5
Decrease in investment property 31.2 124.8 224.2
(Increase)/decrease in other investments (15,188.1) 1,228.0 (12,858.5)
Decrease/(increase) in reinsurance assets 7.2 (7.2) (3.7)
Decrease/(increase) in other receivables 324.0 (680.1) (443.0)
Increase/(decrease) in insurance contract liabilities 9.2 (17.8) 6.0
Increase/(decrease) in financial liabilities (excluding
borrowings) 10,062.3 (350.2) 9,375.3
Decrease in deferred income (5.5) (17.9) (34.8)
Increase in other payables 203.1 379.5 239.8
Increase in net assets attributable to unit holders 4,752.5 75.9 3,089.1
-------------- -------------- -------------
Cash generated from operations 727.7 697.8 102.5
Interest received 8.3 19.9 33.1
Interest paid (4.6) (6.5) (11.6)
Income taxes paid (162.0) (121.6) (248.1)
-------------- -------------- -------------
Net cash inflow/(outflow) from operations 569.4 589.6 (124.1)
Cash flows from investing activities
Payment for acquisition of subsidiaries and other business
combinations, net of cash acquired (7.5) (9.6) (22.4)
Payment for acquisition of property and equipment (0.4) (3.9) (8.0)
Payment for acquisition of computer software and software
developments (8.3) (7.9) (18.8)
Proceeds from sale of subsidiaries and other business combinations 4.1 - -
Net cash outflow from investing activities (12.1) (21.4) (49.2)
Cash flows from financing activities
Proceeds from the issue of share capital and exercise of options 11.3 1.1 3.3
Consideration paid for own shares - (3.8) (3.9)
Additional borrowings 341.6 230.0 270.0
Repayment of borrowings (205.8) (210.0) (332.1)
Principal elements of lease payments (6.8) (4.3) (10.0)
Dividends paid (267.5) (107.1) (107.1)
-------------- -------------- -------------
Net cash outflow from financing activities (127.2) (94.1) (179.8)
-------------- -------------- -------------
Net increase in cash and cash equivalents 430.1 474.1 (353.1)
Cash and cash equivalents at beginning of period 6,660.1 7,013.6 7,013.6
Exchange (losses)/gains on cash and cash equivalents (0.3) 0.5 (0.4)
Cash and cash equivalents at end of period 7,089.9 7,488.2 6,660.1
-51-
NOTES TO THE FINANCIAL STATEMENTS
1. BASIS OF PREPARATION
This condensed set of Consolidated Half-Year Financial Statements for the six months ended 30 June 2021, which comprise the Half-Year Financial Statements of St. James's Place plc (the Company) and its subsidiaries (together referred to as the Group), has been prepared in accordance with the Disclosure Guidance and Transparency Rules sourcebook of the Financial Conduct Authority and with IAS 34 'Interim Financial Reporting', an International Financial Reporting Standard (IFRS) as adopted by the United Kingdom (UK). The Condensed Consolidated Half-Year Financial Statements should be read in conjunction with the Annual Financial Statements for the year ended 31 December 2020, which have been prepared in accordance with the Companies Act 2006 as applicable to companies reporting under IFRS.
Going concern
The Group's business activities, together with the factors likely to affect its future development, performance and position, including the ongoing impact of the COVID-19 pandemic, are set out in the Chief Executive's Report and the Chief Financial Officer's Report on pages 5 to 14. The financial performance and financial position of the Group are described in the Financial Review on pages 16 to 43.
The stress and scenario testing carried out as part our Own Risk and Solvency Assessment (ORSA) and Group dividend assessment that the Group continues to remain resilient to macro-economic shocks (including inflation and interest rate shifts) as well as more extreme events.
The Board has been, and continues to be, actively involved in defining the Group's strategic response to COVID-19. Timely and targeted risk-based information has been provided to the Board to continue to support decision making and help understanding of key issues. The stress and scenario testing work (including capital and liquidity projections, as well as operational risk events) was considered by the Board when deciding to pay the Year-end 2020 final dividend and the retained amount of the Year-end 2019 dividend.
The Board remains confident in the Group's ability to withstand further challenges that may or may not emerge in relation to COVID-19. We would note that our key third party outsourcers have also proven to be operationally resilient in the face of COVID-19.
Having assessed the principal risks, the Directors believe it remains appropriate to adopt the going concern basis of accounting in preparing the Financial Statements.
-52-
NOTES TO THE FINANCIAL STATEMENTS (continued)
2. SIGNIFICANT ACCOUNTING POLICIES
(a) Statement of compliance
These Condensed Consolidated Half-Year Financial Statements were prepared and approved by the Directors in accordance with International Financial Reporting Standards as adopted by the UK .
There were no new or amended IFRS standards effective for periods beginning on 1 January 2021 which are relevant to the Group. However, the March 2021 IFRS Interpretation Committee update included an agenda decision on "Configuration and Customisation costs in a Cloud Computing Arrangement" which was ratified by the IASB in April 2021. The Group is currently reviewing the decision and considering any potential impact on the Group's accounting policies, with the review to be completed during the second half of 2021.
In preparing these Condensed Consolidated Half-Year Financial Statements, the significant judgements made by management in applying the Group's accounting policies and the key sources of estimation uncertainty were the same as those applied to the Consolidated Financial Statements for the year ended 31 December 2020.
(b) New and amended accounting standards not yet effective
As at 30 June 2021, the following new and amended standards, which are relevant to the Group but have not been applied in the Financial Statements, were in issue but are not yet effective. None of these standards or amendments have yet been endorsed by the UK:
-- IFRS 17 Insurance Contracts;
-- Amendments to IAS 1 Presentation of Financial Statements - classification of liabilities as current or non-current;
-- Amendments to IFRS 3 Business Combinations - Reference to conceptual framework; -- Annual Improvements 2018-2020; and
-- Amendments to IFRS 10 Consolidated Financial Statements and IAS 28 Investments in Associates and Joint Ventures - Sale or contribution of assets between an investor and its associate or joint venture.
The Group is currently assessing the impact that the adoption of the above standards, amendments and clarifications will have on the Group's results reported within the Financial Statements. The only one expected to have a significant impact on the Group's Financial Statements is IFRS 17 Insurance Contracts. Further information on this standard is given below.
IFRS 17 Insurance Contracts including Amendments to IFRS 17
IFRS 17 incorporates revised principles for the recognition, measurement, presentation and disclosure of insurance contracts.
The Group closed to new insurance business, as defined under accounting standards, in 2011. At 30 June 2021, the Group has GBP88.5 million of non-unit-linked insurance contract liabilities, which are substantially reinsured, and GBP483.3 million of unit-linked insurance contract liabilities. As a result, the Group's net exposure on this business is not material.
The vast majority of the business written by the Life companies within the Group is defined as investment, rather than insurance, business under accounting standards. Investment business is outside the scope of IFRS 17.
Management is currently assessing the impacts of adopting the new standard. The effective date of the standard is currently 1 January 2023, subject to endorsement by the UK Endorsement Board.
-53-
NOTES TO THE FINANCIAL STATEMENTS (continued)
3. SEGMENT REPORTING
IFRS 8 Operating Segments requires operating segments to be identified, on the basis of internal reports about components of the Group that are regularly reviewed by the Board, in order to allocate resources to each segment and assess its performance.
The Group's only reportable segment under IFRS 8 is a wealth management business - which is a vertically-integrated business providing support to our clients through the provision of financial advice and assistance through our Partner network, and financial solutions including (but not limited to) wealth management products manufactured in the Group, such as insurance bonds, pensions, unit trust and ISA investments, and a DFM service.
Separate geographical segmental information is not presented since the Group does not segment its business geographically. Most of its customers are based in the United Kingdom, as is management of the assets. In particular, the operation based in south-east Asia is not yet sufficiently material for separate consideration.
Segment revenue
Revenue received from fee and commission income is set out in Note 4 which sets out the different types of revenue received from our wealth management business.
Segment profit
Two separate additional measures of profit are monitored by the Board. These are the post-tax Underlying cash result and pre-tax European Embedded Value (EEV), which are both alternative performance measures.
-54-
NOTES TO THE FINANCIAL STATEMENTS (continued)
3. SEGMENT REPORTING (continued)
Underlying cash result
The measure of cash profit monitored on a monthly basis by the Board is the post-tax Underlying cash result. This reflects emergence of cash available for paying a dividend during the year. Underlying cash is based on the cash flows within the IFRS results, but with no allowance for intangibles, principally DAC, DIR, PVIF, goodwill and deferred tax, or short-term costs associated with the back-office infrastructure project. As the cost associated with non-cash-settled share-based payments is reflected in changes in shareholder equity, they are also not included in the Underlying cash result.
More detail is provided on pages 25 to 30 of the Financial Review.
The Cash result should not be confused with the IFRS Condensed Consolidated Statement of Cash Flows which is prepared in accordance with IAS 7.
Six months Six months Year ended
ended ended 31 December
30 June 2021 30 June 2020 2020
GBP'Million GBP'Million GBP'Million
Underlying cash result after tax 189.3 114.4 264.7
Non-cash-settled share-based payments (9.0) (3.7) (10.6)
Deferred tax impacts 2.4 (23.5) (8.2)
Back-office infrastructure - (6.5) (10.0)
Restructuring (9.0) - -
Impact in the period of DAC/DIR/PVIF (18.5) (15.0) (29.6)
Impact of policyholder tax asymmetry (29.2) 98.3 61.7
Other (5.1) 14.1 (6.0)
IFRS profit after tax 120.9 178.1 262.0
Shareholder tax 25.6 43.8 65.6
Profit before tax attributable
to shareholders' returns 146.5 221.9 327.6
Tax attributable to policyholder returns 336.1 (293.8) 98.8
IFRS profit/(loss) before tax 482.6 (71.9) 426.4
-55-
NOTES TO THE FINANCIAL STATEMENTS (continued)
3. SEGMENT REPORTING (continued)
EEV operating profit
EEV operating profit is monitored by the Board. The components of the EEV operating profit are included in more detail in the Financial Review section of the Half-Year Report and Accounts.
Six months Six months Year ended
ended ended 31 December
30 June 2021 30 June 2020 2020
GBP'Million GBP'Million GBP'Million
EEV operating profit before tax 844.8 418.7 919.0
Investment return variance 593.6 (329.7) 304.4
Economic assumption changes 22.8 (44.0) (47.4)
EEV profit before tax 1,461.2 45.0 1,176.0
Adjustments to IFRS basis
Deduct: amortisation of purchased value of in-force business (1.6) (1.6) (3.2)
Movement of balance sheet life value of in-force business (net of tax) (396.3) 169.4 (465.7)
Movement of balance sheet unit trust and DFM value of in-force
business (net of tax) (176.9) 104.7 (91.9)
Corporation tax rate change (408.5) (126.2) (126.9)
Tax on movement in value of in-force business (331.4) 30.6 (160.7)
Profit before tax attributable to shareholders' returns 146.5 221.9 327.6
Tax attributable to policyholder returns 336.1 (293.8) 98.8
IFRS profit/(loss) before tax 482.6 (71.9) 426.4
The movement in life, unit trust and DFM value of in-force is the difference between the opening and closing discounted value of the profits that will emerge from the in-force book over time, adjusting for DAC and DIR impacts which are already included under IFRS.
-56-
NOTES TO THE FINANCIAL STATEMENTS (continued)
3. SEGMENT REPORTING (continued)
Segment assets
Funds under management (FUM)
FUM, as reported in Section 1 of the Financial Review on page 18 is the measure of segment assets which is monitored by the Board.
