TIDMJRP
RNS Number : 0861Z
JRP Group PLC
10 March 2017
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NEWS RELEASE www.jrpgroup.com
10 March 2017
JRP GROUP PLC
PRELIMINARY RESULTS FOR THE 18 MONTH PERIODED 31 DECEMBER
2016
SUSTAINABLE PROFIT GROWTH IN ATTRACTIVE MARKETS
Highlights
-- Pro forma adjusted operating profit grew 58% in calendar year
2016 to GBP164m. The increase was driven by an 82% growth in new
business profit to GBP124m. IFRS statutory profit before tax for
the 18 months to December 2016 was GBP199m
-- New business margin more than doubled. JRP focused on profit
rather than volume in 2016, with Retirement Income sales falling
13%, but IFRS new business margins increasing from 3.3% to 6.8%.
Margin expansion was driven by price improvements, enhanced risk
selection, and unusually high mortgage spreads
-- GBP30m run rate synergies achieved out of the GBP45m 2018
target. The merger integration delivered run rate savings of GBP30m
by the end of 2016, one year ahead of schedule
-- Capital resilient, dividend growth resumes. We estimate the
Group Solvency II coverage ratio rose to 151% at year-end (H1 2016:
134%), helped by our Q4 GBP250m hybrid debt issue. The Board
proposes a 2.4p final dividend, taking the calendar year total to
3.5p, a 6% increase. Embedded value 219p per share
Rodney Cook, Group Chief Executive, said:
"I am truly proud of what our team achieved in 2016. To deliver
a step change in profit at the same time as our merger and Solvency
II implementation is very special. Fortunately, there is more to
come.
Our focus is on growing profits, but this will be helped by
market growth. This is clearest in the DB de-risking and lifetime
mortgage markets, where growth is already underway. Although GIfL
market growth is more measured, our addressable market is growing
as pensions companies put broking services in place to give their
retiring customers access to the open market. It is easier for us
to be selective with respect to the risks we take when markets are
growing. The 2016 margins demonstrated this, and we remain
selective in relation to new business.
We are now in the later stages of the merger integration
process. There are significant further savings to make, but now in
more complex areas such as systems and IT. Our staff have shown
considerable adaptability over the last year, and we appreciate
their commitment despite the additional pressures of the
merger.
We also strengthened the merged Group's capital position during
the year, particularly through the issuance of hybrid debt during
Q4. Our approach to new business has reduced capital consumption,
and in underlying terms our year end figure was little changed from
the prior year level. Given our solid 151% Solvency II coverage
ratio I am delighted the board has proposed a return to dividend
growth.
In summary, our merger has catalysed a transformation of our
earnings potential, and there are opportunities ahead of us. It is
an exciting time to be serving JRP's shareholders and we will
strive to deliver further positive momentum during 2017."
Note
The merger of Just Retirement and Partnership is required for
accounting purposes to be treated as an acquisition by Just
Retirement of Partnership with an effective date of the beginning
of April 2016. Just Retirement Group plc (renamed JRP Group plc)
changed its year end to 31 December and consequently the statutory
information includes 18 months of Just Retirement and nine months
results of Partnership. As a consequence pro forma calendarised
data as though the merger took place at the beginning of January
2015 have been presented to give the market an understanding of the
business of the merged Group.
FINANCIAL CALAR DATE
Annual General Meeting 18 May 2017
Record date for proposed final 5 May 2017
dividend
Payment of final dividend, subject 26 May 2017
to shareholder approval
Expected announcement of interim 13 September 2017
results for the six months ending
30 June 2017
Enquiries
Investors / Analysts Media
James Pearce, Group Director Stephen Lowe, Group Communications
of Corporate Finance and Director
Investor Relations
Telephone: +44 (0) 7715 Telephone: +44 (0) 1737
085 099 827 301
james.pearce@wearejust.co.uk press.office@wearejust.co.uk
Temple Bar Advisory
Alex Child-Villiers
William Barker
Telephone: +44 (0) 20 7002
1080
A presentation for analysts will take place at 10.00am today at
Numis Securities Limited, The London Stock Exchange Building, 10
Paternoster Square, London EC4M 7LT. A live webcast will also be
available on www.jrpgroup.com at 10.00am.
Due to security restrictions at the venue attendance is limited
to those who have registered.
A copy of this announcement, presentation slides and transcript
will be available on the Group's website www.jrpgroup.com
JRP GROUP PLC
GROUP COMMUNICATIONS
Vale House, Roebuck Close
Bancroft Road, Reigate
Surrey RH2 7RU
Forward-looking statements disclaimer:
This announcement in relation to JRP Group plc and its
subsidiaries (the 'Group') contains, and we may make other
statements (verbal or otherwise) containing, forward-looking
statements about the Group's current plans, goals and expectations
relating to future financial conditions, performance, results,
strategy and/or objectives.
Statements containing the words: 'believes', 'intends',
'expects', 'plans', 'seeks', 'targets', 'continues' and
'anticipates' or other words of similar meaning are forward-looking
(although their absence does not mean that a statement is not
forward-looking). Forward-looking statements involve risk and
uncertainty because they relate to future events and circumstances
that are beyond the Group's control. For example, certain insurance
risk disclosures are dependent on the Group's choices about
assumptions and models, which by their nature are estimates. As
such, although the Group believes its expectations are based on
reasonable assumptions, actual future gains and losses could differ
materially from those that we have estimated.
Other factors which could cause actual results to differ
materially from those estimated by forward-looking statements
include but are not limited to: domestic and global economic and
business conditions; asset prices; market-related risks such as
fluctuations in interest rates and exchange rates, and the
performance of financial markets generally; the policies and
actions of governmental and/or regulatory authorities including,
for example, new government initiatives related to the provision of
retirement benefits or the costs of social care and the effect of
the European Union's Solvency II requirements on the Group's
capital maintenance requirements; the impact of inflation and
deflation; market competition; changes in assumptions in pricing
and reserving for insurance business (particularly with regard to
mortality and morbidity trends, gender pricing and lapse rates);
risks associated with arrangements with third parties, including
joint ventures and distribution partners; inability of reinsurers
to meet obligations or unavailability of reinsurance coverage; the
impact of changes in capital, solvency or accounting standards, and
tax and other legislation and regulations in the jurisdictions in
which the Group operates.
As a result, the Group's actual future financial condition,
performance and results may differ materially from the plans, goals
and expectations set out in the forward-looking statements within
this announcement. The forward-looking statements only speak as at
the date of this document and the Group undertakes no obligation to
update or change any of the forward-looking statements contained
within this announcement or any other forward-looking statements it
may make. Nothing in this announcement should be construed as a
profit forecast.
Group Chief Executive Officer's Operating Review
"We are focusing on profits and in 2016 have delivered
increasing new business margins and increasing new business
profits"
I am delighted to present the first CEO's Operating Review for
the new JRP Group plc. This has been a challenging period for the
two predecessor businesses and for the new Group. I am very pleased
to be able to report a very strong performance that has been
achieved while making significant progress in transforming and
integrating our businesses and delivering our merger synergies.
The backdrop to these results is the unprecedented upheaval in
our markets following the introduction of the Pension Freedoms in
2015, the implementation of Solvency II capital requirements in
2016 and the interest rate volatility both before and after the
Brexit Referendum result. We took decisive action and responded to
the changes in the external environment by innovating and using our
intellectual property to penetrate new markets and grow our profits
in existing ones. Our results for 2016 demonstrate that we have
successfully done that.
The competitive landscape in the GIfL market is changing because
of prudential regulatory interventions on capital through Solvency
II and conduct intervention by the FCA, the combination of which
has resulted in a number of major companies changing their business
models and introducing open market GIfL broking services to replace
their internal only manufacturing arrangements. Political and
regulatory risks continue to exist within the pension environment
as government and regulatory policies continue to evolve. At
present we judge that these factors, coupled with the structural
growth drivers for defined contribution pension savings will result
in our addressable market increasing.
Combining the IP of Just Retirement and Partnership on GIfL
policyholder mortality means that we have a significant competitive
advantage in underwriting and pricing new business. We are using
this advantage to better select risks and, given our addressable
markets are expected to grow, we will only target business that
meets our stringent profit and capital objectives.
The results in 2016 demonstrate our ability to use our strengths
to improve profitability and grow new business profits without
increasing sales. We have increased pro forma new business margins
from 3.3% to pre-Pension Freedom levels of 6.8% in the last year.
Despite lower pro forma new business sales, we are still a
high-growth business, with new business far outstripping maturing
business.
Our capital position has proved resilient over a period of
significant market turbulence in the run-up to, and aftermath of,
the EU Referendum vote. We have achieved this by focussing on
pricing discipline on new business and prudent management of the
balance sheet. The Group Solvency Capital Requirement ("SCR")
coverage ratio increased from a pro forma 136% at 1 January 2016 to
151% at 31 December 2016. This ratio was boosted by the GBP250m of
Tier 2 debt issued in October. Ignoring the impact of this debt
issuance, the capital ratio was unchanged over the second half of
2016 despite writing GBP1.2bn of new business.
Looking forward, our current expectation is that the Solvency II
new business capital strain will be a mid-single digit percentage
of premium fully loaded for post-synergy expenses. We expect
shareholder capital deployed on new business to earn a mid-teen
return. These views are dependent on a number of factors. These
include customer rates on DB, GIfL and LTM business, financial
market conditions (for example, credit spreads and risk-free
rates), reinsurance terms and any changes to the Solvency II regime
as applied to our business.
There has been increased competition in the LTM market in 2016.
This may in due course lead to pricing pressure, however, the
developments in the lifetime mortgage market in 2016 have been very
supportive to our business model. We use LTM to back our GIfL and
DB De-risking business as these mortgage assets are a very good
match for the long-term nature of our liabilities. This is
currently a supply constrained market and we see new entrants as
beneficial to customers and market growth.
Our multi-channel distribution and strategic funding
relationships with other providers positions us well to maintain
our position as a leader in the LTM market.
The LTM market has grown by c.30% in 2016 as new entrants
provide more mortgage supply and increasing numbers of customers
are disposed to using their housing wealth to support their needs
in later life. We do not set LTM market share targets. We select
the risks that deliver our profit targets and in 2016 we have been
able to originate more than sufficient new mortgage business to
support the GIfL and DB new business sales.
We are ahead of schedule in capturing the synergy benefits from
the merger and have increased our target from GBP40m to GBP45m by
the end of 2018. Integration of the two businesses is a complex
process that may ultimately take longer or cost more than
anticipated. However so far we have delivered annualised run rate
cost savings of GBP30m to date and are on track to deliver our
revised target of GBP45m of annualised savings. As these benefits
are realised, they will contribute further to our new business
profitability.
We have made great progress over the last year in positioning
ourselves to deliver value to our shareholders. However, we are not
complacent and we will remain focussed on capturing the remaining
expense benefits of the merger and expanding access to our
addressable markets such that we may deploy our IP to select only
those risks that enable us to grow our profits, and use our capital
wisely.
Performance review - pro forma
The merger of Just Retirement and Partnership is required for
accounting purposes to be treated as an acquisition by Just
Retirement of Partnership with an effective date of the beginning
of April 2016. As a consequence, pro forma financial performance
measures on a calendar year basis, as though the merger took place
at the beginning of January 2015, have been presented to give a
better understanding of the business of the merged Group. Pro forma
financial information is shown in this CEO Operating Review. The
underlying assumptions have been aligned to be consistent across
both Group companies. Pro forma information is unaudited. A
reconciliation of pro forma financial information to statutory
financial information is given after the CEO review.
New business sales - pro forma basis (unaudited)
Year ended Year ended
31 December 31 December
2016 2015
GBPm GBPm
---------------------------------------------- ----------- -----------
Defined Benefit De-risking Solutions ("DB") 943.4 1,233.3
Guaranteed Income for Life Solutions ("GIfL") 778.1 762.8
Care Plans ("CP") 97.2 92.2
---------------------------------------------- ----------- -----------
Retirement income sales 1,818.7 2,088.3
Drawdown 25.2 20.6
---------------------------------------------- ----------- -----------
Total retirement sales 1,843.9 2,108.9
Protection 4.7 5.1
LTM loans advanced 559.3 598.0
---------------------------------------------- ----------- -----------
Total new business sales 2,407.9 2,712.0
---------------------------------------------- ----------- -----------
New business sales represent sales for the year ended 31
December 2016 for both Just Retirement and Partnership, together
with comparative information on a pro forma basis representing
sales for the year ended 31 December 2015 for both Just Retirement
and Partnership.
Total new business sales for the Group decreased by 11%, from
GBP2,712.0m for the year ended 31 December 2015, to GBP2,407.9m for
the year ended 31 December 2016. The drivers for this decrease are
explained below.
Defined Benefit De-risking sales
DB sales for the year ended 31 December 2016 were down 24%
compared to the same period in the prior year, falling from
GBP1,233.3m to GBP943.4m. This result is as expected, given
exceptionally high sales in the second half of 2015 as a result of
sales being brought forward before the introduction of Solvency II
on 1 January 2016. Underlying growth is better considered by
looking at 2016 sales compared to 2014 sales, which were up
37%.
Following the Solvency II disruption, sales momentum grew
through 2016 with sales in the second half of the year of GBP779m,
which was approaching five times the GBP164m sales in the first
half.
Prospects for growth for this proposition remain strong. The
total market DB liabilities are anticipated to be some GBP2
trillion, but our primary focus is on the 'Buy-in' sub-sector which
de-risks pensions already in payment. This category makes up 39% of
the DB market liabilities, so our addressable market of pensions in
payment may be around GBP600bn. Our proposition works for every DB
scheme in the market, including those with billions of pounds of
liabilities, but we focus our participations on transactions below
the GBP250m level. Over the last few years the market value of DB
de-risking transactions has been in a corridor of GBP8bn-GBP15bn
per year which, given the size of the market liabilities,
illustrates there is significant headroom for growth during the
next decade.
It is also worth noting the emergence of a further GBP100bn of
life company annuity back book transfers in 2016, which has created
competition for already scarce de- risking capital. Altogether we
expect the DB de-risking market will continue to grow, and the
demand dynamics appear sustainable.
GIfL sales
GIfL sales for the year ended 31 December 2016 have increased by
2% compared to the same period in the prior year (2016: GBP778.1m;
2015: GBP762.8m) confirming the stabilisation of the market after
the introduction of Pension Freedom and Choice. It is our
expectation that our addressable share of this market will grow in
2017, with increasing proportions of people buying this product on
the open market.
In the short term, growth is more likely to be driven by
changing distribution patterns. This should benefit us, given our
focus on the products bought by customers who shop around for
guaranteed income for life products on the open market where we are
now the leading provider. The open market accounted for approaching
50% of sales in the first three quarters of 2016, up from 41% in
2015, which means more than a 20% increase in our addressable
market. There is still plenty of room for improvement before we get
back to open market sales that were around 60% of the total market
prior to the Pension Reforms.
Care sales
Sales of Care Plans were up 5%, from GBP92.2m in 2015 to
GBP97.2m in 2016. This remains an attractive market with
longer-term structural growth prospects.
Drawdown sales
Drawdown sales, which include Flexible Pension Plan ("FPP") and
Capped Drawdown ("CD") sales, increased from GBP20.6m in 2015 to
GBP25.2m in 2016, growth of 22%. This is in line with our
expectations and reflects growth in sales of the FPP product which
allows customers to take advantage of the new Pensions Freedoms.
The product is no longer available to new customers.
Protection sales
Protection sales remained stable at GBP5m.
Lifetime mortgage loans
LTM sales have decreased by 6% from GBP598.0m in 2015 to
GBP559.3m in 2016. We took full advantage of favourable economic
conditions in the first nine months of the year for lifetime
mortgages and then intentionally managed back sales in the final
quarter towards our target ratio of LTM to new Retirement Income
liabilities. These assets provide a good match for the Group's
long-term liabilities, including DB De-risking solutions where the
profile of liabilities can be of a longer duration than for GIfL
contracts due to benefit indexation. The LTM market grew by more
than 30% in 2016, and it remains attractive with favourable
underlying dynamics.
Financial highlights - pro forma basis
Adjusted operating profit - pro forma basis (unaudited)
Adjusted operating profit for the year ended 31 December 2016
and comparatives for 2015 are for both Just Retirement and
Partnership.
Year ended Year ended
31 December 31 December
2016 2015
GBPm GBPm
-------------------------------------------- ----------- -----------
New business operating profit 123.9 68.0
In-force operating profit 75.3 70.9
-------------------------------------------- ----------- -----------
Underlying operating profit 199.2 138.9
Operating experience and assumption changes 2.6 (5.6)
Other Group companies' operating results (12.4) (10.4)
Reinsurance and finance costs (25.7) (19.4)
-------------------------------------------- ----------- -----------
Adjusted operating profit before tax 163.7 103.5
-------------------------------------------- ----------- -----------
New business operating profit
New business operating profit has increased to GBP123.9m (2015:
GBP68.0m), due to the increase in new business margins. Margins
have grown due to pricing changes following implementation of
Solvency II, favourable mortgage yields, initial benefits from
delivering the post-merger cost synergies and our focus on profits
over volumes using our IP to select higher margin new business.
In-force operating profit
In-force operating profit has increased to GBP75.3m (2015:
GBP70.9m). This is as a result of growth in the size of the
in-force business offset by the impact of lower interest rates on
the returns earnt on surplus assets and the effect of narrowing
bond spreads which have reduced the corporate bond default margin
emerging.
Underlying operating profit
Underlying operating profit grew by 43% to GBP199.2m (2015:
GBP138.9m) primarily reflecting the growth in new business profits.
Underlying operating profit is the sum of the new business
operating profit and in-force operating profit. This measure
excludes the impact of one- off assumption changes and investment
variances.
Operating experience and assumption changes
Operating experience and assumption changes, which include
expense and mortality experience variances, amounted to GBP2.6m for
2016 (2015: GBP(5.6)m).
Other Group companies' operating results
This includes the results of our professional services companies
and Group holding companies. The increase in the loss to GBP12.4m
(2015: GBP10.4m) mainly reflects investment in our distribution
companies.
Reinsurance and finance costs
Reinsurance and bank finance costs increased to GBP25.7m (2015:
GBP19.4m), primarily driven by the increase in interest payable on
Tier 2 financing including the Partnership GBP100m bond which was
issued in March 2015 and the JRP GBP250m bond issued in October
2016.
Financial investments
Financial investments have increased to GBP17.3bn (2015:
GBP14.4bn). Of these, GBP10.7bn is invested in corporate bonds,
gilts and liquidity funds, and GBP6.6bn in residential and
commercial mortgages. Of the corporate bonds, gilt and liquidity
fund portfolio, 13% is invested in AAA grade investments and 62% is
invested in investments rated A grade or higher.
LTM advances continue to provide the Group with a high-quality
source of enhanced investment return and an appropriate match for
the Group's long-duration liabilities. The loan to value ("LTV")
ratio of the LTM portfolio is 28% at 31 December 2016.
European embedded value ("EEV") amounted to GBP2,047.0m at 31
December 2016 (31 December 2015: GBP1,772.6m). New business value
generated during the year after tax was GBP141.7m (2015:
GBP98.1m).
Capital and dividends
The Group's capital position remains strong. The Group economic
capital ratio at 31 December 2016 was 216% (30 June 2016: 185%).
The estimated Solvency II capital ratio was 151% at 31 December
2016.
In October 2015 we raised equity capital through a placing and
open offer amounting to GBP97m. We issued shares in connection with
the acquisition of Partnership amounting to GBP570m in April
2016.
Additionally, in October 2016 we raised GBP250m of Solvency II
qualifying Tier 2 debt capital. After this issuance, the Group's
gearing remains comfortably within the range of other listed
insurance companies.
The Board has proposed a final dividend of 2.4p per share,
making a total dividend 3.5p for 2016. This represents an increase
of 6% over the prior calendar year.
Business development
HUB Financial Solutions, the Group's division that provides
services to UK businesses and their customers, has continued to win
new mandates, including deals with Prudential UK and Phoenix Life.
This is an exciting business that enables the Group to expand
access to and grow our addressable markets and we have a healthy
pipeline of prospects. The Group has continued to develop its DB
business and now transacts with all the major employee benefit
consultants.
We continue to explore further opportunities for geographical
diversification and our South African subsidiary is building out
its distribution reach and our American joint venture is beginning
to gain traction with advisers and care facilities.
We have successfully implemented our Solvency II internal model
for Just Retirement Limited and are progressing our work with the
regulators to attain approval for Partnership Life Assurance
Company Limited.
Current trading and outlook
There has been and continues to be considerable uncertainty in
the external environment as a result of exceptional geopolitical
upheavals which drove risk free rates to historic lows. Our new
business margin expansion in 2016 was boosted by unusually high
mortgage spreads. The combination of more normal mortgage spreads
in 2017, partially offset by cost synergies, should allow us to
maintain the new business margin at above 6%. We remain focused on
margins rather than volumes.
And finally...
In the last three years we have successfully completed our
Initial Public Offering, addressed the 2014 Budget changes,
launched and achieved a leading position for our DB business in the
market, transformed our Retirement Income offering from an old
style annuity into a diversified proposition offering guaranteed
income for life and flexible drawdown, completed the merger with
Partnership and made great progress in integrating the two
businesses. None of this would have been possible without the hard
work of my outstanding management team and Group colleagues. The
merger with Partnership has further accelerated the rate of change
and it is only right for me to recognise the huge efforts the JRP
team has already made and continues to make as the integration
progresses.
In this context I am particularly proud that the quality of our
service has not suffered, and that we were awarded the Financial
Adviser 5 Star Service award for the twelfth consecutive year for
our Guaranteed Income for Life service and the ninth consecutive
year for Lifetime Mortgages. This is a fantastic achievement.
The values of the Group remain unchanged, and I am confident
they will help drive the business forward and continue to create
benefits for our shareholders, colleagues and customers.
Rodney Cook
Group Chief Executive Officer
9 March 2017
Reconciliation of pro forma information to IFRS results
The financial performance figures are based on pro forma
financial results for the calendar year 2016 compared to calendar
year 2015 assuming that the merger of Just Retirement and
Partnership had taken place on 1 January 2015. This information is
presented as, in the opinion of the Directors, it provides a more
meaningful view of the performance of the JRP Group in 2016
compared to 2015.
Below are reconciliations between pro forma adjusted operating
profits and pro forma sales to the adjusted operating profit, KPIs
and sales. Reconciliations between the sales KPI and gross written
premiums and the adjusted operating profit KPI and IFRS profit
before tax, are set out in note 7 to the financial statements. The
Board believes that adjusted operating profit, which excludes
effects of short-term economic and investment changes, provides a
better view of the longer-term performance and development of the
business and aligns with the longer-term nature of the
products.
Reconciliation of pro forma new business sales to new business
sales KPI
Current period Prior
GBPm period
GBPm
-------------------------------------------- --------------------------------------------- -------------- ---------
Pro forma new business sales (unaudited) 12 months to December 2016/15 2,407.9 2,712.0
New business sales relating to Partnership
Assurance Group plc 12 months to December 2016/15 pre-acquisition (160.5) (843.2)
-------------------------------------------- --------------------------------------------- -------------- ---------
Post-acquisition new business sales 12 months to December 2016/15 2,247.4 1,868.8
Effect of change in reporting date 6 months to December 2015 1,233.2 (1,233.2)
6 months to December 2014 - 820.2
------------------------------------------------------------------------------------------ -------------- ---------
New business sales 18 months to December 2016/ 3,480.6 1,455.8
12 months to June 2015
------------------------------------------------------------------------------------------ -------------- ---------
Reconciliation of pro forma adjusted operating profit to
adjusted operating profit KPI
Current period Prior
GBPm period
GBPm
--------------------------------------------- --------------------------------------------- ------- ------
Pro forma adjusted operating profit before
tax (unaudited) 12 months to December 2016/15 163.7 103.5
Operating profit relating to Partnership
Assurance Group plc 12 months to December 2016/15 pre-acquisition 2.2 (21.0)
Post-acquisition adjusted operating profit 12 months to December 2016/15 165.9 82.5
Effect of change in year end 6 months to December 2015 49.8 (49.8)
6 months to December 2014 - 34.9
--------------------------------------------- ---------------------------------------------- ------- ------
Adjusted operating profit 18 months to December 2016/ 215.7 67.6
12 months to June 2015
--------------------------------------------- ---------------------------------------------- ------- ------
Financial review
"We have a sound financial position and are well-placed to make
the most of our opportunities and are uniquely placed to grow
profits and economic value"
The results discussed in the Financial Review are for the 18
month period ended 31 December 2016, which incorporate the results
of the acquired Partnership Group from 1 April 2016. The
comparative results are for the Just Retirement Group for the year
ended 30 June 2015.
Our financial results demonstrate the robustness of our business
model, having worked through the significant challenges of the last
three years. The financial benefits of the merger are seen in the
results for the period, with very strong growth in new business
margins and profitability. We have been able to write business at
attractive margins by using our IP to select the most attractive
risks and using the strong returns on lifetime mortgages. We have
conserved capital through our selective approach to writing new
business and strengthened our capital base during the period with
additional debt financing.
We have a sound financial position and are well-placed to make
the most of the opportunities in front of us, where we are able to
write new business at good rates of return.
The financial review describes the Group's financial performance
in terms of its business segments and highlights the key factors
driving movements in the Group's Consolidated statement of
comprehensive income and Consolidated statement of financial
position.
The Insurance segment writes insurance products for the
retirement market - which include Guaranteed Income for Life
Solutions and Defined Benefit De-risking Solutions, Care Plans,
Flexible Pension Plan and Protection - and invests the premiums
received from these contracts in debt securities, gilts, liquidity
funds and lifetime mortgage advances. From a management reporting
perspective, these are managed together, with LTM being an integral
part of the insurance business model.
The professional services business is included with other
corporate companies in the Other segment. This business is not
currently sufficiently significant to separate from other
companies' results and the CODM does not separately consider its
results at present. The Other segment also includes the Group's
corporate activities that are primarily involved in managing the
Group's liquidity, capital and investment activities.
The table below aggregates the financial performance of the
Group's segments.
Group performance
18 months ended Year ended
31 December 30 June
2016 2015 Change
GBPm GBPm GBPm
-------------------------------------------------------------------------------- --------------- ---------- ------
New business operating profit 171.7 36.8 134.9
In-force operating profit 89.3 49.6 39.7
-------------------------------------------------------------------------------- --------------- ---------- ------
Underlying operating profits 261.0 86.4 174.6
Operating experience and assumption changes 2.5 2.4 0.1
Other Group companies' operating results (18.4) (8.7) (9.7)
Reinsurance and bank finance costs (29.4) (12.5) (16.9)
-------------------------------------------------------------------------------- --------------- ---------- ------
Adjusted operating profit before tax 215.7 67.6 148.1
Non-recurring and project expenditure (21.1) (19.4) (1.7)
Investment and economic profits/(losses) 93.1 (74.1) 167.2
-------------------------------------------------------------------------------- --------------- ---------- ------
Profit/(loss) before acquisition transaction and amortisation costs, before tax 287.7 (25.9) 313.6
Acquisition integration costs (40.7) - (40.7)
Acquisition transaction costs (23.4) - (23.4)
Amortisation and impairment of intangible assets (24.8) (3.7) (21.1)
-------------------------------------------------------------------------------- --------------- ---------- ------
Profit/(loss) before tax 198.8 (29.6) 228.4
-------------------------------------------------------------------------------- --------------- ---------- ------
Insurance segment performance
18 months ended Year ended
31 December 30 June
2016 2015 Change
GBPm GBPm GBPm
------------------------------------------------ --------------- ---------- ------
New business operating profit 171.7 36.8 134.9
In-force operating profit 88.2 48.8 39.4
------------------------------------------------ --------------- ---------- ------
Underlying operating profit 259.9 85.6 174.3
Operating experience and assumption changes 2.5 2.4 0.1
Reinsurance and bank finance costs (52.0) (28.7) (23.3)
------------------------------------------------ --------------- ---------- ------
Adjusted operating profit before tax 210.4 59.3 151.1
Non-recurring and project expenditure (18.4) (16.8) (1.6)
Investment and economic profits/(losses) 95.7 (74.2) 169.9
------------------------------------------------ --------------- ---------- ------
Profit/(loss) before tax from insurance segment 287.7 (31.7) 319.4
------------------------------------------------ --------------- ---------- ------
Insurance segment
The Group's insurance segment reported an adjusted operating
profit before tax of GBP210.4m (2015: GBP59.3m), and a profit
before tax of GBP287.7m (2015: loss before tax of GBP31.7m).
New business operating profit was GBP171.7m, compared with
GBP36.8m in the prior year. The increase of GBP134.9m primarily
reflects the longer financial reporting period with increased sales
and improved margins. The new business operating margin for the 18
month period ended 31 December 2016 was 6.3%, up from 3.3% in the
prior year.
Profits emerging from the in-force portfolio continue to grow.
After allowing for the longer reporting period, these are broadly
in line with the continuing increase in the size of the in -force
book of business, together with the contribution, post-acquisition,
from Partnership and amounted to GBP88.2m (2015: GBP48.8m), an
increase of GBP39.4m compared to the previous period.
Underlying profit for the insurance segment increased by
GBP174.3m from GBP85.6m for the year to 30 June 2015 to GBP259.9m
for the 18 months to 31 December 2016 as a result of the factors
described above.
Total adjusted operating profit amounted to GBP210.4m for the
period, an increase of GBP151.1m compared to the prior year. Total
adjusted operating profit includes underlying operating profit
described above, as well as changes in operating experience and
assumptions, and reinsurance and finance costs.
Operating experience and assumption changes, which include
expense, mortgage and mortality items, amounted to a small positive
result of GBP2.5m for the 18 months to 31 December 2016 (2015:
GBP2.4m).
Reinsurance and bank finance costs increased by GBP23.3m to
GBP52.0m for the 18 months to 31 December 2016 (2015: GBP28.7m),
primarily driven by the longer accounting period, increased
interest payable on Tier 2 financing from Group corporate
companies, including interest on the Partnership, and JRL Tier 2
debt issuances, which amounted to GBP40.0m (2015: GBP18.3m).
The insurance segment reported a profit before tax for the 18
months to 31 December 2016 of GBP287.7m (2015: loss before tax of
GBP31.7m). After the GBP151.1m increase in adjusted operating
profit described above, the profit before tax includes the impact
of non-recurring and project expenditure and investment and
economic variances.
Non-recurring and project expenditure amounted to GBP18.4m
(2015: GBP16.8m) and includes any one- off regulatory, project and
development costs. This line item does not include acquisition
integration or acquisition transaction costs, which are shown as
separate line items and are explained further below.
