TIDMJUST
RNS Number : 8531S
Just Group PLC
14 March 2019
NEWS RELEASE www.justgroupplc.co.uk
14 March 2019
This announcement contains inside information for the purposes
of Article 7 of Regulation (EU) No 596/2014 ("MAR"). Upon
publication of this announcement, the inside information is now
considered to be in the public domain for the purposes of MAR.
JUST GROUP plc
RESULTS FOR THE YEARED 31 DECEMBER 2018
Just Group plc ("Just", the "Group") announces its results for
the year ended 31 December 2018.
Highlights
* Underlying operating profit(1) up 31% to GBP315m in
2018. Adjusted operating profit(1) was down 5% to
GBP210m
* IFRS loss before tax was GBP(86m) (2017: profit
GBP181m), driven by changes to property assumptions
in light of the economic and financial uncertainty
caused by Brexit
* New business profits up 44% to GBP244m(2) in 2018,
driven by strong sales growth and an increase in the
new business margin
* New business margin of 11.2%(2) in 2018, up from 9.0%
in 2017 and over three times the level reported in
2015
* Retirement Income sales growth of 15% in 2018.
Defined Benefit De-risking sales were up 32%
* Solvency coverage ratio of 144%, and after notional
recalculation for TMTP(3) , 136% (31 December 2017:
139%). Economic capital ratio has grown to 256% (31
December 2017: 238%)
* Capital actions. Alongside these results we are
announcing an underwritten Restricted Tier 1 debt
offering of at least GBP300m and an underwritten
equity placing of 9.99% of existing share capital.
Rodney Cook, Group Chief Executive, said:
"2018 has been a year of contrasts. We have achieved significant
new business profit growth, strong margins and higher sales despite
significant uncertainty during the Prudential Regulation
Authority's ("PRA") consultation into equity release mortgages.
I want to acknowledge the challenges our shareholders have faced
during this period and to assure them we remain focused on
delivering value for them by developing our highly effective new
business franchise.
As previously announced, following the release of the PRA policy
statement 31/18, the Board has been determining the optimal capital
mix and level in order to provide a stronger capital base to
support the development of the Group's capabilities. After careful
consideration, we are today announcing a package of capital
actions, including an underwritten Restricted Tier 1 debt offering
of at least GBP300m and an underwritten non pre-emptive equity
placing of 9.99% of existing share capital, which will allow the
Group to maintain its focus on growing profits. Further details of
these transactions are available on the Group website.
At the Interim Results in 2018 the Board decided to defer the
2018 interim dividend due to the uncertainty surrounding the
potential outcomes from the PRA consultation paper. The Board has
taken into consideration the extensive feedback received from
shareholders on this matter. Given the proposed capital actions we
are announcing today, we do not consider it appropriate to pay a
dividend for 2018. Our current expectation is to recommence
dividend payments during the 2019 financial year at a rebased
level.
During the year we have continued to innovate by developing new
customer solutions including our 'Just For You' mortgage range; our
Secure Lifetime Income product, which is a market first, and our
new fintech business, HUB Pension Solutions.
We have received external recognition for our service and been
awarded 'Risk Management Provider of the Year' in the Pension Age
awards, crowned winner of the 'Customer focus for a large
Enterprise' category in the Institute of Customer Service awards
and have been awarded a Financial Adviser 5 Star Service Award in
the Life & Pensions category, for the 14th consecutive year.
I'd like to pay tribute to my colleagues across the Group for
continuing to provide outstanding service to our customers in order
to advance our purpose, which is to help people achieve a better
later life.
We operate in highly attractive growth markets in which we hold
leadership positions and despite the challenging current macro
environment we remain confident of the outlook for our Group."
Notes
1. Alternative performance measure ("APM") - In addition to
statutory IFRS performance measures, the Group has presented a
number of non-statutory alternative performance measures. The Board
believes that the APMs used give a more representative view of the
underlying performance of the Group. APMs are identified in the
glossary at the end of this announcement.
2. The margins reported for the year are based on the opening
2018 IFRS actuarial assumptions. If the changes to the IFRS
property assumptions at 31 December 2018 had taken place at the
beginning of 2018, new business margins in 2018 would have been
lower by approximately 1%
3. TMTP - transitional measures for technical provisions
FINANCIAL CALAR DATE
AGM and Q119 Business Update 16 May 2019
============
Enquiries
Investors / Analysts Media
James Pearce, Director of Group Stephen Lowe, Group Communications
Finance Director
Telephone: +44 (0) 7715 085 099 Telephone: +44 (0) 1737 827 301
james.pearce@wearejust.co.uk press.office@wearejust.co.uk
Alistair Smith, Investor Relations Temple Bar Advisory
Manager Alex Child-Villiers
Telephone: +44 (0) 1737 232 792 William Barker
alistair.smith@wearejust.co.uk Telephone: +44 (0) 20 7002 1080
A presentation for analysts will take place at 09.30am today at
Nomura, One Angel Lane, London, EC4R 3AB. A live webcast will also
be available on www.justgroupplc.co.uk at 09:30am.
Due to security restrictions at the venue attendance is limited
to those who have registered.
A copy of this announcement, the presentation slides and
transcript will be available on the Group's website
www.justgroupplc.co.uk
JUST GROUP PLC
GROUP COMMUNICATIONS
Vale House, Roebuck Close
Bancroft Road, Reigate
Surrey RH2 7RU
Forward-looking statements disclaimer:
This announcement in relation to Just Group plc and its
subsidiaries (the "Group") contains, and we may make other
statements (verbal or otherwise) containing, forward-looking
statements 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; the impact of
inflation and deflation; market competition; changes in assumptions
in pricing and reserving for insurance business (particularly with
regard to mortality and morbidity trends, gender pricing and lapse
rates); risks associated with arrangements with third parties,
including joint ventures and distribution partners; inability of
reinsurers to meet obligations or unavailability of reinsurance
coverage; the impact of changes in capital, solvency or accounting
standards; and tax and other legislation and regulations in the
jurisdictions in which the Group operates.
As a result, the Group's actual future financial condition,
performance and results may differ materially from the plans, goals
and expectations set out in the forward-looking statements within
this announcement. The forward-looking statements only speak as at
the date of this document and the Group undertakes no obligation to
update or change any of the forward-looking statements contained
within this announcement or any other forward-looking statements it
may make. Nothing in this announcement should be construed as a
profit forecast.
Chief Executive Officer's Statement
Smart about growth
We remain focused on growing profits and margins, and in
delivering a Just experience for our customers
introduction
We are pleased with our results for the year and have continued
to achieve strong growth in sales and new business profit. We
remain focused on attractive growth markets and making smart
choices to grow profits and margins.
Performance review
The parts of the retirement market that we operate in remain
buoyant and have good long-term prospects. The defined benefit
de-risking market continues to grow and has now became mainstream.
GIfL continues to be a key retirement income solution and growth of
the open market has been stimulated by FCA initiatives to encourage
shopping around. Lifetime mortgages remain a very important tool to
address the needs of those people at- or in-retirement where they
have housing wealth, but insufficient pension income.
We focus on these attractive markets and are disciplined in the
business we choose to accept. This approach has delivered
significant growth in both sales and margins. We think that's smart
growth.
Our corporate solutions businesses which operate under our HUB
brand continue to grow and have further strengthened in 2018
through our strategic partnership to provide M&G Prudential's
customers with a retirement income service, the launch of HUB
Pension Solutions and through our acquisition of Corinthian Pension
Consulting.
New business operating profit was GBP243.7m for 2018, an
increase of 44% compared to the prior year. Adjusted operating
profit before tax fell slightly by 5% compared to the prior year
and was GBP210.3m and overall the Group reported an IFRS loss
before tax for 2018 of GBP85.5m, compared to a profit before tax of
GBP181.3m for 2017. The IFRS loss before tax was primarily due to
the review of the Group's assumptions in relation to property
growth and volatility, further details of which are included in the
Financial Review.
Retirement Income sales increased by 15% to GBP2,173.4m, and LTM
sales increased by 18% to GBP602.1m.
Once again we are proud to have received the highest recognition
from the financial advisers who use our services, by being awarded
a Financial Adviser 5 Star Service Award in the Life & Pensions
category, for the 14th consecutive year. In addition the Institute
of Customer Service crowned Just the winner in the 'Customer focus
for a large Enterprise' category and Pension Age awarded Just 'Risk
Management Provider of the Year'. This recognises the "Just"
experience which we strive to give our customers.
Capital
In our interim results in September I explained that the
Prudential Regulation Authority ("PRA") had issued CP13/18 in
relation to lifetime mortgages being held to back annuity
liabilities, which could have resulted in a material reduction in
our capital position. In December the PRA published a Policy
Statement and updated Supervisory Statement in response to CP13/18
which set out the PRA's final policy and expectations. In summary
I'm pleased to say the PRA has listened to the concerns that we
(and others) raised, and has made adjustments to their original
proposals. All firms in the industry will have to make changes to
their businesses to meet the new requirements set out by the PRA.
For us here at Just, the outcome is well within the range of what
we have been planning for and the impact on the Group is manageable
over time. The PRA has allowed firms until 31 December 2019 to
implement their changes. We and others within the industry put
proposals to the PRA that the lifetime mortgage business we had
developed before the introduction of Solvency II in 2016, should
continue to benefit from the rules that were in place at that time.
We are pleased the PRA has agreed to this.
The outcome is significantly less onerous than CP13/18 suggested
and we have already taken action to ensure we operate within the
new boundaries set out by the PRA. We have announced an
underwritten Restricted Tier 1 debt offering of at least GBP300m
and an underwritten non pre-emptive equity placing of 9.99% of
existing share capital to strengthen the Group's capital base to
support our new business franchise.
The Group's Solvency Capital Requirement coverage ratio was
estimated to be 136% after notional recalculation of the
transitional measure on technical provisions ("TMTP") as at 31
December 2018 (31 December 2017: 139%). This reflects the benefit
of the GBP230m Tier 3 capital issued in February 2018, offset by
the capital strain from the strong new business volumes written
during the year. The majority of our own funds remain comprised of
Tier 1 capital. Our economic capital ratio at 31 December 2018 was
256% (31 December 2017: 238%). We plan to achieve capital
self-sufficiency and the Board now expects own funds to increase
organically from 2022, following implementation of a number of
management actions to improve new business capital efficiency,
reduce expenses, enhance management of the no-negative equity
guarantees ("NNEG") and optimise our investment approach.
Colleagues
Being Just is at the heart of what we do and is the core of what
we strive to deliver to our customers day in, day out. Our
colleagues work hard to deliver a Just experience and achievements
such as the service awards we have received are testament to their
hard work and determination. Once again I would like to extend my
thanks and gratitude to our colleagues across the Group for their
continued efforts, enthusiasm and dedication.
And finally...
We have achieved another set of excellent new business results
and, with the plan to strengthen our capital base remain confident
of the outlook for our Group. Because we operate in growing markets
we can make smart choices in the risks we accept in order to
deliver attractive returns on capital from new business. We are
proud of being "Just" and delivering products and services to help
our customers achieve a better later life.
Rodney Cook
Group Chief Executive Officer
Financial Review
delivering results
The Financial Review presents the results of the Group for the
year ended 31 December 2018, including IFRS, Solvency II and
economic capital information.
Within the Financial Review, the Group has presented a number of
alternative performance measures ("APMs"), which are used in
addition to IFRS statutory performance measures. The Board believes
that the use of APMs gives a more representative view of the
underlying performance of the Group. The APMs used by the Group
are: new business operating profit, in-force operating profit,
underlying operating profit, adjusted operating profit, new
business sales, adjusted earnings per share, embedded value per
share and economic capital coverage ratio. Further information on
APMs can be found in the glossary, together with a reference to
where the APM has been reconciled to the nearest statutory
equivalent.
The Group's new business franchise has delivered significant
growth in sales and margins during 2018 resulting in strong new
business operating profits.
The Group completed the integration of its underwriting IP in
2018 and has updated its IFRS mortality and property assumptions at
31 December 2018. Updates to the Group's mortality assumptions and
mortgage voluntary redemptions, which are included within operating
profit, largely contributed a GBP33.5m negative change and resulted
in a 5% reduction in adjusted operating profit this year, to
GBP210.3m, compared to GBP220.6m in 2017. Updates to property
assumptions, which are included in investment and economic losses,
contributed a GBP236m negative change. The net effect of these
assumption changes resulted in an IFRS loss before tax for the year
of GBP85.5m (2017: IFRS profit before tax of GBP181.3m). These
changes are explained in more detail below.
Adjusted operating profit BEFORE TAX
New business operating profit
New business operating profit has increased by 44%, from
GBP169.8m in 2017 to GBP243.7m in 2018. This is due to increases in
both Retirement Income sales and new business margins. Retirement
Income sales increased by 15% from GBP1,889.9m in 2017 to
GBP2,173.5m in 2018, driven by increased DB sales, and the new
business margin for the year was 11.2% (2017: margin of 9.0%). The
increased margin has been driven by the Group's continued focus on
pricing discipline. The margins reported for the year are based on
the opening 2018 IFRS actuarial assumptions. If the changes to the
IFRS property assumptions at 31 December 2018 had taken place at
the beginning of 2018, new business margins in 2018 would have been
lower by approximately 1%. We are also taking measures to reduce
the capital strain that new business generates by marginally
reducing the LTM backing ratio for new business and reducing the
duration and loan-to-value of our LTM. Taken together, this will
lower the 2019 new business margin by at least another percentage
point.
Adjusted operating profit
Year ended Year ended
31 December 31 December
2018 2017 Change
GBPm GBPm %
============================================ ============ ============ ======
New business operating profit 243.7 169.8 44
============================================ ============ ============ ======
In-force operating profit 71.7 71.3 1
============================================ ============ ============ ======
Underlying operating profit 315.4 241.1 31
============================================ ============ ============ ======
Operating experience and assumption changes (33.5) 34.6 (197)
============================================ ============ ============ ======
Other Group companies' operating results (14.6) (14.0) (4)
============================================ ============ ============ ======
Development expenditure (8.7) (1.1) (691)
============================================ ============ ============ ======
Reinsurance and finance costs (48.3) (40.0) (21)
============================================ ============ ============ ======
Adjusted operating profit before tax1 210.3 220.6 (5)
============================================ ============ ============ ======
1 See reconciliation to IFRS profit before tax in the IFRS
results section of this Financial Review.
In-force operating profit
In-force operating profit has increased slightly compared to the
prior year, from GBP71.3m to GBP71.7m, and represents the margin
emerging from the growing in-force book of business, and the return
on the Group's surplus assets.
Underlying operating profit
Underlying operating profit is the sum of new business operating
profit and in-force operating profit, and has increased by 31%,
from GBP241.1m to GBP315.4m, driven by the strong new business
results.
Operating experience and assumption changes
Operating experience and assumption changes reported a negative
variance of GBP(33.5)m for 2018, compared to a positive variance of
GBP34.6m in the prior year.
Operating experience variances were negligible in aggregate as
overall experience emerged in line with expectations. The Group has
seen a small positive experience variance in relation to GIfL and
Care mortality, and a small negative experience in relation to
lifetime mortgage mortality and redemptions. Expense experience
emerged in line with the updated assumptions set in the prior year,
which were revised in 2017 to take into account the reduced
per-policy running costs following the delivery of integration
synergies post-merger.
Operating assumption changes were GBP(33.5)m negative
overall.
During 2018, the Group completed the exercise of integrating the
IP from the Just Retirement and Partnership legacy businesses and
carried out a comprehensive review of its longevity assumptions. As
a consequence of this review the Group's proprietary tool for
pricing and reserving new business, PrognoSys(TM) , has been
recalibrated using the combined businesses' mortality data set;
mortality improvement assumptions have been updated using CMI 2017,
the actuarial profession's benchmark model, as a base for initial
rates of improvement, increasing the long-term rate of improvement,
and aligning improvement rates for Retirement Income and mortgages;
and the base level structure of mortality assumptions for the other
legacy basis has been developed to align better with experience and
includes a modification to assume a faster run-off of initial
excess mortality for the more impaired lives.
Overall the net effect of mortality assumption changes has been
broadly neutral. However in one of our larger, legacy medically
underwritten blocks of business, the net impact of these changes
resulted in an increase in reserves of GBP57m. On other lines of
business, there was an overall reduction in reserves of GBP31m from
these changes, and provisions which were held pending completion of
this work of GBP30m have been released. Mortality improvement rates
are closely intertwined with the base level and structure of the
mortality basis for medically underwritten business. Moreover, that
valuation is underpinned by a unique, large, and rapidly expanding
experience dataset.
Mortgage voluntary redemption assumptions were updated to
reflect the latest experience and this resulted in a charge of
GBP(33)m. Other minor assumption changes led to a charge of
GBP4m.
Other Group companies' operating results
The operating result for other Group companies was a loss of
GBP14.6m in 2018 compared to a loss of GBP14.0m in 2017. Included
within this line item is the operating result for the Group's
companies which operate under the HUB brand, and holding company
costs.
Development expenditure
Development expenditure mainly relates to amounts spent on
developing new products and services, such as our Just For You
Lifetime Mortgage range which was launched in January 2019 and our
innovative Secure Lifetime Income solution for investment
platforms, launched in February 2019.
Reinsurance and finance costs
The increase in reinsurance and finance costs during 2018 is
mainly due to interest on the GBP230m Tier 3 debt issued in
February 2018.
New business sales
We have achieved double-digit growth in both Retirement Income
sales and total new business sales for 2018. Retirement Income
sales increased by 15%, from GBP1,889.9m in 2017 to GBP2,173.5m in
2018, and total new business sales also increased by 15%, from
GBP2,457.1m in 2017 to GBP2,827.4m in 2018. The main reasons for
these increases are explained below.
DB sales were GBP1,314.2m in 2018 (2017: GBP997.8m), an increase
of 32%. The defined benefit de-risking market has grown
significantly and in 2018 is expected to exceed GBP23bn (2017:
GBP12.2bn). Employee benefits consultants have actively managed the
industry pipeline, reducing seasonality, which resulted in an
increase in business completed in the first half of the year.
GIfL sales decreased slightly by 4% to GBP786.5m in 2018,
compared to GBP820.5m in 2017 and as expected sales slowed in the
final quarter of 2018 as the pricing increases we implemented
following the publication of CP13/18 took effect.
Care Plan sales for the year ended 31 December 2018 were
GBP72.8m, a slight increase compared to 2017 sales of GBP71.6m, and
we remain a leading provider in this sector.
Drawdown sales were GBP51.0m for the year (2017: GBP51.2m) and
are mainly sales of the Group's Flexible Pension Plan ("FPP").
Our Protection product was closed to new business during the
last quarter of 2017; the sales of GBP0.8m in 2018 related to the
completion of pipeline applications.
Lifetime mortgage advances were GBP602.1m in 2018 (2017:
GBP510.0m), an increase of 18%. This growth is similar to our
Retirement Income sales growth. During 2018 the lifetime mortgage
market continued to grow, driven by increased demand from consumers
and increased supply from insurers. We continue to believe that
these assets are a good match for our GIfL and DB liabilities.
Following the publication of the Policy Statement we chose to be
more selective in the business we acquired in the second half of
2018, which resulted in a reduction in new business volumes. We
will continue to select the most attractive risks in 2019 and
expect the pattern of new business to be more aligned to the second
half of 2018.
New business sales
Year ended Year ended
31 December 31 December
2018 2017 Change
GBPm GBPm %
============================================== ============ ============ ======
Defined Benefit De-risking Solutions ("DB") 1,314.2 997.8 32
============================================== ============ ============ ======
Guaranteed Income for Life Solutions ("GIfL") 786.5 820.5 (4)
============================================== ============ ============ ======
Care Plans ("CP") 72.8 71.6 2
============================================== ============ ============ ======
Retirement Income sales 2,173.5 1,889.9 15
============================================== ============ ============ ======
Drawdown 51.0 51.2 -
============================================== ============ ============ ======
Total Retirement sales 2,224.5 1,941.1 15
============================================== ============ ============ ======
Protection 0.8 6.0 NM
============================================== ============ ============ ======
Lifetime Mortgage ("LTM") loans advanced 602.1 510.0 18
============================================== ============ ============ ======
Total new business sales 2,827.4 2,457.1 15
============================================== ============ ============ ======
Adjusted Earnings per share
Adjusted EPS (based on adjusted operating profit after
attributed tax) has decreased by 5% compared to the prior year, and
reflects the decreased operating profit for 2018.
Year ended Year ended
31 December 31 December
2018 2017
============================================ ============ ============
Earnings (GBPm) 170.3 178.1
============================================ ============ ============
Weighted average number of shares (million) 932.7 930.0
============================================ ============ ============
EPS (pence) 18.26 19.15
============================================ ============ ============
Capital management
The Group continues to manage its business on both regulatory
and economic capital bases.
Just Group plc estimated Solvency II capital position
The Group has approval to apply the matching adjustment,
volatility adjustment and transitional measures on technical
provisions ("TMTP") in its calculation of technical provisions and
uses a combination of an internal model and the standard formula to
calculate its Group Solvency Capital Requirement ("SCR").
The Group's Solvency II position was as follows:
31 December 31 December
20181 20172
Unaudited GBPm GBPm
============================= =========== ===========
Capital resources
============================= =========== ===========
Own funds 2,176 2,135
============================= =========== ===========
Solvency Capital Requirement (1,597) (1,539)
============================= =========== ===========
Excess own funds 579 596
============================= =========== ===========
Solvency coverage ratio 136% 139%
============================= =========== ===========
1 These figures allow for a notional recalculation of TMTP as at 31 December 2018.
2 Just Group plc Solvency and Financial Condition Report published June 2018.
The Group's solvency coverage ratio was estimated at 136% at 31
December 2018, including a notional recalculation of TMTP (2017:
139%). A notional recalculation of TMTP allows for economic
conditions as at 31 December 2018 and any changes in valuation
assumptions during 2018. The Group's capital resources have
benefitted from the GBP230m Tier 3 capital issued in February 2018,
offset by the capital strain from the continued growth in new
business volumes written in the year and market movements.
TMTP is recalculated every two years and the next recalculation
will be done at 31 December 2019. The Solvency Capital Requirement
coverage ratio at 31 December 2018, excluding any notional
recalculation of TMTP, has been estimated at 144%.
In July 2017, the PRA issued SS3/17 which set out principles for
tests to be applied to the effective value of lifetime mortgages on
insurers' Solvency II balance sheets. On 10 December 2018, the PRA
issued PS31/18, which set out the parameters for these tests, to be
applied from 31 December 2019. As at 31 December 2018, the Group's
Solvency II balance sheet complies with the principles in SS3/17
and the parameters we have met for these tests (13% house price
volatility and 0.3% deferment rate) are more prudent than those
required as at 31 December 2019 in PS31/18 (13% house price
volatility and 0% deferment rate, respectively).
During 2018 the Group has continued to demonstrate the strength
of its new business franchise, reporting strong IFRS sales and new
business margins. However, the strong new business sales have also
driven capital strain in the Solvency II balance sheet. Whilst we
continue to introduce steps to reduce the capital strain, such as
changes to pricing and asset mix, the Group has announced an
underwritten Restricted Tier 1 debt offering of at least GBP300m
and an underwritten non pre-emptive equity placing of 9.99% of
existing share capital to further strengthen its capital base in
order to support the Company's new business franchise.
The table below analyses the movement in excess own funds.
Movement in excess capital resources(1)
Unaudited GBPm
========================================================= =====
Excess own funds at 31 December 2017 596
========================================================= =====
Tier 3 debt issuance 230
========================================================= =====
In-force surplus (including impact of TMTP amortisation) 125
========================================================= =====
New business strain (160)
========================================================= =====
Overrun and other expenses (45)
========================================================= =====
Dividends and interest (56)
========================================================= =====
Other, including economic and investment fluctuations2 (111)
========================================================= =====
Excess own funds at 31 December 2018 579
========================================================= =====
1 All figures are net of tax.
2 These figures allow for a notional recalculation of TMTP as at 31 December 2018.
Estimated Group Solvency II sensitivities
Unaudited % GBPm
========================================================= === =====
Solvency coverage ratio/excess own funds at 31
December 2018(1) 136 579
========================================================= === =====
-50 bps fall in interest rates (no TMTP recalculation) -12 (159)
========================================================= === =====
-50 bps fall in interest rates (with TMTP recalculation) -2 0
========================================================= === =====
+100 bps credit spreads -1 (19)
========================================================= === =====
+10% LTM early redemption 1 2
========================================================= === =====
-10% property values -17 (257)
========================================================= === =====
-5% mortality -14 (210)
========================================================= === =====
1 These figures allow for a notional recalculation of TMTP as at 31 December 2018.
As at 31 December 2018, the sensitivity of the Just Group's own
funds (post-tax) to a 1% increase in the implied property
volatility is a reduction of c.GBP26m; and to a 0.5% increase in
the implied deferment rate is a reduction of c.GBP63m. The
sensitivities allow for an offset from a change in TMTP.
Reconciliation of IFRS shareholders' net equity to Solvency II
own funds
31 December 31 December
20181 2017
Unaudited GBPm GBPm
======================================================= =========== ===========
Shareholders' net equity on IFRS basis 1,664 1,741
======================================================= =========== ===========
Goodwill (34) (33)
======================================================= =========== ===========
Intangibles (137) (160)
======================================================= =========== ===========
Solvency II risk margin (851) (902)
======================================================= =========== ===========
Solvency II TMTP 1,738 2,110
======================================================= =========== ===========
Other valuation differences and impact on deferred tax (813) (1,009)
======================================================= =========== ===========
Ineligible items (7) (6)
======================================================= =========== ===========
Subordinated debt 615 394
======================================================= =========== ===========
Group adjustments 1 -
======================================================= =========== ===========
Solvency II own funds 2,176 2,135
======================================================= =========== ===========
Solvency II SCR (1,597) (1,539)
======================================================= =========== ===========
Solvency II excess own funds 579 596
======================================================= =========== ===========
1 These figures allow for a notional recalculation of TMTP as at 31 December 2018.
Summary of Just Group plc economic capital position
The table below shows the Group's economic capital position as
at 31 December 2018. The capital coverage ratio at 31 December 2018
remains strong at 256% (2017: 238%). During the year the benefit of
the GBP230m Tier 3 debt raised in February has been partially
offset by the strengthening of the Group's mortality and property
related assumptions.
31 December 31 December
2018 2017
Unaudited GBPm GBPm
========================= =========== ===========
Available capital 2,806 2,835
========================= =========== ===========
Required capital (1,097) (1,191)
========================= =========== ===========
Surplus economic capital 1,709 1,644
========================= =========== ===========
Capital solvency ratio 256% 238%
========================= =========== ===========
The economic capital is the Group's internal assessment of the
capital required to absorb a 1 in 200 year risk event and reflects
our true economic view. It excludes the prudent elements of
Solvency II such as risk margins and matching adjustment
eligibility of assets.
Embedded Value per share (unaudited)
Embedded value per share at 31 December 2018 was 206p per share
(2017: 228p per share).
IFRS results
The following tables present the Group's results on a statutory
IFRS basis.
Year ended Year ended
31 December 31 December
2018 2017
GBPm GBPm
========================================= ============ ============
Adjusted operating profit before tax 210.3 220.6
========================================= ============ ============
Non-recurring and project expenditure (19.6) (11.6)
========================================= ============ ============
Investment and economic (losses)/profits (252.0) 22.6
========================================= ============ ============
Acquisition integration costs - (25.6)
========================================= ============ ============
Amortisation (24.2) (24.7)
========================================= ============ ============
IFRS (loss)/profit before tax (85.5) 181.3
========================================= ============ ============
Adjusted operating profit before tax
The underlying trends in the components of adjusted operating
profit before tax are explained below.