30 June 30 June 31 December
2021 2020 2020
GBP'Million GBP'Million GBP'Million
Investment 34,460.0 29,880.0 32,220.0
Pension 69,150.0 53,520.0 61,310.0
UT/ISA and DFM 40,160.0 32,280.0 35,810.0
Total FUM 143,770.0 115,680.0 129,340.0
Exclude client and third-party holdings in
non-consolidated unit trusts and DFM (4,444.2) (4,643.4) (4,864.4)
Other 1,760.3 2,471.3 1,551.9
Gross assets held to cover unit liabilities 141,086.1 113,507.9 126,027.5
IFRS intangible assets (see page 31 adjustment 2) including goodwill, DAC,
PVIF, reinsurance
and deferred tax 579.0 642.1 605.4
Shareholder gross assets (see page 31) 3,456.4 2,918.6 3,248.4
Total assets 145,121.5 117,068.6 129,881.3
-57-
NOTES TO THE FINANCIAL STATEMENTS (continued)
4. FEE AND COMMISSION INCOME
Six months Six months Year ended
ended ended 31 December
30 June 2021 30 June 2020 2020
GBP'Million GBP'Million GBP'Million
Advice charges (post-RDR) 460.6 376.6 767.4
Third party fee and commission income 66.9 54.5 112.2
Wealth management fees 465.8 429.1 812.4
Investment management fees 33.1 34.3 70.4
Fund tax deductions/(refunds) 336.1 (293.8) 98.8
Policyholder tax asymmetry (29.2) 98.3 61.7
Discretionary fund management fees 10.7 8.4 17.5
Fee and commission income before DIR amortisation 1,344.0 707.4 1,940.4
Amortisation of DIR 80.2 78.0 156.0
Total fee and commission income 1,424.2 785.4 2,096.4
For all post-Retail Distribution Review (RDR) business, advice charges are received from clients for the provision of initial and ongoing advice in relation to an investment into a St. James's Place product.
Where an investment has been made into a third-party product, third-party fee and commission income is received from the product provider.
Wealth management fees recognise charges levied on manufactured business (Investment, Pensions and UT/ISA) which are not separately identified elsewhere.
Investment management fees are amounts received from clients for the provision of all aspects of investment management. Broadly, investment management fees match investment management expenses.
Life insurance (BLAGAB) policies are subject to a corporate tax regime that includes a policyholder tax element. This corporate cost is met by clients through corresponding deductions incorporated into policy charges. We analyse these contributions through two separate items:
Fund tax deductions/(refunds) represent amounts credited to, or deducted from, the life insurance (BLAGAB) policies to match the policyholder tax charge or credit assessed to.
IAS 12 Income Taxes requires that amounts are calculated without discounting, but because tax charges or credits may only be due at some future point, policy charges need to reflect the potential for a wide range of possible outcomes in order to ensure fair outcomes between clients. The associated discounting gives rise to timing differences between the tax assessment (Fund tax deductions/(refunds)) and actual charges, and movements in this Policyholder tax asymmetry are analysed separately.
Asymmetry generally moves counter to Fund tax deductions with the magnitude and direction similarly driven by market conditions. However, it is determined on a fund by fund basis and is therefore dependent on individual fund performance. Consequently, the movement in the asymmetry may not move entirely in line with the aggregate Fund tax deductions/(refunds). It can also be impacted by fund changes made under our Investment Management Approach.
Because asymmetry is a timing difference it will be eliminated over time as future cash flows become less uncertain and are ultimately realised, so the current effect is temporary.
-58-
NOTES TO THE FINANCIAL STATEMENTS (continued)
4. FEE AND COMMISSION INCOME (continued)
Under normal conditions asymmetry is small, but the market conditions arising during the COVID-19 pandemic in 2020 and the partial recovery in 2021 have resulted in significant positive and negative movements, impacting both profit before shareholder tax and profit after tax.
In 2020, we commented that the positive effect of the tax asymmetry seen in that year would be eliminated over time and that we would expect this to reverse as markets increase. The negative effect seen during the period reflects the market increases. For completeness, at year end 2020 we also commented that expected fund mergers planned for 2021 would accelerate and unwind in part the high level of asymmetry experienced in 2020. These fund mergers will take place in the second half of 2021, but the market improvements already experienced have mitigated the impact.
Discretionary fund management fees are received from clients for the provision of DFM services.
Finally, where an investment has been made into a St. James's Place product, the initial product charge and any dealing margin is deferred and recognised as a deferred income liability. This liability is extinguished, and income recognised, over the expected life of the investment. The income is the amortisation of DIR in the table above.
-59-
NOTES TO THE FINANCIAL STATEMENTS (continued)
5. INVESTMENT RETURN
Six months Six months Year ended
ended ended 31 December
30 June 2021 30 June 2020 2020
GBP'Million GBP'Million GBP' Million
Investment return on net assets
held to cover unit liabilities:
Rental income 38.8 45.1 86.3
Gain/(loss) on revaluation of investment properties 36.3 (125.1) (109.7)
Net investment return on financial instruments classified as fair
value through profit and
loss 7,104.3 (3,532.3) 4,832.4
7,179.4 (3,612.3) 4,809.0
21.6 (35.4) 25.4
Attributable to unit-linked insurance contract liabilities
Attributable to unit-linked investment contract benefits 7,157.8 (3,576.9) 4,783.6
7,179.4 (3,612.3) 4,809.0
Income attributable to third party
holdings in unit trusts 2,369.6 (1,437.8) 1,127.1
9,549.0 (5,050.1) 5,936.1
Investment return on shareholder assets:
Net investment return on financial instruments classified as fair
value through profit and
loss 2.7 (10.9) (4.2)
Interest income on financial instruments classified as amortised cost 8.8 9.3 17.7
11.5 (1.6) 13.5
Total investment return 9,560.5 (5,051.7) 5,949.6
Included in the net investment return on financial instruments classified as fair value through profit and loss within investment return on net assets held to cover unit liabilities is dividend income of GBP437.9 million (six months ended 30 June 2020: GBP525.0 million, year ended 31 December 2020: GBP1,017.4 million).
-60-
NOTES TO THE FINANCIAL STATEMENTS (continued)
6. INCOME AND DEFERRED TAXES
Tax for the period
Six months Six months Year ended
ended ended 31 December
30 June 2021 30 June 2020 2020
GBP'Million GBP'Million GBP'Million
Current tax
UK corporation tax
- Current year charge 207.0 19.0 157.9
- Adjustment in respect of prior year 0.2 - (1.0)
Overseas taxes
- Current year charge 6.4 7.0 8.5
213.6 26.0 165.4
Deferred tax
Unrealised capital gains/(losses)
in unit-linked funds 151.3 (297.4) (4.0)
Unrelieved expenses
- Additional expenses recognised in the period (5.3) (4.9) (10.4)
- Utilisation in the period 5.8 5.9 11.8
Capital losses
- Revaluation in the period (1.4) - -
- Utilisation in the period 4.3 28.0 13.7
- Adjustment in respect of prior year - - 0.8
DAC, DIR and PVIF (4.3) (4.9) (10.0)
Other items (2.0) (0.5) (1.9)
Overseas losses (0.1) (0.3) (0.5)
Adjustment for change in tax rate (0.2) (1.9) (1.4)
Adjustments in respect of prior periods - - 0.9
148.1 (276.0) (1.0)
Total tax charge/(credit) for the period 361.7 (250.0) 164.4
Attributable to:
- policyholders 336.1 (293.8) 98.8
- shareholders 25.6 43.8 65.6
361.7 (250.0) 164.4
The prior year adjustment of GBP0.2 million in current tax above represents a charge of GBP0.2 million in respect of policyholder tax (six months to 30 June 2020: GBPnil, year to 31 December 2020: GBP1.4 million credit) and GBPnil in respect of shareholder tax (six months to 30 June 2020: GBPnil, year to 31 December 2020: GBP0.4 million charge). The prior year adjustment of GBPnil in deferred tax above represents GBPnil in respect of policyholder tax (six months to 30 June 2020: GBPnil, year to 31 December 2020: GBP1.3 million charge) and GBPnil in respect of shareholder tax (six months to 30 June 2020: GBPnil, year to 31 December 2020: GBP0.4 million credit).
Included within the deferred tax on 'other items' is a credit of GBP2.1 million (six months to 30 June 2020: charge of GBP1.6 million, year to 31 December 2020: GBPnil) relating to share-based payments.
In arriving at the profit before tax attributable to shareholders' return, it is necessary to estimate the analysis of the total tax charge between that payable in respect of policyholders and that payable by shareholders. Shareholder tax is estimated by making an assessment of the effective rate of tax that is applicable to the shareholders on the profits attributable to shareholders.
-61-
NOTES TO THE FINANCIAL STATEMENTS (continued)
6. INCOME AND DEFERRED TAXES (continued)
This is calculated by applying the appropriate effective corporate tax rates to the shareholder profits. The remainder of the tax charge represents tax on policyholders' investment returns. This calculation method is consistent with the legislation relating to the calculation of tax on shareholder profits.
Reconciliation of tax charge to expected tax
Six months Six months Year
ended ended ended
30 June 30 June 31 December
2021 2020 2020
----------- -----------
GBP'Million GBP'Million GBP'Million
Profit/(loss) before tax 482.6 (71.9) 426.4
Tax attributable to policyholders'
returns (336.1) 293.8 (98.8)
Profit before tax attributable
to shareholders' returns 146.5 221.9 327.6
Shareholder tax charge
at corporate tax rate of
19.0% (2020: 19.0%) 27.9 19.0% 42.2 19.0% 62.2 19.0%
Adjustments:
Lower rate of corporation
tax in overseas subsidiaries (0.6) (0.4%) (0.2) (0.1%) (1.3) 0.0%
Expected shareholder tax 27.3 18.6% 42.0 18.9% 60.9 18.6%
Effects of:
Non-taxable income (0.2) (0.3) (0.9)
Adjustment for change in
tax rates (0.2) (1.9) (1.4)
Adjustment in respect of
prior year
- Current tax - - 0.4
- Deferred tax - - 0.4
Differences in accounting
and tax bases in relation
to employee share schemes (2.5) 0.7 (0.3)
Disallowable expenses 0.3 1.0 3.8
Provision for future liabilities (0.1) - 1.7
Tax losses not recognised 0.9 1.8 0.8
Other 0.1 0.5 0.2
(1.7) (1.2%) 1.8 0.8% 4.7 1.4%
----------- -----------
Shareholder tax charge 25.6 17.4% 43.8 19.7% 65.6 20.0%
Policyholder tax charge/(credit) 336.1 (293.8) 98.8
Total tax charge/(credit)
for the period 361.7 (250.0) 164.4
Tax calculated on profit/(loss) before tax at 19% (2020: 19%) would amount to GBP91.7 million (six months to 30 June 2020: GBP(13.7) million, year to 31 December 2020: GBP81.0 million). The difference of GBP270.0 million (six months to 30 June 2020: (GBP236.3) million, year to 31 December 2020: GBP83.4 million) between this number and the total tax of GBP361.7 million (six months to 30 June 2020: credit of GBP250 million, year to 31 December 2020: charge of GBP164.4 million) is made up of the reconciling items above which total (GBP2.3) million (six months to 30 June 2020: GBP1.6 million, year to 31 December 2020: GBP3.4 million) and the effect of the apportionment methodology on tax applicable to policyholder returns of GBP272.3 million (six months to 30 June 2020: (GBP237.9) million, year to 31 December 2020: GBP80.0 million).
