REG - Just Group plc - Results for the six months ended 30 June 2022
09/08/2022 07:00
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RNS Number : 3305V Just Group PLC 09 August 2022
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NEWS RELEASE
www.justgroupplc.co.uk
9 August 2022
JUST GROUP PLC
INTERIM RESULTS FOR THE SIX MONTHS ENDED 30 JUNE 2022
DEMONSTRATING OUR GROWTH POTENTIAL
Just Group plc (the "Group", "Just") announces its results for the six months
ended 30 June 2022.
Profitable and sustainable growth
· Underlying operating profits(1) up 15% to £74m (H1 21: £64m), driven by
higher in-force operating profit and lower finance costs.
· Retirement Income sales(1) down 3% to £879m (H1 21: £909m), as Defined
Benefit De-risking ("DB") sales increased by 3% and retail sales fell 14%.
· Largest Defined Benefit De-risking ("DB") transaction to date signed in July.
£0.5bn Buy-in insuring
c.4,800 members. c.50% of the liabilities are reinsured with a DB partner. It
adds £24m of new business profit(1) (post 30 June 2022) and is capital
generative.
· Record pipeline of over £5bn gives confidence in meeting or exceeding our
growth ambitions for the year. Very favourable DB market backdrop and growing
pipeline means we expect substantial DB sales growth in 2022 and beyond.
Strong Solvency II
· Improved capital coverage ratio of 184%(2) (31 December 2021: 164%(2)).
Organic capital generation contributed 2 percentage points ("pp") to the ratio
- interest rate increases added 12pp and other economics a further 6pp.
· Underlying organic capital generation(1) ("UOCG") increased to £31m (H1 21:
£25m), driven by continued outperformance in new business capital strain,
which at £11m, represents only 1.3% of sales (H1 21: £17m and 1.9%).
IFRS
· IFRS loss after tax was £226m (H1 21: loss £70m) as economic variances,
driven by the increase in interest rates and the loss on the sale of the third
LTM portfolio led to investment and economic losses of £353m (H1 21: £174m).
· Tangible net assets per share 172p (31 December 2021: 194p).
Rewarding shareholders
· Interim dividend of 0.5p per share. Sustainable dividend expected to grow over
time. Interim dividend restored in line with stated policy.
· Reiterating confidence in achieving 15% target growth in underlying operating
profit, per annum on average over the medium term(1). Increasing organic
capital generation to sustain strong, profitable sales growth and increase the
long term value of the business.
David Richardson, Group Chief Executive Officer, said:
"This is a strong set of results which continues to demonstrate our ability to
generate profitable growth within a sustainable capital model.
In July, we signed our largest single DB transaction to date, at almost
£0.5bn and this is our second DB partnering transaction. There is a very
favourable DB market backdrop and we have a record pipeline of over £5bn.
This together with our positive momentum, and supported by our strong capital
position, give me confidence that we will achieve our growth ambitions in 2022
and beyond.
Following our strong H1 22 we have increased confidence of delivering 15%
growth in underlying operating profit per annum, on average over the medium
term. We have a unique opportunity to build substantial value to shareholders
and deliver our purpose to help more people achieve a better later life."
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.
Adjusted operating profit is reconciled to IFRS profit before tax in the
Financial Review.
(2 ) These figures include the estimated impact of a TMTP
recalculation. For 31 December 2021, the TMTP was recalculated excluding the
contribution from the LTMs that was sold on 22 February 2022.
( )
Enquiries
Investors / Analysts Media
Alistair Smith, Investor Relations Stephen Lowe, Group Communications Director
Telephone: +44 (0) 1737 232 792 Telephone: +44 (0) 1737 827 301
alistair.smith@wearejust.co.uk press.office@wearejust.co.uk
Paul Kelly, Investor Relations Temple Bar Advisory
Telephone: +44 (0) 20 7444 8127 Alex Child-Villiers
paul.kelly@wearejust.co.uk William Barker
Telephone: +44 (0) 20 7183 1190
For those analysts who have registered, a presentation will take place today
at 1 Angel Lane, London, EC4R 3AB, commencing at 08:30 am. The presentation
will also be available via a live webcast.
FINANCIAL CALENDAR DATE
Ex-dividend date for interim dividend 18 August 2022
Record date for interim dividend 19 August 2022
Payment of interim dividend 2 September 2022
A copy of this announcement, the presentation slides and the transcript will
be available on the Group's website www.justgroupplc.co.uk
(http://www.justgroupplc.co.uk) .
JUST GROUP PLC
GROUP COMMUNICATIONS
Enterprise House
Bancroft Road
Reigate
Surrey RH2 7RP
Forward-looking statements disclaimer:
This announcement has been prepared for, and only for, the members of Just
Group plc (the "Company") as a body, and for no other persons. The Company,
its Directors, employees, agents and advisers do not accept or assume
responsibility to any other person to whom this document is shown or into
whose hands it may come and any such responsibility or liability is expressly
disclaimed.
By their nature, the statements concerning the risks and uncertainties facing
the Company and its subsidiaries (the "Group") in this announcement involve
uncertainty since future events and circumstances can cause results and
developments to differ materially from those anticipated. This announcement
contains, and we may make other statements (verbal or otherwise) containing,
forward-looking statements in relation to the current plans, goals and
expectations of the Group relating to its or their future financial condition,
performance, results, strategy and/or objectives. Statements containing the
words: "believes", "intends", "expects", "plans", "seeks", "targets",
"continues" and "anticipates" or other words of similar meaning are
forward-looking (although their absence does not mean that a statement is not
forward-looking). Forward-looking statements involve risk and uncertainty
because they are based on information available at the time they are made,
based on assumptions and assessments made by the Company in light of its
experience and its perception of historical trends, current conditions, future
developments and other factors which the Company believes are appropriate and
relate to future events and depend on circumstances which may be or are
beyond the Group's control. For example, certain insurance risk disclosures
are dependent on the Group's choices about assumptions and models, which by
their nature are estimates. As such, although the Group believes its
expectations are based on reasonable assumptions, actual future gains and
losses could differ materially from those that we have estimated. Other
factors which could cause actual results to differ materially from those
estimated by forward-looking statements include, but are not limited to:
domestic and global political, economic and business conditions (such as the
impact from the COVID-19 outbreak or other infectious diseases and the
continuing situation in Ukraine); asset prices; market-related risks such as
fluctuations in interest rates and exchange rates, and the performance of
financial markets generally; the policies and actions of governmental and/or
regulatory authorities including, for example, new government initiatives
related to the provision of retirement benefits or the costs of social care;
the impact of inflation and deflation; market competition; changes in
assumptions in pricing and reserving for insurance business (particularly with
regard to mortality and morbidity trends, gender pricing and lapse rates);
risks associated with arrangements with third parties, including joint
ventures and distribution partners and the timing, impact and other
uncertainties associated with future acquisitions, disposals or other
corporate activity undertaken by the Group and/or within relevant industries;
inability of reinsurers to meet obligations or unavailability of reinsurance
coverage; default of counterparties; information technology or data security
breaches; the impact of changes in capital, solvency or accounting standards;
and tax and other legislation and regulations in the jurisdictions in which
the Group operates (including changes in the regulatory capital requirements
which the Company and its subsidiaries are subject to). As a result, the
Group's actual future financial condition, performance and results may differ
materially from the plans, goals and expectations set out in the
forward-looking statements. The forward-looking statements only speak as at
the date of this document and reflect knowledge and information available at
the date of preparation of this announcement. The Group undertakes no
obligation to update these forward-looking statements or any other
forward-looking statement it may make (whether as a result of
new information, future events or otherwise), except as may be required by
law. Persons receiving this announcement should not place undue reliance
on forward-looking statements. Past performance is not an indicator of future
results. The results of the Company and the Group in this announcement may not
be indicative of and are not an estimate, forecast or projection of the
Group's future results. Nothing in this announcement should be construed as a
profit forecast.
Chief Executive Officer's Statement
Growing with confidence
In the first six months of 2022 we have made strong progress towards our new
growth targets, and just after the period end we completed our largest single
Defined Benefit De-risking ("DB") transaction to date. We continue to
transform the Group so we are even better placed to unlock the significant
untapped potential inherent in the business and the markets we participate in.
I am very pleased to present my Chief Executive Officer's Statement for the
first six months of 2022.
Retirement sales growth
Sales for the first six months of 2022 were down slightly at £879m. We
focussed on writing low strain new business to preserve flexibility to take
advantage of what we expect will be a very active DB market in the second half
of the year. Our solid start was bolstered in July as we completed our largest
single DB transaction to date - at £0.5bn. For this transaction, we have
chosen to partner with an external capital provider, who will reinsure c.50%
of the liabilities in the scheme. This is our second capital light DB
partnering deal to date, and is a further endorsement of our approach to use
optionality and capital efficiently to grow shareholder value.
In the six months before this transaction, Just Group's DB sales were up 3% to
£574m (H1 21: £555m). Operationally, we were busy as we completed 14
transactions (H1 21: 9 transactions), however, average case sizes were
smaller. The defined benefit de-risking market is very active currently and we
expect to be very busy in the second half. Having just signed our largest ever
single transaction and with a pipeline of over £5bn actively quoting small,
medium and large transactions, we expect that DB sales for the full year will
substantially exceed the level achieved in 2021.
In our retail market, sales of £305m were 14% lower than in the first half of
2021 as we maintained pricing and returns discipline during a period of
uncertain investment markets.
Growing our Investments business
In June we were delighted to host a seminar for investors and analysts to explain in further detail the fundamental role our investment strategy plays in the Group's ability to offer competitive customer pricing and deliver shareholder returns. In order to meet our customer promises, we invest approximately 50% of the premiums we receive into liquid investments, principally public bonds, and the other 50% into illiquid assets. This in turn is split 20% into our traditional strength of lifetime mortgages and 30% into a diversified range of other illiquid asset classes.
In the first half of 2022, we have invested £466m in other illiquids, including infrastructure, private placements, social housing, commercial mortgages, ground rents and income strips. This level of origination positions us to achieve c.£1bn of other illiquid investments in 2022, compared to £0.6bn in 2021. We expect to maintain significant growth in future years as we access growing private debt markets through our close partnerships with 14 external asset managers. Their investment professionals have built strong working relationships with our in-house teams. We work in tandem with these asset managers to provide productive finance for these highly rated, structured and long-term real assets, while benefiting from increased portfolio diversification with good investment yields.
We remain optimistic that HM Treasury's commitment to reform Solvency II will
release capital currently held by life insurers and unlock tens of billions of
pounds for long term productive investments, including infrastructure. The
current proposals put forward by the Prudential Regulation Authority will not
achieve HM Treasury's objectives. Alongside other industry leaders, we remain
committed to working with HM Treasury and the PRA to develop a final set of
proposals that meets all of our objectives and enables the UK to seize this
unique opportunity for the benefit of our customers, the UK economy and the
environment.
Lifetime mortgages contribute to the Group fulfilling its purpose and remain an important part of our business model. In the first half of 2022, we originated £274m of funded lifetime mortgages (H1 21: £248m, up 11%).
Growth and innovation
We are in an exciting growth phase for the Group. A significant portion of
that growth will come from completing more transactions in the larger, above
£250m segment of the DB De-risking market, aided by the optionality of
further DB partnering. These are by their nature more intermittent
transactions and more weighted towards the second half of the year. In July we
completed our largest ever single transaction at £484m.
At the smaller end of the DB market we have developed a streamlined quotation
service which delivers monthly updated quotes to small and mid-sized schemes
and is now integrated into over 100 pension schemes. Through this service,
since 2018, we have completed 40 transactions, cumulatively adding up to
£1.2bn of premium.
In the second half of 2021 we used our intellectual property to positively
disrupt the lifetime mortgage market. By asking customers questions about
their medical conditions and lifestyle factors we've found a way to provide a
tailored solution for each customer. And we've estimated that around
six-in-ten customers will get a better deal than if they didn't disclose this
information. A better deal means they will get a lower interest rate, or for
those that need to, be able to borrow a higher amount. Using medical
underwriting in this way can provide customers with thousands of pounds of
additional value. We've made excellent progress helping financial
intermediaries to adopt this new approach and over one in three of the
quotation requests we received in the first half of 2022 used medical
underwriting. This trend continues to advance higher.
We started deploying our unique digital advice service, Destination
Retirement, into the workplace during the first half of 2022. We have
successfully implemented the service into over 30 employers and have a growing
pipeline of further workplace and other clients.
Our purpose and sustainability
Just has a strong purpose: we help people achieve a better later life. We help
our customers achieve security, certainty and peace of mind.
We achieve our goals responsibly and are committed to a sustainable strategy
that protects our communities and the planet we live on. I am very proud that
over the last two years we have reduced our operational carbon intensity per
employee by 85%, but the most material impact we can make to reduce carbon
emissions will be achieved through the decisions we take with our £23bn
investments portfolio. We are committed to an intermediate step that our
investment portfolio will halve its emissions by 2030(1) and will be carbon
net zero by 2050, in line with the Association of British Insurers climate
change roadmap. We continue to diversify our investments, including additional
green and social assets.
In the first six months of the year, we originated £92m of eligible green and
social assets in accordance with our Sustainable Bond Framework, and expect to
complete our total £575m green and sustainability bond investment commitments
by the end of the year.
Customers
We have ambitious targets to continuously improve the customer experience we
deliver and are investing to enhance our digital capabilities. For our
business partners, this will make Just easier to do business with and provide
our customers with more options to engage with us. The successful
implementation of our digital LTM quotation service has resulted in over 90%
of quotations now being issued through this automated solution providing an
improved and more efficient service.
Colleagues
Delivering outstanding customer service and our growth strategy is underpinned
by our passionate people making a difference to the lives of those around
them. As well as being focused on delivering our strategy, our people
understand the importance of 'how' they go about their daily activities which
must always be led by the right behaviours, summed up as the Just Way. We have
continued to develop our leadership and broader people manager capabilities,
underpinned by an adaptive and open mindset which drives a culture of high
performance.
Our approach to hybrid working continues to evolve as we recognise the
critical role regular office working plays in building and maintaining
relationships between colleagues. It helps to preserve many positive aspects
of the culture we've built at Just, enables colleagues to support and learn
from one other, improves collaboration and accelerates innovation.
We have continued to maintain excellent levels of employee engagement, with a
key priority to build a diverse and inclusive workforce. As well as publishing
our gender pay gap report, we shared our ethnicity pay gap, alongside action
to address any imbalances and under-representation of diverse groups at senior
levels. During the summer we will be joined by a number of interns as part of
our commitment to the 10,000 Black Interns programme and have also become
signatories to the Association of British Insurers (ABI) Making Flexible Work
Charter.
Financial performance
Underlying operating profit increased by 15% in the first six months of 2022,
helped by improved in-force returns and lower financing costs. We are
confident that we will meet or exceed our target to deliver 15% growth in
underlying operating profits, per annum, on average over the medium term.
Our interest rate hedging programme has successfully protected our solvency
capital position during the years of falling interest rates. The continued
rise in interest rates in 2022 has resulted in an economic loss, which means
we have an overall IFRS loss after tax of £226m for the first six months of
2022. During the period, we have adjusted and reduced the level of interest
rate hedging in place to move closer to an economically neutral position.
The strength and resilience of our capital position and our ability to produce
underlying capital generation allows us to be capital self-sufficient. We are
being disciplined in our pricing and risk selection, both on the asset and
liability side, to ensure we write low-strain, profitable new business. This
means we can fund our growth ambitions, reward shareholders with a growing
dividend and maintain a high buffer of capital in what are uncertain times. In
the first six months of 2022, we delivered £31m of underlying organic capital
generation, helped by a continued outperformance on new business capital
strain at 1.3% of premium (H1 21: 1.9%), with most of the full year capital
budget still available to be deployed into the opportunities available in the
second half.
We will pay an interim dividend of 0.5p per share, in line with our stated
policy. During a period of macroeconomic uncertainty and market volatility,
our balance sheet has shown resilience and the Solvency II capital coverage
ratio has strengthened even further to 184% at 30 June 2022, from 164% at the
end of 2021.
In conclusion
We've exceeded the promises we made during the last 3 years by being
innovative, focused and disciplined. As we move our focus to delivering our
profit pledge, these same behaviours will be critical. We're very optimistic,
and excited about our future.
Our DB capability is increasing, the investment portfolio is expanding and
diversifying and we are confident in delivering profitable growth from a
vibrant DB market. We believe this is a winning formula and one which will
ensure we fulfil our purpose to help people achieve a better later life.
David Richardson
Group Chief Executive Officer
1 The baseline for the reduction of 50% was set in 2019.
Business Review
fulfilling our potential
The Group operates in attractive markets which have strong structural growth
drivers and we are well placed to take advantage of these growth opportunities
by leveraging our strong capabilities, brand and reputation. We will continue
to innovate, risk select and price with discipline, ensuring our business
model delivers long-term value for customers and shareholders.
The Business Review presents the results of the Group for the six months ended
30 June 2022, including IFRS and Solvency II information.
The business continues to benefit from the strong positive progress achieved
in previous years, in particular, a transformed, lower capital intensity new
business model, combined with a strengthened and increasingly resilient
capital base. The cost base has been right-sized over the past three years and
we are continuing to keep cost discipline across the business as we invest to
enable the business to scale efficiently. We continue to diversify the asset
portfolio backing our customer commitments - both across investment sectors
and geographies, and by sourcing an increasing proportion of illiquids in line
with our investment strategy.
Momentum in the DB business continues to build with a pipeline of over £5bn
small, medium and large active quotations. We expect a very busy second half
of 2022, with our strong pricing discipline during the first half, boosting
the capital budget available for deployment over the remainder of the year.
Rising interest rates have a positive effect on the DB market, helping to
close scheme funding deficits, and hence accelerating when they will be in a
position to come to market, which leads to a very positive outlook into 2023.
In July, we closed our largest DB transaction to date at £484m, and have
reinsured the investment as well as longevity risks on approximately half of
this scheme with an external partner. As a result, allowing for the upfront
origination fee received from our partner, this transaction was marginally
capital generative for Just. This capital light transaction is a great example
of our ability to innovate, increasing our participation in the £250m-£1bn
transaction size segment, where we have an untapped opportunity, and using
capital efficiently to generate shareholder value. This type of transaction is
repeatable, scalable and provides optionality to the business going forward,
with employee benefit consultants ("EBC") supportive as external capital
increases market capacity.
For the first six months of the year, the underlying operating profit was
£74m (H1 21: £64m), with July's DB partner transaction expected to boost
this by £24m. Retirement Income sales of £879m were 3% lower than H1 21,
impacted by a 14% decline in GIfL/Care volumes, and with higher interest rates
reducing the size of DB transactions on a like for like basis. New business
profit was £68m, with new business margin slightly reduced at 7.8% (H1 21:
8.1%) including a continued strong proportion of DB deferred business (H1 22:
54% of DB sales, H2 21: 50%, H1 21: 8%), which is more capital efficient but
has a lower upfront new business profit than pensioner in payment business.
Adding the new business profit from the July DB partner transaction would
boost new business margin to 8.4%(1), exceeding our 8%+ new business margin
target.
The significant rise, of c.140bps, in long term interest rates over the first
half of 2022 has led to IFRS losses of £341m from hedges used to protect the
Solvency II balance sheet. Other economic variances included a negative from
widening credit spreads (£102m) offset by positive property experience
(£34m) with these leading to an overall loss after tax for the first six
months of £226m. We have actively hedged the solvency position since 2018,
which led to profits when rates fell in 2019/2020 and losses as rates have
risen over the past 18 months - with the cumulative position since 2018 a net
loss (pre-tax), significantly less at £57m. We have actively reduced our
level of interest rate hedging as the capital position has continued to
strengthen over the past six months, which has substantially reduced the
sensitivity of the IFRS balance sheet to future interest rate movements.
Looking forward, we expect the economic environment to remain uncertain
reflecting geopolitical and other macro-economic concerns such as inflation.
The key sensitivities of the Group's capital and financial position to future
economic and demographic factors are set out below and in notes 7 and 10 of
these financial statements.
Recognising the strengthened financial position of the Group, we re-commenced
dividends and paid a £10m distribution to shareholders in May.
Underlying organic capital generation for the first half of 2022 was robust at
£31m (H1 21: £25m) as the capital strain from writing new business reduced
to £11m or 1.3% of premium (H1 21: £17m and 1.9% of premium). This low new
business strain, well within our up to 2.5% target reflects strong pricing
discipline and risk selection, including a healthy proportion of low capital
strain DB deferred business within the sales mix.
Organic capital generation contributed towards further substantial
strengthening of the Group's Solvency II capital position, driven principally
by the rise in long term risk free rates during the period, which reduces the
Group's SCR and risk margin. During the first six months of the year, the
Solvency II capital coverage ratio increased by 20 percentage points to
184%(2) (31 December 2021: 164%(2)). Rising inflation and widening credit
spreads have had limited impact on the Group's solvency, with the property
sensitivity now much reduced following completion of our property related
management actions, earlier this year. Since the onset of the pandemic, we
have demonstrated the resilience of our balance sheet, and continue to closely
monitor and prudently manage our risks, including interest rates, inflation,
currency, residential property and credit.
Over H2 22 and early 2023 as legislation is finalised within the Financial
Services and Markets bill we expect further clarification from HM Treasury
following its commitment to reform Solvency II and introduce a new Regulatory
Framework for financial services following the UK's exit from the European
Union. It is likely that the reform will include a significant reduction in
the risk margin, and measures to widen eligibility criteria for matching
adjustment assets, such as callable bonds or assets with a construction phase
where the commencement of cashflows is not exactly certain. Together with
other industry leaders we are putting forward proposals to ensure any
adjustments made to the fundamental spread or deduction for credit risk, for
the buy and hold assets we use to back our customer commitments, are
consistent with delivering HM Treasury's stated objectives.
At this time, the outlook for the economy continues to evolve, as the world
learns to live with COVID-19, supply chain disruptions, and energy supply
uncertainty associated with the conflict in Ukraine. Inflation, the pace of
central bank tightening to combat rising prices and the associated effect on
slowing the economy continues to be the dominant economic theme in 2022. We
expect these macro forces to have a negligible effect on the Group's business
model, with active hedging to protect the Solvency II capital position, and
tailwinds from higher interest rates to increase demand for our DB products.
We have a strong, stable and resilient capital base and a low strain business
model that is generating consistent capital returns on an underlying basis to
fund our ambitious growth plans, whilst also paying a shareholder dividend
that is expected to grow over time.