Changes in economic and investment conditions over the period
led to a profit of GBP95.7m, compared to a loss of GBP74.2m in the
prior year, mainly reflecting the impact of the significant
reduction of risk-free rates during the period, and the positive
impact from the difference between actual and expected investment
returns earned, together with a narrowing of credit spreads, offset
by property valuation movements, and by changes in future property
assumptions.
Other segment performance
18 months ended Year ended
31 December 30 June
2016 2015 Change
GBPm GBPm GBPm
------------------------------------------------- --------------- ---------- ------
Adjusted operating profit before tax 5.3 8.3 (3.0)
Non-recurring expenditure (2.7) (2.6) (0.1)
Investment and economic profits (2.6) 0.1 (2.7)
Acquisition integration costs (40.7) - (40.7)
Acquisition transaction costs (23.4) - (23.4)
Amortisation and impairment of intangible assets (24.8) (3.7) (21.1)
------------------------------------------------- --------------- ---------- ------
Loss/(profit) before tax from other activities (88.9) 2.1 (91.0)
------------------------------------------------- --------------- ---------- ------
Profit/(loss) before tax from Insurance segment 287.7 (31.7) 319.4
------------------------------------------------- --------------- ---------- ------
Group profit/(loss) before tax 198.8 (29.6) 228.4
------------------------------------------------- --------------- ---------- ------
Results from other activities included adjusted operating profit
before tax of GBP 5.3m (2015: GBP8.3m). The decrease in adjusted
operating profit mainly reflects higher losses in the distribution
companies, partly due to the longer reporting period.
Non-recurring expenditure of GBP2.7m (2015: GBP2.6m) relates to
one-off costs incurred by the Group including regulatory, project
and development costs.
Acquisition integration costs of GBP40.7m relate to the cost
arising from the post-merger integration of the Just Retirement and
Partnership businesses and operations. The restructuring changes
made to date have already delivered approximately GBP30m of
synergies on an annualised basis.
Acquisition transaction costs of GBP23.4m reflect the one-off
costs incurred during the period in relation to the acquisition of
Partnership Assurance Group plc. These costs include advisory,
legal and stamp duty costs.
Amortisation costs relate to the amortisation of the Group's
intangible assets, including the amortisation of intangible assets
newly recognised in relation to the acquisition of Partnership
Assurance Group plc by Just Retirement Group plc. Acquired in-force
business and other intangibles of GBP169.6m were recognised on
acquisition of Partnership Assurance Group plc. The acquired
in-force business asset of GBP142.7m is being amortised in line
with the run-off of the in-force business. Amortisation of the
acquired in-force business relating to Partnership Assurance Group
plc during the period to 31 December 2016 totalled GBP10.7m and
impairment of brand and Partnership related property lease
intangible assets totalled GBP3.8m.
Highlights from Consolidated statement of comprehensive
income
The table below presents the Consolidated statement of
comprehensive income for the Group, with key line explanations.
18 months ended
31 December Year ended
2016 30 June 2015
GBPm GBPm
------------------------------------------ --------------- ------------
Gross premiums written 2,693.5 1,099.0
------------------------------------------ --------------- ------------
Reinsurance premiums ceded (1,553.4) (122.9)
Reinsurance recapture 1,166.9 950.9
------------------------------------------ --------------- ------------
Net premium revenue 2,307.0 1,927.0
Net investment income 1,616.8 635.2
Other operating income 17.1 5.1
------------------------------------------ --------------- ------------
Total revenue 3,940.9 2,567.3
Net claims paid (692.1) (250.5)
Change in insurance liabilities (2,406.7) (2,095.9)
Change in investment contract liabilities (15.5) (3.5)
Acquisition costs (53.6) (18.5)
Other operating expenses (341.5) (127.6)
Finance costs (232.7) (100.9)
------------------------------------------ --------------- ------------
Total claims and expenses (3,742.1) (2,596.9)
------------------------------------------ --------------- ------------
Profit/(loss) before tax 198.8 (29.6)
Income tax (51.3) 4.8
------------------------------------------ --------------- ------------
Total comprehensive income for the period 147.5 (24.8)
------------------------------------------ --------------- ------------
Gross premiums written
Gross premiums written are the total premiums received by the
Group in relation to its GIfL, DB and Care Plan contracts in the
period, gross of commission paid.
Gross premiums written for the period to 31 December 2016 were
GBP2,693.5m (2015: GBP1,099.0m). The increase reflects the longer
accounting period and the growth in sales in our Defined Benefit
De-risking business compared to the prior period, together with the
post-acquisition sales of the Partnership business.
Net premium revenue
Net premium revenue represents the sum of gross premiums written
and reinsurance recapture, less reinsurance premium ceded.
Net premium revenue increased from GBP1,927.0m in 2015 to
GBP2,307.0m in the period to 31 December 2016. This increase
reflected the growth in gross premiums offset by higher reinsurance
ceded. In the period prior to the commencement of Solvency II, the
Group restructured its reinsurance financing arrangements,
exercising its option to recapture GBP1,166.9m of premiums and
entered into new treaties providing more extensive cover. As a
result, reinsurance premiums ceded increased substantially, from
GBP122.9m in the year ended 30 June 2015 to GBP1,553.4m in the
period to 31 December 2016.
Net investment income
Net investment income comprises interest received on financial
assets, and the net gains and losses on financial assets designated
at fair value through profit or loss upon initial recognition and
on financial derivatives.
Net investment income increased by GBP981.6m, from GBP635.2m for
the year ended 30 June 2015 to GBP1,616.8m for the period ended 31
December 2016. The increase in net investment income reflected
higher interest income of GBP683.1m (year to 30 June 2015:
GBP196.4m) reflecting the longer reporting period and acquisition
of Partnership, and a more favourable movement in fair value of
financial assets of GBP998.7m (year to 30 June 2015: GBP568.1m)
driven by the falling long-term interest rate environment over the
period. Reduction in the value of derivative financial instruments
was lower at GBP65.2m (year to 30 June 2015: GBP129.3m); the
derivatives portfolio was restructured during the period following
the implementation of Solvency II.
Net claims paid
Net claims paid represents the total payments due to
policyholders during the accounting period, less the reinsurers'
share of such claims which are payable back to the Group under the
terms of the reinsurance treaties.
Net claims paid increased by GBP441.6m from GBP250.5m for the
year ended 30 June 2015 to GBP692.1m at 31 December 2016,
reflecting the continuing growth of the in-force book, the longer
accounting period and the acquisition of the Partnership business
offset by the reinsurers' share of claims paid.
Change in insurance liabilities
Change in insurance liabilities represents the difference
between the year-on-year change in the carrying value of the
Group's insurance liabilities and the year-on-year change in the
carrying value of the Group's reinsurance assets.
Change in insurance liabilities increased by GBP310.8m from
GBP2,095.9m for the year to 30 June 2015, to GBP2,406.7m for the
period to 31 December 2016. The gross change in liabilities was
GBP2,687.1m in the period to 31 December 2016 compared with
GBP956.7m in the year ended 30 June 2015, reflecting a similar
increase as that seen in gross premiums. The change in insurance
liabilities net of reinsurance reflected the recapture and
implementation of new reinsurance financing arrangements as noted
above.
Acquisition costs
Acquisition costs comprise the direct costs (such as
commissions) and indirect costs of obtaining new business.
Acquisition costs increased by GBP35.1m, from GBP18.5m for the
year to 30 June 2015 to GBP53.6m for the period to 31 December
2016. This reflects primarily the longer accounting period and
increased sales of LTM and GIfL business.
Other operating expenses
Other operating expenses represent the Group's operational
overheads, including personnel expenses, investment expenses and
charges, depreciation of equipment, reinsurance fees, operating
leases, amortisation of intangibles and other expenses incurred in
running the Group's operations.
Other operating expenses increased by GBP213.9m, from GBP127.6m
for the year to 30 June 2015 to GBP341.5m for the period ended 31
December 2016. The increase includes the effect of a longer
accounting period, acquisition-related transaction and integration
costs, increased amortisation of acquired intangible assets and the
acquisition of Partnership. Within this figure are merger-related
costs of GBP64.1m.
Finance costs
Finance costs represent interest payable on the deposits
received from reinsurers, interest payable on subordinated debt,
interest on reinsurance financing and bank finance costs.
Finance costs increased by GBP131.8m from GBP100.9m for the year
to 30 June 2015 to GBP232.7m for the period to 31 December 2016.
The increase is due to the longer period of account, the
subordinated debt interest costs for both the Partnership and JRP
debt together with additional reinsurance finance costs following
the acquisition of Partnership.
Income tax
There is an income tax charge of GBP51.3m for the period to 31
December 2016 (2015: credit of GBP4.8m). The effective tax rate has
increased due to non-tax-deductible expenses incurred in connection
with the acquisition of Partnership, with some offset due to
reductions in the UK rate of corporation tax. The tax credit also
includes the impact of certain transitional rules regarding life
company taxation.
Highlights from Consolidated statement of financial position
The following table presents selected items from the
Consolidated statement of financial position, with key line item
explanations below.
As at As at
31 December 30 June
2016 2015
GBPm GBPm
----------------------------------------- ----------- --------
Assets
Financial investments 17,319.6 8,577.7
Reinsurance assets 6,057.1 2,477.1
Other assets 517.8 193.8
----------------------------------------- ----------- --------
Total assets 23,894.5 11,248.6
----------------------------------------- ----------- --------
Share capital and share premium 185.0 51.3
Reorganisation and merger reserves 881.1 347.4
Accumulated profit and other adjustments 544.5 415.3
----------------------------------------- ----------- --------
Total equity 1,610.6 814.0
----------------------------------------- ----------- --------
Liabilities
Insurance liabilities 15,748.0 7,440.3
Other financial liabilities 5,740.8 2,643.2
Insurance and other payables 113.1 22.7
Other liabilities 682.0 328.4
----------------------------------------- ----------- --------
Total liabilities 22,283.9 10,434.6
----------------------------------------- ----------- --------
Total equity and liabilities 23,894.5 11,248.6
----------------------------------------- ----------- --------
Financial investments
The table below provides a breakdown by credit rating of
financial investments where applicable as at 31 December 2016
compared with the position at 30 June 2015. Financial investments
increased by GBP8.8bn from GBP8.5bn at 30 June 2015 to GBP17.3bn at
31 December 2016 due to the acquisition of Partnership together
with the continued investment of new business premiums into gilts,
corporate bonds and LTM contracts. The quality of the corporate
bond portfolio remains high with 63% (2015: 62%) of our bond and
gilt portfolio rated 'A' or above. There were no corporate bond
defaults during the period (2015: GBPnil). The loan-to-value ratio
of the mortgage portfolio at 31 December 2016 was 28% (30 June
2015: 25%).
Credit rating analysis
As at As at
31 December 2016 30 June 2015
Financial investment ratings GBPm GBPm
----------------------------- ---------------- ------------
AAA* 1,359.9 304.5
AA and gilts 1,603.2 995.3
A 3,471.0 1,731.8
BBB 3,759.0 1,741.1
BB or below 150.7 123.6
Unrated(1) 381.6 209.6
Loans secured by mortgages 6,594.2 3,471.8
----------------------------- ---------------- ------------
Total 17,319.6 8,577.7
----------------------------- ---------------- ------------
* Includes units held in liquidity funds
As at
Sector analysis 31 December 2016
GBPm %
Basic materials 239.2 1.4%
Communications 871.3 5.0%
Auto manufacturers 273.7 1.6%
Consumer 896.1 5.2%
Energy 281.6 1.6%
Banks 2,355.6 13.6%
Insurance 841.6 4.8%
Financial - other 1,023.7 5.9%
Government 927.5 5.4%
Industrial 472.6 2.7%
Utilities 1,625.8 9.4%
Cash and units in liquidity funds 645.5 3.7%
Loans secured by mortgages 6,594.2 38.1%
Other 271.2 1.6%
---------------------------------- ---------------- ------
Total 17,319.6 100.0%
---------------------------------- ---------------- ------
Other balances
Reinsurance assets increased by GBP3.6bn from GBP2.5bn at 30
June 2015 to GBP6.1bn at 31 December 2016 as a result of the
acquisition of Partnership and reinsured new business in the
period.
Insurance liabilities increased from GBP7.4bn at 30 June 2015 to
GBP15.7bn at 31 December 2016 due to the Partnership acquisition
and liabilities arising on new insurance business written less
claims paid in the period.
Other financial liabilities increased by GBP3.1bn from GBP2.6bn
at 30 June 2015 to GBP5.7bn at 31 December 2016. These liabilities
relate mainly to deposits received from reinsurers, with the
increase largely due to the acquired Partnership business.
Insurance and other payables increased by GBP90.4m from GBP22.7m at
30 June 2015 to GBP113.1m at 31 December 2016.
The increase is due to the acquired Partnership business as well
as an unsettled investment transaction balance.
Other liability balances have increased by GBP353.6m from
GBP328.4m at 30 June 2015 to GBP682.0m at 31 December 2016. The
increase has largely been driven by the issuance of Tier 2 debt by
JRP Group in 2016 and the acquired Partnership debt.
Total equity increased by GBP796.6m from GBP814.0m at 30 June
2015 to GBP1,610.6m at 31 December 2016, reflecting the issuance of
shares to acquire the Partnership business and the retained profits
for the period after dividend payments.
European embedded value
The statement of change in embedded value represents the change
for the 18 months ended 31 December 2016 for the JRP Group,
together with the comparative figures for the year ended 30 June
2015. The solvency regime changed to a Solvency II basis from 1
January 2016. As results up to 31 December 2015 have been prepared
under the previous Solvency I regime, the analysis of movement for
the 18 months ended 31 December 2016 has been split into two
periods to reflect the different reporting bases in place for the
two periods. Material economic assumptions have been aligned to be
consistent across both Group companies at 31 December 2015, and,
for JRL, are included within the methodology change as at December
2015.
Statement of change in European embedded value
18 months ended 31 December 2016 12 months
-----------------------------------------------
Covered business Non-covered business Total ended 30 June 2015
GBPm GBPm GBPm GBPm
------------------------------------------- ---------------- -------------------- ------- ------------------
Opening Group EEV 782.8 236.5 1,019.3 959.1
Operating EEV earnings 87.8 2.7 90.5 53.6
Non-operating EEV earnings (33.9) (18.1) (52.0) 25.5
------------------------------------------- ---------------- -------------------- ------- ------------------
Total EEV earnings 53.9 (15.4) 38.5 79.1
Other movements in IFRS net equity - 1.5 1.5 0.9
Dividend and capital flows 30.0 54.5 84.5 (11.0)
------------------------------------------- ---------------- -------------------- ------- ------------------
December closing Group EEV 866.7 277.1 1,143.8 1,028.1
Methodology change as at December 2015 6.5 - 6.5 -
------------------------------------------- ---------------- -------------------- ------- ------------------
Restated December EEV 873.2 277.1 1,150.3 1,028.1
Acquisition of Partnership Assurance Group 571.8 63.8 635.6 -
Operating EEV earnings 186.8 (9.6) 177.2 36.5
Non-operating EEV earnings 143.5 (51.0) 92.5 (41.6)
------------------------------------------- ---------------- -------------------- ------- ------------------
Total EEV earnings 330.3 (60.6) 269.7 (5.1)
Other movements in IFRS net equity - 11.9 11.9 1.8
Dividend and capital flows 10.0 (30.5) (20.5) (5.5)
------------------------------------------- ---------------- -------------------- ------- ------------------
Closing Group EEV 1,785.3 261.7 2,047.0 1,019.3
------------------------------------------- ---------------- -------------------- ------- ------------------
Group EEV increased by GBP1,027.7m from GBP1,019.3m at 30 June
2015 to GBP2,047.0m at 31 December 2016, due primarily to EEV
earnings of GBP308.2m for the period, GBP635.6m from the
acquisition of Partnership and GBP96.9m from net capital
raised.
Capital management
Both Just Retirement and Partnership managed their businesses on
a basis of both economic and regulatory capital, and the combined
JRP Group will continue to do so.
Solvency II
The Solvency II regime came into effect on 1 January 2016. The
Group has approval to apply the matching adjustment and
transitional measures in its calculation of technical provisions
and uses a combination of an Internal Model and the Standard
Formula to calculate its Group Solvency Capital Requirement.
Transitional measures ("TMTP") provide a bridge between the
previous capital regime and Solvency II for business written prior
to 1 January 2016.
The Group received approval to recalculate the TMTP as at 30
June 2016 in light of the significant decrease in interest rates
that were experienced in the period after 1 January 2016.
Further recalculations, if agreed with the regulator, may be
made if there are significant changes in the risk profile of the
insurance companies.
Our capital position has proved resilient during the period by
focussing on pricing discipline on new business and prudent
management of the balance sheet. Our underlying capital ratio was
practically unchanged over the year. The Group SCR coverage ratio
increased from a pro forma 136% at 1 January 2016 to an estimated
151% at 31 December 2016, including 12 months' amortisation of
transitional relief. This ratio was boosted by the GBP250m of Tier
2 debt issued in October.
The Group's estimated Solvency II position was as follows:
31 December 2016 GBPm
----------------------------- -------
Own funds 2,192
Solvency Capital Requirement (1,449)
------------------------------ -------
Excess own funds 743
Solvency coverage ratio 151%
------------------------------ -------
Estimated Group Solvency II sensitivities: % GBPm
------------------------------------------- ---- -----
Solvency II capital surplus at 31 December
2016 151% 743
-50 bps fall in interest rates (no TMTP
recalculation) -13% (141)
-50 bps fall in interest rates (with
TMTP recalculation) 0% 56
+100bps credit spreads +5% 43
+10% LTM early redemption +1% 3
-20% property values -13% (173)
-5% longevity -14% (189)
------------------------------------------- ---- -----
Economic capital
The Group's economic capital surplus position at 31 December
2016 was as follows:
31 December 30 June
2016 2015
GBPm GBPm
------------------ ----------- -------
Available capital 2,670 916
Required capital (1,234) (521)
------------------ ----------- -------
Economic capital 1,436 395
Solvency ratio 216% 176%
------------------ ----------- -------
The period end economic capital reflects the acquisition of
Partnership, the Tier 2 debt raised in 2016 and harmonisation of
economic capital models.
Dividends
The Group paid two interim dividends of 1.1 pence per share in
respect of the 18 months to 31 December 2016. The Board has
recommended a final dividend of 2.4 pence per share, bringing the
total dividend for the 18 months to 31 December 2016 to 4.6 pence
per share (year ended 30 June 2015: 3.3 pence per share).
Risk management
"Through our strong risk culture, we are confident of making
better decisions to achieve business success"
Purpose
We use risk management to make better informed business
decisions that generate value for shareholders while delivering
appropriate outcomes for our customers and providing confidence to
other stakeholders. Our risk management processes are designed to
ensure that our understanding of risk underpins how we run the
business.
Risk framework
Our risk management framework is developed in line with our risk
environment and best practice. The framework, owned by the Group
Board, covers all aspects of risk management including risk
governance, reporting and policies. Our appetite for different
types of risk is embedded across the business to create a culture
of confident risk taking.
Risk evaluation and reporting
We evaluate risks in our operating environment and decide how
best to manage them within our risk appetite. Management regularly
review their risks and produce reports to provide assurance that
material risks in the business are being mitigated. The Risk
function, led by the Chief Risk Officer ("CRO"), challenges the
management team on the effectiveness of its risk evaluation and
mitigation. The CRO provides the Group Board's Risk and Compliance
Committee with his independent assessment of the principal risks to
the business and emerging risk themes.
Financial risk modelling is used to assess the amount of each
risk type against our risk appetite. This modelling is aligned to
both our economic capital and regulatory capital metrics to allow
the Board to understand the capital requirements for our principal
risks. By applying stress and scenario testing, we gain insights
into how risks might impact the Group in different
circumstances.
Own Risk and Solvency Assessment
The Group's Own Risk and Solvency Assessment ("ORSA") further
embeds comprehensive risk reviews into our Group management
structure. Our annual ORSA report is a key part of our business
cycle and informs strategic decision making. ORSA updates are
prepared each quarter to keep the Board apprised of the Group's
evolving risk profile.
Principal risks and uncertainties
"The Group's enterprise-wide risk management strategy is to
enable all colleagues to take more effective business decisions
through a better understanding of risk"
Risk description and impact Mitigation and management action
--------------------------------------------------------- ---------------------------------------------------------
Risks from our chosen market environment
Risk Outlook: No change
Change in previous 18 months: Decreased risk
Our approach to legislative change is to participate
The Group operates in a market where changes in pensions actively and engage with policymakers
legislation can have a considerable in the UK, and this will not change.
effect on our strategy and could reduce our sales and
profitability or require us to hold The Group offers a wide range of retirement options,
more capital. allowing it to remain agile in this changing
environment, and has flexed its offerings in response to
The Pension Reforms introduced in 2015 have had a market dynamics. We believe we are
fundamental impact on the retirement income well-placed to adapt to the changing customer demand,
market, which will continue to evolve. Customers have supported by our brand promise, innovation
reacted to Pension Freedoms by looking credentials and financial strength.
for more flexible retirement solutions and some customers
are deferring their retirement decisions. The most influential factors in the successful delivery
Customer needs for a secure income in retirement have, of the Group's plans are closely monitored
however, not changed and the Group to help inform the business. The factors include market
expects that demand for guaranteed income for life forecasts and market share, supported
solutions will continue to grow. by insights into customer and competitor behaviour.
--------------------------------------------------------- ---------------------------------------------------------
Risk description and impact Mitigation and management action
---------------------------------------------------------- ----------------------------------------------------------
Risks from regulatory changes
Change in previous 18 months: Increased risk Risk Outlook: No change
The financial services industry continues to see a high We monitor and assess regulatory developments on an
level of regulatory change and intense on-going basis and engage fully with the
regulatory supervision. The regulatory agenda for the regulators. Our aims are to implement any required
coming year covers many areas directly changes effectively, and to deliver better
relevant to the Group. outcomes for our customers and competitive advantage for
the business.
The Prudential Regulation Authority ("PRA") started an
industry-wide review during 2016 of Regulatory approval was obtained in 2015 for Just
the valuation and capital treatment of equity release Retirement Limited to use an internal model
mortgages, which could prompt changes to calculate its Solvency Capital Requirement ("SCR")
in the Group's approach in this respect. under Solvency II. As a consequence
of the merger, the Group has applied for regulatory
The Treasury Select Committee is undertaking an enquiry approval to use its internal model to
into the operation of Solvency II calculate a Group SCR. The Group has gained approval from
to supplement its work on the relationships that the UK the PRA for the recalculation of
may now seek with the EU. The ultimate the transitional measure on technical provisions
terms of the UK's exit from the EU could have significant ("TMTP").
consequences for the regulation
and legislation that applies to the Group's operations. We will continue to work closely with the PRA to
understand and seek to influence its developing
The Solvency II risk margin is particularly sensitive to views on solvency capital.
movements in interest rates, which
can cause volatility. The introduction of the matching The Group responded directly to the PRA discussion paper
adjustment to meet Solvency II requirements (DP 1/16) on equity release mortgages,
has made management of liquidity within the Group more and through work with the Association of British Insurers
complex. and Equity Release Council. Any
potential changes needed to our internal model or
The FCA is developing a strategy to address the challenges matching adjustment criteria resulting from
for financial services of the ageing the PRA's equity release mortgage review will be
UK population and is pursuing other reviews and carefully reviewed.
initiatives pertinent to the retirement and
mortgage markets. Where possible, we seek to actively participate in all
regulatory initiatives which may affect
The EU General Data Protection Regulation ("GDPR") comes or provide future opportunities for the Group. We aim to
into effect on 25 May 2018. Although champion outcomes that are positive
many of the GDPR's requirements are already present in the for consumers by ensuring their retirement needs are
UK Data Protection Act 1998 ("DPA"), understood. We develop our strategy by
its requirements are more prescriptive and the rights of giving consideration to planned political and regulatory
data subjects are clearer and easier developments and allow for contingencies
for data subjects to enforce. should outcomes differ from our expectations. The Group
is actively engaged in the insurance
industry's work with the UK government and regulators on
the potential form of the UK's exit
from the EU.
We manage sensitive personal data in accordance with
existing DPA requirements but are reviewing
our existing practices and processes to ensure they
remain compliant as the new regime comes
into force.
---------------------------------------------------------- ----------------------------------------------------------
Risks from our pricing assumptions
Change in previous 18 months: No change Risk Outlook: Decreased risk
Writing long-term retirement income and equity release To manage the risk of our longevity assumptions being
business requires a range of assumptions incorrect, the Group now has the benefit
to be made based on market data and historical experience, of the combined experience of its legacy businesses to
including customers' longevity, provide insights and enhanced understanding
corporate bond yields, interest rates, property values and of the longevity risks that the Group chooses to take.
expenses. These assumptions are
applied to the calculation of the reserves needed for Longevity and other decrement experience is analysed to
future liabilities and solvency margins identify any outcomes materially different
using recognised actuarial approaches. from our assumptions and is used for the regular review
of the reserving assumptions for all
The Group's assumptions on these risk factors may be products.
materially inaccurate, requiring them
to be recalibrated. This could affect the level of Some longevity risk exposure is shared with reinsurance
reserves needed with an impact on profitability partners, who perform due diligence
and the Group's solvency position. on the Group's approach to risk selection. There is a
related counterparty risk of a reinsurer
not meeting its repayment obligations. This counterparty
risk is typically mitigated through
the reinsurer depositing the reinsurance premiums back to
the Group or into third party trusts
and by collateral arrangements.
For equity release, the Group underwrites the properties
against which it lends using valuations
from expert third parties. The Group's property risk is
controlled by limits to the initial
loan-to-property value ratio, supported by product design
features, limiting of concentration
of risks on specific property types or regions, and
monitoring of the exposure to adverse
house price movements.
---------------------------------------------------------- ----------------------------------------------------------
Risk description and impact Mitigation and management action
---------------------------------------------------------- ----------------------------------------------------------
Risks from the economic environment
Change in previous 18 months: Increased risk Risk Outlook: Increased risk
The premiums paid by the Group's customers are invested to Economic conditions are actively monitored and
enable alternative scenarios modelled to better understand
future benefits to be paid. The economic environment and the potential impacts of significant economic changes
financial market conditions have and to inform management action plans.
a significant influence on the value of assets and
liabilities and on the income the Group It is anticipated that the UK's withdrawal from the EU
receives. An adverse market could increase the risk of will have limited direct impact on
credit downgrades and defaults in our the Group as it is almost wholly UK based with no
corporate bond portfolio. services provided into the EEA, and its
customers and policyholders are predominantly UK-based.
The macro-economic outlook is unclear, driven by Any changes to the regulatory environment
uncertainty regarding the UK's future trading as a result of the UK's withdrawal are being monitored,
arrangements with the EU. The Referendum result has but a long-term departure from the
introduced material uncertainty for the Solvency II specifications, for example, is considered
UK economy in the medium and long-term. It is too early to unlikely.
be clear on
the long-term implications of the vote for the UK economy The Group's strategy is to buy and hold high-quality,
and indeed the wider economic impacts lower-risk assets in its investment
on the rest of Europe and the world; market conditions can portfolio to facilitate management of the asset and
be expected to be volatile for liability matching position. Portfolio
some time to come. credit risk is managed by specialist fund managers
executing a diversified investment strategy
The macro-economic outlook will also be impacted by US in investment grade assets while adhering to
policy following the inauguration of counterparty limits.
a new President and the outcome of European elections, in
particular in France and Germany, In a low interest rate environment, improved returns are
later in 2017. sought by diversifying the types,
geographies and industry sectors of investment assets.
In an environment of continued low interest rates, Such diversification creates an exposure
investors may be more willing to accept to foreign exchange risk, which is controlled using
higher credit and liquidity risk to improve investment derivative instruments. Swaps and swaptions
returns. These conditions could make are used to reduce exposures to interest rate
it difficult to source sufficient assets to offer volatility. The credit exposure to the counterparties
attractive retirement income terms. Low with whom we transact these instruments is mitigated by
credit spreads similarly affect the income that can be collateral arrangements.
made available, although margins from
our equity release portfolio help offset this risk. The Group's exposure to inflation risk through the
Defined Benefit De-risking business is
Most defined benefit pension schemes link member benefits managed with inflation-hedging mechanisms.
to inflation through indexation.
As the Group's Defined Benefit De-risking business volumes Liquidity risk is managed by ensuring that assets of a
grow, its exposure to inflation suitable maturity and marketability
risk increases. are held to meet liabilities as they fall due.
Sufficient liquid assets are maintained so
A fall in residential property values could reduce the the Group can readily access the cash it needs should
amounts received from equity release business cash inflows unexpectedly reduce.
redemptions and may also affect the relative
attractiveness of the equity release product There is little short-term volatility in the Group's
to customers. The regulatory capital needed to support the cash flows, which can be reliably estimated
no-negative equity guarantee in in terms of timing and amount. Regular cash flow
the equity release product also increases if property forecasts predict liquidity levels both short
values drop. Uncertainty following the term and long term and stress tests help us understand
EU Referendum could result in property values stagnating any potential periods of strain. The
or even falling in some, or all, Group's liquidity requirements have been comfortably met
UK regions. Conversely, significant future rises in over the past year and forecasting
property values could increase early mortgage confirms that this position can be expected to continue
redemptions, leading to a loss of anticipated value. for both investments and business
operations.
Market risks may affect the liquidity position of the
Group by, for example, having to realise
assets to meet liabilities during stressed market
conditions or to service collateral requirements
due to the changes in market value of financial
derivatives.
---------------------------------------------------------- ----------------------------------------------------------
Risk description and impact Mitigation and management action
---------------------------------------------------------- ----------------------------------------------------------
Risks to the Group's brands and reputation
Change in previous 18 months: No change Risk Outlook: Increased risk
We believe everyone deserves a fair, fulfilling and secure The Group actively seeks to differentiate its business
retirement. Our aim is to help from competitors by investing in the
people to rethink retirement to achieve this. Our Just Group's brand-enhancing activities. Fairness to
brand reflects the way we intend to customers and high service standards are at
conduct our business and treat our customer and wider the heart of the Just brand and were a shared ethos of
stakeholder groups. the Group's legacy Just Retirement
and Partnership Assurance businesses and we encourage
There is a risk that the Group's brands and reputation our staff to take pride in the quality
could be damaged if the Group is found of service they provide to our customers. Engaging our
to be acting, even unintentionally, below the standards we employees in the Just brand and its
set for ourselves. Damage to our associated values has been, and remains, a critical part
brand or reputation may adversely affect our underlying of our post-merger integration activity.
profitability, through reducing sales The Group's system of internal control, and associated
volumes, restricting access to distribution channels and policies and operational procedures,
attracting increased regulatory scrutiny. has been updated following the merger and defines the
standards we expect of all employees.