Non-recurring and project expenditure
Non-recurring and project expenditure increased from GBP11.6m in
2017 to GBP19.6m in 2018. Non-recurring expenditure for 2018
includes costs associated with the issue of new Tier 3 capital in
February 2018, as well as costs of exploring a range of capital
options to further optimise the Group's balance sheet and capital
tiering structure following the publication of CP13/18 in July.
Project expenditure for 2018 relates to a number of projects across
the Group, including investigating new products and markets,
ensuring the Group's readiness for the requirements of the new
General Data Protection Regulation ("GDPR") rules, and preparations
for the new Insurance Contracts accounting standard, IFRS 17, and
migration of IT systems.
Investment and economic losses/profits
Investment and economic losses were GBP252.0m (2017: profit of
GBP22.6m).
During 2018 the Group reviewed and updated its property growth
and volatility assumptions, which are the key inputs into the
valuation of the NNEG included in our lifetime mortgage assets. The
property growth assumption has been reduced from 4.25% to 3.8% per
annum, and the property volatility assumption has been increased
from 12% per annum to 13% per annum. In updating these assumptions
the Board took into consideration future long and short-term
forecasts, benchmarking data, and future macro economic
uncertainties including the possible impact of Brexit on the UK
property market. The strengthening of these assumptions has given
rise to a GBP211m loss reported through this line which is the
combination of the change in lifetime mortgage asset values and the
increase to the value of insurance liabilities from the resulting
reduction to the valuation interest rate.
Investment and economic losses for 2018 also include the impact
of an increase in risk-free rates, and a widening of credit
spreads. By contrast, the year to 31 December 2017 benefited from a
narrowing of credit spreads. The Group's hedging arrangements are
designed to more closely hedge the Solvency II balance sheet and
the IFRS balance sheet retains some exposure to movements in
risk-free rates. There were no corporate bond defaults within our
portfolio during the year (2017: no defaults).
Acquisition integration costs
Merger activity was substantially completed by 31 December 2017.
Any remaining costs of aligning the legacy companies' IT systems
are included in non-recurring and project expenditure.
Amortisation
Amortisation mainly relates to the acquired in-force business
asset relating to Partnership Assurance Group plc, which is being
amortised over ten years in line with the expected run-off of the
in-force business.
Highlights from Condensed consolidated statement of
comprehensive income
The table below presents the Condensed consolidated statement of
comprehensive income for the Group, with key line item
explanations.
Year ended Year ended
31 December 31 December
2018 2017
GBPm GBPm
========================================== ============ ============
Gross premiums written 2,176.9 1,893.4
========================================== ============ ============
Reinsurance premiums ceded (8.0) (17.1)
========================================== ============ ============
Reinsurance recapture 543.3 467.5
========================================== ============ ============
Net premium revenue 2,712.2 2,343.8
========================================== ============ ============
Net investment income 142.6 621.1
========================================== ============ ============
Fee and commission income 8.2 5.8
========================================== ============ ============
Total revenue 2,863.0 2,970.7
========================================== ============ ============
Net claims paid (749.9) (638.1)
========================================== ============ ============
Change in insurance liabilities (1,689.0) (1,656.5)
========================================== ============ ============
Change in investment contract liabilities 0.4 (6.3)
========================================== ============ ============
Acquisition costs (52.4) (43.1)
========================================== ============ ============
Other operating expenses (254.8) (238.4)
========================================== ============ ============
Finance costs (202.8) (207.0)
========================================== ============ ============
Total claims and expenses (2,948.5) (2,789.4)
========================================== ============ ============
(Loss)/profit before tax (85.5) 181.3
========================================== ============ ============
Income tax 21.2 (26.2)
========================================== ============ ============
(Loss)/profit after tax (64.3) 155.1
========================================== ============ ============
Gross premiums written
Gross premiums written for the year were GBP2,176.9m, an
increase of 15% compared to the prior year (2017: GBP1,893.4m). The
increase is driven by the 32% increase in DB sales.
Net premium revenue
Net premium revenue increased from GBP2,343.8m to GBP2,712.2m,
which includes gross premiums written plus the impact of the
reinsurance recaptures made during the year, partly offset by
reinsurance premiums ceded.
Net investment income
Net investment income decreased from GBP621.1m to GBP142.6m in
2018. The main components of investment income are interest earned
and changes in fair value of the Group's corporate bond, mortgage
and other fixed income assets. Increases in risk-free rates and
widening credit spreads and changes in the Group's property growth
and volatility assumptions have given rise to unrealised losses on
the Group's corporate bond and mortgage portfolios during the
current year. There were no corporate bond defaults during the
year.
Net claims paid
Net claims paid increased to GBP749.9m, from GBP638.1m in 2017,
reflecting the growth of the in-force book.
Change in insurance liabilities
Change in insurance liabilities was GBP1,689.0m for the current
year, compared to GBP1,656.5m in 2017. The change for the year
reflects the growth in insurance liabilities and the impact of
reinsurance recaptures as noted above, changes to the Group's
mortality assumptions, and changes to the valuation interest rate
as a result of the changes to property assumptions.
Acquisition costs
Acquisition costs have increased from GBP43.1m in 2017 to
GBP52.4m in 2018, mainly reflecting the increased volumes of new
business written this year.
Other operating expenses
Other operating expenses increased from GBP238.4m in 2017 to
GBP254.8m for the current year, mainly as a result of increases in
development and other project-related expenditure and non-recurring
costs.
Finance costs
The Group's overall finance costs decreased from GBP207.0m in
2017 to GBP202.8m in 2018. The reduction reflects reduced costs in
relation to interest on reinsurance deposits; these balances have
reduced during the year as a result of the reinsurance recaptures.
Finance costs also include interest costs of GBP39.9m payable on
the Group's subordinated debt (2017: GBP32.0m interest payable on
subordinated debt).
Income tax
Income tax for the year ended 31 December 2018 was a credit of
GBP21.2m (2017: income tax charge of GBP26.2m), with an effective
tax rate of (24.8)% (2017: effective tax rate of 14.5%). The
effective tax rate for the current year has been driven by the loss
for the year and by one-off adjustments relating to prior periods.
Without these one-off adjustments, the effective tax rate for the
current year would have been 15.1%.
Highlights from Condensed consolidated statement of financial
position
The following table presents selected items from the Condensed
consolidated statement of financial position, with key line item
explanations below.
Condensed consolidated statement of financial position
31 December 31 December
2018 2017
GBPm GBPm
========================================= =========== ===========
Assets
========================================= =========== ===========
Financial investments 19,252.5 18,287.1
========================================= =========== ===========
Reinsurance assets 4,239.2 5,285.3
========================================= =========== ===========
Other assets 454.1 592.5
========================================= =========== ===========
Total assets 23,945.8 24,164.9
========================================= =========== ===========
Share capital and share premium 188.6 188.0
========================================= =========== ===========
Other reserves 885.5 881.1
========================================= =========== ===========
Accumulated profit and other adjustments 589.7 671.4
========================================= =========== ===========
Total equity 1,663.8 1,740.5
========================================= =========== ===========
Liabilities
========================================= =========== ===========
Insurance liabilities 17,273.8 16,633.0
========================================= =========== ===========
Other financial liabilities 4,063.3 5,045.4
========================================= =========== ===========
Insurance and other payables 78.3 85.5
========================================= =========== ===========
Other liabilities 866.6 660.5
========================================= =========== ===========
Total liabilities 22,282.0 22,424.4
========================================= =========== ===========
Total equity and liabilities 23,945.8 24,164.9
========================================= =========== ===========
Financial investments
During the year, financial investments increased by GBP1.0bn,
from GBP18.3bn at 31 December 2017 to GBP19.3bn at 31 December
2018. The increase is mainly a result of investing the Group's new
business premiums into corporate bonds, gilts, loans secured by
mortgages, and other fixed income investments. The credit quality
of the corporate bond portfolio remains high, with 60% of the
Group's corporate bond and gilts portfolio rated A or above (2017:
61%) and continues to be well balanced across a range of industry
sectors. The loan-to-value ratio of the mortgage portfolio at 31
December 2018 was 32.5% (2017: 29%), and the percentage of lifetime
mortgages remained the same at 37.4% of financial investments.
The following table provides a breakdown by credit rating of
financial investments.
31 December 31 December 31 December 31 December
2018 2018 2017 2017
GBPm % GBPm %
=================== =========== =========== =========== ===========
AAA1 1,798.9 9.3 1,751.1 9.6
=================== =========== =========== =========== ===========
AA1 and gilts 1,799.8 9.3 1,523.0 8.3
=================== =========== =========== =========== ===========
A 3,151.1 16.4 3,397.2 18.6
=================== =========== =========== =========== ===========
BBB 4,072.0 21.1 3,944.8 21.6
=================== =========== =========== =========== ===========
BB or below 208.2 1.1 151.0 0.8
=================== =========== =========== =========== ===========
Unrated 1,031.0 5.4 686.7 3.7
=================== =========== =========== =========== ===========
Lifetime mortgages 7,191.5 37.4 6,833.3 37.4
=================== =========== =========== =========== ===========
Total 19,252.5 100.0 18,287.1 100.0
=================== =========== =========== =========== ===========
1 Includes units held in liquidity funds.
Just Group has signed up to the United Nations Principles for
Responsible Investment ("PRI"). We are the first UK insurer to do
this. In making investment decisions sustainable investing
principles are formally embedded within our processes, as set out
in our Sustainable Investment Framework approved by the Board. As
an example of part of this process the Group made the decision in
2016 to sell all of its tobacco holdings. Over the last two years
the Group has invested in c. GBP350m of infrastructure debt
supporting renewable projects such as wind farms and solar plants
and continues to actively seek for opportunities in the renewable
sector. One of our main renewable infrastructure investments is
already generating enough energy to supply electricity for 600,000
UK homes.
The sector analysis of the Group's financial investments
portfolio at 31 December 2018 is shown below and continues to be
well balanced across a variety of industry sectors.
31 December 31 December 31 December 31 December
2018 2018 2017 2017
GBPm % GBPm %
===================== =========== =========== =========== ===========
Basic materials 272.4 1.4 256.8 1.4
===================== =========== =========== =========== ===========
Communications 963.8 5.0 817.3 4.5
===================== =========== =========== =========== ===========
Auto manufacturers 319.4 1.7 291.9 1.6
===================== =========== =========== =========== ===========
Consumer 878.3 4.6 846.3 4.6
===================== =========== =========== =========== ===========
Energy 313.1 1.6 290.3 1.6
===================== =========== =========== =========== ===========
Banks 2,086.3 10.7 2,227.3 12.2
===================== =========== =========== =========== ===========
Insurance 733.9 3.8 819.3 4.5
===================== =========== =========== =========== ===========
Financial - other 936.3 4.9 633.4 3.5
===================== =========== =========== =========== ===========
Government 1,253.3 6.5 1,264.9 6.9
===================== =========== =========== =========== ===========
Industrial 447.4 2.3 632.0 3.4
===================== =========== =========== =========== ===========
Utilities 1,512.1 7.9 1,429.6 7.8
===================== =========== =========== =========== ===========
Liquidity funds 882.5 4.6 897.9 4.9
===================== =========== =========== =========== ===========
Lifetime mortgages 7,191.5 37.4 6,833.3 37.4
===================== =========== =========== =========== ===========
Commercial mortgages 392.3 2.0 215.4 1.2
===================== =========== =========== =========== ===========
Infrastructure loans 858.9 4.5 513.7 2.8
===================== =========== =========== =========== ===========
Other 211.0 1.1 317.7 1.7
===================== =========== =========== =========== ===========
Total 19,252.5 100.0 18,287.1 100.0
===================== =========== =========== =========== ===========
Reinsurance assets
Reinsurance assets decreased from GBP5.3bn at 31 December 2017
to GBP4.2bn at 31 December 2018. The decrease relates to the impact
of reinsurance recaptures made during the year, and to the receipt
of reinsurers' share of claims paid during the year. Following the
introduction of Solvency II, the Group has increased its use of
reinsurance swaps rather than quota share treaties.
Other assets
Other assets mainly comprise cash and cash equivalents, and
intangible assets.
Insurance liabilities
Insurance liabilities increased from GBP16.6bn at 31 December
2017 to GBP17.3bn at 31 December 2018. The increase in liabilities
arose as a result of new insurance business written less claims
paid and the impact of strengthening the Group's mortality
assumptions and changes to the valuation interest rate as a result
of the changes to property assumptions, partially offset by the
effect of rising long-term interest rates.
Other financial liabilities
Other financial liabilities decreased from GBP5.0bn at 31
December 2017 to GBP4.1bn at 31 December 2018. These liabilities
are mainly reinsurance related and include deposits received from
reinsurers, reinsurance financing and other reinsurance-related
balances. The change in the financial liability balance mainly
reflects reinsurance recaptures made in the year.
Insurance and other payables
Insurance and other payables decreased from GBP85.5m at 31
December 2017 to GBP78.3m at 31 December 2018.
Other liabilities
Other liability balances increased from GBP660.5m at 31 December
2017 to GBP866.6m at 31 December 2018. The overall increase in the
year is due to the GBP230m Tier 3 subordinated debt issued by the
Group in February 2018.
IFRS net assets
The Group's total equity at 31 December 2018 was GBP1,663.8m,
compared to GBP1,740.5m at 31 December 2017. The reduction in net
assets mainly reflects the IFRS loss after tax of GBP64.3m for the
year and the 2017 final dividend, which was paid in May 2018.
Dividends
The Board considers it appropriate not to pay a final year
dividend for 2018 (total 2017 dividend: 3.72 pence per share).
The Board's current expectation is to recommence dividend
payments during the 2019 financial year at a rebased level. The
rebased level for the 2019 full year dividend is expected to be
approximately one third of the 3.72 pence total dividend paid
during the 2017 financial year, subject to the Group's earnings,
cash flow and capital position.
David Richardson
Group Deputy Chief Executive Officer, Interim Group Chief
Financial Officer and MD, UK Corporate Business
Risk Management
STRONG RISK CULTURE
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 continually developed to
reflect our risk environment and emerging best practice. The
framework, owned by the Group Board, covers all aspects of risk
management, including risk governance, reporting and policies. Our
appetite for different types of risk is embedded across the
business to create a culture of confident risk taking.
Risk evaluation and reporting
We evaluate our risks and decide how best to manage them within
our risk appetite. Management regularly reviews its risks and
produces reports to provide assurance that material risks in the
business are being appropriately mitigated. The Risk function, led
by the Group Chief Risk Officer ("GCRO"), challenges the management
team on the effectiveness of its risk evaluation and mitigation.
The GCRO provides the Group Risk and Compliance Committee 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 capital risk appetite. This modelling is
aligned to both our economic capital and regulatory capital
metrics. This modelling allows the Board to understand both the
risks included in the Solvency Capital Requirement ("SCR") and
those not included in the SCR, such as liquidity and strategic
risks, and how they translate into economic and regulatory capital
needs. 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 appraised of the Group's
evolving risk profile.
VIABILITY STATEMENT
The Directors confirm that they have a reasonable expectation
that the Group will continue in operation and meet its liabilities,
as they fall due, over the next five years. The Directors have
carried out a robust assessment of the principal risks facing the
Group, including those that would threaten its business model,
future performance, solvency or liquidity, and make this assessment
with reference to the risk appetite of the Board and the processes
and controls in place to mitigate the principal risks and
uncertainties as detailed in the Strategic Report including the
risks from the UK's withdrawal from the European Union.
The Directors have also assessed the impact of complying with
the parameters set out in PS31/18 "Solvency II: Equity release
mortgages" over the next five years, which is included in the Group
plan approved by the Board.
The Board has considered the ability of the Group to write the
anticipated levels of new business over the next five years, the
associated capital requirements and the need to raise additional
capital in order to write that level of new business. As a result,
the Group plans to strengthen its capital position during 2019 and
beyond in order to support the new business franchise over the next
five years. In assessing viability the Board has considered the
risk that the Group may not be able to raise new capital.
On 14 March 2019 the Group announced an underwritten Restricted
Tier 1 debt offering of at least GBP300m and an underwritten non
pre-emptive equity placing of 9.99% of existing share capital.
In addition, the Board will continue to review the need for
further capital and its optimal mix including consideration of the
use of unutilised Tier 2 capacity and including the refinancing of
the existing Partnership Life Assurance Company Limited Tier 2 debt
which has a call option in March 2020.
The Group undertakes stress and scenario testing to consider the
Group's capacity to respond to a series of relevant financial,
insurance, or operational shocks or changes to financial
regulations should future circumstances or events differ from
current assumptions. The review also considers mitigating actions
available to the Group should a severe stress scenario occur, such
as raising further capital, varying the volumes of new business
written and a scenario where the Group ceases to write new
business. In particular, if adequate capital is not available to
fund anticipated levels of new business, the scope of the Group's
business would change. Even if the Group ceases to write new
business, the Group would still be viable, although as a Group
managing its existing book of business in run-off.
The Directors note that the Group is subject to the Prudential
Regulatory Regime for Insurance Groups which monitors the Group's
compliance with Solvency Capital Requirements. While the Directors
have no reason to believe that the Group will not be viable over a
longer period, given the inherent uncertainty which increases as
longer time frames are considered, the Directors consider five
years to be an appropriate time frame upon which they can report
with a reasonable degree of confidence. A five year time frame has
been selected for this statement, although the Group, as with any
insurance group, has policyholder liabilities in excess of five
years and therefore performs its modelling and stress and scenario
testing on time frames extending to the expected settlement of
these liabilities, with results reported in the Group's ORSA.
Principal Risks and Uncertainties
Description and impact Mitigation and management action
============================================ =====================================================
Risks from our chosen market environment
Strategic objective
1 2 5 Risk outlook - Stable
Change in the year - No change Our approach to legislative change is to
The Group operates in a market where participate actively and engage with policymakers,
changes in pensions legislation and this will not change.
can have a considerable effect on The Group offers a range of retirement options,
our strategy and could reduce our allowing it to remain agile in this changing
sales and profitability or require environment, and has flexed its offerings
us to hold more capital. in response to market dynamics. We believe
The Group has developed propositions we are well placed to adapt to changing
to enable customers to have more customer demand, supported by our brand
flexible retirement solutions. Customers' promise, innovation credentials and financial
need for a secure income in retirement strength.
continues and the Group expects The most influential factors in the successful
that demand for guaranteed income delivery of the Group's plans are closely
for life solutions will continue. monitored to help inform the business. The
The equity release market continues factors include market forecasts and market
to grow due to consumer demand. share, supported by insights into customer
The market has been dominated by and competitor behaviour.
a limited number of specialist providers, Work continues to improve the customer appeal
but new entrants - both providers of the Group's equity release products,
and funders - have emerged along explore new product variants and meet distributors'
with new product launches and, despite digital and service needs.
the market growth, the intensity
of competition has increased. The
equity release asset class provides
a good match for the Group's longer
duration DB de-risking and GIfL
liabilities, where suitable longer
duration corporate or government
bonds or other appropriate assets
are scarce.
============================================ =====================================================
Risks from our pricing assumptions
Strategic objective
3 4 Risk outlook - Stable
Change in the year - No change To manage the risk of our longevity assumptions
Writing long-term DB de-risking, being inaccurate, the Group has the benefit
GIfL and equity release business of extensive underwritten mortality data
requires a range of assumptions to provide insights and enhanced understanding
to be made based on market data of the longevity risks that the Group chooses
and historical experience, including to take.
customers' longevity, corporate Longevity and other decrement experience
bond yields, interest rates, property is analysed to identify any outcomes materially
values and expenses. These assumptions different from our assumptions and is used
are applied to the calculation of for the regular review of the reserving
the reserves needed for future liabilities assumptions for all products.
and solvency margins using recognised Some longevity risk exposure is shared with
actuarial approaches. reinsurance partners, who perform due diligence
The Group's assumptions on these on the Group's approach to risk selection.
risk factors may differ materially There is a related counterparty risk of
from experience, requiring them a reinsurer not meeting its repayment obligations.
to be recalibrated. This could affect This risk is typically mitigated through
the level of reserves needed, with the reinsurer depositing the reinsurance
an impact on profitability and the premiums back to the Group or into third
Group's solvency position. 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
specific property types and exposure to
each region. We also monitor the exposure
to adverse house price movements and the
accuracy of our indexed valuations.
============================================ =====================================================
Risks from regulatory changes Risk outlook - Increasing
Strategic objective We monitor and assess regulatory developments
1 3 4 5 on an on-going basis. We actively seek to
Change in the year - No change participate in all regulatory initiatives
The financial services industry which may affect or provide future opportunities
continues to see a high level of for the Group. Our aims are to implement
regulatory activity and intense any required changes effectively, and to
regulatory supervision. The regulatory deliver better outcomes for our customers
agenda for the coming year covers and competitive advantage for the business.
many areas directly relevant to We develop our strategy by giving consideration
the Group. to planned political and regulatory developments
The Prudential Regulation Authority and allow for contingencies should outcomes
("PRA") has published supervisory differ from our expectations.
statements that set out its expectations A key focus for the Group is addressing
for certain aspects of prudential the implications of PS31/18 while maintaining
regulation under Solvency II. This the confidence of our stakeholders. This
includes statements relating to includes strengthening our capital base,
illiquid assets, matching adjustments for which we have announced plans, in order
and transitional provisions. Further to support the new business franchise.
consultations are being published Any changes to the regulatory environment
on these subjects which would, if as a result of the UK's withdrawal from
implemented, impact on the regulatory the EU are being monitored.
capital position of the Group. Just has an approved partial internal model
On 10 December 2018, the PRA published to calculate a Group Solvency Capital Requirement,
PS31/18, updating SS3/17 in respect and intends to progress an internal model
of the valuation of no-negative major change application for Partnership
equity guarantees ("NNEG") in equity Life Assurance Company Limited to use the
release mortgages. Following extensive Group internal model.
industry feedback and engagement Just Group welcomes the PRA's confirmation
on its consultation, our interpretation that transitional relief will remain available
of PS31/18 is that the PRA has made for pre-2016 business and that the implementation
a number of key changes to its proposals. of PS31/18 has been deferred. This means
The transitional measure on technical the Board can evaluate the optimal capital
provisions ("TMTP") for pre-2016 structure to support our new business franchise
business will continue to be recognised in a considered manner.
over the remaining transitional We note the PRA's intention to consult further
period to 31 December 2031, the in early 2019 on various matters relating
deferment rate will be 1%, volatility to equity release mortgages, including how
will initially be set at 13% and the volatility and deferment rates are reset
effective value test ("EVT") will and how the EVT applies in stress. We will
not be applied to other assets. continue to seek to influence the PRA's
These provisions will apply from developing views on prudential regulation
31 December 2019, rather than 2018 and will work constructively with the PRA
as originally proposed. as part of the process of those consultations.
Improving operational resilience
of financial services firms has
become a key focus of both the FCA
and PRA, with the expectation that
firms will review and enhance their
operational resilience frameworks
covering internal operations, systems
and technology.
EU General Data Protection Regulation
("GDPR") came into effect on 25
May 2018. Whilst the principles
of GDPR are similar to those of
the UK Data Protection Act 1998,
its requirements are more prescriptive
and the rights of consumers are
clearer and easier to enforce. We
have not observed any significant
changes in consumer behaviours with
regard to exercising their rights
under GDPR.
The Department for Work and Pensions
is seeking views on a new legislative
framework for authorising and regulating
defined benefit superfund consolidation
vehicles of the type envisaged by
the White Paper - "Protecting defined
benefit pension schemes" - published
in March 2018, which could potentially
impact the Group's future Defined
Benefit De-risking business volumes.
The regulatory focus on the issue
of sustainable finance and particularly
the risks that climate change could
have on the safety and soundness
of firms and stability of the financial
system may accelerate actions of
market participants that then have
an impact on the availability and
attractiveness of certain securities.
The ultimate terms of the UK's exit
from the EU could have significant
consequences for the regulations
and legislation that apply to Just's
operations.
============================================ =====================================================
Risks from the economic environment Risk outlook - Increasing
Strategic objective Economic conditions are actively monitored
1 3 4 5 and alternative scenarios modelled to better
Change in the year - Increasing understand the potential impacts of significant
The premiums paid by the Group's economic changes on the amount of capital
customers are invested to enable required to be held to cover our long-term
future benefits to be paid when liabilities to customers and the related
expected with a high degree of certainty. risks, and to inform management action plans.
The economic environment and financial It is anticipated that the UK's withdrawal
market conditions have a significant from the EU will have limited direct impact
influence on the value of assets on the Group as it is predominantly UK-based
and liabilities and on the income with no services provided into other countries
the Group receives. An adverse economic of the EEA, and its customers and policyholders
environment could increase the risk are predominantly UK-based.
of credit downgrades and defaults The Group's strategy is to buy and hold
in our corporate bond portfolio. high-quality, lower-risk assets in its investment
The lack of clarity regarding the portfolio to ensure that it has sufficient
UK's future arrangements with the income to meet outgoings as they fall due.
EU has introduced material uncertainty Portfolio credit risk is managed by specialist
for the UK's macro-economic outlook fund managers executing a diversified investment
in the medium and long term. It strategy in assets within counterparty limits.
is too early to be clear on the In a low interest rate environment, improved
long-term implications of departure returns are sought by diversifying the types,
from the EU for the UK economy and geographies and industry sectors of investment
indeed the wider economic impacts assets. Such diversification creates an
on the rest of Europe. However, exposure to foreign exchange risk, which
the Group remains exposed to any is controlled using derivative instruments.
indirect impact that the UK's withdrawal Swaps and swaptions are used to reduce exposures
has on the UK economy as a whole, to interest rate volatility. The credit
including residential house prices exposure to the counterparties with whom
- the UK's withdrawal from the EU we transact these instruments is mitigated
could result in property values by collateral arrangements.
stagnating or falling in some, or The Group's exposure to inflation risk through
all, UK regions. A disorderly or the DB de-risking business is managed with
"no-deal" Brexit is likely to have index-linked bonds and inflation hedges.
the largest impact on the UK economy. Liquidity risk is managed by ensuring that
In an environment of low interest assets of a suitable maturity and marketability
rates, investors may be more willing are held to meet liabilities as they fall
to accept higher credit and liquidity due. Sufficient liquid assets are maintained
risk to improve investment returns. so the Group can readily access the cash
These conditions do make it challenging it needs should business cash inflows unexpectedly
to source sufficient assets to offer reduce.
attractive DB de-risking and GIfL There is little short-term volatility in
terms. Low credit spreads similarly the Group's cash flows, which can be reliably
affect the income that can be made estimated in terms of timing and amount.
available, although margins from Regular cash flow forecasts predict liquidity
our equity release portfolio help levels both short term and long term, and
offset this risk. stress tests help us understand any potential
Most defined benefit pension schemes periods of strain. The Group's liquidity
link member benefits to inflation requirements have been comfortably met over
through indexation. As the Group's the past year and forecasting confirms that
DB de-risking business volumes grow, this position can be expected to continue
its exposure to inflation risk increases. for investments, business operations and
A fall in residential property values our obligations to customers.
could reduce the amounts received
from equity release redemptions
and may also affect the relative
attractiveness of the equity release
product to customers. The regulatory
capital needed to support the possible
shortfall in the redemption of equity
release mortgages also increases
if property values drop. Conversely,
significant future rises in property
values could increase early mortgage
redemptions, leading to an earlier
receipt of anticipated cash flows
with the consequential reinvestment
risk.
Market risks may affect the liquidity
position of the Group by, for example,
having to realise assets to meet
liabilities during stressed market
conditions or to service collateral
requirements due to the changes
in market value of financial derivatives.
A lack of market liquidity and availability
is also a risk to any intention
that the Group may have to raise
capital.