(1 ) The retirement income sales included in this new business
margin has been calculated based on the July DB partnering premium after
deducting the DB partners share.
(2 ) These figures include the estimated impact of a TMTP
recalculation. For 31 December 2021, the TMTP was recalculated excluding the
contribution from the LTMs that was sold on 22 February 2022.
Alternative performance measures and key performance indicators
Within the Business 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: return on equity, Retirement Income sales, underlying
organic capital generation, new business operating profit, adjusted operating
profit before tax, underlying operating profit, management expenses, organic
capital generation, in-force operating profit, adjusted operating profit after
attributed tax, adjusted earnings and adjusted earnings per share. Further
information on our APMs can be found in the glossary, together with a
reference to where the APM has been reconciled to the nearest statutory
equivalent.
The Board has also adopted a number of key performance indicators ("KPIs"),
which include certain APMs, and are considered to give an understanding of the
Group's underlying performance drivers. KPIs are regularly reviewed against
the Group's strategic objectives to ensure that we continue to have the
appropriate set of measures in place to assess and report on our progress.
During the second half of 2021, the Group introduced two new KPIs, return on
equity and underlying operating profit, and discontinued the use of organic
capital generation as a KPI. In addition, the return on equity (target 10%)
and adjusted earnings per share calculations have been updated to be
consistent with the 15% medium term growth metric, based on underlying
operating profit. These changes reflect the Group's focus on profitable and
sustainable growth, and provide a balance of KPIs across profit, sales,
expenses, capital and net assets. The Group's KPIs are discussed in more
detail on the following pages.
The Group's KPIs are shown below:
Six months ended Six months ended Change
30 June 2022 30 June 2021
%
£m £m
Return on equity(1) 6.2% 5.0% 1.2pp
Retirement Income sales(1) 879 909 (3)
Underlying organic capital generation(1) 31 25 24
New business operating profit(1) 68 74 (7)
Adjusted operating profit before tax(1) 63 90 (30)
Underlying operating profit(1) 74 64 15
IFRS loss before tax (296) (87) (241)
Management expenses(1) 71 70 1
30 June 2022 31 December 2021 Change
£m £m
Solvency II capital coverage ratio(2) 184% 164% +20pp
IFRS net assets 2,197 2,440 (10)%
(1 ) Alternative performance measure, see glossary for
definition. The return on equity (target 10%) calculation has been updated to
be consistent with the 15% medium term growth metric, based on annualised
underlying operating profit.
(2 ) These figures include the estimated impact of a TMTP
recalculation. For 31 December 2021, the TMTP was recalculated excluding the
contribution from the LTMs that were sold on 22 February 2022.
Return on equity
The return on equity in the six months to 30 June 2022 was 6.2% (30 June 2021:
5.0%), using annualised underlying operating profit after attributed tax of
£120m (30 June 2021: £104m) arising on average tangible net assets of
£1,898m (30 June 2021: £2,047m). The 1.2pp movement was driven by increased
underlying operating profit. Tangible net assets are reconciled to IFRS total
equity as follows:
30 June 2022 30 June 2021
£m £m
IFRS total equity 2,197 2,412
Less intangible assets (111) (125)
Less tax on amortised intangible assets 17 19
Less equity attributable to Tier 1 noteholders (322) (294)
Tangible net assets 1,781 2,012
Return on equity % 6.2% 5.0%
Underlying operating profit and Adjusted operating profit
Underlying operating profit is the core performance metric on which we have
based our 15% growth target, per annum, on average, over the medium term.
Underlying operating profit captures the performance and running costs of the
business including interest on the capital structure, but excludes operating
experience and assumption changes, which by their nature are unpredictable and
can vary substantially from period to period. For the first six months of
2022, Underlying operating profit grew by 15% to £74m, which is solid
progress towards our target, despite timing differences in relation to DB
transactions.
Six months ended Six months ended Change
30 June 2022 30 June 2021
£m £m %
New business operating profit 68 74 (7)
In-force operating profit 54 44 22
Other Group companies' operating results (7) (8) (13)
Development expenditure (4) (3) 33
Finance costs (37) (43) (12)
Underlying operating profit 74 64 15
Operating experience and assumption changes (11) 26 (141)
Adjusted operating profit before tax(1) 63 90 (30)
(1 ) See reconciliation to IFRS profit before tax further in this
Business Review.
New business operating profit
New business operating profit decreased by 7% to £68m for the six months
ended 30 June 2022 (six months ended 30 June 2021: £74m), driven by a 3% fall
in Retirement Income sales to £879m (six months ended 30 June 2021: £909m).
The new business margin achieved on Retirement Income sales during the period
was slightly lower at 7.8% (six months ended 30 June 2021: 8.1%), with the
sales mix including an increase of DB deferred business (in line with the
second half of 2021).
Management expenses
Management expenses have increased by 1% to £71m for the six months ended 30
June 2022 (six months ended 30 June 2021: £70m). Following the end of a
formal three year cost reduction programme in 2021, management expenses
continued to be contained. We maintain a sharp focus on cost control, with
selective investment in the business, such as the Investments and DB functions
as we continue to build in-house capability to write larger DB transactions on
a more frequent basis. Overall, premium and business growth is expected to
outpace costs, thus further improving operational leverage.
In-force operating profit
In-force operating profit increased by 22% to £54m for the six months ended
30 June 2022 (six months ended
30 June 2021: £44m). Aside from the positive impact of credit spread
widening, the Group's in-force operating profit also benefited from a growing
in-force book of business and the impact of rising rates boosting returns on
surplus assets.
other group companies' operating results
The operating result for other Group companies was a loss of £7m in the six
months ended 30 June 2022
(six months ended 30 June 2021: loss of £8m). These costs arise from the
holding company, Just Group plc, and the HUB group of businesses.
Development expenditure
Development expenditure of £4m for the six months ended 30 June 2022 (six
months ended 30 June 2021 £3m), mainly relates to product development,
proposition enhancement and new initiatives, for example, the Destination
Retirement proposition. It also includes preparations for the new insurance
accounting standard IFRS 17 and distribution improvements such as online
capability and digital access.
finance costs
Finance costs have decreased by 12% to £37m for the six months ended 30 June
2022 (six months ended 30 June 2021: £43m). These include the coupon on the
Group's Restricted Tier 1 notes, as well as the interest payable on the
Group's Tier 2 and Tier 3 notes. The decrease for the period is due to the
opportunistic refinancing in September 2021 of the 2019-issued Restricted Tier
1 bond, with a new £325m Sustainability Restricted Tier 1 bond. This discrete
bond refinancing reduces the interest costs on the RT1 component of the
capital structure by £12m pre-tax per annum, while also lengthening the bond
maturity, with a six month call option available from March 2031.
During the first half of 2022, the Group entered into a new five year
revolving credit facility, with improved commercial terms. The facility has
increased from £200m to £300m, with flexibility for this to grow as the
balance sheet expands over time.
Operating experience and assumption changes
The Group continues to actively assess the potential impact of COVID-19 on
longer term mortality. The long-term impact of the pandemic on the population,
including the health of those who have recovered from the disease, the future
efficacy of the various vaccines and secondary impacts such as delayed
diagnosis for other illnesses or behavioural changes is difficult to
accurately assess at present. The Group continues to allow for future trends
in mortality using the CMI 2019 mortality improvement tables. There were no
changes to the Group's long term mortality and other assumptions at 30 June
2022, and we will carry out a full basis review as usual in December 2022. We
expect to increasingly consider and incorporate COVID-19 experience data and
medical understanding into our pricing and reserving assumptions, as it
becomes available. Sensitivity analysis is shown in notes 17 and 23, which
sets out the impact on the IFRS results from changes to key assumptions,
including mortality and property.
Overall, a negative operating experience of £11m was reported in the first
six months of 2022 (six months ended 30 June 2021: positive £26m). The
negative experience variance was driven by increased early redemptions within
our LTM book, above our redemption assumption as customers took advantage of
the competitive rates on offer to refinance before interest rates rise
further, thus reducing their interest roll-up. The early redemption experience
and minor negative modelling adjustments were offset by £6m of positive
annuitant mortality experience.
Adjusted operating profit BEFORE TAX
Adjusted operating profit before tax, was £63m (six months ended 30 June
2021: £90m). Adjusted operating profit before tax is the sum of Underlying
operating profit and Operating experience and assumption changes. The 15%
increase in underlying operating profit was offset by negative operating
experience as mentioned above, whereas, in the comparative period, we reported
a £26m positive operating experience.
On a statutory IFRS basis, the Restricted Tier 1 coupon is accounted for as a
distribution of capital, consistent with the classification of the Restricted
Tier 1 notes as equity, but the coupon is included as a finance cost on an
adjusted operating profit basis.
Retirement income sales
Six months ended 30 June 2022 Six months ended 30 June 2021 Change
£m £m
%
Defined Benefit De-risking Solutions ("DB") 574 555 3
Guaranteed Income for Life Solutions ("GIfL") and Care Plans ("CP") 305 354 (14)
Retirement Income sales 879 909 (3)
The structural growth drivers that underpin our markets are unchanged, and the
3% fall in Retirement Income sales for the first six months of 2022 to £879m
(six months ended 30 June 2021: £909m) was predominantly due to lower GIfL
sales.
In early 2021, we expanded our proposition in the DB de-risking market to meet
fully the needs of schemes and trustees by adding DB deferred capability,
which enabled us to double our access to the over £2tn DB market opportunity.
Scheme funding levels across the industry have improved, and more schemes are
able to afford full scheme de-risking and buyout as opposed to pensioner only
de-risking. We expect this trend to continue. Rising interest rates also
improve scheme funding levels, meaning that more schemes will commence the
process to be "transaction ready" and hence bring business forward into the
2023 and medium term pipeline. Our efforts in 2021 were recognised by being
named "Risk Management Provider of the Year" at the Pensions Age awards in
February 2022.
DB sales were £574m, an increase of 3%. Activity levels were ahead of the
comparable period as we closed
14 transactions, however average case size was smaller (six months ended 30
June 2021: 9 transactions, 2021 as a whole: 29 transactions) as the majority
of transactions were under £100m, including repeat business. In the first six
months of 2022, DB deferred was 54% of DB sales (six months ended 30 June
2021: 8% of DB sales, 2021 as a whole: 38% of DB sales). The near term
actively quoting pipeline is over £5bn, and we expect a very busy second half
with multiple £100m-£1bn opportunities coming to market. We closed our
largest transaction to date in July, a £484m scheme completed in conjunction
with a new reinsurance partner.
Hymans Robertson estimate that the DB market was £10-£12bn in the six months
ended 30 June 2022 (six months ended 30 June 2021: £7bn) and they predict
c.£25bn of business will transact in the second half (H2 21: £21bn), driven
by an increased number of large deals. At the start of the year, Willis Towers
Watson had predicted a £40bn buy-in/buy-out market in 2022, but the long-term
growth opportunity is very substantial with Lane Clark Peacock ("LCP")
forecasting up to £650bn of DB buy-in and buy-out transactions over the
decade to 2030, as funding deficits in the largest schemes are closed.
GIfL sales fell by 14% to £284m for the six months to 30 June 2022 (six
months ended 30 June 2021: £330m), primarily due to lower case sizes as
pension pots have decreased in value from investment losses resulting from
global stock and bond markets falls during the period. Economic uncertainty
has demonstrated to customers the importance and security of a guaranteed
income. Customer rates have increased as risk free rates rose over H1,
however, customers may be postponing their decisions as they wait for further
increases. We also experienced increased competition in the first half of
2022, as the overall GIfL market fell, but maintained pricing discipline and
using our insight to select the most profitable risks. We are investing
further in our distribution capability, with online applications expected to
be launched by the end of the year. Care sales at £22m in the six months
ended 30 June 2022 (six months ended 30 June 2021: £24m) were subdued and
remain impacted by customer behaviour changes post pandemic, in addition to
uncertainty relating to proposed government initiatives on health and social
care funding.
Other new business sales
Internally funded lifetime mortgage advances for the first six months of 2022
were £274m (six months ended
30 June 2021: £248m), an increase of 11%, with these in part matching
increased back book LTM redemptions. Our target LTM backing ratio for new
business remains at or below 20% (2021 as a whole: 18%). In Q2 22, the market
began to re-price, and LTM spreads have widened, but remain below historical
levels, albeit still higher than the spreads available on other illiquid
assets.
We continue to be selective in the mortgages we originate, as we use our
market insight and distribution to target certain sub-segments of the market.
During 2021, we introduced medical underwriting across the entire lifetime
mortgage range and also signed an exclusive distribution agreement with Saga,
both of which are contributing to increasing volumes within the mix. Increased
investment in LTM digital capabilities and proposition has been well received
by financial advisers.
Adjusted Earnings per share
Adjusted EPS (based on underlying operating profit after attributed tax) has
increased to 5.8 pence for the current period from 5.0 pence for the 6 months
ended 30 June 2021.
Six months ended Six months ended
30 June 2021
30 June 2022
Adjusted earnings (£m) 60 52
Weighted average number of shares (million) 1,036 1,033
Adjusted EPS(1) (pence) 5.8 5.0
( )
(1 ) Alternative performance measure, see glossary for
definition. The adjusted earning calculation has been updated to be consistent
with the 15% medium term growth metric, based on underlying operating profit.
Earnings per share
Six months ended Six months ended
30 June 2021
30 June 2022
Earnings (£m) (233) (81)
Weighted average number of shares (million) 1,036 1,033
EPS (pence) (22.5) (7.8)
Reconciliation of adjusted operating profit to statutory IFRS results
The tables on the following pages present the Group's results on a statutory
IFRS basis.
Six months ended Six months ended
30 June 2022 30 June 2021
£m £m
Adjusted operating profit before tax 63 90
Non-recurring and project expenditure (6) (8)
Investment and economic losses (353) (174)
Interest adjustment to reflect IFRS accounting for Tier 1 notes as equity 9 14
Amortisation of acquired intangibles (9) (9)
IFRS loss before tax (296) (87)
Non-recurring and project expenditure
Non-recurring and project expenditure was £6m for the first six months of
2022 (six months ended 30 June 2021: £8m). This included the transformation
of business processes and increasing efficiency by investing in automation and
new systems, which will lead to long-term cost and control benefits. This also
includes the support for the planned movement of PLACL from standard formula
onto the Group internal model, subject to regulatory approval and timing.
Investment and economic (losses)/profits
Six months ended Six months ended
30 June 2022 30 June 2021
£m
£m
Change in interest rates (341) (274)
(Wider)/narrower Credit spreads (102) 47
Property growth experience 34 42
Other 56 11
Investment and economic (losses)/profits (353) (174)
Investment and economic losses for the six months ended 30 June 2022 were
£353m (six months ended 30 June 2021: £174m loss). Losses from the increase
in risk-free rates during the period contributed £341m. The Group takes an
active approach to hedging its interest rate exposure. In the second half of
2021 and through 2022, as rates rose and our solvency position strengthened,
we have adjusted our interest rate hedging to a more economically neutral
position. Our revised approach is to better balance hedging of the solvency
position whilst minimising the IFRS impact, should rates continue to rise. As
noted above, the cumulative net interest rate loss from our hedging of the
Solvency II balance sheet since 2018 has been a net loss (pre-tax)of £57m.
Other notable economic variances include wider credit spreads (loss of £102m)
offset by a refinement of LPI curve methodology (£28m) and positive property
growth experience (£34m)(1). There were no corporate bond defaults within our
portfolio. The Group has no direct exposure to Russian investments and its
indirect exposure, such as through investments in global issuers with
interests in Russia, is not assessed as material at the current time.
(1 ) Insurance liabilities for inflation-linked products and
inflation-linked assets require an assumption for future expectations of
inflation. These assumptions are derived using a mark to model basis. This
represents a change in approach since 31 December 2021 which utilised market
prices that are not actively traded.
Further details and sensitivities are given in notes 7 and 10 of the financial
statements.
Amortisation of acquired intangibles
Amortisation of acquired intangibles for the first six months of 2022 were
£9m (six months ended 30 June 2021: £9m), these 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.
Capital management
The Group's capital coverage ratio was estimated to be 184% at 30 June 2022,
including a recalculation of transitional measures on technical provisions
("TMTP") (31 December 2021: 164%). The Solvency II capital coverage ratio is a
key metric and is considered to be one of the Group's KPIs.
30 June 2022 31 December 2021
£m
£m
Own funds 2,743 3,004
Solvency Capital Requirement (1,494) (1,836)
Excess own funds 1,249 1,168
Solvency coverage ratio(1) 184% 164%
(1 ) These figures include the estimated TMTP recalculation. For
31 December 2021, the TMTP was recalculated excluding the contribution from
the LTMs that have been sold on 22 February 2022.
The Group has approval to apply the matching adjustment and TMTP in its
calculation of technical provisions and uses a combination of an internal
model and the standard formula to calculate its Group Solvency Capital
Requirement ("SCR").
Movement in excess own funds(1)
The table below analyses the movement in excess own funds, in the six months
to 30 June 2022.
At 30 June At 30 June
(Not covered by PwC's independent review opinion) 2022(2) 2021
£m £m
Excess own funds at 1 January 1,168 1,076
Operating
In-force surplus net of TMTP amortisation 87 95
New business strain (11) (17)
Finance cost (32) (35)
Group and other costs (13) (18)
Underlying organic capital generation 31 25
Management actions and other items 2 18
Total organic capital generation(2) 33 43
Non-operating
Dividend (10) -
Regulatory changes - 1
Economic movements 58 (27)
Excess own funds 1,249 1,093
(1 ) All figures are net of tax and includes a notional
recalculation of TMTP where applicable.
(2 ) Organic capital generation includes surplus from in-force,
new business strain, overrun and other expenses, interest and other operating
items. It excludes economic variances, regulatory changes, dividends and
capital issuance.
underlying Organic capital generation
In the first six months of 2022, we have delivered £31m of underlying organic
capital generation (six months ended 30 June 2021: £25m). The business is
delivering sufficient ongoing capital generation to support decisions on the
deployment of capital between supporting further profitable growth, providing
returns to our capital providers and further investment in the strategic
growth of the business.
Underlying organic capital generation has benefitted from the ongoing focus
across the business on minimising new business capital strain. In the first
six months of 2022, new business strain fell by £6m to £11m, which
represents 1.3% of new business premium (six months ended 30 June 2021: 1.9%).
This outperformance was driven by continued pricing discipline and risk
selection, together with a continuing trend of an increasing proportion of DB
deferred business within the sales mix. Capital light DB deferred business
represented 54% of total DB sales during the period (six months ended 30 June
2021: 8%, six month period to 31 December 2021: 50%, 2021 as a whole: 38%).
Due to our careful management in the first half, most of the 2022 new business
capital strain budget remains available for deployment in the second half of
2022, when we expect to take advantage of the multiple small, medium and large
DB opportunities in our over £5bn actively quoting pipeline to grow
shareholder value.
In-force surplus after TMTP amortisation was down 8% to £87m, primarily due
to higher interest rates which reduces the amount of capital available (via
lower SCR, risk margin and EVT net of TMTP) to release and also the effect of
the three LTM portfolio sales. Group and other costs including development,
non-recurring and non-life costs were £13m (six months ended 30 June 2021:
£18m) with H1 2021 including the new business expense overrun which was
eliminated by the end of 2021. Finance costs at £32m were lower reflecting a
reduced coupon on the RT1 debt, after the opportunistic early re-financing of
that debt in September 2021, while Management actions and other items
contributed £2m to the capital surplus, leading to a total of £33m from
organic capital generation. Organic capital generation added 2% to the capital
coverage ratio.
NON-OPERATING items
Property value movements led to a £24m positive due to actual property price
growth of c.4% (compared to our six monthly 1.65% long term growth assumption)
on our individually updated portfolio. Other economic movements included a
negative £6m from higher interest rates. However, this interest rate movement
also led to a strengthening of the capital coverage ratio by 12 percentage
points, with asset trading and various positive other economic variances
adding a further 7%. This includes a lower than anticipated impact from the
third LTM portfolio sale as we quickly reinvested the proceeds in other
illiquid assets. The benefit from credit migration during the year was £3m,
as credit conditions remained benign. In 2022, the Group recommenced a
shareholder dividend, which cost £10m.
Estimated group Solvency II sensitivities(1)
The property sensitivity has remained stable at 12% (31 December 2021: 11%,
proforma taking into account the third LTM portfolio sale completed in
February 2022, and a peak of 20% on 30 June 2019). We expect that by
maintaining a reduced LTM backing ratio of c.20% or below on new business,
that we will contain the Solvency II sensitivity to house prices to at or
below this level over time. The credit quality step downgrade sensitivity has
increased due to credit spreads widening during the period, which increases
the cost of trading the 20% of our credit portfolio assumed to be downgraded
back to their original credit rating. This is a severe stress requiring an
immediate and significant downgrade in credit quality for 20% of the credit
portfolio, and does not allow for the positive impact from credit portfolio
management during a time of stress.
Sensitivities to economic and other key metrics are shown in the table below.
At 30 June At 30 June
2022 2022
% £m
Solvency coverage ratio/excess own funds at 30 June 2022(2) 184 1,249
-50 bps fall in interest rates (with TMTP recalculation) (7) (27)
+50bps increase in interest rates (with TMTP recalculation) 9 12
+100 bps credit spreads 1 (19)
Credit quality step downgrade(3) (17) (256)
+10% LTM early redemption 1 18
-10% property values (with TMTP recalculation)(4) (12) (158)
-5% mortality (12) (163)
1 In all sensitivities the Effective Value Test ("EVT") deferment
rate is allowed to change subject to the minimum deferment rate floor of 0.50%
as at 30 June 2022 (0.50% as at 31 December 2021) except for the property
sensitivity where the deferment rate is maintained at the level consistent
with base balance sheet.
2 Sensitivities are applied to the reported capital position which
includes a TMTP recalculation.
3 Credit migration stress covers the cost of an immediate big
letter downgrade (e.g. AAA to AA or A to BBB) on 20% of all assets where the
capital treatment depends on a credit rating (including corporate bonds,
ground rents/income strips; but lifetime mortgage senior notes are excluded).
Downgraded assets are assumed to be traded to their original credit rating, so
the impact is primarily a reduction in Own Funds from the loss of value on
downgrade. The impact of the sensitivity will depend upon the market levels of
spreads at the balance sheet date.