-62-
NOTES TO THE FINANCIAL STATEMENTS (continued)
6. INCOME AND DEFERRED TAXES (continued)
Tax paid in the year
Six months Six months
ended ended Year ended
30 June 2021 30 June 2020 31 December 2020
GBP'Million GBP'Million GBP'Million
Current tax charge for the period 213.6 26.0 165.4
(Payments to be made)/refunds due to be received in future years
in respect of current year (80.1) 33.3 (30.3)
Payments made in current year in respect of prior years 27.0 63.0 113.6
Other 1.5 (0.7) (0.6)
Tax paid 162.0 121.6 248.1
Tax paid can be analysed as:
- Taxes paid in UK 155.0 114.1 233.1
- Taxes paid in overseas jurisdictions 1.0 0.2 2.4
- Withholding taxes suffered on investment income received 6.0 7.3 12.6
Total 162.0 121.6 248.1
-63-
NOTES TO THE FINANCIAL STATEMENTS (continued)
6. INCOME AND DEFERRED TAXES (continued)
Deferred tax balances
Deferred tax
assets
Deferred Deferred Fixed asset Other
acquisition income Renewal income Share-based temporary temporary
costs (DAC) (DIR) assets payments differences differences Total
GBP'Million GBP'Million GBP'Million GBP'Million GBP'Million GBP'Million GBP'Million
At 1 January
2021 (19.4) 33.1 (12.3) 6.8 5.6 0.6 14.4
(Charge)/credit
to the Statement
of Comprehensive
Income excluding
the impact of
tax rate
change
- Utilised and
created in
period 0.2 (0.8) 0.7 2.1 0.1 (1.0) 1.3
- Impact of tax
rate change (3.6) 6.2 (2.0) 1.0 0.8 (0.3) 2.1
Total (charge)/
credit (3.4) 5.4 (1.3) 3.1 0.9 (1.3) 3.4
Impact of
acquisition - - (4.1) - - - (4.1)
At 30 June 2021 (22.8) 38.5 (17.7) 9.9 6.5 (0.7) 13.7
Expected
utilisation
period
As at 30 June 14 years 14 years 20 years 3 years 6 years
2020
As at 31 14 years 14 years 20 years 3 years 6 years
December 2020
As at 30 June 14 years 14 years 20 years 3 years 6 years
2021
Deferred tax
liabilities
Unrealised
capital
gains on
life
Unrelieved insurance Purchased
expenses on (BLAGAB) value of
life Deferred Capital losses assets in-force Other
insurance acquisition (available for backing unit business temporary
business costs (DAC) future relief) liabilities (PVIF) differences Total
GBP'Million GBP'Million GBP'Million GBP'Million GBP'Million GBP'Million GBP'Million
At 1 January
2021 (39.8) 32.1 (35.5) 417.3 3.3 0.7 378.1
Credit to the
Statement of
Comprehensive
Income excluding
the impact of
tax rate change
- Utilised and
created in
period 0.5 (4.6) 2.9 151.3 (0.3) (0.2) 149.6
- Impact of tax
rate change - 4.3 (3.0) - 0.7 (0.1) 1.9
Total
charge/(credit) 0.5 (0.3) (0.1) 151.3 0.4 (0. 3) 151.5
Impact of
acquisition - - - - - 0.1 0.1
At 30 June 2021 (39.3) 31.8 (35.6) 568.6 3.7 0.5 529.7
Expected
utilisation
period
As at 30 June 6 years 14 years 6.5 years 6 years 5.5 years
2020
As at 31 6 years 14 years 6 years 6 years 5 years
December 2020
As at 30 June 6 years 14 years 5.5 years 6 years 4.5 years
2021
-64-
NOTES TO THE FINANCIAL STATEMENTS (continued)
6. INCOME AND DEFERRED TAXES (continued)
Appropriate investment income, gains or profits are expected to arise against which the tax assets can be utilised. Whilst the actual rates of utilisation will depend on business growth and external factors, particularly investment market conditions, they have been tested for sensitivity to experience and are resilient to a range of reasonably foreseeable scenarios.
As reported at year end 31 December 2020, the presentation of the allocation between deferred tax liabilities and assets reflected a reassessment of the requirements of IAS 12, with reference to the netting off of certain deferred tax balances. This resulted in some reallocation of the prior year balances between deferred tax liabilities and assets. On this basis, we have not provided a comparison to the 30 June 2020 numbers. The changes were not material.
At the reporting date there were unrecognised deferred tax assets of GBP12.3 million (30 June 2020: GBP14.0 million, 31 December 2020: GBP16.3 million) in respect of GBP71.9 million (30 June 2020: GBP82.9 million, 31 December 2020: GBP96.5 million) of losses in companies where appropriate profits are not considered probable in the forecast period. These losses primarily relate to our Asia-based businesses and can be carried forward indefinitely.
In the UK budget of 3 March 2021, it was announced that the main rate of corporation tax will increase from 19% to 25% with effect from 1 April 2023. This change was substantively enacted on 24 May 2021 within the Finance Bill 2021 and as a result the relevant deferred tax balances have been remeasured. The total impact of this remeasurement in the deferred tax shown above is a GBP0.2 million credit.
-65-
NOTES TO THE FINANCIAL STATEMENTS (continued)
7. GOODWILL, INTANGIBLE ASSETS, DEFERRED ACQUISITION COSTS AND DEFERRED INCOME
Computer
software
Purchased and other
value of specific
in-force software
Goodwill business developments DAC DIR
GBP'Million GBP'Million GBP'Million GBP'Million GBP'Million
Cost
At 1 January 2020 15.6 73.4 25.0 1,309.8 (1,538.6)
Additions - - 7.9 14.9 (60.1)
Disposals - - - (47.3) 43.6
At 30 June 2020 15.6 73.4 32.9 1,277.4 (1,555.1)
Additions 15.4 - 10.9 12.2 (61.1)
Disposals - - - (55.7) 47.0
At 31 December
2020 31.0 73.4 43.8 1,233.9 (1,569.2)
Additions 1.7 - 8.3 19.3 (74.7)
Disposals (0.2) - - (65.7) 57.9
At 30 June 2021 32.5 73.4 52.1 1,187.5 (1,586.0)
Accumulated amortisation
At 1 January 2020 - 52.6 16.1 819.8 (923.9)
Charge for the
period - 1.6 1.6 46.3 (78.0)
Eliminated on disposal - - (47.3) 43.6
At 30 June 2020 - 54.2 17.7 818.8 (958.3)
Charge for the
period - 1.6 2.6 46.3 (78.0)
Eliminated on disposal - - - (55.7) 47.0
At 31 December
2020 - 55.8 20.3 809.4 (989.3)
Charge for the
period - 1.6 3.7 43.0 (80.2)
Eliminated on disposal - - - (65.7) 57.9
At 30 June 2021 - 57.4 24.0 786.7 (1,011.6)
Carrying value
At 30 June 2020 15.6 19.2 15.2 458.6 (596.8)
At 31 December
2020 31.0 17.6 23.5 424.5 (579.9)
At 30 June 2021 32.5 16.0 28.1 400.8 (574.4)
Outstanding amortisation
period
1.5-4.5
At 30 June 2020 n/a 5.5 years years 14 years 6-14 years
At 31 December
2020 n/a 5 years 5 years 14 years 6-14 years
At 30 June 2021 n/a 4.5 years 5 years 14 years 6-14 years
Purchased value of in-force business/DAC/Computer software
Amortisation is charged to expenses in the Condensed Consolidated Statement of Comprehensive Income. Amortisation profiles are reassessed annually.
DIR
Amortisation is credited within fee and commission income in the Condensed Consolidated Statement of Comprehensive Income. Amortisation profiles are reassessed annually.
-66-
NOTES TO THE FINANCIAL STATEMENTS (continued)
8. INVESTMENTS
Net assets held to cover unit liabilities
Included within the Condensed Consolidated Statement of Financial Position are the following assets and liabilities comprising the net assets held to cover unit liabilities. The net assets held to cover unit liabilities are set out in adjustment 1 of the IFRS to Solvency II Net Assets Balance Sheet reconciliation on page 31.
30 June 30 June 31 December
2021 2020 2020
GBP'Million GBP'Million GBP'Million
Assets
Investment property 1,495.5 1,626.1 1,526.7
Equities 97,862.3 70,758.6 83,359.2
Fixed income securities 29,660.5 26,365.3 27,694.0
Investment in Collective Investment Schemes 3,861.8 5,080.9 4,625.4
Cash and cash equivalents 6,791.8 7,198.3 6,405.2
Other receivables 576.2 1,250.5 1,030.2
Derivative financial instruments
- Currency forwards 527.7 415.2 999.9
- Interest rate swaps 61.3 163.8 58.5
- Index options 10.2 42.0 49.7
- Contract for differences 8.8 337.1 11.8
- Equity swaps 9.5 100.9 6.1
- Foreign currency options 0.3 2.3 0.1
- Total return swaps 163.2 125.0 135.5
- Fixed income options - 17.2 79.5
- Credit default swaps 57.0 24.7 45.7
Total derivative financial assets 838.0 1,228.2 1,386.8
Total assets 141,086.1 113,507.9 126,027.5
Liabilities
Other payables 986.3 1,006.8 759.7
Derivative financial instruments
- Currency forwards 770.9 722.1 472.9
- Interest rate swaps 100.9 145.3 79.5
- Index options 6.8 29.7 43.6
- Contract for differences 16.5 325.2 7.2
- Equity swaps 15.1 80.7 11.2
- Foreign currency options 0.2 0.3 -
- Total return swaps 79.3 101.9 87.3
- Fixed income options 0.2 0.2 33.2
- Credit default swaps 24.7 16.6 15.0
Total derivative financial liabilities 1,014.6 1,422.0 749.9
Total liabilities 2,000.9 2,428.8 1,509.6
Net assets held to cover linked liabilities 139,085.2 111,079.1 124,517.9
Investment contract benefits 102,930.3 82,735.1 93,132.7
Net asset value attributable to unit holders 35,671.6 27,905.9 30,919.1
Unit linked insurance contract liabilities 483.3 438.1 466.1
Net unit-linked liabilities 139,085.2 111,079.1 124,517.9
-67-
NOTES TO THE FINANCIAL STATEMENTS (continued)
9. OTHER RECEIVABLES
30 June 30 June 31 December
2021 2020 2020
GBP'Million GBP'Million GBP'Million
Receivables in relation to unit liabilities excluding policyholder
interests 540.9 453.5 479.3
Other receivables in relation to insurance
and unit trust business 93.5 75.0 64.3
Operational readiness prepayment 305.8 310.8 313.9
Advanced payments to Partners 63.1 61.2 54.2
Other prepayments 77.3 65.7 70.3
Business loans to Partners 502.6 498.9 476.7
Renewal income assets 105.9 89.7 87.4
Miscellaneous 3.5 8.2 0.1
Total other receivables on the Solvency II Net Assets Balance Sheet 1,692.6 1,563.0 1,546.2
Policyholder interests in other receivables (see Note 8) 576.2 1,250.5 1,030.2
Policyholder other (see adjustment 2 on page 31) 2.8 3.2 2.8
Total other receivables 2,271.6 2,816.7 2,579.2
All items within other receivables meet the definition of financial assets with the exception of prepayments and advanced payments to Partners. The fair value of financial assets held at amortised cost within other receivables is not materially different from amortised cost.
Receivables in relation to unit liabilities primarily relate to outstanding market trade settlements (sales) in the life unit-linked funds and the consolidated unit trusts. Other receivables in relation to insurance and unit trust business primarily relate to outstanding policy-related settlement timings. Both of these categories of receivables are short-term, typically settled within three days.
The operational readiness prepayment relates to the Bluedoor administration platform developed by our key outsourced back-office administration provider. Management has assessed the recoverability of this prepayment against the expected cost saving benefit of lower future tariff costs arising from the platform. It is believed that any reasonably possible change in the assumptions applied within this assessment, notably levels of future business, the anticipated future service tariffs and the discount rate, would have no impact on the carrying value of the asset.
Renewal income assets represent the present value of future cash flows associated with books of business acquired by the Group. Typically, they arise through business combinations, where the asset represents the value of non-Group related business at the date of acquisition.
-68-
NOTES TO THE FINANCIAL STATEMENTS (continued)
9. OTHER RECEIVABLES (continued)
Business loans to Partners
30 June 30 June 31 December
2021 2020 2020
GBP'Million GBP'Million GBP'Million
Business loans to Partners directly funded by the Group 322.2 325.0 319.6
Securitised business loans to Partners 180.4 173.9 157.1
Total business loans to Partners 502.6 498.9 476.7
Business loans to Partners are interest bearing (linked to Bank of England base rate plus a margin), repayable in line with the terms of the loan contract and secured against the future income streams of the Partner.
The Group has securitised GBP180.4 million (30 June 2020: GBP173.9 million, 31 December 2020: GBP157.1 million) of the business loans to Partners portfolio. Legal ownership of the securitised business loans to Partners has been transferred to a structured entity, SJP Partner Loans No.1 Limited, which has issued loan notes secured upon them. Note 12 Borrowings and financial commitments provides information on these loan notes. The securitised business loans to Partners are ring-fenced from the other assets of the Group, which means that the cash flows associated with these business loans to Partners can only be used to purchase new loans into the structure or repay the note holders, plus associated issuance fees and costs. Holders of the loan notes have no recourse to the Group's other assets.
The securitised business loans to Partners remain recognised on the Group Condensed Consolidated Statement of Financial Position as the Group controls SJP Partner Loans No. 1 Limited.
The business loans to Partners balance is shown net of GBP3.9 million of expected credit losses (30 June 2020: GBP3.9 million, 31 December 2020: GBP4.0 million). Expected credit losses have been calculated using an expected loss impairment model, which is based on the levels of loss experienced in the portfolio with due consideration given to forward-looking information.