Additionally, the Group's brands and reputation could be
threatened by external risks such
as regulatory intervention or enforcement action, either
directly or as a result of contagion
from other companies in the sectors in which we operate.
Risks arising from operational processes and IT systems
Change in previous 18 months: No change Risk Outlook: Increased risk
The Group relies on its operational processes and IT The Group maintains a suite of risk management tools to
systems to conduct its business, including help identify, measure, monitor, manage
the pricing and sale of its products, measuring and and report its operational risks including, but not
monitoring its underwriting liabilities, limited to, those arising from operational
processing applications and maintaining customer service processes and IT systems. These include a risk
and accurate records. There is a management system, risk and control assessments,
risk that these processes and systems may not operate as risk event management, loss reporting, scenario analysis
expected, may not fulfil their intended and risk reporting through the ORSA.
purpose or may be damaged or interrupted by increases in
usage, human error, unauthorised The Group maintains newly modified plans and controls to
access, natural disaster or similarly disruptive events. minimise the risk of business disruption
Any failure of the Group's IT and and information security related events, commensurate to
communications systems and/or third party infrastructure that of our peers. Detailed incident
on which the Group relies could lead and crisis management plans also exist to ensure
to costs and disruptions that could adversely affect the effective responses. These are supported
Group's business as well as harm by specialist third parties for our mass notification
the Group's reputation. (call cascade) system, and our workplace
recovery centre.
Large organisations, including the Group, are increasingly
becoming targets for cyber-crime, Our approach to information security is under constant
particularly those organisations that hold customers' review as the cyber-threat landscape
personal details. The Group is no exception evolves. Due diligence is performed on all partners to
and a cyber-attack could affect customer confidence. ensure that they work to the same high
security standards as the Group. We remain vigilant to
the range of cyber-risks but recognise
the speed of change in cyber-threats means that a risk
exposure remains. The Group has recently
established an Information & Resilience Risk team,
reporting to the Group Chief Risk Officer,
to oversee the Group's strategy and controls in this
area.
---------------------------------------------------------- ----------------------------------------------------------
Risks arising from the post-merger integration process
Change in previous 18 months: Increased risk
Risk Outlook: Decreased risk
On 4 April 2016 the merger of Just Retirement and
Partnership Assurance completed to form Given the complementary business models of the two
JRP Group plc. The purpose of the merger is to deliver organisations, business as usual activity
significant strategic and financial has been maintained and strategic development moved
benefits for the combined Group. forward at the same time as integrating
the businesses. The integration process, which is
Integration of the two businesses is a complex process and currently ahead of schedule, reflects this
may take longer, or cost more, approach and is being carefully managed and overseen by
than expected to deliver the intended synergies, or those senior management and the Board.
synergies may not be fully realised.
During the integration process, management could be Our integration philosophy is "best of both" and this is
distracted from day-to-day business, resulting being applied as key decisions are
in missed opportunities. made for the future of the business; this also sets the
tone for the culture of the organisation
The process of combining two organisations may have an going forward and is a key focus for the management
undesirable effect on the culture of team.
the new Group, impacting its effectiveness in the short
term.
---------------------------------------------------------- ----------------------------------------------------------
Directors' responsibility statement
We confirm to the best of our knowledge that:
-- The financial statements, prepared in accordance with IFRS as
adopted by the EU, give a true and fair view of the assets,
liabilities, financial position and profit or loss of the Company
and the undertakings included in the consolidation taken as a
whole;
-- The Strategic Report includes a fair review of the
development and performance of the business and the position of the
Company and the undertakings included in the consolidation taken as
a whole, together with a description of the principal risks and
uncertainties that they face; and
-- The Annual Report and Accounts, taken as a whole, is fair,
balanced and understandable and provides the information necessary
for shareholders to assess the performance, strategy and business
model of the Company.
The Strategic Report contains certain forward-looking statements
providing additional information to shareholders to assess the
potential for the Company's strategies to succeed. Such statements
are made by the Directors in good faith, based on the information
available to them up to the date of their approval of this report,
and should be treated with caution due to the inherent
uncertainties underlying forward-looking information.
Neither the Company nor the Directors accept any liability to
any person in relation to the Annual Report and Accounts except to
the extent that such liability could arise under English law.
Accordingly, any liability to a person who has demonstrated
reliance on any untrue or misleading statement or omission shall be
determined in accordance with section 90A and schedule 10A of the
Financial Services and Markets Act 2000.
By order of the Board:
Rodney Cook Simon Thomas
Group Chief Executive Officer Group Chief Finance Officer
Consolidated statement of comprehensive income
For the 18 months ended 31 December 2016
18 months ended Year ended
31 December 2016 30 June 2015
Note GBPm GBPm
--------------------------------------------------------------- ---- ---------------- ------------
Gross premiums written 2,693.5 1,099.0
Reinsurance premiums ceded (1,553.4) (122.9)
Reinsurance recapture 1,166.9 950.9
--------------------------------------------------------------- ---- ---------------- ------------
Net premium revenue 2,307.0 1,927.0
Net investment income 3 1,616.8 635.2
Fee and commission income 17.1 5.1
--------------------------------------------------------------- ---- ---------------- ------------
Total revenue 3,940.9 2,567.3
--------------------------------------------------------------- ---- ---------------- ------------
Gross claims paid (1,204.5) (498.6)
Reinsurers' share of claims paid 512.4 248.1
--------------------------------------------------------------- ---- ---------------- ------------
Net claims paid (692.1) (250.5)
Change in insurance liabilities:
Gross amount (2,687.1) (956.7)
Reinsurers' share 1,447.3 (188.3)
Reinsurance recapture (1,166.9) (950.9)
--------------------------------------------------------------- ---- ---------------- ------------
(2,406.7) (2,095.9)
Change in investment contract liabilities 23 (15.5) (3.5)
Acquisition costs 4 (53.6) (18.5)
Other operating expenses 5 (341.5) (127.6)
Finance costs 6 (232.7) (100.9)
--------------------------------------------------------------- ---- ---------------- ------------
Total claims and expenses (3,742.1) (2,596.9)
--------------------------------------------------------------- ---- ---------------- ------------
Profit/(loss) before tax 7 198.8 (29.6)
Income tax 8 (51.3) 4.8
--------------------------------------------------------------- ---- ---------------- ------------
Profit/(loss) for the period 147.5 (24.8)
--------------------------------------------------------------- ---- ---------------- ------------
Other comprehensive income:
Items that may be reclassified subsequently to profit or loss:
exchange differences on translating foreign operations 0.4 (0.2)
--------------------------------------------------------------- ---- ---------------- ------------
Total comprehensive income for the period 147.9 (25.0)
--------------------------------------------------------------- ---- ---------------- ------------
Profit/(loss) attributable to:
Equity holders of JRP Group plc 147.5 (24.8)
--------------------------------------------------------------- ---- ---------------- ------------
Profit/(loss) for the period 147.5 (24.8)
--------------------------------------------------------------- ---- ---------------- ------------
Total comprehensive income attributable to:
Equity holders of JRP Group plc 147.9 (25.0)
--------------------------------------------------------------- ---- ---------------- ------------
Total comprehensive income for the period 147.9 (25.0)
--------------------------------------------------------------- ---- ---------------- ------------
Basic earnings per share (pence) 12 20.16 (4.96)
Diluted earnings per share (pence) 12 20.02 (4.96)
--------------------------------------------------------------- ---- ---------------- ------------
The notes are an integral part of these financial
statements.
Consolidated statement of changes in equity
For the 18 months ended 31 December 2016
Total
Shares
Share Share Reorganisation Merger held Accumulated shareholders'
capital premium reserve reserve by trusts Profit(2) equity
--------------------
18 months ended
31 December 2016 GBPm GBPm GBPm GBPm GBPm GBPm GBPm
-------------------- ------- ------- -------------- ------- --------- ----------- ---------------
Balance at 1 July
2015 50.1 1.2 348.4 - (0.7) 415.0 814.0
Profit for the
period - - - - - 147.5 147.5
Other comprehensive
income for the
period - - - - - 0.4 0.4
Total comprehensive
income for the
period - - - - - 147.9 147.9
Contributions and
distributions
Shares issued (net
of issue costs)(1) 43.2 90.5 - 532.7 - - 666.4
Dividends - - - - - (32.9) (32.9)
Share-based payments - - - - (0.9) 16.1 15.2
-------------------- ------- ------- -------------- ------- --------- ----------- ---------------
Total contributions
and distributions 43.2 90.5 532.7 (0.9) (16.8) 648.7
-------------------- ------- ------- -------------- ------- --------- ----------- ---------------
Balance at 31
December
2016 93.3 91.7 348.4 532.7 (1.6) 546.1 1,610.6
-------------------- ------- ------- -------------- ------- --------- ----------- ---------------
(1) Share issue costs recognised directly in equity were
GBP4.1m.
(2) Includes Currency translation reserve
Total
Shares
Share Share Reorganisation Merger held Accumulated shareholders'
capital premium reserve reserve by trusts Profit(2) equity
--------------------
Year ended 30 June
2015 GBPm GBPm GBPm GBPm GBPm GBPm GBPm
-------------------- ------- ------- -------------- ------- --------- ----------- ---------------
Balance at 1 July
2014 50.1 1.2 348.4 - (0.1) 453.2 852.8
Loss for the period - - - - - (24.8) (24.8)
Other comprehensive
income for the year - - - - - (0.2) (0.2)
Total comprehensive
income for the year - - - - - (25.0) (25.0)
Contributions and
distributions
Dividends - - - - - (16.5) (16.5)
Share-based payments - - - - (0.6) 3.3 2.7
-------------------- ------- ------- -------------- ------- --------- ----------- ---------------
Total contributions
and distributions - - - - (0.6) (13.2) (13.8)
-------------------- ------- ------- -------------- ------- --------- ----------- ---------------
Balance at 30 June
2015 50.1 1.2 348.4 - (0.7) 415.0 814.0
-------------------- ------- ------- -------------- ------- --------- ----------- ---------------
Consolidated statement of financial position
As at 31 December 2016
31 December 30 June 2015
2016 (restated)(1)
Note GBPm GBPm
----------------------------------------------------- ---- ----------- -------------
Assets
Intangible assets 14 217.0 75.2
Property, plant and equipment 15 17.1 0.7
Financial investments 16 17,319.6 8,577.7
Investment in joint ventures and associates 0.3 -
Reinsurance assets 22 6,057.1 2,477.1
Deferred tax assets 17 10.3 4.2
Current tax assets 29 11.1 17.6
Prepayments and accrued income 18 53.3 3.2
Insurance and other receivables 19 137.3 34.1
Cash and cash equivalents 20 71.4 58.8
----------------------------------------------------- ---- ----------- -------------
Total assets 23,894.5 11,248.6
----------------------------------------------------- ---- ----------- -------------
Equity
Share capital 21 93.3 50.1
Share premium 21 91.7 1.2
Reorganisation reserve 348.4 348.4
Merger reserve 21 532.7 -
Shares held by trusts (1.6) (0.7)
Accumulated profit 546.1 415.0
----------------------------------------------------- ---- ----------- -------------
Total equity attributable to owners of JRP Group plc 1,610.6 814.0
----------------------------------------------------- ---- ----------- -------------
Liabilities
Insurance liabilities 22 15,748.0 7,440.3
Investment contract liabilities 23 222.3 228.3
Loans and borrowings 24 343.1 46.9
Other financial liabilities 25 5,740.8 2,643.2
Deferred tax liabilities 17 46.4 32.9
Other provisions 28 8.5 1.5
Current tax liabilities 29 27.3 0.1
Accruals and deferred income 30 34.4 18.7
Insurance and other payables 31 113.1 22.7
----------------------------------------------------- ---- ----------- -------------
Total liabilities 22,283.9 10,434.6
----------------------------------------------------- ---- ----------- -------------
Total equity and liabilities 23,894.5 11,248.6
----------------------------------------------------- ---- ----------- -------------
(1) The fair value of debt securities includes accrued interest
previously classified as prepayments and accrued income on the
statement of financial position. As a result of this change in
presentation, GBP83.0m of accrued interest has been reclassified
from prepayments and accrued income at 30 June 2015.
The notes are an integral part of these financial
statements.
The financial statements were approved by the Board of Directors
on 9 March 2017 and were signed on its behalf by:
Simon Thomas
Director
Consolidated statement of cash flows
For the 18 months ended 31 December 2016
18 months ended
31 December Year ended
2016 30 June 2015
Note GBPm GBPm
-------------------------------------------------------------------- ---- --------------- ------------
Cash flows from operating activities
Profit/(loss) before tax 198.8 (29.6)
Depreciation of equipment 2.6 0.5
Amortisation of intangible assets 24.3 4.2
Impairment of intangible assets 3.8 -
Share-based payments 15.2 2.7
Interest income (683.1) (196.4)
Interest expense 232.7 100.9
Increase in financial investments (2,794.5) (1,082.6)
(Increase)/decrease in reinsurance assets (280.5) 1,139.2
Decrease in prepayments and accrued income (47.0) -
Increase in insurance and other receivables (61.7) (29.1)
Increase in insurance liabilities 2,687.9 956.7
(Decrease)/increase in investment contract liabilities (6.0) 30.9
Increase/(decrease) in deposits received from reinsurers 98.2 (990.4)
Increase in accruals and deferred income 4.3 2.3
Increase/(decrease) in insurance and other payables 53.6 (12.8)
Increase/(decrease) in other creditors 219.4 (38.8)
Interest received 388.1 201.6
Interest paid (208.6) (91.8)
Taxation paid (35.9) (24.1)
-------------------------------------------------------------------- ---- --------------- ------------
Net cash outflow from operating activities (188.4) (56.6)
-------------------------------------------------------------------- ---- --------------- ------------
Cash flows from investing activities
-------------------------------------------------------------------- ---- --------------- ------------
Cash acquired on the acquisition of Partnership Assurance Group plc 2 268.6 -
Additions to internally generated intangible assets - (1.8)
Acquisition of property and equipment (10.3) (0.2)
-------------------------------------------------------------------- ---- --------------- ------------
Net cash inflow/(outflow) from investing activities 258.3 (2.0)
-------------------------------------------------------------------- ---- --------------- ------------
Cash flows from financing activities
-------------------------------------------------------------------- ---- --------------- ------------
Increase/(decrease) in borrowings 202.1 (4.5)
Interest paid (6.0) (2.3)
Dividends paid (32.9) (16.5)
Issue of ordinary share capital (net of costs) 96.9 -
-------------------------------------------------------------------- ---- --------------- ------------
Net cash inflow/(outflow) from financing activities 260.1 (23.3)
-------------------------------------------------------------------- ---- --------------- ------------
Net increase/(decrease) in cash and cash equivalents 330.0 (81.9)
Cash and cash equivalents at start of period 313.7 395.6
-------------------------------------------------------------------- ---- --------------- ------------
Cash and cash equivalents at end of period 643.7 313.7
-------------------------------------------------------------------- ---- --------------- ------------
Cash available on demand 71.4 58.8
Units in liquidity funds 572.3 254.9
-------------------------------------------------------------------- ---- --------------- ------------
Cash and cash equivalents at end of period 20 643.7 313.7
-------------------------------------------------------------------- ---- --------------- ------------
Notes to the Consolidated financial statements
1 Significant accounting policies
General information
JRP Group plc ("the Company") was incorporated and registered in
England and Wales on 13 June 2013 as a public company limited by
shares. The Company's registered office is Vale House, Roebuck
Close, Bancroft Road, Reigate, Surrey, RH2 7RU.
As explained in note 2, on 4 April 2016, Just Retirement Group
plc ("JRG") and Partnership Assurance Group plc ("PAG") completed
an all-share transaction to create JRP Group plc ("JRP"). This has
been accounted for as a business combination in which JRG has
acquired 100% of the ordinary share capital of PAG through a
share-for-share exchange, with effective control passing on 1 April
2016. JRG changed its name to JRP Group plc on 4 April 2016. In May
2016 JRP changed its accounting reference date from 30 June to 31
December. As such, these financial statements comprise the
Consolidated financial statements of JRP Group plc (formerly Just
Retirement Group plc) and its subsidiaries, together referred to as
"the Group", as at, and for the 18 month period ended, 31 December
2016.
1.1 Basis of preparation
The results in this preliminary announcement have been taken
from the Group's Annual Report and Accounts for the period ended 31
December 2016 which will be delivered to the Registrar of Companies
following the Company's Annual General Meeting. The consolidated
financial statements have been prepared in accordance with
International Financial Reporting Standards ("IFRS") as adopted by
the European Union effective for accounting periods commencing on
or before 1 July 2015 and those parts of the Companies Act 2006
applicable to companies reporting under IFRS.
This preliminary announcement does not constitute statutory
accounts as defined in Section 434 of the Companies Act 2006. The
auditor has reported on the consolidated financial statements.
Their report was unqualified and neither contained a statement
under section 498 (2) or (3) of the Companies Act 2006.
The following new accounting standards, interpretations and
amendments to existing accounting standards in issue, but either
not yet effective or endorsed by the EU, have not been early
adopted by the Group. Unless stated, the new and amended standards
and interpretations are being assessed but are not expected to have
a significant impact on the Group's financial statements:
-- IFRS 9, Financial instruments (effective 1 January 2018) and
amendment to IFRS 4, Insurance contracts (effective 1 January 2018,
not yet endorsed).
IFRS 9 includes comprehensive requirements relating to the
classification and measurement of financial instruments. In 2016
the IASB amended IFRS 4, the existing Insurance Contracts standard,
to allow entities that issue insurance contracts to defer
application of IFRS 9 until accounting periods beginning on or
after 1 January 2021. This is intended to align with the expected
effective date of IFRS 17, the forthcoming Insurance Contracts
standard.
This option, which the Group intends to adopt, is subject to
meeting criteria relating to the predominance of insurance
activity. It is expected that the amendment of the insurance
standard will have a significant impact on the presentation of
future cashflows within the financial statements, which will be
formally assessed once the standard has been finalised.
-- IFRS 15, Revenue from contracts with customers (effective 1
January 2017, not yet fully endorsed by the EU).
IFRS 15 specifies how and when an entity recognises revenue,
providing a single, principles-based model to be applied to all
contracts with customers, whilst requiring more informative and
relevant disclosures. Insurance contracts, although contracts with
customers, are outside the scope of IFRS 15.
-- IFRS 16, Leases (effective 1 January 2019, not yet endorsed).
IFRS 16 specifies how to recognise, measure, present and
disclose leases. The standard provides a single accounting model,
requiring lessees to recognise assets and liabilities for leases
unless the term is 12 months or less, or the underlying asset has a
low value.
The effect of applying this standard will be to bring the
operating leases disclosed in note 32 onto the balance sheet.
-- Amendments to IAS 1, Disclosure initiative (effective 1 January 2016, not yet endorsed).
The amendments clarify guidance on materiality and aggregation,
the presentation of subtotals, the structure of financial
statements and the disclosure of accounting policies.
-- Amendment to IAS 12, Income taxes (effective 1 January 2017, not yet endorsed).
The amendments clarify the recognition of deferred tax assets
for unrealised losses on debt instruments, and provide guidance on
estimates for future taxable profits and the assessment of multiple
deferred tax assets in combination.
-- Amendment to IAS 7, Statement of cash flows (effective 1 January 2017, not yet endorsed).
The amendments require additional disclosures that will allow
users to understand changes in liabilities arising from financing
activities, including changes arising from cash flows, such as
drawdowns and repayments of borrowings, and non-cash changes, such
as acquisitions, disposals and unrealised exchange differences.
1.2 Significant accounting policies and the use of judgements,
estimates and assumptions
The preparation of financial statements requires the Group to
select accounting policies and make estimates and assumptions that
affect items reported in the Consolidated statement of
comprehensive income, Consolidated statement of financial position,
other primary statements and Notes to the consolidated financial
statements.
The major areas of judgement used as part of accounting policy
application are summarised below.
Accounting policy Item involving judgement Critical accounting judgement
----------------- --------------------------- ----------------------------------
1.6 Classification of insurance Assessment of significance
and investment contracts of insurance risk transferred.
1.19 Financial investments Classification of financial
investments, including assessment
of market observability of
valuation inputs.
All estimates are based on management's knowledge of current
facts and circumstances, assumptions based on that knowledge and
predictions of future events and actions. Actual results may differ
significantly from those estimates.
The table below sets out those items the Group considers
susceptible to changes in critical estimates and assumptions
together with the relevant accounting policy.
Accounting Item involving Critical estimates and assumptions
policy and estimates and
notes assumptions
------------ ----------------------- -----------------------------------------
1.18, 16(a) Measurement of The critical estimates used
and (d) fair value of in valuing loans secured by
loans residential
secured by residential mortgages include the projected
mortgages future receipts of interest
and loan
repayments, future house prices,
and the future costs of administering
the loan portfolio.
The key assumptions used as
part of the valuation calculation
include
future property prices and
their volatility, mortality,
the rate of
voluntary redemptions and the
liquidity premium added to
the risk-
free curve and used to discount
the mortgage cash flows.
Further details can be found
in note 16(a).
1.19, 22 Measurement of The critical estimates used
reinsurance in measuring the value of reinsurance
assets arising assets include the projected
from reinsurance future cash flows arising from
arrangements reinsurers'
share of the Group's insurance
liabilities.
The key assumptions used in
the valuation include discount
rates and
mortality experience, as described
below, and assumptions around
the
reinsurers' ability to meet
its claim obligations.
1.22, 22(b), Measurement of The critical estimates used
23(b) insurance in measuring insurance liabilities
liabilities arising include
from writing the projected future Retirement
Retirement Income Income payments and the cost
insurance of
contracts administering payments to policyholders.
The key assumptions are the
discount rates and mortality
experience
used in the valuation of future
Retirement Income payments.
The
valuation discount rates are
derived from yields on supporting
assets
after deducting allowances
for default. Mortality assumptions
are
derived from the appropriate
standard mortality tables,
adjusted to
reflect the future expected
mortality experience of the
policyholders.
Further detail can be found
in notes 22 and 23.
1.3, 2 Fair value of The key assumptions for the
Partnership Assurance valuation of the acquired in-force
Group on acquisition business are the projected
profits of the acquired business
and the
discount rate. The discount
rate used represents a weighted-average
cost of capital determined
using a capital asset pricing
model (CAPM) approach.
1.3 Consolidation principles
The consolidated financial statements incorporate the assets,
liabilities, results and cash flows of the Company and its
subsidiaries.
Subsidiaries are those investees over which the Group has
control. The Group has control over an investee if all of the
following are met: (1) it has power over the investee; (2) it is
exposed, or has rights, to variable returns from its involvement
with the investee; and (3) it has the ability to use its power over
the investee to affect its own returns.
Subsidiaries are consolidated from the date on which control is
transferred to the Group and are excluded from consolidation from
the date on which control ceases. All inter-company transactions,
balances and unrealised surpluses and deficits on transactions
between Group companies are eliminated. Accounting policies of
subsidiaries are aligned on acquisition to ensure consistency with
Group policies.
The Group uses the acquisition method of accounting for business
combinations. Under this method, the cost of acquisition is
measured as the aggregate of the fair value of the consideration at
date of acquisition and the amount of any non-controlling interest
in the acquiree. The excess of the consideration transferred over
the identifiable net assets acquired is recognised as goodwill.
The Group uses the equity method to consolidate its investments
in joint ventures and associates. Under the equity method of
accounting the investment is initially recognised at fair value and
adjusted thereafter for the post-acquisition change in the Group's
share of net assets of the joint ventures and associates.
1.4 Segments
The Group's segmental results are presented on a basis
consistent with internal reporting used by the Chief Operating
Decision Maker ("CODM") to assess the performance of operating
segments and the allocation of resources. The CODM has been
identified as the Group Executive Office Committee.
The internal reporting used by the CODM includes product
information (which comprises analysis of product revenues, LTM
advances and amounts written under investment contracts) and
information on adjusted operating profit and profit before tax for
the Group's operating segments.
Product information is analysed by product line and includes DB,
GIfL, Care Plans, Protection, LTM and Capped Drawdown products.
An operating segment is a component of the Group that engages in
business activities from which it earns revenues and incurs
expenses.
The operating segments from which the Group derives revenues and
incurs expenses are as follows:
-- The writing of insurance products for distribution to the at-
or in-retirement market, which is undertaken through the activities
of the life company;
-- The arranging of guaranteed income for life contracts and
lifetime mortgages through a regulated advice and intermediary
services; and
-- The provision of licensed software to financial advisers,
banks, building societies, life assurance companies and pension
trustees.
Operating segments, where certain materiality thresholds in
relation to total results from operating segments are not exceeded,
are combined when determining reportable segments. For segmental
reporting, the arranging of guaranteed income for life contracts,
providing intermediary mortgage advice and arranging, plus the
provision of licensed software, are included in the Other segment
along with Group activities, such as capital and liquidity
management, and investment activities.
The information on adjusted operating profit and profit before
tax used by the CODM is presented on a combined product basis
within the insurance operating segment and is not analysed further
by product.
1.5 Foreign currencies
Transactions in foreign currencies are translated to sterling at
the rates of exchange ruling at the date of the transaction.
Monetary assets and liabilities denominated in foreign currencies
are translated into sterling at the rates of exchange ruling at the
end of the financial year. Foreign exchange gains and losses
resulting from the settlement of such transactions and from the
translation of monetary assets and liabilities denominated in
foreign currencies are recognised in profit or loss.
The assets and liabilities of foreign operations are translated
to sterling at the rates of exchange at the reporting date. The
revenues and expenses are translated to sterling at the average
rates of exchange for the period. Foreign exchange differences
arising on translation to sterling are accounted for through other
comprehensive income.
1.6 Classification of insurance and investment contracts
The measurement and presentation of assets, liabilities, income
and expenses arising from life and pensions business contracts is
dependent upon the classification of those contracts as either
insurance or investment contracts.
A contract is classified as insurance only if it transfers
significant insurance risk. Insurance risk is significant if an
insured event could cause an insurer to pay significant additional
benefits to those payable if no insured event occurred. A contract
that is classified as an insurance contract remains an insurance
contract until all rights and obligations are extinguished or
expire.
Any contracts not considered to be insurance contracts under
IFRS are classified as investment contracts. Capped Drawdown
pension business and Flexible Pension Plan contracts are classified
as investment contracts as there is no transfer of longevity risk
due to the fixed term and unit-linked natures of these respective
contracts.
1.7 Premium revenue
Premium revenue in respect of Individual GIfL contracts is
accounted for when the premiums are received, which coincides with
when the liability to pay the GIfL contract is established.
Premium revenue in respect of Defined Benefit De-risking
contracts is accounted for when the Company becomes 'on risk',
which is the date from which the policy is effective. If a timing
difference occurs between the date from which the policy is
effective and the receipt of payment, the amount due for payment
but not yet received is recognised as a receivable in the
Consolidated statement of financial position.
Premium revenue in respect of Care Plans and Protection policies
are recognised in the accounting period in which the insurance
contract commences.
Facilitated adviser charges, are not accounted for within
premium revenue, and do not represent a charge on the Group.
Deposits collected under investment contracts are not accounted
for through the Consolidated statement of comprehensive income,
except for fee income and attributable investment income, but are
accounted for directly through the Consolidated statement of
financial position as an adjustment to the investment contract
liability.
Reinsurance premiums payable in respect of reinsurance treaties
are accounted for when the reinsurance premiums are due for payment
under the terms of the contract. Reinsurance premiums previously
incurred can be recaptured under certain conditions, notably once
reinsurance financing for an underwriting year is fully repaid.
1.8 Net investment income
Investment income consists of interest receivable for the period
and realised and unrealised gains and losses on financial assets
and liabilities at fair value through profit and loss.
Interest income is recognised as it accrues.
Realised gains and losses on financial assets and liabilities
occur on disposal or transfer and represent the difference between
the proceeds received net of transaction costs, and the original
cost.
Unrealised gains and losses arising on financial assets and
liabilities represent the difference between the carrying value at
the end of the reporting period and the carrying value at the start
of the reporting period or purchase value during the year, less the
reversal of previously recognised unrealised gains and losses in
respect of disposals made during the period.
1.9 Fee and commission income
Fee and commission income, which consists of fee income for
initial advances made on loans secured by mortgages, investment
management fees, administration fees and commission, are recognised
as the services are rendered. Revenue is recognised in full on
acceptance and inception of the contract by the product provider as
there are no post-placement obligations. In addition, operating
income includes fees from software licensing which are recognised
across the license period.
1.10 Claims paid
Policyholder benefits are accounted for when due for payment.
Reinsurance paid claim recoveries are accounted for in the same
period as the related claim.
Death claims are accounted for when notified.
1.11 Acquisition costs
Acquisition costs comprise direct costs such as commission and
indirect costs of obtaining and processing new business.
Acquisition costs are not deferred as they relate to single premium
business.
1.12 Leases
Leases, where a significant portion of the risks and rewards of
ownership are retained by the lessor, are classified as operating
leases. Payments made under operating leases, net of any incentives
received from the lessor, are charged to profit or loss on a
straight-line basis over the term of the lease.
1.13 Finance costs
Finance costs on deposits received from reinsurers are
recognised as an expense in the period in which they are incurred.
Interest on reinsurance financing is accrued in accordance with the
terms of the financing arrangements.
Interest on loans and borrowings is accrued in accordance with
the terms of the loan agreement. Loan issue costs are capitalised
and amortised on a straight-line basis over the term of the loan
issued. Interest expense is calculated using the effective interest
rate method.
1.14 Employee benefits
Defined contribution plans
The Group operates a defined contribution pension scheme. The
assets of the scheme are held separately from those of the Group in
funds managed by a third party. Obligations for contributions to
the defined contribution pension scheme are recognised as an
expense in profit or loss when due.
Share-based payment transactions
Equity-settled share-based payments to employees are measured at
the fair value of the equity instruments at grant date, determined
using stochastic and scenario-based modelling techniques where
appropriate. The fair value is expensed in the Consolidated
statement of comprehensive income on a straight-line basis over the
vesting period, with a corresponding credit to equity, based on the
Group's estimate of the equity instruments that will eventually
vest. At each balance sheet date, the Group revises its estimate of
the number of equity instruments that will eventually vest as a
result of changes in non-market-based vesting conditions, and
recognises the impact of the revision of original estimates in the
Consolidated statement of comprehensive income over the remaining
vesting period, with a corresponding adjustment to equity. Where a
leaver is entitled to their scheme benefits, this is treated as an
acceleration of the vesting in the period they leave. Where a
scheme is modified before it vests, any change in fair value as a
result of the modification is recognised over the remaining vesting
period. Where a scheme is cancelled, this is treated as an
acceleration in the period of the vesting of all remaining
options.