4 After application of NNEG hedges.
Reconciliation of IFRS equity to Solvency II own funds
(Not covered by PwC's independent review opinion) 30 June 31 December 2021
£m
2022
£m
Shareholders' net equity on IFRS basis 2,197 2,440
Goodwill (34) (34)
Intangibles (77) (86)
Solvency II risk margin (518) (759)
Solvency II TMTP(1) 1,079 1,657
Other valuation differences and impact on deferred tax (537) (987)
Ineligible items (85) (3)
Subordinated debt 725 781
Group adjustments (7) (5)
Solvency II own funds(1) 2,743 3,004
Solvency II SCR(1) (1,494) (1,836)
Solvency II excess own funds(1) 1,249 1,168
(1 ) These figures allow for an estimated TMTP recalculation as
at 30 June 2022. The 31 December 2021 figures include the impact of the
biennial reset of TMTP as at
31 December 2021 and the TMTP has been calculated excluding the contribution
from LTMs that have been sold on 22 February 2022.
Highlights from condensed consolidated statement of comprehensive income
The table below presents the Condensed consolidated statement of comprehensive
income for the Group.
Six months ended Six months ended
30 June 2022 30 June 2021
£m £m
Gross premiums written 880 909
Reinsurance premiums ceded (12) (11)
Net premium revenue 868 898
Net investment (expense)/income (3,139) (659)
Fee and commission income 6 8
Total (expense)/revenue (2,265) 247
Net claims paid (601) (560)
Net change in insurance liabilities 2,757 412
Net change in investment contract liabilities - -
Acquisition costs (26) (24)
Other operating expenses (94) (93)
Finance costs (67) (69)
Total claims and expenses 1,969 (334)
Loss before tax (296) (87)
Income tax 70 17
Loss after tax (226) (70)
Gross premiums written
Gross premiums written for the six months to 30 June 2022 were £880m, a
decrease of 3% (six months ended
30 June 2021: £909m). As discussed above, this reflects lower Retirement
Income new business premiums, primarily due to a 14% reduction in GIfL
business.
Net investment income/(expense)
Net investment income/(expense) increased to an expense of £3,139m (six
months ended 30 June 2021: £659m expense). The main components of net
investment income/(expense) are interest earned and changes in fair value of
the Group's corporate bond, mortgage and other fixed income assets. There has
been an increase in risk-free rates during the period, which has resulted in
unrealised losses in relation to assets held at fair value. We closely match
our assets and liabilities, hence fluctuations in interest rates will cause
similar movements on both sides of the IFRS balance sheet. We also actively
monitor and hedge interest rate exposure to reduce the effect of interest rate
movements on the Solvency II capital position, whilst seeking to minimise the
IFRS impact on the balance sheet for the cost of this hedging.
Net claims paid
Net claims paid increased to £601m, (six months ended 30 June 2021: £560m)
reflecting the continuing growth of the in-force book.
Change in insurance liabilities
Change in insurance liabilities was £2,757m for the current period (six
months ended 30 June 2021: £412m). The decrease is principally due to an
increase in the valuation interest rate due to the rise in risk-free rates
noted above.
Acquisition costs
Acquisition costs have increased to £26m (six months ended 30 June 2021:
£24m), and include the 11% increase in LTM origination to pre-fund DB and
GIfL business volumes in the second half of the year.
Other operating expenses
Other operating expenses are broadly stable at £94m in the current period and
are in line with £93m for the six months ended 30 June 2021.
A reconciliation between Other operating expenses and Management expenses is
included below:
Six months ended Six months ended
30 June 2022 30 June 2021
£m £m
Other operating expenses 94 93
Investment expenses and charges (10) (8)
Reassurance management fees (4) (4)
Amortisation of acquired intangible assets (9) (9)
Other costs - (2)
Management expenses 71 70
Finance costs
The Group's overall finance costs decreased to £67m (six months to 30 June
2021: £69m). Note that the coupon on the Group's Restricted Tier 1 notes is
recognised as a capital distribution directly within equity and not within
finance costs.
Income tax
Income tax for the period ended 30 June 2022 was a credit of £70m (six months
ended 2021: credit of £17m). The effective tax rate of 23.6% (2021: 19.2%) is
4.6% higher than the standard 19% corporation tax rate. This is due to the
current year's losses being carried forward at 25% as opposed to the current
tax rate of 19% resulting in a tax effected rate change adjustment.
Highlights from condensed consolidated statement of financial position
The table below presents selected items from the Condensed consolidated
statement of financial position. The information below is extracted from the
statutory consolidated statement of financial position.
30 June 2022 31 December 2021
£m £m
Assets
Financial investments 22,789 24,682
Reinsurance assets 2,372 2,808
Other assets 1,216 858
Total assets 26,377 28,348
Share capital and share premium 199 199
Other reserves 948 948
Accumulated profit and other adjustments 730 973
Total equity attributable to ordinary shareholders of Just Group plc 1,877 2,120
Tier 1 notes 322 322
Non-controlling interest (2) (2)
Total equity 2,197 2,440
Liabilities
Insurance liabilities 18,653 21,813
Reinsurance liabilities 259 275
Other financial liabilities 4,307 2,866
Insurance and other payables 120 93
Other liabilities 841 861
Total liabilities 24,180 25,908
Total equity and liabilities 26,377 28,348
Financial investments
During the period, financial investments decreased by £2bn to £22.8bn (2021:
£24.7bn). Accommodative central bank and fiscal stimulus during 2021 led to
credit spread narrowing, however, in 2022, various government asset purchase
programmes in response to the pandemic are being gradually unwound. At the
same time, central banks continue to raise base rates from their historical
low levels to counteract the effect of inflation. The effect of credit spread
widening and increases in risk-free rates during the period, both of which
reduce the value of the assets was partially offset by investment of the
Group's new business premiums. The credit quality of the corporate bond
portfolio remains resilient, with 52% of the Group's corporate bond and gilts
portfolio rated A or above
(31 December 2021: 54%), with a reduction due to lower Government investments
(see below). Our diversified portfolio continues to grow and is well balanced
across a range of industry sectors and geographies.
Credit rating agencies have maintained a cautious approach similar to 2021. We
continue to position the portfolio with a defensive bias, and year to date
have experienced ratings stability as 6% of the Group's bond portfolio was
upgraded, offset by 5% being downgraded. The Group continues to have very
limited exposure to those sectors that are most sensitive to structural change
or macroeconomic conditions, such as auto manufacturers, consumer (cyclical)
and basic materials. The BBB-rated bonds are weighted towards the most
defensive sectors including utilities, communications and technology, and
infrastructure. The Group has selectively added to its consumer (staples),
utilities, and infrastructure investments, with some rotational changes as in
particular we reduced BBB exposure to industrials, auto manufacturers and
energy.
In the first six months of the year, we originated £466m of other illiquid
assets, and are targeting over £1bn for the full year (2021: £615m), in
addition to lifetime mortgages. Entering 2022, Government investments were
elevated as the Group temporarily invested excess cash, which was further
added to by the third LTM portfolio sale in February. Excess gilts will
continue to be recycled into other corporate bonds and illiquid assets during
2022 as opportunities arise.
At 30 June 2022, the Group had ample liquidity. We continue to prudently
manage the balance sheet by hedging all foreign exchange and inflation
exposure, while monitoring and adjusting an extensive interest rate hedging
programme. As previously mentioned, our interest rate hedging has been
gradually reduced to provide a better balance between solvency protection and
IFRS cost, in particular as rates rise.
The loan-to-value ratio of the mortgage portfolio was 35.6% (31 December 2021:
36.1%), reflecting continued strength and resilience across our geographically
diversified portfolio, which offsets the interest roll-up. Lifetime mortgages
at £5.9bn represent 26% of total financial investments after completion of
the third and final LTM portfolio sale in February. In total, the Group has
disposed of £1.6bn of lifetime mortgages as part of our objective to reduce
the sensitivity of the capital position to house price movements, which at a
12% capital coverage ratio impact for an immediate 10% fall in UK house prices
is at a level we are comfortable with. At the present time, further portfolio
sales are not envisaged as the sensitivity is expected to be contained around
10% through a new business backing ratio of less than 20%. Elevated levels of
early redemptions during the period as customers refinanced to lower rates
have also decreased the amount of LTMs on our balance sheet, but has funded
other investment opportunities, thus accelerating our portfolio
diversification.
Other illiquid assets and environmental, social and governance investing
To achieve its optimal mix of assets backing new business, and to further
diversify its investments, the Group originates other illiquid assets
including infrastructure, real estate investments and private placements.
Income producing real estate investments such as ground rents and income
strips are typically much longer duration and the cashflow profile is very
beneficial to match DB deferred liabilities. To date, Just has invested
£3.0bn in other illiquid assets, representing 13.2% of the total financial
investments portfolio (31 December 2021: 12.3%). We anticipate that the
upcoming Solvency II reform will broaden the matching adjustment eligibility
criteria, which will create opportunities to invest in line with the
Government's various agendas including increased investment in infrastructure,
science and research and decarbonising the economy. Many of the other
illiquids are invested in a range of ESG assets including renewable energy,
social housing and local authority loans. In the first six months of 2022, we
have invested a further £92m in eligible green and social assets, and are on
track to complete our total £575m green and social asset allocation
commitment by the end of the year. The latest Green/Sustainability bond
allocation report is available on https://www.justgroupplc.co.uk/investors/esg
(https://www.justgroupplc.co.uk/investors/esg) .
The following table provides a breakdown by credit rating of financial
investments, including privately rated investments allocated to the
appropriate rating.
30 June 2022 30 June 2022 31 December 2021 31 December 2021
£m % £m %
AAA(1) 2,080 9 2,448 10
AA(1) and gilts 2,378 10 3,194 13
A(2) 5,452 24 4,384 18
BBB 6,217 27 6,500 26
BB or below 374 2 388 1
Unrated 441 2 414 2
Lifetime mortgages 5,897 26 7,423 30
Total(2) 22,839 100 24,751 100
1 Includes units held in liquidity funds.
2 Includes investment in trust which holds ground rent
generating assets which are included in investment properties in the IFRS
consolidated statement of financial position.
The sector analysis of the Group's financial investments portfolio is shown
below and continues to be well diversified across a variety of industry
sectors.
30 June 2022 30 June 2022 31 December 2021 31 December 2021
£m % £m %
Basic materials 223 1.0 264 1.1
Communications and technology 1,258 5.5 1,430 5.8
Auto manufacturers 272 1.2 319 1.3
Consumer (staples including healthcare) 1,108 4.8 1,174 4.7
Consumer (cyclical) 174 0.8 187 0.7
Energy 553 2.4 633 2.6
Banks 1,189 5.2 1,192 4.8
Insurance 702 3.1 845 3.4
Financial - other 390 1.7 481 1.9
Real estate including REITs 667 2.9 661 2.7
Government 1,652 7.2 2,415 9.7
Industrial 684 3.0 920 3.7
Utilities 2,214 9.7 2,302 9.3
Commercial mortgages 616 2.7 678 2.7
Ground rents(1) 288 1.3 263 1.1
Infrastructure 1,531 6.7 1,474 6.0
Other 46 0.2 38 0.2
Corporate / government bond total 13,567 59.4 15,276 61.7
Lifetime mortgages 5,897 25.8 7,423 30.0
Liquidity funds 959 4.2 1,311 5.3
Derivatives and collateral 2,416(2) 10.6 741 3.0
Total(1) 22,839 100.0 24,751 100.0
1 Includes direct ground rents and also an investment in a
property unit trust which holds ground rent generating assets which are
included in investment properties in the IFRS consolidated statement of
financial position.
2 Derivative assets have increased primarily due to an increased
number of positions as part of our dynamic interest rate hedging strategy.
Interest rate swap assets have increased by £811.9m to £981.8m. Compensating
increases in Interest rate swap liability positions means that our overall
interest rate swap exposure is limited to a net liability £21.8m (YE 2021:
net asset £125.0m). In accordance with accounting standards these derivatives
are not offset.
Reinsurance assets and liabilities
Reinsurance assets decreased to £2.4bn at 30 June 2022 (31 December 2021:
£2.8bn), and are declining as the insurance liabilities to which they relate
to run-off and increases in the discount rate. Since the introduction of
Solvency II in 2016, the Group has increased its use of reinsurance swaps
rather than quota share treaties. Reinsurance liabilities relate to liability
balances in respect of the Group's longevity swap arrangements.
Other assets
Other assets increased to £1.2bn at 30 June 2022 (31 December 2021: £0.9bn).
These assets mainly comprise cash and intangible assets. The Group holds
significant amounts of assets in cash, so as to protect against liquidity
stresses.
Insurance liabilities
Insurance liabilities decreased to £18.7bn at 30 June 2022 (31 December 2021:
£21.8bn). The decrease in liabilities arose as new business premiums written
was offset by an increase to the valuation rate of interest and policyholder
payments over the period.
Other financial liabilities
Other financial liabilities increased to £4.3bn at 30 June 2022 (31 December
2021: £2.9bn). These liabilities mainly relate to collateral deposits
received from reinsurers, together with derivative liabilities and other cash
collateral received. The increase from the prior year relates to higher
amounts of derivatives and collateral, given the market volatility.
Other liabilities
Other liability balances decreased to £841m at 30 June 2022 (31 December
2021: £861m) due to the reductions in the deferred tax liability and
accruals.
IFRS net assets
The Group's total equity at 30 June 2022 was £2.2bn, compared to £2.4bn at
31 December 2021. Total equity includes the Restricted Tier 1 notes of £322m
(after issue costs) issued by the Group in September 2021. Including the
negative effects of Solvency II interest rate hedging on the IFRS results,
total equity attributable to ordinary shareholders decreased from £2,120m to
£1,877m resulting in net asset value ("NAV") per ordinary share of 181p
(2021: 204p).
Dividends
The Board has declared an interim dividend of 0.5p (£5m). This is in line
with our stated policy for the interim dividend to be one-third of the
equivalent prior year full year dividend of 1.5p. In the near term, we expect
to deploy the majority of capital we generate to support the new business
available to us in the DB and GIfL markets, whilst supporting an ongoing
sustainable dividend, which we would expect to grow over time.
ANDY PARSONS
Group Chief Financial Officer
Risk management
The Group's enterprise-wide risk management strategy is to enable all
colleagues to take more effective business decisions through a better
understanding of risk.
Purpose
The Group risk management framework supports management in making decisions
that balance the competing risks and rewards. This allows them to generate
value for shareholders, deliver appropriate outcomes for customers and provide
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 framework, owned by the Board, covers all aspects involved in the
successful management of risk, including governance, reporting and policies.
Our appetite for different types of risk is embedded across the business to
create a culture of confident risk-taking. The framework is continually
developed to reflect our risk environment and emerging best practice. Over the
past year, it has been enhanced to facilitate the identification, assessment
and reporting of risks arising from climate change ("climate risk"), with risk
category definitions updated to integrate climate risk aspects. A high-level
qualitative climate risk appetite has been added to the Group's existing
high-level appetites, which include reputation and capital, recognising the
importance of climate risk. Group policies have been updated to draw out any
climate specific considerations for risk management.
Risk evaluation and reporting
We evaluate our principal and emerging risks and decide how best to manage
them within our risk appetite. Management regularly reviews its risks and
produces reports to provide assurance that material risks in the business are
being appropriately mitigated. The Risk function, led by the Group Chief Risk
Officer ("GCRO"), challenges the management team on the effectiveness of its
risk evaluation and mitigation. The GCRO provides the Group Risk and
Compliance Committee ("GRCC") with his independent assessment of the principal
and emerging risks to the business.
Financial risk modelling is used to assess the amount of each risk type
against our capital risk appetite. This modelling is principally aligned to
our regulatory capital metrics. The results of the modelling allow the Board
to understand the risks included in the Solvency Capital Requirement ("SCR")
and how they translate into regulatory capital needs. By applying stress and
scenario testing, we gain insights into how risks might impact the Group in
different circumstances.
The associated policies govern the exposure of the Group to a range of risks,
including climate risk, and define the risk management activities to ensure
these risks remain within appetite.
Quantification of the financial impact of climate risk is subject to
significant uncertainty. Risks arising from the transition risk to a lower
carbon economy are heavily dependent on government policy developments and
social responses to policy. Just's initial focus has therefore been on the
implementation of strategies to reduce the likely exposure to this risk. Just
will continue to adapt its view of climate risk as more data and methodologies
emerge.
The aggregate exposure to climate risk is assessed against existing risk
appetites, with climate risk a factor to be considered in the management of
these risks. Risk appetite tolerances will be reviewed as further
stress-testing results become available.
Own Risk and Solvency Assessment
The Group's Own Risk and Solvency Assessment ("ORSA") process embeds
comprehensive risk reviews into our Group management activities. Our annual
ORSA report is a key part of our business risk management cycle. It summarises
work done through the year on business model and strategic risks, tests the
business in a variety of quantitative scenarios and integrates findings from
recovery and run-off analysis. The report provides an opinion on the viability
and sustainability of the Group and thus informs strategic decision making.
Updates are prepared each quarter, including factors such as key risk limit
consumption as well as operational and market risk developments, to keep the
Board appraised of the Group's evolving risk profile.
Reporting on climate risk is being integrated into the Group's regular
reporting processes to its Risk Committees, including the Group ORSA.
Reporting will evolve as quantification of risk exposures develops and further
key risk indicators ("KRIs") are identified.
Principal risks and uncertainties
STRATEGIC priorities
1 Improve our capital position
2 Transform how we work
3 Get closer to our customers and partners
4 Generate growth in new markets
5 Be proud to work at Just
Risk Description and impact Mitigation and management action
Risk A The premiums paid by the Group's customers are invested to enable benefits to Economic conditions are actively monitored, and alternative scenarios modelled
Risks from the economic and political environment be paid when expected with a high degree of certainty. The economic to better understand the potential impacts of significant economic changes on
environment and financial market conditions have a significant influence on the amount of capital required to be held to cover risks, and to inform
the value of assets and liabilities the Group holds and on the income the management action plans. The Group's strategy is to buy and hold investment
Group receives. A deterioration in the economic environment could impact the grade assets in its portfolio to ensure that it has sufficient income to meet
Strategic priorities availability and attractiveness of certain securities and increase the risk of outgoings as they fall due. Portfolio credit risk is managed by a combination
credit downgrades and defaults in our asset portfolio. of Just's internal investment team and specialist external fund managers,
1, 3, 4, 5
overseen by Just's own credit specialists, executing a diversified investment
Change in the period A fall in residential property values could reduce the amounts received from strategy in assets within concentration risk limits.
Increasing lifetime mortgage redemptions and may affect the relative attractiveness of
Risk outlook the LTM product to customers. The regulatory capital needed to support the Improved returns are sought by increasing the types, geographies, industry
No change/stable possible shortfall on the future redemption of lifetime mortgages also sectors and classes of assets into which the Group invests. This creates
increases if property values drop. Conversely, significant rises in property exposures to foreign exchange risk, which is controlled using derivative
values could increase the incidence of early mortgage redemptions, leading to instruments. Derivative instruments are also used to reduce exposures to
a receipt of cash flows sooner than anticipated with the consequential interest rate volatility. The counterparty exposure arising from transacting
reinvestment risk. in these instruments is mitigated by collateral arrangements and managed to
avoid concentration exposures wherever practical.
It seems likely that the Bank of England will maintain negative real interest
rates as a policy tool. The effect that this will have on customer behaviour For lifetime mortgages, the Group underwrites the properties against which it
or on the market for credit investments or lifetime mortgages is unclear. lends using valuations from expert third parties. The Group's property risk is
controlled by limits to the initial loan-to-value ratio, supported by product
Most defined benefit pension schemes link member benefits to inflation through design features and limiting specific property types and exposure in each
indexation to a limited extent. As the Group's defined benefit de-risking region. We also monitor the exposure to adverse house price movements and the
business volumes grow, its gross exposure to inflation risk increases. accuracy of our indexed valuations. While the Group's capital models
accommodate negative interest rates, there is no historical data to validate
The Group maintains the view taken in mid-2021 that volatility in markets the behaviour of the economy in such an environment.
would increase as inflation took hold with higher rates and wider spreads. The
ongoing conflict in Ukraine is expected to continue to impact energy prices The Group manages its exposure to inflation risk using hedges and index-linked
and increases our expectations of price inflation in the near term and securities. The Group monitors inflationary pressures, including energy
inflation in the labour market. The resolution of the conflict may have prices, and other factors that may have implications for our investments.
limited implications for a number of the investments in our investment
portfolio. Liquidity risk is managed by ensuring that assets of a suitable maturity and
marketability are held to meet liabilities as they fall due.
There can be some short-term volatility in the Group's liquidity position, a
consequence of its derivative hedging. Regular cash flow forecasts predict
liquidity levels over both the short-term and long-term and stress tests help
us determine the required liquidity to hold. The Group monitors market
conditions to ensure appropriate liquid resources are held at all times to
cover extreme stresses such as those seen in March 2020. The Group's liquidity
requirements have been met over the past year and forecasting indicates that
this position can reasonably be expected to continue for both investments and
business operations.
Risk A Market risks may affect the liquidity position of the Group by, for example, The monitoring of climate risk exposures of counterparties is an evolving area
continued having to realise assets to meet liabilities during stressed market conditions as climate disclosures and regulatory expectations are developing. Assessing
or to service collateral requirements due to the changes in market value of such exposure includes consideration of climate risk disclosures, alongside
financial derivatives. A lack of market liquidity is also a risk to any need any associated public reporting and the actions of credit rating agencies and
that the Group may have to raise capital or refinance existing debt. where appropriate regulators.
Just's asset and derivative counterparties have climate risk exposure which
may impact their creditworthiness in due course.
Risk Description and impact Migration and management action
Risk B The financial services industry continues to see a high level of regulatory Just monitors and assesses regulatory developments on an ongoing basis. We
Risks from regulatory changes and supervision activity and regulatory supervision. This is shown in the Business Plans of seek to actively participate in all regulatory initiatives which may affect or
the Prudential Regulation Authority ("PRA") and the Financial Conduct provide future opportunities for the Group. Our aims are to implement any
Authority ("FCA"). changes required effectively, and deliver better outcomes for our customers
and competitive advantage for the business. We develop our strategy by giving
Strategic priorities The Treasury is undertaking a review of the future regulatory framework in the consideration to planned political and regulatory developments and allowing
UK post-Brexit. This covers the general regulatory framework and roles of the for contingencies should outcomes differ from our expectations. The Group also
1, 3, 4, 5 UK regulators as well as a review focused on adapting Solvency II to fit the keeps under review the possible need for capital management actions, such as
Change in the period UK insurance market. The Treasury's consultation is seeking a positive impact reducing new business volumes.