-69-
NOTES TO THE FINANCIAL STATEMENTS (continued)
10. OTHER PAYABLES
30 June 30 June 31 December
2021 2020 2020
GBP'Million GBP'Million GBP'Million
Payables in relation to unit liabilities excluding policyholder interests 151.2 175.8 233.6
Other payables in relation to insurance and unit trust business 513.2 467.9 488.1
Accruals for ongoing advice fees 129.0 109.4 124.0
Other accruals 97.2 92.8 66.8
Contract payment 112.6 74.0 118.1
Lease liabilities 126.5 130.0 132.7
Miscellaneous 107.2 48.0 79.6
Total other payables on the Solvency II Net Assets Balance Sheet 1,236.9 1,097.9 1,242.9
Policyholder interests in other payables (see Note 8) 986.3 1,006.8 759.7
Policyholder other (see adjustment 2 on page 31) 10.3 56.1 35.4
Total other payables 2,233.5 2,160.8 2,038.0
Payables in relation to unit liabilities primarily relate to outstanding market trade settlements (purchases) in the life unit-linked funds and the consolidated unit trusts. Other payables in relation to insurance and unit trust business primarily relate to outstanding policy-related settlement timings. Both of these categories of payables are short-term, typically settled within three days.
The contract payment of GBP112.6 million (30 June 2020: GBP74.0 million, 31 December 2020: GBP118.1 million) represents payments made by a third-party service provider to the Group as part of a service agreement, which are non-interest bearing and repayable over the life of the service agreement. It increased during the second half of 2020 by GBP60 million due to an additional payment being received as part of contract negotiations to extend the life of this agreement by five years. The contract payment received in previous years is repayable on a straight-line basis over the original 12-year term, with repayments commencing on 1 January 2017. The contract premium received in 2020 is repayable on a straight-line basis over 13 years and four months, with repayments commencing on 1 September 2020.
Lease liabilities represent the present value of future cash flows associated with the Group's portfolio of property leases.
The fair value of financial instruments held at amortised cost within other payables is not materially different from amortised cost.
-70-
NOTES TO THE FINANCIAL STATEMENTS (continued)
11. OTHER PROVISIONS AND CONTINGENT LIABILITIES
Complaints provision Lease provision Clawback provision Total provisions
GBP'Million GBP'Million GBP'Million GBP'Million
At 1 January 2020 25.7 11.2 3.7 40.6
Additional provisions 12.0 0.1 - 12.1
Utilised during the period (8.7) - (0.2) (8.9)
Release of provision (5.2) - - (5.2)
At 30 June 2020 23.8 11.3 3.5 38.6
Additional provisions 7.1 0.5 - 7.6
Utilised during the period (12.6) (0.1) - (12.7)
Release of provision 2.1 (1.3) - 0.8
At 31 December 2020 20.4 10.4 3.5 34.3
Additional provisions 14.7 - 0.1 14.8
Utilised during the period (6.3) - - (6.3)
Release of provision (5.2) - - (5.2)
At 30 June 2021 23.6 10.4 3.6 37.6
Total provision for the cost of redress for complaints is based on estimates of the total number of complaints upheld, the estimated cost of redress and the expected timing of settlement. The lease provision is based on the square footage of leased properties and typical costs per square foot of restoring similar buildings to their original state. The clawback provision is based on estimates of the indemnity commission that may be repaid.
As more fully set out in the summary of principal risks and uncertainties on pages 44 to 46, the Group could in the course of its business be subject to legal proceedings and/or regulatory activity. Should such an event arise, the Board would consider their best estimate of the amount required to settle the obligation and, where appropriate and material, establish a provision. While there can be no assurances that circumstances will not change, based upon information currently available to them, the Directors do not believe there is any possible activity or event that could have a material adverse effect on the Group's financial position.
During the normal course of business, the Group may from time to time provide guarantees to Partners, clients or other third parties. However, based upon the information currently available to them, the Directors do not believe there are any guarantees which would have a material adverse effect on the Group's financial position, and so the fair value of any guarantees has been assessed as GBPnil (30 June 2020: GBPnil and 31 December 2020: GBPnil).
-71-
NOTES TO THE FINANCIAL STATEMENTS (continued)
12. BORROWINGS AND FINANCIAL COMMITMENTS
Borrowings
Borrowings are a liability arising from financing activities. The Group has two different types of borrowings:
-- senior unsecured corporate borrowings which are used to manage working capital, bridge intra-Group cash flows and to fund investment in the business; and
-- securitisation loan notes which are secured only on a legally segregated pool of the Group's business loans to Partners, and hence are non-recourse to the Group's other assets. Further information about business loans to Partners is provided in Note 9 Other receivables.
Senior unsecured corporate borrowings
30 June 30 June 31 December
2021 2020 2020
----------- ----------- -----------
GBP'Million GBP'Million GBP'Million
Corporate borrowings: bank loans 229.5 193.0 112.7
Corporate borrowings: loan notes 113.8 113.7 113.8
----------- ----------- -----------
Senior unsecured corporate borrowings 343.3 306.7 226.5
=========== =========== ===========
The primary senior unsecured corporate borrowings are:
-- a GBP340 million revolving credit facility which is repayable at maturity in 2023 with a variable interest rate. At 30 June 2021 the undrawn credit available under this facility was GBP110 million (30 June 2020: GBP150 million, 31 December 2020: GBP230 million); and
-- a US Dollar $160 million private shelf facility, under which the Group has issued two tranches of loan notes: one for GBP50 million and another for GBP64 million. The note issues were denominated in Sterling, eliminating any Group currency risk. The notes are repayable over 10 years, ending in 2025 and 2027 respectively, with variable interest rates.
The Group has a number of covenants within the terms of its senior unsecured corporate borrowing facilities. These covenants are monitored on a regular basis and reported to lenders on a bi-annual basis. During the course of the period all covenants were complied with and the Group did not require waivers or alteration of covenant terms as a result of the economic conditions arising from the COVID-19 pandemic.
As at the 30 June 2021, 31 December 2020 and 30 June 2020 the Group had sufficient headroom available under its covenants to fully draw the remaining commitment under its senior unsecured corporate borrowing facilities. As a result of the Group's business model and cash-flow profile, no additional borrowing facilities were required due to the economic conditions arising from the pandemic.
Total borrowings
30 June 30 June 31 December
2021 2020 2020
-----------
GBP'Million GBP'Million GBP'Million
Senior unsecured corporate borrowings 343.3 306.7 226.5
Senior tranche of non-recourse securitisation loan notes 134.9 129.1 115.3
-----------
Total borrowings 478.2 435.8 341.8
===========
-72-
NOTES TO THE FINANCIAL STATEMENTS (continued)
12. BORROWINGS AND FINANCIAL COMMITMENTS (continued)
The senior tranche of securitisation loan notes are AAA-rated and repayable over the expected life of the securitisation (estimated to be five years) with a variable interest rate. They are held by third-party investors and are secured on a legally segregated portfolio of GBP180.4 million business loans to Partners, and the other net assets of the securitisation entity SJP Partner Loans No.1 Limited. For further information on business loans to Partners, including those that have been securitised, refer to Note 9 Other receivables. Holders of the securitisation loan notes have no recourse to the assets held by any other entity within the Group.
In addition to the senior tranche of securitisation loan notes, a junior tranche has been issued to another entity within the Group. The junior notes are eliminated on consolidation in the preparation of the Group Financial Statements and so do not form part of Group borrowings.
30 June 30 June 31 December
2021 2020 2020
-----------
GBP'Million GBP'Million GBP'Million
Junior tranche of non-recourse securitisation loan notes 54.0 51.7 48.1
Senior tranche of non-recourse securitisation loan notes 134.9 129.1 115.3
-----------
Total non-recourse securitisation loan notes 188.9 180.8 163.4
===========
Backed by:
Securitised business loans to Partners (see Note 9) 180.4 173.9 157.1
Other net assets of SJP Partner Loans No.1 Limited 8.5 6.9 6.3
-----------
Total net assets held by SJP Partner Loans No.1 Limited 188.9 180.8 163.4
===========
The fair value of the outstanding borrowings is not materially different from amortised cost. Interest expense on borrowings is recognised within expenses in the Condensed Consolidated Statement of Comprehensive Income.
Financial commitments
Guarantees
The Group guarantees loans provided by third parties to Partners. In the event of default of any individual Partner loan, the Group guarantees to repay the full amount of the loan, with the exception of Metro Bank. For this third party the Group guarantees to cover losses up to 50% of the value to the total loans drawn. These loans are secured against the future income streams of the Partner. The value of the loans guaranteed is as follows:
Loans drawn Facility
30 June 30 June 31 December 30 June 30 June 31 December
2021 2020 2020 2021 2020 2020
GBP'Million GBP'Million GBP'Million GBP'Million GBP'Million GBP'Million
Bank of Scotland 60.5 57.9 63.3 70.0 70.0 70.0
Clydesdale Bank - - - - - 25.0
Investec 35.2 17.6 25.9 50.0 25.0 50.0
Metro Bank 41.0 42.6 39.8 61.0 61.0 61.0
NatWest 29.7 23.1 22.1 50.0 25.0 50.0
Santander 49.1 48.3 49.6 50.0 50.0 50.0
Total loans 215.5 189.5 200.7 281.0 231.0 306.0
The fair value of these guarantees has been assessed as GBPnil (30 June 2020: GBPnil, 31 December 2020: GBPnil).
-73-
NOTES TO THE FINANCIAL STATEMENTS (continued)
13. FAIR VALUE MEASUREMENT
Fair value estimation
Financial assets and liabilities, which are held at fair value in the Financial Statements, are required to have disclosed their fair value measurements by level from the following fair value measurement hierarchy:
-- Quoted prices (unadjusted) in active markets for identical assets or liabilities (Level 1);
-- Inputs other than quoted prices included within Level 1 that are observable for the asset or liability, either directly (that is, as prices) or indirectly (that is, derived from prices) (Level 2); and
-- Inputs for the asset or liability that are not based on observable market data (that is, unobservable inputs) (Level 3).
The following tables present the Group's shareholder assets and liabilities measured at fair value:
Shareholder assets and liabilities
30 June 2021 Total
Level 1 Level 2 Level 3 balance
GBP'Million GBP'Million GBP'Million GBP'Million
Financial assets:
Fixed income securities 7.8 - - 7.8
Investment in Collective Investment Schemes(1) 1,295.3 - - 1,295.3
Renewal income assets - - 105.9 105.9
Total financial assets 1,303.1 - 105.9 1,409.0
Financial liabilities:
Contingent consideration - - 4.1 4.1
Total financial liabilities - - 4.1 4.1
30 June 2020 Total
Level 1 Level 2 Level 3 balance
GBP'Million GBP'Million GBP'Million GBP'Million
Financial assets:
Fixed income securities 7.6 - - 7.6
Investment in Collective Investment Schemes(1) 810.5 - - 810.5
Renewal income assets - - 89.7 89.7
Total financial assets 818.1 - 89.7 907.8
31 December 2020 Total
Level 1 Level 2 Level 3 balance
GBP'Million GBP'Million GBP'Million GBP'Million
Financial assets:
Fixed income securities 7.4 - - 7.4
Investment in Collective Investment Schemes(1) 1,264.8 - - 1,264.8
Renewal income assets - - 87.4 87.4
Total financial assets 1,272.2 - 87.4 1,359.6
1. All assets included as shareholder investment in collective investment schemes are holdings of high quality, highly liquid unitised money market funds, containing assets which are cash and cash equivalents.
-74-
NOTES TO THE FINANCIAL STATEMENTS (continued)
13. FAIR VALUE MEASUREMENT (continued)
The fair value of financial instruments traded in active markets is based on quoted bid prices at the reporting date. These instruments are included in Level 1.
Level 2 financial assets are valued using observable prices for identical current arm's length transactions.
The renewal income assets are classified as Level 3 and are valued using a discounted cash flow technique. The effect of applying reasonably possible alternative assumptions of a movement of 100bps on the discount rate and a 10% movement in the lapse rate would result in an unfavourable change in valuation of GBP9.2 million (30 June 2020: GBP8.4 million, 31 December 2020: GBP7.5 million) and a favourable change in valuation of GBP10.9 million (30 June 2020: GBP9.3 million, 31 December 2020: GBP9.1 million) , respectively.
The contingent consideration liability is classified as Level 3 and is valued based on the terms set out in the sale and purchase agreement. Given the nature of the valuation basis the effect of applying reasonably possible alternative assumptions would result in an unfavourable change of GBPnil and a favourable change of GBP4.1 million.
There were no transfers between Level 1 and Level 2 during the period, nor into or out of Level 3.