1.15 Earnings per share
Basic earnings per share is calculated by dividing the profit
attributable to equity holders of the Company by the
weighted-average number of ordinary shares outstanding during the
period. The calculation of the weighted-average number of ordinary
shares excludes ordinary shares held in trusts on behalf of
employee share schemes.
For diluted earnings per share, the weighted-average number of
ordinary shares outstanding during the period, excluding ordinary
shares held in trusts on behalf of employee share schemes, is
adjusted to assume conversion of potential ordinary shares, such as
share options granted to employees, if their conversion would
dilute earnings per share.
1.16 Intangible assets
Intangible assets consist of goodwill, which is deemed to have
an indefinite useful life, Purchased Value of In-Force ("PVIF"),
brand and purchased and internally developed software (including
PrognoSys(TM) ), which are deemed to have finite useful lives.
Goodwill represents the excess of the cost of an acquisition
over the fair value of the Group's share of the net assets of the
acquired subsidiary and represents the future economic benefit
arising from assets that are not capable of being individually
identified and separately recognised. Goodwill is measured at
initial value less any accumulated impairment losses. Goodwill is
not amortised, but assessed for impairment annually or when
circumstances or events indicate there may be uncertainty over the
carrying value.
For the purpose of impairment testing, goodwill has been
allocated to cash generating units and an impairment is recognised
when the carrying value of the cash generating unit exceeds its
recoverable amount. Impairment losses are recognised directly in
the Consolidated statement of comprehensive income and are not
subsequently reversed.
Other intangible assets are recognised if it is probable that
the relevant future economic benefits attributable to the asset
will flow to the Group, and are measured at cost less accumulated
amortisation and any impairments.
PVIF, representing the present value of future profits from the
purchased inforce business, is recognised upon acquisition and is
amortised over its expected remaining economic life up to 16 years
on a straight-line basis.
PrognoSys(TM) is the Group's proprietary underwriting engine.
The Group has over 2 million person-years of experience collected
over twenty years of operations. It is enhanced by an extensive
breadth of external primary and secondary healthcare data and
medical literature.
Costs that are directly associated with the production of
identifiable and unique software products controlled by the Group
are capitalised and recognised as an intangible asset. Direct costs
include the incremental software development team's employee costs.
All other costs associated with researching or maintaining computer
software programmes are recognised as an expense as incurred.
Intangible assets with finite useful lives are amortised on a
straight-line basis over their useful lives, which range from three
to 16 years. The useful lives are determined by considering
relevant factors, such as usage of the asset, potential
obsolescence, competitive position and stability of the
industry.
For intangible assets with finite useful lives, impairment
testing is performed where there is an indication that the carrying
value of the assets may be subject to an impairment. An impairment
loss is recognised where the carrying value of an intangible asset
exceeds its recoverable amount.
The significant intangible assets recognised by the Group, their
useful economic lives and the methods used to determine the cost of
intangibles acquired in a business combination are as follows:
Intangible asset Estimated useful Valuation method
economic life
---------------- ---------------- ------------------------------
PVIF Up to 16 years Estimated value in-force
using European Embedded Value
model
Brand 2 - 5 years Estimated royalty stream
if the rights were to be
licensed
Distribution 3 years Estimated discounted cash
network flow
Software 2 - 3 years Estimated replacement cost
Intellectual 12 - 15 years Estimated replacement cost
property
---------------- ---------------- ------------------------------
The useful economic lives of intangible assets recognised by the
Group other than those acquired in a business combination are as
follows:
Intangible asset Estimated useful economic life
---------------- ------------------------------
PrognoSys(TM) 12 years
Software 3 years
---------------- ------------------------------
1.17 Property, plant and equipment
Land and buildings are measured at their revalued amounts less
subsequent depreciation, and impairment losses are recognised at
the date of revaluation. Valuations are performed with sufficient
frequency to ensure that the fair value of the revalued asset does
not differ materially from its carrying value.
A revaluation surplus is recognised in Other comprehensive
income and credited to the revaluation reserve in equity. However,
to the extent that it reverses a revaluation deficit of the same
asset previously recognised in profit or loss, the increase is
recognised in profit or loss. A revaluation deficit is recognised
in profit or loss, except to the extent that it offsets an existing
surplus on the same asset recognised in the revaluation
reserve.
Buildings are depreciated on a straight-line basis over the
estimated useful lives of the buildings of 25 years.
Equipment is stated at cost less accumulated depreciation and
impairment losses. Depreciation is calculated on a straight-line
basis to write down the cost to residual value over the estimated
useful lives as follows:
Computer equipment - 3 to 4 years
Furniture and fittings - 2 to 10 years
1.18 Financial investments
Classification
The Group classifies financial investments in accordance with
IAS 39 whereby, subject to specific criteria, they are accounted
for at fair value through profit and loss. This comprises assets
designated by management as fair value through profit and loss on
inception, as they are managed on a fair value basis, and
derivatives that are classified as held for trading. These
investments are measured at fair value with all changes thereon
being recognised in investment income in the Consolidated statement
of comprehensive income.
Purchases and sales of investments are recognised on the trade
date, which is the date that the Group commits to purchase or sell
the assets. Amounts payable or receivable on unsettled purchases or
sales are recognised in other payables or other receivables
respectively. Transaction costs are expensed through profit and
loss.
Loans secured by residential mortgages are recognised when cash
is advanced to borrowers.
The Group receives and pledges collateral in the form of cash or
gilts in respect of derivative contracts. Collateral received is
recognised as an asset in the Consolidated statement of financial
position with a corresponding liability for the repayment in other
financial liabilities. Collateral pledged is recognised in the
Consolidated statement of financial position within the appropriate
asset classification.
Derivatives are recognised at fair value through profit and
loss. The fair values are obtained from quoted market prices or, if
these are not available, by using standard valuation techniques
based on discounted cash flow models or option pricing models. All
derivatives are carried as assets when the fair value is positive
and liabilities when the fair values are negative. The Group does
not use hedge accounting.
The Group's policy is to derecognise financial investments when
it is deemed that substantially all the risks and rewards of
ownership have been transferred.
Use of fair value
The Group uses current bid prices to value its investments with
quoted prices. Actively traded investments without quoted prices
are valued using prices provided by third parties. If there is no
active established market for an investment, the Group applies an
appropriate valuation technique such as discounted cash flow
analysis.
Determining the fair value of financial investments when the
markets are not active
The Group holds certain financial investments for when the
markets are not active. These comprise financial investments which
are not quoted in active markets and include loans secured by
residential mortgages, derivatives and other financial investments
for when markets are not active. When the markets are not active,
there is generally no or limited observable market data that can be
used in the fair value measurement of the financial investments.
The determination of whether an active market exists for a
financial investment requires management's judgement.
If the market for a financial investment of the Group is not
active, the fair value is determined using valuation techniques.
The Group establishes fair value for these financial investments by
using quotations from independent third parties or internally
developed pricing models. The valuation technique is chosen with
the objective of arriving at a fair value measurement which
reflects the price at which an orderly transaction would take place
between market participants on the measurement date. The valuation
techniques include the use of recent arm's length transactions,
reference to other instruments that are substantially the same, and
discounted cash flow analysis. The valuation techniques may include
a number of assumptions relating to variables such as credit risk
and interest rates and, for loans secured by mortgages, mortality,
future expenses, voluntary redemptions and house price assumptions.
Changes in assumptions relating to these variables impact the
reported fair value of these financial instruments positively or
negatively.
The financial investments measured at fair value are classified
into the following three-level hierarchy on the basis of the lowest
level of inputs that are significant to the fair value measurement
of the financial investment concerned:
Level 1: Quoted price (unadjusted) in active markets for identical assets and liabilities;
Level 2: Inputs other than quoted prices included within Level 1
that are observable either directly or indirectly (i.e. derived
from prices); and
Level 3: Significant inputs for the asset or liability that are
not based on observable market data (unobservable inputs).
1.19 Reinsurance
Reinsurance assets
Amounts recoverable from reinsurers are measured in a consistent
manner with insurance liabilities and are classified as reinsurance
assets. If a reinsurance asset is impaired, the carrying value is
reduced accordingly and that impairment loss is recognised in the
Consolidated statement of comprehensive income.
Financial liabilities
Where reinsurance contracts entered into by the Group are
structured to provide financing, with financing components to be
repaid in future periods, such amounts are classified as
"reinsurance finance" and included in other financial liabilities
in the Consolidated statement of financial position.
Where reinsurance contracts entered into by the Group require
deposits received from reinsurers to be repaid, such amounts are
classified as "deposits received from reinsurers" and included in
other financial liabilities in the Consolidated statement of
financial position. Where the liability carries no insurance risk,
it is initially recognised at fair value at the date the deposited
asset is recognised and subsequently re-measured at fair value at
each balance sheet date. The resulting gain or loss is recognised
in the Consolidated statement of comprehensive income. Fair value
is determined as the amount payable discounted from the first date
that the amount is required to be paid. All other deposits received
from reinsurers are valued in accordance with the terms of the
reinsurance contracts, which take into account an appropriate
discount rate for the timing of expected cash flows.
Amounts receivable/payable
Where reinsurance contracts the Group has entered into include
longevity swap arrangements, such contracts are settled on a net
basis and amounts receivable from or payable to the reinsurers are
included in the appropriate heading under either Insurance and
other receivables or Insurance and other payables.
1.20 Cash and cash equivalents
Cash and cash equivalents consist of cash at bank and in hand,
deposits held at call with banks, and other short-term highly
liquid investments with less than 90 days' maturity from the date
of acquisition.
1.21 Equity
The difference between the proceeds received on issue of the
shares, net of share issue costs, and the nominal value of the
shares issued is credited to the share premium account.
Interim dividends are recognised in equity in the period in
which they are paid. Final dividends are recognised when they have
been approved by shareholders.
Where the Company purchases shares for the purposes of employee
incentive plans, the consideration paid, net of issue costs, is
deducted from equity. Upon issue or sale any consideration received
is credited to equity net of related costs.
The reserve arising on the reorganisation of the Group
represents the difference in the value of the shares in the Company
and the value of shares in Just Retirement Group Holdings Limited
for which they were exchanged as part of the Group reorganisation
in November 2013.
1.22 Insurance liabilities
Measurement
Long-term insurance liabilities arise from the Group writing
Retirement Income contracts, including Defined Benefit De-risking
solutions, long-term care insurance, and whole of life and term
protection insurance. Their measurement uses estimates of projected
future cash flows arising from payments to policyholders plus the
costs of administering them. Valuation of insurance liabilities is
derived using discount rates, adjusted for default allowance, and
mortality assumptions, taken from the appropriate mortality tables
and adjusted to reflect actual and expected experience.
Liability adequacy test
The Group performs adequacy testing on its insurance liabilities
to ensure the carrying amount is sufficient to cover the current
estimate of future cash flows. Any deficiency is immediately
charged to the Consolidated statement of comprehensive income.
1.23 Investment contract liabilities
Investment contracts are measured at fair value through profit
and loss in accordance with IAS 39. The fair value of investment
contracts is estimated using an internal model and determined on a
policy-by-policy basis using a prospective valuation of future
Retirement Income benefit and expense cash flows, but with an
adjustment to amortise any day-one gain over the life of the
contract.
1.24 Loans and borrowings
Loans and borrowings are initially recognised at fair value, net
of transaction costs, and subsequently amortised through profit and
loss over the period to maturity at the effective rate of interest
required to recognise the discounted estimated cash flows to
maturity.
1.25 Other provisions
Provisions are recognised when the Group has a present legal or
constructive obligation as a result of past events, it is probable
that an outflow of economic benefits will be required to settle the
obligation, and a reliable estimate of the amount of the obligation
can be made. The amount recorded as a provision is the best
estimate of the expenditure required to settle the obligation at
the balance sheet date. Where the effect of the time value of money
is material, the provision is the present value of the expected
expenditure.
1.26 Taxation
The current tax expense is based on the taxable profits for the
year, using tax rates substantively enacted at the Consolidated
statement of financial position date, and after any adjustments in
respect of prior years. Tax, including tax relief for losses if
applicable, is allocated over profits before taxation and amounts
charged or credited to components of other comprehensive income and
equity as appropriate.
Provision is made for deferred tax liabilities, or credit taken
for deferred tax assets, using the liability method, on all
material temporary differences between the tax bases of assets and
liabilities and their carrying amounts in the consolidated
financial statements. The principal temporary differences arise
from the revaluation of certain financial assets and liabilities,
including technical provisions and other insurance items and tax
losses carried forward, and include amortised transitional tax
adjustments resulting from changes in tax basis.
Deferred tax assets are recognised to the extent that it is
probable that future taxable profit will be available against which
the temporary differences can be utilised.
2 Acquisition of Partnership Assurance Group plc
On 4 April 2016, the Group completed the acquisition of 100% of
the ordinary share capital of Partnership Assurance Group plc (PAG)
through an all share exchange which gave PAG shareholders 0.834
Just Retirement Group plc (JRP) shares for every PAG share held,
with effective control having passed on 1 April 2016. In total,
368,376,421 new JRP shares were issued and commenced trading on 4
April 2016. As a result, PAG shareholders hold approximately 40% of
the enlarged share capital of the Combined Group. At the closing
price of 154.60 pence on
1 April 2016, the share exchange represented consideration of
GBP569.5m. As part of the acquisition certain employee share
schemes granted to PAG employees have been exchanged for equivalent
JRP employee share schemes. The fair value cost of replacing those
schemes, included in the consideration for PAG, was GBP2.4m.
Established in 2005 following the acquisition of the business of
the Pension Annuity Friendly Society, PAG was a UK life insurance
group whose strategy was aligned with that of the Group. PAG was
focused on retirement income products, offering better rates to
customers who suffer from shortened life expectancy by utilising an
intellectual property led, capital-efficient business model.
Following the Pensions Freedom changes announced in the 2014
Budget, PAG increased its focus on the defined benefit scheme
de-risking segment whilst continually developing its individually
underwritten annuities. The acquisition recognises the benefits of
greater scale, enhanced intellectual property, a broader product
proposition and a more efficient distribution platform that will
improve the potential of the Group to succeed in its chosen markets
in the future.
In accordance with the accounting standard on Business
Combinations (IFRS 3), valuations used in acquisition balance
sheets may be refined within one year following the acquisition
date. The fair value of PAG identifiable assets and liabilities
acquired have been determined to have a net value of GBP571.6m,
compared with the initial value of GBP644.7m disclosed in the 30
June 2016 Interim report. When compared with consideration of
GBP571.9m, goodwill of GBP0.3m has arisen on acquisition, as
follows:
Fair value
Assets GBPm
--------------------------------------------------- ----------
Acquired value of in-force business and intangible
assets - before goodwill 169.6
Property, plant and equipment 8.7
Financial investments 5,293.9
Investment in joint ventures and associates 0.2
Reinsurance assets 3,299.5
Deferred tax assets 8.3
Prepayments and accrued income 3.1
Insurance and other receivables 41.5
Cash and cash equivalents 268.6
--------------------------------------------------- ----------
Total assets 9,093.4
--------------------------------------------------- ----------
Liabilities
Insurance liabilities 5,619.8
Loans and borrowings 94.3
Financial liabilities 2,737.2
Deferred tax liabilities 32.5
Current tax liabilities 1.3
--------------------------------------------------- ----------
Insurance and other payables 36.7
--------------------------------------------------- ----------
Total liabilities 8,521.8
--------------------------------------------------- ----------
Net assets 571.6
Goodwill arising on acquisition 0.3
--------------------------------------------------- ----------
Total net assets acquired 571.9
--------------------------------------------------- ----------
Fair value of shares exchanged 569.5
Fair value cost of exchanging employee share
schemes 2.4
--------------------------------------------------- ----------
Total consideration 571.9
--------------------------------------------------- ----------
The issue of new shares in the Company in exchange for shares of
PAG will attract merger relief under section 612 of the Companies
Act 2006. Of the GBP569.5m, GBP36.8m has been credited to share
capital (representing 10 pence per ordinary share) and the
remaining GBP532.7m has been credited to the merger reserve within
equity.
Fair value and accounting policy adjustments
Insurance liabilities and reinsurance assets
On completion of the acquisition, the economic assumptions
applied to the actuarial models used to determine the value of
insurance liabilities and reinsurance assets have been reviewed
across the Group. Following this review, consistent economic and
other assumptions have been applied to all Group entities,
resulting in an increase of GBP37.3m to PAG's insurance liabilities
and an increase of GBP6.2m to PAG's reinsurance assets recognised
on acquisition. Similarly, consistent economic assumptions have
been applied to the models used to determine the fair value of loan
assets secured by mortgages, resulting in an increase of GBP30.7m
to the value of PAG's mortgage loan assets.
Financial liabilities
PAG's subordinated debt liability has been recognised at fair
value on acquisition. The fair value represents a GBP5.8m reduction
to the amortised cost of the debt liability. The methodology
applied to the valuation of reinsurance deposit back liabilities in
Partnership Life Assurance Company Limited has also been reviewed
and a Group accounting basis has been adopted. Together with the
impact of other basis alignments, this resulted in a GBP74.7m
increase in the value of PAG's financial liabilities.
Acquired value of in-force business and intangible assets
An asset of GBP142.7m was recognised on acquisition representing
the present value of future profits from the acquired in-force
business as of 1 April 2016. Future profit streams have been
discounted using a weighted-average cost of capital of 11.1%, which
was determined using a capital asset pricing model (CAPM) approach.
This will be amortised in accordance with the Group's accounting
policies.
Intangible assets of GBP26.9m represent PAG's distribution and
customer relationships, brands, technology and software including
IP, and other intangibles. These balances will be amortised over
their remaining useful economic lives, in accordance with the
Group's accounting policies.
Goodwill arising on acquisition
The acquisition resulted in goodwill of GBP0.3m, representing
the excess of purchase consideration over the fair value of assets
acquired. The acquisition consideration consisted of shares in the
Group exchanged for shares in PAG at a ratio set at the
announcement of the transaction on 11 August 2015.
Profit and loss
If the acquisition had been effective on 1 July 2015, on a pro
forma basis the Group's revenue is estimated at GBP4,368.7m and
profit before tax attributable to shareholders is estimated at
GBP121.2m for the 18 month period ending 31 December 2016. In
determining these amounts, management has assumed that the fair
value adjustments that arose on the date of acquisition would have
been the same if the acquisition occurred on 1 July 2015. The pro
forma results are provided for information purposes only and do not
necessarily reflect the actual results that would have occurred had
the acquisition taken place on 1 July 2015. Since 1 April 2016
GBP363.3m has been recognised within the Group's revenue and
GBP24.0m has been recognised within the Group's profit before tax
attributable to shareholders arising from the acquired
entities.
Acquisition costs of GBP23.4m incurred to support the
transaction have been recognised within other operating expenses in
the statement of comprehensive income.
3 Net investment income
18 months
ended Year ended
31 December 30 June
2016 2015
GBPm GBPm
-------------------------------------------- ------------ ----------
Interest income:
Assets at fair value through profit
or loss 683.1 196.4
Movement in fair value:
Financial assets and liabilities designated
on initial recognition at fair value
through profit and loss 998.7 568.1
Derivative financial instruments (65.2) (129.3)
Other income 0.2 -
-------------------------------------------- ------------ ----------
Total net investment income 1,616.8 635.2
-------------------------------------------- ------------ ----------
4 Acquisition costs
18 months
ended Year ended
31 December 30 June
2016 2015
GBPm GBPm
--------------------------- ------------ ----------
Commission 25.9 10.1
Other acquisition expenses 27.7 8.4
--------------------------- ------------ ----------
Total acquisition costs 53.6 18.5
--------------------------- ------------ ----------
5 Other operating expenses
18 months
ended Year ended
31 December 30 June
2016 2015
GBPm GBPm
-------------------------------------------- ------------ ----------
Personnel expenses (note 10) 138.0 56.6
Investment expenses and charges 9.8 3.7
Depreciation of equipment 2.6 0.5
Operating lease rentals: land and buildings 4.6 1.5
Acquisition integration costs 40.7 -
Acquisition transaction costs 23.4 -
Impairment of intangible assets 3.8 -
Amortisation of intangible assets 24.3 4.2
Other costs 94.3 61.1
-------------------------------------------- ------------ ----------
Total other operating expenses 341.5 127.6
-------------------------------------------- ------------ ----------
During the period the following services were provided by the
Group's auditor at costs as detailed below:
Services provided by Group's auditor
18 months
ended Year ended
31 December 30 June
2016 2015
GBP'000 GBP'000
------------------------------------------ ------------ ----------
Fees payable for the audit of the Parent
Company and consolidated accounts 50 41
Fees payable for other services:
The audit of the Company's subsidiaries
pursuant to legislation 468 313
Corporate finance services 2,425 -
Audit-related assurance services 705 78
Tax compliance services 2 5
Tax advisory services 85 28
Other assurance services 15 178
------------------------------------------ ------------ ----------
Auditor remuneration 3,750 643
------------------------------------------ ------------ ----------
Audit-related assurance services provided
by other firms 77 -
------------------------------------------ ------------ ----------
6 Finance costs
18 months
ended Year ended
31 December 30 June
2016 2015
GBPm GBPm
-------------------------------------- ------------ ----------
Interest payable on deposits received
from reinsurers 208.6 91.8
Interest payable on subordinated debt 11.3 -
Other interest payable 12.8 9.1
-------------------------------------- ------------ ----------
Total finance costs 232.7 100.9
-------------------------------------- ------------ ----------
The interest payable on deposits received from reinsurers is as
defined by the respective reinsurance treaties and calculated with
reference to the risk-adjusted yield on the relevant backing asset
portfolio.
7 Segmental reporting
Adjusted operating profit
The Group reports adjusted operating profit as an alternative
measure of profit which the Group uses for decision making and
performance measurement. The Board believes that adjusted operating
profit, which excludes effects of short-term economic and
investment changes, provides a better view of the longer-term
performance and development of the business and aligns with the
longer-term nature of the products. The underlying operating profit
represents a combination of both the profits generated from new
business written in the period and profits expected to emerge from
the in-force book of business based on current assumptions. Actual
operating experience where different from that assumed at the start
of the period and the impacts of changes to future operating
assumptions applied in the period are then also included in
arriving at adjusted operating profit.
New business profits represent expected investment returns on
financial instruments backing shareholder and policyholder funds
after allowances for expected movements in liabilities and
acquisition costs. Profits arising from the in-force book of
business represent the expected return on surplus assets, the
expected unwind of prudent reserves above best estimates for
mortality, expenses, corporate bond defaults and, with respect to
lifetime mortgages, no-negative guarantee and early
redemptions.
Adjusted operating profit excludes the impairment and
amortisation of goodwill and other intangible assets arising on
consolidation, restructuring costs and other exceptional items.
Exceptional items are those items that, in the Directors' view, are
required to be separately disclosed by virtue of their nature or
incidence to enable a full understanding of the Group's financial
performance.
Variances between actual and expected investment returns due to
economic and market changes are also disclosed outside adjusted
operating profit.
Segmental analysis
The Insurance segment writes insurance products for the
retirement market - which include Guaranteed Income for Life
Solutions and Defined Benefit De-risking Solutions, Care Plans,
Flexible Pension Plan and Protection - and invests the premiums
received from these contracts in debt securities, gilts, liquidity
funds and lifetime mortgage advances. From a management reporting
perspective, these are managed together, with LTM being an integral
part of the insurance business model.
The professional services business is included with other
corporate companies in the Other segment. This business is not
currently sufficiently significant to separate from other
companies' results and the CODM does not separately consider its
results at present. The Other segment also includes the Group's
corporate activities that are primarily involved in managing the
Group's liquidity, capital and investment activities.
The Group operates in one material geographical segment which is
the United Kingdom.
Segmental reporting and reconciliation to financial
information
Insurance Other Total
18 months ended 31 December 2016 GBPm GBPm GBPm
-------------------------------------------------------------------------------- --------- ------ ------
New business operating profit 171.7 - 171.7
In-force operating profit 88.2 1.1 89.3
-------------------------------------------------------------------------------- --------- ------ ------
Underlying operating profit 259.9 1.1 261.0
Operating experience and assumption changes 2.5 - 2.5
Other Group companies' operating results - (18.4) (18.4)
Reinsurance and financing costs (52.0) 22.6 (29.4)
-------------------------------------------------------------------------------- --------- ------ ------
Adjusted operating profit before tax 210.4 5.3 215.7
Non-recurring and project expenditure (18.4) (2.7) (21.1)
Investment and economic profits/(losses) 95.7 (2.6) 93.1
-------------------------------------------------------------------------------- --------- ------ ------
Profit/(loss) before acquisition transaction and amortisation costs, before tax 287.7 - 287.7
Acquisition integration costs - (40.7) (40.7)
Acquisition transaction costs - (23.4) (23.4)
Impairment of intangible assets - (3.8) (3.8)
Amortisation costs - (21.0) (21.0)
-------------------------------------------------------------------------------- --------- ------ ------
Profit/(loss) before tax 287.7 (88.9) 198.8
-------------------------------------------------------------------------------- --------- ------ ------
Insurance Other Total
Year ended 30 June 2015 GBPm GBPm GBPm
----------------------------------------- --------- ----- ------
New business operating profit 36.8 - 36.8
In-force operating profit 48.8 0.8 49.6
----------------------------------------- --------- ----- ------
Underlying operating profit 85.6 0.8 86.4
Operating experience and assumption
changes 2.4 - 2.4
Other Group companies' operating
result - (8.7) (8.7)
Reinsurance and financing costs (28.7) 16.2 (12.5)
----------------------------------------- --------- ----- ------
Adjusted operating profit before
tax 59.3 8.3 67.6
Non-recurring and project expenditure (16.8) (2.6) (19.4)
Investment and economic (losses)/profits (74.2) 0.1 (74.1)
----------------------------------------- --------- ----- ------
(Loss)/profit before amortisation
costs and before tax (31.7) 5.8 (25.9)
Amortisation costs - (3.7) (3.7)
----------------------------------------- --------- ----- ------
(Loss)/profit before tax (31.7) 2.1 (29.6)
----------------------------------------- --------- ----- ------
Product information analysis
Additional analysis relating to the Group's products is
presented below. The Group's products are from one material
geographical segment which is the UK. The Group's gross premiums
written, as shown in the Consolidated statement of comprehensive
income, is analysed by product below:
18 months ended Year ended
31 December 2016 30 June 2015
GBPm GBPm
---------------------------------------------- ----------------- --------------
Defined Benefit De-risking Solutions ("DB") 1,644.6 608.9
Guaranteed Income for Life contracts ("GIfL") 949.2 478.0
Care Plans ("CP") 97.1 12.1
Protection 2.6 -
---------------------------------------------- ----------------- --------------
Gross premiums written 2,693.5 1,099.0
---------------------------------------------- ----------------- --------------
Drawdown and LTM products are accounted for as investment
contracts and financial investments respectively in the statement
of financial position. An analysis of the amounts advanced during
the period for these products is shown below:
18 months
ended Year ended
31 December 30 June
2016 2015
GBPm GBPm
----------------------------------------- ------------ ----------
Drawdown 32.4 48.7
LTM loans advanced 729.8 308.1
----------------------------------------- ------------ ----------
New business sales not included in gross
premiums written 762.2 356.8
----------------------------------------- ------------ ----------
Reconciliation of gross premiums written to new business
sales
18 months
ended Year ended
31 December 30 June
2016 2015
GBPm GBPm
------------------------------------------- ------------ ----------
Gross premiums written 2,693.5 1,099.0
Change in premiums receivable not included
in new business sales* 24.9 -
Drawdown and LTM new business sales not
included in gross premiums written 762.2 356.8
------------------------------------------- ------------ ----------
New business sales 3,480.6 1,455.8
------------------------------------------- ------------ ----------
* Premiums on insurance contracts are recognised when the
contract becomes effective in accordance with the terms of the
contract. For certain contracts written by Partnership Assurance
Company Limited ("PLACL"), this is when the contract is issued and
completion may be later if the timing of payment differs. PLACL
contracts where payment has not been received in the reporting
period are excluded from new business sales.
8 Income tax
18 months
ended Year ended
31 December 30 June
2016 2015
GBPm GBPm
---------------------------------------- ----------- ----------
Current taxation
Current year 54.0 (13.1)
Adjustments in respect of prior periods 14.0 0.1
---------------------------------------- ----------- ----------
Total current tax 68.0 (13.0)
Deferred taxation
Origination and reversal of temporary
differences (3.0) 8.2
Adjustments in respect of prior periods (12.1) -
Rate change (1.6) -
---------------------------------------- ----------- ----------
Total deferred tax (16.7) 8.2
---------------------------------------- ----------- ----------
Total income tax 51.3 (4.8)
---------------------------------------- ----------- ----------
The current taxation adjustment in respect of prior period of
GBP14.0m relates to losses previously treated as available for
group relief in 2015 which have been utilised against 2016 taxable
profits instead when calculating the GBP54.0m charge for the
period. Similarly the deferred tax adjustment in respect of prior
period reflects the recognition of the tax loss carried forward
into the current reporting period.
Reconciliation of total income tax to the applicable tax
rate:
18 months ended Year ended
31 December 2016 30 June 2015
GBPm GBPm
------------------------------------------------ ----------------- -------------
Profit/(loss) on ordinary activities before tax 198.8 (29.6)
------------------------------------------------ ----------------- -------------
Income tax at 20.00% (2015: 20.75%) 39.8 (6.1)
Effects of:
Expenses not deductible for tax purposes 11.8 1.7
Rate change (1.6) -
Higher rate for overseas income - (0.1)
Unrecognised deferred tax asset 0.4 0.3
Losses utilised 0.7 -
Adjustments in respect of prior periods 1.9 0.1
Other (1.7) (0.7)
------------------------------------------------ ----------------- -------------
Total income tax 51.3 (4.8)
------------------------------------------------ ----------------- -------------
Reductions in the corporation tax rate from 20% to 19%
(effective from 1 April 2017) and 18% (effective from 1 April 2020)
were substantively enacted on 26 March 2016. In the Budget on 16
March 2016, the Chancellor announced a further reduction to the
corporation tax rate to 17% (effective from 1 April 2020) which was
substantively enacted on 15 September 2016. This will reduce the
Group's future current tax charge accordingly, although there will
be no material effect.
The deferred tax assets and liabilities at 31 December 2016 have
been calculated based on the rate at which they are expected to
reverse.
Taxation of life insurance companies was fundamentally changed
following the publication of the Finance Act 2012. Since 1 January
2013, life insurance tax has been based on financial statements;
prior to this date, the basis for profits chargeable to corporation
tax was surplus arising within the Pillar 1 regulatory regime.
Cumulative differences arising between the two bases, which
represent the differences in retained profits and taxable surplus
which are not excluded items for taxation, are brought back into
the computation of taxable profits. However, legislation provides
for transitional arrangements whereby such differences are
amortised on a straight-line basis over a ten year period from 1
January 2013.