No change/stable on capital levels for life insurers; however the accompanying PRA Discussion
Risk outlook Paper on the proposals published in April 2022 do not achieve this for annuity Just is reviewing the potential implications of the Treasury review of
No change/stable writers and instead reduce capital and introduce greater volatility to the Solvency II and the PRA's proposed implementation of the changes and is
Solvency II balance sheets. seeking to engage and influence the shape of this new regulation through
industry bodies and directly with the Treasury.
The PRA required firms to have fully implemented their plans for identifying
and managing the financial risks from climate change by the end of 2021. The We have identified the potential impacts of climate change on the Group's
PRA are now actively supervising firms' adherence to this. Additionally, the risks. The Group's risk management framework has been developed to accommodate
PRA is considering how the capital framework should be adjusted to take and report on climate risks and make appropriate disclosures in line with TCFD
account of climate-related financial risks. recommendations. Climate and environmental considerations have been embedded
in the Group's governance and decision making, as stated in the ORSA.
The FCA have published proposals for a Consumer Duty Principle which states
that "a firm must act to deliver good outcomes for retail clients." The Just is reviewing the extent to which it meets the FCA's clarified
Principle is supported by cross-cutting rules, which develop and clarify the expectations in the Consumer Duty proposals to identify any enhancements
Consumer Principle's overarching expectations of firm's conduct and set out needed to further demonstrate the delivery of good outcomes to our customers.
how it should apply in practice. There is also a set of rules and guidance
that set more detailed expectations for firm's conduct in relation to four We will continue to educate investors on the changes resulting from IFRS 17
specific outcomes for the key elements of the firm-customer relationship. ahead of full implementation.
The change in accounting standard to IFRS 17, due to be implemented in 2023,
will produce a different profit recognition profile to which market
participants will take time to adjust.
The risk of a negative impact on the Group's capital position from broader
financial services regulatory change is not limited to the matters described
in the paragraphs above.
Risk Description and impact Mitigation and management action
Risk C Our purpose is to help people achieve a better later life. Our Group's brands The Group actively seeks to differentiate its business from competitors by
Risks to the Group's brand and reputation reflect the way we aim to conduct our business and treat our customers and investing in brand enhancing activities. Fairness to customers and high
wider stakeholder groups. service standards are at the heart of the Just brand, and we encourage our
colleagues to take pride in the quality of service they provide. Engaging our
The Group's reputation could be damaged if the Group is perceived to be colleagues in the Just brand and its associated values has been, and remains,
Strategic priorities acting, even unintentionally, below the standards we set for ourselves. This a critical part of our internal activity.
could include, for example, failing to achieve the goals we have set for
1, 2, 3, 4, 5 enhancing our sustainability framework and contributing to global efforts to Just is proactive in pursuing its sustainability responsibilities and
Change in the period reduce climate change risk. Increasing customer awareness of sustainability recognises the importance of its social purpose. We have set sustainability
No change/stable risks may raise the standards the Group is required to meet. targets aiming for our operations to be carbon net zero by 2025 and for
Risk outlook
emissions from our investment portfolio and supply chain to be net zero by
Increasing The Group's reputation could also be threatened by external risks such as a 2050, with a 50% reduction in these emissions by 2030. Performance against
cyber attack, a data protection breach, or regulatory enforcement action. Such these targets will be carefully monitored and reported.
regulatory action could result directly from the Group's actions or through
contagion from other companies in the sectors in which we operate. Protecting the personal data of our customers and colleagues remains a key
priority. This is achieved by continued investment in information security
Damage to our reputation may adversely affect our underlying profitability, technologies, and through Group-wide embedded policies and governance
through reducing sales volumes, restricting access to distribution channels controls. We take care to ensure that all data subjects can exercise their
and attracting increased regulatory scrutiny. rights under GDPR, such as the ability to make subject access requests to
obtain the data we hold about them and exercise the right to be forgotten.
Risk Description and impact Mitigation and management action
Risk D Writing long-term defined benefit de-risking, Guaranteed Income for Life and Mortality rates are largely derived using historical experience. The Group has
Risks from our pricing and reinsurance lifetime mortgage business requires a range of assumptions to be made based on the benefit of its extensive underwritten mortality data, as well as external
historical experience, current data and future expectations, for customers' mortality datasets, in setting base longevity assumptions. Experience is
longevity, withdrawal rates, corporate bond yields, interest and inflation regularly monitored to ensure consistency with expected levels of mortality.
rates, property values and expenses. These assumptions are applied to the If there are material differences between assumptions and emerging experience,
Strategic priorities calculation of the reserves needed for future liabilities and solvency margins bases are modified appropriately.
using recognised actuarial approaches.
1, 3, 4
Change in the period Experience may differ materially from the Group's assumptions, requiring them
No change/stable to be recalibrated in future. This could affect the level of reserves needed, Assumptions relating to future longevity are based on our analysis of trends
Risk outlook with an impact on profitability and the Group's solvency position. and the combined effect of possible drivers of future change. This analysis
No change/stable
includes the potential impact (both direct and indirect) of COVID-19, and of
As part of its overall risk mitigation and capital management strategy, the material developments related to climate risk, on the longevity of customers.
Group purchases reinsurance from a number of reinsurance providers to cover a We expect to consider evolving COVID-19 experience data and medical
significant proportion of its longevity risk exposure. The terms on which the understanding in future pricing and reserving assumptions. Given the lack of
Group can obtain reinsurance continue to be an important part of its clarity around the potential impact of climate risk on longevity, no explicit
competitiveness and profitability as the business expands. Use of reinsurance allowance is currently made for these in our assumptions.
creates a counterparty default risk exposure in the unlikely event of the
failure of the reinsurance provider. The Group performs due diligence on our reinsurance partners. The Group
manages its exposure to reinsurers on an ongoing basis within the Group's risk
Just's reinsurance counterparties have climate risk exposures, which may appetite limit, with the maximum exposure to individual counterparties being
impact their creditworthiness in due course. subject to limits set by the Group Board. This exposure is partially mitigated
through the posting of collateral into third party trusts or similar security
arrangements, or the deposit of premiums back to the Group.
The Group measures its counterparty exposure as the change in its Solvency II
capital coverage ratio from a default of each individual counterparty combined
with simultaneous longevity and market stresses. The measures used include the
change immediately upon default and after allowing for management actions such
as re-establishing reinsurance cover.
Potential increased counterparty risk exposure for the reinsurer due to
climate risk is at present difficult to assess due to the diverse nature of
the reinsurers' business models but should become clearer over time.
Risk Description and impact Mitigation and management action
Risk E The Group relies on its operational processes and IT systems to conduct its The Group maintains a system of internal control, with associated policies and
Risks business, including the pricing and sale of its products, managing its operational procedures, to ensure its processes operate with a low level of
arising from operational processes and investments, measuring and monitoring its underwriting liabilities, processing risk of failure. A review of the controls framework is being carried out to
IT systems applications and delivering customer service and maintaining accurate records. ensure it remains appropriate for the current and future business. Lessons
These processes and systems may not operate as expected, may not fulfil their learnt when processes do not operate as planned are used to drive
intended purpose or may be damaged or interrupted by human error, unauthorised improvements. The Group also defines clear expectations of the standards we
access, natural disaster or similarly disruptive events. Any failure of the expect of all colleagues.
Strategic priorities Group's IT and communications systems or the third party infrastructure on
which it relies could lead to costs and disruptions that could adversely As described above, protecting our customers and their data remains a key
1, 2, 3, 4, 5 affect its business and ability to serve its customers as well as harm its priority, while maintaining a resilient framework on our existing,
reputation. well-established operational resilience management and disaster recovery
Change in the period
capabilities.
Large organisations continue to be targeted for cyber crime. This includes
No change/stable attacks by state-sponsored actors on national infrastructure as well as Programmes of work are underway to deliver further resilience benefits to the
criminal attacks on particular organisations that hold customers' personal Group. Enhancements to network architecture, data centre upgrades and data
Risk outlook details. The Group is exposed to the effects of indirect and direct attacks management technologies will improve data security and Group resilience
and these could affect customer confidence, or lead to financial losses. overall. We are on track to achieve key milestones throughout 2022 and beyond
No change/stable that enable the security and continuity of IT services.
Management and security tools have been added to the Group email system to
identify and resist malicious attacks. The telephony system builds security
and resilience into all contact points with our customers and partners. A
specialist Security Operations Centre monitors all Group externally facing
infrastructure and services, providing real-time threat analysis, incident
management and response capabilities.
The Group continues to invest in strategic technologies, internal controls and
our people to protect and maintain our multi-layered approach to information
security and resilience.
Risk Description and impact Mitigation and management action
Risk F The Group operates in a market where changes in pensions legislation can have The Group offers a range of retirement options for customers, allowing it to
Risks from a considerable effect on our strategy and could reduce our sales and remain agile in this changing environment, and flexes its offerings in
profitability or require us to hold more capital. response to market dynamics. Our approach to legislative change in our markets
our chosen market environment
is to participate actively and engage with policymakers.
We are well placed to adapt to changing customer and distributor demands,
Our chosen market of helping people approaching and in-retirement is rightly supported by our brand promise, innovation credentials, digital expertise and
Strategic priorities highly regulated. While we maintain strong controls across our services, we financial strength.
could fail to meet these ever increasing standards impacting our ability to
1, 2, 3, 4 deliver to our core purpose of helping people achieve a better later life. The most influential factors in the successful delivery of the Group's plans
Likewise, customer needs and expectations continue to evolve and change in are closely monitored to help inform the business. The factors include market
Change in profile, and we may not optimise our professional services offering and forecasts and market share, supported by insights into customer and competitor
distribution models to suit their requirements. Failures in these areas would behaviour.
the period raise the risk of losing one or more of our key partners on whom we rely for
customer introductions. Demand from scheme trustees for defined benefit de-risking solutions is
No change/stable
expected to continue to grow, mitigating the impacts on Just of increased
market competition.
Risk outlook
Competitive pressure within both lifetime mortgage and guaranteed income
No change/stable markets is strong. Providers continue to seek to control distribution in both
markets potentially reducing market access.
Risk Description and impact Mitigation and management action
Risk F Political and economic uncertainty may impact market growth due to consumers The automated advice service Destination Retirement is a strategic response by
continued deferring retirement decisions. In the event of a significant fall in property the distribution business to address changing needs in the retirement market.
values, consumer appetite for equity release may be affected. This service is targeted at people approaching or in retirement with modest
pension savings who may be unable to afford traditional financial advice.
Climate risk could affect Just Group's financial risks due to its exposure to
residential property through its lifetime mortgage portfolio and through its Competitive pressures are being addressed through product development, to
corporate bond and illiquid investment portfolio. increase customer appeal and access new market segments, revised distribution
arrangements and investment to meet distributors' digital and service needs.
For lifetime mortgages:
We continue to develop stress testing capabilities to further improve
monitoring of the potential impact of climate change on our investment and
equity release portfolios. Proposed Government policy on the energy
(i) transition risk - government policy changes may impact the value of performance of residential properties is being monitored.
residential properties, such as through the introduction of minimum energy
performance requirements at the time of sale; Risks arising from flooding, coastal erosion and subsidence are taken into
account in lifetime mortgage lending decisions. The lending policy will remain
under review in light of climate risk and adjustments will be made as
required.
(ii) physical risks - such as increased flooding, resulting from severe
rainfall, or more widespread subsidence, due to extended droughts, may affect Just has enhanced its approach to ESG in its investment strategy as set out in
the value of properties not seen as having such an exposure at present. its Responsible Investment Framework. This has resulted in the environmental
credentials of bonds and illiquid investments being considered when new
For corporate bond and illiquid investment portfolios, the impact of climate premium income is invested.
risk on assets or business models may affect the ability of corporate bond
issuers and commercial borrowers to service their liabilities. The yields
available from corporate bonds may also be affected by any litigation or
reputational risks associated with the issuers' environmental policies or
adherence to emissions targets.
The increased consideration of sustainability in investment decisions may
restrict investment choice and the yields available; it may also create new
opportunities to invest in assets that are perceived to be more sustainable.
The Group's strategic priorities are explained in more detail on pages 16 and
17 of the Just Group plc Annual Report and Accounts 2021.
Statement of Directors' responsibilities
Each of the Directors of the Company confirms that to the best of their
knowledge:
· the Condensed consolidated financial statements have been
prepared in accordance with UK-adopted IAS 34: Interim financial reporting, as
adopted by the UK Endorsement Board;
· the interim results statement includes a fair review of the
information required by Disclosure and Transparency Rule 4.2.7, namely
important events that have occurred during the period and their impact on the
Condensed consolidated financial statements, as well as a description of the
principal risks and uncertainties faced by the Company and the undertakings
included in the Condensed consolidated financial statements taken as a whole
for the remaining six months of the financial period; and
· the interim results statement includes a fair review of material
related party transactions and any material changes in the related party
transactions described in the last annual report as required by Disclosure and
Transparency Rule 4.2.8.
By order of the Board:
David Richardson
Group Chief Executive Officer
8 August 2022
Independent review report to Just Group plc
Report on the condensed consolidated interim financial statements
Our conclusion
We have reviewed Just Group plc's condensed consolidated interim financial
statements (the "interim financial statements") in the interim results of Just
Group plc for the six month period ended 30 June 2022 (the "period").
Based on our review, nothing has come to our attention that causes us to
believe that the interim financial statements are not prepared, in all
material respects, in accordance with UK adopted International Accounting
Standard 34, 'Interim Financial Reporting' and the Disclosure Guidance and
Transparency Rules sourcebook of the United Kingdom's Financial Conduct
Authority.
The interim financial statements comprise:
· the condensed consolidated statement of financial position as at
30 June 2022;
· the condensed consolidated statement of comprehensive income for
the period then ended;
· the condensed consolidated statement of cash flows for the period
then ended;
· the condensed consolidated statement of changes in equity for the
period then ended; and
· the explanatory notes to the interim financial statements.
The interim financial statements included in the interim results of Just Group
plc have been prepared in accordance with UK adopted International Accounting
Standard 34, 'Interim Financial Reporting' and the Disclosure Guidance and
Transparency Rules sourcebook of the United Kingdom's Financial Conduct
Authority.
Basis for conclusion
We conducted our review in accordance with International Standard on Review
Engagements (UK) 2410, 'Review of Interim Financial Information Performed by
the Independent Auditor of the Entity' issued by the Financial Reporting
Council for use in the United Kingdom. A review of interim financial
information consists of making enquiries, primarily of persons responsible for
financial and accounting matters, and applying analytical and other review
procedures.
A review is substantially less in scope than an audit conducted in accordance
with International Standards on Auditing (UK) and, consequently, does not
enable us to obtain assurance that we would become aware of all significant
matters that might be identified in an audit. Accordingly, we do not express
an audit opinion.
We have read the other information contained in the interim results and
considered whether it contains any apparent misstatements or material
inconsistencies with the information in the interim financial statements.
Conclusions relating to going concern
Based on our review procedures, which are less extensive than those performed
in an audit as described in the Basis for conclusion section of this report,
nothing has come to our attention to suggest that the directors have
inappropriately adopted the going concern basis of accounting or that the
directors have identified material uncertainties relating to going concern
that are not appropriately disclosed. This conclusion is based on the review
procedures performed in accordance with this ISRE. However, future events or
conditions may cause the group to cease to continue as a going concern.
Responsibilities for the interim financial statements and the review
Our responsibilities and those of the directors
The interim results, including the interim financial statements, is the
responsibility of, and has been approved by the directors. The directors are
responsible for preparing the interim results in accordance with the
Disclosure Guidance and Transparency Rules sourcebook of the United Kingdom's
Financial Conduct Authority. In preparing the interim results, including the
interim financial statements, the directors are responsible for assessing the
group's ability to continue as a going concern, disclosing, as applicable,
matters related to going concern and using the going concern basis of
accounting unless the directors either intend to liquidate the group or to
cease operations, or have no realistic alternative but to do so.
Our responsibility is to express a conclusion on the interim financial
statements in the interim results based on our review. Our conclusion,
including our Conclusions relating to going concern, is based on procedures
that are less extensive than audit procedures, as described in the Basis for
conclusion paragraph of this report. This report, including the conclusion,
has been prepared for and only for the company for the purpose of complying
with the Disclosure Guidance and Transparency Rules sourcebook of the United
Kingdom's Financial Conduct Authority and for no other purpose. We do not, in
giving this conclusion, accept or assume responsibility for any other purpose
or to any other person to whom this report is shown or into whose hands it may
come save where expressly agreed by our prior consent in writing.
PricewaterhouseCoopers LLP
Chartered Accountants
London
8 August 2022
Condensed consolidated statement of comprehensive income
for the period ended 30 June 2022
Note Six months ended Six months ended Year ended
30 June 2022
31 December 2021
£m 30 June 2021 £m
£m
Gross premiums written 2 880.1 909.6 2,676.1
Reinsurance premiums ceded (12.1) (11.2) (23.3)
Net premium revenue 868.0 898.4 2,652.8
Net investment (expense)/income (3,139.3) (659.4) (130.3)
Fee and commission income 6.3 8.0 15.6
Total revenue (2,265.0) 247.0 2,538.1
Gross claims paid (718.8) (682.0) (1,381.3)
Reinsurers' share of claims paid 117.2 122.1 239.9
Net claims paid (601.6) (559.9) (1,141.4)
Change in insurance liabilities:
Gross amount 3,177.0 622.4 (706.7)
Reinsurers' share (419.7) (210.6) (332.0)
Net change in insurance liabilities 2,757.3 411.8 (1,038.7)
Change in investment contract liabilities 0.4 0.1 (0.8)
Acquisition costs (26.8) (24.3) (48.6)
Other operating expenses (93.8) (92.8) (193.2)
Finance costs (66.6) (68.7) (136.8)
Total claims and expenses 1,968.9 (333.8) (2,559.5)
Loss before tax (296.1) (86.8) (21.4)
Income tax 3 69.7 16.7 5.6
Loss for the period (226.4) (70.1) (15.8)
Other comprehensive income/(loss):
Items that will not be reclassified subsequently to profit or loss:
Revaluation of land and buildings (0.2) - -
Items that may be reclassified subsequently to profit or loss:
Exchange differences on translating foreign operations 0.9 0.2 (0.6)
Other comprehensive income/(loss) for the period, net of income tax 0.7 0.2 (0.6)
Total comprehensive (loss)/income for the period (225.7) (69.9) (16.4)
Profit attributable to:
Equity holders of Just Group plc (226.1) (69.6) (15.0)
Non-controlling interest (0.3) (0.5) (0.8)
(Loss)/profit for the period (226.4) (70.1) (15.8)
Total comprehensive (loss)/income attributable to:
Equity holders of Just Group plc (225.4) (69.4) (15.6)
Non-controlling interest (0.3) (0.5) (0.8)
Total comprehensive (loss)/income for the period (225.7) (69.9) (16.4)
Basic earnings per share (pence) 4 (22.51) (7.84) (3.42)
Diluted earnings per share (pence) 4 (22.51) (7.84) (3.42)
The notes are an integral part of these financial statements.
Condensed consolidated statement of changes in equity
for the period ended 30 June 2022
Share Share Reorganisation Merger Shares held by Accumulated Tier 1 notes Non- Total
capital premium reserve reserve
trusts profit(1)
Six months ended 30 June 2022 £m £m £m £m Revaluation reserve £m £m £m Total owners' controlling interest £m
equity(2)
£m
£m £m
At 1 January 2022 103.9 94.6 348.4 597.1 2.8 (4.3) 977.0 322.4 2,441.9 (1.9) 2,440.0
Loss for the period - - - - - - (226.1) - (226.1) (0.3) (226.4)
Other comprehensive income for the period, net of income tax - - - - (0.2) - 0.9 - 0.7 - 0.7
Total comprehensive loss for the period - - - - (0.2) - (225.2) - (225.4) (0.3) (225.7)
Contributions and distributions
Shares issued - 0.1 - - - - - - 0.1 - 0.1
Dividends - - - - - - (10.4) - (10.4) - (10.4)
Interest paid on Tier 1 notes (net of tax) - - - - - - (7.0) - (7.0) - (7.0)
Share-based payments - - - - - 0.6 (0.4) - 0.2 - 0.2
Total contributions and distributions - 0.1 - - - 0.6 (17.8) - (17.1) - (17.1)
At 30 June 2022 103.9 94.7 348.4 597.1 2.6 (3.7) 734.0 322.4 2,199.4 (2.2) 2,197.2
Year ended 31 December 2021 Share Share Reorganisation Merger Shares held by Accumulated Tier 1 notes Total owners' equity(2) Non- Total
capital premium reserve reserve
trusts profit(1) £m
£m £m £m £m Revaluation reserve £m £m £m controlling interest £m
£m £m
At 1 January 2021 103.8 94.5 348.4 597.1 3.3 (5.4) 1,056.6 294.0 2,492.3 (1.9) 2,490.4
Loss for the year - - - - - - (15.0) - (15.0) (0.8) (15.8)
Other comprehensive loss for the year, net of income tax - - - - (0.5) - (0.1) - (0.6) - (0.6)
Total comprehensive loss for the year - - - - (0.5) - (15.1) - (15.6) (0.8) (16.4)
Contributions and distributions
Shares issued 0.1 0.1 - - - - - - 0.2 - 0.2
Tier 1 notes issued (net of costs) - - - - - - - 322.4 322.4 - 322.4
Tier 1 notes redeemed - - - - - - (47.0) (294.0) (341.0) - (341.0)
Dividends - - - - - - - - - - -
Interest paid on Tier 1 notes - - - - - - (20.4) - (20.4) - (20.4)
Share-based payments - - - - - 1.1 3.7 - 4.8 - 4.8
Total contributions and distributions 0.1 0.1 - - - 1.1 (63.7) 28.4 (34.0) - (34.0)
Changes in ownership interest
Acquisition of non-controlling interest - - - - - - (0.8) - (0.8) 0.8 -
Total changes in ownership interests - - - - - - (0.8) - (0.8) 0.8 -
At 31 December 2021 103.9 94.6 348.4 597.1 2.8 (4.3) 977.0 322.4 2,441.9 (1.9) 2,440.0
Share Share Reorganisation Merger Shares held by Accumulated Tier 1 notes Non- Total
capital premium reserve reserve
trusts profit(1) £m
Six months ended 30 June 2021 £m £m £m £m Revaluation reserve £m £m Total owners' controlling interest £m
equity(2) £m
£m £m
At 1 January 2021 103.8 94.5 348.4 597.1 3.3 (5.4) 1,056.6 294.0 2,492.3 (1.9) 2,490.4
Loss for the period - - - - - - (69.6) - (69.6) (0.5) (70.1)
Other comprehensive income for the period, net of income tax - - - - - - 0.2 - 0.2 - 0.2
Total comprehensive loss for the period - - - - - - (69.4) - (69.4) (0.5) (69.9)
Contributions and distributions
Shares issued - - - - - - - - - - -
Dividends - - - - - - - - - - -
Interest paid on Tier 1 notes (net of tax) - - - - - - (11.4) - (11.4) - (11.4)
Share-based payments - - - - - 1.0 1.5 - 2.5 - 2.5
Total contributions and distributions - - - - - 1.0 (9.9) - (8.9) - (8.9)
At 30 June 2021 103.8 94.5 348.4 597.1 3.3 (4.4) 977.3 294.0 2,414.0 (2.4) 2,411.6
(1) Includes currency translation reserve.