The following tables present the changes in Level 3 financial assets and liabilities at fair value through the profit and loss:
Financial assets:
Renewal income assets 30 June 2021 30 June 2020 31 December 2020
-----------------
GBP'Million GBP'Million GBP'Million
Opening balance 87.4 85.7 85.7
Additions during the period 31.2 13.5 16.5
Disposals during the period (9.4) - -
Unrealised losses recognised in the Statement
of Comprehensive Income (3.3) (9.5) (14.8)
Closing balance 105.9 89.7 87.4
=================
Unrealised losses on renewal income assets are recognised within investment return in the Condensed Consolidated Statement of Comprehensive Income.
Financial liabilities:
Contingent consideration 30 June 2021 30 June 2020 31 December 2020
-----------------
GBP'Million GBP'Million GBP'Million
Opening balance - - -
Additions during the period 4.1 - -
Closing balance 4.1 - -
=================
-75-
NOTES TO THE FINANCIAL STATEMENTS (continued)
13. FAIR VALUE MEASUREMENT (continued)
Unit liabilities and associated assets
30 June 2021 Total
Level 1 Level 2 Level 3 balance
GBP'Million GBP'Million GBP'Million GBP'Million
Financial assets and investment properties
Investment property - - 1,495.5 1,495.5
Equities 97,285.5 - 576.8 97,862.3
Fixed income securities 7,780.6 21,529.5 350.4 29,660.5
Investment in Collective Investment Schemes 3,860.2 - 1.6 3,861.8
Derivative financial instruments - 838.0 - 838.0
Cash and cash equivalents 6,791.8 - - 6,791.8
Total financial assets and
investment properties 115,718.1 22,367.5 2,424.3 140,509.9
Financial liabilities
Investment contract benefits - 102,930.3 - 102,930.3
Derivative financial instruments - 1,014.6 - 1,014.6
Net asset value attributable to unit holders 35,671.6 - - 35,671.6
Total financial liabilities 35,671.6 103,944.9 - 139,616.5
30 June 2020 Total
Level 1 Level 2 Level 3 balance
GBP'Million GBP'Million GBP'Million GBP'Million
Financial assets and investment properties
Investment property - - 1,626.1 1,626.1
Equities 70,517.0 - 241.6 70,758.6
Fixed income securities 6,619.5 19,608.1 137.7 26,365.3
Investment in Collective Investment Schemes 5,079.4 - 1.5 5,080.9
Derivative financial instruments - 1,228.2 - 1,228.2
Cash and cash equivalents 7,198.3 - - 7,198.3
Total financial assets and
investment properties 89,414.2 20,836.3 2,006.9 112,257.4
Financial liabilities
Investment contract benefits - 82,735.1 - 82,735.1
Derivative financial instruments - 1,422.0 - 1,422.0
Net asset value attributable to unit holders 27,905.9 - - 27,905.9
Total financial liabilities 27,905.9 84,157.1 - 112,063.0
-76-
NOTES TO THE FINANCIAL STATEMENTS (continued)
13. FAIR VALUE MEASUREMENT (continued)
31 December 2020 Total
Level 1 Level 2 Level 3 balance
GBP'Million GBP'Million GBP'Million GBP'Million
Financial assets and investment properties
Investment property - - 1,526.7 1,526.7
Equities 82,893.4 - 465.8 83,359.2
Fixed income securities 7,348.7 20,035.9 309.4 27,694.0
Investment in Collective Investment Schemes 4,623.6 - 1.8 4,625.4
Derivative financial instruments - 1,386.8 - 1,386.8
Cash and cash equivalents 6,405.2 - - 6,405.2
Total financial assets and
investment properties 101,270.9 21,422.7 2,303.7 124,997.3
Financial liabilities
Investment contract benefits - 93,132.7 - 93,132.7
Derivative financial instruments - 749.9 - 749.9
Net asset value attributable to unit holders 30,919.1 - - 30,919.1
Total financial liabilities 30,919.1 93,882.6 - 124,801.7
In respect of the derivative financial liabilities, GBP296.0 million of collateral has been posted at 30 June 2021, comprising cash and treasury bills (30 June 2020: GBP253.9 million, 31 December 2020: GBP123.6 million), in accordance with the terms and conditions of the derivative contracts.
-77-
NOTES TO THE FINANCIAL STATEMENTS (continued)
13. FAIR VALUE MEASUREMENT (continued)
The fair value of financial instruments traded in active markets is based on quoted bid prices at the reporting date. These instruments are included in Level 1.
The Group closely monitors the valuation of assets in markets that have become less liquid. Determining whether a market is active requires the exercise of judgement and is determined based upon the facts and circumstances of the market for the instrument being measured. Where it is determined that there is no active market, fair value is established using a valuation technique. The techniques applied incorporate relevant information available and reflect appropriate adjustments for credit and liquidity risks. These valuation techniques maximise the use of observable market data where it is available and rely as little as possible on entity specific estimates. The relative weightings given to differing sources of information and the determination of non-observable inputs to valuation models can require the exercise of significant judgement.
If all significant inputs required to fair value an instrument are observable, the instrument is included in Level 2. If one or more of the significant inputs is not based on observable market data, the instrument is included in Level 3.
Note that all of the resulting fair value estimates are included in Level 2, except for certain equities and investments in Collective Investment Schemes (CIS) and investment properties as detailed below.
Specific valuation techniques used to value Level 2 financial assets and liabilities include:
-- The use of observable prices for identical current arm's length transactions, specifically:
o The fair value of u nit-linked liabilities is assessed by reference to the value of the underlying net asset value of the Group's unitised investment funds, determined on a bid value, at the reporting date.
o The Group's derivative financial instruments are valued using valuation techniques commonly used by market participants. These consist of discounted cash flow and options pricing models, which typically incorporate observable market data, principally interest rates, basis spreads, foreign exchange rates, equity prices and counterparty credit.
Specific valuation techniques used to value Level 3 financial assets and liabilities include:
-- The use of unobservable inputs, such as expected rental values and equivalent yields;
-- Other techniques, such as discounted cash flow and historic lapse rates, are used to determine fair value for the remaining financial instruments.
There were no transfers between Level 1 and Level 2 during the period.
-78-
NOTES TO THE FINANCIAL STATEMENTS (continued)
13. FAIR VALUE MEASUREMENT (continued)
Transfers into and out of Level 3 portfolios
Transfers out of Level 3 portfolios arise when inputs that could have a significant impact on the instrument's valuation become market observable; conversely, transfers into the portfolios arise when consistent sources of data cease to be available.
Transfers in of certain equities and investments in CIS occur when asset valuations can no longer be obtained from an observable market price i.e. become illiquid, in liquidation, suspended etc. The converse is true if an observable market price becomes available.
The following table presents the changes in Level 3 financial assets and liabilities at fair value through the profit and loss:
Six months ended 30 June 2021
Investment property Fixed income securities Equities Investment in CIS
GBP'Million GBP'Million GBP'Million GBP'Million
Opening balance 1,526.7 309.4 465.8 1.8
Transfer into Level 3 - - - 0.1
Transfer out of Level 3 - - (46.7) -
Additions during the period 11.1 79.9 123.6 -
Disposals during the period (78.6) (34.9) (8.2) (0.2)
Gains/(losses) recognised in the
Statement of Comprehensive Income 36.3 (4.0) 42.3 (0.1)
Closing balance 1,495.5 350.4 576.8 1.6
Realised gains 11.1 0.8 0.2 -
Unrealised gains/(losses) 25.2 (4.8) 42.1 (0.1)
Gains/(losses) recognised in the
Statement of Comprehensive Income 36.3 (4.0) 42.3 (0.1)
Six months ended 30 June 2020
Fixed income securities Investment
Investment property Equities in CIS
GBP'Million GBP'Million GBP'Million GBP'Million
Opening balance 1,750.9 81.7 169.4 1.5
Transfer into Level 3 - - - 0.1
Additions during the period 12.8 55.5 52.8 -
Disposals during the period (12.5) (3.7) - (0.1)
(Losses)/gains recognised in the Statement
of Comprehensive Income (125.1) 4.2 19.4 -
Closing balance 1,626.1 137.7 241.6 1.5
Realised gains 0.6 - - -
Unrealised (losses)/gains (125.7) 4.2 19.4 -
(Losses)/gains recognised in the Statement
of Comprehensive Income (125.1) 4.2 19.4 -
-79-
NOTES TO THE FINANCIAL STATEMENTS (continued)
13. FAIR VALUE MEASUREMENT (continued)
Year ended 31 December 2020
Fixed income securities
Investment property Equities Investment in CIS
GBP'Million GBP'Million GBP'Million GBP'Million
Opening balance 1,750.9 81.7 169.4 1.5
Transfer into Level 3 - - - 0.4
Additions during the year 27.5 225.9 363.4 -
Disposals during the year (142.0) (5.2) (123.8) (0.1)
(Losses)/gains recognised in the
Statement of
Comprehensive Income (109.7) 7.0 56.8 -
Closing balance 1,526.7 309.4 465.8 1.8
Unrealised gains 42.8 7.6 41.7 -
Realised (losses)/gains (152.5) (0.6) 15.1 -
(Losses)/gains recognised in the
Statement of Comprehensive Income (109.7) 7.0 56.8 -
Unrealised gains and realised (losses)/gains for all Level 3 assets are recognised within investment return in the Condensed Consolidated Statement of Comprehensive Income.
-80-
NOTES TO THE FINANCIAL STATEMENTS (continued)
13. FAIR VALUE MEASUREMENT (continued)
Level 3 valuations
Investment property
At 30 June 2021 the Group held GBP1,495.5 million (30 June 2020: GBP1,626.1 million, 31 December 2020: GBP1,526.7 million) of investment property, all of which is classified as Level 3 in the fair value hierarchy. It is initially measured at cost including related acquisition costs and subsequently valued monthly by professional external valuers at the properties' respective fair values at each reporting date. The fair values derived are based on anticipated market values for the properties in accordance with the guidance issued by the Royal Institution of Chartered Surveyors, being the estimated amount that would be received from a sale of the assets in an orderly transaction between market participants. The valuation of investment property is inherently subjective as it requires, among other factors, assumptions to be made regarding the ability of existing tenants to meet their rental obligations over the entire life of their leases, the estimation of the expected rental income into the future, an assessment of a property's potential to remain as an attractive technical configuration to existing and prospective tenants in a changing market and a judgement on the attractiveness of a building, its location and the surrounding environment.
Investment property classification
Office Industrial Retail and leisure All
30 June 2021
Gross ERV (per sq ft)(1)
Range GBP15.00 - GBP96.04 GBP4.50 - GBP17.50 GBP2.50 - GBP99.98 GBP2.50 - GBP99.98
Weighted average GBP42.73 GBP9.67 GBP13.03 GBP15.59
True equivalent yield
Range 4.2% - 10.3% 3.7% - 5.5% 5.0% - 15.9% 3.7% - 15.9%
Weighted average 5.4% 4.3% 7.5% 5.6% 30 June 2020 Gross ERV (per sq ft)(1) Range GBP14.75 - GBP97.55 GBP4.13 - GBP17.50 GBP2.50 - GBP99.98 GBP2.50 - GBP99.98 Weighted average GBP36.10 GBP8.73 GBP14.59 GBP15.24 True equivalent yield Range 4.2% - 8.7% 4.3% - 6.0% 4.7% - 14.1% 4.2% - 14.1% Weighted average 5.5% 4.7% 7.2% 5.7% 31 December 2020 Gross ERV (per sq ft)(1) Range GBP15.00 - GBP96.04 GBP4.13 - GBP17.50 GBP2.50 - GBP105.01 GBP2.50 - GBP105.01 Weighted average GBP42.19 GBP9.16 GBP13.56 GBP15.20 True equivalent yield Range 4.2% - 9.4% 3.8% - 5.7% 4.0% - 15.1% 3.8% - 15.1% Weighted average 5.4% 4.5% 7.1% 5.6% 1. Equivalent rental value (per square foot).
-81-
NOTES TO THE FINANCIAL STATEMENTS (continued)
13. FAIR VALUE MEASUREMENT (continued)
Fixed income securities and equities
At 30 June 2021 the Group held GBP350.4 million (30 June 2020: GBP137.7 million, 31 December 2020: GBP309.3 million) in private credit investments, and GBP576.8 million (30 June 2020: GBP241.6 million, 31 December 2020: GBP465.8 million) in private market investments through the St. James's Place Diversified Assets (FAIF) Unit Trust.
The private credit and private market investments are recognised within fixed income securities and equities, respectively, in the Condensed Consolidated Statement of Financial Position. They are initially measured at cost and are subsequently remeasured to fair value following a monthly valuation process which includes verification by suitably qualified professional external valuers, who are members of various industry bodies including the British Private Equity and Venture Capital Association (BVCA).