Similarly, the resulting cumulative transitional adjustments for
tax purposes in adoption of IFRS will be amortised on a
straight-line basis over a ten year period from 1 January 2016.
The tax charge for the period to 31 December 2016 includes
profits chargeable to corporation tax arising from amortisation of
transitional balances of GBP10.1m (2015: GBP(3.0)m).
9 Remuneration of Directors
Information concerning individual Directors' emoluments,
interests and transactions is given in the Directors' Remuneration
Report. For the purposes of the disclosure required by Schedule 5
to the Companies Act 2006, the total aggregate emoluments of the
Directors in respect of the 18 months ended 31 December 2016 was
GBP6.7m (2015: GBP3.4m). Employer contributions to pensions for
Executive Directors for qualifying periods were GBPnil (2015:
GBPnil). The aggregate net value of share awards granted to the
Directors in the period was GBP5.6m (2015: GBP2.6m). The net value
has been calculated by reference to the closing middle-market price
of an ordinary share at the date of grant. No Directors exercised
share options during the period whilst a Director of the
Company.
10 Staff numbers and costs
The average number of persons employed by the Group (including
Directors) during the financial period, analysed by category, was
as follows:
18 months ended Year ended
31 December
2016 30 June 2015
Number Number
------------------------ --------------- ------------
Directors 13 9
Senior management 136 68
Staff 1,041 692
------------------------ --------------- ------------
Average number of staff 1,190 769
------------------------ --------------- ------------
The aggregate personnel costs were as follows:
18 months ended Year ended
31 December
2016 30 June 2015
GBPm GBPm
---------------------------- --------------- ------------
Wages and salaries 106.3 46.7
Social security costs 11.6 5.0
Other pension costs 5.2 1.6
Share-based payment expense 14.9 3.3
---------------------------- --------------- ------------
Total personnel costs 138.0 56.6
---------------------------- --------------- ------------
The Company does not have any employees.
11 Employee benefits
Defined contribution pension scheme
The Group operates a defined contribution pension scheme. The
pension cost charge for the period represents contributions payable
to the fund and amounted to GBP5.2m (2015: GBP1.6m).
Employee share plans
The Group operates a number of employee share option and share
award plans. Details of those plans are as follows:
Share Options
Just Retirement Group plc 2013 Long Term Incentive Plan
("LTIP")
The Group has made awards under the LTIP to Executive Directors
and other senior managers. Awards are made in the form of nil-cost
options which become exercisable on the third anniversary of the
grant date, subject to the satisfaction of service and performance
conditions set out in the Directors' Remuneration Report. Options
are exercisable until the tenth anniversary of the grant date.
The options are accounted for as equity-settled schemes.
The number and weighted-average remaining contractual life of
outstanding options under the LTIP are as follows:
18 months ended Year ended 30
31 December 2016 June 2015
Number of Number of
options options
-------------------------------------------------------- ---------------- -------------
Outstanding at start of period 7,708,723 2,994,265
On acquisition of Partnership Assurance Group plc (PAG) 6,312,856 -
Granted 10,179,879 4,816,871
Forfeited (1,628,885) (102,413)
Exercised (592,801) -
Expired (4,822,608) -
-------------------------------------------------------- ---------------- -------------
Outstanding at end of period 17,157,164 7,708,723
Exercisable at the end of period 1,173,184 -
Weighted-average share price at exercise (GBP) 1.38 -
Weighted-average remaining contractual life (years) 1.68 1.91
-------------------------------------------------------- ---------------- -------------
Options arising on the acquisition of PAG relate to options
awarded to PAG employees in 2014 and 2015 which the Group has
replaced with options over shares in JRP Group plc in the same
ratio as the share exchange which achieved the acquisition of PAG.
The replacement options for the 2014 PAG options were subject to
achieving a Total Shareholder Return of JRP relative to the
constituents of a relevant comparator index or peer group, but to
vest on 31 December 2016. The performance conditions were not
achieved and all options lapsed in the period. Of the replacement
options for the 2015 PAG options, 20% are free awards which vested
on 31 December 2016, 40% are subject to an adjusted operating
profit growth measure which are due to vest on 11 August 2018, and
40% are subject to the Total Shareholder Return performance which
are also due to vest on 11 August 2018.
Options granted in the period include 83,596 additional options
in respect of modifications to options awarded in 2013 and 2014 to
ensure option holders were not adversely affected by the Group's
placing and open offer to shareholders in October 2015. There is no
change to the fair value of the options as a result of these
modifications
The exercise price for options granted under the LTIP is
nil.
During the period to 31 December 2016, awards of LTIPs were made
on 6 November 2015, 21 April 2016, 16 May 2016 and 28 September
2016. The weighted-average fair value and assumptions used to
determine the fair value of options granted during the period under
the LTIP are as follows:
Fair value at grant date GBP1.17
Option pricing model used - adjusted operating
profit performance Black-Scholes
Option pricing model used - TSR performance Stochastic
Share price at grant date GBP1.37
Exercise price Nil
Expected volatility(1) 40%
Option life 3 years
Dividends Nil
Risk-free interest rate 0.58%
----------------------------------------------- -------------
(1) For the November 2015 awards, a proxy volatility based on
the average volatility of ten UK listed insurance companies,
measured over the historic period commensurate with the performance
period, has been used. For the 2016 awards actual historic
volatility has been used.
Deferred share bonus plan ("DSBP")
The DSBP is operated in conjunction with the Group's short-term
incentive plan for Executive Directors and other senior managers of
the Company or any of its subsidiaries, as explained in the
Directors' remuneration report. Awards are made in the form of
nil-cost options which become exercisable on the third anniversary,
and until the tenth anniversary, of the grant date.
The options are accounted for as equity-settled schemes.
The number and weighted-average remaining contractual life of
outstanding options under the DSBP are as follows:
18 months ended Year ended
31 December 2016 30 June 2015
Number of options Number of options
-------------------------------------------------------- ----------------- -----------------
Outstanding at start of period 447,916 -
On acquisition of Partnership Assurance Group plc (PAG) 1,288,376 -
Granted 2,115,578 447,916
Forfeited - -
Exercised (1,594,326) -
Expired - -
-------------------------------------------------------- ----------------- -----------------
Outstanding at end of period 2,257,544 447,916
Exercisable at end of period - -
Weighted-average share price at exercise (GBP) 1.48 -
Weighted-average remaining contractual life (years) 1.85 2.24
-------------------------------------------------------- ----------------- -----------------
Options arising on the acquisition of PAG relate to options made
to PAG employees in 2014 and 2015 which the Group has replaced with
options over shares in JRP Group plc in the same ratio as the share
exchange which achieved the acquisition of PAG. All options vested
in full on completion of the acquisition and all options were
exercised in the period.
Options granted in the period include 4,894 additional options
in respect of a modification to options awarded in 2014 to ensure
option holders were not adversely affected by the Group's placing
and open offer to shareholders in October 2015. There is no change
to the fair value of the options as a result of this
modification.
The exercise price for options granted under the DSBP is
nil.
During the period to 31 December 2016, awards of DSBPs were made
on 6 November 2015 and 21 April 2016. The weighted-average fair
value and assumptions used to determine the fair value of options
granted during the period under the DSBP are as follows:
Fair value at grant date GBP1.48
Option pricing model used Black-Scholes
Share price at grant date GBP1.48
Exercise price Nil
Expected volatility Nil
Option life 3 years
Dividends Nil
Risk-free interest rate Nil
------------------------- -------------
Save As You Earn ("SAYE") scheme
The Group operates SAYE plans for all employees, allowing a
monthly amount to be saved from salaries over either a three year
or five year period which can be used to purchase shares in the
Company at a predetermined price. The employee must remain in
employment for the duration of the saving period and satisfy the
monthly savings requirement (except in "good leaver"
circumstances). Options are exercisable for up to six months after
the saving period. There were no options granted under the SAYE in
the period to 31 December 2016.
The options are accounted for as equity-settled schemes.
The number, weighted-average exercise price, weighted-average
share price at exercise, and weighted-average remaining contractual
life of outstanding options under the SAYE are as follows:
18 months ended Year ended
31 December 2016 30 June 2015
-------------------- --------------------
Weighted- Weighted-
average average
Number exercise Number exercise
of price of price
options (GBP) options (GBP)
------------------------------- --------- --------- --------- ---------
Outstanding at start of period 4,390,881 1.22 4,192,332 1.21
On acquisition of Partnership
Assurance Group plc (PAG) 1,321,179 1.21 - -
Granted 46,875 1.21 792,683 1.28
Forfeited (692,407) 1.22 (346,340) 1.21
Cancelled (104,190) 1.26 (193,468) 1.21
Exercised (139,623) 1.15 (33,636) 1.21
Expired (18,568) 1.22 (20,690) 1.21
------------------------------- --------- --------- --------- ---------
Outstanding at end of period 4,804,147 1.21 4,390,881 1.22
Exercisable at end of period 150,717 1.23 4,545 1.21
Weighted-average share price
at exercise 1.43 1.44
Weighted-average remaining
contractual life (years) 1.42 2.56
------------------------------- --------- --------- --------- ---------
Options arising on the acquisition of PAG relate to options made
to PAG employees in 2014 and 2015, which the Group has replaced
with options over shares in JRP Group plc in the same ratio as the
share exchange which achieved the acquisition of PAG. The exercise
price of the original options were also adjusted from GBP0.94 to
GBP1.13 for the 2014 options and from GBP1.23 to GBP1.47 for the
2015 options.
Options granted in the period include 46,875 additional options
in respect of modifications to options awarded in 2014 and 2015 to
ensure option holders were not adversely affected by the Group's
placing and open offer to shareholders in October 2015. The
exercise prices were also adjusted by the same ratio, from GBP1.21
to GBP1.20 for the 2014 options and from GBP1.28 to GBP1.27 for the
2015 options. There is no change to the fair value of the options
as a result of these modifications.
The range of exercise prices of options outstanding at the end
of the period are as follows:
2016 2015
Number Number
of options of options
outstanding outstanding
-------- ------------ ------------
GBP1.13 667,993 -
GBP1.20 3,260,855 3,598,198
GBP1.27 683,202 792,683
GBP1.47 192,097 -
-------- ------------ ------------
Total 4,804,147 4,390,881
-------- ------------ ------------
Share Awards
Share incentive plan ("SIP")
The SIP is an "all-employee" share ownership plan. The Group
made an award of 831,070 free shares immediately after admission to
all eligible employees. The shares are held in trust on behalf of
the employees. The shares are forfeited if the employees cease
employment (except in "good leaver" circumstances) within the first
three years from the date of the award. The awards vested on 11
November 2016.
On the acquisition of PAG, shares held in trust in respect of
SIP awards were converted to JRP shares in the same ratio as the
share exchange which achieved the acquisition of PAG. The awards
vested on 12 June 2016.
Awards made in the period are in respect of additional shares to
existing scheme participants on payment of dividends by the Group.
The weighted-average fair value of awards made in the year was
GBP26,748 measured by reference to the quoted share price of the
Company at grant date.
Share-based payment expense
The share-based payment expense recognised in the Consolidated
statement of comprehensive income for employee services receivable
during the period is as follows:
18 months
ended Year ended
31 December 30 June
2016 2015
GBPm GBPm
----------------------- ------------ ----------
Equity-settled schemes 14.9 3.3
----------------------- ------------ ----------
Total expense 14.9 3.3
----------------------- ------------ ----------
12 Earnings per share
The calculation of basic and diluted earnings per share is based
on dividing the profit or loss attributable to equity holders of
the Company by the weighted-average number of ordinary shares
outstanding and by the diluted weighted-average number of ordinary
shares potentially outstanding at the end of the period, calculated
as follows:
18 months ended Year ended 30
31 December 2016 June 2015
------------------------------ ----------------------------
Weighted Weighted
average average
number number Earnings
of Earnings of per
Earnings shares per share Earnings shares share
GBPm million pence GBPm million pence
----------------------------- -------- -------- ---------- -------- -------- --------
Basic 147.5 731.6 20.16 (24.8) 499.7 (4.96)
----------------------------- -------- -------- ---------- -------- -------- --------
Effect of dilutive potential
ordinary shares:
Share options - 5.3 (0.14) - - -
----------------------------- -------- -------- ---------- -------- -------- --------
Diluted 147.5 736.9 20.02 (24.8) 499.7 (4.96)
----------------------------- -------- -------- ---------- -------- -------- --------
13 Dividends
Dividends paid in the year were as follows:
18 Months ended Year ended
31 December 2016 30 June 2015
GBPm GBPm
---------------------------------------------------------------------------------- ----------------- -------------
Final dividend:
- in respect of the year ended 30 June 2015 - 2.2 pence per share, paid on 7
December 2015 12.4 -
- in respect of the year ended 30 June 2014 - 2.2 pence per share, paid on 8
December 2014 - 11.0
Interim dividend:
- first interim dividend in respect of the 18 month period ended 31 December 2016
- 1.1 pence
per share, paid on 20 May 2016 10.2 -
- second interim dividend in respect of the 18 month period ended 31 December 2016
- 1.1 pence
per share, paid on 28 October 2016 10.3 -
- in respect of the year ended 30 June 2015 - 1.1 pence per share, paid on 14 May
2015 - 5.5
---------------------------------------------------------------------------------- ----------------- -------------
Total dividends paid 32.9 16.5
---------------------------------------------------------------------------------- ----------------- -------------
Subsequent to 31 December 2016, the Directors proposed a final
dividend for 2016 of 2.4 pence per ordinary share (2015: 2.2p),
amounting to GBP22.4 million (2015: GBP12.4m) in total. Subject to
approval by shareholders at the AGM, the dividend will be paid on
26 May 2017 and will be accounted for as an appropriation of
retained earnings in the year ending 31 December 2017.
14 Intangible assets
Present
value PrognoSys(TM)
of and other
in-force Distribution intellectual
31 December Goodwill business network Brand property Software Leases Total
2016 GBPm GBPm GBPm GBPm GBPm GBPm GBPm GBPm
------------------ -------- --------- ------------ ----- ------------- -------- ------ ------
Cost
Balance at 1
July 2015 33.6 57.3 16.6 1.6 5.4 14.8 - 129.3
Additions arising
on acquisition
of Partnership
Assurance Group
plc 0.3 142.7 10.0 4.0 2.0 8.9 2.0 169.9
------------------ -------- --------- ------------ ----- ------------- -------- ------ ------
At 31 December
2016 33.9 200.0 26.6 5.6 7.4 23.7 2.0 299.2
------------------ -------- --------- ------------ ----- ------------- -------- ------ ------
Amortisation
and impairment
Balance at 1
July 2015 (0.8) (20.0) (16.6) (1.6) (0.5) (14.6) - (54.1)
Charge for the
year - (16.1) (2.5) (1.5) (0.7) (2.8) (0.7) (24.3)
Impairment - - - (2.5) - - (1.3) (3.8)
------------------ -------- --------- ------------ ----- ------------- -------- ------ ------
At 31 December
2016 (0.8) (36.1) (19.1) (5.6) (1.2) (17.4) (2.0) (82.2)
------------------ -------- --------- ------------ ----- ------------- -------- ------ ------
Net book value
at 31 December
2016 33.1 163.9 7.5 - 6.2 6.3 - 217.0
------------------ -------- --------- ------------ ----- ------------- -------- ------ ------
Net book value
at 30 June 2015 32.8 37.3 - - 4.9 0.2 - 75.2
------------------ -------- --------- ------------ ----- ------------- -------- ------ ------
Present
value
of
in-force Distribution
Goodwill business network Brand PrognoSys(TM) Software Leases Total
30 June 2015 GBPm GBPm GBPm GBPm GBPm GBPm GBPm GBPm
------------------ -------- --------- ------------ ----- ------------- -------- ------ ------
Cost
Balance at 1
Jul 2014 33.6 57.3 16.6 1.6 3.6 14.8 - 127.5
Additions arising
from internal
development - - - - 1.8 - - 1.8
At 30 June 2015 33.6 57.3 16.6 1.6 5.4 14.8 - 129.3
------------------ -------- --------- ------------ ----- ------------- -------- ------ ------
Amortisation
and impairment
Balance at 1
Jul 2014 (0.8) (16.4) (16.6) (1.5) (0.4) (14.2) - (49.9)
Charge for the
year - (3.6) - (0.1) (0.1) (0.4) - (4.2)
------------------ -------- --------- ------------ ----- ------------- -------- ------ ------
At 30 June 2015 (0.8) (20.0) (16.6) (1.6) (0.5) (14.6) - (54.1)
------------------ -------- --------- ------------ ----- ------------- -------- ------ ------
Net book value
at 30 June 2015 32.8 37.3 - - 4.9 0.2 - 75.2
------------------ -------- --------- ------------ ----- ------------- -------- ------ ------
Net book value
at 30 June 2014 32.8 40.9 - 0.1 3.2 0.6 - 77.6
------------------ -------- --------- ------------ ----- ------------- -------- ------ ------
Amortisation and impairment charge
The amortisation and impairment charge is recognised in other
operating expenses in profit or loss. The fair value attributed to
the Partnership brand has been impaired following the adoption of
the Just brand. The lease intangible asset has been impaired as a
result of the rationalisation of office space.
Impairment testing
Goodwill is tested for impairment in accordance with IAS 36,
Impairment of assets, at least annually.
The Group's goodwill of GBP33.1m at 31 December 2016 represents
GBP0.3m recognised in the period on the acquisition of the
Partnership Assurance Group and GBP32.8m on the 2009 acquisition by
Just Retirement Group Holdings Limited of Just Retirement
(Holdings) Limited, the holding company of Just Retirement Limited
(JRL).
The existing goodwill has been allocated to the insurance
segment as the cash generating unit. The recoverable amounts of
goodwill have been determined from value-in-use. The key
assumptions of this calculation are noted below:
2016 2015
---------------------------------------------- ------- -------
Period on which management approved forecasts 5 years 5 years
are based
Discount rate (pre-tax) 12.0% 12.0%
---------------------------------------------- ------- -------
The value-in-use of the insurance operating segment is
considered by reference to latest business plans over the next five
years, and a stressed scenario that assumes no growth in sales for
the next five years and discount rate of 20%. The outcome of the
impairment assessment under both scenarios is that the goodwill in
respect of the insurance operating segment is not impaired and that
the value-in-use is higher than the carrying value of goodwill.
Any reasonably possible changes in assumption will not cause the
carrying value of the goodwill to exceed the recoverable
amounts.
15 Property, plant and equipment
Freehold
land and Computer Furniture
buildings equipment and fittings Total
31 December 2016 GBPm GBPm GBPm GBPm
-------------------------------------------------------------------- ---------- ---------- ------------- -----
Cost
Balance at 1 July 2015 - 3.9 2.8 6.7
Acquired during the year 9.7 0.5 0.1 10.3
Additions arising on acquisition of Partnership Assurance Group plc - 1.1 7.6 8.7
-------------------------------------------------------------------- ---------- ---------- ------------- -----
At 31 December 2016 9.7 5.5 10.5 25.7
-------------------------------------------------------------------- ---------- ---------- ------------- -----
Depreciation
Balance at 1 July 2015 - (3.2) (2.8) (6.0)
Charge for the year (0.3) (1.4) (0.9) (2.6)
-------------------------------------------------------------------- ---------- ---------- ------------- -----
At 31 December 2016 (0.3) (4.6) (3.7) (8.6)
-------------------------------------------------------------------- ---------- ---------- ------------- -----
Net book value at 31 December 2016 9.4 0.9 6.8 17.1
-------------------------------------------------------------------- ---------- ---------- ------------- -----
Net book value at 30 June 2015 - 0.7 - 0.7
-------------------------------------------------------------------- ---------- ---------- ------------- -----
Computer Furniture and
equipment fittings Total
30 June 2015 GBPm GBPm GBPm
---------- ------------- -----
Cost
Balance at 1 July 2014 3.7 2.8 6.5
Acquired during the year 0.2 - 0.2
At 30 June 2015 3.9 2.8 6.7
Depreciation
Balance at 1 July 2014 (2.7) (2.8) (5.5)
Charge for the year (0.5) - (0.5)
-------------------------------------------------------------------- ---------- ---------- ------------- -----
At 30 June 2015 (3.2) (2.8) (6.0)
-------------------------------------------------------------------- ---------- ---------- ------------- -----
Net book value at 30 June 2015 0.7 - 0.7
-------------------------------------------------------------------- ---------- ---------- ------------- -----
Net book value at 30 June 2014 1.0 - 1.0
-------------------------------------------------------------------- ---------- ---------- ------------- -----
Included in Freehold land and buildings is land of value GBP3.6m
(2015: GBPnil).
16 Financial investments
This note explains the methodology for valuing the Group's
financial assets and liabilities measured at fair value, including
financial investments, and provides disclosures in accordance with
IFRS 13, Fair value measurement, including an analysis of such
assets and liabilities categorised in a fair value hierarchy based
on market observability of valuation inputs.
All of the Group's financial investments are measured at fair
value through profit or loss, and are either designated as such on
initial recognition or, in the case of derivative financial assets,
classified as held for trading.
The fair value of debt securities includes accrued interest
previously classified as prepayments and accrued income on the
statement of financial position. As a result of this change in
presentation, GBP83.0m of accrued interest has been reclassified
from prepayments and accrued income at 30 June 2015.
31 December 30 June
2016 2015
GBPm GBPm
------------------------------------------------------------ ----------- -------
Fair value
Units in liquidity funds 572.3 280.2
Debt securities and other fixed income securities 9,751.9 4,756.8
Deposits with credit institutions 73.2 18.0
Derivative financial assets 107.0 50.9
Loans secured by residential mortgages 6,430.4 3,471.8
Loans secured by commercial mortgages 163.8 -
Other loans 192.5 -
Amounts recoverable from reinsurers on investment contracts 28.5 -
------------------------------------------------------------ ----------- -------
Total fair value 17,319.6 8,577.7
------------------------------------------------------------ ----------- -------
31 December 30 June
2016 2015
GBPm GBPm
------------------------------------------------------------ ----------- -------
Cost
Units in liquidity funds 572.3 279.9
Debt securities and other fixed income securities 8,907.6 4,536.2
Deposits with credit institutions 73.2 18.0
Derivative financial assets - 8.2
Loans secured by residential mortgages 3,927.5 2,073.3
Loans secured by commercial mortgages 159.0 -
Other loans 160.9 -
Amounts recoverable from reinsurers on investment contracts 29.1 -
------------------------------------------------------------ ----------- -------
Total cost 13,829.6 6,915.6
------------------------------------------------------------ ----------- -------
The majority of investments included in debt securities and
other fixed income securities are listed investments.
Units in liquidity funds comprise wholly of units in funds which
invest in cash and cash equivalents.
Deposits with credit institutions with a carrying value of
GBP71.0m (30 June 2015: GBP17.2m) have been pledged as collateral
in respect of the Group's derivative financial instruments. Amounts
pledged as collateral are deposited with the derivative
counterparty.
(a) Determination of fair value and fair value hierarchy
All assets and liabilities for which fair value is measured or
disclosed in the financial statements are categorised within the
fair value hierarchy described as follows, based on the lowest
level input that is significant to the fair value measurement as a
whole.
Level 1
Inputs to Level 1 fair values are unadjusted quoted prices in
active markets for identical assets and liabilities that the entity
can access at the measurement date.
Level 2
Inputs to Level 2 fair values are inputs other than quoted
prices included within Level 1 that are observable for the asset or
liability, either directly or indirectly. If the asset or liability
has a specified (contractual) term, a Level 2 input must be
observable for substantially the full term of the instrument. Level
2 inputs include the following:
-- Quoted prices for similar assets and liabilities in active markets;
-- Quoted prices for identical assets or similar assets in
markets that are not active, the prices are not current, or price
quotations vary substantially either over time or among market
makers, or in which very little information is released
publicly;
-- Inputs other than quoted prices that are observable for the asset or liability; and
-- Market-corroborated inputs.
Where the Group uses broker/asset manager quotes and no
information as to observability of inputs is provided by the
broker/asset manager, the investments are classified as
follows:
-- Where the broker/asset manager price is validated by using
internal models with market-observable inputs and the values are
similar, the investment is classified as Level 2; and
-- In circumstances where internal models are not used to
validate broker/asset manager prices, or the observability of
inputs used by brokers/asset managers is unavailable, the
investment is classified as Level 3.
The majority of the Group's debt securities held at fair value
and financial derivatives are valued using independent pricing
services or third party broker quotes, and therefore classified as
Level 2.
Level 3
Inputs to Level 3 fair values are unobservable inputs for the
asset or liability. Unobservable inputs may have been used to
measure fair value to the extent that observable inputs are not
available, thereby allowing for situations in which there is
little, if any, market activity for the asset or liability at the
measurement date. However, the fair value measurement objective
remains the same, i.e. an exit price at the measurement date from
the perspective of a market participant that holds the asset or
owes the liability. Unobservable inputs reflect the same
assumptions as those that the market participant would use in
pricing the asset or liability.
The Group's assets and liabilities held at fair value which are
valued using valuation techniques for which significant observable
market data is not available and classified as Level 3 include
loans secured by mortgages, asset-backed securities, and investment
contract liabilities.
The valuation of loans secured by mortgages is determined using
internal models which project future cash flows expected to arise
from each loan. Future cash flows allow for assumptions relating to
future expenses, future mortality experience, costs arising from
no-negative equity guarantees and voluntary redemptions. The fair
value is calculated by discounting the future cash flows at a swap
rate plus a liquidity premium.
During the prior year the internal model used to value the loans
secured by residential mortgages was recalibrated in respect of the
liquidity premium added to the swap rate. Previously the liquidity
premium was considered to be unobservable and was therefore set at
zero. This gave rise to a day-one gain which was deferred and
recognised over the expected life of the loan.
The recalibration process reassessed the level of the liquidity
premium and this is now considered to be an observable input to the
internal model. As a result of the recalibration, a day- one gain
no longer arises, and profit is recognised over the term of the
contract. There is no longer any aggregate difference yet to be
recognised in profit or loss between the fair value of the
mortgages at initial recognition and the amount that would have
been determined at that date using the valuation technique.
The Level 3 bonds are mainly infrastructure private placement
bonds or asset-backed securities. Such securities are valued using
discounted cash flow analyses using prudent assumptions based on
the repayment of the underlying bond.
The level 3 Other loans are infrastructure-related loans, and
are valued using discounted cash flow analyses using prudent
assumptions based on the repayment of the underlying loan.
Investment contract liabilities are calculated on a policy-by-
policy basis using a prospective valuation of future retirement
income benefits and expense cash flows, but with an adjustment to
amortise any day-one gain over the life of the contract.
There are no non-recurring fair value measurements as at 31
December 2016 (30 June 2015: nil).
(b) Analysis of assets and liabilities held at fair value
according to fair value hierarchy
Level 1 Level 2 Level 3 Total
------------------------------------------------------
31 December 2016 GBPm GBPm GBPm GBPm
------------------------------------------------------ ------- ------- ------- --------
Assets held at fair value
Units in liquidity funds 572.3 - - 572.3
Debt securities and other fixed income securities 645.2 8,927.7 179.0 9,751.9
Deposits with credit institutions 71.0 2.2 - 73.2
Derivative financial assets - 107.0 - 107.0
Loans secured by residential mortgages - - 6,430.4 6,430.4
Loans secured by commercial mortgages - - 163.8 163.8
Other loans - 3.8 188.7 192.5
Recoveries from reinsurers on investment contracts - - 28.5 28.5
------------------------------------------------------ ------- ------- ------- --------
Total assets held at fair value 1,288.5 9,040.7 6,990.4 17,319.6
------------------------------------------------------ ------- ------- ------- --------
Liabilities held at fair value
Investment contract liabilities - - 222.3 222.3
Derivative financial liabilities - 189.3 - 189.3
Obligations for repayment of cash collateral received 21.6 30.5 - 52.1
Deposits received from reinsurers - - 2,741.1 2,741.1
------------------------------------------------------ ------- ------- ------- --------
Total liabilities held at fair value 21.6 219.8 2,963.4 3,204.8
------------------------------------------------------ ------- ------- ------- --------
30 June 2015 Level 1 Level 2 Level 3 Total
------------------------------------------------------
GBPm GBPm GBPm GBPm
------------------------------------------------------ ------- ------- ------- --------
Assets held at fair value
Units in liquidity funds 280.2 - - 280.2
Debt securities and other fixed income securities 717.0 4,021.0 18.8 4,756.8
Deposits with credit institutions 17.2 0.8 - 18.0
Derivative financial assets - 50.9 - 50.9
Loans secured by residential mortgages - - 3,471.8 3,471.8
------------------------------------------------------ ------- ------- ------- --------
Total assets held at fair value 1,014.4 4,072.7 3,490.6 8,577.7
------------------------------------------------------ ------- ------- ------- --------
Liabilities held at fair value
Investment contract liabilities - - 228.3 228.3
Derivative financial liabilities - 74.3 - 74.3
Obligations for repayment of cash collateral received 18.6 - - 18.6
------------------------------------------------------ ------- ------- ------- --------
Total liabilities held at fair value 18.6 74.3 228.3 321.2
------------------------------------------------------ ------- ------- ------- --------
(c) Transfers between levels
The Group's policy is to assess pricing source changes and
determine transfers between levels as of the end of each
half-yearly reporting period. During the period there were no
transfers between Level 1 and Level 2. The transfer from Level 2 to
Level 3 followed a change in the availability of market prices for
specific bonds.
(d) Level 3 assets and liabilities measured at fair value
Reconciliation of the opening and closing recorded amount of
Level 3 assets and liabilities held at fair value.