============================================ =====================================================
Risks arising from operational processes
and IT Systems
Strategic objective
1 2 3 4 5
Change in the year - No change
The Group relies on its operational Risk outlook - Stable
processes and IT systems to conduct The Group maintains a suite of risk management
its business, including the pricing tools to help identify, measure, monitor,
and sale of its products, measuring manage and report its operational risks,
and monitoring its underwriting including those arising from operational
liabilities, processing applications processes and IT systems. These include
and delivering customer service a risk management system, risk and control
and maintaining accurate records. assessments, risk event and loss reporting
These processes and systems may management, scenario analysis and risk reporting
not operate as expected, may not through the ORSA.
fulfil their intended purpose or The Group maintains plans and controls to
may be damaged or interrupted by minimise the risk of business disruption
human error, unauthorised access, and information security-related events.
natural disaster or similarly disruptive Detailed incident and crisis management
events. Any failure of the Group's plans also exist to ensure effective responses.
IT and communications systems and/or These are supported by specialist third
third party infrastructure on which parties for our workplace recovery centre.
it relies could lead to costs and Our approach to information security is
disruptions that could adversely under constant review as the cyber-threat
affect its business as well as harm landscape evolves. Due diligence is performed
its reputation. on all partners to ensure that they work
Large organisations continue to to the same high security standards as the
be targets for cyber-crime, particularly Group. The Group continues to invest in
those organisations that hold customers' its information security control environment,
personal details. The Group is no but we recognise that the speed of change
exception and a cyber-attack could in cyber-threats means that a risk exposure
affect customer confidence, or lead remains.
to financial losses.
-------------------------------------------- -----------------------------------------------------
Risks to the Group's brands and
reputation
Strategic objective
1 2 3 5
Change in the year - Increasing
Our purpose is to help people achieve Risk outlook - Stable
a better later life. Our Group's The Group actively seeks to differentiate
brands reflect the way we intend its business from competitors by investing
to conduct our business and treat in brand-enhancing activities. Fairness
our customer and wider stakeholder to customers and high service standards
groups. are at the heart of the Just brands, and
There is a risk that the Group's we encourage our colleagues to take pride
brands and reputation could be damaged in the quality of service they provide to
if the Group is perceived to be our customers. Engaging our colleagues in
acting, even unintentionally, below the Just brands and its associated values
the standards we set for ourselves. has been, and remains, a critical part of
Damage to our brands or reputation our internal activity. The Group maintains
may adversely affect our underlying a system of internal control, with associated
profitability, through reducing policies and operational procedures, that
sales volumes, restricting access define the standards we expect of all colleagues.
to distribution channels and attracting
increased regulatory scrutiny.
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.
======================================== ===================================================
Strategic objectives
1. Grow our markets & broaden our distribution reach
2. Give customers a distinctly 'Just' experience every time
3. Make smart risk choices
4. Focus on strong financial management
5. Diversify our business away from any single business line or
market
Consolidated statement of comprehensive income
for the year ended 31 December 2018
Year ended Year ended
31 December 31 December
2018 2017
Note GBPm GBPm
================================================= ==== ============ ============
Gross premiums written 6 2,176.9 1,893.4
================================================= ==== ============ ============
Reinsurance premiums ceded (8.0) (17.1)
================================================= ==== ============ ============
Reinsurance recapture 543.3 467.5
================================================= ==== ============ ============
Net premium revenue 2,712.2 2,343.8
================================================= ==== ============ ============
Net investment income 2 142.6 621.1
================================================= ==== ============ ============
Fee and commission income 6 8.2 5.8
================================================= ==== ============ ============
Total revenue 2,863.0 2,970.7
================================================= ==== ============ ============
Gross claims paid (1,185.3) (1,098.8)
================================================= ==== ============ ============
Reinsurers' share of claims paid 435.4 460.7
================================================= ==== ============ ============
Net claims paid (749.9) (638.1)
================================================= ==== ============ ============
Change in insurance liabilities:
================================================= ==== ============ ============
Gross amount (642.9) (884.7)
================================================= ==== ============ ============
Reinsurers' share (502.8) (304.3)
================================================= ==== ============ ============
Reinsurance recapture (543.3) (467.5)
================================================= ==== ============ ============
Net change in insurance liabilities (1,689.0) (1,656.5)
================================================= ==== ============ ============
Change in investment contract liabilities 22 0.4 (6.3)
================================================= ==== ============ ============
Acquisition costs 3 (52.4) (43.1)
================================================= ==== ============ ============
Other operating expenses 4 (254.8) (238.4)
================================================= ==== ============ ============
Finance costs 5 (202.8) (207.0)
================================================= ==== ============ ============
Total claims and expenses (2,948.5) (2,789.4)
================================================= ==== ============ ============
(Loss)/profit before tax 6 (85.5) 181.3
================================================= ==== ============ ============
Income tax 7 21.2 (26.2)
================================================= ==== ============ ============
(Loss)/profit for the year (64.3) 155.1
================================================= ==== ============ ============
Other comprehensive income:
================================================= ==== ============ ============
Items that will not be reclassified subsequently
to profit or loss:
================================================= ==== ============ ============
Revaluation of land and buildings 7,14 4.4 -
================================================= ==== ============ ============
Items that may be reclassified subsequently
to profit or loss:
================================================= ==== ============ ============
Exchange differences on translating foreign
operations (0.4) -
================================================= ==== ============ ============
Other comprehensive income for the year,
net of income tax 4.0 -
================================================= ==== ============ ============
Total comprehensive (loss)/income for the
year (60.3) 155.1
================================================= ==== ============ ============
(Loss)/profit attributable to:
================================================= ==== ============ ============
Equity holders of Just Group plc (63.7) 155.1
================================================= ==== ============ ============
Non-controlling interest 35 (0.6) -
================================================= ==== ============ ============
(Loss)/profit for the year (64.3) 155.1
================================================= ==== ============ ============
Total comprehensive (loss)/income attributable
to:
================================================= ==== ============ ============
Equity holders of Just Group plc (59.7) 155.1
================================================= ==== ============ ============
Non-controlling interest 35 (0.6) -
================================================= ==== ============ ============
Total comprehensive (loss)/income for the
year (60.3) 155.1
================================================= ==== ============ ============
Basic earnings per share (pence) 11 (6.83) 16.68
================================================= ==== ============ ============
Diluted earnings per share (pence) 11 (6.83) 16.54
================================================= ==== ============ ============
The notes are an integral part of these financial
statements.
Consolidated statement of changes in equity
for the year ended 31 December 2018
Shares
held Total Non-
Share Share Reorganisation Merger Revaluation by Accumulated shareholders' controlling
Year ended 31 capital premium reserve reserve reserve trusts profit(1) equity interest Total
December 2018 Note GBPm GBPm GBPm GBPm GBPm GBPm GBPm GBPm GBPm GBPm
============== ==== ======= ======= ============== ======= ============ ====== =========== ============= =========== =======
At 1 January
2018 93.8 94.2 348.4 532.7 - (5.0) 676.4 1,740.5 - 1,740.5
============== ==== ======= ======= ============== ======= ============ ====== =========== ============= =========== =======
Loss for the
year - - - - - - (63.7) (63.7) (0.6) (64.3)
============== ==== ======= ======= ============== ======= ============ ====== =========== ============= =========== =======
Other
comprehensive
income/(loss)
for the year,
net of income
tax - - - - 4.4 - (0.4) 4.0 - 4.0
============== ==== ======= ======= ============== ======= ============ ====== =========== ============= =========== =======
Total
comprehensive
income/(loss)
for the year - - - - 4.4 - (64.1) (59.7) (0.6) (60.3)
============== ==== ======= ======= ============== ======= ============ ====== =========== ============= =========== =======
Contributions
and
distributions
============== ==== ======= ======= ============== ======= ============ ====== =========== ============= =========== =======
Shares issued 20 0.3 0.3 - - - - - 0.6 - 0.6
============== ==== ======= ======= ============== ======= ============ ====== =========== ============= =========== =======
Dividends 12 - - - - - - (24.4) (24.4) - (24.4)
============== ==== ======= ======= ============== ======= ============ ====== =========== ============= =========== =======
Share-based
payments - - - - - (1.2) 8.6 7.4 - 7.4
============== ==== ======= ======= ============== ======= ============ ====== =========== ============= =========== =======
Total
contributions
and
distributions 0.3 0.3 - - - (1.2) (15.8) (16.4) - (16.4)
============== ==== ======= ======= ============== ======= ============ ====== =========== ============= =========== =======
At 31 December
2018 94.1 94.5 348.4 532.7 4.4 (6.2) 596.5 1,664.4 (0.6) 1,663.8
============== ==== ======= ======= ============== ======= ============ ====== =========== ============= =========== =======
Merger Shares Accumulated Total
Share Share Reorganisation reserve held profit1 shareholders'
Year ended 31 December capital premium reserve GBPm by trusts GBPm equity
2017 Note GBPm GBPm GBPm GBPm GBPm
========================= ==== ======== ======== ============== ======== ========== =========== ==============
At 1 January 2017 93.3 91.7 348.4 532.7 (1.6) 546.1 1,610.6
========================= ==== ======== ======== ============== ======== ========== =========== ==============
Profit for the year - - - - - 155.1 155.1
========================= ==== ======== ======== ============== ======== ========== =========== ==============
Other comprehensive - - - - - - -
income
for the year,
net of income tax
========================= ==== ======== ======== ============== ======== ========== =========== ==============
Total comprehensive
income
for the year - - - - - 155.1 155.1
========================= ==== ======== ======== ============== ======== ========== =========== ==============
Contributions and
distributions
========================= ==== ======== ======== ============== ======== ========== =========== ==============
Shares issued 20 0.5 2.5 - - - - 3.0
========================= ==== ======== ======== ============== ======== ========== =========== ==============
Dividends 12 - - - - - (33.2) (33.2)
========================= ==== ======== ======== ============== ======== ========== =========== ==============
Share-based payments - - - - (3.4) 8.4 5.0
========================= ==== ======== ======== ============== ======== ========== =========== ==============
Total contributions and
distributions 0.5 2.5 - - (3.4) (24.8) (25.2)
========================= ==== ======== ======== ============== ======== ========== =========== ==============
At 31 December 2017 93.8 94.2 348.4 532.7 (5.0) 676.4 1,740.5
========================= ==== ======== ======== ============== ======== ========== =========== ==============
1 Includes currency translation reserve.
The notes are an integral part of these financial
statements.
Consolidated statement of financial position
as at 31 December 2018
2018 2017
Note GBPm GBPm
============================================ ===== ======== ========
Assets
============================================ ===== ======== ========
Intangible assets 13 171.0 193.5
============================================ ===== ======== ========
Property, plant and equipment 14 21.4 19.6
============================================ ===== ======== ========
Financial investments 15 19,252.5 18,287.1
============================================ ===== ======== ========
Investment in joint ventures and associates 0.3 0.3
============================================ ===== ======== ========
Reinsurance assets 21 4,239.2 5,285.3
============================================ ===== ======== ========
Deferred tax assets 16 18.6 13.0
============================================ ===== ======== ========
Current tax assets 28 42.1 3.7
============================================ ===== ======== ========
Prepayments and accrued income 17 67.9 56.5
============================================ ===== ======== ========
Insurance and other receivables 18 18.9 44.5
============================================ ===== ======== ========
Cash and cash equivalents 19 113.9 261.4
============================================ ===== ======== ========
Total assets 23,945.8 24,164.9
============================================ ===== ======== ========
Equity
============================================ ===== ======== ========
Share capital 20 94.1 93.8
============================================ ===== ======== ========
Share premium 20 94.5 94.2
============================================ ===== ======== ========
Reorganisation reserve 348.4 348.4
============================================ ===== ======== ========
Merger reserve 20 532.7 532.7
============================================ ===== ======== ========
Revaluation reserve 14,16 4.4 -
============================================ ===== ======== ========
Shares held by trusts (6.2) (5.0)
============================================ ===== ======== ========
Accumulated profit 596.5 676.4
============================================ ===== ======== ========
Total equity attributable to owners of Just
Group plc 1,664.4 1,740.5
============================================ ===== ======== ========
Non-controlling interest 35 (0.6) -
============================================ ===== ======== ========
Total equity 1,663.8 1,740.5
============================================ ===== ======== ========
Liabilities
============================================ ===== ======== ========
Insurance liabilities 21 17,273.8 16,633.0
============================================ ===== ======== ========
Investment contract liabilities 22 197.8 220.7
============================================ ===== ======== ========
Loans and borrowings 23 573.4 343.9
============================================ ===== ======== ========
Other financial liabilities 24 4,063.3 5,045.4
============================================ ===== ======== ========
Deferred tax liabilities 16 32.2 39.2
============================================ ===== ======== ========
Other provisions 27 0.7 2.1
============================================ ===== ======== ========
Current tax liabilities 28 3.5 9.2
============================================ ===== ======== ========
Accruals and deferred income 29 59.0 45.4
============================================ ===== ======== ========
Insurance and other payables 30 78.3 85.5
============================================ ===== ======== ========
Total liabilities 22,282.0 22,424.4
============================================ ===== ======== ========
Total equity and liabilities 23,945.8 24,164.9
============================================ ===== ======== ========
The notes are an integral part of these financial
statements.
The financial statements were approved by the Board of Directors
on 14 March 2019 and were signed on its behalf by:
David Richardson
Director
Consolidated statement of cash flows
for the year ended 31 December 2018
Year ended Year ended
31 December 31 December
2018 2017
Note GBPm GBPm
============================================== ==== ============ ============
Cash flows from operating activities
============================================== ==== ============ ============
(Loss)/profit before tax (85.5) 181.3
============================================== ==== ============ ============
Loss on revaluation of land and buildings 2.9 -
============================================== ==== ============ ============
Depreciation of equipment 1.4 1.8
============================================== ==== ============ ============
Loss on disposal of equipment - 3.1
============================================== ==== ============ ============
Amortisation of intangible assets 24.7 25.2
============================================== ==== ============ ============
Share-based payments 7.4 5.0
============================================== ==== ============ ============
Interest income (655.2) (636.4)
============================================== ==== ============ ============
Interest expense 202.8 207.0
============================================== ==== ============ ============
Increase in financial investments (720.2) (410.3)
============================================== ==== ============ ============
Decrease in reinsurance assets 1,046.1 771.8
============================================== ==== ============ ============
Increase in prepayments and accrued income (11.4) (3.2)
============================================== ==== ============ ============
Decrease in insurance and other receivables 25.1 92.5
============================================== ==== ============ ============
Increase in insurance liabilities 640.8 885.0
============================================== ==== ============ ============
Decrease in investment contract liabilities (22.9) (1.6)
============================================== ==== ============ ============
Decrease in deposits received from reinsurers (875.7) (675.9)
============================================== ==== ============ ============
Increase in accruals and deferred income 10.4 11.0
============================================== ==== ============ ============
Decrease in insurance and other payables (7.2) (27.6)
============================================== ==== ============ ============
Decrease in other creditors (91.2) (22.6)
============================================== ==== ============ ============
Interest received 375.9 399.0
============================================== ==== ============ ============
Interest paid (159.2) (170.8)
============================================== ==== ============ ============
Taxation paid (36.5) (46.8)
============================================== ==== ============ ============
Net cash (outflow)/inflow from operating
activities (327.5) 587.5
============================================== ==== ============ ============
Cash flows from investing activities
============================================== ==== ============ ============
Additions to internally generated intangible
assets (2.2) (1.7)
============================================== ==== ============ ============
Acquisition of property and equipment (0.8) (7.4)
============================================== ==== ============ ============
Net cash outflow from investing activities (3.0) (9.1)
============================================== ==== ============ ============
Cash flows from financing activities
============================================== ==== ============ ============
Increase in borrowings (net of costs) 228.5 -
============================================== ==== ============ ============
Interest paid (37.1) (32.6)
============================================== ==== ============ ============
Dividends paid (24.4) (33.2)
============================================== ==== ============ ============
Issue of ordinary share capital (net of
costs) 0.6 3.0
============================================== ==== ============ ============
Net cash inflow/(outflow) from financing
activities 167.6 (62.8)
============================================== ==== ============ ============
Net (decrease)/increase in cash and cash
equivalents (162.9) 515.6
============================================== ==== ============ ============
Cash and cash equivalents at start of year 1,159.3 643.7
============================================== ==== ============ ============
Cash and cash equivalents at end of year 996.4 1,159.3
============================================== ==== ============ ============
Cash available on demand 113.9 261.4
============================================== ==== ============ ============
Units in liquidity funds 882.5 897.9
============================================== ==== ============ ============
Cash and cash equivalents at end of year 19 996.4 1,159.3
============================================== ==== ============ ============
The notes are an integral part of these financial
statements.
Notes to the consolidated financial statements
1. Significant accounting policies
General information
Just Group plc (formerly JRP Group plc) (the "Company") was
incorporated and registered in England and Wales on 13 June 2013 as
a public company limited by shares. The Company's registered office
is Vale House, Roebuck Close, Bancroft Road, Reigate, Surrey, RH2
7RU.
1.1. Basis of preparation
The consolidated financial statements have been prepared in
accordance with International Financial Reporting Standards
("IFRS") as adopted by the European Union effective for accounting
periods commencing on or before 1 January 2018 and those parts of
the Companies Act 2006 applicable to companies reporting under
IFRS.
The financial information set out above does not constitute the
company's statutory accounts for the years ended 31 December 2018
or 2017 but is derived from those accounts. Statutory accounts for
2017 have been delivered to the registrar of companies, and those
for 2018 will be delivered in due course. The auditor has reported
on those accounts. Their report for the year ended 31 December 2018
was (i) unqualified, (ii) did not contain a statement under section
498 (2) or (3) of the Companies Act 2006, and (iii) by way of
emphasis of matter, without qualifying their report, drew attention
to the capital note which discloses the matters also covered in
note 34 to this results announcement. Their report for the year
ended 31 December 2017 was (i) unqualified, (ii) did not contain a
statement under section 498 (2) or (3) of the Companies Act 2006,
and (iii) did not include a reference to any matters to which the
auditor drew attention by way of emphasis without qualifying their
report.
As part of their assessment of going concern at 31 December 2018
the Directors have considered the development of CP13/18 "Solvency
II: Equity Release Mortgages" (the CP). CP13/18 was published by
the PRA in July 2018 and set out a number of parameters relating to
the calculation of the matching adjustment including volatility and
deferment rate, with implementation expected for the December 2018
year end. This created a significant level of uncertainty for the
Group in relation to the treatment of its Lifetime Mortgage assets
in the Solvency II balance sheet. At the time of publishing the
Group's interim results for 2018 on 6 September 2018, the
consultation period for CP13/18 was still open. When carrying out
the assessment of going concern in relation to the interim results
for 2018, the Directors concluded that although the going concern
basis of preparation was appropriate, the potential outcome of the
CP, together with any actions that the PRA might take, represented
a material uncertainty.
In December 2018 the PRA published PS31/18 "Solvency II: Equity
Release Mortgages" (the PS) setting out its conclusions, including
a number of key changes from the original CP which are material to
the Group, such as the deferral of the implementation date to 31
December 2019, confirmation that transitional measures for
technical provisions for pre-2016 business will be recognised over
the remaining transitional period to 31 December 2031, and a
requirement that firms must meet an effective value test using a
volatility rate of 13% and a deferment rate of 0% at the end of
2019 and that the deferment rate should increase to 1% by year-end
2021. The PS also noted a number of areas for further
consideration, in particular the calculation of the SCR.
As part of the assessment of going concern for December 2018,
the Directors have considered the impact of the PS. The PS has
significantly reduced the uncertainty created by the CP and
provides clarity on the calculation of the matching adjustment for
future periods, which has enabled the Group to model the impact of
the PS in its latest capital projections, business plan and
liquidity forecasts.
There is still some uncertainty as regards areas for further PRA
consultation and determination, which include the process by which
the volatility and deferment rates will be updated and how the
effective value test applies in stress, but the Board considers,
including having considered the matters below, that the material
uncertainty in relation to going concern which was disclosed in the
Group's interim results for 2018 does not exist at the 2018
year-end.
The Directors have also considered the following in their
assessment:
-- The projected liquidity position of the Group, current
financing arrangements and contingent liabilities.
-- A range of forecast scenarios with differing levels of new
business and associated additional capital requirements, including
the Restricted Tier 1 debt and equity placing, to write anticipated
levels of new business. This included assessing the risk that the
Group may not be able to raise new capital.
-- Eligible own funds being in excess of minimum capital
requirements in a combined stress scenario with a disruptive
Brexit, no capital strengthening and reduced new business
volumes.
-- The findings of the 2018 Group Own Risk and Solvency
Assessment ("ORSA"), and in particular sensitivity to the most
significant risks faced by the Group, including the risks from the
open areas of PS31/18 noted earlier and from the UK's withdrawal
from the European Union.
-- Scenarios, including those in the ORSA, where the Group
ceases to write new business. In such a run off scenario, this
included any changes required in the valuation of insurance
liabilities as a result of changes in assumptions. However, in the
run-off scenario the going concern basis would continue to be
applicable because the Group would be continuing to trade with its
existing business (e.g. collect premiums and administer policies)
rather than ceasing to trade.
-- The Group plan, which was approved by the Board in the first
quarter of 2019, and in particular the forecast regulatory solvency
position calculated on a Solvency II basis, which included
strengthening the Group's capital base to support its new business
franchise.
Taking the above matters into account the Directors of the
Company have concluded that they have a reasonable expectation that
the Group and the Company have adequate resources to continue in
operational existence for the foreseeable future, including in the
event of the run-off scenarios considered above. Therefore, the
financial statements of Just Group plc have been prepared on a
going concern basis.
The following new accounting standards, interpretations and
amendments to existing accounting standards have been adopted by
the Group with effect from 1 January 2018:
-- Amendments to IFRS 4, Applying IFRS 9 Financial Instruments with IFRS 4 Insurance Contracts.
The amendments to IFRS 4 allow the deferral of the application
of IFRS 9 until accounting periods commencing on 1 January 2021.
This is intended to align with the effective date of IFRS 17, the
replacement insurance contracts standard. The IASB has recommended
that the deferral period for IFRS 9 and the effective date of IFRS
17 are extended to 1 January 2022. This option, which the Group has
adopted, is subject to meeting criteria relating to the
predominance of insurance activity. The predominance of insurance
activity has been assessed at 31 December 2016, the end of the
annual period during which the acquisition of Partnership Assurance
Group plc took place and significantly changed the magnitude of the
Group's activities. At 31 December 2016, the Group's insurance
liabilities in relation to its total liabilities were 95% and
deferral of IFRS 9 was applicable.
If the Group had adopted IFRS 9 it would continue to classify
financial assets at fair value through profit or loss. Therefore,
under IFRS 9 all financial assets would continue to be recognised
at fair value through profit or loss and the fair value at 31
December 2018 would be GBP19,252.5m. As well as financial assets,
the Group also holds Insurance and other receivables and Cash and
cash equivalents assets, with contractual terms that give rise to
cash flows on specified dates; the fair value of these investments
is considered to be materially consistent with their carrying
value, as disclosed in notes 18 and 19.
-- IFRS 15, Revenue from Contracts with Customers.
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. The core principle of
IFRS 15 is that an entity recognises revenue to depict the transfer
of promised goods or services to customers in an amount that
reflects the consideration to which the entity expects to be
entitled in exchange for those goods or services. The main source
of non-insurance contract income in the year was fee and commission
income amounting to GBP8.2m. The Group's previous accounting policy
was to recognise fee and commission income when the service is
rendered. Therefore, the adoption of IFRS 15 does not result in a
material difference to when revenue is recognised by the Group.
The following new accounting standards, interpretations and
amendments to existing accounting standards in issue, but not yet
effective, have not been early adopted by the Group. Unless stated,
the new and amended standards and interpretations are being
assessed but are not expected to have a significant impact on the
Group's financial statements:
-- IFRS 16, Leases (effective 1 January 2019).
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 at 31 December 2018 would
be to recognise right of use assets and lease payment liabilities
on the balance sheet with an approximate value of GBP13.3m.
-- IFRS 17, Insurance Contracts (effective 1 January 2021, not
yet endorsed by the EU, IASB recommended extension of
implementation date to 1 January 2022).
IFRS 17 provides a comprehensive approach for accounting for
insurance contracts including their valuation, income statement
presentation and disclosure. The Group has initiated a project to
assess the financial and operational implications of the standard
and to prepare for adoption.
1.2. Significant accounting policies and the use of judgements,
estimates and assumptions
The preparation of financial statements requires the Group to
select accounting policies and make estimates and assumptions that
affect items reported in the Consolidated statement of
comprehensive income, Consolidated statement of financial position,
other primary statements and Notes to the consolidated financial
statements.
The major areas of judgement used as part of accounting policy
application are summarised below.
Accounting policy Item involving judgement Critical accounting judgement
================= =========================== =============================================
1.6 Classification of insurance Assessment of significance of insurance
and investment contracts risk transferred.
================= =========================== =============================================
1.18 Financial investments Classification of financial investments,
including assessment of market observability
of valuation inputs.
================= =========================== =============================================
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 policy Item involving estimates
and notes and assumptions Critical estimates and assumptions
=================== ========================== ===========================================
1.18, 15(a) and (d) Measurement of fair The critical estimates used in valuing
value of loans secured loans secured by residential mortgages
by residential mortgages, include the projected future receipts
including measurement of interest and loan repayments,
of the no-negative and the future costs of administering
equity guarantees 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.
=================== ========================== ===========================================
1.19, 21, 24 Measurement of reinsurance The critical estimates used in measuring
assets and deposits the value of reinsurance assets include
received from reinsurers the projected future cash flows arising
arising from reinsurance from reinsurers' share of the Group's
arrangements insurance liabilities.
The key assumptions used in the valuation
include discount rates and mortality
experience, as described below, and
assumptions around the reinsurers'
ability to meet its claim obligations.
Deposits received from reinsurers
are measured in accordance with the
reinsurance contract and taking account
of an appropriate discount rate for
the timing of the expected cash flows
of the liabilities.
For deposits received from reinsurers
measured at fair value through profit
or loss, the key assumption used
in the valuation is the discount
rate.
For deposits received from reinsurers
measured using insurance rules under
IFRS 4, the key assumptions used
in the valuation include discount
rates and mortality experience.
=================== ========================== ===========================================
1.21, 21(b) Measurement of insurance The critical estimates used in measuring
liabilities arising insurance liabilities include the
from writing Retirement projected future Retirement Income
Income insurance payments and the cost of administering
payments to policyholders.
The key assumptions are the discount
rates and mortality experience used
in the valuation of future Retirement
Income payments. The valuation discount
rates are derived from yields on
supporting assets after deducting
allowances for default. Mortality
assumptions are derived from the
appropriate standard mortality tables,
adjusted to reflect the future expected
mortality experience of the policyholders.
Further detail can be found in note
21.
=================== ========================== ===========================================
1.16, 13 Assessment of carrying Intangible assets recognised on the
value of intangible acquisition of PAG in 2016, including
assets recognised the value of the acquired in-force
on acquisition of business, are reviewed for indicators
Partnership Assurance of impairment and, if such indicators
Group ("PAG") exist, are tested for impairment.
The key impairment testing assumptions
include the choice of discount rate
used, which represents a weighted-average
cost of capital determined using
a capital asset pricing model 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 (this is referred to as the insurance segment
in note 6, Segmental reporting);
-- the arranging of guaranteed income for life contracts and
lifetime mortgages through regulated advice and intermediary
services; and
-- the provision of licensed software to financial advisers,
banks, building societies, life assurance companies and pension
trustees.
Operating segments, where certain materiality thresholds in
relation to total results from operating segments are not exceeded,
are combined when determining reportable segments. For segmental
reporting, the arranging of guaranteed income for life contracts,
providing intermediary mortgage advice and arranging, plus the
provision of licensed software, are included in the Other segment
along with Group activities, such as capital and liquidity
management, and investment activities.