(2 ) Total equity attributable to owners of Just Group plc has
been restated to include Tier 1 notes, which were previously presented
separately within total equity.
Condensed consolidated statement of financial position
as at 30 June 2022
Note 30 June 2022 31 December 2021 30 June 2021
£m
£m £m
Assets
Intangible assets 111.3 119.7 124.7
Property, plant and equipment 12.7 14.2 19.4
Investment property 50.1 69.6 -
Financial investments 6 22,788.6 24,681.7 23,174.5
Reinsurance assets 10 2,372.4 2,808.2 2,913.3
Deferred tax assets 66.8 - 17.1
Current tax assets 14.1 30.2 15.7
Prepayments and accrued income 34.2 75.6 30.7
Insurance and other receivables 381.8 35.4 288.5
Cash available on demand 544.4 510.2 768.8
Assets classified as held for sale - 3.1 -
Total assets 26,376.4 28,347.9 27,352.7
Equity
Share capital 8 103.9 103.9 103.8
Share premium 8 94.7 94.6 94.5
Reorganisation reserve 348.4 348.4 348.4
Merger reserve 8 597.1 597.1 597.1
Revaluation reserve 2.6 2.8 3.3
Shares held by trusts (3.7) (4.3) (4.4)
Accumulated profit 734.0 977.0 977.3
Total equity attributable to shareholders of Just Group plc 1,877.0 2,119.5 2,120.0
Tier 1 notes 9 322.4 322.4 294.0
Total equity attributable to owners of Just Group plc(1) 2,199.4 2,441.9 2,414.0
Non-controlling interest (2.2) (1.9) (2.4)
Total equity 2,197.2 2,440.0 2,411.6
Liabilities
Insurance liabilities 10 18,652.7 21,812.9 20,498.8
Reinsurance liabilities 10 258.6 274.7 258.4
Investment contract liabilities 29.8 33.6 38.5
Loans and borrowings 11 774.7 774.3 774.0
Lease liabilities 2.0 3.9 5.8
Other financial liabilities 12 4,307.4 2,865.6 2,855.0
Deferred tax liabilities - 5.3 9.0
Other provisions 0.8 1.2 0.6
Accruals and deferred income 33.0 43.1 33.8
Insurance and other payables 120.2 93.3 467.2
Total liabilities 24,179.2 25,907.9 24,941.1
Total equity and liabilities 26,376.4 28,347.9 27,352.7
1 Total equity attributable to owners of Just Group plc has been
restated to include Tier 1 notes, which were previously presented separately
within total equity.
The notes are an integral part of these financial statements.
The financial statements were approved by the Board of Directors on 8 August
2022 and were signed on its behalf by:
Andy parsons
Director
Condensed consolidated statement of cash flows
for the period ended 30 June 2022
Note Six months ended Six months ended Year ended 31 December 2021
30 June 2022 30 June 2021 £m
£m
£m
Cash flows from operating activities
(Loss)/profit before tax (296.1) (86.8) (21.4)
Property revaluation loss through profit and loss - - -
Depreciation of property, plant and equipment 1.7 2.1 4.2
Impairment of property, plant and equipment - - 0.3
Amortisation of intangible assets 9.2 10.0 20.4
Impairment of intangible assets - - -
Share-based payments (0.5) 2.5 4.8
Interest income (309.5) (345.9) (572.1)
Interest expense 66.4 68.7 136.8
Realised and unrealised losses/(gains) on financial investments 2,668.1 361.6 (1,103.8)
Decrease in reinsurance assets 419.7 210.6 332.0
Decrease/(increase) in prepayments and accrued income 41.4 43.6 (1.3)
Increase in insurance and other receivables (346.6) (256.7) (3.8)
(Decrease)/increase in insurance liabilities (3,160.2) (619.6) 694.5
Decrease in investment contract liabilities (3.8) (4.3) (9.2)
(Decease)/increase in deposits received from reinsurers (334.7) (172.6) (270.3)
(Decrease)/increase in accruals and deferred income (9.9) (19.9) (10.8)
Increase in insurance and other payables 26.9 375.6 1.7
Increase/(decrease) in other creditors 787.2 4.3 (60.4)
Interest received 192.0 203.1 337.8
Interest paid (37.7) (39.9) (78.7)
Taxation paid 16.0 (12.7) (12.7)
Net cash (outflow)/inflow from operating activities (270.4) (276.3) (612.0)
Cash flows from investing activities
Additions to internally generated intangible assets (0.8) (1.2) (6.6)
Acquisition of property and equipment 2.9 (0.4) (0.7)
Acquisition of subsidiaries - - (70.6)
Acquisition of non-controlling interest - - -
Net cash outflow from investing activities 2.1 (1.6) (77.9)
Cash flows from financing activities
Issue of ordinary share capital (net of costs) 8 0.1 - 0.2
Proceeds from issue of Tier 1 notes (net of costs) 9 - - 321.8
Redemption of Tier 1 notes (including costs) 9 - - (350.6)
(Decrease)/increase in borrowings (net of costs) - - -
Dividends paid 5 (10.4) - -
Coupon paid on Tier 1 notes 5 (8.7) (14.1) (25.2)
Interest paid on borrowings (28.4) (28.3) (56.7)
Payment of lease liabilities - principal (1.9) (1.6) (3.6)
Payment of lease liabilities - interest - (0.1) (0.1)
Net cash (outflow)/inflow from financing activities (49.3) (44.1) (114.2)
Net (decrease)/increase in cash and cash equivalents (317.6) (322.0) (804.1)
Cash and cash equivalents at start of period 1,820.7 2,624.8 2,624.8
Cash and cash equivalents at end of period 1,503.1 2,302.8 1,820.7
Cash available on demand 544.4 768.8 510.2
Units in liquidity funds 958.7 1,534.0 1,310.5
Cash and cash equivalents at end of period 1,503.1 2,302.8 1,820.7
The notes are an integral part of these financial statements.
Notes to the Condensed consolidated financial statements
1. Basis of preparation
These Condensed interim financial statements comprise the Condensed
consolidated financial statements of Just Group plc ("the Company") and its
subsidiaries, together referred to as "the Group", as at, and for the
six-month period ended, 30 June 2022.
These Condensed interim financial statements have been prepared on the basis
of the policies set out in the 2021 Annual Report and Accounts and in
accordance with International Accounting Standard IAS 34 "Interim Financial
Reporting", as adopted by the UK Endorsement Board and the Disclosure Guidance
and Transparency Rules sourcebook of the United Kingdom's Financial Conduct
Authority.
These Condensed interim financial statements need to be read in conjunction
with the Annual Report and Accounts for the year ended 31 December 2021 which
were prepared in accordance with the Companies Act 2006, including application
of International Accounting Standards and other disclosure requirements, and
International Financial Reporting Standards ("IFRS") as adopted pursuant to
Regulations (EC) No 1606/2002 as it applies in the European Union.
These Condensed interim financial statements do not comprise statutory
accounts within the meaning of Section 434 of the Companies Act 2006. The
results for the year ended and position as at 31 December 2021 have been taken
from the Group's 2021 Annual Report and Accounts, which was approved by the
Board of Directors on 9 March 2022 and delivered to the Registrar of
Companies. The report of the auditor on those accounts was (i) unqualified,
(ii) did not contain any statement under section 498 (2) or (3) of the
Companies Act 2006, and (iii) did not contain an emphasis of matter paragraph.
The results for the six‑month period ended 30 June 2021 have been taken from
the Group's Interim Results for the six months to 30 June 2021.
i) Going concern
A detailed going concern assessment has been undertaken and having completed
this assessment, the Directors are satisfied that the Group has adequate
resources to continue to operate as a going concern for a period of not less
than 12 months from the date of this report and that there is no material
uncertainty in relation to going concern. Accordingly, they continue to adopt
the going concern basis in preparing the Condensed interim financial
statements.
This assessment includes the consideration of the Group's business plan
approved by the Board; the projected liquidity position of the Company and the
Group, impacts of economic stresses, the current financing arrangements and
contingent liabilities and a range of forecast scenarios with differing levels
of new business and associated additional capital requirements to write
anticipated levels of new business. In addition, a risk assessment has been
carried out on the potential impacts on the Group of the on-going conflict in
the Ukraine. The conflict is not expected to have any direct impacts on the
Group's operations and underwriting results. The Group has no direct exposure
to Russian investments and its indirect exposure, such as through investments
in global issuers with interests in Russia, is not assessed as material at the
current time.
The Group and its regulated insurance subsidiaries are required to comply with
the requirements established by the Solvency II Framework directive as adopted
by the Prudential Regulation Authority ("PRA") in the UK, and to measure and
monitor its capital resources on this basis. The 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. They 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, over the next years' time horizon, 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.
The resilience of the solvency capital position has been tested under a range
of adverse scenarios, before and after management actions within the Group's
control, which considers the possible impacts on the Group's business,
including stresses to UK residential property prices, house price inflation,
the credit quality of assets, mortality, and risk-free rates, together with a
reduction in new business levels. In addition, the results of extreme
property stress tests were considered, including a property price fall in
excess of 40%. Eligible own funds exceeded the minimum capital requirements in
all stressed scenarios described above.
Furthermore, the Directors note that in a scenario where the Group ceases to
write new business the going concern basis would continue to be applicable
while the Group continued to service in-force policies.
The Directors' assessment concluded that it remains appropriate to value
assets and liabilities on the assumption that there are adequate resources to
continue in business and meet obligations as they fall due for the foreseeable
future, being at least 12 months from the date of signing this report.
Accordingly, the going concern basis has been adopted in the valuation of
assets and liabilities.
ii) Significant accounting policies
The Group applies UK-adopted IFRS. The accounting policies adopted in the
preparation of these interim Condensed consolidated financial statements are
consistent with those followed in the preparation of the Group's annual
consolidated financial statements for the year ended 31 December 2021.
A number of amended standards became applicable from 1 January 2022. The Group
did not have to change its accounting policies or make retrospective
adjustments as a result of adopting these amendments to accounting standards.
The following new accounting standards and amendments to existing accounting
standards in issue have not yet been adopted by the Group.
· IFRS 9, Financial Instruments (effective 1 January 2018).
Amendments to IFRS 4, Insurance Contracts, published in September 2016 and
adopted by the Group with effect from 1 January 2018, permits the deferral of
the application of IFRS 9 until accounting periods commencing on
1 January 2023 for eligible insurers. Just continues to defer IFRS 9.
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 30 June 2022 would be unchanged at £22,788.6m. As well
as financial assets, the Group also holds Insurance and other receivables and
Cash and cash equivalent 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.
· IFRS 17, Insurance Contracts (effective 1 January 2023, endorsed
in May 2022).
IFRS 17 was initially issued in May 2017 and was subsequently amended in June
2020 and December 2021. In May 2022 the UK Endorsement Board endorsed the
standard including the amendments. The amendments aimed to assist entities
implementing the standard and to provide relief from accounting mismatches in
comparative information impacted by adoption of IFRS 9 and IFRS 17. Once
effective, IFRS 17 will replace IFRS 4 that was issued in 2005.
IFRS 17 provides a comprehensive revision of the accounting for insurance
contracts including their valuation, income statement presentation and
disclosure. The main impact of the standard applicable to annuities is the
deferment of premium revenues and expenses on the balance sheet within a
"contractual service margin" ("CSM") account instead of recognition at point
of sale under IFRS 4. The CSM is then recognised in the profit or loss account
over the life of contracts. The presentation of insurance revenue in the
statement of comprehensive income will be based on the concept of insurance
services provided in the period rather than the value of premiums as presented
under IFRS 4. The standard also requires an explicit allowance for
non-financial risk instead of the prudence margins held on an implicit basis
under IFRS 4.
Given the long-term nature of the Group's business, the impact of IFRS 17 on
the measurement and presentation of insurance contracts in the Group's
statutory reporting is expected to be significant. The transition requirements
of IFRS 17 include three approaches: retrospective, modified retrospective and
fair value approach. Although the impact is not known or reasonably
estimatable, there is expected to be a reduction in equity on transition as a
result of the deferment of premium revenues and expenses on the balance sheet
within the CSM.
The Group initiated a project in 2017 to develop measurement and reporting
systems and processes which will apply to all of the Group's insurance
business. The requirements of the new standard are complex and will require
fundamental changes to accounts reporting systems and processes as well as the
application of significant judgement. A steering committee chaired by the
Group Chief Financial Officer provides oversight and strategic direction, a
technical committee provides governance over the technical interpretation and
accounting policies selected, with delivery of the project managed within the
Group's broader Finance Transformation Programme. The Group has made progress
in preparation for the implementation of the Standard including significant
work performed on the required system developments and changes to existing
processes.
The Group has participated actively in relevant industry consultations and
forums to date. Following the IASB interpretation Committee decision on the
approach to recognising CSM for annuities-in-payment in July 2022, the most
significant matter that is subject to ongoing debate by the industry and
external auditors is the approach to the pattern of recognition of the CSM
where multiple services are provided. Other interpretation matters will
continue to be debated by the industry in advance of the implementation of the
standard on 1 January 2023.
2. Segmental reporting
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 and Protection - and invests the premiums received from
these contracts in debt and other fixed income 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.
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
long-term nature of the products. Underlying operating profit represents a
combination of both the profit generated from new business written in the
period 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 period and the impacts of changes to future
operating assumptions applied in the period are then also included in arriving
at adjusted operating profit.
New business profits represent expected investment returns on financial
instruments assumed to be newly purchased to back that business after
allowances for expected movements in liabilities and deduction of 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, and corporate bond defaults.
Adjusted operating profit excludes the impairment and amortisation of goodwill
and other intangible assets arising on consolidation, non-recurring and
project expenditure, 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, including on surplus assets and on assets assumed to back new business, and gains and losses on the revaluation of land and buildings, are also disclosed outside adjusted operating profit.
Segmental reporting and reconciliation to financial information
Six months ended 30 June 2022 Six months ended 30 June 2021
Insurance Other Total Insurance Other Total
£m £m £m £m £m £m
New business operating profit 68.4 - 68.4 73.7 - 73.7
In-force operating profit 52.7 1.4 54.1 43.3 1.2 44.5
Other Group companies' operating results - (7.0) (7.0) - (8.0) (8.0)
Development expenditure (2.6) (1.7) (4.3) (2.2) (1.0) (3.2)
Reinsurance and financing costs (44.4) 6.8 (37.6) (44.3) 1.5 (42.8)
Underlying operating profit 74.1 (0.5) 73.6 70.5 (6.3) 64.2
Operating experience and assumption changes (10.8) - (10.8) 26.1 - 26.1
Adjusted operating profit/(loss) before tax 63.3 (0.5) 62.8 96.6 (6.3) 90.3
Non-recurring and project expenditure (5.6) (0.2) (5.8) (7.4) (0.9) (8.3)
Investment and economic (losses)/profits (353.6) 0.8 (352.8) (172.7) (1.2) (173.9)
Interest adjustment to reflect IFRS accounting for Tier 1 notes as equity 14.0 (5.3) 8.7 14.1 - 14.1
Loss before amortisation costs and tax (281.9) (5.2) (287.1) (69.4) (8.4) (77.8)
Amortisation of acquired intangibles - (9.0) (9.0) - (9.0) (9.0)
Loss before tax (281.9) (14.2) (296.1) (69.4) (17.4) (86.8)
Year ended 31 December 2021
Insurance Other Total
£m £m £m
New business operating profit 224.7 - 224.7
In-force operating profit 87.3 2.7 90.0
Other Group companies' operating results - (15.1) (15.1)
Development expenditure (4.2) (2.6) (6.8)
Reinsurance and financing costs (89.1) 6.0 (83.1)
Underlying operating profit 218.7 (9.0) 209.7
Operating experience and assumption changes 28.0 - 28.0
Adjusted operating profit/(loss) before tax 246.7 (9.0) 237.7
Non-recurring and project expenditure (14.8) (0.2) (15.0)
Investment and economic profits/(losses) (248.6) (2.6) (251.2)
Interest adjustment to reflect IFRS accounting for Tier 1 notes as equity 28.1 (3.0) 25.1
Profit/(loss) before amortisation costs and tax 11.4 (14.8) (3.4)
Amortisation of acquired intangibles - (18.0) (18.0)
Profit/(loss) before tax 11.4 (32.8) (21.4)
Additional analysis of segmental profit or loss
Revenue (other than fee and commission income presented in the disaggregation
of fee and commission income below), depreciation of property, plant and
equipment, and amortisation of intangible assets (other than amortisation of
acquired intangibles presented in the table above) are materially all
allocated to the insurance segment. The interest adjustment in respect of Tier
1 notes in the other segment represents the difference between interest
charged to the insurance segment in respect of Tier 1 notes and interest
incurred by the Group in respect of Tier 1 notes.
Product information analysis
Additional analysis relating to the Group's products is presented below. The
Group's gross premiums written, as shown in the Condensed consolidated
statement of comprehensive income, is analysed by product below:
Six months Six months ended Year ended
31 December 2021
ended 30 June 2021 £m
30 June 2022
£m £m
Defined Benefit De-risking Solutions ("DB") 573.6 554.7 1,934.6
Guaranteed Income for Life contracts ("GIfL") 283.8 330.3 688.2
Care Plans ("CP") 21.7 23.5 51.1
Protection 1.0 1.1 2.2
Gross premiums written 880.1 909.6 2,676.1
Drawdown and Lifetime Mortgage ("LTM") products are accounted for as
investment contracts and financial investments respectively in the statement
of financial position. An analysis of the amounts advanced during the period
for these products is shown below:
Six months ended Six months Year ended
30 June 2022 ended 31 December
£m 30 June 2021 2021
£m £m
LTM loans advanced 284.9 275.5 528.2
Drawdown deposits 2.7 1.1 1.1
Reconciliation of gross premiums written to Retirement Income sales
Six months ended Six months Year ended
30 June 2022 ended 31 December
£m 30 June 2021 2021
£m £m
Gross premiums written 880.1 909.6 2,676.1
Protection sales not included in Retirement Income sales (1.0) (1.1) (2.2)
Retirement Income sales 879.1 908.5 2,673.9
Disaggregation of fee and commission income
Six months ended 30 June 2022 Six months ended 30 June 2021
Insurance Other Total Insurance Other Total
£m £m £m £m £m £m
Product/service
GIfL commission - 3.1 3.1 - 2.9 2.9
LTM commission - 0.4 0.4 - 0.6 0.6
Other 1.1 1.7 2.8 2.7 1.8 4.5
1.1 5.2 6.3 2.7 5.3 8.0
Timing of revenue recognition
Products transferred at point in time 1.1 4.9 6.0 2.7 5.1 7.8
Products and services transferred over time - 0.3 0.3 - 0.2 0.2
Revenue from contracts with customers 1.1 5.2 6.3 2.7 5.3 8.0
Year ended 31 December 2021
Insurance Other To
ta
£m £m l
£m
Product/service
GIfL commission - 6.1 6.1
LTM commission - 2.0 2.0
Other 3.9 3.6 7.5
3.9 11.7 15.6
Timing of revenue recognition
Products transferred at point in time 3.9 11.4 15.3
Products and services transferred over time - 0.3 0.3
Revenue from contracts with customers 3.9 11.7 15.6
All revenue from contracts with customers is from the UK.
3. Income tax
Six months ended Six months Year ended
30 June 2022 ended 31 December
£m 30 June 2021 2021
£m £m
Current taxation
Current year 1.7 - 0.8
Adjustments in respect of prior periods - (0.1) (0.4)
Total current tax 1.7 (0.1) 0.4
Deferred taxation
Origination and reversal of temporary differences 0.2 (2.8) (5.7)
Deferred tax on current period loss at 19% (55.7) (14.4) -
Adjustments in respect of prior periods - - -
Rate change (15.9) 0.6 (0.3)
Total deferred tax (71.4) (16.6) (6.0)
Total income tax recognised in profit or loss (69.7) (16.7) (5.6)
The deferred tax on current period loss is based on the current tax rate of
19%. On 3 March 2021, the government announced an increase in the rate of
corporation tax rate to 25% from 1 April 2023. The change in rate was
substantively enacted on 24 May 2021. Deferred tax balances are recognised at
the rate in which they are expected to be realised. The net deferred tax asset
includes £15.9m associated with the impact of the future increase in the tax
rate to 25% from 2023.
The deferred tax assets and liabilities at 30 June 2022 have been calculated
based on the rate at which they are expected to reverse.
Reconciliation of total income tax to the applicable tax rate
Six months ended Six months Year ended
30 June 2022 ended 31 December
£m 30 June 2021 2021
£m £m
(Loss)/profit on ordinary activities before tax (296.1) (86.8) (21.4)
Income tax at 19% (2021: 19%) (56.3) (16.5) (4.1)
Effects of:
Expenses not deductible for tax purposes 0.8 0.4 1.0
Rate change (15.9) 0.6 (0.3)
Unrecognised deferred tax asset 0.1 0.4 0.1
Adjustments in respect of prior periods 1.2 (0.1) (0.4)
Other 0.4 (1.5) (1.9)
Total income tax recognised in profit or loss (69.7) (16.7) (5.6)
Income tax recognised directly in equity
Six months ended Six months Year ended
30 June 2022 ended 31 December
£m 30 June 2021 2021
£m £m
Current taxation
Relief on Tier 1 interest (1.7) (2.7) (4.8)
Relief on cost of redeeming RT1 - - (9.6)
Other - - (0.6)
Total current tax (1.7) (2.7) (15.0)
Deferred taxation
Relief in respect of share-based payments (0.7) - -
Total deferred tax (0.7) - -
Total income tax recognised directly in equity (2.4) (2.7) (15.0)
4. Earnings per share
The calculation of basic and diluted earnings per share is based on dividing
the profit or loss attributable to ordinary equity holders of the Company by
the weighted average number of ordinary shares outstanding, and by the diluted
weighted average number of ordinary shares potentially outstanding at the end
of the period. The weighted-average number of ordinary shares excludes shares
held by the Employee Benefit Trust on behalf of the Company to satisfy future
exercises of employee share scheme awards.
