REG - Just Group plc - Results for the year ended 31 December 2022
07/03/2023 07:00
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RNS Number : 0904S Just Group PLC 07 March 2023
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NEWS RELEASE
www.justgroupplc.co.uk
7 March 2023
JUST GROUP PLC
RESULTS FOR THE YEAR ENDED 31 DECEMBER 2022
STRONG GROWTH, POSITIVE OUTLOOK
Just Group plc (the "Group", "Just") announces its results for the year ended
31 December 2022.
Profitable and sustainable growth
· Underlying operating profits(1) up 19% to £249m (FY 21: £210m), driven by
higher in-force operating profit and increased new business profits.
· Retirement Income sales(1) up 17% to £3.1bn (FY 21: £2.7bn), driven by
Defined Benefit De-risking ("DB") sales, which grew by 33%.
· Strong momentum in Q1 2023, including our largest DB transaction to date
(£513m). A very favourable DB market backdrop and a £6bn pipeline means we
expect substantial DB sales growth in 2023. Our retail business has also had a
strong start to the year.
Solvency II and IFRS
· Significantly higher capital coverage ratio of 199%(2) (31 December 2021:
164%(2)). Organic capital generation contributed 5 percentage points ("pp") to
the ratio, interest rate increases added 30pp.
· New business strain of 1.9% (FY 21 1.5%), well within our target of 2.5%.
The volumes written in 2022 and a lower in-force cash release due to higher
interest rates led to underlying organic capital generation(1) ("UOCG")
falling to £29m (FY 21: £51m). Management actions and longevity releases
boosted organic capital generation to £134m (FY 21: £93m).
· IFRS loss after tax was £232m (FY 21: loss £16m), driven by losses on
interest rate hedges to protect the Solvency II balance sheet of £510m (FY
21: £226m). These hedges were removed as the solvency position strengthened
over the course of the year.
· Return on equity of 10.7% with tangible net assets of 170p per share(3) (31
December 2021: 8.3% and 194p respectively). Solvency II Shareholder Own Funds
of 175p per share (31 December 2021: 183p).
Rewarding shareholders
· Full year dividend of 1.73p per share, up 15%, in line with our medium term
operating profit target.
· Reiterating confidence in achieving 15% target growth in underlying operating
profits, per annum on average over the medium term(1).
David Richardson, Group Chief Executive Officer, said:
"This is a very strong set of results which continues to demonstrate our
ability to generate profitable growth within a sustainable capital model. Over
the last four years, our performance has consistently exceeded the commitments
we have made.
We have had a record start to the year with strong DB volumes and a return to
GIfL sales growth. We have significant long term opportunity in both of the DB
and retail markets, driven by near and long term structural growth drivers.
Our positioning in the exciting DB and improving retail markets underpin our
confidence to deliver 15% growth in underlying operating profit per annum, on
average over the medium term. We have the capability and opportunities to
achieve our ambitious growth plans so that we build substantial value for
shareholders and fulfil 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 formal TMTP
recalculation. For 31 December 2021, the TMTP was recalculated excluding the
contribution from the LTMs that was sold on 22 February 2022.
(3 )Following a review of APM calculations, comparative results
for the year ended 31 December 2021 have been restated.
( )
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 who have registered, a presentation will take place today at 1 Angel
Lane, London, EC4R 3AB, commencing at 09:30 am. The presentation will also be
available via a live webcast.
FINANCIAL CALENDAR DATE
Ex-dividend date for final dividend 13 April 2023
Record date for final dividend 14 April 2023
Annual General Meeting 9 May 2023
Payment of final dividend 17 May 2023
Interim results for the six months ended 30 June 2023 15 August 2023
A copy of this announcement, the presentation slides and the transcript will
be available on the Group's website 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
Accelerating growth
We exceeded the promises made over the last four years and we are very
optimistic about the future.
I'm pleased to present my Chief Executive Officer's Statement for 2022. We've
delivered a strong performance and have increased confidence in meeting our
pledge to grow underlying operating profits over the medium term by an average
of 15% per annum.
Retirement sales growth
Sales in 2022 were up 17% at £3.1bn. This was driven by growth in DB sales,
which were up 33% to £2.6bn (2021: £1.9bn). Operationally, we were
exceptionally busy as we completed 56 DB transactions, almost double the
number in 2021 (2021: 29 transactions). The rise in interest rates has
improved pension scheme funding levels materially. As a result, DB de-risking
market volumes were boosted in the second half of 2022, with that momentum
carrying into 2023. Our pipeline of DB business is over £6bn and in March
2023 we announced our largest transaction to date at £513m. We expect that
our DB sales in 2023 will continue to show substantial growth over the record
levels achieved in 2022.
In our retail market, sales of GIfL and Care products at £564m were 24% lower
than in 2021. In a year of falling investment markets and a competitive
environment, we maintained a disciplined approach to pricing and returns.
However rising interest rates has stimulated increased customer appetite for
guaranteed income solutions, boosting quotation volumes. This augers well for
a return to growth in 2023.
Growing our defined benefit de-risking business and expanding our investments in tandem
During the year we were delighted to host two seminars for investors and
analysts to develop their understanding of our growth potential.
We showcased our investment capability and explained how the investment
strategy delivers competitive customer pricing and shareholder returns. During
2022 our investments in other illiquids, including infrastructure, private
placements, social housing, commercial mortgages, ground rents and income
strips, amounted to over £1bn (2021: £615m). Growth will continue in 2023 as
we access the fast developing investment opportunities in private debt markets
through our partnerships with 15 external asset managers. We were pleased
with the government's consultation response to the proposed reforms of the
Solvency II regime, published in November 2022. When implemented these reforms
could unlock billions of pounds of investment from insurers into the UK
economy.
In our second seminar we highlighted the enormous growth potential in our DB
business.
The development of the DB risk transfer market is relatively immature. To
date, only 11% of total DB liabilities have been transferred from sponsors to
insurers. This is expected to accelerate in the coming years. Slowing
longevity increases and significant employer contributions have led to a
steady improvement in DB pension scheme funding levels, and in 2022, this was
boosted by rising interest rates. This is translating into more schemes
bringing forward their de-risking plans which will further increase our
addressable market.
We will drive growth by securing more larger transactions and by expanding our
leadership position in the smaller transaction size segment of the DB market.
We are receiving increased enquiries from smaller schemes and to service this
demand efficiently we have developed a streamlined quotation service. This
service delivers updated quotes each month to over 120 small and mid-sized
schemes. In 2022 we completed 28 transactions that originated from our
streamlined service.
We have written almost 300 DB transactions since entering the market in 2013
and through these, have gained significant pricing and deal experience to now
regularly quote on larger transactions. This is supported by our stronger
capital position and expanded panel of reinsurance partners. Combined with
the strong outlook for the market in 2023, we expect our participation in the
larger deal segment to increase further.
Customers and our purpose
The challenging economic events in the UK and the volatility in investment
markets witnessed by our customers in 2022 has created uncertainty and worry
for many who have investments in equities and fixed interest bonds. We provide
a guaranteed income for life to customers. This secure income is often
purchased to cover the essential expenditure of the household and in these
uncertain times, our solutions provide reassurance to customers.
As the retirement specialist we are doing what we can to help people. We help
them to discover whether they are entitled to State Benefits and often uncover
many missed benefits, that when secured, can make a profound impact on their
lives. We provide a range of professional advice and guidance to help our
customers. We can't resolve all the challenges faced by our customers, but we
are helping where we are able to do so and remain focused on living up to the
purpose we set out many years ago: we help people achieve a better later life.
Sustainability
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 three years we have reduced our operational carbon intensity per
employee by 81%, but the most material impact we can make to reduce carbon
emissions will be achieved through the decisions we take with our £20bn
investments portfolio (excluding derivatives and collateral).
During 2022, we invested in £279m of eligible green and social assets in
accordance with our Sustainability Bond Framework and we have now completed
our total £575m green and sustainability bond investment commitments well
ahead of schedule.
Our people
Our Just culture is underpinned by our people who are passionate and are
committed to making a difference to the lives of those around them.
A key business priority is that all of our colleagues feel proud to work at
Just. The combination of our strong purpose and having highly engaged teams
working the 'Just way', is a competitive advantage which will help drive high
performance and our growth strategy.
I would like to thank my colleagues who once again rose to the challenge in
2022, providing support and certainty to our customers when they needed it
most. Our people have been energised and inspired by our commitment to be a
strong and sustainable purpose-led business for our customers, our colleagues
and our planet.
We have continued to maintain excellent levels of employee engagement, with a
key priority to build a diverse and inclusive workforce. Further details on
all our initiatives in this area can be found in the Colleagues and Culture
section of the Annual Report and Accounts.
Financial performance
Underlying operating profit increased by 19% to £249m in 2022, helped by
improved in-force returns and lower financing costs.
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 £232m for 2022 (2021: £16m).
The strength and resilience of our capital position and our disciplined
pricing and risk selection ensures we are capital self-sufficient. 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.
We will pay a final dividend of 1.23 pence per share, giving a total of 1.73
pence for the year - which represents 15% growth over last year's pro forma
full year dividend.
In conclusion
We have never been stronger. We have the capability and opportunities to
achieve our ambitious growth plans so that we build substantial value for
shareholders and fulfil our purpose to help more people achieve a better later
life.
Business review
Strong and sustainable growth
Our strong capital base and compelling proposition in the market provide us
with a solid foundation to deliver ongoing sustainable growth.
The Group operates in attractive markets, with solid structural growth
drivers. By leveraging our strong capabilities, brand and reputation we are
well placed to take advantage of the expected boost in demand for our products
following the rise in long term interest rates during 2022. 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 year ended 31
December 2022, including IFRS and unaudited Solvency II information.
The business continues to benefit from the strong positive progress achieved
in previous years, in particular, a transformed, low capital intensity new
business model, combined with a strengthened and increasingly resilient
capital base. After right sizing the cost base, we continue to maintain strong
cost discipline across the business and are investing to enable the business
to scale efficiently. We are also diversifying the asset portfolio backing our
customer commitments by originating an increasing proportion of illiquid
assets to back the new business in line with our investment strategy.
The DB business goes from strength to strength as the £5bn pipeline at the
half year stage translated into the strongest six months of DB sales on record
for Just. The drivers behind this momentum remain and we expect a very busy
2023, as we execute on small, medium and larger transactions, while
maintaining pricing discipline and capital flexibility. The steep rise in
interest rates during 2022 has had a positive impact as it further reduces DB
scheme funding deficits, thereby making de-risking transactions more
affordable. Many schemes are already or approaching fully funded sooner than
they had expected, and hence able to accelerate their de-risking plans. Post
year end, in February 2023, we completed our largest transaction to date at
£513m, and have signed or are exclusive on a number of other medium sized
deals.
In July, utilising our DB partnering model, we reinsured the investment as
well as longevity risks on just over half of a £484m transaction, our largest
deal of the year. After allowing for the upfront origination fee received from
our external reinsurance partner, this transaction created £24m of new
business profit and was in aggregate marginally capital generative for Just.
This capital light transaction is an example of our innovation - it increases
our participation in the above £100m transaction size segment, where we have
significant opportunity to grow, and generates upfront fee income to offset
new business capital strain. This type of transaction is repeatable, scalable
and provides optionality going forward, with employee benefit consultants
("EBCs") supportive as the external capital increases overall market capacity.