The fair values of the private credit investments are principally determined using two valuation methods:
1. the shadow rating method, which assigns a shadow credit rating to the debt issuing entity and determines an expected yield with reference to observable yields for comparable companies with public credit rating in the loan market; and
2. the weighted average cost of capital (WACC) method, which determines the debt issuing entity's WACC with reference to observable market comparatives.
The expected yield and WACC are used as the discount rates to calculate the present value of the expected future cash flows under the shadow rating and WACC methods respectively, which is taken to be the fair value.
The fair values of the private equity investments are principally determined using two valuation methods:
1. a market approach with reference to suitable market comparatives; and
2. an income approach using discounted cash flow analysis which assesses the fair value of each asset based on its expected future cash flows.
The output of each method for both the private credit and private equity investments is a range of values, from which the mid-point is selected to be the fair value in the majority of cases. The mid-point would not be selected if further information is known about an investment which cannot be factored into the valuation method used. A weighting is assigned to the values determined following each method to determine the final valuation.
The valuations are inherently subjective as they require a number of assumptions to be made, such as determining which entities provide suitable market comparatives and their relevant performance metrics (for example earnings before interest, tax, depreciation and amortisation), determining appropriate discount rates and cash flow forecasts to use in models, the weighting to apply to each valuation methodologies and the point in the range of valuations to select as the fair value.
-82-
NOTES TO THE FINANCIAL STATEMENTS (continued)
13. FAIR VALUE MEASUREMENT (continued)
Sensitivity of Level 3 valuations
Investment in Collective Investment Schemes
T he valuation of certain investments in CIS are based on the latest observable price available. Whilst such valuations are sensitive to estimates, it is believed that changing the price applied to a reasonably possible alternative would not change the fair value significantly.
Investment property
As set out above, investment property is initially measured at cost including related acquisition costs and subsequently valued monthly by professional external valuers at their respective fair values at each reporting date. The following table sets out the effect of applying reasonably possible alternative assumptions, being a 5% movement in estimated rental value and a 25 bps movement in the relative yield, to the valuation of the investment properties. Any change in the value of investment property is matched by the associated movement in the policyholder liability, and therefore would not impact on the shareholder net assets.
Investment property Effect of reasonable possible alternative assumptions
significant unobservable Favourable Unfavourable
inputs Carrying value changes changes
GBP'Million GBP'Million GBP'Million
Expected rental value /
30 June 2021 Relative yield 1,495.5 1,644.8 1,363.3
Expected rental value /
30 June 2020 Relative yield 1,626.1 1,778.4 1,491.5
Expected rental value /
31 December 2020 Relative yield 1,526.7 1,839.5 1.277.4
Fixed income securities and equities
As set out above, the fair values of the Level 3 fixed income securities and equities are selected from the valuation range determined through the monthly valuation process. The following table sets out the effect of valuing each of the assets at the high and low point of the range. As for investment property, any change in the value of these fixed income securities or equities is matched by an associated movement in the policyholder liability, and therefore would not impact on the shareholder net assets.
Effect of reasonable possible alternative assumptions
Favourable Unfavourable
Carrying value changes changes
GBP'Million GBP'Million GBP'Million
30 June 2021 Fixed income securities 350.4 358.9 342.4
Equities 576.8 691.3 488.2
30 June 2020 Fixed income securities 137.7 139.3 136.1
Equities 241.6 278.0 216.0
31 December 2020 Fixed income securities 309.3 314.9 304.8
Equities 465.8 559.2 408.4
-83-
NOTES TO THE FINANCIAL STATEMENTS (continued)
14. SHARE CAPITAL, EARNINGS PER SHARE AND DIVIDS
Share capital
Number of Called up
ordinary shares share capital
GBP'Million
At 1 January 2020 534,800,626 80.2
- Exercise of options 2,016,092 0.3
At 30 June 2020 536,816,718 80.5
- Exercise of options 526,748 0.1
At 31 December 2020 537,343,466 80.6
- Issue of share capital 850,985 0.1
- Exercise of options 1,385,243 0.2
At 30 June 2021 539,579,694 80.9
Ordinary shares have a par value of 15 pence per share (30 June 2020: 15 pence per share, 31 December 2020: 15 pence per share) and are fully paid.
Included in the issued share capital are 1,819,047 (30 June 2020: 3,352,963, 31 December 2020: 2,913,822) shares held in the shares in trust reserve with a nominal value of GBP0.3 million (30 June 2020: GBP0.5 million, 31 December 2020: GBP0.4 million). The shares are held by the SJP Employee Share Trust and the St. James's Place 2010 SIP Trust to satisfy certain share-based payment schemes. The trustees of the SJP Employee Share Trust retain the right to dividends on the shares held by the Trust but have chosen to waive their entitlement to the dividends on 373,691 shares at 30 June 2021 (30 June 2020: 941,722 shares, 31 December 2020: 663,769 shares). No dividends have been waived on shares held in the St. James's Place 2010 SIP Trust in 2021 or 2020.
-84-
NOTES TO THE FINANCIAL STATEMENTS (continued)
14. SHARE CAPITAL, EARNINGS PER SHARE AND DIVIDS (continued)
Earnings per share
Six months Six months
ended ended Year ended
30 June 2021 30 June 2020 31 December 2020
------------------
GBP'Million GBP'Million GBP'Million
Earnings
Profit after tax attributable to equity shareholders (for both
basic and diluted EPS) 120.9 178.1 262.0
Million Million Million
Weighted average number of shares
Weighted average number of ordinary shares in issue (for basic
EPS) 536.7 533.8 533.5
Adjustments for outstanding share options 7.6 5.1 5.8
Weighted average number of ordinary shares (for diluted EPS) 544.3 538.9 539.3
Pence Pence Pence
Earnings per share (EPS)
Basic earnings per share 22.5 33.4 49.1
======
Diluted earnings per share 22.2 33.0 48.6
-85-
NOTES TO THE FINANCIAL STATEMENTS (continued)
14. SHARE CAPITAL, EARNINGS PER SHARE AND DIVIDS (continued)
Dividends
The following dividends have been paid by the Group:
Six months Six months
ended ended Year ended
30 June 2021 30 June 2020 31 December 2020
GBP'Million GBP'Million GBP'Million
Second interim dividend in respect of 2019 - 20.00 pence per
ordinary share - 107.1 107.1
Withheld 2019 dividend - 11.22 pence per ordinary share 60.3 - -
Final dividend in respect of 2020 - 31.22 pence per ordinary
share 207.2 - -
Total dividends paid 267.5 107.1 107.1
=============
The Directors have resolved to pay an interim dividend of 11.55 pence per share (30 June 2020: nil). This amounts to GBP62.3 million (30 June 2020: GBPnil) and will be paid on 24 September 2021 to shareholders on the register at 27 August 2021.
15. BUSINESS COMBINATIONS
During the year the Group acquired the following subsidiary in line with the Group's strategic objective of growing and supporting the Partnership :
Business acquired Principal activity % Shareholding Date of acquisition Jamie Lewington & Co Limited Provision of financial services 100% 4 January 2021
Acquisition-related costs of GBP0.1 million have been charged to administration expenses in the Consolidated Statement of Comprehensive Income for the period ended 30 June 2021.
Jamie Lewington & Co Limited
The acquisition contributed GBPnil million to fee and commission income and a GBP1.6 million profit before income tax for the period between the acquisition date and 30 June 2021. Had the acquisitions been consolidated from 1 January 2021, there would be no change to the contribution.
-86-
NOTES TO THE FINANCIAL STATEMENTS (continued)
15. BUSINESS COMBINATIONS (continued)
The net assets, fair value adjustments and consideration for this acquisition is summarised below (all values shown as at their acquisition date):
Book value Fair value adjustment Total
----------- ------------
GBP'Million GBP'Million GBP'Million
Financial assets 1.1 21.1 22.2
Cash and cash equivalents 3.2 - 3.2
Financial liabilities (2.3) (4.0) (6.3)
Total 2.0 17.1 19.1
Consideration
Cash consideration on completion 8.4
Shares issued on completion* 8.3
Deferred contingent consideration 4.1
Total consideration 20.8
Goodwill 1.7
============
*Shares issued refer to St. James's Place plc ordinary shares
Goodwill comprises the future value generated from new business opportunities.
It is expected that the deferred contingent consideration will be paid in full with no changes to the amount initially recognised. Of the remaining balance to be settled the Group expects that GBP4.1 million will be settled by 18 July 2022.
16. RELATED PARTY TRANSACTIONS
For the Half-Year to 30 June 2021 the nature of the related party transactions is similar to those for the year ended 31 December 2020.
Transactions with St. James's Place unit trusts
In respect of the non-consolidated St. James's Place managed unit trusts that are held as investments in the St. James's Place life and pension funds, there were losses recognised of GBP11.0 million (30 June 2020: losses of GBP30.8 million and 31 December 2020: losses of GBP18.2 million) and the total value of transactions with those non-consolidated unit trusts was GBP14.1 million (30 June 2020: GBP16.7 million and 31 December 2020: GBP35.1 million). Net management fees receivable from these unit trusts amounted to GBP1.8 million (30 June 2020: GBP4.2 million and 31 December 2020: GBP8.0 million). The value of the investment into the non-consolidated unit trusts at 30 June 2021 was GBPnil (30 June 2020: GBP98.3 million and 31 December 2020: GBP101.1 million).
17. STATUTORY ACCOUNTS
The financial information shown in this publication is unaudited and does not constitute statutory accounts. The comparative figures for the financial year ended 31 December 2020 are not the Company's statutory accounts for the financial year. Those accounts have been reported on by the Company's auditors and delivered to the Registrar of Companies.
The report of the auditors was unmodified and did not include a reference to any matter to which the auditors drew attention to, by way of emphasis without modifying their report, and did not contain a statement under section 498 of the Companies Act 2006.
-87-
NOTES TO THE FINANCIAL STATEMENTS (continued)
18. APPROVAL OF HALF-YEAR REPORT
These Condensed Consolidated Half-Year Financial Statements were approved by the Board of Directors on 27 July 2021.
19. NATIONAL STORAGE MECHANISM
A copy of the Half-Year Report will be submitted shortly to the National Storage Mechanism (NSM) and will be available for inspection at the NSM, which is situated at: https://data.fca.org.uk/#/nsm/nationalstoragemechanism .
-88-
Independent review report to St. James's Place plc
Report on the condensed consolidated interim financial statements
Our conclusion
We have reviewed St. James's Place plc's condensed consolidated interim financial statements (the "interim financial statements") in the Half-Year Report & Accounts of St. James's Place plc for the 6 month period ended 30 June 2021 (the "period").
Based on our review, nothing has come to our attention that causes us to believe that the interim financial statements are not prepared, in all material respects, in accordance with UK adopted International Accounting Standard 34, 'Interim Financial Reporting' and the Disclosure Guidance and Transparency Rules sourcebook of the United Kingdom's Financial Conduct Authority.
What we have reviewed
The interim financial statements comprise:
-- the condensed consolidated statement of financial position as at 30 June 2021; -- the condensed consolidated statement of comprehensive income for the period then ended; -- the condensed consolidated statement of cash flows for the period then ended; -- the condensed consolidated statement of changes in equity for the period then ended; and -- the explanatory notes to the interim financial statements.
The interim financial statements included in the Half-Year Report & Accounts of St. James's Place plc have been prepared in accordance with UK adopted International Accounting Standard 34, 'Interim Financial Reporting' and the Disclosure Guidance and Transparency Rules sourcebook of the United Kingdom's Financial Conduct Authority.
Responsibilities for the interim financial statements and the review
Our responsibilities and those of the directors
The Half-Year Report & Accounts, including the interim financial statements, is the responsibility of, and has been approved by the directors. The directors are responsible for preparing the Half-Year Report & Accounts in accordance with the Disclosure Guidance and Transparency Rules sourcebook of the United Kingdom's Financial Conduct Authority.
Our responsibility is to express a conclusion on the interim financial statements in the Half-Year Report & Accounts based on our review. This report, including the conclusion, has been prepared for and only for the company for the purpose of complying with the Disclosure Guidance and Transparency Rules sourcebook of the United Kingdom's Financial Conduct Authority and for no other purpose. We do not, in giving this conclusion, accept or assume responsibility for any other purpose or to any other person to whom this report is shown or into whose hands it may come save where expressly agreed by our prior consent in writing.