Debt Recoveries
securities from
and other Loans Loans reinsurers Deposits
fixed secured by secured by on Investment received
income residential commercial investment contract from
18 months ended 31 December securities mortgages mortgages Other loans contracts liabilities reinsurers
2016 GBPm GBPm GBPm GBPm GBPm GBPm GBPm
---------------------------- ---------- ----------- ---------- ----------- ---------- ----------- -----------
At start of period 18.8 3,471.8 - - - (228.3) -
On acquisition of
Partnership Assurance Group
plc 0.1 1,623.6 117.2 - - - (2,659.6)
Purchases/Advances/Deposits 135.0 744.9 44.6 157.1 29.1 (32.4) (54.5)
Transfers from Level 2 20.5 - - - - - -
Sales/Redemptions/Payments (6.8) (254.3) 0.1 - (1.9) 53.9 173.5
Gains and losses recognised
in profit or loss within
net investment income 11.6 572.5 1.5 31.6 1.3 - (128.8)
Amortisation (0.2) 271.9 0.4 - - - (71.7)
Change in fair value of
liabilities recognised in
profit or loss - - - - - (15.5) -
---------------------------- ---------- ----------- ---------- ----------- ---------- ----------- -----------
At end of period 179.0 6,430.4 163.8 188.7 28.5 (222.3) (2,741.1)
---------------------------- ---------- ----------- ---------- ----------- ---------- ----------- -----------
Debt Recoveries
securities from
and other Loans Loans reinsurers Deposits
fixed secured by secured by on Investment received
income residential commercial investment contract from
securities mortgages mortgages Other loans contracts liabilities reinsurers
Year ended 30 June 2015 GBPm GBPm GBPm GBPm GBPm GBPm GBPm
---------------------------- ---------- ----------- ---------- ----------- ---------- ----------- -----------
At start of period 15.5 2,749.4 - - - (197.4) -
Purchases/Advances/Deposits - 308.1 - - - (49.1) -
Transfers from Level 2 3.5 - - - - - -
Sales/Redemptions/Payments - (109.6) - - - 21.7 -
Gains and losses recognised
in profit or loss within
net investment income 0.2 523.9 - - - - -
Amortisation (0.4) - - - - - -
Change in fair value of
liabilities recognised in
profit
or loss - - - - - (3.5) -
---------------------------- ---------- ----------- ---------- ----------- ---------- ----------- -----------
At end of period 18.8 3,471.8 - - - (228.3) -
---------------------------- ---------- ----------- ---------- ----------- ---------- ----------- -----------
Debt securities and other fixed income securities
Debt securities classified as Level 3 are either infrastructure
private placement bonds or asset-backed securities.
Principal assumptions underlying the calculation of the debt
securities and other fixed income securities classified as Level
3.
Redemption and defaults
The redemption and default assumptions used in the valuation of
infrastructure private placement bonds are similar to the rest of
the Group's bond portfolio.
For asset-backed securities, the assumptions are that the
underlying loans supporting the securities are redeemed in the
future in a similar profile to the existing redemptions on an
average rate of 3% per annum, and that default levels on the
underlying basis remain at the current level of the Group's bond
portfolio.
Sensitivity analysis
Changes to unobservable inputs used in the valuation technique
could give rise to significant changes in the fair value of the
assets.
The Group has estimated the impact on profit for the period in
changes to these inputs as follows:
Debt securities and other fixed income securities
-------------------------------------------------------
Default assumption
Net increase/(decrease) in profit before tax (GBPm) +100bps
-------------------------------------------------------- ------------------
31 December 2016 (1.7)
30 June 2015 (0.2)
----------------------------------------------------- ------------------
Loans secured by residential mortgages
Principal assumptions underlying the calculation of loans
secured by residential mortgages
All gains and losses arising from loans secured by mortgages are
largely dependent on the term of the mortgage, which in turn is
determined by the longevity of the customer. Principal assumptions
underlying the calculation of loans secured by mortgages include
the following:
Maintenance expenses
Assumptions for future policy expense levels are based on the
Group's recent expense analyses. The assumed future expense levels
incorporate an annual inflation rate allowance of 4.3% for loans
written by Just Retirement (30 June 2015: 3.8%) and 4.3% for loans
written by Partnership.
Mortality
Mortality assumptions have been derived by reference to
appropriate standard mortality tables. These tables have been
adjusted to reflect the expected future mortality experience of
mortgage contract holders, taking into account the medical and
lifestyle evidence collected during the sales process and the
Group's assessment of how this experience will develop in the
future. This assessment takes into consideration relevant industry
and population studies, published research materials, input from
the Group's lead reinsurer and management's own experience.
Property prices
The value of a property at the date of valuation is calculated
by taking the latest valuation for that property and indexing this
value using the Office for National Statistics monthly index for
the property's location.
Voluntary redemptions
Assumptions for future voluntary redemption levels are based on
the Group's recent analyses and external benchmarking, and the
assumed redemption rate for policies in their first year is 0.7%
for loans written by Just Retirement (30 June 2015: 0.6%) and 1.8%
for loans written by Partnership.
Sensitivity analysis
Changes to unobservable inputs used in the valuation technique
could give rise to significant changes in the fair value of the
assets.
The Group has estimated the impact on profit for the period in
changes to these inputs as follows:
Loans secured by residential mortgages valuation assumptions
------------------------------------------------------------------
Maintenance Property Voluntary
Net increase/(decrease) in profit before tax expenses Mortality prices redemptions
(GBPm) +10% -5% -20% +10%
-------------------------------------------------- ----------------- ------------- ------------ ------------------
31 December 2016 (5.9) 36.8 (79.8)* (30.7)
30 June 2015 (4.1) 15.3 (52.2) (14.3)
-------------------------------------------------- ----------------- ------------- ------------ ------------------
*This sensitivity assumes an additional 10% reduction to
property prices over and above the 10% fall assumed in the base
position.
The sensitivity factors are determined via actuarial models. The
analysis has been prepared for a change in each variable with other
assumptions remaining constant. In reality such an occurrence is
unlikely due to the correlation between the assumptions and other
factors. It should also be noted that these sensitivities are
non-linear and larger or smaller impacts cannot be interpolated or
extrapolated from these results.
The sensitivity factors take into consideration that the Group's
assets and liabilities are actively managed and may vary at the
time that any actual market movement occurs.
Other limitations in the above sensitivity analysis include the
use of hypothetical market movements to demonstrate potential risk
that only represents the Group's view of reasonably possible
near-term market changes that cannot be predicted with any
certainty, and the assumption that there is a parallel shift in
interest rates at all durations.
Loans secured by commercial mortgages
Principal assumption(s) underlying the calculation of loans
secured by commercial mortgages
The discount rate is the most significant assumption applied in
calculating the fair value of the loans secured by commercial
mortgages. The discount rate used 0.9% plus a spread % of between
1.3% and 2.8% depending on the individual loan.
Sensitivity analysis
Changes to unobservable inputs used in the valuation technique
could give rise to significant changes in the fair value of the
assets. The Group has estimated the impact on profit for the period
in changes to these inputs as follows.
Loans secured
by
commercial
mortgages
valuation
assumptions
Net increase/(decrease) in profit before tax Interest
(GBPm) rates +100bps
--------------------------------------------- --------------
31 December 2016 (9.5)
--------------------------------------------- --------------
Other loans
Other loans classified as Level 3 are infrastructure loans.
Principal assumptions underlying the calculation of other loans
classified as Level 3
Redemption and defaults
The redemption and default assumptions used in the valuation of
infrastructure loans are similar to the Group's bond portfolio.
They have additional covenants which provide greater security but
these are not quantified in the valuation.
Sensitivity analysis
The sensitivity of profit before tax to changes in default
assumptions and redemption profiles in respect of Level 3
infrastructure loans is not material.
Recoveries from reinsurers on investment contracts
Recoveries from reinsurers on investment contracts represent
fully reinsured funds invested under the Flexible Pension Plan. The
linked liabilities are included in Level 3 investment contract
liabilities.
Principal assumptions and sensitivity of profit before tax
Recoveries from reinsurers on investment contracts are valued
based on the price of the reinsured underlying funds determined by
the asset managers. The assets are classified as Level 3 because
the prices are not validated by internal models or the observable
inputs used by the asset managers are not available. Therefore,
there are no principal assumptions used in the valuation of these
Level 3 assets.
Investment contract liabilities
Principal assumptions underlying the calculation of investment
contract liabilities
Maintenance expenses
Assumptions for future policy expense levels are based on the
Group's recent expense analyses. The assumed future expense levels
incorporate an annual inflation rate allowance of 4.5% (30 June
2015: 4.1%).
Sensitivity analysis
The sensitivity of profit before tax to changes in maintenance
expense assumptions in respect of investment contract liabilities
is not material.
Deposits received from reinsurers
Principal assumption(s) underlying the calculation of deposits
received from reinsurers
Discount rate
The valuation model discounts the expected future cash flows
using a contractual discount rate derived from the assets
hypothecated to back the liabilities at a product level. The
discount rates used as at 31 December 2016 for Individual
retirement and Individual care annuities were 3.24% and 1.17%
respectively (30 June 2015: not applicable).
Credit spreads
The valuation of deposits received from reinsurers includes a
credit spread applied by individual reinsurers. A credit spread of
166bps was applied in respect of the most significant reinsurance
contract.
Sensitivity analysis
Changes to unobservable inputs used in the valuation technique
could give rise to significant changes in the fair value of the
assets (see note 25 (b)). The Group has estimated the impact on
profit for the period in changes to these inputs as follows:
Deposits received
from reinsurers
-------------------
Credit Interest
Net increase/(decrease) in fair value spreads rates
(GBPm) +100bps +100bps
-------------------------------------- --------- --------
31 December 2016 (32.5) (54.6)
-------------------------------------- --------- --------
17 Deferred tax
Asset Liability Total
-------------------
31 December 2016 GBPm GBPm GBPm
------------------- ----- --------- ------
Transitional tax - (12.6) (12.6)
Intangible assets - (33.8) (33.8)
Other provisions 10.3 - 10.3
------------------- ----- --------- ------
Total deferred tax 10.3 (46.4) (36.1)
------------------- ----- --------- ------
Asset Liability Total
-------------------
30 June 2015 GBPm GBPm GBPm
------------------- ----- --------- ------
Transitional tax - (22.1) (22.1)
Intangible assets - (7.5) (7.5)
Other provisions 4.2 (3.3) 0.9
------------------- ----- --------- ------
Total deferred tax 4.2 (32.9) (28.7)
------------------- ----- --------- ------
The transitional tax liability of GBP12.6m (30 June 2015:
GBP22.1m) represents the adjustment arising from the change in the
tax rules for life insurance companies which is amortised over ten
years from 1 January 2013 and the transitional adjustments for tax
purposes in adopting IFRS which is amortised over 10 years from 1
January 2016. Included in the movement in the period were net asset
balances amounting to GBP6.6m which were recognised in full in year
one.
Other provisions principally relate to temporary differences
between the IFRS financial statements and tax deductions for
statutory insurance liabilities.
The movement in the net deferred tax balance was as follows:
18 months
ended Year ended
31 December 30 June
2016 2015
GBPm GBPm
--------------------------------------------------------------------------------- ------------ ----------
Net balance at start of period (28.7) (20.5)
Arising on acquisition of Partnership Assurance Group plc (24.1) _
Amounts credited/(charged) to the Consolidated statement of comprehensive income 16.7 (8.2)
--------------------------------------------------------------------------------- ------------ ----------
Net balance at end of period (36.1) (28.7)
--------------------------------------------------------------------------------- ------------ ----------
The Group has unrecognised deferred tax assets of GBP5.4m (30
June 2015: GBP6.4m) arising from unrelieved tax losses.
18 Prepayments and accrued income
Included in prepayments and accrued income are capitalised bank
borrowing issue costs of GBPnil (30 June 2015: GBP0.8m).
Prepayments and accrued income for the Group includes GBP0.1m
(30 June 2015: GBP0.7m) that is expected to be recovered more than
one year after the Consolidated statement of financial position
date.
19 Insurance and other receivables
31 December 30 June
2016 2015
GBPm GBPm
------------------------------------------------------------- ----------- -------
Receivables arising from insurance and reinsurance contracts 126.7 28.6
Other receivables 10.6 5.5
------------------------------------------------------------- ----------- -------
Total insurance and other receivables 137.3 34.1
------------------------------------------------------------- ----------- -------
Of the above insurance and other receivables, GBP99.4m (30 June
2015: GBP0.6m) is expected to be recovered more than one year after
the Consolidated statement of financial position date.
20 Cash and cash equivalents
31 December 30 June
2016 2015
GBPm GBPm
---------------------------------------------------------------------- ----------- -------
Cash available on demand 71.4 58.8
Units in liquidity funds 572.3 254.9
---------------------------------------------------------------------- ----------- -------
Cash and cash equivalents in the Consolidated statement of cash flows 643.7 313.7
---------------------------------------------------------------------- ----------- -------
21 Share capital
The allotted and issued ordinary share capital of JRP Group plc
at 31 December 2016 is detailed below:
Number of Share Share Merger
GBP0.10 ordinary capital premium reserve Total
shares GBPm GBPm GBPm GBPm
--------------------------------------------------- ----------------- -------- -------- -------- -----
At 1 July 2015 500,864,706 50.1 1.2 - 51.3
Shares issued under capital placing and open offer 63,525,672 6.4 90.5 - 96.9
Shares issued in exchange for shares in PAG 368,376,421 36.8 - 532.7 569.5
In respect of employee share schemes 117,234 - - - -
--------------------------------------------------- ----------------- -------- -------- -------- -----
At 31 December 2016 932,884,033 93.3 91.7 532.7 717.7
--------------------------------------------------- ----------------- -------- -------- -------- -----
Consideration for the acquisition of 100% of the equity shares
of Partnership Assurance Group plc consisted of a new issue of
shares in the Company. Accordingly merger relief under section 612
of the Companies Act 2006 applies, and share premium has not been
recognised in respect of this issue of shares. A merger reserve has
been recognised representing the difference between the nominal
value of the shares issued and the net assets of Partnership
Assurance Group plc acquired.
Number of Share Share
GBP0.10 ordinary capital premium Total
shares GBPm GBPm GBPm
------------------------------------- ----------------- -------- -------- -----
At 1 July 2014 500,831,070 50.1 1.2 51.3
In respect of employee share schemes 33,636 - - -
------------------------------------- ----------------- -------- -------- -----
At 30 June 2015 500,864,706 50.1 1.2 51.3
------------------------------------- ----------------- -------- -------- -----
22 Insurance contracts and related reinsurance
Insurance liabilities
Gross Reinsurance Net
31 December 2016 GBPm GBPm GBPm
---------------------- -------- ----------- -------
Insurance liabilities 15,748.0 6,057.1 9,690.9
---------------------- -------- ----------- -------
Gross Reinsurance Net
30 June 2015 GBPm GBPm GBPm
---------------------- -------- ----------- -------
Insurance liabilities 7,440.3 2,477.1 4,963.2
---------------------- -------- ----------- -------
(a) Terms and conditions of insurance contracts
The Group's long-term insurance contracts include annuities to
fund Retirement Income, Guaranteed Income for Life ("GIfL") and
Defined Benefit ("DB"), annuities to fund care fees (immediate
needs and deferred), long-term care insurance and whole of life and
term protection insurance.
The insurance liabilities are determined by the Board on the
advice of the Group's Actuarial Reporting Function using recognised
actuarial methods. In particular, a prospective gross premium
valuation method has been adopted for major classes of
business.
Although the process for the establishment of insurance
liabilities follows specified rules and guidelines, the provisions
that result from the process remain uncertain. As a consequence of
this uncertainty, the eventual value of claims could vary from the
amounts provided to cover future claims. The Group seeks to provide
for appropriate levels of contract liabilities taking known facts
and experiences into account but nevertheless such provisions
remain uncertain.
The estimation process used in determining insurance liabilities
involves projecting future annuity payments and the cost of
maintaining the contracts. For non-annuity contracts, the liability
is determined as the sum of the discounted value of future benefit
payments and future administration expenses less the expected value
of premiums payable under the contract. The key sensitivities are
the assumed level of interest rates and the mortality
experience.
(b) Principal assumptions underlying the calculation of
insurance contracts
The principal assumptions underlying the calculation of
insurance contracts are as follows:
Mortality assumptions
Mortality assumptions have been set by reference to appropriate
standard mortality tables. These tables have been adjusted to
reflect the future mortality experience of the policyholders,
taking into account the medical and lifestyle evidence collected
during the underwriting process, premium size, gender and the
Group's assessment of how this experience will develop in the
future. The assessment takes into consideration relevant industry
and population studies, published research materials, input from
the Group's lead reinsurer and management's own industry
experience.
The standard tables which underpin the mortality assumptions are
summarised in the table below.
31 December 2016 30 June 2015
-------------------------------------- -------------------------------------- --------------------------------------
Individually underwritten Guaranteed PCMA/PCFA00, with CMI model mortality PCMA/PCFA00 , with CMI model mortality
Income for Life Solutions (JRL) improvements improvements
-------------------------------------- -------------------------------------- --------------------------------------
Individually underwritten Guaranteed Modified E&W Population mortality, Not applicable
Income for Life Solutions (PLACL) with
CMI model mortality improvements
-------------------------------------- -------------------------------------- --------------------------------------
Defined Benefit (JRL) Reinsurer supplied tables underpinned Reinsurer supplied tables underpinned
by by the Self-Administered Pension
the Self-Administered Pension Scheme Scheme ("SAPS") S1
("SAPS") S1 tables, with CMI model tables, with CMI model mortality
mortality improvements improvements
-------------------------------------- -------------------------------------- --------------------------------------
Defined Benefit (PLACL) Modified E&W Population mortality, Not applicable
with
CMI model mortality improvements
-------------------------------------- -------------------------------------- --------------------------------------
Other annuity products (PLACL) Modified PCMA/PCFA bespoke Not applicable
improvements
-------------------------------------- -------------------------------------- --------------------------------------
Term and whole of life products TM/TF00 Select Not applicable
(PLACL)
-------------------------------------- -------------------------------------- --------------------------------------
Valuation discount rates
Valuation discount rate assumptions are set with regards to
yields on supporting assets. An explicit allowance for credit risk
is included by making an explicit deduction from the yields on debt
and other fixed income securities based on a prudent expectation of
default experience of each asset class.
31 December 30 June
2016 2015
Valuation discount rates - gross liabilities % %
--------------------------------------------- ----------- --------------
Individually underwritten Guaranteed
Income for Life Solutions (JRL) 3.18 3.96
Individually underwritten Guaranteed
Income for Life Solutions (PLACL) 3.24 Not applicable
Defined Benefit (JRL) 3.18 3.96
Defined Benefit (PLACL) 3.24 Not applicable
Other annuity products (PLACL) 1.17 Not applicable
Term and whole of life products (PLACL) 1.63 Not applicable
--------------------------------------------- ----------- --------------
Future expenses
Assumptions for future policy expense levels are determined from
the Group's recent expense analyses. The assumed future policy
expense levels incorporate an annual inflation rate allowance of
4.5% (30 June 2015: 4.1%) derived from the expected retail price
index implied by inflation swap rates and an additional allowance
for earnings inflation.
(c) Movements
The following movements have occurred in the insurance contract
balances for Retirement Income products during the period.
Gross Reinsurance Net
GBPm GBPm GBPm
-------------------------------------------------- --------- ----------- -------
Carrying amount
At 1 July 2015 7,440.3 2,477.1 4,963.2
On acquisition of Partnership Assurance Group plc 5,619.8 3,299.5 2,320.3
Increase in liability from premiums 2,395.9 87.2 2,308.7
Release of liability due to recorded claims (1,023.8) (384.1) (639.7)
Unwinding of discount 391.1 113.5 277.6
Changes in economic assumptions 917.7 259.5 658.2
Changes in non-economic assumptions 11.9 5.3 6.6
Other movements(1) (4.9) 199.1 (204.0)
-------------------------------------------------- --------- ----------- -------
At 31 December 2016 15,748.0 6,057.1 9,690.9
-------------------------------------------------- --------- ----------- -------
Gross Reinsurance Net
GBPm GBPm GBPm
-------------------------------------------------- --------- ----------- -------
Carrying amount
At 1 July 2014 6,483.6 3,616.3 2,867.3
Increase in liability from premiums 1,079.5 148.5 931.0
Release of liability due to recorded claims (510.9) (252.2) (258.7)
Unwinding of discount 269.0 110.6 158.4
Changes in economic assumptions 116.6 (172.7) 289.3
Changes in non-economic assumptions (1.5) (8.6) 7.1
Other movements(*) 4.0 (964.8) 968.8
-------------------------------------------------- --------- ----------- -------
At 30 June 2015 7,440.3 2,477.1 4,963.2
-------------------------------------------------- --------- ----------- -------
* Includes the impact of reinsurance recapture
Effect of changes in assumptions and estimates during the
period
Economic assumption changes
Discount rates
The JRL valuation interest rate over the period has decreased by
0.78% from 3.96% at 30 June 2015 to 3.18% at 31 December 2016. A
decrease in the valuation interest rate increases the carrying
value of insurance liabilities. The PLACL valuation interest rate
at 31 December 2016 was 3.24%.
Expense inflation
The maintenance expense inflation assumption used at 31 December
2016 was 4.5% p.a. (30 June 2015: 4.1% p.a.).
Non-economic assumption change
Expense assumption
The JRL GIfL maintenance expense assumption used at 31 December
2016 was GBP46.68 per plan, an increase from GBP43.97 per plan at
30 June 2015, whilst the JRL DB maintenance assumption used at 31
December 2016 was GBP56.61 per plan (30 June 2015: GBP 53.32 per
plan). An increase in the maintenance expense assumption increases
the carrying value of insurance liabilities. The PLACL GIfL and DB
maintenance assumption used at 31 December 2016 was GBP22.99 per
plan.
(d) Estimated timing of net cash outflows from insurance
contract liabilities
The following shows the insurance contract balances analysed by
duration. The total balances are split by duration of Retirement
Income payments in proportion to the policy cash flows estimated to
arise during that period.
Expected cash flows (undiscounted)
---------------------------------------------------------- -------------
Carrying
Within Over value
1 year 1-5 years 5-10 years 10 years Total (discounted)
31 December 2016 GBPm GBPm GBPm GBPm GBPm GBPm
----------------- ------- ----------- ------------- ---------- --------- -------------
Gross 1,096.5 4,182.7 4,675.3 13,226.0 23,180.5 15,748.0
Reinsurance (454.1) (1,713.6) (1,867.8) (4,583.6) (8,619.1) (6,057.1)
----------------- ------- ----------- ------------- ---------- --------- -------------
Net 642.4 2,469.1 2,807.5 8,642.4 14,561.4 9,690.9
----------------- ------- ----------- ------------- ---------- --------- -------------
Expected cash flows (undiscounted)
------- -------------------------------------- --------- -------------
Carrying
Within Over value
1 year 1-5 years 5-10 years 10 years Total (discounted)
30 June 2015 GBPm GBPm GBPm GBPm GBPm GBPm
----------------- ------- ----------- ------------- ---------- --------- -------------
Gross 538.0 2,076.3 2,377.3 6,386.6 11,378.2 7,440.3
Reinsurance (175.5) (685.2) (790.2) (2,071.3) (3,722.2) (2,477.1)
----------------- ------- ----------- ------------- ---------- --------- -------------
Net 362.5 1,391.1 1,587.1 4,315.3 7,656.0 4,963.2
----------------- ------- ----------- ------------- ---------- --------- -------------
(e) Sensitivity analysis
The Group has estimated the impact on profit for the year in
relation to insurance contracts and related reinsurance from
changes in key assumptions relating to financial assets and
liabilities.
Sensitivity Description of sensitivity factor applied
factor
--------------------- -----------------------------------------------------
Interest rate The impact of a change in the market interest
and rates by +/- 1% (e.g. if a current interest
investment rate is 5%, the impact of an immediate change
return to 4 and 6% respectively. The test consistently
allows for similar changes to investment returns
and movements in the market by backing fixed
interest securities
Expenses The impact of an increase in maintenance expenses
by 10%
Mortality rates The impact of a decrease in mortality rates
by 5% applied to both Retirement Income liabilities
and mortgage assets
Property prices The impact of an immediate decrease in the
value of properties by 20%. The test allows
for the impact on the Retirement Income liabilities
arising from any change in yield on the loans
secured by residential mortgages and loans
secured by commercial mortgages used to back
the liabilities
Voluntary redemptions The impact of an increase in voluntary redemption
rates on loans secured by residential and commercial
mortgages by 10%. The test allows for the impact
on the annuity liabilities arising from any
change in yield on the loans secured by residential
mortgages and loans secured by commercial mortgages
used to back the liabilities
--------------------- -----------------------------------------------------
Impact on profit before tax (GBPm)
Net increase/(decrease) Interest Interest Maintenance Property Voluntary
in profit before Rates Rates Expenses Mortality Prices redemptions
tax (GBPm) +1% -1% +10% -5% -20% +10%
------------------------ -------- -------- ----------- --------- -------- ------------
31 December 2016 (177.5) 225.1 (49.2) (131.3) (106.3)* (67.9)
30 June 2015 (25.9) 83.7 (19.9) (48.9) (52.2) (14.3)
------------------------ -------- -------- ----------- --------- -------- ------------
*This sensitivity assumes an additional 10% reduction to
property prices over and above the 10% fall assumed in the base
position.
The sensitivity factors are applied via actuarial models. The
analysis has been prepared for a change in each variable with other
assumptions remaining constant. In reality, such an occurrence is
unlikely, due to correlation between the assumptions and other
factors. It should also be noted that these sensitivities are non-
linear, and larger or smaller impacts cannot be interpolated or
extrapolated from these results. Property growth assumptions in the
base balance sheet at 31 December 2016 allow for a -10%
year-on-year fall in property prices between June 2016 and June
2017. This sensitivity allows for the change in lifetime mortgage
and commercial mortgage asset value arising from an immediate fall
of 20% in property prices. For lifetime mortgages, from 30 June
2017 onwards, the sensitivity assumes an additional 10% reduction
to property prices over and above the 10% fall assumed in the base
position. The sensitivity also allows for the corresponding change
in liabilities as a result of the yield change.
The sensitivity factors take into consideration that the Group's
assets and liabilities are actively managed and may vary at the
time that any actual market movement occurs. The impacts indicated
above for insurance contracts also reflect movements in financial
derivatives, which are impacted by movements in interest rates.
Related reinsurance assets are not impacted by financial
derivatives.
Other limitations in the above sensitivity analysis include the
use of hypothetical market movements to demonstrate potential risk
that only represents the Group's view of reasonably possible
near-term market changes that cannot be predicted with any
certainty, and the assumption that there is a parallel shift in
interest rates at all durations.
23 Investment contract liabilities
Year ended Year ended
31 December 2016 30 June 2015
GBPm GBPm
------------------------------------------------------------ ----------------- -------------
Balance at start of period 228.3 197.4
Deposits received from policyholders 32.4 49.1
Payments made to policyholders (53.9) (21.7)
Change in contract liabilities recognised in profit or loss 15.5 3.5
------------------------------------------------------------ ----------------- -------------
Balance at end of period 222.3 228.3
------------------------------------------------------------ ----------------- -------------
Recoveries from reinsurers on investment contracts were GBP28.5m
(2015: GBPnil) as shown in note 16.
(a) Terms and conditions of investment contracts
The Group writes Flexible Pension Plan products for the at-
retirement market. Policyholder premiums are invested in selected
unit-linked funds, with the policyholder able to drawdown on funds,
the return on which will be based on actual investment returns.
The Group has written Capped Drawdown products for the
at-retirement market. These products are no longer available to new
customers. In return for a single premium, these contracts pay a
guaranteed lump sum on survival to the end of the fixed term. There
is an option at outset to select a lower sum at maturity and
regular income until the earlier of death or maturity. Upon death
of the policyholder and subject to the option selected at the
outset, there may be a return of premium less income received or
income payable to a dependant until the death of that
dependant.
(b) Principal assumptions underlying the calculation of
investment contracts
Valuation discount rates
Valuation discount rate assumptions for investment contracts are
set with regards to yields on supporting assets. An explicit
allowance for credit risk is included by making an explicit
deduction from the yields on debt and other fixed income securities
based on historical default experience of each asset class.
The changes in the valuation discount rates reflect the changes
in yields on the supporting assets.
31 December 30 June
2016 2015
Valuation discount rates % %
------------------------- ----------- -------
Investment contracts 3.18 3.96
------------------------- ----------- -------
24 Loans and borrowings
31 December 30 June
2016 2015
GBPm GBPm
--------------------------- ----------- -------
Bank borrowings - 46.9
Subordinated debt 343.1 -
--------------------------- ----------- -------
Total loans and borrowings 343.1 46.9
--------------------------- ----------- -------
Bank borrowings
On 25 September 2012, Just Retirement (Holdings) Limited entered
into a GBP35m five-year term loan agreement provided by Royal Bank
of Scotland plc. On 9 May 2013, Deutsche Bank AG and Nomura
International plc acceded to the loan agreement under the terms of
an accordion feature, with each providing loans of GBP10m to Just
Retirement (Holdings) Limited. On 7 August 2015, Just Retirement
(Holdings) Limited entered into an amendment to the original loan
agreement and on 10 August 2015 drew down a further GBP30m from
each of Royal Bank of Scotland plc and Barclays Bank plc. GBP3.6m
of the loan was repaid on 11 October 2013, GBP4.5m was repaid on 11
October 2014, and GBP8.8m was repaid on 11 October 2015. The
outstanding balance was repaid in full in October 2016.
The fair value of the bank borrowings is the same as the
carrying value.
Subordinated debt
In March 2015, the Partnership Group issued a GBP100m Solvency
II Tier 2 qualifying instrument at par with a maturity date of
March 2025 and a coupon of 9.5%. Net of issuance fees the amount
received was GBP99.9m. The fair value of the debt at the date of
acquisition of PAG was GBP94.1m, and the difference to the nominal
value is being amortised over the period to maturity. The carrying
value at 31 December 2016 of GBP94.6m compares with a fair value of
GBP105.5m.
On 26 October 2016, JRP issued a GBP250m Solvency II Tier 2
qualifying instrument at par with a maturity date of October 2026
and a coupon of 9%. Subordinated guarantee has been provided by
Just Retirement Limited. Net of issuance fees the amount received
was GBP248.8m and the difference to the nominal value is being
amortised over the period to maturity. The carrying value at 31
December 2016 of GBP248.5m was similar to fair value.
25 Other financial liabilities
The Group has other financial liabilities which are measured at
either amortised cost, fair value through profit or loss, or in
accordance with relevant underlying contracts ("insurance rules"),
summarised as follows.
30 June
31 December 2015
Note 2016 GBPm GBPm
------------------------------------- ----- ----------- -------
Fair value through profit or loss
Derivative financial liabilities (a) 189.3 74.3
Obligations for repayment of cash
collateral received (a) 52.2 18.6
Deposits received from reinsurers (b) 2,741.1 -
Liabilities measured using insurance
rules under IFRS4
Deposits received from reinsurers (b) 2,490.3 2,473.6
Reinsurance finance (c) 65.9 76.7
Reinsurance funds withheld (d) 202.0 -
------------------------------------- ----- ----------- -------
Total other liabilities 5,740.8 2,643.2
-------------------------------------------- ----------- -------
The amount of deposits received from reinsurers that is expected
to be settled more than one year after the Consolidated statement
of financial position date is GBP5,021.1m (30 June 2015:
GBP2,292.5m).
(a) Derivative financial liabilities and obligations for
repayment of cash collateral received
The derivative financial liabilities are classified at fair
value through profit or loss. All financial liabilities at fair
value through profit or loss are designated as such on initial
recognition or, in the case of derivative financial liabilities,
are classified as held for trading.