During 2022, underlying operating profit was £249m (2021: £210m), a rise of
19%, ahead of our medium term annualised profit growth target. Rising interest
rates during 2022 boosted the return on surplus assets, thereby increasing
in-force operating profit, up 29% to £116m, while proactive management of our
debt profile in September 2021 and November 2022 has materially reduced
finance costs. Shareholder funded Retirement Income sales2 of £3,131m were
17% higher than 2021, as a 33% increase in DB business was offset by a 24%
decline in GIfL/Care volumes. New business profit, which includes the DB
partner origination fee, was up 4% at £233m (2021: £225m), translating to a
new business margin of 7.4% (2021: 8.4%) on shareholder funded premiums. The
higher interest rates that benefited the in-force operating profit during the
year, also reduces the size of each individual DB transaction as well as
reducing the new business margin.
The significant rise, of c.275bps in long term interest rates during 2022 also
led to IFRS losses of £510m from hedges used to protect the Solvency II
balance sheet. These hedges had produced profits as interest rates fell in
previous years. During the year, we actively reduced the level of interest
rate hedging as the capital position strengthened, with the sensitivity at
year end 2022 now close to zero (c.£7m of IFRS profit for a 100 basis point
increase in long term rates compared to £526m loss at year end 2021).
Cumulatively since 2018, we have incurred a net loss of £226m (pre-tax) on
interest rate hedging as profits when rates fell in 2019/2020 were more than
offset by losses incurred as rates rose more significantly over the past two
years. Other economic variances included negatives from widening credit
spreads (£112m) and property growth experience (£22m), which at 2% for the
year was a little below our long term 3.3% annual growth assumption (2021:
3.3%). We also incurred a £95m loss on asset timing variance, which is
expected to reverse as we acquire the desired asset mix during the first half
of 2023 and a £49m loss from the third and final LTM portfolio sale in
February 2022. Taken together, these investment and economic losses of £639m,
when combined with other items led to an overall loss after tax for the year
of £232m (2021: loss of £16m).
The Group's Solvency II capital position strengthened significantly during the
year, increasing by 35 percentage points to 199% (31 December 2021: 164%1).
Rising rates drove most of the increase, by reducing the solvency capital
requirement ("SCR") and risk margin, although this in turn leads to a smaller
unwind subsequently through in-force surplus. Despite reduced unwind of
capital following the rise in rates, underlying organic capital generation
("UOCG") during 2022 was robust at £29m (2021: £51m), marking three years of
positive underlying organic capital generation. Within this capital strain
from writing new business increased to £60m, reflecting the significantly
higher volumes of business written during the year. New business strain at
1.9% of premium (2021: 1.5% of premium) is based on target asset mix, with any
timing differences taken as an investment variance. This low level of new
business strain is due to our continued focus on strong pricing discipline,
risk selection and business mix. Sustainable growth through a capital
self-sufficiency business model continues to be a central pillar of how we run
the business. Furthermore, management actions were £15m (2021: £16m) and
other, driven by a longevity assumption change, was £90m. When added to the
UOCG this leads to a total of £134m of organic capital generation (2021:
£93m), which boosted the capital coverage ratio by 5 percentage points. The
solvency sensitivity to property was further reduced following completion of
our third and final planned LTM portfolio sale in February 2022, and remains
within risk appetite. No further portfolio sales are anticipated.
Recognising the resilience and strengthened financial position of the Group,
we recommenced dividends at FY 2021 and paid a £16m distribution to
shareholders during the year.
In 2023, as legislation is finalised within the Financial Services and Markets
bill, we expect further clarification from the PRA following HMT Treasury's
announcement to reform Solvency II and introduce a new Regulatory Framework
for financial services following the UK's exit from the European Union. The
Chancellor's Autumn Statement in November very positively outlined a 65%
reduction in the risk margin (which will help to reduce the size and
volatility of the solvency balance sheet), 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, and no changes to the fundamental spread of the matching adjustment,
which remains a critical component of the Solvency UK regulatory regime. We
are very supportive of and keen to see swift progress on the proposed reforms,
which will better enable insurers to support the economy and the government's
various agendas including "levelling up", decarbonisation and increased
investment in science and technology. We await further detail on timing and
implementation.
At this time, the outlook for the economy continues to evolve reflecting
geopolitical and other macro-economic concerns including the trajectory of
interest rates to reduce and control inflation, and associated slowing of the
UK and global economies. The key sensitivities of the Group's capital and
financial position to future economic and demographic factors are set out
below and in notes 17 and 23 of the financial statements. We expect these
macro forces to have a negligible effect on the Group's business model with
demand for our products boosted by higher interest rates. We have a low strain
new business model that is generating sufficient underlying capital to fund
our ambitious growth plans, whilst also paying a shareholder dividend that is
expected to grow over time.
1 Solvency II capital coverage ratios as at 31 December 2021 and 31
December 2022 include a recalculation of TMTP as at the respective dates.
2 The retirement income sales included in this new business margin has
been calculated based on the July DB partnering premium after deducting the DB
partner share.
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 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. 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. This reflects 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:
Year ended Year ended Change
31 December 31 December
2022 2021
£m £m
Return on equity1 10.7% 8.3% 2.4pp
Retirement Income sales1 3,131 2,674 17%
Underlying organic capital generation1 29 51 (43)%
New business operating profit1 233 225 4%
Adjusted operating profit before tax1 336 238 41%
Underlying operating profit1 249 210 19%
IFRS loss before tax (317) (21) 15x
Management expenses1 153 147 4%
31 December 31 December Change
2022 2021
£m £m
Solvency II capital coverage ratio2 199% 164% 35pp
IFRS net assets 2,178 2,440 (11)%
1 Alternative performance measure, see glossary. The return on equity
(target 10%) calculation has been updated to be consistent with the 15% medium
term growth metric.
2 Solvency II capital coverage ratios as at 31 December 2021 and 31
December 2022 include a recalculation of TMTP as at the respective dates.
Return on equity
The return on equity in the year to 31 December 2022 was 10.7% (2021: 8.3%),
based on underlying operating profit after attributed tax of £202m (2021:
£170m) arising on average tangible net assets of £1,891m (2021: £2,048m).
Tangible net assets are reconciled to IFRS total equity as follows:
31 December 31 December
2022 2021
£m £m
IFRS total equity 2,178 2,440
Less intangible assets (104) (120)
Less tax on amortised intangible assets 15 17
Less equity attributable to Tier 1 noteholders (322) (322)
Tangible net assets 1,767 2,015
Return on equity 10.7% 8.3%
Underlying operating profit and adjusted operating profit before tax
Underlying operating profit is the core performance metric on which we have
based our target 15% growth, 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. 2022 underlying operating profit
grew by 19% to £249m (2021: £210m), which is a very solid start towards our
medium term target, albeit year to year, the trajectory may be influenced by
timing differences in relation to larger DB transactions.
Year ended Year ended Change
31 December 31 December %
2022 2021
£m £m
New business operating profit 233 225 4
In-force operating profit 116 90 29
Other Group companies' operating results (15) (15) -
Development expenditure (12) (7) 71
Reinsurance and finance costs (73) (83) (12)
Underlying operating profit 249 210 19
Operating experience and assumption changes 87 28 211
Adjusted operating profit before tax1 336 238 41
1 New business operating profit is reconciled to IFRS loss/profit (via
adjusting operating profit before tax) further in this Business Review.
New business operating profit
New business operating profit was up 4% at £233m for the year ended 31
December 2022 (2021: £225m), as shareholder funded Retirement Income sales
rose 17% to £3,131m (2021: £2,674m). The new business margin achieved on
Retirement Income sales during the period was lower at 7.4% (2021: 8.4%). We
are achieving similar spreads compared to the prior year, however, due to
higher interest rates, the new business profit we recognise is now being
discounted at a higher rate than the prior year, and hence the margin is
lower.
Management expenses
Management expenses have increased by 4% to £153m for the year ended 31
December 2022 (2021: £147m). Following the end of a formal three year cost
reduction programme in 2021, management expenses continue to be contained. We
have maintained 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,
and investing in the HUB Destination Retirement business. Going forward,
premium and business growth is expected to outpace costs, thus further
improving operational leverage.
In-force operating profit
In-force operating profit increased by 29% to £116m for the year ended 31
December 2022 (2021: £90m). Aside from the positive impact of credit spread
widening, the Group's in-force operating profit also benefited from the impact
of rising rates, which has boosted the return on surplus assets.
Other Group companies' operating results
The operating result for other Group companies was a loss of £15m (2021: loss
of £15m). These costs arise from the holding company, Just Group plc, and the
HUB group of businesses.
Development expenditure
Development expenditure of £12m for the year ended 31 December 2022 (2021:
£7m), mainly relates to product development, proposition enhancement and new
initiatives. It also includes preparations for the new insurance accounting
standard IFRS 17 and distribution improvements such as online capability and
digital access.
Reinsurance and finance costs
Finance costs have decreased by 12% to £73m (2021: £83m). 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 reduced the interest costs on the RT1 component of
the capital structure by £12m pre-tax per annum, while also lengthening the
bond maturity to 2031. In November 2022, the Group tendered for and cancelled
£76m of 9% tier 2 debt due in 2026, which will lead to additional interest
savings in 2023 as the Group further optimises its capital structure and debt
profile.
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. This facility has not been drawn upon in
2022.
Operating experience and assumption changes
Over the past two years, the Group has actively continued to assess the
potential impact of COVID-19 on longer term mortality and has increasingly
incorporated COVID-19 experience data and medical understanding into our
pricing and reserving assumptions, as it became available. As usual, the Group
carried out a full basis review in December 2022, and has updated its
longevity reserving using the CMI 2021 mortality tables (2021: CMI 2019) and
reviewing mortality rates experienced over the past three years. The Group
continues to allow for future improvements in long-term mortality, but with
nearer term mortality also reflecting the heightened mortality being
experienced post pandemic. Our assessment of 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
continues to evolve. However, these factors, combined with the winter flu
season, longer NHS waiting lists and inflation pressures on incomes are
undoubtedly contributing to continued elevated deaths across the population,
which we have sought to reflect in our year end assumption. There were a
number of very minor changes to the Group's other assumptions in 2022.
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, operating experience and assumption changes were £87m (2021: £28m).
The Group reported negative operating experience of £5m in 2022 (2021:
positive £33m), as positive annuitant mortality experience and modelling
adjustments were more than offset 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 rates rose and thus reducing
interest roll-up. Assumption changes resulted in a £92m release (2021: £5m
strengthening), and were almost entirely driven by the mortality assumption
change, as per above.
Adjusted operating profit before tax
Adjusted operating profit before tax, was £336m (2021: £238m). Adjusted
operating profit before tax is the sum of underlying operating profit and
operating experience and assumption changes.
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
Year ended Year ended Change
31 December 31 December %
2022 2021
£m £m
Defined Benefit De-risking Solutions ("DB") 2,567 1,935 33
Guaranteed Income for Life Solutions ("GIfL") and Care Plans ("CP") 564 739 (24)
Retirement Income sales 3,131 2,674 17
The structural growth drivers that underpin our markets are unchanged.
Shareholder funded Retirement Income sales for the year ended 31 December 2022
rose 17% to £3,131m (2021: £2,674m).
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 increase our access to the c.£1.5tn DB market
opportunity. Prior to 2022, scheme funding levels across the industry had been
steadily improving primarily due to increased contributions from sponsors, and
therefore more schemes were able to afford full scheme de-risking and buyout
(with deferreds) as opposed to pensioner only de-risking. During 2022, rising
interest rates accelerated the funding gap closure, which means that more
schemes will commence the process to be "transaction ready" and hence bring
business forward into the 2023 and medium term pipeline from ordinarily
expecting to transact in the second half of the decade. Our efforts in 2021
were recognised by being named "Risk Management Provider of the Year" at the
Pensions Age awards in February 2022.