What a review of interim financial statements involves
We conducted our review in accordance with International Standard on Review Engagements (UK and Ireland) 2410, 'Review of Interim Financial Information Performed by the Independent Auditor of the Entity' issued by the Auditing Practices Board for use in the United Kingdom. A review of interim financial information consists of making enquiries, primarily of persons responsible for financial and accounting matters, and applying analytical and other review procedures.
A review is substantially less in scope than an audit conducted in accordance with International Standards on Auditing (UK) and, consequently, does not enable us to obtain assurance that we would become aware of all significant matters that might be identified in an audit. Accordingly, we do not express an audit opinion.
We have read the other information contained in the Half-Year Report & Accounts and considered whether it contains any apparent misstatements or material inconsistencies with the information in the interim financial statements.
PricewaterhouseCoopers LLP
Chartered Accountants
London
27 July 2021
-89-
RESPONSIBILITY STATEMENT OF THE DIRECTORS IN RESPECT OF
THE HALF-YEAR FINANCIAL REPORT
The Directors confirm that this consolidated interim financial information has been prepared in accordance with IAS 34 as adopted by the UK and that the interim management report includes a fair review of the information required by DTR 4.2.7R and DTR 4.2.8R, namely:
-- an indication of important events that have occurred during the first six months of the financial year and their impact on the condensed set of consolidated Financial Statements, and a description of the principal risks and uncertainties for the remaining six months of the financial year; and
-- material related-party transactions in the first six months and any material changes in the related party transactions described in the last Annual Report.
The Directors of St. James's Place plc are listed in the St. James's Place plc Annual Report for 31 December 2020. A list of current Directors is maintained on the St. James's Place plc website: www.sjp.co.uk
The Directors are responsible for the maintenance and integrity of the Group's website. Legislation in the United Kingdom governing the preparation and dissemination of Financial Statements may differ from legislation in other jurisdictions.
By order of the Board:
Andrew Croft Craig Gentle Chief Executive Chief Financial Officer 27 July 2021 27 July 2021
-90-
SUPPLEMENTARY INFORMATION:
CONSOLIDATED FINANCIAL STATEMENTS
ON A CASH RESULT BASIS (UNAUDITED)
-91-
CONSOLIDATED STATEMENT OF COMPREHENSIVE INCOME
ON A CASH RESULT BASIS (UNAUDITED)
Six months ended Six months ended Year ended
30 June 2021 30 June 2020 31 December
Note 2020
GBP'Million GBP'Million GBP'Million
Fee and commission income 1,446.1 657.6 2,011.3
Investment return 5 11.5 (1.6) 13.5
Net income 1,457.6 656.0 2,024.8
Expenses (915.8) (798.0) (1,601.3)
Profit/(loss) before tax 541.8 (142.0) 423.5
Tax attributable to policyholders' returns (336.1) 293.8 (98.8)
Tax attributable to shareholders' returns (29.9) (27.1) (70.0)
Total cash result profit for the period 175.8 124.7 254.7
Pence Pence Pence
Cash result basic earnings per share III 32.8 23.4 47.7
Cash result diluted earnings per share III 32.3 23.1 47.2
The Note references above cross refer to the Notes to the Condensed Consolidated Financial Statements under IFRS as adopted by the UK on pages 47 to 87, except where denoted in roman numerals.
-92-
CONSOLIDATED STATEMENT OF CHANGED IN EQUITY
ON A CASH RESULT BASIS (UNAUDITED)
Equity attributable owners of the Parent
Shares Non-
Share Share in trust Misc Retained controlling Total
Note Capital premium reserve reserves earnings Total interests equity
------------ ------------
GBP'Million GBP'Million GBP'Million GBP'Million GBP'Million GBP'Million GBP'Million GBP'Million
At 1 January
2020 80.2 182.4 (16.4) 2.5 809.0 1,057.7 (0.9) 1,056.8
Cash result
for the
period 124.7 124.7 124.7
Dividends 14 (107.1) (107.1) (107.1)
Exercise of
options 0.3 0.8 1.1 1.1
Consideration
paid
for own
shares (3.8) (3.8) (3.8)
Shares sold
during the
period 4.1 (4.1) - -
Change in
deferred
tax (23.5) (23.5) (23.5)
Impact of
policyholder
tax asymmetry 98.3 98.3 98.3
Change in
goodwill,
intangibles
and other
non-cash
movements (11.4) (11.4) (11.4)
At 30 June
2020 80.5 183.2 (16.1) 2.5 885.9 1,136.0 (0.9) 1,135.1
At 1 January
2021 80.6 185.3 (14.8) 2.5 965.9 1,219.5 (0.9) 1,218.6
Cash result
for the
period 175.8 175.8 175.8
Dividends 14 (267.5) (267.5) (267.5)
Issue of share
capital 0.1 10.2 10.3 10.3
Exercise of
options 0.2 11.1 11.3 11.3
Consideration - -
paid
for own shares
Shares sold
during the
period 6.4 (6.4) - -
Change in
deferred
tax 2.4 2.4 2.4
Impact of
policyholder
tax asymmetry (29.2) (29.2) (29.2)
Change in
goodwill,
intangibles
and other
non-cash
movements (8.4) (8.4) (8.4)
At 30 June
2021 80.9 206.6 ( 8.4) 2.5 832.6 1,114.2 (0.9) 1,113.3
-93-
CONSOLIDATED STATEMENT OF FINANCIAL POSITION
ON A CASH RESULT BASIS (UNAUDITED)
30 June 30 June 31 December
Note 2021 2020 2020
------------
GBP'Million GBP'Million GBP'Million
Assets
Property and equipment 162.6 172.9 174.4
Deferred tax assets - 74.7 0.7
Other receivables 1,692.6 1,563.0 1,546.2
Fixed income securities 13 7.8 7.6 7.4
Investment in Collective Investment Schemes 13 1,295.3 810.5 1,264.8
Cash and cash equivalents 298.1 289.9 254.9
Total assets 3,456.4 2,918.6 3,248.4
Liabilities
Borrowings 12 478.2 435.8 341.8
Deferred tax liabilities 506.7 191.3 378.0
Other provisions 11 37.6 38.6 34.3
Other payables 1,236.9 1,097.9 1,242.9
Income tax liabilities 83.6 19.8 32.7
Preference shares 0.1 0.1 0.1
------------
Total liabilities 2,343.1 1,783.5 2,029.8
Net assets 1,113.3 1,135.1 1,218.6
Shareholders' equity
Share capital 14 80.9 80.5 80.6
Share premium 206.6 183.2 185.3
Shares in trust reserve (8.4) (16.1) (14.8)
Miscellaneous reserves 2.5 2.5 2.5
Retained earnings 832.6 885.9 965.9
------------
Shareholders' equity 1,114.2 1,136.0 1,219.5
Non-controlling interests (0.9) (0.9) (0.9)
Total shareholders' equity on a cash result basis 1,113.3 1,135.1 1,218.6
Pence Pence Pence
------------
Net assets per share 206.3 211.5 226.8
The Note references above cross refer to the Notes to the Condensed Consolidated Financial Statements under IFRS as adopted by the UK on pages 47 to 87, except where denoted in roman numerals.
-94-
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
ON A CASH RESULT BASIS (UNAUDITED)
I. BASIS OF PREPARATION
The Consolidated Financial Statements on a Cash Result Basis have been prepared by adjusting the Financial Statements prepared in accordance with International Financial Reporting Standards adopted by the UK for items which do not reflect the cash emerging from the business. The adjustments are as follows:
1. Unit liabilities and net assets held to cover unit liabilities, as set out in Note 8, are policyholder balances which are removed in the Statement of Financial Position on a Cash Result Basis. No adjustment for payments in or out is required in the Statement of Comprehensive Income as this business is subject to deposit accounting, which means that policyholder deposits and withdrawals are recognised in the Statement of Financial Position under IFRS, with only marginal cash flows attributable to shareholders recognised in the Statement of Comprehensive Income. However, adjustment is required for the investment return and the movement in investment contract liabilities, which are offsetting and are both zero-ised.
2. Deferred acquisition costs, the purchased value of in-force business and deferred income assets and liabilities are removed from the Statement of Financial Position on a Cash Result Basis, and the amortisation of these balances is removed in the Statement of Comprehensive Income on a Cash Result Basis. The assets, liabilities and amortisation are set out in Note 7.
3. Share-based payment expense is removed from the Statement of Comprehensive Income on a Cash Result Basis, and the equity and liability balances for equity-settled and cash-settled share-based payment schemes respectively are removed from the Statement of Financial Position on a Cash Result Basis.
4. Non-unit-linked insurance contract liabilities and reinsurance assets are removed in the Statement of Financial Position on a Cash Result Basis. The movement in these balances is removed from the Statement of Comprehensive Income on a Cash Result Basis.
5. Goodwill, computer software intangible assets and some other assets and liabilities which are inadmissible under the Solvency II regime are removed from the Statement of Financial Position on a Cash Result Basis, however the movement in these figures are included in the Statement of Comprehensive Income on a Cash Result Basis.
6. Deferred tax assets and liabilities are adjusted in the Statement of Financial Position on a Cash Result Basis to reflect the adjustments noted above and other discounting differences between tax charges and IFRS accounting. However, the impact of movements in deferred tax assets and liabilities are not included in the Statement of Comprehensive Income on a Cash Result Basis.
-95-
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
ON A CASH RESULT BASIS (UNAUDITED) (CONTINUED)
II. RECONCILIATION OF THE IFRS BALANCE SHEET TO THE CASH BALANCE SHEET
The Solvency II (or Cash) balance sheet is based on the IFRS Condensed Consolidated Statement of Financial Position (on page 49), with adjustments made to accounting assets and liabilities to reflect the Solvency II regulations and the provision for insurance liabilities set equal to the associated unit liabilities.
The reconciliation between the IFRS and Solvency II Net Assets Balance Sheet as at 30 June 2021 is set out on page 31. The reconciliations as at 30 June 2020 and 31 December 2020 are provided on the following pages.
Solvency II
Net Assets
30 June 2020 IFRS Balance Sheet Adjustment 1 Adjustment 2 Balance Sheet
GBP'Million GBP'Million GBP'Million GBP'Million
Assets
Goodwill 15.6 - (15.6) -
Deferred acquisition costs 458.6 - (458.6) -
Purchased value of in-force business 19.2 - (19.2) -
Computer software 15.2 - (15.2) -
Property and equipment 172.9 - - 172.9
Deferred tax assets 109.2 - (34.5) 74.7
Reinsurance assets 95.8 - (95.8) -
Other receivables 2,816.7 (1,250.5) (3.2) 1,563.0
Investment property 1,626.1 (1,626.1) - -
Equities 70,758.6 (70,758.6) - -
Fixed income securities 26,372.9 (26,365.3) - 7.6
Investment in Collective Investment Schemes 5,891.4 (5,080.9) - 810.5
Derivative financial instruments 1,228.2 (1,228.2) - -
Cash and cash equivalents 7,488.2 (7,198.3) - 289.9
Total assets 117,068.6 (113,507.9) (642.1) 2,918.6
Liabilities
Borrowings 435.8 - - 435.8
Deferred tax liabilities 195.7 - (4.4) 191.3
Insurance contract liabilities 538.8 (438.1) (100.7) -
Deferred income 596.8 - (596.8) -
Other provisions 38.6 - - 38.6
Other payables 2,160.8 (1,006.8) (56.1) 1,097.9
Investment contract benefits 82,735.1 (82,735.1) - -
Derivative financial instruments 1,422.0 (1,422.0) - -
Net asset value attributable to unit holders 27,905.9 (27,905.9) - - Income tax liabilities 19.8 - - 19.8 Preference shares 0.1 - - 0.1 Total liabilities 116,049.4 (113,507.9) (758.0) 1,783.5 Net assets 1,019.2 - 115.9 1,135.1
-96-
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
ON A CASH RESULT BASIS (UNAUDITED) (CONTINUED)
II. RECONCILIATION OF THE IFRS BALANCE SHEET TO THE CASH BALANCE SHEET (CONTINUED)
Solvency II
Net Assets
31 December 2020 IFRS Balance Sheet Adjustment 1 Adjustment 2 Balance Sheet
GBP'Million GBP'Million GBP'Million GBP'Million
Assets
Goodwill 31.0 - (31.0) -
Deferred acquisition costs 424.5 - (424.5) -
Purchased value of in-force business 17.6 - (17.6) -
Computer software 23.5 - (23.5) -
Property and equipment 174.4 - - 174.4
Deferred tax assets 14.4 - (13.7) 0.7
Reinsurance assets 92.3 - (92.3) -
Other receivables 2,579.2 (1,030.2) (2.8) 1,546.2
Investment property 1,526.7 (1,526.7) - -
Equities 83,359.2 (83,359.2) - -
Fixed income securities 27,701.4 (27,694.0) - 7.4
Investment in Collective Investment Schemes 5,890.2 (4,625.4) - 1,264.8
Derivative financial instruments 1,386.8 (1,386.8) - -
Cash and cash equivalents 6,660.1 (6,405.2) - 254.9
Total assets 129,881.3 (126,027.5) (605.4) 3,248.4
Liabilities
Borrowings 341.8 - - 341.8
Deferred tax liabilities 378.1 - (0.1) 378.0
Insurance contract liabilities 562.6 (466.1) (96.5) -
Deferred income 579.9 - (579.9) -
Other provisions 34.3 - - 34.3
Other payables 2,038.0 (759.7) (35.4) 1,242.9
Investment contract benefits 93,132.7 (93,132.7) - -
Derivative financial instruments 749.9 (749.9) - -
Net asset value attributable to unit holders 30,919.1 (30,919.1) - -
Income tax liabilities 32.7 - - 32.7
Preference shares 0.1 - - 0.1
Total liabilities 128,769.2 (126,027.5) (711.9) 2,029.8
Net assets 1,112.1 - 106.5 1,218.6
Adjustment 1 nets out the policyholder interest in unit-linked assets and liabilities.