Six months ended Six months ended
30 June 2022 30 June 2021
Earnings Weighted average number of shares million Earnings per share pence Earnings Weighted average number of shares million Earnings per share pence
£m £m
(Loss)/profit attributable to equity holders of Just Group plc (226.1) - - (69.6) - -
Coupon payments in respect of Tier 1 notes (net of tax) (7.0) - - (11.4) - -
(Loss)/profit attributable to ordinary equity holders of Just Group plc (233.1) 1,035.7 (22.51) (81.0) 1,033.0 (7.84)
(basic)
Effect of potentially dilutive share options(1) - - - - - -
Diluted (233.1) 1,035.7 (22.51) (81.0) 1,033.0 (7.84)
(1) The weighted-average number of share options for the six months
ended 30 June 2022 that could potentially dilute basic earnings per share in
the future but are not included in diluted EPS because they would be
antidilutive was 22.2 million share options.
Year ended
31 December 2021
Earnings Weighted average number of shares million Earnings per share pence
£m
Loss attributable to equity holders of Just Group plc (15.0) - -
Coupon payments in respect of Tier 1 notes (net of tax) (20.4) - -
Loss attributable to ordinary equity holders of Just Group plc (basic) (35.4) 1,033.7 (3.42)
Effect of potentially dilutive share options - - -
Diluted (35.4) 1,033.7 (3.42)
5. Dividends and appropriations
Dividends and appropriations paid were as follows:
Six months Six months ended Year ended
31 December 2021
ended 30 June 2021
30 June 2022
£m
£m
£m
Final dividend
Final dividend in respect of prior year end 10.4 - -
Total dividends paid 10.4 - -
Coupon payments in respect of Tier 1 notes(1) 8.7 14.1 25.2
Total distributions to equity holders in the period 19.1 14.1 25.2
(1 ) Coupon payments on Tier 1 notes are treated as an
appropriation of retained profits and, accordingly, are accounted for when
paid.
In addition to the amounts recognised in the Interim financial statements
above, subsequent to 30 June 2022, the Directors approved an interim dividend
for 2022 of 0.5 pence per ordinary share (2021: nil), amounting to £5m (2021:
£nil) in total, which will be paid on 2 September 2022.
6. FINANCIAL INVESTMENTS
All of the Group's financial investments are measured at fair value through
the profit or loss, and are either designated as such on initial recognition
or, in the case of derivative financial assets, classified as held for
trading.
Fair value Cost
30 31 December 2021 30 30 31 December 2021 30
June £m June June £m June
2022 2021 2022 2021
£m
£m £m £m
Units in liquidity funds 958.7 1,310.5 1,534.0 958.7 1,310.5 1,534.0
Investment funds 370.1 301.8 265.9 361.5 290.5 260.7
Debt securities and other fixed income securities 11,183.7 12,924.0 10,996.2 11,889.7 12,141.7 10,189.4
Deposits with credit institutions 750.5 52.9 95.3 750.5 52.9 95.3
Loans secured by residential mortgages 5,897.3 7,422.8 7,893.1 4,202.1 4,328.7 4,625.1
Loans secured by commercial mortgages 616.0 677.8 663.6 650.9 686.3 655.3
Loans secured by ground rents 236.6 189.7 121.6 438.9 185.9 121.6
Infrastructure loans 968.8 993.1 971.0 996.8 858.0 855.7
Other loans 126.8 117.9 116.0 124.5 115.0 113.8
Derivative financial assets 1,680.1 691.2 517.8 - - -
Total 22,788.6 24,681.7 23,174.5 20,373.6 19,969.5 18,450.9
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
very short dated liquid assets.
Deposits with credit institutions with a carrying value of £750.5m (31
December 2021: £52.9m / 30 June 2021: £95.3m) have been pledged as
collateral in respect of the Group's derivative financial instruments. Amounts
pledged as collateral are deposited with the derivative counterparty.
7. FINANCIAL ASSETS AND LIABILITIES MEASURED AT FAIR VALUE
This note explains the methodology for valuing the Groups financial assets and
liabilities measured at fair value, including financial investments, and
provides disclosures in accordance with IFRS13, Fair value measurement,
including an analysis of such assets and liabilities categorised in a fair
value hierarchy based on market observability of valuation inputs.
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.
All level 1 and 2 assets continue to have pricing available from actively
quoted prices or observable market data.
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 cannot be used to validate
broker/asset manager prices as the observability of inputs used by
brokers/asset managers is unavailable, the investment is classified as Level
3.
Debt securities held at fair value and financial derivatives are valued using
independent pricing services or third party broker quotes are classified as
Level 2.
Level 3
Inputs to Level 3 fair values are unobservable inputs for the asset or
liability. Unobservable inputs are 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,
infrastructure loans, private placement debt securities, investment funds,
investment contract liabilities, and deposits received from reinsurers. Other
than freehold land and buildings there are no non-recurring fair value
measurements as at 30 June 2022 (2021: nil).
Analysis of assets and liabilities held at fair value according to fair value
hierarchy
30 June 2022 31 December 2021
Level 1 Level 2 Level 3 Total Level 1 Level 2 Level 3 Total
£m £m £m £m £m £m £m £m
Assets held at fair value through profit or loss
Investment property - - 50.1 50.1 - - 69.6 69.6
Units in liquidity funds 953.7 5.0 - 958.7 1,304.9 5.6 - 1,310.5
Investment funds 55.0 64.8 250.3 370.1 - 68.5 233.3 301.8
Debt securities and other fixed income securities 3,291.4 6,507.6 1,384.7 11,183.7 4,302.5 7,172.0 1,449.5 12,924.0
Deposits with credit institutions 735.8 14.7 - 750.5 50.3 2.6 - 52.9
Loans secured by residential mortgages - - 5,897.3 5,897.3 - - 7,422.8 7,422.8
Loans secured by commercial mortgages - - 616.0 616.0 - - 677.8 677.8
Loans secured by ground rents - - 236.6 236.6 - - 189.7 189.7
Infrastructure loans - - 968.8 968.8 - - 993.1 993.1
Other loans - 14.5 112.3 126.8 15.6 12.6 89.7 117.9
Derivative financial assets - 1,680.1 - 1,680.1 - 682.7 8.5 691.2
Assets classified as held for sale - - - - - - 3.1 3.1
Total financial assets 5,035.9 8,286.7 9,516.1 22,838.7 5,673.3 7,944.0 11,137.1 24,754.4
Liabilities held at fair value
Investment contract liabilities - - 29.8 29.8 - - 33.6 33.6
Derivative financial liabilities - 2,008.4 9.0 2,017.4 - 386.1 8.6 394.7
Obligations for repayment of cash collateral received 459.1 20.9 - 480.0 311.7 14.5 - 326.2
Deposits received from reinsurers - - 1,810.0 1,810.0 - - 2,144.7 2,144.7
Other financial liabilities
Fair value of loans and borrowings at amortised cost - 822.9 - 822.9 - 936.8 - 936.8
Total financial liabilities 459.1 2,852.2 1,848.8 5,160.1 311.7 1,337.4 2,186.9 3,836.0
30 June 2021
Level 1 Level 2 Level 3 Total
£m £m £m £m
Assets held at fair value through profit or loss
Units in liquidity funds 1,528.8 5.2 - 1,534.0
Investment funds - 71.9 194.0 265.9
Debt securities and other fixed income securities 684.6 8,999.3 1,312.3 10,996.2
Deposits with credit institutions 93.8 1.5 - 95.3
Loans secured by residential mortgages - - 7,893.1 7,893.1
Loans secured by commercial mortgages - - 663.6 663.6
Loans secured by ground rents - - 121.6 121.6
Infrastructure loans - - 971.0 971.0
Other loans 20.5 12.6 82.9 116.0
Derivative financial assets - 515.6 2.2 517.8
Total financial assets 2,327.7 9,606.1 11,240.7 23,174.5
Liabilities held at fair value
Investment contract liabilities - - 38.5 38.5
Derivative financial liabilities - 362.2 8.5 370.7
Obligations for repayment of cash collateral received 232.0 9.9 - 241.9
Deposits received from reinsurers - - 2,242.4 2,242.4
Other financial liabilities
Loans and borrowings at amortised cost - 800.5 - 800.5
Total financial liabilities 232.0 1,172.6 2,289.4 3,694.0
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.
Six months ended Investment Debt securities and other fixed income securities Loans secured by residential mortgages Loans secured by commercial mortgages Loans secured by ground Infra- Other loans Derivative financial assets Investment contract liabilities Derivative financial liabilities Deposits received from reinsurers
30 June 2022
rents
funds £m £m £m
structure £m £m £m £m £m
£m
£m loans
£m
At 1 January 2022 233.3 1,449.5 7,422.8 677.8 189.7 993.1 89.7 8.5 (33.6) (8.6) (2,144.7)
Purchases/advances/ 49.5 126.6 284.9 47.8 112.9 150.1 - - (2.7) - (0.6)
deposits
Transfers from Level 2 - - - - - - - - - - -
Sales/redemptions/ - (41.7) (253.6) (83.5) (9.4) (11.3) (12.8) - 6.1 - 97.9
payments
Disposal of a portfolio of LTMs1 - - (750.8) - - - - - - - -
Recognised in profit or loss in net investment income
Realised gains and losses - - 87.9 - - - - - - - -
Unrealised gains and losses (32.5) (151.5) (963.0) (26.1) (56.6) (163.9) 35.4 (8.5) - (0.4) 275.1
Interest accrued - 1.8 69.1 - - 0.8 - - - - (37.7)
Change in fair value of liabilities recognised in profit or loss - - - - - - - - 0.4 - -
At 30 June 2022 250.3 1,384.7 5,897.3 616.0 236.6 968.8 112.3 0.0 (29.8) (9.0) (1,810.0)
(1) In February 2022 the Group disposed of a portfolio of loans secured
by residential mortgages with a fair value of £750.8m. The transaction is
part of the Group's strategy to reduce exposure and sensitivity of the balance
sheet to the UK property market following changes in the regulatory
environment in 2018.
Year ended Investment Debt securities and other fixed income securities Loans secured by residential mortgages Loans secured by commercial mortgages Loans secured by ground Infra- Other loans Derivative financial assets Investment contract liabilities Derivative financial liabilities Deposits received from reinsurers
31 December 2021
rents
funds £m £m £m
structure £m £m £m £m £m
£m
£m loans
£m
At 1 January 2021 139.0 1,256.8 8,261.1 592.1 114.9 945.0 66.1 3.6 (42.8) (3.3) (2,415.0)
Purchases/advances/ 84.9 281.4 528.2 169.0 72.4 79.1 46.1 - (1.1) - (1.2)
deposits
Transfers from Level 2 - 49.9 - - - - - - - - -
Sales/redemptions/ - (87.9) (508.9) (49.4) - (17.7) - - 11.1 - 202.9
payments
Disposal of a portfolio of LTMs(1) - - (508.8) - - - - - - - -
Recognised in profit or loss in net investment income
Realised gains and losses - - 169.1 - - - - - - - -
Unrealised gains and losses 9.4 (37.6) (722.8) (34.6) 2.4 (13.4) (22.5) 4.9 - (5.3) 147.3
Interest accrued - (13.1) 204.9 0.7 - 0.1 - - - - (78.7)
Change in fair value of liabilities recognised in profit or loss - - - - - - - - (0.8) - -
At 31 December 2021 233.3 1,449.5 7,422.8 677.8 189.7 993.1 89.7 8.5 (33.6) (8.6) (2,144.7)
(1) In August 2021 the Group disposed of a portfolio of loans secured by
residential mortgages with a fair value of £508.8m. The transaction is part
of the Group's strategy to reduce exposure and sensitivity of the balance
sheet to the UK property market following changes in the regulatory
environment in 2018.
Six months ended Investment Debt securities and other fixed income securities Loans secured by residential mortgages Loans secured by commercial mortgages Loans secured by ground Infra- Other loans Derivative financial assets Investment contract liabilities Derivative financial liabilities Deposits received from reinsurers
rents
£m
30 June 2021 funds £m £m £m
structure £m £m £m £m
£m
£m loans
£m
At 1 January 2021 139.0 1,256.8 8,261.1 592.1 114.9 945.0 66.1 3.6 (42.8) (3.3) (2,415.0)
Purchases/advances/ 60.1 125.2 275.5 123.5 8.2 67.5 18.0 - (1.1) - (0.6)
deposits
Sales/redemptions/ (5.8) - (272.1) (34.9) - (8.4) - - 5.3 - 102.6
payments
Recognised in profit or loss in net investment income
Realised gains and losses - - 86.8 - - - - - - - -
Unrealised gains and losses(1) 0.7 (59.4) (592.9) (18.5) (1.5) (33.4) (1.2) (1.4) - (5.2) 110.6
Interest accrued - (10.3) 134.7 1.4 - 0.3 - - - - (40.0)
Change in fair value of liabilities recognised in profit or loss - - - - - - - - 0.1 - -
At 30 June 2021 194.0 1,312.3 7,893.1 663.6 121.6 971.0 82.9 2.2 (38.5) (8.5) (2,242.4)
(1) Includes £971.0m of infrastructure loans.
For Level 1 and Level 2 assets and liabilities measured at fair value, unrealised losses during the period were £386.4m and £1,790.0m respectively (year ended 31 December 2021: losses of £32.1m and £131.4m respectively/ period ended 30 June 2021: losses of £23.1m and £297.7m respectively).
Investment funds
Investment funds classified as Level 3 are structured entities that operate
under contractual arrangements which allow a group of investors to invest in a
pool of corporate loans without any one investor having overall control of the
entity. There have not been any significant impacts to these investments in
relation to COVID-19, global, political and other economic factors.
Principal assumptions underlying the calculation of investment funds
classified as Level 3
Discount rate
Discount rates are the most significant assumption applied in calculating the
fair value of investment funds. The average discount rate used is 7.0% (31
December 2021 and 30 June 2021: 7.0%).
Sensitivity analysis
Reasonably possible alternative assumptions for unobservable inputs used in
the valuation model either as at the valuation date or from a suitable recent
reporting period where appropriate to do so could give rise to significant
changes in the fair value of the assets. The sensitivity of the valuation of
investment funds 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:
Investment funds Credit spreads
net increase/(decrease) in fair value (£m) +100bps
30 June 2022 (10.6)
31 December 2021 (8.9)
30 June 2021 (4.9)
Debt securities and other fixed income securities
Debt securities classified as Level 3 are private placement bonds and
asset-backed securities. Such securities are valued using discounted cash flow
analyses. The impact of COVID-19 has been taken into account in the assessment
of the future cash flows default risk at 30 June 2022. Due to the nature of
these assets and the sectors in which they operate, the Group has assessed
that there is not any significant impact from COVID-19 on the valuation at 30
June 2022.
Principal assumptions underlying the calculation of the debt securities and
other fixed income securities classified as Level 3
Credit spreads
The valuation model discounts the expected future cash flows using a discount
rate which includes a credit spread allowance associated with that asset.
Redemption and defaults
The redemption and default assumptions used in the valuation of private
placement bonds are similar to the rest of the Group's bond portfolio.
Sensitivity analysis
Reasonably possible alternative assumptions for upon observable inputs used in
the valuation model either as at the valuation date or from a suitable recent
reporting period where appropriate to do so could give rise to significant
changes in the fair value of the assets. The sensitivity of the valuation of
bonds 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 +100bps
net increase/(decrease) in fair value (£m)
30 June 2022 (109.6)
31 December 2021 (124.6)
30 June 2021 (109.0)
Derivative financial assets and liabilities
Derivative financial assets and liabilities classified as Level 3 are the put
options on property index (also referred to as NNEG hedges). The value of each
NNEG hedge is made up of premiums payable to the counterparty less expected
claims back from the option where losses are made. The expected claims are
calculated through the Black-Scholes framework, with parameters set such that
at outset the fair value of the NNEG hedge is zero.
Principal assumptions underlying the calculation of the derivative financial
assets and liabilities classified as Level 3
Property prices and interest rates are the most significant assumption applied
in calculating the fair value of the derivative financial assets and
liabilities. As described above, these assumptions are set at outset such that
the fair value of the NNEG hedge is zero. The Group has assessed the possible
impact of COVID-19 and economic uncertainty on current property assumptions.
Details of the matters considered in relation to property assumptions at 30
June 2022 are noted in the section on Loans secured by residential mortgages
further below. The future property price volatility assumption used in the
fair value calculation of derivative financial assets and liabilities is
unchanged at 11% (31 December 2021: 11%). This assumption is based upon
property price index volatility only, consistent with protection provided by
the underlying derivatives. Property growth assumptions used in the fair value
calculation of derivative financial assets and liabilities have remained
unchanged from 31 December 2021, consistent with the equivalent assumptions on
loans secured by residential mortgages as noted below. The impact on
derivative financial assets and liabilities from changes to property
assumptions are noted in the sensitivity analysis below.
Sensitivity analysis
Reasonable possible alternative assumptions for unobservable inputs used in
the valuation model could give rise to significant changes in the fair value
of the assets and liabilities. The Group has estimated the impact on fair
value to changes to these inputs as follows:
Net increase/(decrease) in fair value (£m) Interest rates +100bps Immediate property Future property Future
price fall price growth property price volatility
-10% -0.5% +1%
Derivative financial assets
30 June 2022 (3.0) 8.7 8.7 3.9
31 December 2021 (4.6) 10.4 10.6 4.4
30 June 2021 (4.4) 18.5 18.1 8.6
Derivative financial liabilities
30 June 2022 (2.6) 10.8 9.8 5.3
31 December 2021 (4.1) 13.4 12.5 6.2
30 June 2021 (1.2) 5.8 6.1 2.5
Loans secured by residential mortgages
Methodology and judgement underlying the calculation of loans secured by
residential mortgages
The valuation of loans secured by residential 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 NNEG. The fair value is calculated by
discounting the future cash flows at a swap rate plus a liquidity premium.
Under the NNEG, the amount recoverable by the Group on eligible termination of
mortgages is generally capped at the net sale proceeds of the property. A key
judgement is with regard to the calculation approach used. We have used the
Black 76 variant of the Black-Scholes option pricing model in conjunction with
an approach using best estimate future house price growth assumptions. There
has been significant academic and market debate concerning the valuation of
no-negative equity guarantees in recent years, including proposals to use
risk-free based methods rather than best estimate assumptions to project
future house price growth. We continue to actively monitor this debate. In the
absence of any widely supported alternative approach, we have continued in
line with the common industry practice to value no-negative equity guarantees
using best estimate assumptions.
The best estimate assumptions used include future property growth and future
property price volatility.
Cash flow models are used in the absence of a deep and liquid market for loans
secured by residential mortgages. The sales of the portfolios of Just LTMs in
2020, 2021 and 2022 represented market prices specific to the characteristics
of the underlying portfolios of loans sold. In particular, loan rates,
loan-to-value and customer age. This was considered insufficient to affect the
judgement of the methodology and assumptions underlying the discounted cash
flow approach used to value individual loans in the remaining portfolio. The
methodology and assumptions used would be reconsidered if any information is
obtained from future portfolio sales that is relevant and applicable to the
remaining portfolio.
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 items set out below. These assumptions
are also used to provide the expected cash flows from the loans secured by
residential mortgages which determines the yield on this asset. This yield is
used for the purpose of setting valuation discount rates on the liabilities
supported, as described in note 10.
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 4.0% (31 December 2021: 4.2% / 30 June 2021:
3.9%). Inflation rates are generated using 15 year inflation rate models.
Mortality
Mortality assumptions have been derived with reference to England & Wales
population mortality using the CMI 2019 model for mortality improvements for
2020 onwards and have been applied by the Group since 2020. 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. The Group has
considered the possible impact of the COVID-19 pandemic on its mortality
assumptions, but has kept these unchanged at 30 June 2022. Further details of
the matters considered in relation to mortality assumptions at 30 June 2022
are set out in note 10.
Property prices
The approach in place at 30 June 2022, which is the same as at 31 December
2021, is to calculate the value of a property by taking the latest Automated
Valuation Model "AVM" result, or latest surveyor value if more recent,
indexing this to the balance sheet date using Nationwide UK house price
indices and then making a further allowance for property dilapidation since
the last revaluation date.
Although the COVID-19 pandemic has had a very significant impact on the UK
economy since 2020, the UK property market has exhibited strong growth over
the period. The current level of price indices has been driven by high demand
and a shortage of supply. While this imbalance may reduce, our view is that
current market prices are sustainable and appropriate for valuation of the
properties.
The appropriateness of this valuation basis is regularly tested on the event
of redemption of mortgages. The sensitivity of loans secured by mortgages to a
fall in property prices is included in the table of sensitivities below.
Future property price
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 consumer price inflation, "CPI", plus an allowance for
the expectation of house price growth above CPI (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 3.3%
(31 December 2021: 3.3% / 30 June 2021: 3.3%), with a volatility assumption
of 13% per annum (31 December 2021: 13% / 30 June 2021 13%). The setting of
these assumptions includes consideration of future long and short-term
forecasts, the Group's historical experience, benchmarking data, and future
uncertainties including the possible impact of Brexit on the UK property
market. As noted above, the Group has considered the uncertainties in relation
to the property market as a result of the COVID-19 pandemic. House price
growth over the first half of 2022 has been strong, and there has been an
increase in market-implied RPI and CPI inflation expectations too. However,
the impact of the pandemic on long-term property prices is uncertain at the
current time without consensus that the pandemic will alter the long-term
prospects of the housing market. In light of this the future house price
growth and property volatility assumptions have been maintained at the same
level as assumed at 31 December 2021. The sensitivity of loans secured by
mortgages to changes in future property price growth, and to future property
price volatility, are included in the table of sensitivities below.
Voluntary redemptions
Assumptions for future voluntary redemption levels are based on the Group's
recent analyses. The assumed redemption rate varies by duration and product
line between 0.5% and 4.1% for loans in JRL (31 December 2021: between 0.5%
and 4.1% / 30 June 2021: between 0.5% and 4.1%) and between 0.6% and 6.8% for
loans in PLACL (31 December 2021: between 0.6% and 6.8% / 30 June 2021:
between 0.6% and 6.8%). No changes are assumed with regard to the COVID-19
experience. In the prior period, a separate provision for potential higher
short-term experience arising from additional remortgaging activity was also
allowed for. No adjustment has been applied to this provision in the current
reporting period.