Shareholder funded DB sales were £2,567m, an increase of 33%. Activity levels
were significantly ahead of the comparable period as we closed 56 transactions
(2021: 29 transactions) aided by our proprietary bulk quotation service and
repeat business. This level of transaction activity is estimated to reflect
over a quarter of all transactions in the market - a very strong endorsement
of our DB new business franchise. In July, we completed a £484m deal
utilising our DB partnering model. Adding the £259m DB partner premium to
Just's shareholder funded DB sales led to total DB market volumes of £2,826m,
up 46% on prior year.
We expect industry volumes for 2022 to be c.£30bn (2021: £27.7bn), and
therefore our market volume share to be close to 10%. Our confidence in
substantial market growth in 2023 is underpinned by Lane Clark Peacock ("LCP")
who anticipate that DB market volumes could exceed the record £44bn achieved
in 2019, while Willis Towers Watson expect in excess of £40bn of
Buy-in/Buy-out DB transactions. Our near term actively quoting pipeline is
over £6bn, and we expect a busy year with a greater number of medium and
large transaction opportunities coming to market. However, the long-term
growth opportunity is very substantial with LCP forecasting up to £600bn of
DB Buy-in and Buy-out transactions over the decade to 2032, as funding
deficits in the largest schemes are closed. Indeed, over the next three years,
more than £200bn could transact, similar to the amount that transacted during
the last decade. We will take advantage of this very strong market backdrop
through our low strain new business model, which enables us to fund our
ambitious growth plans through underlying organic capital generation, and
utilising various forms of reinsurance through DB partnering. When combined
with our proven ability to originate high quality illiquid assets, shareholder
capital invested in new business adds substantially to increasing the existing
shareholder value.
GIfL sales fell by 24% to £520m (2021: £688m), due to a competitive market
and a decrease in the value of pension pots, which resulted in smaller case
sizes. Falling equity and bond markets, and economic uncertainty demonstrate
to customers the importance and security of a guaranteed income. We maintained
pricing discipline and used our insight to select the most profitable risks in
a competitive market, while deploying the available capital budget towards the
heightened activity in the DB market. The rise in long term interest rates has
translated into increased customer rates which has stimulated interest in
guaranteed income relative to other forms of retirement income. Year to date,
quotation volumes are substantially higher than 2022, which provides us with
further optionality to deploy available capital. We continue to invest in our
distribution capability, with online applications now available, which
contributed towards our 18th consecutive Five Stars at November's Financial
Advisor Service Awards. Care sales were down 14% at £44m (2021: £51m) and
remain subdued due to customer behaviour changes post pandemic, with a further
delay to October 2025 in relation to proposed government initiatives on health
and social care funding.
Other new business sales
2022 internally funded lifetime mortgage advances were £519m (2021: £488m),
an increase of 6%, with these in part used to replace an increased level of
back book LTM early redemptions. Going forward, our target LTM backing ratio
for new business has been revised downwards to 10-15%. Relative to the spreads
available on other illiquid assets, LTMs remain an attractive asset class,
however, in a higher interest rate environment, the capital charge attaching
to the NNEG risk becomes onerous.
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 19.6 pence (2021: 16.4 pence).
Year ended Year ended
31 December 31 December
2022 2021
Adjusted earnings (£m) 202 170
Weighted average number of shares (million) 1,032 1,034
Adjusted EPS1 (pence) 19.6 16.4
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
Year ended Year ended
31 December 31 December
2022 2021(1)
Earnings (£m) (245) (82)
Weighted average number of shares (million) 1,032 1,034
EPS (pence) (23.7) (8.0)
1 Restated as explained in note 1.
Reconciliation of operating profit to statutory IFRS results
The tables on the following pages present the Group's results on a statutory
IFRS basis.
Year ended Year ended
31 December 31 December
2022 2021
£m £m
Adjusted operating profit before tax 336 238
Non-recurring and project expenditure (12) (15)
Investment and economic losses (639) (251)
Interest adjustment to reflect IFRS accounting for Tier 1 notes as equity 16 25
Amortisation costs (18) (18)
IFRS loss before tax (317) (21)
Non-recurring and project expenditure
Non-recurring and project expenditure was £12m for the year ended 31 December
2022 (2021: £15m). This included the business process transformation and
increasing efficiency by investing in automation and new systems, across DB,
retail and finance, which will lead to improved customer service and long-term
cost and control benefits. This also includes the support for Group internal
model updates and other items.
Investment and economic losses
Year ended Year ended
31 December 31 December
2022 2021
£m £m
Change in interest rates (510) (226)
(Wider)/narrower credit spreads (112) 57
Property growth experience (22) 56
Sale of LTM portfolio (49) (161)
Asset timing variance (95) 51
Other 149 (28)
Investment and economic losses (639) (251)
Investment and economic losses for the year ended 31 December 2022 were £639m
(2021: £251m loss). Losses from the increase in risk-free rates during the
period contributed £510m. The Group takes an active approach to hedging its
interest rate exposure. In the second half of 2021 and across 2022, as rates
rose and our solvency position strengthened, we gradually reduced the interest
rate hedging to a broadly economically neutral position. Our modified approach
will allow the solvency position to fluctuate as interest rates move, but
minimise the economic cost should rates rise further. As noted above, the
cumulative net interest rate loss from hedging the Solvency II balance sheet
since 2018 has been a net loss (pre-tax) of £226m. Rising rates over the
second half of 2022 helped the Solvency II capital coverage ratio strengthen
by a further 15 percentage points to 199%.
We also incurred a £95m loss on asset timing variance, largely on investments
backing new business completed in December, which is expected to reverse as we
lengthen the duration of our assets to achieve the targeted asset mix during
the first few months of 2023 and a £49m loss from the third and final LTM
portfolio sale in February 2022. Other notable economic variances include a
refinement of LPI curve1 methodology (£49m) and the lack of corporate bond
defaults offset by wider credit spreads (loss of £112m) and negative property
growth experience (loss of £22m).
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 to changes in property assumptions are given
in notes 17 and 23 of the financial statements.
Amortisation of acquired intangibles
Amortisation of acquired intangibles for the year ended 31 December 2022 were
£18m (2021: £18m), these mainly relate 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
Just Group plc estimated Solvency II capital position
The Group's coverage ratio was estimated at 199% at 31 December 2022 after a
formal recalculation of transitional measures on technical provisions
("TMTP"), an increase of 35 percentage points, driven by the substantial rise
in interest rates in 2022 (31 December 2021: 164% after a formal biennial
recalculation of TMTP). The Solvency II capital coverage ratio is a key metric
and is considered to be one of the Group's KPIs.
Unaudited 31 December 31 December
2022 2021
£m £m
Own funds 2,757 3,004
Solvency Capital Requirement (1,387) (1,836)
Excess own funds 1,370 1,168
Solvency coverage ratio1 199% 164%
1 Solvency II capital coverage ratios as at 31 December 2021 and 31
December 2022 include a recalculation of TMTP as at the respective dates.
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 year ended
31 December 2022.
Unaudited 2022 2021
£m £m
Excess own funds at 1 January 1,168 1,076
Operating
In-force surplus net of TMTP amortisation 174 191
New business strain2 (60) (40)
Finance cost (57) (71)
Group and other costs (28) (29)
Underlying organic capital generation 29 51
Management actions and other items 105 42
Total organic capital generation3 134 93
Non-operating
Dividend (16) -
Regulatory changes - (38)
Economic movements 117 56
Effect of Tier 2 debt buyback (2022) and RT1 refinancing (2021), net of costs (33) (19)
Excess own funds at 31 December 1,370 1,168
1 All figures are net of tax, and include a recalculation of TMTP as
at the respective dates.
2 New business strain calculated based on pricing assumptions.
3 Organic capital generation includes surplus from in-force, new
business strain and other expenses, interest and other operating items. It
excludes economic variances, regulatory changes, dividends and capital
issuance.
Underlying organic capital generation
During 2022, we delivered £29m of underlying organic capital generation
(2021: £51m, 2020: £18m). The decrease was primarily due to the effect of
rising interest rates on the solvency balance sheet, which leads to a smaller
SCR and risk margin and hence unwind into the In-force surplus net of TMTP
amortisation, an increase in new business strain reflecting higher volumes of
new business, both offset by lower financing costs. The business continues to
deliver sufficient ongoing capital generation to support decisions on capital
deployment between profitable growth, providing returns to our capital
providers and further investment in the strategic growth of the business.
Underlying organic capital generation continues to benefit from the ongoing
focus across the business on minimising new business capital strain. During
2022, new business strain increased by £20m to £60m, which represents 1.9%
of new business premium (2021: 1.5%), well within our target of below 2.5% of
premium. This outperformance was driven by continued pricing discipline and
risk selection, including DB deferred business and a greater weighting towards
small and medium transactions within the sales mix. Due to careful management
of the capital budget in the first half of the year, we deployed capital in
the seasonally busier second half of the year. We expect seasonality to be
less pronounced in 2023, given that the DB market could potentially be a
record year as a result of scheme funding deficits closing or being eliminated
due to the rise in interest rates over the past 12 months.
In-force surplus after TMTP amortisation was down 9% to £174m, primarily due
to higher interest rates which reduces the amount of capital available (via
lower SCR and risk margin) to release and the cumulative effect of the three
LTM portfolio sales, which were more capital intensive than the assets that
replaced them. Group and other costs including development, non-recurring and
non-life costs were £28m (2021: £29m), reflecting strong cost control.
Finance costs at £57m (2021: £71m) were 20% lower reflecting a reduced
coupon on the RT1 debt, after the opportunistic early re-financing of that
debt in September 2021. Interest costs will fall further in 2023 following the
£76m tier 2 debt tender completion in November 2022. Management actions at
£15m (2021: £16m) further augment underlying organic capital generation and
are combined with assumption changes including mortality into management
actions and other items, which contributed a total of £105m to the capital
surplus. Adding underlying organic capital generation and management actions
and other items led to a total of £134m from organic capital generation,
which added 5% to the capital coverage ratio.
Non-operating items
Within the surplus, property value movements led to a £18m negative due to
actual property price growth of c.2% (compared to our annual 3.3% long term
growth assumption) on our individually updated portfolio. Other economic
movements included a positive £137m to the surplus as both the SCR (£436m)
and the Own Funds (£299m) fell due to higher interest rates. This interest
rate movement led to a strengthening of the capital coverage ratio by 30
percentage points, with asset trading and various positive other economic
variances having minimal impact on the coverage ratio. This includes a lower
than anticipated impact from the third LTM portfolio sale as we reinvested the
proceeds in other illiquid assets and the positive impact from high inflation
indexation and no corporate bond defaults during the year. The Tier 2 debt
buyback in November 2022 led to a £33m reduction in capital surplus as the
£76m nominal that was bought back was partially offset by the release of
capital tiering restrictions. In 2022, the Group recommenced a shareholder
dividend, which cost a total of £16m during the year.
Sensitivities to economic and other key metrics are shown in the table below.
Estimated Group Solvency II sensitivities1,5
Unaudited % £m
Solvency coverage ratio/excess own funds at 31 December 20222 199 1,370
-50 bps fall in interest rates (with TMTP recalculation) (13) (88)
+50 bps increase in interest rates (with TMTP recalculation) 13 79
+100 bps credit spreads (with TMTP recalculation) 8 31
Credit quality step downgrade3 (8) (107)
+10% LTM early redemption 1 13
-10% property values (with TMTP recalculation)4 (12) (135)
-5% mortality (10) (136)
1 In all sensitivities the Effective Value Test ("EVT") deferment rate
is allowed to change subject to the minimum deferment rate floor of 2.0% as at
31 December 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 10% 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.