(b) Deposits received from reinsurers
Deposits received from reinsurers are measured in accordance
with the reinsurance contract and taking into account an
appropriate discount rate for the timing of expected cash flows of
the liabilities.
(c) Reinsurance finance
The reinsurance finance has been established in recognition of
the loan obligation to the reinsurers under the Group's reinsurance
financing arrangements, the repayment of which remain contingent
upon the emergence of surplus under the old Solvency I valuation
rules.
(d) Reinsurance funds withheld
Reinsurance funds withheld are measured and valued in accordance
with the reinsurance contract, which takes into account an
appropriate discount rate for the timing of expected cash
flows.
26 Derivative financial instruments
The Group uses various derivative financial instruments to
manage its exposure to interest rates, counterparty credit risk,
inflation and foreign exchange risk, including interest rate swaps,
interest rate swaptions, inflation swaps, credit default swaps, and
foreign currency asset swaps.
Asset Liability Notional
fair value fair value amount
Derivatives GBPm GBPm GBPm
-------------------------- ----------- ----------- --------
Foreign currency swaps 0.8 113.5 764.8
Interest rate swaps 67.8 55.4 1,182.8
Interest rate swaptions - - 1,140.0
Inflation swaps 33.1 18.8 1,220.0
Forward swap 3.8 1.6 343.8
Credit default swaps 1.5 - 43.4
-------------------------- ----------- ----------- --------
Total at 31 December 2016 107.0 189.3 4,694.8
-------------------------- ----------- ----------- --------
Liability
Asset fair fair Notional
value value amount
Derivatives GBPm GBPm GBPm
-------------------------- ----------- ----------- --------
Foreign currency swaps 29.7 4.0 368.4
Interest rate swaps 15.1 70.3 314.0
Interest rate swaptions 6.1 - 1,140.0
Inflation swap - - 6.5
-------------------------- ----------- ----------- --------
Total at 30 June 2015 50.9 74.3 1,828.9
-------------------------- ----------- ----------- --------
The Group's derivative financial instruments are not designated
as hedging instruments and changes in their fair value are included
in profit or loss. Derivatives are used to manage the Group's
European embedded value and regulatory capital, which is affected
by a surplus of long-dated fixed interest securities when
liabilities are measured on a realistic basis.
All over-the- counter derivative transactions are conducted
under standardised International Swaps and Derivatives Association
Inc. ("ISDA") master agreements, and the Group has collateral
agreements between the individual Group entities and relevant
counterparties in place under each of these market master
agreements.
As at 31 December 2016, the Company had pledged collateral of
GBP176.6m (30 June 2015: GBP55.6m) of which GBP105.6m were gilts
and European Investment Bank bonds (30 June 2015: GBP38.4m) and had
received cash collateral of GBP52.2m (30 June 2015: GBP18.6m).
Amounts recognised in profit or loss in respect of derivative
financial instruments are as follows:
18 months Year
ended ended
31 December 30 June
2016 2015
GBPm GBPm
------------------------------------------------- ----------- -------
Movement in fair value of derivative instruments 3.3 15.7
Realised losses on interest rate swaps
closed (68.5) (145.0)
------------------------------------------------- ----------- -------
Total amounts recognised in profit or loss (65.2) (129.3)
------------------------------------------------- ----------- -------
27 Reinsurance
The Group uses reinsurance as an integral part of its risk and
capital management activities. New business was reinsured via
longevity swap arrangements as follows:
-- DB is 55% reinsured for underwritten schemes, and 75% for
non-underwritten schemes (55% prior to 1 January 2016)
-- GIfL is 75% reinsured (45% prior to 1 January 2016)
-- Care is 42.5% reinsured (90% prior to 1 April 2016)
-- Protection is 65% reinsured
In-force business is reinsured under longevity swap and quota
share treaties. The quota share treaties have deposit back or
premium withheld arrangements to remove the majority of the
reinsurer credit risk.
The quota share treaties entered into by the Group's subsidiary,
Just Retirement Limited ("JRL"), include financing arrangements
(see note 25c), the repayment of which is contingent upon the
emergence of surplus under the old Solvency I valuation rules. The
Group retains a capital benefit under Solvency II from the
financing arrangements as these form part of the transitional
calculations.
These treaties also allow JRL to recapture business once the
financing has been repaid. During the period the Group recaptured
business in respect of certain underwriting years that resulted in
a decrease of ceded liabilities of GBP1,166.9m and a reduction of
equal amount in the deposit received.
In addition to the deposits received from reinsurers recognised
within other financial liabilities (see note 25b), certain
reinsurance arrangements within the Group's subsidiary, Partnership
Life Assurance Company Limited, give rise to deposits from
reinsurers that are not included in the Consolidated statement of
financial position of the Group as described below:-
-- The Group has an agreement with two reinsurers (30 June 2015:
nil) whereby financial assets arising from the payment of
reinsurance premiums, less the repayment of claims, in relation to
specific treaties, are legally and physically deposited back with
the Group. Although the funds are managed by the Group (as the
Group controls the investment of the asset), no future benefits
accrue to the Group as any returns on the deposits are paid to
reinsurers. Consequently the deposits are not recognised as assets
of the Group and the investment income they produce does not accrue
to the Group.
-- The Group has an agreement with one reinsurer (30 June 2015:
nil) whereby assets equal to the reinsurer's full obligation under
the treaty are deposited into a ringfenced collateral account. The
Group has first claim over these assets should the reinsurer
default, but as the Group has no control over these funds and does
not accrue any future benefit, this fund is not recognised as an
asset of the Group.
31 December 30 June
2016 2015
GBPm GBPm
------------------------------------- ----------- -------
Deposits managed by the Group 235.6 -
Deposits held in trust 296.9 -
------------------------------------- ----------- -------
Total deposits not included in the
Consolidated statement of financial
position 532.5 -
------------------------------------- ----------- -------
28 Other provisions
18 months
ended Year ended
31 December 30 June
2016 2015
GBPm GBPm
------------------------------------------ ------------ ----------
Balance at start of period 1.5 4.8
Amounts charged to Consolidated statement
of comprehensive income 11.9 0.2
Amounts utilised (3.7) (2.2)
Amounts released (1.2) (1.3)
------------------------------------------ ------------ ----------
Balance at end of period 8.5 1.5
------------------------------------------ ------------ ----------
Of the amount charged to Consolidated statement of comprehensive
income in the period, GBP5.3m was in respect of the cost of staff
redundancies.
Other provisions at 31 December 2016 include onerous leases and
ancillary expense provisions.
The amount of provisions that is expected to be settled more
than 12 months after the Consolidated statement of financial
position date is GBP2.3m (30 June 2015: GBP0.5m).
29 Current tax
Current tax assets/liabilities receivable/payable in more than
one year are GBPnil (30 June 2015: GBPnil).
30 Accruals and deferred income
Accruals and deferred income payable in more than one year are
GBP1.5m (30 June 2015: GBP0.7m).
31 Insurance and other payables
31 December 30 June
2016 2015
GBPm GBPm
------------------------------------------------ ----------- -------
Payables arising from insurance and reinsurance
contracts 28.1 15.6
Other payables 85.0 7.1
------------------------------------------------ ----------- -------
Total insurance and other payables 113.1 22.7
------------------------------------------------ ----------- -------
Insurance and other payables due in more than one year are
GBPnil (30 June 2015: GBP2.0m).
32 Commitments
Operating leases
The Group leases a number of properties under operating leases.
The future minimum lease payments payable over the remaining terms
of non-cancellable operating leases are as follows:
31 December 30 June
2016 2015
GBPm GBPm
------------------------------------ ----------- -------
Less than one year 4.4 1.5
Between one and five years 12.7 6.0
More than five years 5.6 0.3
------------------------------------ ----------- -------
Total future minimum lease payments 22.7 7.8
------------------------------------ ----------- -------
Capital commitments
The Group had no capital commitments as at 31 December 2016 (30
June 2015: GBPnil).
33 Contingent liabilities
The Group had no contingent liabilities as at 31 December 2016
(30 June 2015: GBPnil).
34 Financial and insurance risk management
This note presents information about the major financial and
insurance risks to which the Group is exposed, and its objectives,
policies and processes for their measurement and management.
Financial risk comprises exposure to market, credit and liquidity
risk.
(a) Insurance risk
The writing of long-term insurance contracts requires a range of
assumptions to be made and risk arises from these assumptions being
materially inaccurate.
The Group's main insurance risk arises from adverse experience
compared with the assumptions used in pricing products and valuing
insurance liabilities, and in addition its reinsurance treaties may
be terminated, not renewed, or renewed on terms less favourable
than those under existing treaties.
Insurance risk arises through exposure to longevity, mortality
and morbidity and exposure to factors such as withdrawal levels and
management and administration expenses.
Individually underwritten GIfL are priced using assumptions
about future longevity that are based on historic experience
information, lifestyle and medical factors relevant to individual
customers, and judgements about the future development of longevity
improvements. In the event of an increase in longevity, the
actuarial reserve required to make future payments to customers may
increase.
Loans secured by mortgages are used to match some of the
liabilities arising from the sale of GIfL and DB business. In the
event that early repayments in a given period are higher than
anticipated, less interest will have accrued on the mortgages and
the amount repayable will be less than assumed at the time of sale.
In the event of an increase in longevity, although more interest
will have accrued and the amount repayable will be greater than
assumed at the time of the sale, the associated cash flows will be
received later than had originally been anticipated. In addition, a
general increase in longevity would have the effect of increasing
the total amount repayable, which would increase the LTV ratio and
could increase the risk of failing to be repaid in full as a
consequence of the no-negative equity guarantee. There is also
morbidity risk exposure as the contract ends when the customer
moves into long-term care.
Underpinning the management of insurance risk are:
-- The development and use of medical information including
PrognoSys(TM) for both pricing and reserving to provide detailed
insight into longevity risk;
-- Adherence to approved underwriting requirements;
-- Controls around the development of suitable products and their pricing;
-- Review and approval of assumptions used by the Board;
-- Regular monitoring and analysis of actual experience;
-- Use of reinsurance to minimise volatility of capital requirement and profit; and
-- Monitoring of expense levels.
Concentrations of insurance risk
Concentration of insurance risk comes from improving longevity.
Improved longevity arises from enhanced medical treatment and
improved life circumstances. Concentration risk is managed by
writing business across a wide range of different medical and
lifestyle conditions to avoid excessive exposure.
(b) Market risk
Market risk is the risk of loss or of adverse change in the
financial situation resulting, directly or indirectly, from
fluctuations in the level and in the volatility of market prices of
assets, liabilities and financial instruments, together with the
impact of changes in interest rates.
Significant market risk is implicit in the insurance business
and arises from exposure to interest rate risk, property risk,
inflation risk and currency risk. The Group is not exposed to any
equity risk or material currency risk.
Market risk represents both upside and downside impacts but the
Group's policy to manage market risk is to limit downside risk.
Falls in the financial markets can reduce the value of pension
funds available to purchase Retirement Income products and changes
in interest rates can affect the relative attractiveness of
Retirement Income products. Changes in the value of the Group's
investment portfolio will also affect the Group's financial
position.
In mitigation, Retirement Income product monies are invested to
match the asset and liability cash flows as closely as practicable.
In practice it is not possible to eliminate market risk fully as
there are inherent uncertainties surrounding many of the
assumptions underlying the projected asset and liability cash
flows.
For each of the material components of market risk, described in
more detail below, the market risk policy sets out the risk
appetite and management processes governing how each risk should be
measured, managed, monitored and reported.
(i) Interest rate risk
The Group is exposed to interest rate risk through its impact on
the value of, or income from, specific assets, liabilities or both.
It seeks to limit its exposure through appropriate asset and
liability matching and hedging strategies.
The Group's exposure to changes in interest rates is
concentrated in the investment portfolio, loans secured by
mortgages and its insurance obligations. Changes in investment and
loan values attributable to interest rate changes are mitigated by
corresponding and partially offsetting changes in the value of
insurance liabilities. The Group monitors this exposure through
regular reviews of the asset and liability position, capital
modelling, sensitivity testing and scenario analyses. Interest rate
risk is also managed using derivative instruments e.g. swaps and
swaptions.
The following table indicates the earlier of contractual
repricing or maturity dates for the Group's significant financial
assets.
Less than One to Five to Over ten No fixed
one year five years ten years years term Total
------------------------------------------------------
31 December 2016 GBPm GBPm GBPm GBPm GBPm GBPm
------------------------------------------------------ --------- ---------- --------- -------- -------- --------
Units in liquidity funds 572.3 - - - - 572.3
Debt securities and other fixed income securities 949.1 2,492.7 2,651.2 3,658.9 - 9,751.9
Deposits with credit institutions 73.2 - - - - 73.2
Derivative financial assets 4.4 11.7 12.9 78.0 - 107.0
Loans secured by residential mortgages - - - - 6,430.4 6,430.4
Loans secured by commercial mortgages - 64.0 99.8 - - 163.8
Other loans 3.8 - - 188.7 - 192.5
Amounts recoverable from reinsurers on investment
contracts 28.5 - - - - 28.5
------------------------------------------------------ --------- ---------- --------- -------- -------- --------
Total 1,631.3 2,568.4 2,763.9 3,925.6 6,430.4 17,319.6
------------------------------------------------------ --------- ---------- --------- -------- -------- --------
A sensitivity analysis of the impact of interest rate movements
on profit before tax is included in note 22(e).
One Five
Less to to Over
than five ten ten No fixed
one year years years years term Total
30 June 2015 GBPm GBPm GBPm GBPm GBPm GBPm
---------------------------------- --------- ------- ------- ------- -------- -------
Units in liquidity funds 280.2 - - - - 280.2
Debt securities and other
fixed income securities 274.6 1,248.9 1,405.4 1,827.9 - 4,756.8
Deposits with credit institutions 18.0 - - - - 18.0
Derivative financial assets - 6.3 29.5 15.1 - 50.9
Loans secured by mortgages - - - - 3,471.8 3,471.8
---------------------------------- --------- ------- ------- ------- -------- -------
Total 572.8 1,255.2 1,434.9 1,843.0 3,471.8 8,577.7
---------------------------------- --------- ------- ------- ------- -------- -------
(ii) Property risk
The Group's exposure to property risk arises from indirect
exposure to the UK residential property market through the
provision of lifetime mortgages. A substantial decline or sustained
underperformance in UK residential property prices, against which
the Group's lifetime mortgages are secured, could result in
proceeds on sale being exceeded by the mortgage debt at the date of
redemption. Demand may also reduce for lifetime mortgage products
through reducing consumers' propensity to borrow and by reducing
the amount they are able to borrow due to reductions in property
values and the impact on loan to value limits.
The risk is mitigated by ensuring that the advance represents a
low proportion of the property's value at outset and independent
third party valuations are undertaken on each property before
initial mortgages are advanced. Lifetime mortgage contracts are
also monitored through dilapidation reviews. House prices are
monitored and the impact of exposure to adverse house prices (both
regionally and nationally) is regularly reviewed.
A sensitivity analysis of the impact of property price movements
on profit before tax is included in note 22(e).
(iii) Inflation risk
Inflation risk is the risk of fluctuations in the value of, or
income from, specific assets or liabilities or both in combination,
arising from relative or absolute changes in inflation or in the
volatility of inflation.
Exposure to inflation occurs in relation to the Group's own
management expenses and its matching of index-linked Retirement
Income products. Its impact is managed through the application of
disciplined cost control over its management expenses and through
matching its index-linked assets and index-linked liabilities for
the inflation risk associated with its index-linked Retirement
Income products.
(iv) Currency risk
Currency risk arises from fluctuations in the value of, or
income from, assets denominated in foreign currencies, from
relative or absolute changes in foreign exchange rates or in the
volatility of exchange rates.
Exposure to currency risk could arise from the Group's
investment in non-sterling denominated assets. From time to time,
the Group acquires fixed income securities denominated in US
dollars or other foreign currencies for its financial asset
portfolio. All material Group liabilities are in sterling. As the
Group does not wish to introduce foreign exchange risk into its
investment portfolio, derivative or quasi-derivative contracts are
entered into to eliminate the foreign exchange exposure as far as
possible.
(c) Credit risk
Credit risk arises if another party fails to perform its
financial obligations to the Group, including failing to perform
them in a timely manner.
Credit risk exposures arise from:
-- Holding fixed income investments where the main risks are
default and market risk. The risk of default (where the
counterparty fails to pay back the capital and/or interest on a
corporate bond) is mitigated by investing only in higher quality or
investment grade assets. Market risk is the risk of bond prices
falling as a result of concerns over the counterparty, or over the
market or economy in which the issuing company operates. This leads
to wider spreads (the difference between redemption yields and a
risk-free return), the impact of which is mitigated through the use
of a "hold to maturity" strategy. Concentration of credit risk
exposures is managed by placing limits on exposures to individual
counterparties and limits on exposures to credit rating levels.
-- The Group also manages credit risk on its corporate bond
portfolio through the appointment of specialist fund managers, who
execute a diversified investment strategy, investing in
investment-grade assets and imposing individual counterparty
limits. Current economic and market conditions are closely
monitored, as are spreads on the bond portfolio in comparison with
benchmark data.
-- Counterparties in derivative contracts - the Group uses
financial instruments to mitigate interest rate and currency risk
exposures. It therefore has credit exposure to various
counterparties through which it transacts these instruments,
although this is usually mitigated by collateral arrangements (see
note 26).
-- Reinsurance - reinsurance is used to manage longevity risk
but, as a consequence, credit risk exposure arises should a
reinsurer fail to meet its claim repayment obligations. Credit risk
on reinsurance balances is mitigated by the reinsurer depositing
back more than 100% of premiums ceded under the reinsurance
agreement.
-- Cash balances - credit risk on cash assets is managed by
imposing restrictions over the credit ratings of third parties with
whom cash is deposited.
-- Credit risk - credit risks for loans secured by mortgages has
been considered within "property risk" above.
The following table provides information regarding the credit
risk exposure for financial assets of the Group, which are neither
past due nor impaired at 31 December 2016 and 30 June 2015:
UK gilts AAA AA A BBB(1) Unrated Total
--------------------------------------------------
31 December 2016 GBPm GBPm GBPm GBPm GBPm GBPm GBPm
-------------------------------------------------- -------- ------- ------- ------- ------- ------- --------
Units in liquidity
funds - 569.3 3.0 - - - 572.3
Debt securities and other fixed income securities 645.7 790.6 919.0 3,432.4 3,582.6 381.6 9,751.9
Deposits with credit institutions - - 2.2 13.1 57.9 - 73.2
Derivative financial assets - - 1.0 25.5 80.5 - 107.0
Other loans - - 3.8 - 188.7 - 192.5
Loans secured by mortgages - - - - - 6,594.2 6,594.2
Reinsurance - - 309.4 342.8 - - 652.2
Insurance and other receivables - - - - - 137.3 137.3
Total 645.7 1,359.9 1,238.4 3,813.8 3,909.7 7,113.1 18,080.6
UK gilts AAA AA A BBB(1) Unrated Total
30 June 2015 GBPm GBPm GBPm GBPm GBPm GBPm GBPm
Units in liquidity
funds 254.9 - - - 25.3 280.2
Debt securities and other fixed income securities 749.3 49.6 246.0 1,713.4 1,814.2 184.3 4,756.8
Deposits with credit institutions - - - 0.9 17.1 - 18.0
Derivative financial assets - - - 17.5 33.4 - 50.9
Loans secured by mortgages - - - - - 3,471.8 3,471.8
Reinsurance - - 2.6 0.9 - - 3.5
Insurance and other receivables - - - 0.6 - 33.5 34.1
Total 749.3 304.5 248.6 1,733.3 1,864.7 3,714.9 8,615.3
(1) Includes BB and below of GBP150.7m (30 June 2015:
GBP123.6m).
The carrying amount of those assets subject to credit risk
represents the maximum credit risk exposure.
(d) Liquidity risk
The investment of Retirement Income cash in corporate bonds,
gilts and lifetime mortgages, and commitments to pay policyholders
and other obligations, requires liquidity risks to be taken.
Liquidity risk is the risk of loss because the Group, although
solvent, either does not have sufficient financial resources
available to it in order to meet its obligations as they fall due,
or can secure them only at excessive cost.
Exposure to liquidity risk arises from:
-- Deterioration in the external environment caused by economic
shocks, regulatory changes or reputational damage;
-- Realising assets to meet liabilities during stressed market conditions;
-- Increasing cash flow volatility in the short term giving rise
to mismatches between cash flows from assets and requirements from
liabilities;
-- Needing to support liquidity requirements for day-to-day operations;
-- Ensuring financial support can be provided across the Group; and
-- Maintaining and servicing collateral requirements arising
from the changes in market value of financial derivatives used by
the Group.
Liquidity risk is managed by ensuring that assets of a suitable
maturity and marketability are held to meet liabilities as they
fall due. The Group's short-term liquidity requirements are
predominantly funded by advance Retirement Income premium payments,
investment coupon receipts, and bond principal repayments out of
which contractual payments need to be made. There are significant
barriers for policyholders to withdraw funds that have already been
paid to the Group in the form of premiums. Cash outflows associated
with Retirement Income liabilities can be reasonably estimated and
liquidity can be arranged to meet this expected outflow through
asset-liability matching and new business premiums.
The cash flow characteristics of the lifetime mortgages are
reversed when compared with Retirement Income products, with cash
flows effectively representing an advance payment, which is
eventually funded by repayment of principal plus accrued interest.
Policyholders are able to redeem mortgages, albeit at a cost. The
mortgage assets are considered illiquid, as they are not readily
saleable due to the uncertainty about their value and the lack of a
market in which to trade them.
Cash flow forecasts over the short, medium and long terms are
regularly prepared to predict and monitor liquidity levels in line
with limits set on the minimum amount of liquid assets
required.
The table below summarises the maturity profile of the financial
liabilities, including both principal and interest payments, of the
Group based on remaining undiscounted contractual obligations:
Within one
year or
payable on One to More than No fixed
demand five years five years term
31 December 2016 GBPm GBPm GBPm GBPm
Subordinated debt - 259.9 362.5 -
Derivative financial liabilities 34.6 35.5 149.6 -
Obligations for repayment of cash collateral received 52.1 - - -
Deposits received from reinsurers 400.3 1,506.8 5,342.7 -
Reinsurance finance - - - 65.9
Reinsurance funds withheld 17.5 64.8 179.1 -
Within one
year or
payable on One to More than No fixed
demand five years five years term
30 June 2015 GBPm GBPm GBPm GBPm
Bank borrowings 6.2 44.3 - -
Derivative financial liabilities 1.0 4.0 454.7 -
Obligations for repayment of cash collateral received 18.6 - - -
Deposits received from reinsurers 183.9 715.0 2,743.4 -
Reinsurance finance - - - 76.7
35 Capital
Since 1 January 2016, the Group has been required to measure and
monitor its capital resources on a new regulatory basis and to
comply with the requirements established by the Solvency II
Framework Directive, as adopted by the Prudential Regulation
Authority (PRA) in the UK. The Group and its regulated subsidiaries
are required to maintain eligible capital, or 'Own Funds' in excess
of the value of their Solvency Capital Requirements (SCR). The SCR
represents the risk capital required to be set aside to absorb 1 in
200 year stress tests of each risk type that the JRP Group is
exposed to, including longevity risk, property risk, credit risk,
and interest rate risk. These risks are all aggregated with
appropriate allowance for diversification benefits.
In December 2015, Just Retirement Group plc and Just Retirement
Limited received approval to calculate their Solvency II capital
requirements using a full internal model which continued to be used
for those parts of the Group at December 2016. The capital
requirement for the ex-Partnership business is assessed using the
standard formula.
The surplus of Own Funds over the SCR is called "Excess Own
Funds" and this effectively acts as working capital for the Group.
The overriding objective of the Solvency II capital framework is to
ensure there is sufficient capital within the insurance company to
protect policyholders and meet their payments when due.
The Group's capital position can be adversely affected by a
number of factors, in particular factors that erode the Group's
capital resources and/or which impact the quantum of risk to which
the Group is exposed. In addition, any event which erodes current
profitability and is expected to reduce future profitability and/or
make profitability more volatile could impact the Group's capital
position, which in turn could have a negative effect on the Group's
results of operations.
The Group's objectives when managing capital for all
subsidiaries are:
-- To comply with the insurance capital requirements required by
the regulators of the insurance markets where the Group operates.
The Group's policy is to manage its capital in line with its risk
appetite and in accordance with regulatory requirements;
-- To safeguard the Group's ability to continue as a going
concern so that it can continue to provide returns for shareholders
and benefits for other stakeholders; and
-- To provide an adequate return to shareholders by pricing insurance and investment contracts commensurately with the level of risk.
Group entities that are under supervisory regulation and are
required to maintain a minimum levels of regulatory capital
include:
-- Just Retirement Limited and Partnership Life Assurance
Company Limited - authorised by the PRA, and regulated by the PRA
and FCA.
-- Just Retirement Solutions Limited, Just Retirement Money
Limited, and Partnership Home Loans Limited - authorised and
regulated by the FCA.
The Group and its regulated subsidiaries complied with their
regulatory capital requirements throughout the year.
Group capital position
The Group's estimated capital surplus position at 31 December
2016, which is unaudited, and is stated after including 12 months'
amortisation of transitional relief was as follows:
JRP Group
(unaudited)
31 December 2016 GBPm
Eligible Own Funds 2,192.5
Solvency Capital Requirement 1,449.0
Excess Own Funds 743.5
Solvency ratio 151%
36 Related parties
The Group has related party relationships with its key
management personnel and associated undertakings. All transactions
with related parties are carried out on an arm's length basis.
Key management personnel comprise the Directors of the
Company.
There were no material transactions between the Group and its
key management personnel other than those disclosed below.
Key management compensation is as follows:
18 months ended Year ended
31 December 2016 30 June 2015
GBPm GBPm
Short-term employee benefits 6.3 7.0
Share-based payments 3.5 1.2
-------------------------------------
Total key management compensation 9.8 8.2
-------------------------------------
Loans owed by Directors 0.3 -
Loans advanced to associate and fees
on loans 0.2 -
-------------------------------------
The loan advances to Directors accrue interest fixed at 4% p.a.
and are repayable in whole or in part at any time.
Loans are regularly advanced to the Group's associate,
Eldercare, to provide short-term prefunding for policy holder
annuity purchases.
37 Ultimate Parent Company and ultimate controlling party
Prior to 1 April 2016 the ultimate Parent undertaking of the
Group was Avallux S.Ã .r.l., a Company incorporated in Luxembourg.
Following the share exchange to acquire the entire share capital of
Partnership Assurance Group plc on this date, the Company did not
have a controlling party.
38 Post balance sheet events
Subject to approval by shareholders at the AGM, the final
dividend for 2016 of 2.4 pence per ordinary share, amounting to
GBP22.4 million, will be paid on 26 May 2017 and accounted for as
an appropriation of retained earnings in the year ending 31
December 2017.
There are no other post balance sheet events that have taken
place between 31 December 2016 and the date of this report.
European embedded value ("EEV")
Statement of Directors' responsibilities in respect of the
European Embedded Value ("EEV") basis supplementary financial
statements
The Directors of JRP Group plc have chosen to prepare
supplementary financial statements in accordance with the CFO
Forum's Principles and Guidance on EEV reporting dated April 2016
("EEV Principles").
When compliance with the EEV Principles is stated, those
Principles require the Directors to prepare supplementary financial
statements in accordance with the methodology contained in the EEV
Principles and to disclose and explain any non-compliance with the
EEV Guidance included in the EEV Principles.
In preparing the EEV supplementary financial statements, the
Directors have:
-- Prepared the supplementary financial statements in accordance with the EEV Principles;
-- Identified and described the business covered by the EEV Principles;
-- Applied the EEV Principles consistently to the covered business;
-- Determined assumptions on a realistic basis, having regard to
past, current and expected future experience and to any relevant
external data, and then applied them consistently; and
-- Made estimates that are reasonable and consistent.
The supplementary financial statements were approved by the
Board of Directors on 9 March 2017 and were signed on its behalf
by:
Rodney Cook Simon Thomas
Group Chief Executive Officer Group Chief Finance Officer
9 March 2017
Supplementary financial statements
Life insurance products are, by their nature, long-term and the
profit on this business is generated over a significant number of
years. Accounting under IFRS alone does not, in the Group's
opinion, fully reflect the value of future cash flows. Under EEV,
the total profit recognised over the lifetime of a policy is the
same as that recognised under IFRS but the timing of recognition is
different. The Group considers that embedded value reporting
provides investors with a measure of the future profit streams of
the Group's in-force long-term business and is a valuable
supplement to statutory accounts.
Following the change in solvency regime to Solvency II from 1
January 2016, the Group has prepared its EEV with the covered
business being valued consistently with IFRS. This has resulted in
the difference in the adjustments to IFRS relative to prior
periods. Extracted from the unaudited interim results for the
period ending 30 June 2016.
Reconciliation of IFRS shareholders' net equity to EEV
31 December 31 December 30 June
2016 2015(1) 2015
GBPm GBPm GBPm
----------- -----------
Shareholders' net equity on IFRS basis 1,610.6 921.5 814.0
Goodwill (33.1) (32.8) (32.8)
Intangibles (183.9) (35.5) (37.3)
Adjustments to IFRS 58.4 (263.8) (142.5)
----------- -----------
EEV net worth 1,452.0 589.4 601.4
Value of in-force business
Present value of future profits 674.7 624.4 525.8
Cost of residual non-hedgeable risks (56.3) (13.4) (11.9)
Frictional cost of capital (23.4) (31.2) (28.6)
Deferred Tax Asset - 31.1 8.7
Time Value of Options and Guarantees - (56.5) (76.1)
----------- -----------
EEV (net of taxation) 2,047.0 1,143.8 1,019.3
----------- -----------
(1) Extracted from the unaudited interim results for the period
ending 30 June 2016
-- The EEV as at 30th June 2015 and 31 December 2015 was
calculated on the previous methodology based on Solvency I, which
included a deferred tax asset within the VIF. The changes to
deferred tax assets as at 31 December 2016 have now been included
within the adjustments to IFRS line.
-- The Time Value of Options and Guarantees ("TVOG") included
within the VIF at 30 June 2015 and 31 December 2015 included an
amount reflecting a quantification of the reduction in the yield of
lifetime mortgages and the impact this has on the liquidity premium
(primarily arising from assumption differences between the IFRS
valuation and the Solvency I valuation of TVOG). With the alignment
to IFRS, this is no longer required.