Liquidity premium
The liquidity premium at initial recognition is set such that the fair value
of each loan is equal to the face value of the loan. The liquidity premium
partly reflects the illiquidity of the loan and also spreads the recognition
of profit over the lifetime of the loan. Once calculated, the liquidity
premium remains unchanged at future valuations except when further advances
are taken out. In this situation, the single liquidity premium to apply to
that loan is recalculated allowing for all advances. Historically the
liquidity premium has been set relative to LIBOR swap rates. Following the
discontinuance of LIBOR from the end of 2021, SONIA has been adopted as the
risk free index. The liquidity premium at 31 December 2021 was adjusted such
that the fair value of the loan was unchanged before and after this change in
index. The average liquidity premium for loans held within JRL is 3.23% (31
December 2021: 3.04% / 30 June 2021: 2.87%) and for loans held within PLACL is
3.47% (31 December 2021: 3.51% / 30 June 2021: 3.19%). These average rates are
relative to the risk free index used in each period. The movement over the
period observed in both JRL and PLACL is therefore a function of the liquidity
premiums on new loan originations compared to the liquidity premiums on those
policies which have redeemed or have been included in a portfolio sale over
the period, both in reference to the average spread on the back book of
business.
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 Maintenance expenses Base mortality Immediate property price fall Future property price growth Future property price volatility Voluntary redemptions +10% Liquidity premium +10bps
net increase/(decrease) in fair value (£m) +10% -5% -10% -0.5% +1%
30 June 2022 (5.6) 16.2 (89.5) (63.3) (41.2) 4.3(1) (62.2)
31 December 2021 (6.5) 22.7 (114.6) (82.3) (53.2) (5.2) (78.0)
30 June 2021 (5.7) 31.6 (119.1) (88.4) (56.7) (14.6) (84.2)
(1 ) Interest rates have risen over both 2021 and 2022, impacting
the magnitude and direction of this sensitivity.
The sensitivity factors are applied via financial models either as at the
valuation date or from a suitable recent reporting period where appropriate to
do so. 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 be noted
that some of these sensitivities are non-linear and larger or smaller impacts
should not be simply interpolated or extrapolated from these results. For
example, the impact from a 5% fall in property prices would be slightly less
than half of that disclosed in the table above.
The sensitivities above only consider the impact of the change in these
assumptions on the fair value of the asset. Some of these sensitivities would
also impact the yield on this asset and hence the valuation discount rate used
to determine liabilities. For some of these sensitivities, the impact on the
value of insurance liabilities and hence profit before tax is included in note
10.
Other limitations in the above sensitivity analysis include the use of
hypothetical market movements to demonstrate potential risk that only
represents the Group's view of reasonably possible near-term market changes
that cannot be predicted with any certainty.
Loans secured by commercial mortgages
Loans secured by commercial mortgages are valued using discounted cash flow
analysis using assumptions based on the repayment of the underlying loan.
Principal assumption underlying the calculation of loans secured by commercial
mortgages
Credit spreads
The valuation model discounts the expected future cash flows using a discount
rate which includes a credit spread allowance associated with that asset.
Redemption and defaults
The redemption and default assumptions used in the valuation of loans secured
by commercial mortgages are derived from the assumptions for the Group's bond
portfolio. The impact of COVID-19 on the timing of future cash flows, and on
expected defaults, has been taken into account in the calculation of fair
value at 30 June 2022, with no significant impacts noted to fair values.
Sensitivity analysis
Reasonably possible alternative assumptions for unobservable inputs used in
the valuation model either as at the valuation date or from a suitable recent
reporting period where appropriate to do so could give rise to significant
changes in the fair value of the assets. The sensitivity of the valuation of
commercial mortgages 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:
Loans secured by commercial mortgages Credit spreads +100bps
net increase/(decrease) in fair value (£m)
30 June 2022 (20.3)
31 December 2021 (25.0)
30 June 2021(1) (26.9)
1 The 2021 sensitivities for loans secured by commercial mortgages, have been updated to provide a more granular disclosure level, which aligns to the investment categorises applied at 31 December 2021.
Loans secured by ground rents
Loans secured by ground rents are valued using discounted cash flow analysis
using assumptions based on the repayment of the underlying loan.
Principal assumption underlying the calculation of loans secured by ground
rents
Credit spreads
The valuation model discounts the expected future cash flows using a discount
rate which includes a credit spread allowance associated with that asset.
Redemption and defaults
The redemption and default assumptions used in the valuation of loans secured
by ground rents are derived from the assumptions for the Group's bond
portfolio. The impact of COVID-19 on the timing of future cash flows, and on
expected defaults, has been taken into account in the calculation of fair
value at 30 June 2022, with no significant impacts noted to fair values.
Sensitivity analysis
Reasonably possible alternative assumptions for unobservable inputs used in
the valuation model either as at the valuation date or from a suitable recent
reporting period where appropriate to do so could give rise to significant
changes in the fair value of the assets. The sensitivity of the valuation of
ground rents 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:
Loans secured by ground rents Credit spreads +100bps
net increase/(decrease) in fair value (£m)
30 June 2022 (60.2)
31 December 2021 (59.2)
30 June 2021 (28.1)
Infrastructure loans
Infrastructure loans classified as Level 3 are valued using discounted cash
flow analyses.
Principal assumptions underlying the calculation of infrastructure loans
classified as Level 3
Credit spreads
The valuation model discounts the expected future cash flows using a discount
rate which includes a credit spread allowance associated with that asset.
Redemption and defaults
The redemption and default assumptions used in the valuation of Level 3
infrastructure loans are derived from the assumptions for the Group's bond
portfolio. Due to the nature of these assets and the sectors in which they
operate, being primarily local authorities, renewable energy generation and
housing associations sectors, the Group has assessed that there is no
significant impact from COVID-19 on the valuation at 30 June 2022.
Sensitivity analysis
Reasonably possible alternative assumptions for unobservable inputs used in
the valuation model either as at the valuation date or from a suitable recent
reporting period where appropriate to do so could give rise to significant
changes in the fair value of the assets. The sensitivity of the valuation of
infrastructure loans 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:
Infrastructure loans Credit spreads +100bps
net increase/(decrease) in fair value (£m)
30 June 2022 (87.9)
31 December 2021 (96.6)
30 June 2021 (95.6)
Other loans
Other loans classified as Level 3 are mainly commodity trade finance loans.
These are valued using discounted cash flow analyses.
Principal assumptions underlying the calculation of other loans classified as
Level 3
Credit spreads
The valuation model discounts the expected future cash flows using a discount
rate which includes a credit spread allowance associated with that asset.
Redemption and defaults
The redemption and default assumptions used in the valuation of Level 3 loans
are derived from the assumptions for the Group's bond portfolio. The impact of
COVID-19 on expected defaults has been taken into account in the calculation
of fair value at 30 June 2022, with no significant impacts noted to fair
values.
Sensitivity analysis
Reasonably possible alternative assumptions for unobservable inputs used in
the valuation model either as at the valuation date or from a suitable recent
reporting period where appropriate to do so could give rise to significant
changes in the fair value of the assets. The sensitivity of the valuation of
other loans to the default assumption is determined by reference to movement
in credit spreads. The Group has estimated the impact on fair value to changes
to these inputs as follows:
Other loans Credit spreads +100bps
net increase/(decrease) in fair value (£m)
30 June 2022 (1.1)
31 December 2021 (0.9)
30 June 2021(1) (1.0)
1 The 2021 sensitivities for other loans, have been updated to provide a more granular disclosure level, which aligns to the investment categorises applied at
31 December 2021.
Investment contract liabilities
Investment contracts are valued 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.
Principal assumptions underlying the calculation of investment contract
liabilities
Valuation discount rates
The valuation model discounts the expected future cash flows using a
contractual discount rate derived from the assets hypothecated to back the
liabilities. The discount rate used for the fixed term annuity product treated
as investment business is 4.45% (31 December 2021: 2.73% / 30 June 2021:
2.85%).
Sensitivity analysis
The sensitivity of fair value to changes in the discount rate assumptions in
respect of investment contract liabilities is not material.
Deposits received from reinsurers
Deposits from reinsurers which have been unbundled from their reinsurance
contract and recognised at fair value through profit or loss are measured in
accordance with the reinsurance contract and taking into account an
appropriate discount rate for the timing of expected cash flows of the
liabilities.
Principal assumptions underlying the calculation of deposits received from
reinsurers
Discount rate
The valuation model discounts the expected future cash flows using a
contractual discount rate derived from the assets hypothecated to back the
liabilities at a product level. The discount rates used for individual
retirement and individual care annuities were 4.61% and 2.36% respectively (31
December 2021: 2.87% and 1.03% respectively / 30 June 2021: 2.70% and 0.67%
respectively).
Credit spreads
The valuation of deposits received from reinsurers includes a credit spread
derived from the assets hypothecated to back these liabilities. A credit
spread of 263bps (31 December 2021: 219bps / 30 June 2021: 204bps) was applied
in respect of the most significant reinsurance contract.
Sensitivity analysis
Reasonably possible alternative assumptions for unobservable inputs used in
the valuation model either as at the valuation date or from a suitable recent
reporting period where appropriate to do so could give rise to significant
changes in the fair value of the liabilities (see note 12(b)). The Group has
estimated the impact on fair value to changes to these inputs as follows:
Deposits received from reinsurers Credit spreads +100bps Interest rates +100bps
net increase/(decrease) in fair value (£m)
30 June 2022 (68.6) (192.3)
31 December 2021 (72.4) (196.1)
30 June 2021 (70.5) (182.8)
8. Share capital
The allotted, issued and fully paid ordinary share capital of Just Group plc
at 30 June 2022 is detailed below:
Number of £0.10 ordinary shares Share capital Share premium Merger reserve Total
£m £m £m £m
At 1 January 2022 1,038,537,044 103.9 94.6 597.1 795.6
In respect of employee share schemes 16,589 - 0.1 - 0.1
At 30 June 2022 1,038,553,633 103.9 94.7 597.1 795.7
At 1 January 2021 1,038,128,556 103.8 94.5 597.1 795.4
In respect of employee share schemes 408,488 0.1 0.1 - 0.2
At 31 December 2021 1,038,537,044 103.9 94.6 597.1 795.6
At 1 January 2021 1,038,128,556 103.8 94.5 597.1 795.4
In respect of employee share schemes 115,018 - - - -
At 30 June 2021 1,038,243,574 103.8 94.5 597.1 795.4
The merger reserve is the result of a placing of 94,012,782 ordinary shares in
2019 and the acquisition of 100% of the equity of Partnership Assurance Group
plc in 2016. The placing was achieved by the Company acquiring 100% of the
equity of a limited company for consideration of the new ordinary shares
issued. Accordingly, merger relief under section 612 of the Companies Act 2006
applies, and share premium has not been recognised in respect of this issue of
shares. The merger reserve recognised represents the premium over the nominal
value of the shares issued. Consideration for the acquisition 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. The merger reserve recognised represents the difference
between the nominal value of the shares issued and the net assets of
Partnership Assurance Group plc acquired.
9. Tier 1 notes
30 June 31 December 30 June
2021
2022
2021
£m
£m £m
At start period 322.4 294.0 294.0
Issued in the year - 325.0 -
Issue costs, net of tax - (2.6) -
Redeemed in the year - (294.0) -
At end of period 322.4 322.4 294.0
On 16 September 2021 the Group issued £325m 5.0% perpetual restricted Tier 1
contingent convertible notes, incurring issue costs of £2.6m, net of tax, and
concurrently redeemed its £300m 9.375% perpetual restricted Tier 1 contingent
convertible notes issued in 2019 (£294.0m net of issue costs, net of tax) at
a cost of £341.0m, net of tax. The loss on redemption of the 2019 notes of
£47.0m (net of tax) has been recognised directly in equity.
During the period, interest of £8.7m was paid to holders of the 2021 notes,
(31 December 2021: £25.2m on the 2019 notes). The 2021 notes bear interest on
the principal amount up to 30 September 2031 (the first reset date) at the
rate of 5.0% per annum, and thereafter at a fixed rate of interest reset on
the first call date and on each fifth anniversary thereafter. Interest is
payable on the notes semi-annually in arrears on 30 March and 30 September
each year which commenced on 30 March 2022.
The Group has the option to cancel the coupon payment at its discretion and
cancellation of the coupon payment becomes mandatory upon non-compliance with
the solvency capital requirement or minimum capital requirement or where the
Group has insufficient distributable items. Cancelled coupon payments do not
accumulate or become payable at a later date and do not constitute a default.
In the event of non-compliance with specific solvency requirements, the
conversion of the Tier 1 notes into Ordinary Shares could be triggered.
The Tier 1 notes are treated as a separate category within equity and the
coupon payments are recognised outside of the profit after tax result and
directly in shareholders' equity.
10. Insurance contracts and related reinsurance
30 June 31 December 30 June
2022 2021 2021
£m £m £m
Gross insurance liabilities 18,652.7 21,812.9 20,498.8
Net reinsurance assets (2,113.8) (2,533.5) (2,654.9)
Net insurance liabilities 16,538.9 19,279.4 17,843.9
Reinsurance in the table above includes reinsurance assets net of reinsurance
liability positions that can arise on longevity swaps which are presented as
liabilities in the Consolidated statement of financial position.
Principal assumptions underlying the calculation of insurance contracts
The principal assumptions underlying the calculation of insurance contracts
are explained below. This includes any areas sensitive to COVID-19 effects or
other economic downturn.
Mortality assumptions
The COVID-19 pandemic has had a significant effect on mortality rates. There
were particularly high rates in the spring of 2020 and early part of 2021
which contributed significantly to positive mortality experience variances in
the respective reporting periods.
Over the second half of 2021 there was a more modest but sustained elevation
of mortality rates, whereas rates over the first half of 2022 have been closer
to expected levels, for the UK population overall. The extent to which
mortality rates may be elevated in future, as a result of the pandemic, is
subject to considerable uncertainty.
The Group considers that it is still too early to judge the longer-term impact
of COVID-19 on mortality and therefore no explicit allowance for the pandemic
has been included in future mortality assumptions at 30 June 2022. Moreover,
mortality assumptions for each future year have been maintained at the same
level as assumed at 31 December 2021. The Group will continue to follow
closely the actual impact of COVID-19 on mortality and to analyse potential
direct and indirect future impacts of the pandemic, including the possibility
there will be enduring influences on the longevity of customers. The Group
will consider the conclusions of such analysis, alongside assessment of other
factors influencing mortality trends, in maintaining its assumptions under
regular review.
Valuation discount rates
Valuation discount rate assumptions are set by considering the yields on the
assets allocated to back the liabilities. The yields on lifetime mortgage
assets are derived using the assumptions described in note 7 with allowance
for risk through the deductions related to the NNEG. An explicit allowance for
credit risk is included by making an explicit deduction from the yields on
debt and other fixed income securities, loans secured by commercial mortgages,
and other loans based on an expectation of default experience of each asset
class and application of a prudent loading. Allowances vary by asset category
and by rating. Economic uncertainty relating to the Russian/Ukraine conflict,
supply chain issues and inflation increases the risk of credit defaults. Our
underlying default methodology allows for the impact of credit rating
downgrades and spread widening and hence we have maintained the same
methodology at 30 June 2022. The considerations around COVID-19 and
macro-economic factors for property prices affecting the NNEG are as described
in note 7.
Valuation discount rates - gross liabilities 30 June 2022 31 December 2021 30 June 2021
% % %
Individually underwritten Guaranteed Income for Life Solutions (JRL) 4.45 2.73 2.85
Individually underwritten Guaranteed Income for Life Solutions (PLACL) 4.61 2.87 2.70
Defined Benefit (JRL) 4.45 2.73 2.85
Defined Benefit (PLACL) 4.61 2.87 2.70
Other annuity products (PLACL) 2.36 1.03 0.67
Term and whole of life products (PLACL) 2.38 1.03 0.75
The overall reduction in yield to allow for the risk of defaults from all
non-LTM assets (including gilts, corporate bonds, infrastructure loans,
private placements and commercial mortgages) and NNEG from LTMs was 68bps in
JRL and 65bps in PLACL (31 December 2021: 64bps and 63bps respectively).
Movements
The following movements have occurred in the insurance contract balances
during the period.
Six months ended 30 June 2022 Year ended 31 December 2021
Gross Reinsurance Net Gross Reinsurance Net
£m £m £m
£m £m £m
At start of period 21,812.9 (2,533.5) 19,279.4 21,118.4 (2,865.5) 18,252.9
Change due to new premiums 750.6 7.9 758.5 2,298.1 33.8 2,331.9
Change due to new claims (752.7) 112.6 (640.1) (1,478.1) 239.0 (1,239.1)
Unwinding of discount 298.5 (35.4) 263.1 488.8 (62.1) 426.7
Changes in economic assumptions (3,470.0) 344.0 (3,126.0) (595.1) 135.4 (459.7)
Changes in non-economic assumptions - - - (9.8) - (9.8)
Other movements 13.4 (9.4) 4.0 (9.4) (14.1) (23.5)
At end of period 18,652.7 (2,113.8) 16,538.9 21,812.9 (2,533.5) 19,279.4
Six months ended 30 June 2021
Gross Reinsurance Net
£m £m £m
At start of period 21,118.4 (2,865.5) 18,252.9
Change due to new premiums 775.6 7.6 783.2
Change due to new claims (743.1) 125.8 (617.3)
Unwinding of discount 243.4 (31.5) 211.9
Changes in economic assumptions (890.7) 110.4 (780.3)
Other movements (4.8) (1.7) (6.5)
At end of period 20,498.8 (2,654.9) 17,843.9
Reinsurance in the table above includes reinsurance assets net of reinsurance liability positions that can arise on longevity swaps which are presented as liabilities in the Consolidated statement of financial position.
Effect of changes in assumptions and estimates during the period
Economic assumption changes
The principal economic assumption changes impacting the movement in insurance
liabilities during the period relate to discount rates and inflation.
Discount rates
The movement in the valuation interest rate captures the impact of underlying
changes in risk-free curves and spreads and cash flows arising on backing
assets held over the course of the year. The movement of the discount rate
includes purchases to support new business and trading for risk management
purposes. For the period to 30 June 2022, changes in discount rates resulted
in a net reduction of insurance liabilities £3,117m (year to
31 December 2021: reduction of £813m / six months to 30 June 2021: reduction
of £953m) which was largely due to increases in the risk free rate and
changes to the backing asset portfolio, including as a consequence of the LTM
portfolio sale during 2022.
Inflation
Insurance liabilities for inflation-linked products, most notably Defined
Benefit business and expenses on all products are impacted by changes in
future expectations of RPI, CPI and earnings inflation. For the period to
30 June 2022 changes in inflation, driven by a rise in market-implied
expectations of future RPI and CPI inflation, resulted in a net increase of
insurance liabilities of £16m (year to 31 December 2021: £348m / six months
to
30 June 2021: £171m). This includes an impact of £28m in respect of a change
in approach since 31 December 2021 to the derivation of the annuity escalation
curves required for RPI, LPI and CPI linked liabilities, to using a mark to
model basis instead of the existing approach which utilises market prices that
are not actively traded.
Sensitivity analysis
The Group has estimated the impact on profit before tax for the year in
relation to insurance contracts and related reinsurance from reasonably
possible changes in key assumptions relating to financial assets and to
liabilities. The sensitivities capture the liability impacts arising from the
impact on the yields of the assets backing liabilities in each sensitivity.
The impact of changes in the value of assets and liabilities has been shown
separately to aid the comparison with the change in value of assets for the
relevant sensitivities in note 7. To further assist with this comparison, any
impact on reinsurance assets has also been included within the liabilities
line item.
The sensitivity factors are applied via financial models either as at the
valuation date or from a suitable recent reporting period where appropriate to
do so. 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 necessarily be interpolated or extrapolated from these results.
The extent of non-linearity grows as the severity of any sensitivity is
increased. For example, in the specific scenario of property price falls, the
impact on IFRS profit before tax from a 5% fall in property prices would be
slightly less than half of that disclosed in the table below. Furthermore, in
the specific scenario of a mortality reduction, a smaller fall than disclosed
in the table below or a similar increase in mortality may be expected to
result in broadly linear impacts. However, it becomes less appropriate to
extrapolate the expected impact for more severe scenarios. 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 sensitivities below cover the changes on all assets and
liabilities from the given stress. The impact on liabilities includes the net
effect of the impact on reinsurance assets and liabilities. The impact of
these sensitivities on IFRS net equity is the impact on profit before tax as
set out in the table below less tax at the current tax rate.
The reduction in interest rate sensitivity is due to the change in the
interest rate hedging position.
Impact on profit before tax (£m)
Interest Interest Base Immediate property Future Credit
rates rates mortality price fall property defaults
+1% -1% -5% -10% price growth +10bps
-0.5%
30 June 2022
Assets (1,796.7) 2,139.1 17.2 (70.0) (44.7) -
Liabilities 1,614.9 (1,894.0) (126.2) (58.7) (40.1) (140.8)
Total (181.8) 245.1 (109.0) (128.7) (84.8) (140.8)
31 December 2021
Assets (2,602.0) 3,118.9 23.8 (90.8) (59.2) -
Liabilities 2,076.3 (2,492.5) (140.6) (67.7) (67.7) (151.6)
Total (525.7) 626.4 (116.8) (158.5) (126.9) (151.6)
30 June 2021
Assets (2,265.5) 2,718.0 32.6 (94.8) (64.2) -
Liabilities 1,839.3 (2,196.1) (138.9) (64.1) (60.3) (121.1)
Total (426.2) 521.9 (106.3) (158.9) (124.5) (121.1)
11. Loans and borrowings
Carrying value Fair Value
30 31 December 2021 30 30 31 December 2021 30
June 2022 £m June 2021 June 2022 £m June 2021(1)
£m £m £m £m
£250m 9.0% 10 year subordinated debt 2026 (Tier 2) issued by Just Group plc 249.3 249.2 249.2 278.7 323.5 335.0
£125m 8.125% 10 year subordinated debt 2029 (Tier 2) issued by Just Group 122.3 122.2 122.0 145.1 165.6 165.3
plc
£250m 7.0% 10.5 year subordinated debt 2013 non-callable 5.5 years (Green 248.5 248.4 248.3 252.0 287.2 294.0
Tier 2) issued by Just Group plc
£230m 3.5% 7 year subordinated debt 2025 (Tier 3) issued by Just Group plc 154.6 154.5 154.5 147.1 160.5 165.3
Total loans and borrowings 774.7 774.3 774.0 822.9 936.8 959.6
(1 ) The fair value disclosed for loans and borrowings for June
2021 has been restated to correct the basis on which the fair value was
determined. This resulted in a change across all loans from £800.5m to
£959.6m.