4 After application of NNEG hedges.
5 The results do not include the impact of capital tiering restriction.
Reconciliation of IFRS total equity to Solvency II own funds
Unaudited 31 December 31 December
2022 2021
£m £m
Shareholders' net equity on IFRS basis 2,178 2,440
Goodwill (34) (34)
Intangibles (70) (86)
Solvency II risk margin (456) (759)
Solvency II TMTP1 874 1,657
Other valuation differences and impact on deferred tax (304) (987)
Ineligible items (50) (3)
Subordinated debt 619 781
Group adjustments - (5)
Solvency II own funds1 2,757 3,004
Solvency II SCR1 (1,387) (1,836)
Solvency II excess own funds1 1,370 1,168
1 Solvency II capital coverage ratios as at 31 December 2021 and 31
December 2022 include a recalculation of transitional measures on technical
provisions ("TMTP") as at the respective dates.
Reconciliation from regulatory capital surplus to reported capital surplus
31 December 31 December 31 December 31 December
2022 2022 2021 2021
£m % £m %
Regulatory capital surplus 1,370 199 1,168 164
Notional recalculation of TMTP - - - -
Reported capital surplus 1,370 199 1,168 164
Highlights from condensed consolidated statement of comprehensive income
The table below presents the Condensed consolidated statement of comprehensive
income for the Group, with key line item explanations.
Year ended Year ended
31 December 31 December
2022 2021
£m £m
Gross premiums written 3,391 2,676
Reinsurance premiums ceded (271) (23)
Net premium revenue 3,120 2,653
Net investment expense (4,778) (130)
Fee and commission income 14 16
Share of results of associates (3) -
Total (expense)/revenue (1,647) 2,539
Net claims paid (1,210) (1,141)
Change in insurance liabilities 2,935 (1,039)
Change in investment contract liabilities 3 (1)
Acquisition costs (56) (49)
Other operating expenses (209) (193)
Finance costs (133) (137)
Total claims and expenses 1,330 (2,560)
Loss before tax (317) (21)
Income tax 85 5
Loss after tax (232) (16)
Gross premiums written
Gross premiums written for the year ended 31 December 2022 were £3,391m, an
increase of 27% (2021: £2,676m). As discussed above, this reflects overall
higher new business premiums, as shareholder backed DB and DB partner business
combined led to a 46% increase in DB business offset by a 24% reduction in
GIfL/Care business.
Reinsurance premiums ceded
Reinsurance premiums ceded (expense of £271m) has increased in 2022 as a
result of reinsurance in relation to the Group's DB partner transaction
mentioned above.
Net investment expense
Net investment expense increased to £4,778m (2021: £130m). The main
components of net investment 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 had hedged interest rate exposure to reduce the effect of
interest rate movements on the Solvency II capital position, but with this
creating IFRS losses as interest rates rose. We have progressively reduced our
hedging of the Solvency II interest rate exposure over the year and by the end
of 2022 were broadly economically neutral to interest rates up and down.
Net claims paid
Net claims paid increased to £1,210m, (2021: £1,141m) reflecting the
continuing growth of the in-force book.
Change in insurance liabilities
Change in insurance liabilities was £2,935m (2021: £(1,039)m). The increase
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 £56m (2021: £49m), driven by the 6%
increase in internally funded LTM origination.
Other operating expenses
Other operating expenses have increased to £209m (2021: £193m) driven by
higher investment management fees due to our significantly increased
origination of illiquid assets, which have higher fees, but also diversify our
investments portfolio, support new business pricing and optimise back book
returns.
Finance costs
The Group's overall finance costs decreased to £133m (2021: £137m). 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 year ended 31 December 2022 was a credit of £85m (2021:
credit of £5m). The effective tax rate of 27.0% (2021: 26.4%) is 8% 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%.
Highlights from condensed consolidated statement of financial position
The table below presents selected items from the Condensed consolidated
statement of financial position, with key line item explanations below. The
information below is extracted from the statutory consolidated statement of
financial position.
31 December 31 December
2022 2021
£m £m
Assets
Financial investments 23,477 24,682
Reinsurance assets 2,287 2,808
Other assets 1,350 858
Total assets 27,114 28,348
Share capital and share premium 199 199
Other reserves 948 948
Accumulated profit and other adjustments 711 973
Total equity attributable to ordinary shareholders of Just Group plc 1,858 2,120
Tier 1 notes 322 322
Non-controlling interest (2) (2)
Total equity 2,178 2,440
Liabilities
Insurance liabilities 18,333 21,813
Reinsurance liabilities 306 275
Other financial liabilities 5,250 2,866
Insurance and other payables 263 93
Other liabilities 784 861
Total liabilities 24,936 25,908
Total equity and liabilities 27,114 28,348
Financial investments
During the year, financial investments decreased by £1.2bn to £23.5bn (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 started to be gradually unwound. At the
same time, central banks raised base rates from their historical low levels to
counteract the effect of inflation. The interest rate increases are predicted
to cause a shallow recession in 2023 followed by a gradual recovery, and this
backdrop led to wider spreads during the year. The effect of credit spread
widening and increases in risk-free rates, 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 50% of the Group's corporate bond and gilts portfolio rated A
or above (31 December 2021: 54%), with the reduction due to lower Government
investments (see below). Year to date, credit spreads have narrowed as the UK
and global economic outlook relative to forecasts continues to improve. Our
diversified portfolio continues to increase by issuer and is well balanced
across a range of industry sectors and geographies.
Similar to 2021, credit rating agencies continue to maintain a cautious
approach. We continue to position the portfolio with a defensive bias, and in
2022 have experienced ratings stability as 9% of the Group's bond portfolio
was upgraded, offset by 8% 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),
basic materials, energy and real estate (including REITs). The BBB-rated bonds
are weighted towards the most defensive sectors including utilities,
communications & technology, and infrastructure. Reflecting this bias, the
Group has further increased its infrastructure allocation and selectively
added to utilities and commercial ground rent & income strips investments,
with some rotational changes as in particular we reduced BBB exposure to
communications & technology, industrials, auto manufacturers and energy.
Following a reclassification, "Financial - other" now includes short and
medium term illiquid assets including SME lending, commodity trade finance and
others.
During 2022, we originated £1,031m of long term other illiquid assets (2021:
£615m), via our roster of specialist asset managers, in addition to funding
£519m of lifetime mortgages (2021: £488m). Our investments model
demonstrated its flexibility and capabilities as we achieved our target
illiquid new business backing ratio of c.50%. We have the flexibility to
adjust the asset class allocations, and in 2022, increased our origination of
private placements as credit spreads widened, mirroring the public markets.
This flexibility enables us to support new business pricing and optimise back
book return whilst maintaining strict credit underwriting. 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
2022. Excess cash and gilts were recycled into other corporate bonds and
illiquid assets during 2022 as opportunities arose.
At year end, the Group had ample liquidity. We continue to prudently manage
the balance sheet by hedging all foreign exchange and inflation exposure,
while managing interest rate, credit and NNEG risk. As previously mentioned,
and reflecting the strengthened capital position of the Group, the interest
rate hedging was neutralised during the second half of the year. The effect of
the hedging was to protect the solvency ratio, but caused economic losses when
rates rose and profits when rates fell. Without hedging, interest rate
movements will impact the solvency balance sheet, but not IFRS and therefore,
we expect that, in future, the IFRS result will be more closely aligned to the
operating performance of the business.
The loan-to-value ratio of the mortgage portfolio was 37.3% (31 December 2021:
36.1%), reflecting continued strength and resilience across our geographically
diversified portfolio, which offsets the interest roll-up. Lifetime mortgages
at £5.3bn represent 26% of the investments portfolio and reflects completion
of the third and final LTM portfolio sale in February 2022. 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. Further portfolio sales
are not envisaged as the property sensitivity is expected to be contained
within risk appetite through maintaining NNEG hedges on c.20% of the portfolio
and a new business backing ratio of 10-15%.
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 hence the cash flow profile is
very beneficial, especially to match DB deferred liabilities.
To date, Just has invested £3.3bn in other illiquid assets, representing 16%
of the investments portfolio (excluding derivatives and collateral, 31
December 2021: 13%), as we make continued progress towards our 25% medium term
target, driven by new business backing. We have invested in our in-house
credit team as we have broadened our illiquid asset origination, and we work
very closely with our specialist asset managers on structuring to enhance our
security, with a right to veto on each asset. We anticipate that the upcoming
Solvency II reforms, when implemented, will increase the investment
opportunities available to us to provide long term capital that helps to
underpin UK economic growth and productivity. In particular, widening the
eligibility criteria for matching adjustment assets to include assets with a
construction phase where the commencement of cashflows is not exactly certain
is a very welcome development. We are pleased that these reforms can provide
support to insurance firms to fund 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. During 2022, we
invested a further £279m in eligible green and social assets (2021: £146m),
and have now completed our total £575m green and social asset allocation
commitment arising from the green and sustainability bonds issued in October
2020 and September 2021 respectively. The allocations were spread across 23
green and social investments comprising renewable energy, social housing and
green buildings. The Green/Sustainability bond full allocation report is
available on 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.
31 December 31 December 31 December 31 December
2022 2022 2021 2021
£m % £m %
AAA1 1,939 8 2,448 10
AA1 and gilts 1,986 8 3,194 13
A2 5,968 25 4,384 18
BBB 6,500 28 6,500 26
BB or below 455 2 388 1
Unrated/Other 1,363 6 414 2
Lifetime mortgages 5,306 23 7,423 30
Total2 23,517 100 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.
31 December 31 December 31 December 31 December
2022 2022 2021 2021
£m % £m %
Basic materials 270 1.3 264 1.1
Communications and technology 1,327 6.5 1,430 6.0
Auto manufacturers 250 1.2 319 1.3
Consumer (staples including healthcare) 1,012 5.1 1,174 4.8
Consumer (cyclical) 142 0.7 187 0.8
Energy 535 2.6 633 2.6
Banks 1,120 5.5 1,192 11.3
Insurance 607 3.0 845 3.5
Financial - other 956 4.7 481 2.0
Real estate including REITs 437 2.1 661 2.8
Government 1,596 7.8 2,415 10.1
Industrial 622 3.1 920 1.2
Utilities 2,266 11.0 2,302 9.6
Commercial mortgages 584 2.9 678 2.8
Ground rents1 291 1.4 263 1.1
Infrastructure 1,811 9.0 1,474 6.1
Other 42 0.2 38 0.2
Corporate/government bond total 13,868 68.1 15,276 63.6
Lifetime mortgages 5,306 26.1 7,423 30.9
Liquidity funds 1,174 5.8 1,311 5.5
Investments portfolio 20,348 100.0 24,010 100.0
Derivatives and collateral(2) 3,169 741
Total1 23,517 24,751
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 More than 99% of the derivative assets are comprised of interest
rate swaps, foreign exchange swaps to hedge the currency risk on non-GBP
investments, and inflation swaps. In addition, collateral in the form of
corporate bonds and cash has been posted in relation to the Group's hedging
activity. Further details are available in note 16 and note 28 of the
financial statements. Derivatives are used to manage risks on the balance
sheet, and we seek to be economically neutral on interest rate, currency and
inflation risks. The derivatives and collateral total has increased primarily
due to an increased number of positions as part of our dynamic interest rate
hedging strategy. Interest rate swap assets have accounted for the vast
majority of the increase, as they rose by £1,238m to £1,408m, while foreign
exchange swaps rose by £170m to £413m, and inflation swaps rose by £176m to
£438m. In relation to the interest rate, foreign exchange and inflation
derivative assets, compensating increases in the swap liability positions
means that the overall swap exposure in relation to these categories is
limited to a net liability of £722m (2021: net asset £291m). Increased
collateral requirements from the hedging activity drove the increase in
deposits with credit institutions (2022: £908m, 2021: £53m), and is almost
all in relation to interest rate swaps. Combining the 2022 net derivative
liability and deposits held at credit institutions (predominantly collateral)
is a net asset of £186m (2021: net asset of £343m). Other swap assets and
liabilities are negligible. In accordance with accounting standards these
derivatives are not offset. Given that the net asset/liability is not
represented in the financial investments total on the balance sheet, to aid
comparability, the percentage of financial investments does not include
derivatives and collateral.