The information on adjusted operating profit and profit before
tax used by the CODM is presented on a combined product basis
within the insurance operating segment and is not analysed further
by product.
1.5. Foreign currencies
Transactions in foreign currencies are translated to sterling at
the rates of exchange ruling at the date of the transaction.
Monetary assets and liabilities denominated in foreign currencies
are translated into sterling at the rates of exchange ruling at the
end of the financial year. Foreign exchange gains and losses
resulting from the settlement of such transactions and from the
translation of monetary assets and liabilities denominated in
foreign currencies are recognised in profit or loss.
The assets and liabilities of foreign operations are translated
to sterling at the rates of exchange at the reporting date. The
revenues and expenses are translated to sterling at the average
rates of exchange for the year. Foreign exchange differences
arising on translation to sterling are accounted for through other
comprehensive income.
1.6. Classification of insurance and investment contracts
The measurement and presentation of assets, liabilities, income
and expenses arising from life and pensions business contracts is
dependent upon the classification of those contracts as either
insurance or investment contracts.
A contract is classified as insurance only if it transfers
significant insurance risk. Insurance risk is significant if an
insured event could cause an insurer to pay significant additional
benefits to those payable if no insured event occurred. A contract
that is classified as an insurance contract remains an insurance
contract until all rights and obligations are extinguished or
expire.
Any contracts not considered to be insurance contracts under
IFRS are classified as investment contracts. Capped Drawdown
pension business and Flexible Pension Plan contracts are classified
as investment contracts as there is no transfer of longevity risk
due to the fixed term and unit-linked natures of these respective
contracts.
1.7. Premium revenue
Premium revenue in respect of individual GIfL contracts is
accounted for when the premiums are received, which coincides with
when the liability to pay the GIfL contract is established.
Premium revenue in respect of Defined Benefit De-risking
contracts is accounted for when the Company becomes "on risk",
which is the date from which the policy is effective. If a timing
difference occurs between the date from which the policy is
effective and the receipt of payment, the amount due for payment
but not yet received is recognised as a receivable in the
Consolidated statement of financial position.
Premium revenue in respect of Care Plans and Protection policies
is recognised in the accounting period in which the insurance
contract commences.
Facilitated adviser charges are not accounted for within premium
revenue, and do not represent a charge on the Group.
Deposits collected under investment contracts are not accounted
for through the Consolidated statement of comprehensive income,
except for fee income and attributable investment income, but are
accounted for directly through the Consolidated statement of
financial position as an adjustment to the investment contract
liability.
Reinsurance premiums payable in respect of reinsurance treaties
are accounted for when the reinsurance premiums are due for payment
under the terms of the contract. Reinsurance premiums previously
incurred can be recaptured under certain conditions, notably once
reinsurance financing for an underwriting year is fully repaid.
1.8. Net investment income
Investment income consists of interest receivable for the year
and realised and unrealised gains and losses on financial assets
and liabilities at fair value through profit or loss.
Interest income is recognised as it accrues.
Realised gains and losses on financial assets and liabilities
occur on disposal or transfer and represent the difference between
the proceeds received net of transaction costs, and the original
cost.
Unrealised gains and losses arising on financial assets and
liabilities represent the difference between the carrying value at
the end of the year and the carrying value at the start of the year
or purchase value during the year, less the reversal of previously
recognised unrealised gains and losses in respect of disposals made
during the year.
1.9. Revenue from contracts with customers
The Group recognises revenue from contracts with customers in
accordance with IFRS15, in an amount that reflects the
consideration to which the Group expects to be entitled in exchange
for the services provided. Revenue from contracts with customers
comprises fee income on initial advances made on loans secured by
residential mortgages, investment management fees, administration
fees, software licensing fees and commission.
1.10. Claims paid
Policyholder benefits are accounted for when due for payment.
Reinsurance paid claim recoveries are accounted for in the same
period as the related claim.
Death claims are accounted for when notified.
1.11. Acquisition costs
Acquisition costs comprise direct costs such as commission and
indirect costs of obtaining and processing new business.
Acquisition costs are not deferred as they relate to single premium
business.
1.12. Leases
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
year. The calculation of the weighted-average number of ordinary
shares excludes ordinary shares held in trusts on behalf of
employee share schemes.
For diluted earnings per share, the weighted-average number of
ordinary shares outstanding during the year, excluding ordinary
shares held in trusts on behalf of employee share schemes, is
adjusted to assume conversion of potential ordinary shares, such as
share options granted to employees, if their conversion would
dilute earnings per share.
1.16. Intangible assets
Intangible assets consist of goodwill, which is deemed to have
an indefinite useful life, Purchased Value of In-Force ("PVIF"),
brand and purchased and internally developed software (including
PrognoSys(TM)), which are deemed to have finite useful lives.
Goodwill represents the excess of the cost of an acquisition
over the fair value of the Group's share of the net assets of the
acquired subsidiary and represents the future economic benefit
arising from assets that are not capable of being individually
identified and separately recognised. Goodwill is measured at
initial value less any accumulated impairment losses. Goodwill is
not amortised, but assessed for impairment annually or when
circumstances or events indicate there may be uncertainty over the
carrying value.
For the purpose of impairment testing, goodwill has been
allocated to cash-generating units and an impairment is recognised
when the carrying value of the cash-generating unit exceeds its
recoverable amount. Impairment losses are recognised directly in
the Consolidated statement of comprehensive income and are not
subsequently reversed.
Other intangible assets are recognised if it is probable that
the relevant future economic benefits attributable to the asset
will flow to the Group, and are measured at cost less accumulated
amortisation and any impairments.
PVIF, representing the present value of future profits from the
purchased in-force business, is recognised upon acquisition and is
amortised over its expected remaining economic life up to 16 years
on a straight-line basis.
PrognoSys(TM) is the Group's proprietary underwriting engine.
The Group has over two million person-years of experience collected
over 20 years of operations. It is enhanced by an extensive breadth
of external primary and secondary healthcare data and medical
literature.
Costs that are directly associated with the production of
identifiable and unique software products controlled by the Group
are capitalised and recognised as an intangible asset. Direct costs
include the incremental software development team's employee costs.
All other costs associated with researching or maintaining computer
software programmes are recognised as an expense as incurred.
Intangible assets with finite useful lives are amortised on a
straight-line basis over their useful lives, which range from two
to 16 years. The useful lives are determined by considering
relevant factors, such as usage of the asset, potential
obsolescence, competitive position and stability of the
industry.
For intangible assets with finite useful lives, impairment
testing is performed where there is an indication that the carrying
value of the assets may be subject to an impairment. An impairment
loss is recognised where the carrying value of an intangible asset
exceeds its recoverable amount.
The significant intangible assets recognised by the Group, their
useful economic lives and the methods used to determine the cost of
intangibles acquired in a business combination are as follows:
Estimated useful
Intangible asset economic life Valuation method
===================== ================ ===========================================
Up to 16 years Estimated value in-force using European
PVIF embedded value model
===================== ================ ===========================================
2 - 5 years Estimated royalty stream if the rights were
Brand to be licensed
===================== ================ ===========================================
Distribution network 3 years Estimated discounted cash flow
===================== ================ ===========================================
Software 2 - 3 years Estimated replacement cost
===================== ================ ===========================================
Intellectual property 12 - 15 years Estimated replacement cost
===================== ================ ===========================================
The useful economic lives of intangible assets recognised by the
Group other than those acquired in a business combination are as
follows:
Intangible asset Estimated useful economic life
================ ==============================
PrognoSys(TM) 12 years
================ ==============================
Software 3 years
================ ==============================
1.17. Property, plant and equipment
Land and buildings are measured at their revalued amounts less
subsequent depreciation, and impairment losses are recognised at
the date of revaluation. Valuations are performed with sufficient
frequency to ensure that the fair value of the revalued asset does
not differ materially from its carrying value.
A revaluation surplus is recognised in other comprehensive
income and credited to the revaluation reserve in equity. However,
to the extent that it reverses a revaluation deficit of the same
asset previously recognised in profit or loss, the increase is
recognised in profit or loss. A revaluation deficit is recognised
in profit or loss, except to the extent that it offsets an existing
surplus on the same asset recognised in the revaluation
reserve.
Buildings are depreciated on a straight-line basis over the
estimated useful lives of the buildings of 25 years.
Equipment is stated at cost less accumulated depreciation and
impairment losses. Depreciation is calculated on a straight-line
basis to write down the cost to residual value over the estimated
useful lives as follows:
Plant and equipment Estimated useful economic life
=================== ==============================
Computer equipment 3 - 4 years
=================== ==============================
Furniture and 2 - 10 years
fittings
=================== ==============================
1.18. Financial investments
Classification
The Group classifies financial investments in accordance with
IAS 39 whereby, subject to specific criteria, they are accounted
for at fair value through profit or loss. This comprises assets
designated by management as fair value through profit or loss on
inception, as they are managed on a fair value basis, and
derivatives that are classified as held for trading. These
investments are measured at fair value with all changes thereon
being recognised in investment income in the Consolidated statement
of comprehensive income.
Purchases and sales of investments are recognised on the trade
date, which is the date that the Group commits to purchase or sell
the assets. Amounts payable or receivable on unsettled purchases or
sales are recognised in other payables or other receivables
respectively. Transaction costs are expensed through profit or
loss.
Loans secured by residential mortgages are recognised when cash
is advanced to borrowers.
The Group receives and pledges collateral in the form of cash or
gilts in respect of derivative contracts. Collateral received is
recognised as an asset in the Consolidated statement of financial
position with a corresponding liability for the repayment in other
financial liabilities and collateral pledged is recognised in the
Consolidated statement of financial position within the appropriate
asset classification when the collateral is controlled by the Group
and receives the economic benefit.
Derivatives are recognised at fair value through profit or loss.
The fair values are obtained from quoted market prices or, if these
are not available, by using standard valuation techniques based on
discounted cash flow models or option pricing models. All
derivatives are carried as assets when the fair value is positive
and liabilities when the fair values are negative. The Group does
not use hedge accounting.
The Group's policy is to derecognise financial investments when
it is deemed that substantially all the risks and rewards of
ownership have been transferred.
Use of fair value
The Group uses current bid prices to value its investments with
quoted prices. Actively traded investments without quoted prices
are valued using prices provided by third parties. If there is no
active established market for an investment, the Group applies an
appropriate valuation technique such as discounted cash flow
analysis.
Determining the fair value of financial investments when the
markets are not active
The Group holds certain financial investments for which the
markets are not active. These comprise financial investments which
are not quoted in active markets and include loans secured by
residential mortgages, derivatives and other financial investments
for which markets are not active. When the markets are not active,
there is generally no or limited observable market data that can be
used in the fair value measurement of the financial investments.
The determination of whether an active market exists for a
financial investment requires management's judgement.
If the market for a financial investment of the Group is not
active, the fair value is determined using valuation techniques.
The Group establishes fair value for these financial investments by
using quotations from independent third parties or internally
developed pricing models. The valuation technique is chosen with
the objective of arriving at a fair value measurement which
reflects the price at which an orderly transaction would take place
between market participants on the measurement date. The valuation
techniques include the use of recent arm's length transactions,
reference to other instruments that are substantially the same, and
discounted cash flow analysis. The valuation techniques may include
a number of assumptions relating to variables such as credit risk
and interest rates and, for loans secured by mortgages, mortality,
future expenses, voluntary redemptions and house price assumptions.
Changes in assumptions relating to these variables impact the
reported fair value of these financial instruments positively or
negatively.
The financial investments measured at fair value are classified
into the following three-level hierarchy on the basis of the lowest
level of inputs that are significant to the fair value measurement
of the financial investment concerned:
Level 1: Quoted price (unadjusted) in active markets for
identical assets and liabilities;
Level 2: Inputs other than quoted prices included within Level 1
that are observable either directly or indirectly (i.e. derived
from prices); and
Level 3: Significant inputs for the asset or liability that are
not based on observable market data (unobservable inputs).
1.19. Reinsurance
Reinsurance assets
Amounts recoverable from reinsurers are measured in a consistent
manner with insurance liabilities and are classified as reinsurance
assets. If a reinsurance asset is impaired, the carrying value is
reduced accordingly and that impairment loss is recognised in the
Consolidated statement of comprehensive income.
Financial liabilities
Where reinsurance contracts entered into by the Group are
structured to provide financing, with financing components to be
repaid in future years, such amounts are classified as "reinsurance
finance" and included in other financial liabilities in the
Consolidated statement of financial position.
Where reinsurance contracts entered into by the Group require
deposits received from reinsurers to be repaid, such amounts are
classified as "deposits received from reinsurers" and included in
other financial liabilities in the Consolidated statement of
financial position. Where the liability carries no insurance risk,
it is initially recognised at fair value at the date the deposited
asset is recognised and subsequently re-measured at fair value at
each balance sheet date. The resulting gain or loss is recognised
in the Consolidated statement of comprehensive income. Fair value
is determined as the amount payable discounted from the first date
that the amount is required to be paid. All other deposits received
from reinsurers are valued in accordance with the terms of the
reinsurance contracts under IFRS 4, which take into account an
appropriate discount rate for the timing of expected cash flows. It
should be noted that the reinsurance recoverable amount is capped
at the value of the deposit anticipating that underwriting years
will eventually be recaptured.
Amounts receivable/payable
Where reinsurance contracts the Group has entered into include
longevity swap arrangements, such contracts are settled on a net
basis and amounts receivable from or payable to the reinsurers are
included in the appropriate heading under either Insurance and
other receivables or Insurance and other payables.
1.20. Cash and cash equivalents
Cash and cash equivalents consist of cash at bank and in hand,
deposits held at call with banks, and other short-term highly
liquid investments with less than 90 days' maturity from the date
of acquisition.
1.21. Equity
The difference between the proceeds received on issue of the
shares, net of share issue costs, and the nominal value of the
shares issued is credited to the share premium account.
Interim dividends are recognised in equity in the year in which
they are paid. Final dividends are recognised when they have been
approved by shareholders.
Where the Company purchases shares for the purposes of employee
incentive plans, the consideration paid, net of issue costs, is
deducted from equity. Upon issue or sale any consideration received
is credited to equity net of related costs.
The reserve arising on the reorganisation of the Group
represents the difference in the value of the shares in the Company
and the value of shares in Just Retirement Group Holdings Limited
for which they were exchanged as part of the Group reorganisation
in November 2013.
1.22. Insurance liabilities
Measurement
Long-term insurance liabilities arise from the Group writing
Retirement Income contracts, including Defined Benefit De-risking
Solutions, long-term care insurance, and whole of life and term
protection insurance. Their measurement uses estimates of projected
future cash flows arising from payments to policyholders plus the
costs of administering them. Valuation of insurance liabilities is
derived using discount rates, adjusted for default allowance, and
mortality assumptions, taken from the appropriate mortality tables
and adjusted to reflect actual and expected experience.
Liability adequacy test
The Group performs adequacy testing on its insurance liabilities
to ensure the carrying amount is sufficient to cover the current
estimate of future cash flows. Any deficiency is immediately
charged to the Consolidated statement of comprehensive income.
1.23. Investment contract liabilities
Investment contracts are measured at fair value through profit
or loss in accordance with IAS 39. The fair value of investment
contracts is estimated using an internal model and determined on a
policy-by-policy basis using a prospective valuation of future
Retirement Income benefit and expense cash flows, 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 or
loss over the period to maturity at the effective rate of interest
required to recognise the discounted estimated cash flows to
maturity.
1.25. Other provisions
Provisions are recognised when the Group has a present legal or
constructive obligation as a result of past events, it is probable
that an outflow of economic benefits will be required to settle the
obligation, and a reliable estimate of the amount of the obligation
can be made. The amount recorded as a provision is the best
estimate of the expenditure required to settle the obligation at
the balance sheet date. Where the effect of the time value of money
is material, the provision is the present value of the expected
expenditure.
1.26. Taxation
The current tax expense is based on the taxable profits for the
year, using tax rates substantively enacted at the Consolidated
statement of financial position date, and after any adjustments in
respect of prior years. Tax, including tax relief for losses if
applicable, is allocated over profits before taxation and amounts
charged or credited to components of other comprehensive income and
equity as appropriate.
Provision is made for deferred tax liabilities, or credit taken
for deferred tax assets, using the liability method, on all
material temporary differences between the tax bases of assets and
liabilities and their carrying amounts in the consolidated
financial statements. The principal temporary differences arise
from the revaluation of certain financial assets and liabilities,
including technical provisions and other insurance items and tax
losses carried forward, and include amortised transitional tax
adjustments resulting from changes in tax basis.
Deferred tax assets are recognised to the extent that it is
probable that future taxable profit will be available against which
the temporary differences can be utilised.
2. Net investment income
Year ended Year ended
31 December 31 December
2018 2017
GBPm GBPm
======================================================= ============ ============
Interest income:
======================================================= ============ ============
Assets at fair value through profit or loss 655.2 636.4
======================================================= ============ ============
Movement in fair value:
======================================================= ============ ============
Financial assets and liabilities designated on initial
recognition at fair value through profit or loss (447.3) (44.0)
======================================================= ============ ============
Derivative financial instruments (note 25) (65.3) 28.7
======================================================= ============ ============
Total net investment income 142.6 621.1
======================================================= ============ ============
3. Acquisition costs
Year ended Year ended
31 December 31 December
2018 2017
GBPm GBPm
=========================== ============ ============
Commission 19.2 15.8
=========================== ============ ============
Other acquisition expenses 33.2 27.3
=========================== ============ ============
Total acquisition costs 52.4 43.1
=========================== ============ ============
4. Other operating expenses
Year ended Year ended
31 December 31 December
2018 2017
GBPm GBPm
============================================ ============ ============
Personnel costs (note 9) 118.7 113.8
============================================ ============ ============
Investment expenses and charges 16.3 11.2
============================================ ============ ============
Depreciation of equipment 1.4 1.8
============================================ ============ ============
Operating lease rentals: land and buildings 2.4 4.2
============================================ ============ ============
Acquisition integration costs - 25.6
============================================ ============ ============
Amortisation of intangible assets 24.7 25.2
============================================ ============ ============
Other costs 91.3 56.6
============================================ ============ ============
Total other operating expenses 254.8 238.4
============================================ ============ ============
During the year the following services were provided by the
Group's auditor at costs as detailed below:
Year ended Year ended
31 December 31 December
2018 2017
GBP000 GBP000
===================================================== ============ ============
Fees payable for the audit of the Parent Company and
consolidated accounts 125 41
===================================================== ============ ============
Fees payable for other services:
===================================================== ============ ============
The audit of the Company's subsidiaries pursuant to
legislation 885 835
===================================================== ============ ============
Corporate finance services 1,155 175
===================================================== ============ ============
Audit-related assurance services 653 639
===================================================== ============ ============
Other assurance services 222 234
===================================================== ============ ============
Auditor remuneration 3,040 1,924
===================================================== ============ ============
Audit-related assurance services mainly include fees relating to
the audit of the Group's Solvency II regulatory returns. Other
assurance services mainly include fees relating to review
procedures in relation to the Group's interim results. Corporate
finance services relate to due diligence and reporting accountant
services.
5. Finance costs
Year ended Year ended
31 December 31 December
2018 2017
GBPm GBPm
====================================================== ============ ============
Interest payable on deposits received from reinsurers 159.2 170.8
====================================================== ============ ============
Interest payable on subordinated debt 39.9 32.0
====================================================== ============ ============
Other interest payable 3.7 4.2
====================================================== ============ ============
Total finance costs 202.8 207.0
====================================================== ============ ============
The interest payable on deposits received from reinsurers is as
defined by the respective reinsurance treaties and calculated with
reference to the risk-adjusted yield on the relevant backing asset
portfolio.
6. Segmental reporting
Adjusted operating profit
The Group reports adjusted operating profit as an alternative
measure of profit which is used for decision making and performance
measurement. The Board believes that adjusted operating profit,
which excludes effects of short-term economic and investment
changes, provides a better view of the longer-term performance and
development of the business and aligns with the longer-term nature
of the products. The underlying operating profit represents a
combination of both the profit generated from new business written
in the year and profit expected to emerge from the in-force book of
business based on current assumptions. Actual operating experience,
where different from that assumed at the start of the year, and the
impacts of changes to future operating assumptions applied in the
year, are then also included in arriving at adjusted operating
profit.
New business profits represent expected investment returns on
financial instruments backing shareholder and policyholder funds
after allowances for expected movements in liabilities and
acquisition costs. Profits arising from the in-force book of
business represent the expected return on surplus assets, the
expected unwind of prudent reserves above best estimates for
mortality, expenses, corporate bond defaults and, with respect to
lifetime mortgages, no-negative equity guarantee and early
redemptions.
Adjusted operating profit excludes the impairment and
amortisation of goodwill and other intangible assets arising on
consolidation, and restructuring costs, since these items arise
outside the normal course of business in the year. Adjusted
operating profit also excludes exceptional items. Exceptional items
are those items that, in the Directors' view, are required to be
separately disclosed by virtue of their nature or incidence to
enable a full understanding of the Group's financial
performance.
Variances between actual and expected investment returns due to
economic and market changes, and gains and losses on the
revaluation of land and buildings, are also disclosed outside
adjusted operating profit.
Segmental analysis
The insurance segment writes insurance products for the
retirement market - which include Guaranteed Income for Life
Solutions, Defined Benefit De-risking Solutions, Care Plans,
Flexible Pension Plans and Protection - and invests the premiums
received from these contracts in debt securities, gilts, liquidity
funds and lifetime mortgage advances.
The professional services business, HUB, is included with other
corporate companies in the Other segment. This business is not
currently sufficiently significant to separate from other
companies' results. The Other segment also includes the Group's
corporate activities that are primarily involved in managing the
Group's liquidity, capital and investment activities.
The Group operates in one material geographical segment, which
is the United Kingdom.
Segmental reporting and reconciliation to financial
information
Year ended 31 December
Year ended 31 December 2018 2017
================================= =============================== ===========================
Insurance Other Total Insurance Other Total
GBPm GBPm GBPm GBPm GBPm GBPm
================================= ============ ======= ======== ========== ======= ======
New business operating profit 243.7 - 243.7 169.8 - 169.8
================================= ============ ======= ======== ========== ======= ======
In-force operating profit 69.2 2.5 71.7 71.0 0.3 71.3
================================= ============ ======= ======== ========== ======= ======
Underlying operating profit 312.9 2.5 315.4 240.8 0.3 241.1
================================= ============ ======= ======== ========== ======= ======
Operating experience and
assumption changes (33.5) - (33.5) 34.6 - 34.6
================================= ============ ======= ======== ========== ======= ======
Other Group companies' operating
results - (14.6) (14.6) - (14.0) (14.0)
================================= ============ ======= ======== ========== ======= ======
Development expenditure (6.4) (2.3) (8.7) - (1.1) (1.1)
================================= ============ ======= ======== ========== ======= ======
Reinsurance and financing
costs (45.8) (2.5) (48.3) (43.4) 3.4 (40.0)
================================= ============ ======= ======== ========== ======= ======
Adjusted operating profit
before tax 227.2 (16.9) 210.3 232.0 (11.4) 220.6
================================= ============ ======= ======== ========== ======= ======
Non-recurring and project
expenditure (4.3) (15.3) (19.6) (10.9) (0.7) (11.6)
================================= ============ ======= ======== ========== ======= ======
Investment and economic
(losses)/profits (251.0) (1.0) (252.0) 22.6 - 22.6
================================= ============ ======= ======== ========== ======= ======
(Loss)/profit before acquisition
transaction and amortisation
costs, before tax (28.1) (33.2) (61.3) 243.7 (12.1) 231.6
================================= ============ ======= ======== ========== ======= ======
Acquisition integration
costs - (25.6)
================================= ============ ======= ======== ========== ======= ======
Amortisation costs (24.2) (24.7)
================================= ============ ======= ======== ========== ======= ======
(Loss)/profit before tax (85.5) 181.3
================================= ============ ======= ======== ========== ======= ======
Segmental revenue
All net premium revenue arises from the Group's insurance
segment. Net investment income of GBP141.3m arose from the
insurance segment and GBP1.3m arose from other segments (2017:
GBP621.0m and GBP0.1m respectively). Fee and commission income of
GBP5.0m arose from the insurance segment and GBP3.2m arose from
other segments (2017: GBP1.6m and GBP4.2m respectively).
Product information analysis
Additional analysis relating to the Group's products is
presented below. The Group's products are from one material
geographical segment, which is the United Kingdom. The Group's
gross premiums written, as shown in the Consolidated statement of
comprehensive income, is analysed by product below:
Year ended Year ended
31 December 31 December
2018 2017
GBPm GBPm
============================================== ============ ============
Defined Benefit De-risking Solutions ("DB") 1,314.2 997.8
============================================== ============ ============
Guaranteed Income for Life contracts ("GIfL") 786.5 820.5
============================================== ============ ============
Care Plans ("CP") 72.8 71.6
============================================== ============ ============
Protection 3.4 3.5
============================================== ============ ============
Gross premiums written 2,176.9 1,893.4
============================================== ============ ============
Drawdown and LTM products are accounted for as investment
contracts and financial investments respectively in the statement
of financial position. An analysis of the amounts advanced during
the year for these products is shown below:
Year ended Year ended
31 December 31 December
2018 2017
GBPm GBPm
=================== ============ ============
Drawdown 51.0 51.2
=================== ============ ============
LTM loans advanced 602.1 510.0
=================== ============ ============
Reconciliation of gross premiums written to new business
sales
Year ended Year ended
31 December 31 December
2018 2017
GBPm GBPm
=========================================================== ============ ============
Gross premiums written 2,176.9 1,893.4
=========================================================== ============ ============
Regular premiums recognised on a single premium equivalent
basis in
new business sales (2.6) 2.5
=========================================================== ============ ============
Drawdown and LTM new business sales not included
in gross premiums written 653.1 561.2
=========================================================== ============ ============
New business sales 2,827.4 2,457.1
=========================================================== ============ ============
Disaggregation of revenue from contracts with customers
Year ended 31 December
Year ended 31 December 2018 2017
================================== =============================== ==========================
Insurance Other Total Insurance Other Total
GBPm GBPm GBPm GBPm GBPm GBPm
================================== ============= ======= ======= =========== ====== =====
Product/service
================================== ============= ======= ======= =========== ====== =====
LTM set-up fees 0.5 - 0.5 0.6 - 0.6
================================== ============= ======= ======= =========== ====== =====
LTM commission and advice fees - 1.7 1.7 - 1.7 1.7
================================== ============= ======= ======= =========== ====== =====
GIfL commission - 1.8 1.8 - 1.2 1.2
================================== ============= ======= ======= =========== ====== =====
FPP fees 0.6 0.1 0.7 0.3 0.1 0.4
================================== ============= ======= ======= =========== ====== =====
Other 0.4 3.1 3.5 1.0 0.9 1.9
================================== ============= ======= ======= =========== ====== =====
Timing of revenue recognition 1.5 6.7 8.2 1.9 3.9 5.8
================================== ============= ======= ======= =========== ====== =====
Products transferred at point
in time 0.9 6.4 7.3 1.6 3.9 5.5
================================== ============= ======= ======= =========== ====== =====
Products and services transferred
over time 0.6 0.3 0.9 0.3 - 0.3
================================== ============= ======= ======= =========== ====== =====
Revenue from contracts with
customers 1.5 6.7 8.2 1.9 3.9 5.8
================================== ============= ======= ======= =========== ====== =====
All revenue from contracts with customers is from the UK.