The Group has replaced the existing revolving credit facility with a new and
undrawn revolving credit facility of up to £300m for general corporate and
working capital purposes available until 13 June 2025. Interest is payable on
any drawdown loans at a rate of SONIA plus a margin of between 1.00% and 1.50%
per annum depending on the Group's unsecured issuer rating provided by any of
Fitch, S&P and Moody's.
12. Other financial liabilities
The Group has other financial liabilities which are measured at fair value
through profit or loss:
Note 30 June 2022 31 December 2021 £m 30 June 2021
£m £m
Fair value through profit or loss
Derivative financial liabilities (a) 2,017.4 394.7 370.7
Obligations for repayment of cash collateral received (a) 480.0 326.2 241.9
Deposits received from reinsurers (b) 1,810.0 2,144.7 2,242.4
Total other financial liabilities 4,307.4 2,865.6 2,855.0
(a) Derivative financial liabilities and obligations for repayment of cash collateral received
Derivative financial liabilities and obligations for repayment of cash
collateral received 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 unbundled from their reinsurance
contract and recognised at fair value through profit or loss in accordance
with IAS 39, Financial instruments: measurement and recognition. 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.
13. Derivative financial instruments
The Group uses various derivative financial instruments to manage its exposure
to interest rates, counterparty credit risk, inflation and foreign exchange
risk.
30 June 2022 31 December 2021
Derivatives Asset fair value Liability fair value Notional amount Asset Fair value Liability fair value Notional Amount
£m £m £m £m £m £m
Foreign currency swaps 359.7 837.1 11,328.0 243.4 247.2 8,069.4
Interest rate swaps 981.8 1,003.6 13,865.5 169.9 44.9 9,117.7
Inflation swaps 336.1 148.0 4,803.5 261.8 92.5 4580.0
Forward swap 0.3 17.6 318.5 1.8 3.4 213.9
Total return swaps 2.2 2.2 - 5.8 5.8 -
Put options on property index (NNEG hedges) - 8.9 705.0 8.5 0.9 705.0
Total 1,680.1 2,017.4 31,020.5 691.2 394.7 22,686.0
30 June 2021
Derivatives Asset Fair value Liability fair value Notional Amount
£m £m £m
Foreign currency swaps 243.8 197.6 6,947.7
Interest rate swaps 189.5 33.8 6,500.8
Inflation swaps 73.4 123.5 3,306.3
Forward swaps 2.6 0.9 202.1
Total return swaps 6.3 6.3 -
Put option on property index (NNEG hedge) 2.2 8.6 770.0
Total 517.8 370.7 17,726.9
The Group's derivative financial instruments are not designated as hedging
instruments and changes in their fair value are included in profit or loss.
The significant increase in the interest rate swaps is due to changes in the
hedging position.
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 30 June 2022, the Company had pledged collateral of £843.8m (31
December 2021: £61.3m / 30 June 2021: £120.4m) and had received cash
collateral of £480.0m (31 December 2021: £326.2m / 30 June 2021: £241.9m).
Amounts recognised in profit or loss in respect of derivative financial
instruments are as follows:
Six months ended Six months ended Year ended
30 June 2022
£m 30 June 2021 31 December 2021
£m £m
Movement in fair value of derivative instruments (633.8) (135.9) 9.2
Realised losses on interest rate swaps closed 45.9 47.8 120.5
Total amounts recognised in profit or loss (587.9) (88.1) 129.7
14. 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 exposes the Group to insurance
risk. 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.
Management of insurance risk
Underpinning the management of insurance risk are:
· the development and use of medical information including
PrognoSys™ 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. 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.
Just has several EUR denominated bonds that have coupons linked to EURIBOR,
which are hedged into fixed GBP coupons. If EURIBOR were no longer produced,
there is a risk that the bond coupons would not match the swap EUR leg
payments. In mitigation, Just would restructure the related cross currency
asset swap to match the new coupon rate.
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 strategy is to actively monitor and hedge the interest
rate risk to reduce the effect to its Solvency II balance sheet exposure;
whilst seeking to minimise the cost of this hedging on an IFRS basis.
The Group's main 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.
(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. Further mitigation is
through management of the volume of lifetime mortgages, including disposals,
in the portfolio in line with the Group's LTM backing ratio target, and the
establishment of the NNEG hedges. The Group has managed its property risk
exposure in the period via a reduction in the LTM backing ratio and an
additional LTM portfolio sale.
A sensitivity analysis of the impact of residential property price movements
is included in note 7 and note 10. These notes also discuss the Group's
consideration of the impact of COVID-19 on property assumptions at 30 June
2022.
The Group is also exposed to commercial property risk indirectly through the
investment in loans secured by commercial mortgages. A substantial decline or
sustained underperformance in the commercial property market would impact
credit spreads on such assets and increase the risk of default. Mitigation of
such risk is covered by the credit risk section below.
(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 long term 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 long term 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. The Group invests in 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 13).
· Reinsurance - reinsurance is used to manage longevity risk and to
fund new business 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 and/or through robust
collateral engagements or recapture plans.
· 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 for loans secured by residential 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
30 June 2022, 31 December 2021 and 30 June 2021:
30 June 2022 UK gilts AAA AA A BBB BB or below Unrated Total
£m £m £m £m £m £m £m £m
Investment property - - - 50.1 - - - 50.1
Units in liquidity funds - 953.7 - - - 5.0 - 958.7
Investment funds - - 55.1 - - - 315.0 370.1
Debt securities and other fixed income securities 271.6 811.8 1,740.5 3,055.0 4,965.9 338.9 - 11,183.7
Deposits with credit institutions - - - 696.6 39.2 14.7 - 750.5
Loans secured by residential mortgages - - - - - - 5,897.3 5,897.3
Loans secured by commercial mortgages - - - - - - 616.0 616.0
Loans secured by ground rents - - - (51.0) - - 287.6 236.6
Infrastructure loans - 74.5 128.5 148.4 603.3 14.1 - 968.8
Other loans - - - - - 14.7 112.1 126.8
Derivative financial assets - - - 1,197.8 482.3 - - 1,680.1
Reinsurance - - 214.7 250.0 5.1 - 0.5 470.3
Insurance and other receivables - - - - - - 381.8 381.8
Total 271.6 1,840.0 2,138.8 5,346.9 6,095.8 387.4 7,610.3 23,690.8
31 December 2021 UK gilts AAA AA A BBB BB or below Unrated Total
£m £m £m £m £m £m £m £m
Investment property - - - 69.6 - - - 69.6
Units in liquidity funds - 1,304.9 - - - 5.6 - 1,310.5
Investment funds - - - - - - 301.8 301.8
Debt securities and other fixed income securities 741.8 894.0 2,132.3 3,279.7 5,554.2 322.0 - 12,924.0
Deposits with credit institutions - - - 11.1 39.2 2.6 - 52.9
Loans secured by residential mortgages - - - - - - 7,422.8 7,422.8
Loans secured by commercial mortgages - - - - - - 677.8 677.8
Loans secured by ground rents - - - - - - 189.7 189.7
Infrastructure loans - 82.4 116.6 180.9 567.5 45.7 - 993.1
Other loans - - - - - 12.5 105.4 117.9
Derivative financial assets - - 0.3 519.3 171.6 - - 691.2
Reinsurance - - 214.7 277.0 5.1 - 0.5 497.3
Insurance and other receivables - - - - - - 35.4 35.4
Total 741.8 2,281.3 2,463.9 4,337.6 6,337.6 388.4 8,733.4 25,284.0
30 June 2021 UK gilts AAA AA A BBB BB or below Unrated Total
£m £m £m £m £m £m £m £m
Units in liquidity funds - 1,528.8 - - - 5.2 - 1,534.0
Investment funds - - - - - - 265.9 265.9
Debt securities and other fixed income securities 185.5 753.7 1,609.8 2,907.0 5,177.2 363.0 - 10,996.2
Deposits with credit institutions - - - 54.6 39.2 1.5 - 95.3
Loans secured by residential mortgages - - - - - - 7,893.1 7,893.1
Loans secured by commercial mortgages - - - - - - 663.6 663.6
Loans secured by ground rents - - - - - - 121.6 121.6
Infrastructure loans - 70.9 116.3 178.4 548.0 57.4 - 971.0
Other loans - 12.6 - - - - 103.4 116.0
Derivative financial assets - - - 394.1 123.7 - - 517.8
Reinsurance - - 255.9 289.5 6.2 - 0.5 552.1
Insurance and other receivables - - - - - - 288.5 288.5
Total 185.5 2,366.0 1,982.0 3,823.6 5,894.3 427.1 9,336.6 24,015.1
There are no financial assets that are either past due or impaired.
The credit rating for Cash available on demand at 30 June 2022 was between a
range of AA and BB
(31 December 2021 and 30 June 2021: 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 cash received from Retirement Income sales 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 the COVID-19 pandemic or from Brexit;
· needing to realise 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 individually.
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. Cash flow forecasts include an
assessment of the impact of a 1-in-200 year event on the Group's liquidity and
increasing the minimum cash and cash equivalent levels to cover enhanced
stresses. Derivative stresses have been revised to take into account the
market volatility caused by COVID-19, and focus on the worst observed
movements over the last 40 years, in shorter periods up to and including one
month.
15. Capital
Group capital position
The Group's estimated capital surplus position at 30 June 2022 was as follows:
30 June 2022(1) 31 December 2021(2)
£m
£m
Capital resources
Eligible Own funds 2,743 3,004
Solvency Capital Requirement (1,494)(3) (1,836)
Excess own funds 1,249(3) 1,168
Solvency coverage ratio 184%(3) 164%
(1) Estimated regulatory position.
(2 ) This is the reported regulatory position as included in the
Group's Solvency and Financial Condition Report as at 31 December 2021.
(3) Not covered by PwC independent review opinion.
Further information on the Group's Solvency II position, including a
reconciliation between the regulatory capital position to the reported capital
surplus, is included in the Business Review. This information is not covered
by the PwC independent review opinion.
The Group and its regulated insurance subsidiaries are required to comply with
the requirements established by the Solvency II Framework directive as adopted
by the Prudential Regulation Authority ("PRA") in the UK, and to measure and
monitor its capital resources on this basis. The 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. They 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 over the next one year time horizon 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.
The capital requirement for Just Group plc is calculated using a partial
internal model. Just Retirement Limited ("JRL") uses a full internal model and
Partnership Life Assurance Company Limited ("PLACL") capital is calculated
using the standard formula.
Group entities that are under supervisory regulation and are required to
maintain a minimum level of regulatory capital include:
· JRL and PLACL - 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 first half of the year.
Capital management
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 expectations;
· to safeguard the Group's ability to continue as a going concern,
and to continue to write new business;
· to ensure that in all reasonably foreseeable circumstances, the
Group is able to fulfil its commitment over the short term and long term to
pay policyholders' benefits;
· to continue to provide returns for shareholders and benefits for
other stakeholders;
· to provide an adequate return to shareholders by pricing
insurance and investment contracts commensurately with the level of risk; and
· to generate capital from in-force business, excluding economic
variances, management actions, and dividends, that is c.£36m greater than new
business strain.
The Group regularly assesses a wide range of actions to improve the capital
position and resilience of the business.
To improve resilience, we have significantly reduced the property risk
exposure related to LTMs by selling three blocks of LTMs and transacting three
no-negative equity guarantee ("NNEG") hedges since 2018.
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.
EVT Compliance
Following on from PRA approval of JRL's Internal Model in December 2021, which
was developed to meet regulatory expectations in respect of the Effective
Value Test ("EVT"), we are planning to apply to the PRA to approve further
developments to our internal model to refine our credit risk model and have
future plans to bring PLACL onto the internal model.
At 30 June 2022, Just passed the PRA EVT with a buffer of 2.3% (not reviewed
by PwC) over the current minimum deferment rate of 0.5% (allowing for
volatility of 13%, in line with the requirement for the EVT). At 31 December
2021, the buffer was 0.75% (unaudited) compared to the minimum deferment rate
of 0.5%. The buffer increased significantly in H1 2022, primarily due to the
increase in long-term risk-free rates. If risk-free rates stay at current
levels, it is likely that the PRA would increase the minimum deferment rate
when it is reviewed in September 2022. This would lead to a reduction in the
buffer. There is uncertainty in the level of increase in minimum deferment
rate but we expect to have sufficient headroom.
Regulatory developments
In April 2022, the government and the PRA launched a consultation on potential
reforms to Solvency II. In line with the PRA Quantitative Impact Study
conducted in 2021, the key features targeted for reform, that are relevant for
the Group, are the risk margin and the matching adjustment. We are engaged
with the consultations and, as proposals for reform become more certain, we
will assess the potential impacts for the Group. For further details see Risk
A, risks from regulatory changes and supervision in the Principal risks and
uncertainties section.
16. Related parties
The nature of the related party transactions of the Group has not changed from
those described in the Group's annual report and accounts for the year ended
31 December 2021.
There were no transactions with related parties during the six months ended 30
June 2022 which have had a material effect on the results or financial
position of the Group.
17. Post balance sheet events
Subsequent to 30 June 2022, the Directors approved an interim dividend for
2022 of 0.5 pence per ordinary share (2021: nil), amounting to £5m (2021:
£nil) in total, which will be paid on 2 September 2022.
There are no other material post balance sheet events that have taken place
between 30 June 2022 and the date of this report.
Additional financial information
The following additional financial information is not covered by the PwC
independent review opinion on pages
27 and 28.
Financial investments credit ratings
The sector analysis of the Group's financial investments portfolio by credit
rating is shown below:
Unaudited Total % AAA AA A BBB BB or Unrated
£m £m £m £m £m below £m
£m
Basic materials 223 1.0 - 5 92 121 5 -
Communications and technology 1,258 5.5 107 161 183 774 33 -
Auto manufacturers 272 1.2 - - 247 25 - -
Consumer (staples including healthcare) 1,108 4.8 140 263 230 358 19 98
Consumer (cyclical) 174 0.7 - 4 15 129 - 26
Energy 553 2.4 - 188 114 161 90 -
Banks 1,189 5.2 36 93 434 371 208 47
Insurance 702 3.1 18 160 141 383 - -
Financial - other 390 1.7 96 89 59 41 12 93
Real estate including REITs 667 2.9 36 22 261 306 32 10
Government 1,652 7.2 378 922 166 186 - -
Industrial 684 3.00 - 69 90 410 19 96
Utilities 2,214 9.7 - 90 779 1,335 10 -
Commercial mortgages 616 2.7 69 174 256 116 1 -
Ground rent 288 1.3 171 8 98 11 - -
Infrastructure loans 1,531 6.8 74 130 341 970 12 4
Other 46 0.2 - - 46 - - -
Corporate/government bond total 13,567 59.4 1,125 2,378 3,552 5,697 441 374
Lifetime mortgages 5,897 25.8
Liquidity funds 959 4.2
Derivatives and collateral 2,416 10.6
Total 22,839 100.00
Glossary
Acquisition costs - comprise the direct costs (such as commissions) of
obtaining new business.
Adjusted earnings per share (adjusted EPS) - an APM, this measures earnings
per share based on underlying operating profit after attributed tax, rather
than IFRS profit before tax. This measure is calculated by dividing underlying
operating profit after attributed tax by the weighted average number of shares
in issue by the Group for the period. For remuneration purposes (see
Directors' Remuneration Report), the measure is calculated as adjusted
operating profit before tax divided by the weighted average number of shares
in issue by the Group for the period.
Adjusted operating profit after attributed tax - the adjusted operating profit
before tax APM reduced for the standard tax rate.
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, operating experience and assumption changes, other Group companies'
operating results, development expenditure and reinsurance and financing
costs. The Board believes it provides a better view of the longer-term
performance of the business than profit before tax because it excludes the
impact of short-term economic variances and other one-off items. It excludes
the following items that are included in profit before tax: non-recurring and
project expenditure, implementation costs for cost saving initiatives,
investment and economic profits and amortisation and impairment costs of
acquired intangible assets. In addition, it includes Tier 1 interest (as part
of financing costs) which is not included in profit before tax (because the
Tier 1 notes are treated as equity rather than debt in the IFRS financial
statements). Adjusted operating profit is reconciled to IFRS profit before tax
in the Business Review.
Alternative performance measure ("APM") - in addition to statutory IFRS
performance measures, the Group has presented a number of non-statutory
alternative performance measures within this report. 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 acquired intangibles - relate to the
amortisation of the Group's intangible assets arising on consolidation,
including the amortisation of intangible assets recognised in relation to the
acquisition of Partnership Assurance Group plc by Just Group plc (formerly
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 ("CP") - 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 - 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 deferred ("DB deferred") business - the part of DB de-risking
transactions that relates to deferred members of a pension scheme. These
members have accrued benefits in the pension scheme but have not retired yet.
Defined benefit de-risking partnering ("DB partnering") - a DB de-risking
transaction in which a reinsurer has provided reinsurance in respect of the
asset and liability side risks associated with one of our DB Buy-in
transactions.
Defined benefit ("DB") 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 - 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.
Employee benefits consultant - an adviser offering specialist knowledge to
employers on the legal, regulatory and practical issues of rewarding staff,
including non-wage compensation such as pensions, health and life insurance
and profit sharing.
Equity release - products and services enabling homeowners to generate income
or lump sums by accessing some of the value of the home while continuing to
live in it - see Lifetime mortgage.
Finance costs - represent interest payable on reinsurance deposits and
financing and the interest on the Group's Tier 2 and Tier 3 debt.
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 - total premiums received by the Group in relation to
its Retirement Income and Protection sales in the period, 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 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 adjusted operating profit
before tax, and adjusted operating profit before tax is reconciled to IFRS
profit before tax in the Business Review.
Investment and economic profits - reflect the difference in the period between
expected investment returns, based on investment and economic assumptions at
the start of the period, and the actual returns earned. Investment and
economic profits 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 Return on Equity, Solvency II
capital coverage ratio, Underlying organic capital generation, Retirement
Income sales, New business operating profit, Underlying operating profit,
Management expenses, Adjusted operating profit, IFRS profit before tax and
IFRS net assets.
Lifetime mortgage ("LTM") - an equity release product that allows homeowners
to take out a loan secured on the value of their home, typically with the loan
plus interest repaid when the homeowner has passed away or moved into
long-term care.
LTM notes - structured assets issued by a wholly owned special purpose entity,
Just Re1 Ltd. Just Re1 Ltd holds two pools of lifetime mortgages, each of
which provides the collateral for issuance of senior and mezzanine notes to
Just Retirement Ltd, eligible for inclusion in its matching portfolio.
Management expenses - an APM and one of the Group's KPIs, and are business as
usual costs incurred in running the business, including all operational
overheads. Management expenses are other operating expenses excluding
investment expenses and charges; reassurance management fees which are largely
driven by strategic decisions; amortisation of acquired intangible assets
relating to merger and acquisition activity; and other costs impacted by
external factors. Management expenses are reconciled to IFRS other operating
expenses in the Business Review.
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 asset value ("NAV") - IFRS total equity, net of tax, and excluding equity
attributable to Tier 1 noteholders.
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 - 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 - represents the sum of gross premiums written and
reinsurance recapture, less reinsurance premium ceded.
New business margin - the new business operating profit divided by Retirement
Income sales. It provides a measure of the profitability of Retirement Income
sales.
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 adjusted operating
profit before tax, and adjusted operating profit before tax is reconciled to
IFRS profit before tax in the Business Review.
New business strain - represents the capital strain on new business written in
the year after allowing for acquisition expense allowances and the
establishment of Solvency II technical provisions and solvency capital
requirements.
No-negative equity guarantee ("NNEG") hedge - a derivative instrument designed
to mitigate the impact of changes in property growth rates on both the
regulatory and IFRS balance sheets arising from the guarantees on lifetime
mortgages provided by the Group which restrict the repayment amounts to the
net sales proceeds of the property on which the loan is secured.
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
period, plus the impact of changes to future operating assumptions applied
during the period. It also includes the impact of any expense reserve
movements, and other sundry operating items.
Organic capital generation/(consumption) - an APM and calculated in the same
way as underlying organic capital generation/(consumption), but includes
impact of management actions and other 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 - 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™ - 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.
Retail sales (in reference to Just Group sales or products) - collective term
for GIfL and Care Plan.
Retirement Income sales (in reference to Just Group sales or products) - an
APM and one of the Group's KPIs and a collective term for GIfL, DB and Care
Plan. Retirement Income sales are reconciled to IFRS gross premiums in note 2
to the condensed consolidated financial statements.
Return on equity - an APM and one of the Group's KPIs. Return on equity is
annualised underlying operating profit after attributed tax for the period
divided by the average tangible net asset value for the period. Tangible net
asset value is reconciled to IFRS total equity in the Business Review.
Secure Lifetime Income ("SLI") - a tax efficient solution for individuals who
want the security of knowing they will receive a guaranteed income for life
and the flexibility to make changes in the early years of the plan.
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.
Tangible net asset value - IFRS total equity excluding goodwill and other
intangible assets, net of tax, and excluding equity attributable to Tier 1
noteholders.
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 one of the Group's KPIs. Underlying
profit is calculated in the same way as adjusted operating profit before tax
but excludes operating experience and assumption changes. Underlying operating
profit is reconciled to adjusted operating profit before tax, and adjusted
operating profit before tax is reconciled to IFRS profit before tax in the
Business Review.
Underlying organic capital generation/(consumption) - an APM and one of the
Group's KPIs. Underlying organic capital generation/(consumption) is the net
increase/(decrease) in Solvency II excess own funds over the year, generated
from ongoing business activities, and includes surplus from in-force, net of
new business strain, cost overruns and other expenses and debt interest. It
excludes economic variances, regulatory adjustments, capital raising or
repayment and impact of management actions and other operating items. The
Board believes that this measure provides good insight into the ongoing
capital sustainability of the business. Underlying organic capital
generation/(consumption) is reconciled to Solvency II excess own funds, and
Solvency II excess own funds is reconciled to shareholders' net equity on an
IFRS basis in the Business Review.
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