Reinsurance assets and liabilities
Reinsurance assets decreased to £2.3bn at 31 December 2022 (2021: £2.8bn)
due to the increase in the valuation rate of interest over the period. Since
the introduction of Solvency II in 2016, the Group has increased its use of
reinsurance longevity swaps rather than quota share treaties for shareholder
funded business, albeit the DB partnering business is written via quota share.
Reinsurance liabilities relate to liability balances in respect of the Group's
longevity swap arrangements.
Other assets
Other assets increased to £1.4bn at 31 December 2022 (2021: £0.9bn).
These assets include cash, investment in associate, deferred tax assets,
insurance receivables and intangible assets.
Insurance liabilities
Insurance liabilities decreased to £18.3bn at 31 December 2022 (2021:
£21.8bn). The decrease in liabilities arose from the new business premiums
written during the year, which was more than offset by an increase to the
valuation rate of interest over the period.
Other financial liabilities
Other financial liabilities increased to £5.3bn at 31 December 2022 (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 £784m at 31 December 2022 (2021:
£861m) due to the £76m repayment of the Tier 2 debt.
IFRS net assets
The Group's total equity at 31 December 2022 was £2.2bn (2021: £2.4bn).
Total equity includes the Restricted Tier 1 notes of £322m (after issue
costs) issued by the Group in September 2021. Including negative effects of
Solvency II interest rate hedging on the IFRS results, total equity
attributable to ordinary shareholders decreased from £2,120m to £1,823m
resulting in net asset value per ordinary share of 179 pence (2021: 204
pence).
Dividends
In line with our stated policy to grow the dividend over time, the Board is
recommending a final dividend of 1.23 pence per share bringing the total
dividend for the year ended 31 December 2022 to 1.73 pence per share,
representing a 15% increase on the annualised dividend (2021: 1.0 pence,
recommenced dividend and represents a final dividend only).
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 help
our business partners and other stakeholders have confidence in us. Our
approach to risk management is designed to ensure that our understanding of
risk underpins how we run the business.
RISK FRAMEWORK
Our risk framework, owned by the Group 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.
The framework has now 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 qualitative climate risk appetite has been added to the Group's
existing high-level appetites, which include reputation and capital,
recognising the potential impacts of climate risk.
RISK EVALUATION AND REPORTING
We evaluate our principal and emerging risks to decide how best to manage them
within our risk appetite. Management regularly reviews its risks and produces
management information 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.
Company policies govern the exposure of risks to which the Group is exposed
and define the risk management activities to ensure these risks remain within
appetite. Our policies have been updated to draw out any climate specific
considerations for risk management.
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.
Quantification of the financial impact of climate risk is subject to
significant uncertainty. Risks arising from the transition to a lower carbon
economy are heavily dependent on government policy developments, social
responses to these developments and market trends. Just's initial focus has
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 carried out in assessing the Group's risks related to its
strategy and business plan, supported by 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
informs strategic decision making. Updates are provided to the GRCC each
quarter, including factors such as key risk limit consumption as well as
conduct, and 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, which will evolve as the quantification of risk exposures
develops and key risk indicators ("KRIs") are identified.
Principal risks and uncertainties
STRATEGIC PRIORITIES
1. Grow sustainably
2. Transform how we work
3. Grow through innovation
4. Get closer to our customers and partners
5. Be proud to work at Just
A material change was made to how the risks and uncertainties are presented in
this report. The first section summarises the Group's ongoing core risks and
how they are managed in business as usual. The risk outlook section calls out
the risk subjects that are evolving and are of material importance from a
Group perspective.
Ongoing principal risks
Risk How we manage or mitigate the risk
A • Premiums invested to match asset and liability cash flows as closely as
Market risk arises from changes in interest rates, residential property practicable;
prices, credit spreads, inflation, and exchange rates, which affect, directly
or indirectly, the level and volatility of market prices of assets and • Market risk exposures managed within pre-defined limits aligned to risk
liabilities. The Group is not exposed to any material levels of equity risk. appetite for individual risks;
Some very limited equity risk exposure arises from investment into credit
funds which have a mandate which allows preferred equity to be held. • Exposure managed using regulatory and economic metrics to achieve desired
financial outcomes;
• Balance sheet managed by hedging exposures including currency and
Strategic priorities inflation where cost effective to do so; and
1, 3 • Interest rate hedging is in place to manage Solvency II capital coverage
and IFRS equity positions.
B • Investments are restricted to permitted asset classes and concentration
Credit risk arises if another party fails to perform its financial obligations limits;
to the Group, including failing to perform them in a timely manner.
• Credit risk exposures monitored in line with credit risk framework,
driving corrective action where required;
Strategic priorities • External events that could impact credit markets are tracked continuously;
1, 3, 4 • Credit risks from reinsurance balances mitigated by the reinsurer
depositing back premiums ceded and through collateral arrangements or
recapture plans; and
• The external fund managers we use are subject to Investment Management
Agreements and additional credit guidelines.
C • Controls maintained over insurance risks related to product development
Insurance risk arises through exposure to longevity, mortality, morbidity and pricing;
risks and related factors such as levels of withdrawal from lifetime mortgages
and management and administration expenses. • Adherence to approved underwriting requirements;
• Medical information developed and used for pricing and reserving to assess
longevity risk;
Strategic priorities
• Reinsurance used to reduce longevity risk, with oversight by Just of
1, 3, 4 overall exposures and the aggregate risk ceded;
• Group Board review and approval of assumptions used; and
• Regular monitoring, control and analysis of actual experience and expense
levels.
D • Stress and scenario testing and analysis: including collateral margin
Liquidity risk is the risk of insufficient suitable assets available to meet stresses, asset eligibility and haircuts under stress;
the Group's financial obligations as they fall due.
• Corporate collateral capacity to reduce liquidity demands and improve our
liquidity stress resilience;
Strategic priorities • Risk assessment reporting and risk event logs inform governance and enable
effective oversight; and
1, 3, 4
• Contingency funding plan maintained with funding options and process for
determining actions.
E • Implementation of policies, controls, and mitigating activities to keep
Conduct and operational risks arise from inadequate internal processes, people risks within appetite;
and systems, or external events including changes in the regulatory
environment. Such risks can result in harm to our customers, the markets • GRCC oversight of risk status reports and any actions needed to bring
in which we do business or our regulatory relationships as well as direct or risks back within appetite;
indirect loss, or reputational impacts.
• Scenario-based assessment to establish the level of capital needed for
conduct and operational risks;
Strategic priorities • Monitoring conduct risk indicators and their underlying drivers prompting
action to protect customers;
1, 2, 3, 4, 5
• Risk management training and other actions to embed regulatory changes;
and
• Ensuring data subjects can exercise their GDPR rights including their
right to be forgotten and subject access requests to obtain their data held
by Just.
F • The Group operates an annual strategic review cycle;
Strategic risk arises from the choices the Group makes about the markets in
which it competes and the environment in which it competes. These risks • Information on the strategic environment, which includes both external
include the risk of changes to regulation, competition, or social changes market and economic factors and those internal factors which affect our
which affect the desirability of the Group's products and services. ability to maintain our competitiveness, is regularly analysed to assess the
impact on the Group's business models;
• Engagement with industry bodies supports our information gathering; and
Strategic priorities
• The Group responds to consultations through trade bodies where
1, 2, 3, 4, 5 appropriate.
Risk outlook
How this risk affects Just Just's exposure to the risk Outlook and how we manage or mitigate the risk
1 Just monitors and assesses regulatory developments on an ongoing basis. We HM Treasury continues to review the future regulatory framework for financial
Political and regulatory seek to actively participate in all regulatory initiatives which may affect or services, which includes the Solvency II review. Both reviews could impact the
provide future opportunities for the Group. Our aims are to implement any amount of capital our businesses are required to hold. Matching Adjustment
Changes in regulation and/or the political environment can impact the Group's changes required effectively and deliver better outcomes for our customers and and Risk Margin reform is of key importance to Just's business model. The HM
financial position and its ability to conduct business. The financial services a competitive advantage for the business. We develop our strategy by giving Treasury response in November 2022 set out the Government's final reform
industry continues to see a high level of regulatory activity. consideration to planned political and regulatory developments and allowing package for Solvency UK, including:
for contingencies should outcomes differ from our expectations.
• a reduction in the Risk Margin;
Strategic priorities • an enhancement in the Fundamental Spread risk sensitivity although its
underlying design will be unchanged; and
1, 3, 4, 5
• a broadening of eligibility requirements for the Matching Adjustment, the
Trend inclusion of assets with 'highly predictable' cash flows, and other changes
including increased flexibility in the associated processes.
Uncertain
The potential impact of the changes will not be fully understood until the
details of their implementation are known.
The FCA's rules for a new Consumer Duty (PS22/9 published July 2022) will set
higher and clearer standards for consumer protection across financial services
and require firms to put customers' needs first. Firms need to apply the Duty
to new and existing products and services that are open to sale (or renewal)
from 31 July 2023, and from 31 July 2024 to apply the Duty to products and
services in closed books. Work is now progressing to implement within the
timeframes the plans approved by the Just Boards in October 2022.
New PRA and FCA regulations on operational resilience took effect in March
2022. The Regulators expect firms to be operationally resilient to ensure
customers are not at a financial disadvantage or be placed at risk of
financial harm. Firms must identify its most important business services and
set impact tolerances for each, with regular scenario testing and an annual
Self-Assessment for Board approval.
The change in insurance 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. We published an investor presentation
in February 2023 to brief investors on the changes resulting from IFRS 17
ahead of full implementation.
2 Our TCFD disclosures (section "Sustainability strategy: TCFD disclosure Just is proactive in pursuing its sustainability responsibilities and
Climate and ESG framework") explains how climate-related risks and opportunities are embedded recognises the importance of its social purpose. We have set sustainability
in Just's governance, strategy and risk management, with metrics to show the targets for our operations to be carbon net zero by 2025 and for emissions
Climate change could impact our financial position by impacting the value of potential financial impacts on the Group. The metrics reflect the from our investment portfolio, properties on which lifetime mortgages are
residential properties in our lifetime mortgage portfolio and the yields and stress-testing capabilities developed to date to assess the potential impact secured and supply chain to be net zero by 2050, with a 50% reduction in
default risk of our investment portfolios. Just's reputation could also be of climate risk on the Group's financial position. these emissions by 2030. Performance against these targets is being monitored
affected by missed emissions targets or inadequate actions on environmental
and reported.
issues. The value of properties on which lifetime mortgages are secured can be
affected by: We will continue to develop stress testing capabilities to support the
monitoring of potential climate change impact on our investment and LTMs
(i) transition risk - such as potential government policy changes related to portfolios with a particular focus on refining the quality of input data.
Strategic priorities the energy efficiency of residential properties;
Under Just's Responsible Investment Framework, the environmental credentials
1, 2, 3, 4, 5 (ii) physical risks - such as increased flooding due to severe rainfall, or of bonds and illiquid investments are considered when new premium income is
more widespread subsidence after extended droughts. invested. Risks arising from flooding, coastal erosion and subsidence are
Trend
taken into account in lifetime mortgage lending decisions.
A shortfall in property sale price against the outstanding mortgage could lead
Increasing to a loss due to the no-negative equity guarantee given to customers. The The consideration of sustainability in investment decisions may restrict
lifetime mortgage lending policy will be kept under review in light of climate investment choice and the yields available; it may also create new
risk and adjustments made as required. opportunities to invest in assets that are perceived to be more sustainable.