7. Income tax
Income tax recognised in profit or loss
Year ended Year ended
31 December 31 December
2018 2017
GBPm GBPm
================================================== ============ ============
Current taxation
================================================== ============ ============
Current year (9.8) 44.2
================================================== ============ ============
Adjustments in respect of prior periods 2.1 (8.1)
================================================== ============ ============
Total current tax (7.7) 36.1
================================================== ============ ============
Deferred taxation
================================================== ============ ============
Origination and reversal of temporary differences (12.9) (7.3)
================================================== ============ ============
Adjustments in respect of prior periods (0.9) (2.5)
================================================== ============ ============
Rate change 0.3 (0.1)
================================================== ============ ============
Total deferred tax (13.5) (9.9)
================================================== ============ ============
Total income tax recognised in profit or loss (21.2) 26.2
================================================== ============ ============
The net income tax credit of GBP21.2m includes a tax credit of
GBP9.8m for carry back of current year tax losses of GBP51.6m
against 2017 taxable profits for overpayment relief of GBP15.9m and
tax provision for the HMRC transfer pricing enquiry of GBP3.3m.
The tax rate for the current year is lower than the prior year,
due to changes in the UK corporation tax rate, which decreased from
20% to 19% from 1 April 2017. Changes to the UK corporation tax
rates were substantively enacted as part of the Finance Bill 2016
(on 6 September 2016). These include reductions to the main rate to
reduce the rate to 17% from 1 April 2020. Deferred taxes at the
balance sheet date have been measured using these enacted tax rates
and reflected in these financial statements.
The deferred tax assets and liabilities at 31 December 2018 have
been calculated based on the rate at which they are expected to
reverse.
Reconciliation of total income tax to the applicable tax
rate
Year ended Year ended
31 December 31 December
2018 2017
GBPm GBPm
================================================ ============ ============
(Loss)/profit on ordinary activities before tax (85.5) 181.3
================================================ ============ ============
Income tax at 19% (2017: 19.25%) (16.2) 34.9
================================================ ============ ============
Effects of:
================================================ ============ ============
Expenses not deductible for tax purposes 1.0 0.4
================================================ ============ ============
Rate change 0.1 0.4
================================================ ============ ============
Higher rate for overseas income (0.3) -
================================================ ============ ============
Unrecognised deferred tax asset 1.3 0.5
================================================ ============ ============
Losses utilised/carried back (0.1) 0.6
================================================ ============ ============
Adjustments in respect of prior periods 1.2 (10.6)
================================================ ============ ============
Deferred tax not previously recognised (9.1) -
================================================ ============ ============
Other 0.9 -
================================================ ============ ============
Total income tax recognised in profit or loss (21.2) 26.2
================================================ ============ ============
The rate change of GBP0.1m is largely due to deferred tax
recognised at 17% rather than current rate of 19%.
Income tax recognised in other comprehensive income
Year ended Year ended
31 December 31 December
2018 2017
GBPm GBPm
=================================================== ============ ============
Deferred taxation
=================================================== ============ ============
Revaluation of land and buildings 0.9 -
=================================================== ============ ============
Total deferred tax 0.9 -
=================================================== ============ ============
Total income tax recognised in other comprehensive
income 0.9 -
=================================================== ============ ============
Taxation of life insurance companies was fundamentally changed
following the publication of the Finance Act 2012. Since 1 January
2013, life insurance tax has been based on financial statements;
prior to this date, the basis for profits chargeable to corporation
tax was surplus arising within the Pillar 1 regulatory regime.
Cumulative differences arising between the two bases, which
represent the differences in retained profits and taxable surplus
which are not excluded items for taxation, are brought back into
the computation of taxable profits. However, legislation provides
for transitional arrangements whereby such differences are
amortised on a straight-line basis over a ten year period from 1
January 2013. Similarly, the resulting cumulative transitional
adjustments for tax purposes in adoption of IFRS will be amortised
on a straight-line basis over a ten year period from 1 January
2016. The tax charge for the year to 31 December 2018 includes
profits chargeable to corporation tax arising from amortisation of
transitional balances of GBP2.5m (2017: GBP2.5m).
Tax balances included within these financial statements include
the use of estimates and assumptions which are based on
management's best knowledge of current circumstances and future
events and actions. This includes the determination of tax
liabilities and recoverables for uncertain tax positions. The
actual outcome may differ from the estimated position.
8. Remuneration of Directors
Information concerning individual Directors' emoluments,
interests and transactions is given in the Directors' Remuneration
Report. For the purposes of the disclosure required by Schedule 5
to the Companies Act 2006, the total aggregate emoluments of the
Directors in the year was GBP4.4m (2017: GBP5.7m). Employer
contributions to pensions for Executive Directors for qualifying
periods were GBPnil (2017: GBPnil). The aggregate net value of
share awards granted to the Directors in the year was GBP2.7m
(2017: GBP2.3m). The net value has been calculated by reference to
the closing middle-market price of an ordinary share at the date of
grant. Two Directors exercised share options during the year with
an aggregate gain of GBP5k (2017: two Directors exercised options
with an aggregate gain of GBP1,735k).
9. Staff numbers and costs
The average number of persons employed by the Group (including
Directors) during the financial year, analysed by category, was as
follows:
Year ended Year ended
31 December 31 December
2018 2017
Number Number
======================== ============ ============
Directors 9 12
======================== ============ ============
Senior management 120 116
======================== ============ ============
Staff 1,007 963
======================== ============ ============
Average number of staff 1,136 1,091
======================== ============ ============
The aggregate personnel costs were as follows:
Year ended Year ended
31 December 31 December
2018 2017
GBPm GBPm
============================ ============ ============
Wages and salaries 96.6 90.3
============================ ============ ============
Social security costs 9.0 8.9
============================ ============ ============
Other pension costs 4.3 4.3
============================ ============ ============
Share-based payment expense 8.8 10.3
============================ ============ ============
Total personnel costs 118.7 113.8
============================ ============ ============
The Company does not have any employees.
10. Employee benefits
Defined contribution pension scheme
The Group operates a defined contribution pension scheme. The
pension cost charge for the year represents contributions payable
to the fund and amounted to GBP4.3m (2017: GBP4.3m).
Employee share plans
The Group operates a number of employee share option and share
award plans. Details of those plans are as follows:
Share options
Just Retirement Group plc 2013 Long Term Incentive Plan
("LTIP")
The Group has made awards under the LTIP to Executive Directors
and other senior managers. Awards are made in the form of nil-cost
options which become exercisable on the third anniversary of the
grant date, subject to the satisfaction of service and performance
conditions set out in the Directors' Remuneration Report. Options
are exercisable until the tenth anniversary of the grant date.
Options granted since 2017 are subject to a two year holding period
after the options have been exercised.
The options are accounted for as equity-settled schemes.
The number and weighted-average remaining contractual life of
outstanding options under the LTIP are as follows:
Year ended Year ended
31 December 31 December
2018 2017
Number of Number of
options options
==================================================== ============ ============
Outstanding at start of year 15,736,774 17,157,164
==================================================== ============ ============
Granted 4,498,115 4,718,136
==================================================== ============ ============
Forfeited (23,303) (1,450,989)
==================================================== ============ ============
Exercised (357,912) (2,439,772)
==================================================== ============ ============
Expired (2,258,366) (2,247,765)
==================================================== ============ ============
Outstanding at end of year 17,595,308 15,736,774
==================================================== ============ ============
Exercisable at end of year 3,203,315 1,117,994
==================================================== ============ ============
Weighted-average share price at exercise (GBP) 1.11 1.57
==================================================== ============ ============
Weighted-average remaining contractual life (years) 1.13 1.45
==================================================== ============ ============
The exercise price for options granted under the LTIP is
nil.
During the year to 31 December 2018, awards of LTIPs were made
on 29 March 2018. The weighted-average fair value and assumptions
used to determine the fair value of options granted during the year
under the LTIP are as follows:
Fair value at grant date GBP1.03
========================================== ===================================
Option pricing models Black-Scholes, Stochastic, Finnerty
========================================== ===================================
Share price at grant date GBP1.36
========================================== ===================================
Exercise price Nil
========================================== ===================================
Expected volatility - TSR performance 37.41%
========================================== ===================================
Expected volatility - holding period 39.52%
========================================== ===================================
Option life 3 years + 2 year holding period
========================================== ===================================
Dividends Nil
========================================== ===================================
Risk-free interest rate - TSR performance 0.87%
Risk-free interest rate - holding period 1.11%
========================================== ===================================
A Black-Scholes option pricing model is used where vesting is
related to an earnings per share target, a Stochastic model is used
where vesting is related to a total shareholder return target, and
a Finnerty model is used to model the holding period.
Deferred share bonus plan ("DSBP")
The DSBP is operated in conjunction with the Group's short-term
incentive plan for Executive Directors and other senior managers of
the Company or any of its subsidiaries, as explained in the
Directors' Remuneration Report. Awards are made in the form of
nil-cost options which become exercisable on the third anniversary,
and until the tenth anniversary, of the grant date.
The options are accounted for as equity-settled schemes.
The number and weighted-average remaining contractual life of
outstanding options under the DSBP are as follows:
Year ended Year ended
31 December 31 December
2018 2017
Number of Number of
options options
==================================================== ============ ============
Outstanding at start of year 2,959,716 2,257,544
==================================================== ============ ============
Granted 925,734 1,493,790
==================================================== ============ ============
Exercised (20,892) (791,618)
==================================================== ============ ============
Outstanding at end of year 3,864,558 2,959,716
==================================================== ============ ============
Exercisable at end of year 1,641,831 796,252
==================================================== ============ ============
Weighted-average share price at exercise (GBP) 0.74 1.58
==================================================== ============ ============
Weighted-average remaining contractual life (years) 1.02 1.57
==================================================== ============ ============
The exercise price for options granted under the DSBP is
nil.
During the year to 31 December 2018, awards of DSBPs were made
on 29 March 2018. The weighted-average fair value and assumptions
used to determine the fair value of options granted during the year
under the DSBP are as follows:
Fair value at grant date GBP1.36
========================= =============
Option pricing model used Black-Scholes
========================= =============
Share price at grant date GBP1.36
========================= =============
Exercise price Nil
========================= =============
Expected volatility Nil
========================= =============
Option life 3 years
========================= =============
Dividends Nil
========================= =============
Risk-free interest rate Nil
========================= =============
Save As You Earn ("SAYE") scheme
The Group operates SAYE plans for all employees, allowing a
monthly amount to be saved from salaries over either a three or
five year period which can be used to purchase shares in the
Company at a predetermined price. The employee must remain in
employment for the duration of the saving period and satisfy the
monthly savings requirement (except in "good leaver"
circumstances). Options are exercisable for up to six months after
the saving period.
The options are accounted for as equity-settled schemes.
The number, weighted-average exercise price, weighted-average
share price at exercise, and weighted-average remaining contractual
life of outstanding options under the SAYE are as follows:
Year ended 31 December Year ended 31 December
2018 2017
========================================= ============================= =============================
Weighted-average Weighted-average
exercise exercise
Number price Number price
of options GBP of options GBP
========================================= =========== ================ =========== ================
Outstanding at start of year 4,401,381 1.12 4,804,147 1.21
========================================= =========== ================ =========== ================
Granted 1,544,255 1.18 3,302,135 1.07
========================================= =========== ================ =========== ================
Forfeited (348,098) 1.13 (423,430) 1.21
========================================= =========== ================ =========== ================
Cancelled (632,207) 1.13 (621,001) 1.20
========================================= =========== ================ =========== ================
Exercised (285,347) 1.24 (2,539,617) 1.19
========================================= =========== ================ =========== ================
Expired (123,601) 1.25 (120,853) 1.20
========================================= =========== ================ =========== ================
Outstanding at end of year 4,556,383 1.12 4,401,381 1.12
========================================= =========== ================ =========== ================
Exercisable at end of year 69,981 1.36 234,759 1.14
========================================= =========== ================ =========== ================
Weighted-average share price at exercise 1.42
========================================= =========== ================ =========== ================
Weighted-average remaining contractual
life (years) 2.39
========================================= =========== ================ =========== ================
The range of exercise prices of options outstanding at the end
of the year are as follows:
2018 2017
Number of Number of
options outstanding options outstanding
======== ==================== ====================
GBP1.07 2,581,382 3,157,377
======== ==================== ====================
GBP1.13 81,640 194,057
======== ==================== ====================
GBP1.18 1,335,184 -
======== ==================== ====================
GBP1.20 445,922 521,114
======== ==================== ====================
GBP1.27 61,973 426,917
======== ==================== ====================
GBP1.47 50,282 101,916
======== ==================== ====================
Total 4,556,383 4,401,381
======== ==================== ====================
During the year to 31 December 2018, awards of SAYEs were made
on 20 June 2018. The weighted-average fair value and assumptions
used to determine the fair value of options granted during the year
under the SAYE are as follows:
Fair value at grant date GBP0.40
======================================== =============
Option pricing model used Black-Scholes
======================================== =============
Share price at grant date GBP1.38
======================================== =============
Exercise price GBP1.18
======================================== =============
Expected volatility - 3 year scheme 36.93%
======================================== =============
Expected volatility - 5 year scheme 54.53%
======================================== =============
Option life 3-5 years
======================================== =============
Dividends Nil
======================================== =============
Risk-free interest rate - 3 year scheme 0.79%
======================================== =============
Risk-free interest rate - 5 year scheme 1.05%
======================================== =============
Saving forfeit discounts 5%
======================================== =============
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.
Awards made in the year 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
GBP10,185 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 year is as follows:
Year ended Year ended
31 December 31 December
2018 2017
GBPm GBPm
======================= ============ ============
Equity-settled schemes 8.8 10.3
======================= ============ ============
Total expense 8.8 10.3
======================= ============ ============
11. Earnings per share
The calculation of basic and diluted earnings per share is based
on dividing the profit or loss attributable to equity holders of
the Company by the weighted average number of ordinary shares
outstanding, and by the diluted weighted average number of ordinary
shares potentially outstanding at the end of the year, calculated
as follows:
Year ended 31 December Year ended 31 December
2018 2017
=============================== ================================ ================================
Weighted Weighted
average average
number Earnings number Earnings
Earnings of shares per share Earnings of shares per share
GBPm million pence GBPm million pence
=============================== ======== ========== ========== ======== ========== ==========
Basic (63.7) 932.7 (6.83) 155.1 930.0 16.68
=============================== ======== ========== ========== ======== ========== ==========
Effect of potentially dilutive
share options - - - - 7.5 (0.14)
=============================== ======== ========== ========== ======== ========== ==========
Diluted (63.7) 932.7 (6.83) 155.1 937.5 16.54
=============================== ======== ========== ========== ======== ========== ==========
12. Dividends
Dividends paid in the year were as follows:
Year ended Year ended
31 December 31 December
2018 2017
GBPm GBPm
======================================================== ============ ============
Final dividend:
======================================================== ============ ============
- in respect of the year ended 31 December 2017 (2.55
pence per share,
paid on 25 May 2018) 23.8 -
======================================================== ============ ============
- in respect of the 18 months ended 31 December 2016
(2.4 pence per share,
paid on 26 May 2017) - 22.3
======================================================== ============ ============
Interim dividend:
======================================================== ============ ============
- in respect of the year ended 31 December 2017 (1.17
pence per share,
paid on 24 November 2017) - 10.9
======================================================== ============ ============
Dividends paid on the vesting of employee share schemes 0.6 -
======================================================== ============ ============
Total dividends paid 24.4 33.2
======================================================== ============ ============
The Board considers it appropriate to not pay a final year
dividend for 2018 (total 2017:3.72 pence per ordinary share,
amounting to GBP34.7m in total).
The Board's current expectation is to recommence dividend
payments during the 2019 financial year at a rebased level. The
rebased level for the 2019 full year dividend is expected to be
approximately one third of the 3.72 pence total dividend paid
during the 2017 financial year, subject to the Group's earnings,
cash flow and capital position.
13. Intangible assets
Present PrognoSys(TM)
value and other
of in-force Distribution intellectual
Year ended 31 December Goodwill business network Brand property Software Leases Total
2018 GBPm GBPm GBPm GBPm GBPm GBPm GBPm GBPm
============================ ======== ============ ============ ===== ============= ======== ====== =======
Cost
============================ ======== ============ ============ ===== ============= ======== ====== =======
At 1 January 2018 33.9 200.0 26.6 5.6 7.4 25.4 2.0 300.9
============================ ======== ============ ============ ===== ============= ======== ====== =======
Additions 1.0 - - - 0.5 0.7 - 2.2
============================ ======== ============ ============ ===== ============= ======== ====== =======
At 31 December 2018 34.9 200.0 26.6 5.6 7.9 26.1 2.0 303.1
============================ ======== ============ ============ ===== ============= ======== ====== =======
Amortisation and impairment
============================ ======== ============ ============ ===== ============= ======== ====== =======
At 1 January 2018 (0.8) (54.0) (22.4) (5.6) (1.4) (21.2) (2.0) (107.4)
============================ ======== ============ ============ ===== ============= ======== ====== =======
Charge for the year - (17.9) (3.3) - (0.6) (2.9) - (24.7)
============================ ======== ============ ============ ===== ============= ======== ====== =======
At 31 December 2018 (0.8) (71.9) (25.7) (5.6) (2.0) (24.1) (2.0) (132.1)
============================ ======== ============ ============ ===== ============= ======== ====== =======
Net book value at 31
December 2018 34.1 128.1 0.9 - 5.9 2.0 - 171.0
============================ ======== ============ ============ ===== ============= ======== ====== =======
Net book value at 31
December 2017 33.1 146.0 4.2 - 6.0 4.2 - 193.5
============================ ======== ============ ============ ===== ============= ======== ====== =======
Present PrognoSys(TM)
value and other
of in-force Distribution intellectual
Year ended 31 December Goodwill business network Brand property Software Leases Total
2017 GBPm GBPm GBPm GBPm GBPm GBPm GBPm GBPm
============================ ======== ============ ============ ===== ============= ======== ====== =======
Cost
============================ ======== ============ ============ ===== ============= ======== ====== =======
At 1 January 2017 33.9 200.0 26.6 5.6 7.4 23.7 2.0 299.2
============================ ======== ============ ============ ===== ============= ======== ====== =======
Additions - - - - - 1.7 - 1.7
============================ ======== ============ ============ ===== ============= ======== ====== =======
At 31 December 2017 33.9 200.0 26.6 5.6 7.4 25.4 2.0 300.9
============================ ======== ============ ============ ===== ============= ======== ====== =======
Amortisation and impairment
============================ ======== ============ ============ ===== ============= ======== ====== =======
At 1 January 2017 (0.8) (36.1) (19.1) (5.6) (1.2) (17.4) (2.0) (82.2)
============================ ======== ============ ============ ===== ============= ======== ====== =======
Charge for the year - (17.9) (3.3) - (0.2) (3.8) - (25.2)
============================ ======== ============ ============ ===== ============= ======== ====== =======
At 31 December 2017 (0.8) (54.0) (22.4) (5.6) (1.4) (21.2) (2.0) (107.4)
============================ ======== ============ ============ ===== ============= ======== ====== =======
Net book value at 31
December 2017 33.1 146.0 4.2 - 6.0 4.2 - 193.5
============================ ======== ============ ============ ===== ============= ======== ====== =======
Net book value at 31
December 2016 33.1 163.9 7.5 - 6.2 6.3 - 217.0
============================ ======== ============ ============ ===== ============= ======== ====== =======
Amortisation and impairment charge
The amortisation and impairment charge is recognised in other
operating expenses in profit or loss.
Impairment testing
Goodwill is tested for impairment in accordance with IAS 36,
Impairment of Assets, at least annually.
The Group's goodwill of GBP34.1m at 31 December 2018 represents
GBP1.0m recognised on the 2018 acquisition of Corinthian Group
Limited (see note 35), GBP0.3m recognised on the 2016 acquisition
of the Partnership Assurance Group and GBP32.8m on the 2009
acquisition by Just Retirement Group Holdings Limited of Just
Retirement (Holdings) Limited, the holding company of Just
Retirement Limited ("JRL").
The existing goodwill has been allocated to the insurance
segment as the cash-generating unit. The recoverable amounts of
goodwill have been determined from value-in-use. The key
assumptions of this calculation are noted below:
2018 2017
======================================================== ======= =======
Period on which management approved forecasts are based 5 years 5 years
======================================================== ======= =======
Discount rate (pre-tax) 10.0% 10.0%
======================================================== ======= =======
The value-in-use of the insurance operating segment is
considered by reference to latest business plans over the next five
years, which reflect management's best estimate of future profits
based on historical experience, expected growth rates and
assumptions around market share, customer numbers, expense
inflation and mortality rates. A stressed scenario that assumes no
growth in sales for the next five years and discount rate of 20% is
also considered. The outcome of the impairment assessment under
both scenarios is that the goodwill in respect of the insurance
operating segment is not impaired and that the value-in-use is
higher than the carrying value of goodwill and net assets.
Any reasonably possible changes in assumption will not cause the
carrying value of the goodwill to exceed the recoverable
amounts.
14. Property, plant and equipment
Freehold Furniture
land and Computer and
buildings equipment fittings Total
Year ended 31 December 2018 GBPm GBPm GBPm GBPm
=================================== ========== ========== ========= =====
Cost or valuation
=================================== ========== ========== ========= =====
At 1 January 2018 16.6 6.0 5.7 28.3
=================================== ========== ========== ========= =====
Acquired during the year - 0.8 - 0.8
=================================== ========== ========== ========= =====
Revaluations 1.3 - - 1.3
=================================== ========== ========== ========= =====
At 31 December 2018 17.9 6.8 5.7 30.4
=================================== ========== ========== ========= =====
Depreciation
=================================== ========== ========== ========= =====
At 1 January 2018 (0.7) (5.1) (2.9) (8.7)
=================================== ========== ========== ========= =====
Eliminated on revaluation 1.1 - - 1.1
=================================== ========== ========== ========= =====
Charge of the year (0.5) (0.5) (0.4) (1.4)
=================================== ========== ========== ========= =====
At 31 December 2018 (0.1) (5.6) (3.3) (9.0)
=================================== ========== ========== ========= =====
Net book value at 31 December 2018 17.8 1.2 2.4 21.4
=================================== ========== ========== ========= =====
Net book value at 31 December 2017 15.9 0.9 2.8 19.6
=================================== ========== ========== ========= =====
Freehold
land and Computer Furniture
buildings equipment and fittings Total
Year ended 31 December 2017 GBPm GBPm GBPm GBPm
=================================== ========== ========== ============= =====
Cost
=================================== ========== ========== ============= =====
At 1 January 2017 9.7 5.5 10.5 25.7
=================================== ========== ========== ============= =====
Acquired during the year 6.9 0.5 - 7.4
=================================== ========== ========== ============= =====
Disposed during the year - - (4.8) (4.8)
=================================== ========== ========== ============= =====
At 31 December 2017 16.6 6.0 5.7 28.3
=================================== ========== ========== ============= =====
Depreciation
=================================== ========== ========== ============= =====
At 1 January 2017 (0.3) (4.6) (3.7) (8.6)
=================================== ========== ========== ============= =====
Charge for the year (0.4) (0.5) (0.9) (1.8)
=================================== ========== ========== ============= =====
Disposed during the year - - 1.7 1.7
=================================== ========== ========== ============= =====
At 31 December 2017 (0.7) (5.1) (2.9) (8.7)
=================================== ========== ========== ============= =====
Net book value at 31 December 2017 15.9 0.9 2.8 19.6
=================================== ========== ========== ============= =====
Net book value at 31 December 2016 9.4 0.9 6.8 17.1
=================================== ========== ========== ============= =====
Included in freehold land and buildings is land of value GBP4.4m
(2017: GBP4.3m).
The Company's freehold land and buildings are stated at their
revalued amounts, being the fair value at the date of revaluation
less any subsequent accumulated depreciation and subsequent
accumulated impairment losses. The fair value measurements of the
Company's freehold land and buildings as at 15 November 2018 were
performed by Hurst Warne & Partners Surveyors Ltd, independent
valuers not related to the Company. Hurst Warne & Partners
Surveyors Ltd is registered for regulation by the Royal Institution
of Chartered Surveyors ("RICS"). The valuation was undertaken by a
RICS registered valuer. The valuer has sufficient current local
knowledge of the particular market, and the knowledge, skills and
understanding to undertake the valuation competently. The fair
value of the freehold land was undertaken using a residual
valuation assuming a new build office on each site to an exact
equivalent size as currently and disregarding the possibility of
developing any alternative uses or possible enhancements. The fair
value of the buildings was determined based on open market
comparable evidence of market rent.
Revaluations during the year comprise a loss of GBP2.9m
recognised in profit or loss, a gain of GBP5.3m recognised in other
comprehensive income (gross of tax of GBP0.9m), and the elimination
of depreciation on the revaluations of GBP1.1m.
15. 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 the profit or loss, and are either designated as such
on initial recognition or, in the case of derivative financial
assets, classified as held for trading.
Fair value Cost
======================================= ================== ==================
2018 2017 2018 2017
GBPm GBPm GBPm GBPm
======================================= ======== ======== ======== ========
Units in liquidity funds 882.5 897.9 882.5 897.9
======================================= ======== ======== ======== ========
Investment funds 182.0 46.3 182.8 45.6
======================================= ======== ======== ======== ========
Debt securities and other fixed income
securities 9,518.3 9,589.5 8,858.5 8,745.8
======================================= ======== ======== ======== ========
Deposits with credit institutions 153.4 87.9 153.4 87.9
======================================= ======== ======== ======== ========
Derivative financial assets 81.2 100.2 - 2.6
======================================= ======== ======== ======== ========
Loans secured by residential mortgages 7,191.5 6,833.3 4,847.6 4,127.0
======================================= ======== ======== ======== ========
Loans secured by commercial mortgages 392.3 215.4 385.9 211.7
======================================= ======== ======== ======== ========
Other loans 749.1 444.3 711.8 408.0
======================================= ======== ======== ======== ========
Amounts recoverable from reinsurers
on investment contracts 102.2 72.3 101.2 67.6
======================================= ======== ======== ======== ========
Total 19,252.5 18,287.1 16,123.7 14,594.1
======================================= ======== ======== ======== ========
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
GBP152.6m (2017: GBP87.1m) have been pledged as collateral in
respect of the Group's derivative financial instruments. Amounts
pledged as collateral are deposited with the derivative
counterparty.
(a) Determination of fair value and fair value hierarchy
All assets and liabilities for which fair value is measured or
disclosed in the financial statements are categorised within the
fair value hierarchy described as follows, based on the lowest
level input that is significant to the fair value measurement as a
whole.
Level 1
Inputs to Level 1 fair values are unadjusted quoted prices in
active markets for identical assets and liabilities that the entity
can access at the measurement date.
Level 2
Inputs to Level 2 fair values are inputs other than quoted
prices included within Level 1 that are observable for the asset or
liability, either directly or indirectly. If the asset or liability
has a specified (contractual) term, a Level 2 input must be
observable for substantially the full term of the instrument. Level
2 inputs include the following:
-- quoted prices for similar assets and liabilities in active markets;
-- quoted prices for identical assets or similar assets in
markets that are not active, the prices are not current, or price
quotations vary substantially either over time or among market
makers, or in which very little information is released
publicly;
-- inputs other than quoted prices that are observable for the asset or liability; and
-- market-corroborated inputs.
Where the Group uses broker/asset manager quotes and no
information as to observability of inputs is provided by the
broker/asset manager, the investments are classified as
follows:
-- where the broker/asset manager price is validated by using
internal models with market-observable inputs and the values are
similar, the investment is classified as Level 2; and
-- in circumstances where internal models are not used to
validate broker/asset manager prices, or the observability of
inputs used by brokers/asset managers is unavailable, the
investment is classified as Level 3.
The majority of the Group's debt securities held at fair value
and financial derivatives are valued using independent pricing
services or third party broker quotes, and therefore classified as
Level 2.