Statement of change in Group embedded value and analysis of
movement in the value of covered business
For the 18 months ended 31 December 2016
The statement of change in embedded value and analysis of
movement in the value of the covered business represents the change
for the 18 months ended 31 December 2016 for the JRP Group,
together with the comparative figures for the 12 month period ended
30 June 2015.
Following the change in solvency regime to Solvency II from 1
January 2016, the Group has prepared its EEV, with the covered
business liabilities being valued consistently with IFRS. In the
tables below, the results up to 31 December 2015 have been prepared
with the covered business liabilities being valued under the
previous Solvency I regime and the following 12 month results
reflect the current EEV basis. The change in methodology as at
December 2015 in the table below captures the impact of these
changes. The EEV earnings in the twelve months following 31
December 2015 include nine months of post-acquisition PAG EEV
earnings as well as twelve months of JRG EEV earnings.
18 months ended 31 December 2016 12 months
Covered business Non-covered business Total ended 30 June 2015
GBPm GBPm GBPm GBPm
Opening Group EEV 782.8 236.5 1,019.3 959.1
Operating EEV earnings 87.8 2.7 90.5 53.6
Non-operating EEV earnings (33.9) (18.1) (52.0) 25.5
Total EEV earnings 53.9 (15.4) 38.5 79.1
Other movements in IFRS net equity - 1.5 1.5 0.9
Dividend and capital flows 30.0 54.5 84.5 (11.0)
Closing Group EEV at December 866.7 277.1 1,143.8 1,028.1
Methodology change as at December 2015 6.5 - 6.5 -
Restated 2015 EEV 873.2 277.1 1,150.3 1,028.1
Acquisition of Partnership Assurance Group 571.8 63.8 635.6 -
Operating EEV earnings 186.8 (9.6) 177.2 36.5
Non-operating EEV earnings 143.5 (51.0) 92.5 (41.6)
Total EEV earnings 330.3 (60.6) 269.7 (5.1)
Other movements in IFRS net equity - 11.9 11.9 1.8
Dividend and capital flows 10.0 (30.5) (20.5) (5.5)
Closing Group EEV 1,785.3 261.7 2,047.0 1,019.3
Other movements in IFRS net equity mainly consist of the impact
of share-based payments on the EEV. During the period the Group
raised GBP96.9m of capital, net of issue costs, which increased
EEV, and paid dividends of GBP32.9m which reduced EEV. A total of
GBP40.0m of capital was injected into the covered business from the
non-covered business.
To better demonstrate the movement in embedded value, the
composition of the embedded value profit for the current year is
shown separately between the movement in shareholders' net worth
and the value of in-force business, for covered business only.
18 months ended 31 December 2016 12 months
Shareholders' net worth Value of in-force business Total ended 30 June 2015
GBPm GBPm GBPm GBPm
Opening EEV 364.9 417.9 782.8 699.1
New business value (34.8) 105.8 71.0 48.6
Expected existing business
contribution (reference rate and in
excess of reference rate) 1.7 15.6 17.3 13.8
Transfers from VIF and required
capital to free surplus 25.4 (25.4) - -
Experience variances (52.6) 49.1 (3.5) (10.1)
Assumption changes (26.8) 37.8 11.0 6.9
Other operating variances (8.0) - (8.0) (6.9)
Operating EEV earnings (95.1) 182.9 87.8 52.3
Economic variances 12.5 (46.4) (33.9) 27.2
Total EEV earnings (82.6) 136.5 53.9 79.5
Dividend and capital flows 30.0 - 30.0 10.0
Closing EEV at December 312.3 554.4 866.7 788.6
Methodology change as at December
2015 269.5 (263.0) 6.5 -
Restated 2015 EEV 581.8 291.4 873.2 788.6
Acquisition of Partnership Assurance
Group 401.5 170.3 571.8 -
New business value 100.6 40.9 141.5 49.5
Expected existing business
contribution (reference rate and in
excess of reference rate) - 25.2 25.2 16.3
Transfers from VIF and required
capital to free surplus 22.7 (22.7) - -
Experience variances (19.1) 3.9 (15.2) (13.0)
Assumption changes 21.9 7.1 29.0 (7.4)
Other operating variances 7.2 (0.9) 6.3 (7.6)
Operating EEV earnings 133.3 53.5 186.8 37.8
Economic variances 72.2 71.4 143.6 (43.6)
Other non-operating variances (8.0) 7.9 (0.1) -
Total EEV earnings 197.5 132.8 330.3 (5.8)
Dividend and capital flows 10.0 - 10.0 -
Closing EEV 1,190.8 594.5 1,785.3 782.8
The movement in EEV of the covered business is discussed in more
detail below.
The acquisition of PAG has increased EEV for covered business by
GBP571.8m. This figure has been revised from the figure disclosed
at June 2016 in line with the revisions to the acquisition balance
sheet in the primary financial statements.
Following the change in solvency regime to Solvency II from 1
January 2016, the Group has prepared its EEV with the covered
business liabilities being valued consistently with IFRS instead of
the previous Solvency I regime. The impact of this methodology
change has been reflected as at 31 December 2015 and has resulted
in an increase in EEV of GBP6.5m. Whilst the impact on total EEV
has been small, there was a large increase in the shareholders' net
worth that was offset by a reduction in the value of in-force
business to reflect the lower provisions for adverse deviations
held in the IFRS reserves relative to the Solvency I Pillar 1
reserves. The figures for the impact of the methodology change have
been revised from the figures disclosed at June 2016 to reflect
refinements to harmonise the implementation of the revised
methodology across the Group.
Operating EEV earnings increased embedded value by GBP274.6m in
the period, primarily from the value of new business written in the
period of GBP212.5m. Operating EEV earnings also include GBP42.5m
in respect of the expected contribution from existing business. The
remaining GBP18.5m of operating EEV earnings arises from operating
assumption changes which have partly been offset by experience
variances, interest payable on the subordinated debt, and expenses
in the non-covered business.
Non-operating EEV earnings increased embedded value by
GBP109.6m, primarily due to positive economic variance from the
fall in risk-free rates over 2016. Transaction and integration
costs with regards to the merger of GBP64.1m (pre-tax) reduced the
non-operating EEV earnings.
Notes to the European Embedded Value results
Supplementary financial statements
1) Basis of presentation
The Group's primary financial statements have been prepared in
accordance with International Financial Reporting Standards
("IFRS") as adopted by the European Union. The Group has prepared
these supplementary financial statements in accordance with the
European Embedded Value Principles and associated guidance issued
in April 2016 by the European Insurance CFO Forum ("CFO
Forum").
These principles permit, but do not require, the use of
projection methods and assumptions applied for market-consistent
solvency regimes. JRP has not aligned its EEV methodology and
assumptions with Solvency II. The valuation of covered (long-term
business) business liabilities underlying the EEV is consistent
with the methods and assumptions used for the primary financial
statements which are prepared under IFRS.
The Group uses EEV methodology to value all lines of insurance
business within Just Retirement Limited ("JRL") and Partnership
Life Assurance Company Limited ("PLACL"), representing the covered
business of the Group. No other Group companies contain material
amounts of covered business. For other Group companies, the net
worth is the IFRS net asset value less the value of goodwill and
intangibles. The Group EEV includes the value of subordinated debt
at fair value.
The acquisition of Partnership Assurance Group plc ("PAG") by
Just Retirement Group plc ("JRG") took place on 1 April 2016, at
which point Just Retirement Group plc was renamed JRP Group plc
("JRP"). These supplementary statements of JRP report on JRP's EEV
for the 18 month period to 31 December 2016 following the change in
JRP's reporting date to 31 December. The transaction has been
accounted for as a business combination in which JRG acquired PAG
on 1 April 2016. As such, the result for JRP has included PAG's
embedded value as an acquisition at 1 April 2016 and includes the
impact of changes in PAG's EEV for the nine months from 1 April
2016 to 31 December 2016.
The Directors of the Group are responsible for the preparation
of these supplementary financial statements.
2) Methodology
The following methodology applies to the covered business of the
Group.
Following the change in solvency regime to Solvency II from 1
January 2016, the Group has prepared its EEV with the covered
business liabilities being valued consistently with IFRS. As part
of the acquisition of PAG, the methodologies for calculating the
EEV and material economic assumptions were harmonised across the
two groups. The notes that follow generally apply to the
calculation of the embedded values for both JRL and PLACL. Any
differences are commented on as appropriate.
A. Embedded value overview
In reporting under the EEV Principles, the Group has chosen to
adopt a "bottom-up" approach to the allowance for risk. The
approach makes an explicit allowance for part of the spread (that
part being referred to as "liquidity premium") expected to be
earned on corporate bonds and lifetime mortgages in determining the
embedded value.
The embedded value is the sum of the net worth of the Group
companies, plus the value of in-force covered business. The
embedded value is calculated net of the impacts of reinsurance and
allows for taxation based on current legislation and enacted future
changes.
The net worth is the market value of the shareholders' net
assets. The shareholders' net assets in respect of the life
companies are taken from the IFRS consolidated statement of the
financial position with adjustment to value subordinated debt at
fair value. The net worth represents the market value of the assets
of the life company in excess of the insurance and non-insurance
liabilities of the life company as assessed on an IFRS basis.
The net worth in the covered business can be split into the free
surplus and required capital. The free surplus is the market value
of assets attributed to, but not required to support, the in -force
covered business. The required capital is assessed as the market
value of assets attributed to the covered business in excess of
assets required to back liabilities and for which distribution to
shareholders is restricted. The level of required capital is set
with regards to the regulatory capital requirements (i.e Solvency
II) such that the free surplus is equal to Solvency II Excess Own
Funds. This methodology reflects the level of capital considered by
the Directors to be required to support the business.
The value of in-force business is the present value of projected
after-tax profits emerging in future from the current in-force
business less the cost arising from holding the required capital to
support the in-force business and an allowance for non-hedgeable
risks. The future cash flows are projected using best estimate
assumptions for each component of the cash flow.
The value of new business is the present value of projected
after-tax profits emerging in future from new business sold in the
period less the cost arising from holding additional capital to
support this business and an allowance for non-hedgeable risks. The
figures shown also include the expected return between the point of
sale and the reporting date.
B. Covered business
The business to which the EEV Principles have been applied is
defined as the covered business. The covered business includes all
business written by JRL and PLACL. In particular, it includes the
long-term insurance business for UK regulatory purposes and
principally comprising:
-- Pension Guaranteed Income for Life Solutions ("GIfL");
-- Defined Benefit De-risking contracts ("DB");
-- Drawdown pension business contracts;
-- Care Plans; and
-- Protection
Some purchased life annuity business has been written, but this
has not been written in significant volumes. Although it has been
allowed for in the calculations, it has not been explicitly
modelled. The impact of this approximate treatment is not
material.
C. New business
All annuity business is written on a single premium basis.
Premium increments received following policy issue are excluded
from the value of new business. Single and regular premium
protection business is included in new business. No allowance is
made in the embedded value for the value of new business written
after the reporting date.
Point-of sale economic assumptions and opening period
non-economic assumptions are used to value the new business. Any
variances or changes in assumptions after the point-of-sale are
recorded within the analysis of EEV earnings as operating
experience variances or operating assumption changes.
Any changes to non-economic assumptions and methodology in
respect of new business are introduced at the reporting date. The
impact of these changes on the value of new business at the end of
the year is therefore included within the analysis of the embedded
value profit in the operating assumption changes.
D. Components of value
The values of in-force business and new business each comprise
four components:
(i) Certainty equivalent value; less
(ii) Time value of financial options and guarantees; less
(iii) Allowance for non-hedgeable risk; less
(iv) Cost of capital.
(i) Certainty equivalent value
The certainty equivalent value is the value of the future cash
flows, excluding the time value of financial options and
guarantees. It is calculated assuming assets earn the reference
rate and the cash flows are discounted at the reference rate. The
reference rate is defined in section E "Valuation of cash flows"
below.
The future cash flows are those arising from the assets backing
the liabilities as assessed on an IFRS basis and from the
liabilities themselves. The calculation of the IFRS liabilities at
future dates in the projection assumes the continuation of the
bases used to calculate the liabilities at the valuation date.
(ii) Time value of financial options and guarantees ("TVOG")
The certainty equivalent value calculation above is based on a
single (base) deterministic economic scenario; however, a single
scenario cannot appropriately allow for the effect of certain
features of options and guarantees. If an option or guarantee
affects shareholder cash flows in the base scenario, the impact is
included in the certainty equivalent value and is referred to as
the intrinsic value of the option or guarantee; however, as future
investment returns are uncertain, the actual impact on shareholder
profits may be higher or lower and hence allowance will have to be
made for the TVOG.
The covered business does not contain any significant
policyholder options or guarantees and therefore there is no
explicit TVOG.
The assets backing the covered business include mortgages
secured against individual domestic properties (lifetime
mortgages). These mortgages contain a "no negative equity"
guarantee. Under this guarantee, the amount recoverable by the
Group on termination of the mortgage is generally capped at the net
sale proceeds of the property. This guarantee does not apply where
the mortgage redemption is not accompanied by a sale of the
underlying property. This could occur when, for example, the
property is remortgaged with another provider. The time value of
this option and guarantee is allowed for in the asset valuation
using closed form calculations, based on a variant of the
Black-Scholes option pricing formula. The formula incorporates a
number of assumptions, including those for risk-free interest
rates, future property growth and future property price volatility.
The value of this guarantee is allowed for through a reduction in
the liquidity premium included in the VIF for covered business, and
hence is not explicitly valued.
(iii) Allowance for non-hedgeable risks
The key non-hedgeable risks faced by the Group are mortality
(including longevity), early redemptions of lifetime mortgages, and
operational risks.
No allowance has been made within the cost of non-hedgeable
risks for symmetrical risks as the assumptions made regarding
future experience are set so as to give the mean of the expected
outcome (including allowing for the tails of the distribution).
Mortality risk and the risk of early redemptions of lifetime
mortgages are symmetrical and hence no further adjustment has been
made in respect of these risks.
However, the certainty equivalent value and the time value of
financial options and guarantees make no allowance for the cost of
possible operational and other asymmetric risk and the Group has
made an explicit allowance for these risks.
In the valuation approach used, the market risks faced by the
Group are allowed for directly in the valuation of the cash
flows.
(iv) Frictional cost of capital
The additional costs to a shareholder of holding the assets
backing the required capital within an insurance company rather
than directly in the market are called frictional costs. These are
deducted from the certainty equivalent value. The additional costs
allowed for are the taxation costs on the investment return and any
additional investment expenses on the assets backing the required
capital.
Frictional costs are calculated by projecting the level of
required capital. The projection of the required capital is based
on an approximate method that assumes the required capital is a
constant proportion of the projected IFRS liabilities. Tax on
investment returns and investment expenses are payable on the
assets backing required capital, up to the point that the required
capital is released to shareholders.
E. Valuation of cash flows
Reference rates are calculated by adding the liquidity premiums
derived from assets backing liabilities (mainly corporate bond and
lifetime mortgages) to the swap curve. The liquidity premium on
corporate bond assets is calculated by deducting an allowance for
credit default, individually assessed for each bond based on credit
rating, from the spread on each bond and comparing the resulting
risk-adjusted internal rate of return on the portfolio to the swap
curve. The lifetime mortgage assets are valued using a mark to
model approach that allows for expected future expenses for the
mortgages and the cost of the no-negative equity guarantee, where
relevant, with the liquidity premium calculated on a consistent
basis with corporate bonds.
For protection business, there is no allowance for a liquidity
premium in the reference rate used to value the business.
(i) In-force business
For the in-force business, the liquidity premium has been
derived using the method described above.
(ii) New business
For new business written during the period, the liquidity
premium varies by the month of policy inception. The liquidity
premium adjustment applied to each month's new Retirement Income
business is consistent with the method used to value the in-force
business described above. For corporate bonds assumed to back the
new business, the liquidity premium is calculated by deducting an
allowance for credit default risk from the estimated spread for new
bond purchases in the period. For lifetime mortgages the liquidity
premium is calculated by equating the present value of all the
matching cash flows for new lifetime mortgages discounted at the
swap rate plus the liquidity premium to the point-of-sale IFRS
asset value of the new matching mortgages.
F. Reinsurance
The Group has a number of reinsurance arrangements in place in
respect of the GIfL business, whereby part of the mortality risk is
transferred to the reinsurers. The Group received an initial
financing payment which is repayable out of future surplus
emerging. Some associated initial and renewal fees are also payable
to the reinsurers. The face value of the amount owed to the
reinsurers at the relevant reporting date together with all
management fees expected to be paid in the future has been
explicitly allowed for in the value of the in-force business at the
reporting date. The risk transfer is not reflected in the EEV
because, on the assumptions used, the Group expects to recapture
the business once remaining financing has been repaid.
The Group also has in place quota share, quota share with
deposit back and mortality swap reinsurance arrangements for the
GIfL DB and Care business where part of the mortality risk on each
contract is transferred to the reinsurers. The risk transfer for
these contracts is reflected in the EEV.
G. Taxation
The projected cash flows take into account all tax which the
Group expects to pay. The calculations are undertaken assuming
rates based on current and expected future tax rates.
3) Assumptions
A. Economic assumptions
Reference rates
The term structure of the reference rates has been derived from
mid-market swap rates. The resulting rates reflect the shape of the
swap rate curve. For new business the rates have been derived from
the swap rates applicable on the date each payment was received for
Retirement Income policies or the date each mortgage advance was
completed as appropriate.
Sample mid-market swap rates at 30 June 2016, 31 December 2015
and 30 June 2015 are shown in the following table.
Term (years)
Swap rates (at sample terms, %) 1 5 10 20 30
31 December 2016 0.6 0.9 1.2 1.5 1.4
31 December 2015 0.8 1.6 2.0 2.2 2.2
30 June 2015 0.8 1.7 2.2 2.4 2.4
--- --- --- --- ---
The liquidity premiums used to value the annuity in-force
business are as follows:
Liquidity premium, bps JRG PAG
31 December 2016 189 228
31 December 2015 192 n/a
30 June 2015 178 n/a
--------------------------
The liquidity premium for each month's new business has varied
over the period but the effect is equivalent to an average
adjustment as follows:
Liquidity premium, bps JRG PAG
31 December 2016 262 282
31 December 2015 228 n/a
30 June 2015 61 n/a
---
The liquidity premium methodology in JRL changed from 30 June
2015 and the value quoted above is therefore calculated under the
previous methodology.
Residential property assumptions
When calculating the value of the no-negative equity guarantee
on the lifetime mortgages, certain economic assumptions are
required within the variant of the Black-Scholes formula. These
assumptions were harmonised across the Group following the
acquisition of PAG.
The market, against which these assumptions have been assessed,
and the cost of the no-negative equity guarantee has been
calibrated, is neither deep nor liquid. The Group has therefore set
these assumptions taking into account historic, published, UK
residential property price movements. The risk-free rate used in
the variant of the Black-Scholes formula is the mid-market swap
rate.
In the absence of a reliable long-term forward curve for UK
residential property price inflation, the Group has made an
assumption about future residential property price inflation. This
has been derived by reference to the long-term expectation of the
UK retail price inflation, "RPI", (consistent with the Bank of
England inflation target) plus an allowance for the expectation of
house price growth above RPI (property risk premium) less a margin
for a combination of risks including property dilapidation and
basis risk. This results in a single rate of future house price
growth of 4.25%.
In June 2016, the Group took a view that due to external factors
there may be potential disruption in the property market in the
short term but these factors would not affect the long term view
and hence adopted an assumption that house prices will fall by 10%
(from levels as at 30 June 2016) by 30 June 2017 and would grow
thereafter at a rate of 5.0% p.a. The Group has retained this
assumption for the current valuation. The impact of this
assumptions is broadly equivalent to using a flat 4.25% p.a.
assumption. The methodology at 30 June 2015 had assumed that future
house price growth was derived by adding a house price inflation
spread (derived from historic UK retail price inflation rates) to a
term structure of future inflation rates.
In deriving an assessment of long-term UK residential property
price volatility, the Group has used house price data published by
the Nationwide Building Society. The Group has adjusted the derived
value to allow for the additional volatility expected to be
observed in the Group's portfolios compared with the market as a
whole, the idiosyncratic risk. The volatility assumption used at 31
December 2016 was 12% p.a. (30 Jun 2015: 9.7% p.a.).
Expense inflation
The Group has harmonised this assumption across the life
companies and products. The best estimate expense inflation
assumption for 31 December 2016 is 4.3%. (As at 30 Jun 2015 the
assumptions varied by products and ranged from 3.6% p.a. to 4.5%
p.a.)
Taxation
The current and future tax rates used are the corporation tax
rates as published by HM Treasury and take into account proposed
changes to future tax rates. For the purposes of modelling tax on
future profits, a calendar year assumption is set using a pro rata
method based on the number of months at each effective rate. The
blended corporation tax rates used were as follows:
Calendar year Effective tax rate 31 December 2016
2016 20.00%
2017 19.25%
2018 19.00%
2019 19.00%
2020 17.50%
2021 17.00%
The rate of corporation tax assumed by JRG at 30 June 2015 was
20% for all future periods (being the effective tax rate at the
valuation date). The above approach was adopted by the Group when
harmonising assumptions as at 31 December 2015.
B. Operating assumptions
Operating assumptions have been reviewed as part of the
reporting process.
Mortality
The mortality assumptions have been set by the Group taking into
account the Group's own mortality experience together with relevant
studies undertaken by the Continuous Mortality Investigation Bureau
of the Institute and Faculty of Actuaries ("CMI"), population
studies undertaken by offices of the UK government, published
research materials, input from the Group's reinsurers and
management's own industry experience.
Mortgage repayments
Assumptions are made about the number of future mortgage
repayments resulting from individuals moving into long-term care or
through voluntary repayments. When deriving appropriate assumptions
the Group has taken into account its own experience together with
other relevant available information. The JRL assumptions for
mortality have been updated from those used at
30 June 2015 to reflect the emerging experience on this
business.
The decrement for moving into long -term care is expressed as a
proportion of the underlying mortality assumption for the relevant
lives. This assumption is unchanged from that used at 30 June 2015
for JRL.
The decrements for voluntary repayments are expressed as annual
percentages of the portfolio in force and exhibit a term structure
based on duration in-force. The JRL assumptions for rates of
voluntary redemption have been updated from those used at 30 June
2015 to reflect the emerging experience on this business.
Expenses
The expense levels are based on internal expense analysis
investigations and are appropriately allocated to the new business
and policy maintenance functions. Acquisition expenses have been
fully allocated to the values of new business for each product.
The Group has set long-term maintenance expense allowances for
each product at a level which it considers to be realistic.
Investment expenses have been set by reference to the expenses
payable under the investment management arrangements.
Some of the expenses incurred in the financial period to 30 June
2016 have been considered exceptional and one-off in nature. These
non-recurring expenses have been identified separately and have not
been included in the calculation of the value of in-force business
or in the value of new business and have been charged to the
non-operating earnings in the year incurred. Total non-recurring
expenses for the 18 months ended 30 June 2016 were GBP18.4m for the
Group's covered business (12 month period ended 30 Jun 2015:
GBP16.8m).
The look-through principle has not been applied to the losses in
the distribution company arising from the sale of products arising
from the covered business, and so these losses have not been
included as a deduction against the value of new business. The
distribution company is considered to be a stand-alone business and
its activities do not relate solely to the sale of covered
business. The recognised loss in the distribution company has been
accounted for on an IFRS basis, separately to the results of the
covered business.
The remaining expenses are included within operating results of
the distribution and other Group companies and have been accounted
for on an IFRS basis.
Non-hedgeable risk
At 31 December 2016 the provision for non-hedgeable risk has
been established as 0.35% of the best estimate reserves in respect
of Retirement Income business for the combined Group (30 June 2015:
0.18% for JRG). The increase in this assumption is due to changes
to the assessment of operational and expense risks. The
implementation of the methodology has not yet been fully aligned
between JRG and PAG. This assumption applies to new business from 1
January 2016. New business in the six months to 31 December 2015
uses the 30 June 2015 assumption of 0.18% of best estimate reserves
at point-of-sale.
Required capital
At 31 December 2016, the amount of required capital has been
assessed with reference to the Solvency II regulatory
requirements.
This assumption is changed from that used as at 30 June 2015,
which was based on 175% of JRL's capital resource requirement as
set out in the Solvency I Pillar 1 regulations in force at that
time.
4) Sensitivities
The Group embedded value at 31 December 2016 and the value of
new business for the year to 31 December 2016 have been
recalculated to show the sensitivity of the results to changes in
certain of the assumptions discussed above.
No future management actions are modelled following the change
to the assumptions. The results are shown net of tax.
For each of the sensitivities, all of the other assumptions
remain unchanged, unless otherwise stated. Except where explicitly
noted, the IFRS reserving basis is changed to reflect the revised
assumptions in each sensitivity.
The sensitivities of the embedded value and the value of new
business to changes in economic and non-economic assumptions are as
follows:
Sensitivity of values to changes in assumptions
Value of new
business
Embedded value at for 12 months Value of new business
31 December ended for 12 months ended
2016 31 December 2016 30 June2015
GBPm GBPm GBPm
Central value 1,785.3 141.5 95.7
Impact of:
349.6 n/a n/a
* 1% reduction in yield curves
(285.5) n/a n/a
* 1% increase in yield curves
* 20% reduction in property values (88.3) (6.4) (5.3)
* 125% of implied property volatilities (162.3) (15.3) (10.5)
* 5% reduction in retirement income customer base
mortality (137.2) (8.8) (10.4)
* 10% increase in lifetime mortgage voluntary
redemptions (49.3) (8.8) n/a
* 10% increase in maintenance expenses (28.7) (1.3) n/a
* 0.25% increase in mortality improvements for
Retirement Income business (74.6) (9.2) n/a
Notes to the sensitivities:
-- Interest rate environment +/-100 bps: this sensitivity is
modelled as a 100bp change to the yield on each asset. The
sensitivity allows for the resulting change in asset value and the
change in liability value that follows from the change in
risk-adjusted internal rate of return on the portfolio. In the
-100bp sensitivity the reference rate has a floor of 0%.
-- 20% fall in property values: this sensitivity allows for the
change in lifetime mortgage and commercial mortgage asset value
arising from an immediate fall of 20% in property prices. For
lifetime mortgages, from 30 June 2017 onwards, the sensitivity
assumes an additional 10% reduction in property prices over and
above the 10% fall assumed in the base position. The sensitivity
also allows for the corresponding change in liabilities as a result
of the yield change.
-- 25% increase in property volatility: this sensitivity allows
for the change in lifetime mortgage asset values as a result of the
change in the cost of the no-negative equity guarantee, and for the
change in commercial mortgage asset value. The sensitivity also
allows for the corresponding change in liabilities as a result of
the yield change.
-- 5% decrease in base mortality: this sensitivity is modelled
for the annuity business only. This is modelled as a change in the
best estimate mortality level and the prudent margins remain
unchanged.
-- 10% proportionate change in lapses: this sensitivity is
modelled as a change assumption for both covered business lapse
rates and lifetime mortgage voluntary repayment rates. The
sensitivity is applied as a proportionate reduction in the rate of
withdrawal (e.g. a withdrawal rate of 5.5% becomes 4.95% under the
sensitivity). The IFRS reserves are also changed in this scenario
as a result of changing yields on the lifetime mortgages.
-- 10% increase in maintenance expenses: this sensitivity is
modelled as a 10% change in the expense reserve. There is no change
to expense inflation and no change to valuation interest rates.
-- Mortality improvements +0.25%: this sensitivity is modelled
as an additional 0.25% improvement in each future year within the
best estimate basis for annuity business only. The IFRS reserving
basis remains unchanged.
Interest rate sensitivities are not modelled for new business as
the Group actively reviews its pricing, and in the event of a
sudden movement in asset values the pricing of new business would
be changed.
For the twelve months to 30 June 2015, sensitivities on new
business for voluntary redemptions and maintenance expenses were
calculated as reductions to the base assumption, and have not been
restated as increases to the base assumption. The mortality
improvement sensitivity was not performed on the new business in
the twelve months to June 2015.
Pro forma statement of change in Group embedded value and
analysis of movement in the value of covered business
For the 12 months ended 31 December 2016
The following pro forma financial information is provided for
illustrative purposes and is presented on the basis that the merger
between Just Retirement and Partnership had taken place as at 1
January 2016. Pro forma information is unaudited.
12 months ended 31 December 2016
Covered Non-covered
business business Total
GBPm GBPm GBPm
Opening Group EEV (Pro forma)(1) 1,432.5 340.1 1,772.6
Operating EEV earnings 184.9 (9.6) 175.3
Non-operating EEV earnings 157.9 (50.7) 107.2
Total EEV earnings 342.8 (60.3) 282.5
Other movements in IFRS net equity - 12.4 12.4
Dividend and capital flows 10.0 (30.5) (20.5)
Closing Group EEV 1,785.3 261.7 2,047.0
1. The opening Group EEV has been stated on harmonised
assumptions, and after methodology changes made following the
introduction of the Solvency II regulatory regime at 31 December
2015.
Other movements in IFRS net equity mainly consisted of the
impact of share-based payments on the EEV. In the year, the Group
paid dividends of GBP20.5m which reduced EEV, and GBP10.0m of
capital was injected into the covered business from the non-covered
business.
The composition of the embedded value profit is shown separately
between the movement in shareholders' net worth and the value of
in-force business below, for covered business only:
12 months ended 31 December 2016
Net worth VIF EEV
GBPm GBPm GBPm
Restated opening EEV (Pro forma) 983.1 449.4 1,432.5
New business value 99.3 42.4 141.7
Expected existing business contribution (reference rate and in excess of
reference rate) - 28.0 28.0
Transfers from VIF and required capital to free surplus 26.7 (26.7) -
Experience variances (18.2) 3.4 (14.8)
Assumption changes 21.9 7.0 28.9
Other operating variances 1.6 (0.5) 1.1
Operating EEV earnings 131.3 53.6 184.9
Economic variances 74.8 82.7 157.5
Other non-operating variances (8.4) 8.8 0.4
Total EEV earnings 197.7 145.1 342.8
Dividend and capital flows 10.0 - 10.0
Closing EEV 1,190.8 594.5 1,785.3
Operating EEV earnings increased embedded value by GBP184.9m in
the period, primarily from the value of new business written in the
period of GBP141.7m. Operating EEV earnings also included GBP28.0m
in respect of the expected contribution from existing business. The
remaining GBP15.2m of operating EEV earnings arises from operating
assumption changes which has partly been offset by experience
variance, interest payable on the subordinated debt and expenses in
the non-covered business.
Non-operating EEV earnings increased embedded value by
GBP107.2m, primarily due to positive economic variances from the
fall in risk free rates over 2016. Transaction and integration
costs with regards to the merger of GBP48.6m (pre-tax) reduced the
non-operating EEV earnings.
This information is provided by RNS
The company news service from the London Stock Exchange
END
FR UKAURBNAORUR
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