For corporate bond and illiquid investment portfolios, the impact of climate
risk on assets or business models may affect the ability of corporate bond
issuers and commercial borrowers to service their liabilities. 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.
3 Our IT systems are central to conducting our business from delivering The cyber threat to firms is expected to continue at a high level in the
Cyber and technology outstanding customer service to the financial management of the business. We coming years with evolving sophistication. We will continue to closely monitor
maintain a framework of operational resilience and disaster recovery evolving external cyber threats to ensure our information security measures
IT systems are key to serving customers and running the business. These capabilities so that we can continue to operate the business in adverse remain fit for purpose.
systems may not operate as expected or may be subject to cyber-attack to steal circumstances.
or misuse our data or for financial gain. Any system failure affecting the
2023 will see further investments in cyber-attack countermeasures, to enable
Group could lead to costs and disruption, adversely affecting its business and Protecting the personal information of our customers and colleagues is a key consistent delivery of required security standards. This will include the
ability to serve its customers, as well as reputational damage. priority. Internal controls and our people are integral to protecting the replacement of the Security Incident Event Management tool to increase
integrity of our systems, with our multi-layered approach to information security. Other new technologies will be evaluated during the year. Just's new
security supported by training, embedded company policies and governance. Chief Information Security Officer will implement a revised information
security team structure and approach.
Strategic priorities We continue to invest in strategic technologies to strengthen data security
and overall resilience. In 2022 we have made enhancements to network
1, 2, 3, 4, 5 architecture and implemented data centre upgrades. Our email system has been
made more resilient to malicious attacks, including emerging types of
Trend ransomware.
Stable A specialist Security Operations Centre monitors all our externally facing
infrastructure and services, with threat analysis, incident management and
response capabilities. The Group's cyber defences are subject to regular
external penetration tests to drive enhancements to our technology
infrastructure.
The development of in-house systems and our use of third-party systems is
tightly controlled by technical teams following established standards and
practices.
4 A high proportion of longevity risk on new business Just writes is reinsured, Experience and insights emerging since mid-2021 indicate that COVID-19 and
Insurance risk with the exception of Care business for which the risk is retained in full. the aftermath of the pandemic, will have a material and enduring impact on
Most of the financial exposure to the longevity risks that are not reinsured mortality for existing and future policyholders. Our current assumption about
In the long-term, the rates of mortality suffered by our customers may differ relate to business written prior to 2016. these changes has been incorporated into Just's pricing across our Retirement
from the assumptions made when we priced the contract.
Income and Lifetime Mortgage products and will be updated as more information
Reinsurance treaties include collateral to minimise exposure in the event of becomes available.
Strategic priorities a reinsurer default. Analysis of collateral arrangements can be found in notes
27 and 29 of the Annual Report and Accounts.
1, 3, 4
Mortality experience continues to be volatile and significantly above
Trend pre-pandemic levels.
Stable
5 Financial market volatility leads to changes in the level of market prices of Tightening fiscal and monetary policy are expected to weaken global growth
Market and credit risk assets and liabilities. Our business model and risk management framework have significantly in 2023, with a sustained recession possible in the UK.
been designed to remain robust against market headwinds. Our policy is to Financial markets are likely to remain volatile during this period.
Fluctuations in interest rates, residential property values, credit spreads, manage market risk within pre-defined limits.
inflation and currency may result, directly or indirectly, in changes in the
Our investment assets may experience increased movements in downgrade and/or
level and volatility of market prices of assets and liabilities. Investment in fixed income investments involves default, credit rating default experience in 2023. Residential property price falls may increase the
downgrade and concentration risks. Other credit risk exposures arise due to Group's exposure to the risk of shortfalls in expected repayments due to
the potential default by counterparties we use to: no-negative equity guarantee within its portfolio of lifetime mortgages. Any
commercial property price falls would reduce the value of collateral held
Investment credit risk is a result of investing to generate returns to meet • provide reinsurance to manage longevity risk and to fund new business. within our commercial mortgage portfolio.
our obligations to policyholders.
• provide financial instruments to mitigate interest rate and currency risk Our balance sheet sensitivities to these risks can be found in note 17.
exposures.
Global factors have led to high inflation, increased interest rates and • holding our cash balances.
significant volatility in financial markets in 2022.
All over-the-counter derivative transactions are conducted under standardised
International Swaps and Derivatives Association master agreements. The Group
has collateral agreements with relevant counterparties under each master
Strategic priorities agreement.
1, 3, 4 Credit risk on cash assets is managed by imposing restrictions over the credit
ratings of third parties with whom cash is deposited.
Trend
Increasing
6 Exposure to liquidity risk arises from: Financial markets are expected to remain volatile into the foreseeable future
Liquidity risk
with an increased level of liquidity risk. At the same time (partly as a
• short term cash flow volatility leading to mismatches between cash flows result of the LDI crisis) Just is experiencing strong market demand for
Having sufficient liquidity to meet our financial obligations as they fall due from assets and liabilities, particularly servicing collateral requirements defined benefit de-risking solutions from pension schemes.
requires ongoing management and the availability of appropriate liquidity of financial derivatives and reinsurance agreements;
cover. The liquidity position is stressed in extremely volatile conditions
Just's use of derivative positions is planned to increase in proportion to its
such as those triggered by the September 2022 "mini-budget." • the liquidation of assets to meet liabilities during stressed market planned growth. Throughout any period of heightened volatility, Just maintains
conditions; robust liquidity stress testing and holds a high level of liquidity coverage
above stressed projections.
• higher-than-expected funding requirements on existing LTM contracts,
Strategic priorities lower redemptions than expected; and
1, 3, 4 • liquidity transferability risk across the Group.
Trend Financial markets have experienced significant volatility recently. Just was
not directly affected by the Liability Driven Investment ("LDI") crisis
Increasing following September's "mini-budget," which impacted defined benefit pension
schemes unprepared for the effect on many collateralised derivative positions
of a sudden increase in interest rates. However, the market turmoil, including
the fall in the value of sterling, did create a sharp increase in collateral
calls for the Group, which were managed through its liquidity risk framework.
7 Risks to the Group's strategy arise from regulatory change as the Group Regulation changes, such as Solvency II reform, have been agreed recently and
Strategic risk operates in regulated markets and has partners and distributors who are it is likely the Group's own regulators will not make any significant change
themselves regulated. Actions by regulators may change the shape and scale of until these have been embedded.
The choices we make about the markets in which we compete and the demand the market or alter the attractiveness of markets.
for our product and service offering may be affected by external risks
There is a risk that pension scheme regulation may change as a result of
including changes to regulation, competition, or social changes. Changes in the nature or intensity of competition may impact the Group and schemes' exposures.
increase the risk the business model is not able to be maintained. The actions
of our competitors may increase the exposure to the risk from regulation Demand for de-risking solutions is expected to remain stable.
should they fail to maintain appropriate standards of prudence.
Strategic priorities
1, 2, 3, 4, 5
Trend
Stable
Consolidated statement of comprehensive income
for the year ended 31 December 2022
Note Year ended Year ended
31 December 31 December
2022 2021
£m £m
Gross premiums written 6 3,391.3 2,676.1
Reinsurance premiums ceded (271.5) (23.3)
Net premium revenue 3,119.8 2,652.8
Net investment expense 2 (4,778.5) (130.3)
Fee and commission income 14.0 15.6
Share of results of associates accounted for using the equity method 35 (2.9) -
Total revenue net of investment expense (1,647.6) 2,538.1
Gross claims paid (1,446.5) (1,381.3)
Reinsurers' share of claims paid 236.5 239.9
Net claims paid (1,210.0) (1,141.4)
Change in insurance liabilities:
Gross amount 3,487.4 (706.7)
Reinsurers' share (552.4) (332.0)
Net change in insurance liabilities 2,935.0 (1,038.7)
Change in investment contract liabilities 24 2.6 (0.8)
Acquisition costs 3 (55.5) (48.6)
Other operating expenses 4 (209.2) (193.2)
Finance costs 5 (132.7) (136.8)
Total claims and expenses 1,330.2 (2,559.5)
Loss before tax 6 (317.4) (21.4)
Income tax 7 85.7 5.6
Loss for the year (231.7) (15.8)
Other comprehensive income/(loss):
Items that will not be reclassified subsequently to profit or loss:
Revaluation of land and buildings 7, 14 0.2 -
Items that may be reclassified subsequently to profit or loss:
Exchange differences on translating foreign operations 0.5 (0.6)
Other comprehensive income/(loss) for the year, net of income tax 0.7 (0.6)
Total comprehensive loss for the year (231.0) (16.4)
Loss attributable to:
Equity holders of Just Group plc (231.1) (15.0)
Non-controlling interest 35 (0.6) (0.8)
Loss for the year (231.7) (15.8)
Total comprehensive loss attributable to:
Equity holders of Just Group plc (230.4) (15.6)
Non-controlling interest 35 (0.6) (0.8)
Total comprehensive loss for the year (231.0) (16.4)
Basic earnings per share (pence)1 11 (23.70) (7.97)
Diluted earnings per share (pence)1 11 (23.70) (7.97)
The notes are an integral part of these financial statements.
1 Restated see note 1
Consolidated statement of changes in equity
for the year ended 31 December 2022
Year ended Note Share capital Share premium £m Reorganisation reserve Merger reserve £m Revaluation reserve Shares held Accumulated Total Tier 1 Total Non- Total
31 December 2022 £m £m £m by trusts profit1 shareholders' notes owners Equity controlling £m
£m £m equity £m £m interest
£m £m
At 1 January 2022 103.9 94.6 348.4 597.1 2.8 (4.3) 977.0 2,119.5 322.4 2,441.9 (1.9) 2,440.0
Loss for the year - - - - - - (231.1) (231.1) - (231.1) (0.6) (231.7)
Other comprehensive income for the year, net of income tax - - - - 0.2 - 0.5 0.7 - 0.7 - 0.7
Total comprehensive income/(loss) for the year - - - - 0.2 - (230.6) (230.4) - (230.4) (0.6) (231.0)
Contributions and distributions
Shares issued 21 - 0.1 - - - - - 0.1 - 0.1 - 0.1
Dividends 12 - - - - - - (15.6) (15.6) - (15.6) - (15.6)
Interest paid on Tier 1 notes (net of tax) 22 - - - - - - (13.6) (13.6) - (13.6) - (13.6)
Share-based payments - - - - - (5.9) 3.8 (2.1) - (2.1) - (2.1)
Total contributions and distributions - 0.1 - - - (5.9) (25.4) (31.2) - (31.2) - (31.2)
Total changes in ownership interests - - - - - - - - - - - -
At 31 December 2022 103.9 94.7 348.4 597.1 3.0 (10.2) 721.0 1,857.9 322.4 2,180.3 (2.5) 2,177.8
1 Includes currency translation reserve of £1.1m, 31 December 2021
£1.6m.