Level 3
Inputs to Level 3 fair values are unobservable inputs for the
asset or liability. Unobservable inputs may have been used to
measure fair value to the extent that observable inputs are not
available, thereby allowing for situations in which there is
little, if any, market activity for the asset or liability at the
measurement date. However, the fair value measurement objective
remains the same, i.e. an exit price at the measurement date from
the perspective of a market participant that holds the asset or
owes the liability. Unobservable inputs reflect the same
assumptions as those that the market participant would use in
pricing the asset or liability.
The Group's assets and liabilities held at fair value which are
valued using valuation techniques for which significant observable
market data is not available and classified as Level 3 include
loans secured by mortgages, asset-backed securities, investment
contract liabilities, and deposits received from reinsurers.
The valuation of loans secured by mortgages is determined using
internal models which project future cash flows expected to arise
from each loan. Future cash flows allow for assumptions relating to
future expenses, future mortality experience, voluntary redemptions
and repayment shortfalls on redemption of the mortgages due to the
no-negative equity guarantee. The fair value is calculated by
discounting the future cash flows at a swap rate plus a liquidity
premium.
Under the "no-negative equity" guarantee, the amount recoverable
by the Group on termination of mortgages 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 Level 3 bonds are either private placement bonds or
asset-backed securities. Such securities are valued using
discounted cash flow analyses using 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 analysis using 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.
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.
There are no non-recurring fair value measurements as at 31
December 2018 (2017: nil).
(b) Analysis of assets and liabilities held at fair value according to fair value hierarchy
2018 2017
================================== =================================== ===================================
Level Level Level Level Level Level
1 2 3 Total 1 2 3 Total
GBPm GBPm GBPm GBPm GBPm GBPm GBPm GBPm
================================== ======= ======= ======= ======== ======= ======= ======= ========
Assets held at fair value
================================== ======= ======= ======= ======== ======= ======= ======= ========
Units in liquidity funds 877.7 4.8 - 882.5 894.3 3.6 - 897.9
================================== ======= ======= ======= ======== ======= ======= ======= ========
Investment funds - 112.2 69.8 182.0 - 46.3 - 46.3
================================== ======= ======= ======= ======== ======= ======= ======= ========
Debt securities and other
fixed income securities 918.0 7,984.3 616.0 9,518.3 553.5 8,295.5 740.5 9,589.5
================================== ======= ======= ======= ======== ======= ======= ======= ========
Deposits with credit institutions 152.6 0.8 - 153.4 87.0 0.9 - 87.9
================================== ======= ======= ======= ======== ======= ======= ======= ========
Derivative financial assets 1.8 79.4 - 81.2 - 100.2 - 100.2
================================== ======= ======= ======= ======== ======= ======= ======= ========
Loans secured by residential
mortgages - - 7,191.5 7,191.5 - - 6,833.3 6,833.3
================================== ======= ======= ======= ======== ======= ======= ======= ==========
Loans secured by commercial
mortgages - - 392.3 392.3 - - 215.4 215.4
================================== ======= ======= ======= ======== ======= ======= ======= ==========
Other loans - 25.9 723.2 749.1 - 11.0 433.3 444.3
================================== ======= ======= ======= ======== ======= ======= ======= ==========
Recoveries from reinsurers
on investment contracts - - 102.2 102.2 - - 72.3 72.3
================================== ======= ======= ======= ======== ======= ======= ======= ==========
Total assets held at fair
value 1,950.1 8,207.4 9,095.0 19,252.5 1,534.8 8,457.5 8,294.8 18,287.1
================================== ======= ======= ======= ======== ======= ======= ======= ==========
Liabilities held at fair
value
================================== ======= ======= ======= ======== ======= ======= ======= ==========
Investment contract liabilities - - 197.8 197.8 - - 220.7 220.7
================================== ======= ======= ======= ======== ======= ======= ======= ========
Derivative financial liabilities - 178.3 - 178.3 - 236.3 - 236.3
================================== ======= ======= ======= ======== ======= ======= ======= ========
Obligations for repayment
of cash collateral received 3.2 0.2 - 3.4 16.3 - - 16.3
================================== ======= ======= ======= ======== ======= ======= ======= ========
Deposits received from reinsurers - - 2,443.5 2,443.5 - - 2,654.1 2,654.1
================================== ======= ======= ======= ======== ======= ======= ======= ========
Total liabilities held at
fair value 3.2 178.5 2,641.3 2,823.0 16.3 236.3 2,874.8 3,127.4
================================== ======= ======= ======= ======== ======= ======= ======= ========
(c) Transfers between levels
The Group's policy is to assess pricing source changes and
determine transfers between levels as of the end of each
half-yearly reporting period. During the year transfers from Level
2 to Level 1 were GBP485.7m (2017: GBPnil). Transfers between Level
1 and Level 2 and between Level 2 and Level 3, as shown in the
tables below, have arisen from changes in the availability of
market prices for specific bonds.
(d) Level 3 assets and liabilities measured at fair value
Reconciliation of the opening and closing recorded amount of
Level 3 assets and liabilities held at fair value.
Debt Recoveries
securities Loans Loans from
and other secured secured reinsurers Deposits
fixed by by on Investment received
Investment income residential commercial Other investment contract from
Year ended 31 December funds securities mortgages mortgages loans contracts liabilities reinsurers
2018 GBPm GBPm GBPm GBPm GBPm GBPm GBPm GBPm
============================ ========== ========== =========== ========== ===== ========== =========== ==========
At 1 January 2018 - 740.5 6,833.3 215.4 433.3 72.3 (220.7) (2,654.1)
============================ ========== ========== =========== ========== ===== ========== =========== ==========
Purchases/advances/deposits 79.0 78.1 602.1 177.8 295.5 54.6 (51.0) (20.2)
============================ ========== ========== =========== ========== ===== ========== =========== ==========
Transfers to Level 2 - (158.3) - - - - - -
============================ ========== ========== =========== ========== ===== ========== =========== ==========
Sales/redemptions/payments (9.7) (26.6) (297.2) (18.0) (4.7) (24.5) 73.5 227.7
============================ ========== ========== =========== ========== ===== ========== =========== ==========
Realised gains and losses
recognised in profit or
loss within net investment
income - (2.4) 78.7 - - - - -
============================ ========== ========== =========== ========== ===== ========== =========== ==========
Unrealised gains and losses
recognised in profit or
loss within net investment
income(1) - (9.7) (291.4) 27.1 (0.9) (0.2) - 92.0
============================ ========== ========== =========== ========== ===== ========== =========== ==========
Interest accrued 0.5 (5.6) 266.0 (10.0) - - - (88.9)
============================ ========== ========== =========== ========== ===== ========== =========== ==========
Change in fair value of
liabilities recognised
in profit or loss - - - - - - 0.4 -
============================ ========== ========== =========== ========== ===== ========== =========== ==========
At 31 December 2018 69.8 616.0 7,191.5 392.3 723.2 102.2 (197.8) (2,443.5)
============================ ========== ========== =========== ========== ===== ========== =========== ==========
1 Includes the impact of changes in assumptions in respect of
the valuation of loans secured by residential mortgages of GBP112m,
which includes GBP61m in relation to property growth assumptions
and GBP51m in relation to property volatility assumptions.
For Level 1 and Level 2 assets measured at fair value, the
change in fair value during the year was GBP66.3m and GBP181.0m
respectively.
Debt Recoveries
securities Loans Loans from
and other secured secured reinsurers Deposits
fixed by by on Investment received
income residential commercial Other investment contract from
securities mortgages mortgages loans contracts liabilities reinsurers
Year ended 31 December 2017 GBPm GBPm GBPm GBPm GBPm GBPm GBPm
============================ =========== ============ ============ ====== ============ ============ ===========
At 1 January 2017 179.0 6,430.4 163.8 188.7 28.5 (222.3) (2,741.1)
============================ =========== ============ ============ ====== ============ ============ ===========
Purchases/advances/deposits 27.0 510.0 60.5 240.2 49.4 (51.2) (31.1)
============================ =========== ============ ============ ====== ============ ============ ===========
Transfers from Level 2 534.3 - - - - - -
============================ =========== ============ ============ ====== ============ ============ ===========
Sales/redemptions/payments (11.5) (360.3) (7.8) - (8.9) 59.1 191.7
============================ =========== ============ ============ ====== ============ ============ ===========
Realised gains and losses
recognised
in profit or loss within
net
investment income 0.1 167.5 (0.1) 0.4 - - -
============================ =========== ============ ============ ====== ============ ============ ===========
Unrealised gains and losses
recognised
in profit or loss within
net
investment income 11.6 (164.6) (1.5) 4.0 3.3 - 19.7
============================ =========== ============ ============ ====== ============ ============ ===========
Interest accrued - 250.3 0.5 - - - (93.3)
============================ =========== ============ ============ ====== ============ ============ ===========
Change in fair value of
liabilities
recognised in profit or
loss - - - - - (6.3) -
============================ =========== ============ ============ ====== ============ ============ ===========
At 31 December 2017 740.5 6,833.3 215.4 433.3 72.3 (220.7) (2,654.1)
============================ =========== ============ ============ ====== ============ ============ ===========
Investment funds
Investment funds classified as Level 3 are structured entities
that operate under contractual arrangements which allow a group of
investors to invest in a pool of corporate loans without any one
investor having overall control of the entity.
Principal assumptions underlying the calculation of investment
funds classified as Level 3
Discount rate
Discount rates are the most significant assumption applied in
calculating the fair value of investment funds. The discount rates
used range from 6.9% to 12.1% depending on the individual loan
within the investment fund.
Sensitivity analysis
Reasonably possible alternative assumptions for unobservable
inputs used in the valuation model could give rise to significant
changes in the fair value of the assets. The Group has estimated
the impact on fair value to changes to these inputs as follows:
Net increase/(decrease) in fair value (GBPm) Investment
funds
============================================= ==========
Discount
rate
+1%
============================================= ==========
2018 (3.1)
============================================= ==========
2017 n/a
============================================= ==========
Debt securities and other fixed income securities
Debt securities classified as Level 3 are either 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
Reasonably possible alternative assumptions for unobservable
inputs used in the valuation model could give rise to significant
changes in the fair value of the assets. The sensitivity of the
valuation of bonds to the default assumption is determined by
reference to movement in credit spreads. The Group has estimated
the impact on fair value to changes to these inputs as follows:
Debt securities
and other
fixed income
securities
============================================= ===============
Credit spreads
Net increase/(decrease) in fair value (GBPm) +100bps
============================================= ===============
2018 (28.9)
============================================= ===============
2017 (44.8)
============================================= ===============
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 4.1% (2017:
4.2%).
Mortality
Mortality assumptions have been derived with reference to
England & Wales population mortality using the CMI 2017 data
set and model mortality tables for both base table rates and
mortality improvements (2017: CMI 2016 mortality tables for both
base table rates and mortality improvements). These base mortality
and improvement tables have been adjusted to reflect the expected
future mortality experience of mortgage contract holders, taking
into account the medical and lifestyle evidence collected during
the sales process and the Group's assessment of how this experience
will develop in the future. This assessment takes into
consideration relevant industry and population studies, published
research materials and management's own experience.
Property prices
The value of a property at the date of valuation is calculated
by taking the latest valuation for that property and indexing this
value using the Office for National Statistics monthly index for
the property's location. The appropriateness of this valuation
basis is regularly tested on the event of redemption of
mortgages.
Future property prices
In the absence of a reliable long-term forward curve for UK
residential property price inflation, the Group has made an
assumption about future residential property price inflation based
upon available market and industry data. These assumptions have
been derived with reference to the long-term expectation of the UK
retail price inflation, "RPI", plus an allowance for the
expectation of house price growth above RPI (property risk premium)
less a margin for a combination of risks including property
dilapidation and basis risk. An additional allowance is made for
the volatility of future property prices. This results in a single
rate of future house price growth of 3.8% (2017: 4.25%), with a
volatility assumption of 13% per annum (2017: 12%). The change in
these assumptions since 2017 included consideration of future long
and short term forecasts, the Group's historical experience,
benchmarking data, and future uncertainties including the possible
impact of Brexit on the UK property market.
Voluntary redemptions
Assumptions for future voluntary redemption levels are based on
the Group's recent analyses and external benchmarking. The assumed
redemption rate varies by duration and product line between 0.7%
and 3.8% for loans written by JRL (2017: 0.7% and 3.0%) and between
0.9% and 3.2% for loans written by PLACL (2017: 0.9% and 2.8%).
Sensitivity analysis
Reasonably possible alternative assumptions for unobservable
inputs used in the valuation model could give rise to significant
changes in the fair value of the assets. The Group has estimated
the impact on fair value to changes to these inputs as follows:
Loans secured by residential mortgages valuation
assumptions
======================== ======================================================================================
Immediate
Maintenance Base property Future property Future property Voluntary
Net increase/(decrease) expenses mortality price fall price growth price volatility redemptions
in fair value (GBPm) +10% -5% -10% -0.5% +1% +10%
======================== =========== ========== =========== =============== ================= ============
2018 (7.1) 22.4 (97.1) (79.4) (53.2) (15.1)
======================== =========== ========== =========== =============== ================= ============
2017 (7.2) 30.3 (72.4) (62.3) (43.8) (24.1)
======================== =========== ========== =========== =============== ================= ============
Loans secured by commercial mortgages
The sensitivity factors are determined via financial models. The
analysis has been prepared for a change in each variable with other
assumptions remaining constant. In reality such an occurrence is
unlikely due to correlation between the assumptions and other
factors. It should also be noted that these sensitivities are
non-linear and larger or smaller impacts cannot be interpolated or
extrapolated from these results.
The 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.
Principal assumption 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 is 1.4% for JRL (2017: n/a) and
1.5% for PLACL (2017: 0.9%) plus a spread % of between 2.0% and
2.8% for JRL (2017: n/a) and between 1.7% and 3.2% for PLACL (2017:
1.3% and 2.8%) depending on the individual loan.
Sensitivity analysis
Reasonably possible alternative assumptions for unobservable
inputs used in the valuation model could give rise to significant
changes in the fair value of the assets. The Group has estimated
the impact on fair value to changes to these inputs as follows.
Loans secured
by commercial
mortgages
valuation
assumptions
=============================================
Interest
Net increase/(decrease) in fair value (GBPm) rates +100bps
============================================= ==============
2018 (19.8)
============================================= ==============
2017 (11.1)
============================================= ==============
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
Reasonably possible alternative assumptions for unobservable
inputs used in the valuation model could give rise to significant
changes in the fair value of the assets. The sensitivity of the
valuation of infrastructure loans to the default assumption is
determined by reference to the movement in credit spreads.
The Group has estimated the impact on fair value to changes to
these inputs as follows:
Other loans
=============================================
Credit spreads
Net increase/(decrease) in fair value (GBPm) +100bps
============================================= ==============
2018 (73.4)
============================================= ==============
2017 (37.1)
============================================= ==============
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 fair value
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 4.6% (2017:
4.4%).
Sensitivity analysis
The sensitivity of fair value to changes in maintenance expense
assumptions in respect of investment contract liabilities is not
material.
Deposits received from reinsurers measured at fair value through
profit or loss
Principal assumptions underlying the calculation of deposits
received from reinsurers
Discount rate
The valuation model discounts the expected future cash flows
using a contractual discount rate derived from the assets
hypothecated to back the liabilities at a product level. The
discount rates used for individual retirement and individual care
annuities were 3.47% and 1.32% respectively (2017: 3.11% and 0.95%
respectively).
Credit spreads
The valuation of deposits received from reinsurers includes a
credit spread applied by the individual reinsurer. A credit spread
of 142bps (2017: 102bps) was applied in respect of the most
significant reinsurance contract.
Sensitivity analysis
Reasonably possible alternative assumptions for unobservable
inputs used in the valuation model could give rise to significant
changes in the fair value of the liabilities (see note 24 (b)). The
Group has estimated the impact on fair value to changes to these
inputs as follows:
Deposits received
from reinsurers
============================================= ==============================
Credit spreads Interest
Net increase/(decrease) in fair value (GBPm) +100bps rates +100bps
============================================= ============== ==============
2018 (75.8) (196.4)
============================================= ============== ==============
2017 (88.5) (217.1)
============================================= ============== ==============
16. Deferred tax
2018 2017
=================== ======================== ==========================
Asset Liability Total Asset Liability Total
GBPm GBPm GBPm GBPm GBPm GBPm
=================== ===== ========= ====== ===== ========= ======
Transitional tax - (8.5) (8.5) - (11.1) (11.1)
=================== ===== ========= ====== ===== ========= ======
Intangible assets - (22.1) (22.1) - (27.3) (27.3)
=================== ===== ========= ====== ===== ========= ======
Land and buildings - (0.9) (0.9) - - -
=================== ===== ========= ====== ===== ========= ======
Other provisions 18.6 (0.7) 17.9 13.0 (0.8) 12.2
=================== ===== ========= ====== ===== ========= ======
Total deferred tax 18.6 (32.2) (13.6) 13.0 (39.2) (26.2)
=================== ===== ========= ====== ===== ========= ======
The transitional tax liability of GBP8.5m (2017: GBP11.1m)
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 ten years from 1 January
2016.
Other provisions principally relate to temporary differences
between the IFRS financial statements and tax deductions for
statutory insurance liabilities.
The movement in the net deferred tax balance was as follows:
Year ended Year ended
31 December 31 December
2018 2017
GBPm GBPm
========================================= ============ ============
Net balance at start of year (26.2) (36.1)
========================================= ============ ============
Recognised in profit or loss 13.5 9.9
========================================= ============ ============
Recognised in other comprehensive income (0.9) -
========================================= ============ ============
Net balance at end of year (13.6) (26.2)
========================================= ============ ============
The Group has unrecognised deferred tax assets of GBP4.2m (2017:
GBP5.4m).
17. Prepayments and accrued income
Included in prepayments and accrued income are capitalised bank
borrowing costs of GBP1.4m (2017: GBP1.8m).
Prepayments and accrued income for the Group includes GBP0.8m
(2017: GBP0.2m) that is expected to be recovered more than one year
after the Consolidated statement of financial position date.
18. Insurance and other receivables
2018 2017
GBPm GBPm
============================================================= ===== =====
Receivables arising from insurance and reinsurance contracts 14.1 40.3
============================================================= ===== =====
Other receivables 4.8 4.2
============================================================= ===== =====
Total insurance and other receivables 18.9 44.5
============================================================= ===== =====
Of the above insurance and other receivables, GBPnil (2017:
GBPnil) is expected to be recovered more than one year after the
Consolidated statement of financial position date.
19. Cash and cash equivalents
2018 2017
GBPm GBPm
======================================================== ===== =======
Cash available on demand 113.9 261.4
======================================================== ===== =======
Units in liquidity funds 882.5 897.9
======================================================== ===== =======
Cash and cash equivalents in the Consolidated statement
of cash flows 996.4 1,159.3
======================================================== ===== =======
20. share capital
The allotted and issued ordinary share capital of Just Group plc
at 31 December 2018 is detailed below:
Number of Share Share Merger
GBP0.10 ordinary capital premium reserve Total
shares GBPm GBPm GBPm GBPm
============================= ================= ======== ======== ======== =====
At 1 January 2018 938,308,340 93.8 94.2 532.7 720.7
============================= ================= ======== ======== ======== =====
In respect of employee share
schemes 2,760,542 0.3 0.3 - 0.6
============================= ================= ======== ======== ======== =====
At 31 December 2018 941,068,882 94.1 94.5 532.7 721.3
============================= ================= ======== ======== ======== =====
At 1 January 2017 932,884,033 93.3 91.7 532.7 717.7
============================= ================= ======== ======== ======== =====
In respect of employee share
schemes 5,424,307 0.5 2.5 - 3.0
============================= ================= ======== ======== ======== =====
At 31 December 2017 938,308,340 93.8 94.2 532.7 720.7
============================= ================= ======== ======== ======== =====
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.
21. Insurance contracts and related reinsurance
Insurance liabilities
2018 2017
GBPm GBPm
============================ ========= =========
Gross insurance liabilities 17,273.8 16,633.0
============================ ========= =========
Reinsurance (4,239.2) (5,285.3)
============================ ========= =========
Net insurance liabilities 13,034.6 11,347.7
============================ ========= =========
(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 agreed by the Board using
recognised actuarial valuation methods proposed by the Group's
Actuarial Reporting Function. In particular, a prospective gross
premium valuation method has been adopted for major classes of
business.
Although the process for the establishment of insurance
liabilities follows specified rules and guidelines, the provisions
that result from the process remain uncertain. As a consequence of
this uncertainty, the eventual value of claims could vary from the
amounts provided to cover future claims. The Group seeks to provide
for appropriate levels of contract liabilities taking known facts
and experiences into account but nevertheless such provisions
remain uncertain.
The estimation process used in determining insurance liabilities
involves projecting future annuity payments and the cost of
maintaining the contracts. For non-annuity contracts, the liability
is determined as the sum of the discounted value of future benefit
payments and future administration expenses less the expected value
of premiums payable under the contract. The key sensitivities are
the assumed level of interest rates and the mortality
experience.
(b) Principal assumptions underlying the calculation of
insurance contracts
The principal assumptions underlying the calculation of
insurance contracts are as follows:
Mortality assumptions
Mortality assumptions have been set by reference to appropriate
standard mortality tables. These tables have been adjusted to
reflect the future mortality experience of the policyholders,
taking into account the medical and lifestyle evidence collected
during the underwriting process, premium size, gender and the
Group's assessment of how this experience will develop in the
future. The assessment takes into consideration relevant industry
and population studies, published research materials, input from
the Group's lead reinsurer and management's own industry
experience.
The standard tables which underpin the mortality assumptions are
summarised in the table below.
2018 2017
=================== ================================= =====================================
Individually Modified E&W Population PCMA/PCFA00, with CMI 2014
underwritten mortality, with modified model mortality improvements
Guaranteed Income CMI 2017 model mortality for both Merica and PrognoSys(TM)
for Life Solutions improvements for both Merica underwritten business
(JRL) and PrognoSys(TM) underwritten
business
=================== ================================= =====================================
Individually Modified E&W Population Modified E&W Population
underwritten mortality, with modified mortality, with CMI 2014
Guaranteed Income CMI 2017 model mortality model mortality improvements
for improvements
Life Solutions
(PLACL)
=================== ================================= =====================================
Defined Benefit Modified E&W Population Modified E&W Population
(JRL) mortality, with modified mortality, with CMI 2016
CM 2017 model mortality model mortality improvements
improvements for standard for standard underwritten
underwritten business; Reinsurer business;
supplied tables underpinned Reinsurer supplied tables
by the Self-Administered underpinned by the Self-Administered
Pension Scheme ("SAPS") Pension Scheme ("SAPS")
S1 tables, with CMI 2009 S1 tables, with CMI 2009
model mortality improvements model mortality improvements
for medically underwritten for medically underwritten
business business
=================== ================================= =====================================
Defined Benefit Modified E&W Population Modified E&W Population
(PLACL) mortality, with modified mortality, with CMI 2015
CMI 2017 model mortality model mortality improvements
improvements
=================== ================================= =====================================
Care plans and Modified PCMA/PCFA and with Modified PCMA/PCFA with
other annuity modified CMI 2017 model CMI 2016 model mortality
products (PLACL) mortality improvements for improvements for Care Plans;
Care Plans; Modified PCMA/PCFA bespoke
Modified PCMA/PCFA or modified improvements for other annuity
E&W Population mortality products
with modified CMI 2017 model
mortality improvements for
other annuity products
=================== ================================= =====================================
Protection (PLACL) TM/TF00 Select TM/TF00 Select
=================== ================================= =====================================
The long term improvement rates in the modified CMI 2017 model
are 2.0% for males and 1.75% for females (2017: long term
improvement rates in the CMI 2016 and earlier versions of the CMI
model for mortality improvements range from 1.75% for males and
1.5% for females to 2.5% for males and 2.3% for females). The
period smoothing parameter in the modified CMI 2017 model has been
set to 7.25 (2017: core CMI models were used).
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.
2018 2017
Valuation discount rates - gross liabilities % %
===================================================== ==== ====
Individually underwritten Guaranteed Income for Life
Solutions (JRL) 3.51 3.23
===================================================== ==== ====
Individually underwritten Guaranteed Income for Life
Solutions (PLACL) 3.47 3.11
===================================================== ==== ====
Defined Benefit (JRL) 3.51 3.23
===================================================== ==== ====
Defined Benefit (PLACL) 3.47 3.11
===================================================== ==== ====
Other annuity products (PLACL) 1.32 0.95
===================================================== ==== ====
Term and whole of life products (PLACL) 1.54 1.39
===================================================== ==== ====
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
4.6% (2017: 4.4%) derived from the expected retail price index
implied by inflation swap rates and an additional allowance for
earnings inflation.
(c) Movements
The following movements have occurred in the insurance contract
balances for Retirement Income products during the year.
Gross Reinsurance Net
Year ended 31 December 2018 GBPm GBPm GBPm
============================================ ========= =========== ========
At 1 January 2018 16,633.0 (5,285.3) 11,347.7
============================================ ========= =========== ========
Increase in liability from premiums 1,735.4 2.2 1,737.6
============================================ ========= =========== ========
Release of liability due to recorded claims (1,213.2) 419.8 (793.4)
============================================ ========= =========== ========
Unwinding of discount 547.4 (154.9) 392.5
============================================ ========= =========== ========
Changes in economic assumptions (286.6) 136.4 (150.2)
============================================ ========= =========== ========
Changes in non-economic assumptions (128.8) 98.1 (30.7)
============================================ ========= =========== ========
Other movements(1) (13.4) 544.5 531.1
============================================ ========= =========== ========
At 31 December 2018 17,273.8 (4,239.2) 13,034.6
============================================ ========= =========== ========
Gross Reinsurance Net
Year ended 31 December 2017 GBPm GBPm GBPm
============================================ ========= =========== ========
At 1 January 2017 15,748.0 (6,057.1) 9,690.9
============================================ ========= =========== ========
Increase in liability from premiums 1,526.5 (25.1) 1,501.4
============================================ ========= =========== ========
Release of liability due to recorded claims (1,133.6) 457.6 (676.0)
============================================ ========= =========== ========
Unwinding of discount 503.2 (180.2) 323.0
============================================ ========= =========== ========
Changes in economic assumptions 210.7 (43.6) 167.1
============================================ ========= =========== ========
Changes in non-economic assumptions (193.8) 79.2 (114.6)
============================================ ========= =========== ========
Other movements(1) (28.0) 483.9 455.9
============================================ ========= =========== ========
At 31 December 2017 16,633.0 (5,285.3) 11,347.7
============================================ ========= =========== ========
1 Includes the impact of reinsurance recapture.
Effect of changes in assumptions and estimates during the
year
Economic assumption changes
The principal economic assumption change impacting the movement
in insurance liabilities during the year relates to discount rates
for both JRL and PLACL.
Discount rates
The movement in the valuation interest rate captures the impact
of underlying changes in risk-free curves and spreads on backing
assets (excluding Lifetime Mortgages) and impact of changes to the
property growth and volatility assumptions and mortality
improvement rates on the Lifetime Mortgages. The mortality
improvement rates for Lifetime Mortgages have been aligned with
mortality assumptions for annuities. Both existing in-force assets
and new assets purchased during the year contribute to the movement
in the discount rate. Differences between the discount rates
recognised on new business written during the year and the
prevailing discount rates on the entire portfolio of business also
contribute to the movement in insurance liabilities.
Non-economic assumption changes
The principal non-economic assumption changes impacting the
movement in insurance liabilities during the year relate to
maintenance expenses and mortality assumptions for both JRL and
PLACL.