Adjustment 2 comprises adjustment to the IFRS Condensed Consolidated Statement of Financial Position in line with Solvency II requirements, including removal of DAC, DIR, PVIF and their associated deferred tax balances, goodwill and other intangibles.
-97-
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
ON A CASH RESULT BASIS (UNAUDITED) (CONTINUED)
III. EARNINGS PER SHARE
Six months ended Six months ended Year ended
30 June 2021 30 June 2020 31 December
2020
GBP'Million GBP'Million GBP'Million
Earnings
Cash result after tax attributable to equity shareholders
(for both basic and diluted EPS) 175.8 124.7 254.7
Weighted average number of shares Million Million Million
Weighted average number of ordinary shares
in issue (for basic EPS) 536.7 533.8 533.5
Adjustments for outstanding share options 7.6 5.1 5.8
Weighted average number of ordinary shares (for diluted
EPS) 544.3 538.9 539.3
Pence Pence Pence
Earnings per share (EPS)
Basic earnings per share 32.8 23.4 47.7
Diluted earnings per share 32.3 23.1 47.2
The Directors have resolved to pay an interim dividend of 11.55 pence per share (30 June 2020: nil). This amounts to GBP62.3 million (30 June 2020: GBPnil) and will be paid on 24 September 2021 to shareholders on the register at 27 August 2021.
-98-
OTHER INFORMATION
-99-
GLOSSARY OF ALTERNATIVE PERFORMANCE MEASURES
Within the Half-Year Report and Accounts various alternative performance measures (APMs) are disclosed. An APM is a measure of financial performance, financial position or cash flows which is not defined by the relevant financial reporting framework, which for the Group is International Financial Reporting Standards as adopted by the UK (adopted IFRSs). APMs are used to provide greater insight into the performance of the Group and the way it is managed by the Directors. The table below defines each APM, explains why it is used and, if applicable, where the APM has been reconciled to IFRS:
Financial position related APMs
Reconciliation
to the Financial
APM Definition Why is this measure used? Statements
Solvency Based on IFRS Net Assets, Our ability to satisfy Refer to
II net but with the following adjustments: our liabilities to clients, page 31.
assets and consequently our solvency,
1. Reflection of the recognition is central to our business.
requirements of the Solvency By removing the liabilities
II regulations for assets which are fully matched
and liabilities. In particular by assets, this presentation
this removes deferred acquisition allows the reader to focus
costs (DAC), deferred income on the business operation.
(DIR), purchased value of It also provides a simpler
in-force (PVIF) and their comparison with other wealth
associated deferred tax management companies.
balances, other intangibles
and some other small items
which are treated as inadmissible
from a regulatory perspective;
and
2. Adjustment to remove
the matching client assets
and the liabilities as these
do not represent shareholder
assets.
No adjustment is made to
deferred tax, except for
that arising on DAC, DIR
and PVIF, as this is treated
as an allowable asset in
the Solvency II regulation.
Total embedded A discounted cashflow valuation Life business and wealth Not applicable.
value methodology, assessing the management business differ
long-term economic value from most other businesses,
of the business. in that the expected shareholder
income from the sale of
Our embedded value is determined a product emerges over
in line with the EEV principles, a long period in the future.
originally set out by the We therefore supplement
Chief Financial Officers the IFRS and Cash results
(CFO) Forum in 2004, and by providing additional
amended for subsequent changes disclosure on an embedded
to the principles, including value basis, which brings
those published in April into account the net present
2016, following the implementation value of expected future
of Solvency II. cash flows, as we believe
that a measure of total
economic value of the Group
is useful to investors.
Net asset EEV net asset value per Total embedded value provides Not applicable.
value (NAV) share is calculated as the a measure of total economic
per share EEV net assets divided by value of the Group, and
(EEV) the year end number of ordinary assessing the NAV per share
shares. allows analysis of the
overall value of the Group
by share.
NAV per IFRS net asset value per Total IFRS net assets provides Not applicable.
share (IFRS) share is calculated as the a measure
IFRS net assets divided of value of the Group,
by the year-end number of and assessing the NAV per
ordinary shares. share allows analysis of
the overall value of the
Group by share.
-100-
Financial performance related APMs
Reconciliation
to the Financial
APM Definition Why is this measure used? Statements
Operating The Cash result is defined IFRS income statement methodology Refer to
cash result, as the movement between recognises non-cash items pages 25,
Underlying the opening and closing such as deferred tax and 26 and also
cash result Solvency II net assets adjusted non-cash-settled share see Note
and Cash for the following items: options. By contrast, dividends 3 - Segment
result can only be paid to shareholders Profit to
1. The movement in deferred from appropriately fungible the Condensed
tax is removed to reflect assets. The Board therefore Consolidated
just the cash realisation uses the Cash results to Financial
from the deferred tax position; monitor the level of cash Statements
generated by the business.
2. The movements in goodwill
and other intangibles are While the Cash result gives
included; and an absolute measure of
the cash generated in the
3. Other changes in equity, year, the Underlying and
such as dividends paid in Operating cash results
the year and non-cash-settled are particularly useful
share option costs, are for monitoring the expected
excluded. long-term rate of cash
emergence, which supports
The Operating cash result dividends and sustainable
reflects the regular emergence dividend growth.
of cash from the business
operations.
The Underlying cash results
additionally reflects the
cash impact of the strategic
investments we are making.
Finally, the Cash result
reflects all other cash
items, including those whose
emergence is volatile, varying
over time and often influenced
by markets, together with
the short-term costs associated
with the back-office infrastructure
project.
Neither the Cash result
nor the underlying cash
result should be confused
with the IFRS Condensed
Consolidated Statement of
Cash Flows which is prepared
in accordance with IAS 7.
Underlying These EPS measures are calculated As Underlying cash is the Not applicable.
cash basic as Underlying cash divided best reflection of the
and diluted by the number of shares cash generated by the business,
earnings used in the calculation Underlying cash EPS measures
per share of IFRS basic and diluted allow analysis of the shareholder
(EPS) EPS. cash generated by the business
by share.
EEV profit Derived as the movement Both the IFRS and Cash See Note
in the total EEV during results reflect only the 3 - Segment
the year. cashflows in the year. Profit to
However our business is the Condensed
long-term, and activity Consolidated
in the year can generate Financial
business with a long-term Statements
value. We therefore believe
it is helpful to understand
the full economic impact
of activity in the year,
which is the aim of the
EEV methodology.
EEV operating A discounted cashflow valuation Both the IFRS and Cash See Note
profit methodology, assessing the results reflect only the 3 - Segment
long-term economic value cash flows in the year. Profit to
of the business. However, our business is the Condensed
long-term, and activity Consolidated
Our embedded value is determined in the year can generate Financial
in line with the EEV principles, business with a long-term Statements
originally set out by the value. We therefore believe
Chief Financial Officers it is helpful to understand
(CFO) Forum in 2004, and the full economic impact
amended for subsequent changes of activity in the year,
to which is the aim of the
EEV methodology.
-101-
Reconciliation
to the Financial
APM Definition Why is this measure used? Statements
the principles, including Within the EEV, many of
those published in April the future cash flows derive
2016, following the implementation from fund charges, which
of Solvency II. change with movements in
stock markets. Since the
The EEV operating profit impact of these changes
reflects the total EEV result is typically unrelated
with an adjustment to strip to the performance of the
out the impact of stock business, we believe that
market and other economic the EEV operating profit
effects during the year. (reflecting the EEV profit,
adjusted to reflect only
Within EEV operating profit the expected investment
is new business contribution, performance and no change
which is the change in embedded in economic basis) provides
value arising from writing the most useful measure
new business during the of embedded value performance
year. in the year.
EEV operating These EPS measures are calculated As EEV operating profit Not applicable.
profit as EEV operating profit is the best reflection
basic and after tax divided by the of the EEV generated by
diluted number of shares used in the business, EEV operating
earnings the calculation of IFRS profit EPS measures allow
per share basic and diluted EPS. analysis of the long-term
(EPS) value generated by the
business by share.
Policyholder Shareholder tax is estimated The UK tax regime facilitates Disclosed
and Shareholder by making an assessment the collection of tax from as separate
tax of the effective rate of life insurance policyholders line items
tax that is applicable to by making an equivalent in the Condensed
the shareholders on the charge within the corporate Consolidated
profits attributable to tax of the Company. The Statement
the shareholders. This is total tax charge for the of Comprehensive
calculated by applying the insurance companies therefore Income on
appropriate effective corporate comprises both this element page 47.
tax rates to the shareholder and an element more closely
profits. related to normal corporation
tax.
The remainder of the tax
charge represents tax on Life insurance business
policyholders' investment impacted by this tax typically
returns. includes policy charges
This calculation method which align with the tax
is consistent with the legislation liability, to mitigate
relating to the calculation the impact on the corporate.
of the tax on shareholders' As a result, when policyholder
profits. tax increases, the charges
also increase. Given these
offsetting items can be
large, and typically do
not perform in line with
the business, it is beneficial
to be able to identify
the two elements separately.
We therefore refer to that
part of the overall tax
charge, which is deemed
attributable to policyholders,
as policyholder tax, and
the rest as shareholder
tax.
Profit A profit measure which reflects The IFRS methodology requires Disclosed
before the IFRS result adjusted that the tax recognised as a separate
shareholder for policyholder tax, but in the financial statements line item
tax before deduction of shareholder should include the tax in the Condensed
tax. Within the Condensed incurred on behalf of policyholders Consolidated
Consolidated Statement of in our UK life assurance Statement
Comprehensive Income the company. Since the policyholder of Comprehensive
full title of this measure tax charge is unrelated Income on
is 'Profit before tax attributable to the performance of the page 47.
to shareholders' returns'. business, we believe it
is also useful to separately
identify the profit before
shareholder tax, which
reflects the IFRS profit
before tax, adjusted only
for tax paid on behalf
of policyholders.
Underlying A profit measure which reflects The IFRS methodology promotes Refer to
profit the IFRS result adjusted recognition of profits page 23.
to remove the DAC, DIR and in line with the provision
PVIF adjustments. of services and so, for
long-term business, some
of the initial cash flows
are spread over the life
of the contract through
.
-102-
Reconciliation
to the Financial
APM Definition Why is this measure used? Statements
the use of intangible assets .
and liabilities (DAC and
DIR). Due to the Retail
Distribution Review (RDR)
regulation change in 2013,
there was a step change
in the progression of these
items in our accounts,
which resulted in significant
accounting presentation
changes despite the fundamentals
of our vertically-integrated
business remaining unchanged.
We therefore believe it
is useful to consider the
IFRS result having removed
the impact of movements
in these intangibles as
it better reflects the
underlying performance
of the business.
Controllable The total of expenses which We are focused on managing Full detail
expenses reflects Establishment, long-term growth in controllable of the breakdown
Development (both Operational expenses to 5% p.a. of expenses
and Strategic), and Academy. is provided
on page 9.
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