Year ended Note Share capital Share premium £m Reorganisation reserve Merger reserve £m Revaluation reserve Shares held Accumulated Total Tier 1 Total Non- Total
31 December 2021 £m £m £m by trusts profit1 shareholders' notes owners Equity controlling £m
£m £m equity £m £m interest
£m £m
At 1 January 2021 103.8 94.5 348.4 597.1 3.3 (5.4) 1,056.6 2,198.3 294.0 2,492.3 (1.9) 2,490.4
(Loss)/income for the year - - - - - - (15.0) (15.0) - (15.0) (0.8) (15.8)
Other comprehensive (loss)/income for the year, net of income tax - - - - (0.5) - (0.1) (0.6) - (0.6) - (0.6)
Total comprehensive (loss)/income for the year - - - - (0.5) - (15.1) (15.6) - (15.6) (0.8) (16.4)
Contributions and distributions
Shares issued 21 0.1 0.1 - - - - - 0.2 - 0.2 - 0.2
Tier 1 notes issued (net of costs) 22 - - - - - - - - 322.4 322.4 - 322.4
Tier 1 notes redeemed 22 - - - - - - (47.0) (47.0) (294.0) (341.0) - (341.0)
Dividends 12 - - - - - - - - - - - -
Interest paid on Tier 1 notes (net of tax) 22 - - - - - - (20.4) (20.4) - (20.4) - (20.4)
Share-based payments - - - - - 1.1 3.7 4.8 - 4.8 - 4.8
Total contributions and distributions 0.1 0.1 - - - 1.1 (63.7) (62.4) 28.4 (34.0) - (34.0)
Changes in ownership interest
Acquisition of non-controlling interest 35 - - - - - - (0.8) (0.8) - (0.8) 0.8 -
Total changes in ownership interests - - - - - - (0.8) (0.8) - (0.8) 0.8 -
At 31 December 2021 103.9 94.6 348.4 597.1 2.8 (4.3) 977.0 2,119.5 322.4 2,441.9 (1.9) 2,440.0
The notes are an integral part of these financial statements.
Consolidated statement of financial position
as at 31 December 2022
Note 31 December 31 December
2022 2021
£m £m
Assets
Intangible assets 13 103.8 119.7
Property, plant and equipment 14 22.4 14.2
Investment property 15 40.3 69.6
Financial investments 16 23,477.2 24,681.7
Investments accounted for using the equity method 35 194.3 -
Reinsurance assets 23 2,286.9 2,808.2
Deferred tax assets 18 93.2 -
Current tax assets 5.7 30.2
Prepayments and accrued income 85.0 75.6
Insurance and other receivables 19 322.8 35.4
Cash available on demand 20 482.0 510.2
Assets classified as held for sale 14 - 3.1
Total assets 27,113.6 28,347.9
Equity
Share capital 21 103.9 103.9
Share premium 21 94.7 94.6
Reorganisation reserve 348.4 348.4
Merger reserve 21 597.1 597.1
Revaluation reserve 14 3.0 2.8
Shares held by trusts (10.2) (4.3)
Accumulated profit 721.0 977.0
Total equity attributable to shareholders of Just Group plc 1,857.9 2,119.5
Tier 1 notes 22 322.4 322.4
Total equity attributable to owners of Just Group plc1 2,180.3 2,441.9
Non-controlling interest 35 (2.5) (1.9)
Total equity 2,177.8 2,440.0
Liabilities
Insurance liabilities 23 18,332.9 21,812.9
Reinsurance liabilities 23 305.8 274.7
Investment contract liabilities 24 32.5 33.6
Loans and borrowings 25 699.3 774.3
Lease liabilities 26 8.6 3.9
Other financial liabilities 27 5,250.2 2,865.6
Deferred tax liabilities 18 - 5.3
Other provisions 1.1 1.2
Accruals and deferred income 42.9 43.1
Insurance and other payables 30 262.5 93.3
Total liabilities 24,935.8 25,907.9
Total equity and liabilities 27,113.6 28,347.9
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 6 March
2023 and were signed on its behalf by:
Andy Parsons
Director
Consolidated statement of cash flows
for the year ended 31 December 2022
Note Year ended Year ended
31 December 31 December
2022 2021
£m £m
Cash flows from operating activities
Loss before tax (317.4) (21.4)
Depreciation of property, plant and equipment 14 3.3 4.2
Share of results from associates 2.9 -
Impairment of property, plant and equipment 14 - 0.3
Amortisation of intangible assets 13 20.5 20.4
Property revaluation loss 0.5 -
Share-based payments (3.4) 4.8
Interest income 2 (637.9) (572.1)
Interest expense 5 132.7 136.8
Realised and unrealised gains on financial investments 2,914.4 (1,103.8)
Decrease in reinsurance assets 552.4 332.0
Increase in prepayments and accrued income (9.4) (1.3)
Increase in insurance and other receivables (287.8) (3.8)
(Decrease)/increase in insurance liabilities (3,480.0) 694.5
Decrease in investment contract liabilities (1.1) (9.2)
Decrease in deposits received from reinsurers (540.8) (270.3)
Increase/(decrease) in accruals and deferred income 1.4 (10.8)
Increase in insurance and other payables 169.2 1.7
Increase/(decrease) in other creditors 1,339.6 (60.4)
Interest received 401.9 337.8
Interest paid (74.7) (78.7)
Taxation received/(paid) 16.0 (12.7)
Net cash inflow/(outflow) from operating activities 202.3 (612.0)
Cash flows from investing activities
Additions to internally generated intangible assets 13 (4.6) (6.6)
Acquisition of property and equipment 14 (3.5) (0.7)
Disposal of assets 3.1 -
Acquisition of associates/subsidiaries 35 (197.3) (70.6)
Net cash outflow from investing activities (202.3) (77.9)
Cash flows from financing activities
Issue of ordinary share capital (net of costs) 21 0.1 0.2
Proceeds from issue of Tier 1 notes (net of costs) 22 - 321.8
Redemption of Tier 1 notes (including costs) 22 - (350.6)
Decrease in borrowings (net of costs) 25 (76.5) -
Dividends paid 12 (15.6) -
Coupon paid on Tier 1 notes 12 (16.9) (25.2)
Interest paid on borrowings (57.1) (56.7)
Payment of lease liabilities - principal 26 (2.9) (3.6)
Payment of lease liabilities - interest 26 (0.1) (0.1)
Net cash outflow from financing activities (169.0) (114.2)
Net decrease in cash and cash equivalents (169.0) (804.1)
Foreign exchange differences on cash balances 4.7 -
Cash and cash equivalents at 1 January 1,820.7 2,624.8
Cash and cash equivalents at 31 December 1,656.4 1,820.7
Cash available on demand 482.0 510.2
Units in liquidity funds 1,174.4 1,310.5
Cash and cash equivalents at 31 December 20 1,656.4 1,820.7
The notes are an integral part of these financial statements.
Notes to the consolidated financial statements
1 Significant accounting policies
General information
Just Group plc (the "Company") is a public company limited by shares,
incorporated and domiciled in England and Wales. The Company's registered
office is Enterprise House, Bancroft Road, Reigate, Surrey, RH2 7RP.
Restatement
A limited scope review of the Company's Annual Report and Accounts to 31
December 2021 was performed by the FRC in accordance with Part 2 of the FRC
Corporate Reporting Review Operating Procedures. The review covered only those
aspects of the Annual Report and Accounts that relate to the application of
IAS 33, 'Earnings per Share', and compliance with its requirements.
As a result of the review of the 2021 Annual Report by the FRC, the Directors
reconsidered the accounting for the loss on redemption of the Restricted Tier
1 (RT1) notes redeemed in 2021. The requirements in IAS 33 regarding
redemption of preference shares should have been applied to the redemption of
the RT1 notes and as such the loss on redemption should have been deducted
from earnings for the purposes of calculating Earnings per share and Diluted
earnings per share. The impact of correcting this error is shown below.
As originally disclosed Adjusted As restated
pence pence pence
Earnings per share (3.42) (4.55) (7.97)
Diluted earnings per share (3.42) (4.55) (7.97)
The above restatement has no effect on the 2021 Adjusted earnings per share.
The FRC's enquiry, which was limited to only those aspects of the 2021 Annual
Report and Accounts that relate to the application of IAS 33, 'Earnings per
Share', and compliance with its requirements is now complete. The FRC review
does not benefit from detailed knowledge of our business or an understanding
of the underlying transaction entered into in redemption of the Restricted
Tier 1 notes, and accordingly the review provides no assurance that the Annual
Report and Accounts are correct in all material respects.
1.1 Basis of preparation
The consolidated financial statements have been prepared in accordance with UK
adopted international accounting standards in conformity with the requirements
of the Companies Act 2006 and the disclosure guidance and transparency rules
sourcebook of the United Kingdom's Financial Conduct Authority.
The consolidated financial statements have been prepared under the historical
cost convention, as modified by the revaluation of land and buildings, and
financial assets and financial liabilities (including derivative instruments
and investment contract liabilities) at fair value. Values are expressed to
the nearest £0.1m.
The financial information set out above does not constitute the Company's
statutory accounts for the years ended 31 December 2022 and 2021 but is
derived from those accounts. Statutory accounts for 2021 have been delivered
to the registrar of companies, and those for 2022 will be delivered in due
course. The auditor has reported on those statutory accounts. Their report for
the years ended 31 December 2022 and 31 December 2021 were (i) unqualified,
(ii) did not contain a statement under section 498 (2) or (3) of the Companies
Act 2006, and (iii) did not include a reference to any matters to which the
auditor drew attention by way of emphasis without qualifying their report.
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 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.
The Group has a robust liquidity framework designed to withstand 1-in-200 year
stress events. The Group liquid resources includes an undrawn revolving credit
facility of up to £300m for general corporate and working capital purposes.
The borrowing facility is subject to covenants that are measured biannually in
June and December, being the ratio of consolidated net debt to the sum of net
assets and consolidated net debt not being greater than 45%. The ratio on 31
December 2022 was 14.6% (2021: 15.8%). The Group's business plan indicates
that liquidity headroom will be maintained above the Group's borrowing
facilities and financial covenants will be met throughout the period.
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. Insurers are required to maintain eligible capital, or "Own Funds", in
excess of the value of the Solvency Capital Requirement ("SCR"). The SCR
represents the risk capital required to be set aside to absorb 1-in-200 year
stress tests, over the next year's time horizon, of each risk type that the
insurer is exposed to, including longevity risk, property risk, credit risk,
and interest rate risk. These risks are aggregated together 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 of over 40%.
Eligible own funds exceeded the minimum capital requirement in all stressed
scenarios described above.
Based on the assessment performed above, the Directors conclude 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.
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. The
Directors also considered the findings of the work performed to support the
long-term viability statement of the Group in the Risk management section of
the Annual Report and Accounts, which is undertaken together with the going
concern assessment. The Board and Audit Committee considered going concern
over 12 months as well as the consistency with the longer-term viability of
the Group, reviewing this over five years. Accordingly, the going concern
basis has been adopted in the valuation of assets and liabilities.
ii) New accounting standards and new significant accounting policies
The following amendments to existing accounting standards are effective from 1
January 2022 but do not have a significant impact on the Group's financial
statements. The amendments include clarifications that are not inconsistent
with the Group's existing accounting treatment and other insignificant
changes.
· IFRS 3, Business combinations - Amendments to references to the
conceptual framework for financial reporting in order to avoid the
unintentional recognition of day-two gains following revisions to the
conceptual framework in 2018;
· IAS 16, Property, plant and equipment - Amendments in respect of
proceeds before intended use that prohibits deducting proceeds from selling
items from the cost of an item of property, plant and equipment;
· IAS 37, Provisions, contingent liabilities and contingent assets
- Amendments in respect of costs of fulfilling a contract to clarify that such
costs include both direct costs and an allocation of costs that relate
directly to fulfilling the contract.