Expense assumption
Cost synergies arising within the Group following the merger
have been recognised through an overall reduction in maintenance
expense assumptions. This has resulted in a decrease in the
carrying value of insurance liabilities.
The JRL GIfL maintenance expense assumption used at 31 December
2018 was GBP30.29 per plan (2017: GBP30.68), whilst the JRL DB
maintenance assumption used at 31 December 2018 was GBP118.75 per
scheme member (2017: GBP113.53). The PLACL GIfL maintenance expense
assumption used at 31 December 2018 was GBP29.30 per plan (2017:
GBP23.69), whilst the PLACL DB maintenance assumption used at 31
December 2018 was GBP161.40 per scheme member (2017: GBP128.02). An
increase in the maintenance expense assumption increases the
carrying value of the insurance liabilities.
Mortality assumptions
For both JRL and PLACL mortality assumptions have been derived
with reference to England & Wales population mortality using
the CMI 2017 data set and model for both base table rates and
mortality improvements (2017: England & Wales population
mortality or CMI annuitant mortality tables for base mortality and
CMI 2016 and earlier versions of the CMI model for mortality
improvements). These base mortality and improvement tables have
been adjusted to reflect the expected future mortality experience
of the lives insured, taking into account the medical and lifestyle
evidence collected during the underwriting process and the Group's
assessment of how this experience will develop in the future. This
assessment takes into consideration relevant industry and
population studies, published research materials and management's
own experience.
(d) Estimated timing of net cash outflows from insurance
contract liabilities
The following table shows the insurance contract balances
analysed by duration. The total balances are split by duration of
Retirement Income payments in proportion to the policy cash flows
estimated to arise during the year.
Expected cash flows (undiscounted)
============ ===================================================== ===================
Within 1 Over Carrying
year 1-5 years 5-10 years 10 years Total value (discounted)
2018 GBPm GBPm GBPm GBPm GBPm GBPm
============ ======== ========= ========== ========= ========= ===================
Gross 1,243.2 4,715.5 5,353.2 14,667.9 25,979.8 17,273.8
============ ======== ========= ========== ========= ========= ===================
Reinsurance (358.3) (1,320.8) (1,399.0) (2,998.7) (6,076.8) (4,239.2)
============ ======== ========= ========== ========= ========= ===================
Net 884.9 3,394.7 3,954.2 11,669.2 19,903.0 13,034.6
============ ======== ========= ========== ========= ========= ===================
2017 Expected cash flows (undiscounted)
============ ===================================================== ===================
Within 1 Over Carrying
year 1-5 years 5-10 years 10 years Total value (discounted)
GBPm GBPm GBPm GBPm GBPm GBPm
============ ======== ========= ========== ========= ========= ===================
Gross 1,158.9 4,395.2 4,948.2 13,934.2 24,436.5 16,633.0
============ ======== ========= ========== ========= ========= ===================
Reinsurance (413.3) (1,542.1) (1,652.6) (3,798.7) (7,406.7) (5,285.3)
============ ======== ========= ========== ========= ========= ===================
Net 745.6 2,853.1 3,295.6 10,135.5 17,029.8 11,347.7
============ ======== ========= ========== ========= ========= ===================
(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 factor Description of sensitivity factor applied
===================== =============================================================
Interest rate and The impact of a change in the market interest rates
investment return by +/- 1% (e.g. if a current interest rate is 5%, the
impact of an immediate change to 4% and 6% respectively).
The test consistently allows for similar changes to
both assets and liabilities
===================== =============================================================
Expenses The impact of an increase in maintenance expenses by
10%
===================== =============================================================
Base mortality The impact of a decrease in base table mortality rates
rates by 5% applied to both Retirement Income liabilities
and mortgage assets
===================== =============================================================
Immediate property The impact of an immediate decrease in the value of
price fall properties by 10%. 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
===================== =============================================================
Future property The impact of a reduction in future property price growth
price growth by 0.5%
===================== =============================================================
Future property The impact of an increase in future property price volatility
price volatility by 1%
===================== =============================================================
Voluntary redemptions The impact of an increase in voluntary redemption rates
on loans secured by residential 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
===================== =============================================================
Credit defaults The impact of an increase in the credit default assumption
of 10pbs
===================== =============================================================
Mortality improvement The impact of a level increase in mortality improvement
rates rates of 0.25% for both Retirement Income liabilities
and mortgage assets
===================== =============================================================
Impact on profit before tax (GBPm)
Immediate Future Future
property property property
Interest Interest Maintenance Base price price price Voluntary Credit
rates rates expenses mortality fall growth volatility redemptions defaults
+1% -1% +10% -5% -10% -0.5% +1% +10% +10bps
===== ======== ======== =========== ============= ========= ========= ============ ============ =============
2018 (156.3) 199.7 (37.6) (116.6) (161.3) (143.6) (83.2) (88.3) (60.0)
===== ======== ======== =========== ============= ========= ========= ============ ============ =============
2017 (123.3) 127.1 (52.1) (125.9) (122.7) (124.8) (71.7) (98.7) (65.2)
===== ======== ======== =========== ============= ========= ========= ============ ============ =============
The sensitivity to an additional 0.25% improvement in mortality
rates in each future year for both annuity and lifetime mortgage
business is GBP(86.8)m. This is broadly equivalent to a four month
increase in projected life expectancy for a typical male aged
65.
The sensitivity factors are applied via financial models. The
analysis has been prepared for a change in each variable with other
assumptions remaining constant. In reality, such an occurrence is
unlikely, due to correlation between the assumptions and other
factors. It should also be noted that these sensitivities are
non-linear, and larger or smaller impacts cannot be interpolated or
extrapolated from these results.
The sensitivity factors take into consideration that the Group's
assets and liabilities are actively managed and may vary at the
time that any actual market movement occurs. The impacts indicated
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.
22. Investment contract liabilities
Year ended Year ended
31 December 31 December
2018 2017
GBPm GBPm
==================================================== ============ =============
At start of year 220.7 222.3
==================================================== ============ =============
Deposits received from policyholders 51.0 51.2
==================================================== ============ =============
Payments made to policyholders (73.5) (59.1)
==================================================== ============ =============
Change in contract liabilities recognised in profit
or loss (0.4) 6.3
==================================================== ============ =============
At end of year 197.8 220.7
==================================================== ============ =============
Recoveries from reinsurers on investment contracts were
GBP102.2m (2017: GBP72.3m) as shown in note 15.
(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 regard 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.
Valuation discount rates 2018 2017
% %
========================= ==== ====
Investment contracts 3.51 3.23
========================= ==== ====
23. loans and borrowings
Carrying value Fair value
=============================================== ================ =============
2018 2017 2018 2017
GBPm GBPm GBPm GBPm
=============================================== ======= ======= ====== =====
GBP100m 9.5% 10 year subordinated debt
2025 non-callable 5 years (Tier 2) issued
by Partnership Life Assurance Company Limited
(call option in March 2020) 95.9 95.3 113.5 112.8
=============================================== ======= ======= ====== =====
GBP250m 9.0% 10 year subordinated debt
2026 (Tier 2) issued by Just Group plc 248.8 248.6 289.9 282.3
=============================================== ======= ======= ====== =====
GBP230m 3.5% 7 year subordinated debt 2025
(Tier 3) issued by Just Group plc 228.7 - 214.7 -
=============================================== ======= ======= ====== =====
Total loans and borrowings 573.4 343.9 618.1 395.1
=============================================== ======= ======= ====== =====
24. 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.
2018 2017
Note GBPm GBPm
============================================= ===== ======= =======
Fair value through profit or loss
============================================= ===== ======= =======
Derivative financial liabilities (a) 178.3 236.3
============================================= ===== ======= =======
Obligations for repayment of cash collateral
received (a) 3.4 16.3
============================================= ===== ======= =======
Deposits received from reinsurers (b) 2,443.5 2,654.1
============================================= ===== ======= =======
Liabilities measured using insurance rules
under IFRS 4
============================================= ===== ======= =======
Deposits received from reinsurers (b) 1,236.3 1,901.4
============================================= ===== ======= =======
Reinsurance finance (c) 30.6 49.3
============================================= ===== ======= =======
Reinsurance funds withheld (d) 171.2 188.0
============================================= ===== ======= =======
Total other liabilities 4,063.3 5,045.4
==================================================== ======= =======
The amount of deposits received from reinsurers and reinsurance
funds withheld that is expected to be settled more than one year
after the Consolidated statement of financial position date is
GBP3,730.4m (2017: GBP4,363.3m).
(a) Derivative financial liabilities and obligations for repayment of cash collateral received
The derivative financial liabilities are classified at fair
value through profit or loss. All financial liabilities at fair
value through profit or loss are designated as such on initial
recognition or, in the case of derivative financial liabilities,
are classified as held for trading.
(b) Deposits received from reinsurers
Deposits received from reinsurers are measured in accordance
with the reinsurance contract and taking into account an
appropriate discount rate for the timing of expected cash flows of
the liabilities.
(c) Reinsurance finance
The reinsurance finance has been established in recognition of
the loan obligation to the reinsurers under the Group's reinsurance
financing arrangements, the repayment of which are contingent upon
the emergence of surplus under 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.
25. Derivative financial instruments
The Group uses various derivative financial instruments to
manage its exposure to interest rates, counterparty credit risk,
property risk, inflation and foreign exchange risk.
2018 2017
======================= ================================== ==================================
Asset Liability Notional Asset Liability Notional
fair value fair value amount fair value fair value amount
Derivatives GBPm GBPm GBPm GBPm GBPm GBPm
======================= =========== =========== ======== =========== =========== ========
Foreign currency swaps 1.3 131.8 1,186.5 7.7 71.1 866.2
======================= =========== =========== ======== =========== =========== ========
Interest rate swaps 36.2 9.5 2,131.8 63.7 48.8 1,527.5
======================= =========== =========== ======== =========== =========== ========
Inflation swaps 38.0 27.6 1,879.3 25.6 31.1 1,689.1
======================= =========== =========== ======== =========== =========== ========
Forward swaps 0.6 9.4 927.6 1.8 1.0 385.8
======================= =========== =========== ======== =========== =========== ========
Put option on property
index 3.3 - 80.0 - - -
======================= =========== =========== ======== =========== =========== ========
Credit default swaps - - - - 0.5 43.4
======================= =========== =========== ======== =========== =========== ========
Interest rate futures 1.8 - 186.0 1.4 83.8 186.0
======================= =========== =========== ======== =========== =========== ========
Total 81.2 178.3 6,391.2 100.2 236.3 4,698.0
======================= =========== =========== ======== =========== =========== ========
The Group's derivative financial instruments are not designated
as hedging instruments and changes in their fair value are included
in profit or loss. 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.
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 2018, the Company had pledged collateral of
GBP152.6m (2017: GBP119.3m) of which GBPnil were gilts and European
Investment Bank bonds (2017: GBP5.8m) and had received cash
collateral of GBP3.4m (2017: GBP16.3m). In addition to the cash
collateral received recognised within other financial liabilities
(see note 24), certain collateral arrangements within the Group's
subsidiary, PLACL, give rise to collateral of GBP10.4m (2017:
GBP6.7m) which is not included in the Consolidated statement of
financial position of the Group because it is deposited into a
ringfenced collateral account that the Group has no control over
and does not accrue any of the economic benefit.
Amounts recognised in profit or loss in respect of derivative
financial instruments are as follows:
Year ended Year ended
31 December 31 December
2018 2017
GBPm GBPm
================================================= ============ ============
Movement in fair value of derivative instruments (49.0) 30.1
================================================= ============ ============
Realised losses on interest rate swaps closed (16.3) (1.4)
================================================= ============ ============
Total amounts recognised in profit or loss (65.3) 28.7
================================================= ============ ============
26. 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,
JRL, include financing arrangements (see note 24(c)), 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 year the Group recaptured
business in respect of certain underwriting years that resulted in
a decrease of ceded liabilities of GBP543.3m 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 24(b)), certain
reinsurance arrangements within the Group's subsidiary, PLACL, give
rise to deposits from reinsurers that are not included in the
Consolidated statement of financial position of the Group as
described below:
-- The Group has an agreement with two reinsurers whereby
financial assets arising from the payment of reinsurance premiums,
less the repayment of claims, in relation to specific treaties, are
legally and physically deposited back with the Group. Although the
funds are managed by the Group (as the Group controls the
investment of the asset), no future benefits accrue to the Group as
any returns on the deposits are paid to reinsurers. Consequently,
the deposits are not recognised as assets of the Group and the
investment income they produce does not accrue to the Group.
-- The Group has an agreement with one reinsurer whereby assets
equal to the reinsurer's full obligation under the treaty are
deposited into a ringfenced collateral account. The Group has first
claim over these assets should the reinsurer default, but as the
Group has no control over these funds and does not accrue any
future benefit, this fund is not recognised as an asset of the
Group.
2018 2017
GBPm GBPm
========================================================== ===== =====
Deposits managed by the Group 191.6 221.3
========================================================== ===== =====
Deposits held in trust 272.8 295.4
========================================================== ===== =====
Total deposits not included in the Consolidated statement
of financial position 464.4 516.7
========================================================== ===== =====
27. Other provisions
Year ended Year ended
31 December 31 December
2018 2017
GBPm GBPm
================= ============ ============
At start of year 2.1 8.5
================= ============ ============
Amounts utilised (1.4) (6.4)
================= ============ ============
At end of year 0.7 2.1
================= ============ ============
The amount of provisions that is expected to be settled more
than 12 months after the Consolidated statement of financial
position date is GBP0.5m (2017: GBP0.5m).
28. Current tax
Current tax assets/liabilities receivable/payable in more than
one year are GBPnil (2017: GBPnil).
29. Accruals and deferred income
Accruals and deferred income payable in more than one year are
GBP0.6m (2017: GBP1.1m).
30. Insurance and other payables
2018 2017
GBPm GBPm
========================================================== ===== =====
Payables arising from insurance and reinsurance contracts 21.2 34.0
========================================================== ===== =====
Other payables 57.1 51.5
========================================================== ===== =====
Total insurance and other payables 78.3 85.5
========================================================== ===== =====
Insurance and other payables due in more than one year are
GBPnil (2017: GBPnil).
31. 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:
2018 2017
GBPm GBPm
==================================== ===== =====
Less than one year 2.4 2.1
==================================== ===== =====
Between one and five years 8.2 6.4
==================================== ===== =====
More than five years 2.7 3.4
==================================== ===== =====
Total future minimum lease payments 13.3 11.9
==================================== ===== =====
Capital commitments
The Group had no capital commitments as at 31 December 2018
(2017: GBPnil).
32. Contingent liabilities
The Group has recognised GBP0.3m of contingent consideration on
the acquisition of Corinthian Group Limited. There are no other
contingent liabilities as at 31 December 2018 (2017: GBPnil).
33. Financial and insurance risk management
This note presents information about the major financial and
insurance risks to which the Group is exposed, and its objectives,
policies and processes for their measurement and management.
Financial risk comprises exposure to market, credit and liquidity
risk.
(a) Insurance risk
The writing of long-term insurance contracts requires a range of
assumptions to be made and risk arises from these assumptions being
materially inaccurate.
The Group's main insurance risk arises from adverse experience
compared with the assumptions used in pricing products and valuing
insurance liabilities, and in addition its reinsurance treaties may
be terminated, not renewed, or renewed on terms less favourable
than those under existing treaties.
Insurance risk arises through exposure to longevity, mortality
and morbidity and exposure to factors such as withdrawal levels and
management and administration expenses.
Individually underwritten GIfL are priced using assumptions
about future longevity that are based on historic experience
information, lifestyle and medical factors relevant to individual
customers, and judgements about the future development of longevity
improvements. In the event of an increase in longevity, the
actuarial reserve required to make future payments to customers may
increase.
Loans secured by mortgages are used to match some of the
liabilities arising from the sale of GIfL and DB business. In the
event that early repayments in a given period are higher than
anticipated, less interest will have accrued on the mortgages and
the amount repayable will be less than assumed at the time of sale.
In the event of an increase in longevity, although more interest
will have accrued and the amount repayable will be greater than
assumed at the time of the sale, the associated cash flows will be
received later than had originally been anticipated. In addition, a
general increase in longevity would have the effect of increasing
the total amount repayable, which would increase the LTV ratio and
could increase the risk of failing to be repaid in full as a
consequence of the no-negative equity guarantee. There is also
morbidity risk exposure as the contract ends when the customer
moves into long-term care.
Underpinning the management of insurance risk are:
-- the development and use of medical information including
PrognoSys(TM) for both pricing and reserving to provide detailed
insight into longevity risk;
-- adherence to approved underwriting requirements;
-- controls around the development of suitable products and their pricing;
-- review and approval of assumptions used by the Board;
-- regular monitoring and analysis of actual experience;
-- use of reinsurance to minimise volatility of capital requirement and profit; and
-- monitoring of expense levels.
Concentrations of insurance risk
Concentration of insurance risk comes from improving longevity.
Improved longevity arises from enhanced medical treatment and
improved life circumstances. Concentration risk is managed by
writing business across a wide range of different medical and
lifestyle conditions to avoid excessive exposure.
(b) Market risk
Market risk is the risk of loss or of adverse change in the
financial situation resulting, directly or indirectly, from
fluctuations in the level and in the volatility of market prices of
assets, liabilities and financial instruments, together with the
impact of changes in interest rates.
Significant market risk is implicit in the insurance business
and arises from exposure to interest rate risk, property risk,
inflation risk and currency risk. The Group is not exposed to any
equity risk or material currency risk.
Market risk represents both upside and downside impacts but the
Group's policy to manage market risk is to limit downside risk.
Falls in the financial markets can reduce the value of pension
funds available to purchase Retirement Income products and changes
in interest rates can affect the relative attractiveness of
Retirement Income products. Changes in the value of the Group's
investment portfolio will also affect the Group's financial
position.
In mitigation, Retirement Income product monies are invested to
match the asset and liability cash flows as closely as practicable.
In practice, it is not possible to eliminate market risk fully as
there are inherent uncertainties surrounding many of the
assumptions underlying the projected asset and liability cash
flows.
For each of the material components of market risk, described in
more detail below, the market risk policy sets out the risk
appetite and management processes governing how each risk should be
measured, managed, monitored and reported.
(i) Interest rate risk
The Group is exposed to interest rate risk through its impact on
the value of, or income from, specific assets, liabilities or both.
It seeks to limit its exposure through appropriate asset and
liability matching and hedging strategies.
The Group's exposure to changes in interest rates is
concentrated in the investment portfolio, loans secured by
mortgages and its insurance obligations. Changes in investment and
loan values attributable to interest rate changes are mitigated by
corresponding and partially offsetting changes in the value of
insurance liabilities. The Group monitors this exposure through
regular reviews of the asset and liability position, capital
modelling, sensitivity testing and scenario analyses. Interest rate
risk is also managed using derivative instruments e.g. swaps.
The following table indicates the earlier of contractual
repricing or maturity dates for the Group's significant financial
assets.
Less than One to Five to Over ten No fixed
one year five years ten years years term Total
2018 GBPm GBPm GBPm GBPm GBPm GBPm
================================== ========= =========== ========== ======== ======== ========
Units in liquidity funds 882.5 - - - - 882.5
================================== ========= =========== ========== ======== ======== ========
Investment funds 112.2 69.8 - - - 182.0
================================== ========= =========== ========== ======== ======== ========
Debt securities and other
fixed income securities 829.6 2,732.8 2,514.9 3,441.0 - 9,518.3
================================== ========= =========== ========== ======== ======== ========
Deposits with credit institutions 153.4 - - - - 153.4
================================== ========= =========== ========== ======== ======== ========
Derivative financial assets 3.5 13.7 5.2 58.8 - 81.2
================================== ========= =========== ========== ======== ======== ========
Loans secured by residential
mortgages - - - - 7,191.5 7,191.5
================================== ========= =========== ========== ======== ======== ========
Loans secured by commercial
mortgages 12.3 173.5 142.4 64.1 - 392.3
================================== ========= =========== ========== ======== ======== ========
Other loans 2.7 8.3 62.3 675.8 - 749.1
================================== ========= =========== ========== ======== ======== ========
Amounts recoverable from
reinsurers on investment
contracts 102.2 - - - - 102.2
================================== ========= =========== ========== ======== ======== ========
Total 2,098.4 2,998.1 2,724.8 4,239.7 7,191.5 19,252.5
================================== ========= =========== ========== ======== ======== ========
Less than One to Five to Over ten No fixed
one year five years ten years years term Total
2017 GBPm GBPm GBPm GBPm GBPm GBPm
==================================== ========= =========== ========== ======== ======== ========
Units in liquidity funds 897.9 - - - - 897.9
==================================== ========= =========== ========== ======== ======== ========
Investment funds 46.3 - - - - 46.3
==================================== ========= =========== ========== ======== ======== ========
Debt securities and other
fixed income securities 994.1 2,570.0 2,408.6 3,616.8 - 9,589.5
==================================== ========= =========== ========== ======== ======== ========
Deposits with credit institutions 87.9 - - - - 87.9
==================================== ========= =========== ========== ======== ======== ========
Derivative financial assets 3.3 13.7 8.6 74.6 - 100.2
==================================== ========= =========== ========== ======== ======== ========
Loans secured by residential
mortgages - - - - 6,833.3 6,833.3
==================================== ========= =========== ========== ======== ======== ========
Loans secured by commercial
mortgages - 103.4 89.8 22.2 - 215.4
==================================== ========= =========== ========== ======== ======== ========
Other loans 0.8 3.1 3.0 437.4 - 444.3
==================================== ========= =========== ========== ======== ======== ========
Amounts recoverable from reinsurers
on investment contracts 72.3 - - - - 72.3
==================================== ========= =========== ========== ======== ======== ========
Total 2,102.6 2,690.2 2,510.0 4,151.0 6,833.3 18,287.1
==================================== ========= =========== ========== ======== ======== ========
A sensitivity analysis of the impact of interest rate movements
on profit before tax is included in note 21(e).
(ii) Property risk
The Group's exposure to property risk arises from indirect
exposure to the UK residential property market through the
provision of lifetime mortgages. A substantial decline or sustained
underperformance in UK residential property prices, against which
the Group's lifetime mortgages are secured, could result in
proceeds on sale being exceeded by the mortgage debt at the date of
redemption. Demand may also reduce for lifetime mortgage products
through reducing consumers' propensity to borrow and by reducing
the amount they are able to borrow due to reductions in property
values and the impact on loan-to-value limits.
The risk is mitigated by ensuring that the advance represents a
low proportion of the property's value at outset and independent
third party valuations are undertaken on each property before
initial mortgages are advanced. Lifetime mortgage contracts are
also monitored through dilapidation reviews. House prices are
monitored and the impact of exposure to adverse house prices (both
regionally and nationally) is regularly reviewed.
A sensitivity analysis of the impact of property price movements
on profit before tax is included in note 21(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 25).
-- 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:
BB or
UK gilts AAA AA A BBB below Unrated Total
2018 GBPm GBPm GBPm GBPm GBPm GBPm GBPm GBPm
================================== ======== ======= ======= ======= ======= ====== ======= ========
Units in liquidity funds - 877.7 4.8 - - - - 882.5
================================== ======== ======= ======= ======= ======= ====== ======= ========
Investment funds - - 13.7 - - - 168.3 182.0
================================== ======== ======= ======= ======= ======= ====== ======= ========
Debt securities and other
fixed income securities 623.4 832.1 938.3 2,916.7 3,555.9 208.2 443.7 9,518.3
================================== ======== ======= ======= ======= ======= ====== ======= ========
Deposits with credit institutions - - - 111.0 41.6 - 0.8 153.4
================================== ======== ======= ======= ======= ======= ====== ======= ========
Derivative financial assets - - 0.3 30.1 50.8 - - 81.2
================================== ======== ======= ======= ======= ======= ====== ======= ========
Loans secured by residential
mortgages - - - - - - 7,191.5 7,191.5
================================== ======== ======= ======= ======= ======= ====== ======= ========
Loans secured by commercial
mortgages - - - - - - 392.3 392.3
================================== ======== ======= ======= ======= ======= ====== ======= ========
Other loans - 89.1 117.1 93.3 423.7 - 25.9 749.1
================================== ======== ======= ======= ======= ======= ====== ======= ========
Reinsurance - - 189.3 294.2 - - 6.9 490.4
================================== ======== ======= ======= ======= ======= ====== ======= ========
Insurance and other receivables - - - - - - 18.9 18.9
================================== ======== ======= ======= ======= ======= ====== ======= ========
Total 623.4 1,798.9 1,263.5 3,445.3 4,072.0 208.2 8,248.3 19,659.6
================================== ======== ======= ======= ======= ======= ====== ======= ========
BB or
UK gilts AAA AA A BBB below Unrated Total
2017 GBPm GBPm GBPm GBPm GBPm GBPm GBPm GBPm
================================== ======== ======= ======= ======= ======= ====== ======= ========
Units in liquidity funds - 894.3 3.6 - - - - 897.9
================================== ======== ======= ======= ======= ======= ====== ======= ========
Investment funds - - 7.2 - - - 39.1 46.3
================================== ======== ======= ======= ======= ======= ====== ======= ========
Debt securities and other
fixed income securities 552.9 792.6 886.2 3,298.3 3,488.2 151.0 420.3 9,589.5
================================== ======== ======= ======= ======= ======= ====== ======= ========
Deposits with credit institutions - - - 29.8 57.2 - 0.9 87.9
================================== ======== ======= ======= ======= ======= ====== ======= ========
Derivative financial assets - - 0.8 18.8 80.6 - - 100.2
================================== ======== ======= ======= ======= ======= ====== ======= ========
Loans secured by residential
mortgages - - - - - - 6,833.3 6,833.3
================================== ======== ======= ======= ======= ======= ====== ======= ========
Loans secured by commercial
mortgages - - - - - - 215.4 215.4
================================== ======== ======= ======= ======= ======= ====== ======= ========
Other loans - 64.2 - 50.3 318.8 - 11.0 444.3
================================== ======== ======= ======= ======= ======= ====== ======= ========
Reinsurance - - 294.7 347.8 5.2 - 0.4 648.1
================================== ======== ======= ======= ======= ======= ====== ======= ========
Insurance and other receivables - - - - - - 44.5 44.5
================================== ======== ======= ======= ======= ======= ====== ======= ==========
Total 552.9 1,751.1 1,192.5 3,745.0 3,950.0 151.0 7,564.9 18,907.4
================================== ======== ======= ======= ======= ======= ====== ======= ==========
The credit rating for Cash and cash equivalents assets at 31
December 2018 was between a range of AA and BB.
The carrying amount of those assets subject to credit risk
represents the maximum credit risk exposure.
(d) Liquidity risk
The investment of Retirement Income cash in corporate bonds,
gilts and lifetime mortgages, and commitments to pay policyholders
and other obligations, requires liquidity risks to be taken.
Liquidity risk is the risk of loss because the Group, although
solvent, either does not have sufficient financial resources
available to it in order to meet its obligations as they fall due,
or can secure them only at excessive cost.
Exposure to liquidity risk arises from:
-- deterioration in the external environment caused by economic
shocks, regulatory changes, reputational damage, or an economic
shock resulting from Brexit;
-- realising assets to meet liabilities during stressed market conditions;
-- increasing cash flow volatility in the short term giving rise
to mismatches between cash flows from assets and requirements from
liabilities;
-- needing to support liquidity requirements for day-to-day operations;
-- ensuring financial support can be provided across the Group; and
-- maintaining and servicing collateral requirements arising
from the changes in market value of financial derivatives used by
the Group.
Liquidity risk is managed by ensuring that assets of a suitable
maturity and marketability are held to meet liabilities as they
fall due. The Group's short-term liquidity requirements are
predominantly funded by advance Retirement Income premium payments,
investment coupon receipts, and bond principal repayments out of
which contractual payments need to be made. There are significant
barriers for policyholders to withdraw funds that have already been
paid to the Group in the form of premiums. Cash outflows associated
with Retirement Income liabilities can be reasonably estimated and
liquidity can be arranged to meet this expected outflow through
asset-liability matching and new business premiums.
The cash flow characteristics of the lifetime mortgages are
reversed when compared with Retirement Income products, with cash
flows effectively representing an advance payment, which is
eventually funded by repayment of principal plus accrued interest.
Policyholders are able to redeem mortgages, albeit at a cost. The
mortgage assets are considered illiquid, as they are not readily
saleable due to the uncertainty about their value and the lack of a
market in which to trade them.
Cash flow forecasts over the short, medium and long term are
regularly prepared to predict and monitor liquidity levels in line
with limits set on the minimum amount of liquid assets
required.
The table below summarises the maturity profile of the financial
liabilities, including both principal and interest payments, of the
Group based on remaining undiscounted contractual obligations:
Within one
year or
payable
on One to More than No fixed
demand five years five years term
2018 GBPm GBPm GBPm GBPm
============================================= ========== =========== =========== ========
Subordinated debt 40.8 203.8 672.0 -
============================================= ========== =========== =========== ========
Derivative financial liabilities 10.4 86.1 486.9 -
============================================= ========== =========== =========== ========
Obligations for repayment of cash collateral
received 3.4 - - -
============================================= ========== =========== =========== ========
Deposits received from reinsurers 316.6 1,156.4 3,675.6 -
============================================= ========== =========== =========== ========
Reinsurance finance - - - 30.6
============================================= ========== =========== =========== ========
Reinsurance funds withheld 16.3 59.9 148.8 -
============================================= ========== =========== =========== ========
Within one
year or
payable
on One to More than No fixed
demand five years five years term
2017 GBPm GBPm GBPm GBPm
============================================= ========== =========== =========== ========
Subordinated debt 32.0 160.0 478.0 -
============================================= ========== =========== =========== ========
Derivative financial liabilities 107.9 114.7 999.7 -
============================================= ========== =========== =========== ========
Obligations for repayment of cash collateral
received 16.3 - - -
============================================= ========== =========== =========== ========
Deposits received from reinsurers 365.4 1,354.6 4,508.8 -
============================================= ========== =========== =========== ========
Reinsurance finance - - - 49.3
============================================= ========== =========== =========== ========
Reinsurance funds withheld 16.9 62.5 163.7 -
============================================= ========== =========== =========== ========
34. Capital
The net assets of the Group at 31 December 2018 on an IFRS basis
were GBP1,663.8m (2017: GBP1,740.5m). The Group manages capital on
a regulatory basis. 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 Group is exposed to, including longevity risk,
property risk, credit risk and interest rate risk. These risks are
all aggregated with appropriate allowance for diversification
benefits.
In December 2015, Just Retirement Group plc and JRL received
approval to calculate their Solvency II capital requirements using
a full internal model 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.
In managing its capital the Group undertakes stress and scenario
testing to consider the Group's capacity to respond to a series of
relevant financial, insurance, or operational shocks or changes to
financial regulations should future circumstances or events differ
from current assumptions. The review also considers mitigating
actions available to the Group should a severe stress scenario
occur, such as raising capital, varying the volumes of new business
written and a scenario where the Group does not write new
business.
The Group's capital position can be adversely affected by a
number of factors, in particular factors that erode the Group's
capital resources and/or which impact the quantum of risk to which
the Group is exposed. In addition, any event which erodes current
profitability and is expected to reduce future profitability and/or
make profitability more volatile could impact the Group's capital
position, which in turn could have a negative effect on the Group's
results of operations.
In assessing the Group's capital position the requirements of
PS31/18 "Solvency II: Equity release mortgages", published by the
PRA in December 2018, have been taken into account. The publication
of PS31/18 has significantly reduced the uncertainty created by
CP13/18 "Solvency II: Equity release mortgages" and includes a
number of key changes which are material to the Group, such as the
deferral of the implementation date to 31 December 2019,
confirmation that transitional measures for technical provisions
for pre-2016 business will be recognised over the remaining
transitional period to 31 December 2031, requirement that firms
must meet an effective value test using a volatility rate of 13%
and a deferment rate of 0% at the end of 2019 and that the
deferment rate should increase to 1% by year-end 2021. PS31/18 also
noted a number of areas for further consideration, in particular
the calculation of the SCR. There is still some uncertainty as
regards areas for further PRA consultation and determination, which
include the process by which the volatility and deferment rates
will be reset and how the effective value test applies in
stress.
Given that the Group continues to experience a high level of
regulatory activity and intense regulatory supervision, there is
also the risk of PRA intervention, not limited to the matters
described in the paragraph above, which could negatively impact on
the Group's capital position.
The Group plans to strengthen its capital position during 2019
and beyond in order to write the anticipated levels of new
business.
On 14 March 2019 the Group announced an underwritten Restricted
Tier 1 debt offering of at least GBP300m and an underwritten non
pre-emptive equity placing of 9.99% of existing share capital.
In addition, the Board will continue to review the need for
further capital and its optimal mix including consideration of the
use of unutilised Tier 2 capacity and including the refinancing of
the existing Partnership Life Assurance Company Limited Tier 2 debt
which has a call option in March 2020.
Further information on the matters considered by the Directors
at 31 December 2018 in relation to capital and going concern is
included in note 1.1, Basis of preparation.
The Group's objectives when managing capital for all
subsidiaries are:
-- to comply with the insurance capital requirements required by
the regulators of the insurance markets where the Group operates.
The Group's policy is to manage its capital in line with its risk
appetite and in accordance with regulatory requirements;
-- to safeguard the Group's ability to continue as a going concern;
-- to continue to provide returns for shareholders and benefits for other stakeholders; and
-- to provide an adequate return to shareholders by pricing insurance and investment contracts commensurately with the level of risk.
Group entities that are under supervisory regulation and are
required to maintain a minimum level of regulatory capital
include:
-- Just Retirement Limited and Partnership Life Assurance
Company Limited - authorised by the PRA, and regulated by the PRA
and FCA.
-- HUB Financial Solutions Limited, Just Retirement Money
Limited, and Partnership Home Loans Limited - authorised and
regulated by the FCA.
The Group and its regulated subsidiaries complied with their
regulatory capital requirements throughout the year.
Group capital position (unaudited)
The Group's estimated capital surplus position at 31 December
2018, which is unaudited, and is stated after including 12 months'
amortisation of transitional relief, was as follows:
Solvency Capital Minimum Group Solvency
Requirement Capital Requirement
==================== ================== =========================
2018 2017 2018 2017
GBPm GBPm GBPm GBPm
==================== ======== ======== ============ ===========
Eligible Own Funds 2,288.9 2,135.1 1,762.9 1,815.0
==================== ======== ======== ============ ===========
Capital Requirement 1,591.4 1,539.2 392.5 382.2
==================== ======== ======== ============ ===========
Excess Own Funds 697.5 595.9 1,370.4 1,432.8
==================== ======== ======== ============ ===========
Coverage ratio 144% 139% 449% 475%
==================== ======== ======== ============ ===========
35. Group entities
On 4 July 2018, the Group subscribed for 33% of the ordinary
share capital of Spire Platform Solutions Limited, a newly
incorporated company, for consideration of GBP500. The Group has
majority representation on the Board of the company, giving it
effective control, and therefore consolidates the company in full
in the results of the Group.
On 17 August 2018, the Group acquired 75% of the ordinary share
capital of Corinthian Group Limited for consideration of GBP1.2m.
The Group's share of net assets acquired were GBP0.2m, consisting
mainly of trading balances, resulting in goodwill recognised on
acquisition of GBP1.0m. In 2018 revenue of GBP1.2m and profit of
nil have been recognised in the Group's consolidated statement of
comprehensive income since acquisition.
As a result of the above transactions, the non-controlling
interests of the minority shareholders of Spire Platform Solutions
Limited and Corinthian Group Limited totalling GBP(0.6)m have been
recognised in the year.
The Group holds investment in the ordinary shares (unless
otherwise stated) of the following subsidiary undertakings and
associate undertakings. All subsidiary undertakings have a
financial year end at 31 December.
Percentage
of nominal
share capital
and voting
Registered rights
Principal activity office held
======================================= ====================== ============= ==============
Direct subsidiary
======================================= ====================== ============= ==============
Just Retirement Group Holdings
Limited Holding company Reigate 100%
======================================= ====================== ============= ==============
Partnership Assurance Group Limited Holding company London 100%
======================================= ====================== ============= ==============
Indirect subsidiary
======================================= ====================== ============= ==============
HUB Acquisitions Limited(1) Holding company Reigate 100%
======================================= ====================== ============= ==============
HUB Financial Solutions Limited Distribution Reigate 100%
======================================= ====================== ============= ==============
HUB Online Development Limited Software development Belfast 100%
======================================= ====================== ============= ==============
Just Management Services (Proprietary)
Limited Management services South Africa 100%
======================================= ====================== ============= ==============
Just Re 1 Limited Investment activity Reigate 100%
======================================= ====================== ============= ==============
Just Re 2 Limited Investment activity Reigate 100%
======================================= ====================== ============= ==============
Just Retirement (Holdings) Limited Holding company Reigate 100%
======================================= ====================== ============= ==============
Just Retirement (South Africa)
Holdings (Pty) Limited Holding company South Africa 100%
======================================= ====================== ============= ==============
Just Retirement Life (South Africa)
Limited Life assurance South Africa 100%
======================================= ====================== ============= ==============
Just Retirement Limited Life assurance Reigate 100%
======================================= ====================== ============= ==============
Just Retirement Management Services
Limited Management services Reigate 100%
======================================= ====================== ============= ==============
Provision of lifetime
Just Retirement Money Limited mortgage products Reigate 100%
======================================= ====================== ============= ==============
Partnership Group Holdings Limited Holding company London 100%
======================================= ====================== ============= ==============
Partnership Holdings Limited Holding company London 100%
======================================= ====================== ============= ==============
Provision of lifetime
Partnership Home Loans Limited mortgage products London 100%
======================================= ====================== ============= ==============
Partnership Life Assurance Company
Limited Life assurance London 100%
======================================= ====================== ============= ==============
Partnership Life US Company Management services USA 100%
======================================= ====================== ============= ==============
Partnership Services Limited Management services London 100%
======================================= ====================== ============= ==============
PASPV Limited Investment activity London 100%
======================================= ====================== ============= ==============
PayingForCare Limited Website Reigate 100%
======================================= ====================== ============= ==============
PLACL RE 1 Limited Investment activity Reigate 100%
======================================= ====================== ============= ==============
PLACL RE 2 Limited Investment activity Reigate 100%
======================================= ====================== ============= ==============
The Open Market Annuity Service
Limited Software solutions Belfast 100%
======================================= ====================== ============= ==============
TOMAS Online Development Limited Software development Belfast 100%
======================================= ====================== ============= ==============
Enhanced Retirement Limited Dormant Reigate 100%
======================================= ====================== ============= ==============
HUB Pension Consulting Limited Dormant Reigate 100%
======================================= ====================== ============= ==============
HUB Pension Solutions Limited Dormant Reigate 100%
======================================= ====================== ============= ==============
HUB Transfer Solutions Limited Dormant Reigate 100%
======================================= ====================== ============= ==============
JRP Group Limited Dormant Reigate 100%
======================================= ====================== ============= ==============
JRP Nominees Limited Dormant Reigate 100%
======================================= ====================== ============= ==============
Just Annuities Limited Dormant Reigate 100%
======================================= ====================== ============= ==============
Just Equity Release Limited Dormant Reigate 100%
======================================= ====================== ============= ==============
Just Incorporated Limited Dormant Reigate 100%
======================================= ====================== ============= ==============
Just Protection Limited Dormant Reigate 100%
======================================= ====================== ============= ==============
Just Retirement Finance plc Dormant Reigate 100%
======================================= ====================== ============= ==============
Just Retirement Nominees Limited Dormant Reigate 100%
======================================= ====================== ============= ==============
Just Retirement Solutions Limited Dormant Reigate 100%
======================================= ====================== ============= ==============
PAG Finance Limited Dormant Jersey 100%
======================================= ====================== ============= ==============
PAG Holdings Limited Dormant Jersey 100%
======================================= ====================== ============= ==============
TOMAS Acquisitions Limited Dormant Reigate 100%
======================================= ====================== ============= ==============
Corinthian Group Limited Holding company Reigate 75%
======================================= ====================== ============= ==============
Corinthian Pension Consulting
Limited Pension Consulting Reigate 75%
======================================= ====================== ============= ==============
Spire Platform Solutions Limited(2) Software development Portsmouth 33%(3)
======================================= ====================== ============= ==============
Associate
======================================= ====================== ============= ==============
Independent financial
Eldercare Group Limited advisers Hitchin 33%
======================================= ====================== ============= ==============
Independent financial
Eldercare Solutions Limited advisers Hitchin 33%
======================================= ====================== ============= ==============
Independent financial
Eldercare Property Partners Limited advisers Hitchin 33%
======================================= ====================== ============= ==============
Care Fees Investment Limited Dormant Hitchin 33%
======================================= ====================== ============= ==============
1 Class "A" and Class "B" ordinary shares. 2 Class "B" ordinary
shares. 3 Control is based on Board representation rather than
percentage holding.
Registered offices
Reigate office: London office: Belfast office: South Africa office:
=============== ========================== ========================= ==========================
Vale House 5th Floor, 110 Bishopsgate 3rd Floor, Arena Building Office G01, Big Bay
Office Park
=============== ========================== ========================= ==========================
Roebuck Close, London EC2N 4AY Ormeau Road 16 Beach Estate Boulevard,
Bancroft Road Big Bay
=============== ========================== ========================= ==========================
Reigate, Surrey Belfast BT7 1SH Western Cape 7441
RH2 7RU
=============== ========================== ========================= ==========================
Jersey office: United States office: Portsmouth office: Hitchin office:
=============== ========================== ========================= ==========================
44 Esplanade 2711 Centerville Building 3000, Lakeside Suite 4, Titmore Court,
Road, Suite 400 North Harbour Titmore Green
=============== ========================== ========================= ==========================
St Helier Wilmington Portsmouth Little Wymondley,
Hitchin
=============== ========================== ========================= ==========================
Jersey JE4 9WG Delaware Hampshire, PO6 3EN Hertfordshire, SG4
7JT
=============== ========================== ========================= ==========================
36. Related parties
The Group has related party relationships with its key
management personnel and associated undertakings. All transactions
with related parties are carried out on an arm's length basis.
Key management personnel comprise the Directors of the
Company.
There were no material transactions between the Group and its
key management personnel other than those disclosed below.
Key management compensation is as follows:
Year ended Year ended
31 December 31 December
2018 2017
GBPm GBP'000
================================== ============ ============
Short-term employee benefits 4.4 4.8
================================== ============ ============
Share-based payments 2.7 2.3
================================== ============ ============
Total key management compensation 7.1 7.1
================================== ============ ============
Loans owed by Directors 0.4 0.3
================================== ============ ============
The loan advances to Directors accrue interest fixed at 4% per
annum and are repayable in whole or in part at any time.
37. Ultimate Parent Company and ultimate controlling party
The Company is the ultimate Parent Company of the Group and has
no controlling interest.
38. Post balance sheet events
On 14 March 2019 the Group announced an underwritten Restricted
Tier 1 debt offering of at least GBP300m and an underwritten non
pre-emptive equity placing of 9.99% of existing share capital.
There are no other post balance sheet events that have taken
place between 31 December 2018 and the date of this report.
Glossary
Acquisition costs - acquisition costs comprise the direct costs
(such as commissions) of obtaining new business.
Adjusted earnings per share - an APM, this measures earnings per
share based on adjusted operating profit after attributed tax,
rather than IFRS profit before tax. This measure is calculated by
taking the adjusted operating profit APM, reduced for the effective
tax rate (19% for 2018), and dividing this result by the weighted
average number of shares in issue by the Group for the year.
Adjusted operating profit before tax - an APM and one of the
Group's KPIs, this is the sum of the new business operating profit
and in-force operating profit together with the impact of one-off
assumption changes, experience variances, results of the other
Group companies and financing costs. Adjusted operating profit is
reconciled to IFRS profit before tax in the financial review.
Alternative performance measure ("APM") - in addition to
statutory IFRS performance measures, the Group has presented a
number of non-statutory alternative performance measures ("APMs")
within the Annual Report and Accounts. The Board believes that the
APMs used give a more representative view of the underlying
performance of the Group. APMs are identified in this glossary
together with a reference to where the APM has been reconciled to
its nearest statutory equivalent. APMs which are also KPIs are
indicated as such.
Amortisation and impairment of intangible assets - amortisation
costs relate to the amortisation of the Group's intangible assets,
including the amortisation of intangible assets recognised in
relation to the acquisition of Partnership Assurance Group plc by
Just Retirement Group plc.
Auto-enrolment - new legal duties being phased in that require
employers to automatically enrol workers into a workplace
pension.
Buy-in - an exercise enabling a pension scheme to obtain an
insurance contract that pays a guaranteed stream of income
sufficient to cover the liabilities of a group of the scheme's
members.
Buy-out - an exercise that wholly transfers the liability for
paying member benefits from the pension scheme to an insurer which
then becomes responsible for paying the members directly.
Capped Drawdown - a non-marketed product from Just Group
previously described as Fixed Term Annuity. Capped Drawdown
products ceased to be available to new customers when the tax
legislation changed for pensions in April 2015.
Care Plan - a specialist insurance contract contributing to the
costs of long-term care by paying a guaranteed income to a
registered care provider for the remainder of a person's life.
Change in insurance liabilities - change in insurance
liabilities represents the difference between the year-on-year
change in the carrying value of the Group's insurance liabilities
and the year-on-year change in the carrying value of the Group's
reinsurance assets including the effect of the impact of
reinsurance recaptures.
Combined Group/Just Group - following completion of the merger
with Partnership Assurance Group plc, Just Group plc and each of
its consolidated subsidiaries and subsidiary undertakings
comprising the Just Retirement Group and the Partnership Assurance
Group.
Defined benefit pension scheme - a pension scheme, usually
backed or sponsored by an employer, that pays members a guaranteed
level of retirement income based on length of membership and
earnings.
Defined contribution ("DC") pension scheme - a work-based or
personal pension scheme in which contributions are invested to
build up a fund that can be used by the individual member to
provide retirement benefits.
De-risk/de-risking - an action carried out by the trustees of a
pension scheme with the aim of transferring investment, inflation
and longevity risk from the sponsoring employer and scheme to a
third party such as an insurer.
Development expenditure - development expenditure captures costs
relating to the development of new products and new initiatives,
and is included within adjusted operating profit.
Drawdown (in reference to Just Group sales or products) -
collective term for Flexible Pension Plan and Capped Drawdown.
Economic capital coverage ratio - an APM and one of the Group's
KPIs, economic capital is a key risk-based capital measure and
expresses the Board's view of the available capital as a percentage
of the required capital.
Employee benefits consultant ("EBC") - an adviser offering
specialist knowledge to employers on the legal, regulatory and
practical issues of rewarding staff including non-wage compensation
such as pensions, health and life insurance and profit sharing.
Equity release - products and services enabling homeowners to
generate income or lump sums by accessing some of the value of the
home while continuing to live in it.
Embedded value - an APM, this represents the sum of
shareholders' net assets and the value of in-force business, and is
a measure in assessing the future profit streams of the Group's
long-term business. It also recognises the additional value of
profits in the business that has been written but not yet
recognised under IFRS accounting.
Finance costs - finance costs represent interest payable on
reinsurance deposits and financing, the interest on the Group's
Tier 2 Debt, and, in the prior year, bank finance costs.
Flexi-access drawdown - the option introduced in April 2015 for
DC pension savers who have taken tax-free cash to take a taxable
income directly from their remaining pension with no limit on
withdrawals.
Gross premiums written - gross premiums written are the total
premiums received by the Group in relation to its Retirement Income
and Protection sales in the year, gross of commission paid.
Guaranteed Guidance - see Pensions Wise.
Guaranteed Income for Life ("GIfL") - retirement income products
which transfer the investment and longevity risk to the Company and
provide the retiree a guarantee to pay an agreed level of income
for as long as a retiree lives. On a "joint-life" basis, continues
to pay a guaranteed income to a surviving spouse/partner. Just
provides modern individually underwritten GIfL solutions.
IFRS net assets - one of the Group's KPIs, representing the
assets attributable to equity holders.
IFRS profit before tax - one of the Group's KPIs, representing
the profit before tax attributable to equity holders.
In-force operating profit - an APM and one of the Group's KPIs,
capturing the expected margin to emerge from the in-force book of
business and free surplus, and results from the gradual release of
prudent reserving margins over the lifetime of the policies.
In-force operating profit is reconciled to IFRS profit before tax
in the financial review.
Investment and economic profits - investment and economic
profits reflect the difference in the year between expected
investment returns, based on investment and economic assumptions at
the start of the year, and the actual returns earned. Investment
and economic profits also reflect the impact of assumption changes
in future expected risk-free rates, corporate bond defaults and
house price inflation and volatility.
Key performance indicators ("KPIs") - KPIs are metrics adopted
by the Board which are considered to give an understanding of the
Group's underlying performance drivers. The Group's KPIs are new
business sales, new business operating profit, in-force operating
profit, adjusted operating profit, IFRS profit before tax, IFRS net
assets, Solvency II capital coverage ratio and economic capital
coverage ratio.
Lifetime mortgages - an equity release product that allows
homeowners to take out a loan secured on the value of their home,
typically with the loan plus interest repaid when the home is no
longer needed.
Medical underwriting - the process of evaluating an individual's
current health, medical history and lifestyle factors, such as
smoking, when pricing an insurance contract.
Net claims paid - net claims paid represents the total payments
due to policyholders during the accounting period, less the
reinsurers' share of such claims which are payable back to the
Group under the terms of the reinsurance treaties.
Net investment income - net investment income comprises interest
received on financial assets and the net gains and losses on
financial assets designated at fair value through profit or loss
upon initial recognition and on financial derivatives.
Net premium revenue - net premium revenue represents the sum of
gross premiums written and reinsurance recapture, less reinsurance
premium ceded.
New business operating profit - an APM and one of the Group's
KPIs, representing the profit generated from new business written
in the year after allowing for the establishment of prudent
reserves and for acquisition expenses. New business operating
profit is reconciled to IFRS profit before tax in the Financial
Review.
New business sales - an APM and one of the Group's KPIs, and a
key indicator of the Group's growth and realisation of its
strategic objectives. New business sales include DB, GIfL, Care,
FPP and protection premiums written combined with LTM advances in
the year. New business sales are reconciled to IFRS Gross premiums
in note 2 to the consolidated financial statements.
Non-recurring and project expenditure - non-recurring and
project expenditure includes any one-off regulatory, project and
development costs. This line item does not include acquisition
integration, or acquisition transaction costs, which are shown as
separate line items.
Operating experience and assumption changes - captures the
impact of the actual operating experience differing from that
assumed at the start of the year, plus the impact of changes to
future operating assumptions applied during the year. It also
includes the impact of any expense reserve movements, and other
sundry operating items.
Other Group companies' operating results - the results of Group
companies including our HUB group of companies, which provides
regulated advice and intermediary services, and professional
services to corporates, and corporate costs incurred by Group
holding companies and the overseas start-ups.
Other operating expenses - other operating expenses represent
the Group's operational overheads, including personnel expenses,
investment expenses and charges, depreciation of equipment,
reinsurance fees, operating leases, amortisation of intangibles,
and other expenses incurred in running the Group's operations.
Pension Freedoms/Pension Freedom and Choice/Pension Reforms -
the UK Government's pension reforms, implemented in April 2015.
Pensions Wise - the free and impartial service introduced in
April 2015 to provide "Guaranteed Guidance" to defined contribution
pension savers considering taking money from their pensions.
PrognoSys(TM) - a next generation underwriting system, which is
based on individual mortality curves derived from Just Group's own
data collected since its launch in 2004.
Regulated financial advice - personalised financial advice for
retail customers by qualified advisers who are regulated by the
Financial Conduct Authority.
Reinsurance and finance costs - the interest on subordinated
debt, bank loans and reinsurance financing, together with
reinsurance fees incurred.
Retirement Income sales (in reference to Just Group sales or
products) - collective term for GIfL, DB and Care Plan.
Retirement sales (in reference to Just Group sales or products)
- collective term for Retirement Income sales and Drawdown.
Simplified advice - regulated financial advice offering a
limited service on a limited or specialist area of financial need,
such as retirement, to retail customers taking into account
information relevant to that need.
Solvency II - an EU Directive that codifies and harmonises the
EU insurance regulation. Primarily this concerns the amount of
capital that EU insurance companies must hold to reduce the risk of
insolvency.
Solvency II capital coverage ratio - one of the Group's KPIs.
Solvency II capital is the regulatory capital measure and is
focused on by the Board in capital planning and business planning
alongside the economic capital measure. It expresses the regulatory
view of the available capital as a percentage of the required
capital
Trustees - individuals with the legal powers to hold, control
and administer the property of a trust such as a pension scheme for
the purposes specified in the trust deed. Pension scheme trustees
are obliged to act in the best interests of the scheme's
members.
Underlying operating profit - an APM and the sum of the new
business operating profit and in-force operating profit. As this
measure excludes the impact of one-off assumption changes and
investment variances, the Board considers it to be a key indicator
of the progress of the business and a useful measure for investors
and analysts when assessing the Group's financial performance.
Underlying operating profit is reconciled to IFRS profit before tax
in the Financial Review.
Abbreviations
AGM - Annual General Meeting OP - adjusted operating profit
APM - alternative performance measures ORSA - Own Risk and Solvency Assessment
Articles - Articles of Association PAG - Partnership Assurance Group
BME - black and minority ethnic PILON - payment in lieu of notice
Code - UK Corporate Governance Code PLACL - Partnership Life Assurance
CP - Care Plans Company Limited
CMI - Continuous Mortality Investigation PRA - Prudential Regulation Authority
DB - Defined Benefit De-risking PRI -United Nations Principles for
Solutions Responsible Investment
DC - defined contribution PVIF - purchased value of in-force
DSBP - deferred share bonus plan PwC - PricewaterhouseCoopers LLP
EBC - employee benefits consultant RICS - the Royal Institution of
EBT - employee benefit trust Chartered Surveyors
EPS - earnings per share RPI - retail price inflation
EVT - effective value test SAM - Solvency Assessment and Management
FCA - Financial Conduct Authority SAPS - Self-Administered Pension
FPP - Flexible Pension Plan Scheme
GDPR - General Data Protection Regulation SAYE - Save As You Earn
GHG - greenhouse gas SCR - Solvency Capital Requirement
GIfL - Guaranteed Income for Life SFCR - Solvency and Financial Condition
Hannover - Hannover Life Reassurance Report
Bermuda Ltd SIP - Share Incentive Plan
IFRS - International Financial Reporting STIP - Short Term Incentive Plan
Standards tCO2e - tonnes of carbon dioxide
IP - intellectual property equivalent
JRL - Just Retirement Limited TMTP - transitional measures on
KPI - key performance indicators technical provisions
LTIP - Long Term Incentive Plan TSR - Total Shareholder Return
LTM - lifetime mortgage
MAR - Market Abuse Regulation
NBS - New Bridge Street
NED - Non-Executive Director
NNEG - no-negative equity guarantees
This information is provided by RNS, the news service of the
London Stock Exchange. RNS is approved by the Financial Conduct
Authority to act as a Primary Information Provider in the United
Kingdom. Terms and conditions relating to the use and distribution
of this information may apply. For further information, please
contact rns@lseg.com or visit www.rns.com.
END
FR USVNRKRAOARR
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