The following new accounting standards and amendments to existing accounting
standards have not yet been adopted and are expected to have a significant
impact on 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 31 December 2022 would be unchanged at £23,474.1m. 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).
i) IFRS 17
Background
IFRS 17 Insurance Contracts was issued in May 2017 with an effective date of 1
January 2021. In June 2020, the IASB issued an amended standard which delayed
the effective date to 1 January 2023. The amendments issued in June 2020 aimed
to assist entities implementing the standard. During 2022, the IASB
Interpretation Committee ("IFRIC") signalled its conclusion regarding the
approach to assessing coverage units for annuity contracts in payment and this
has been adopted in Just's approach. IFRS 17 was approved for adoption by the
UK Endorsement Board in May 2022. Results in the 2023 financial year will
comply with IFRS 17, with the first Annual Report published in accordance with
IFRS 17 being that for the year ending 31 December 2023. IFRS 17 establishes
the principles for the recognition, measurement, presentation and disclosure
of insurance contracts and supersedes IFRS 4, Insurance Contracts. IFRS 17
represents a significant conceptual change from IFRS 4, with recognition of
profits over lives of contracts instead of mainly at point of sale for annuity
business. Furthermore, recognition of demographic and expense assumption
changes will also be deferred under IFRS 17, with recognition over the
remaining lives of contracts, which will result in reduced volatility in
reported profits in future. There is no change to the interpretation of
significant insurance risk and its application to Just's products, and hence
the scope of contracts within IFRS 17 is consistent with IFRS 4.
IFRS 17 Project
The Group has deployed a cross-functional project team dedicated to the
implementation of IFRS 17. This team has been engaged in determining
accounting policies under the new standard, quantifying the transitional
adjustments and developing and implementing a new system for calculating the
contractual service margin together with a new accounting system which will
support the extensive financial statements disclosures required by IFRS 17.
The team is currently focussed on validating transition results, producing the
2022 year end results on an IFRS 17 basis, and the embedding of new IFRS 17
processes and controls across reporting, planning and relevant operational
functions.
Transition
On the transition date, 1 January 2022, the Group will:
· Identify, recognise, and measure each group of gross insurance
contracts and associated reinsurance contracts, as if IFRS 17 had always
applied unless impracticable;
· Derecognise any existing IFRS 4 balances, including the Present
Value of In Force Business and other relevant balances that would not exist
had IFRS 17 always applied;
· Classify reinsurance balances separately depending whether they
are in an asset or liability position at a portfolio level, where previously
they were classified at a treaty level;
· Reclassify reinsurance deposits previously classified as
financial instruments, to be included within the value of reinsurance
contracts; and
· Recognise any resulting net difference in accumulated profit net
of any related tax adjustments.
Firms are required to apply IFRS 17 fully retrospectively, unless it is
impracticable to do so, in which case either a modified retrospective approach
or fair value approach may be taken. For insurance and reinsurance contracts
where the effective date of the contract was prior to 1 January 2021,
management have concluded that it would be impracticable to apply the standard
on a fully retrospective basis due to the inability of determining the risk
adjustment, a new requirement in terms of IFRS 17, in earlier years without
the application of hindsight. Guidance contained in the IAS 8 accounting
standard 'Accounting Policies, Changes in Accounting Estimates and Errors'
requires that hindsight should not be applied in the application of an
accounting standard on a retrospective basis. The risk adjustment is a new
requirement of IFRS 17 and represents the compensation that an entity requires
to take on non-financial risk. Defining "compensation that the entity
requires" to take on non-financial risk differs to any of the risk-based
allowances adopted by the Group for either existing regulatory or statutory
reporting purposes. The Group's new risk adjustment policy was developed and
adopted during 2021 with calculation of the risk stresses to be applied from 1
January 2021. Under this policy, management determines a target confidence
level based upon an assessment of the current level of risks that the business
is exposed to and the compensation required to cover those risks. Key factors
for consideration here include: the size of the business, products offered,
reinsurance structures, regulatory challenges and market competitiveness.
These factors are not necessarily stable from period to period, and today's
understanding of these aspects should be excluded from any historic assessment
of risk as doing so would be to apply hindsight.
Management have assessed whether other information used in previous reporting
cycles, including for pricing new business, could be used to determine the
risk adjustment, but have concluded that none of these alternatives would be
appropriate. The development of the new approach for IFRS 17 represents a
significant enhancement in the approach used to determine the Group's
allowance for non-financial risk, with the use of a target confidence interval
and probability distributions providing a more meaningful quantification of
allowance for risk compared with IFRS 4 reporting. The reinsurance risk
adjustment in IFRS 17 reflects the "amount of risk being transferred" to the
reinsurer, so where the risk adjustment for insurance contracts is
impracticable then, by definition, the reinsurance risk adjustment is also
impracticable. For contracts for which the Fully Retrospective Approach is
impracticable, the Group will apply the Fair Value Approach. A reconciliation
of our primary financial statements under IFRS 17 to those in accordance with
IFRS 4 will be provided in the 2023 interim financial statements.
Fair value calculations
Under the fair value approach, the Contractual Service Margin ("CSM") will be
determined as the difference between the fair value of a group of contracts
and the fulfilment cash flows at the transition date. Fair values have been
calculated in accordance with IFRS 13 which requires that entities should
consider market observable data. There is no active observable market for the
transfer of insurance liabilities and associated reinsurance between market
participants and therefore there is limited market observable data. The fair
value methodology adopted by the Group calculates the premium that would be
required by a market participant to accept the insurance liabilities together
with associated reinsurance. The fair value models have been based on Just's
internal pricing models as used for pricing new business. By basing the fair
values on results from pricing models used in the active insurance markets,
management believes that the results are representative of market fair values.
Key assumptions used as inputs within the models are the Solvency Capital
Requirement coverage ratio, the Return on Capital ("RoC") assumption and the
backing asset mix. These assumptions and other key inputs into the fair value
calculations have been reviewed by an independent firm of accountants who have
access to industry surveys and other benchmarking, and their review
conclusions made available to the Group Audit Committee. The fair value result
has been benchmarked against any publicly available and relevant market
information as well as an independent internal calculation based upon a
Dividend Discount Model ("DDM") approach sometimes used in industry for the
valuation of insurance business.
Contractual Service Margin
The recognition of the Contractual Service Margin ("CSM") liability represents
a major change from existing accounting treatment under which profits in
excess of prudence margins are immediately recognised in the income statement.
The CSM is held on the balance sheet as part of insurance contract
liabilities, and represents the unearned profit of insurance contracts. The
CSM in respect of contracts gross of reinsurance cannot be negative; in this
event, a loss will be reported in the statement of comprehensive income (the
"income statement") to the extent that fulfilment cash flows represent a net
outflow over the coverage period.
Under the general model, the CSM is adjusted at each subsequent reporting
period, using discount rate determined at inception, for changes in expected
future cash flows. Changes in fulfilment cash flows are recognised as
follows:
· Changes relating to future services adjusted against the CSM (or
recognised in the insurance service result in the income statement if the
group is onerous).
· Changes relating to current or past services are recognised in
the insurance service result in the income statement.
· Effects of the time value of money, financial risk and changes
therein on estimated future cash flows are recognised as insurance finance
income or expenses in the income statement.
Interest is accreted on the CSM at rates locked in at initial recognition of a
contract (i.e. discount rate used at inception to determine the present value
of the estimated cash flows). The CSM will be released into the income
statement based on coverage units which reflect the quantity of the benefits
provided and the expected coverage duration of the remaining contracts in the
group.
The Group provides the following services to customers:
· Investment return service when a customer is in the deferred or
guarantee phase; and
· Insurance coverage services when an annuitant is in payment
period for annuitants.
By their nature, coverage units will vary depending on the type of service
provided. A weighting then needs to be applied to the different types of
coverage unit in order to calculate an aggregate value of the proportion of
the CSM balance that is to be released. The Group will use the probability of
the policy being in force in each time period for weighting the disparate
types of coverage unit. This weighting reflects management's view that the
value of services provided to policyholders is broadly equivalent across the
different phases in the life of contracts. These weightings are applied to the
coverage units which are defined as follows:
· In the deferred phase, investment return service coverage units
are represented by the return on the funds backing the future cash flows in
this accumulation phase and the insurance service is considered insignificant;
· In the guaranteed phase when payments outwards are being made,
investment return service is represented by the payments to annuitants; and
· In the life contingent phase, insurance service is represented by
payments to annuitants.
The coverage units and the weightings used to combine coverage units are
discounted using the locked-in discount rates and financial risk assumptions
as at inception of the contracts. The weightings applied are updated each
period for changes in life expectancies.
IFRS 17 fulfilment cash flows
The IFRS 17 fulfilment cash flows comprise a best estimate component, the
'estimate of present value of future cash flows', and a risk adjustment for
non-financial risks. The best estimate cash flows are expected to be
consistent with the current IFRS 4 cash flows after removing the prudence
margins.
Risk adjustment for non-financial risks
A further change introduced by IFRS 17 is the inclusion of the risk adjustment
for non-financial risk (risk adjustment) as an explicit reserve within
insurance liabilities to reflect the compensation required by the Group for
bearing the uncertainty in respect of the amount and timing of the future cash
flows. This component replaces an implicit allowance for prudence within the
IFRS 4 reserves. The determination of the risk adjustment within Just follows
a value-at-risk type approach, representing the maximum loss within a retained
confidence level. Applying a confidence level technique, the Group will
estimate the probability distribution of the expected present value of the
future cash flows from the contracts at each reporting date and calculate the
risk adjustment for non-financial risk as the excess of the value at risk at
the target confidence level over the expected present value of the future cash
flows allowing for the associated risks over all future years. The Group is
targeting a confidence level of 70% on an ultimate run off basis. This target
level has been chosen in light of it being commensurate to a 1 in 10 year risk
confidence level on a one-year basis. No diversification of risk adjustment
for non-financial risk between legal entities is assumed.
Discount rates
The Group will continue to use the 'top-down' approach for determining the
discount rates as it currently does for IFRS 4. Following this approach, the
effect of factors within the yield that are not characteristic of the
insurance cash flows, notably credit risk, both expected and unexpected, must
be removed. This marks a change from IFRS 4, which simply requires that a
prudent allowance is made for credit risk. The quantification of the allowance
for credit risk within asset yields is not observable in the market or readily
available data sources and hence involves subjective judgement. The Group will
make an allowance for unexpected default risk and remove the IFRS 4 prudence
for different investment types, with the overall change not expected to be
significant in the context of the insurance contracts balance. No adjustment
for liquidity differences between the reference portfolio and the liabilities
is made.
Discount rates at the inception of each contract are based on the yields
within a hypothetical reference portfolio of assets which the Group expects to
acquire to back the portfolio of new insurance liabilities (the "target
portfolio"). This is consistent with the approach taken for the current new
business operating profit metric. For the purposes of the CSM relating to each
group of contracts, a weighted average of these discount rate curves is
determined to lock-in each annual cohort.
At each valuation date, the estimate of the present value of future cash flows
and the risk adjustment for non-financial risk are discounted based on the
yields within a reference portfolio of assets consisting of the actual asset
portfolio backing the net of reinsurance liabilities. The reference portfolio
is adjusted in respect of new contracts incepting in the period to allow for a
period of transition from the target portfolio to the actual asset portfolio.
Level of aggregation
The Group's life companies will aggregate all insurance contracts into single
portfolios as their products bear similar risks and are managed together. The
CSM is computed for separate contract groupings based on annual cohorts split
between DB, GIfL and Care products. These groupings are further subdivided at
the date of initial recognition into three groupings: onerous (if any);
contracts which have no significant possibility of becoming onerous
subsequently (if any); and the remaining contracts.
Reinsurance
The Group will measure reinsurance contracts separately to the underlying
contracts using consistent assumptions in cases where the reinsurance is
transacted or in place in the same accounting period, in accordance with the
standard. The level of aggregation for CSM calculation purposes will be at
treaty (contract) level. The existing treaties for which the deposit back
arrangements are currently reported separately as financial liabilities will
be included within the value of the associated reinsurance contracts under
IFRS 17.
Impact
We have estimated that the post-tax impact on accumulated profit of the Group
at transition will be a decrease of between £0.9bn and £1.1bn. The
corresponding impact will primarily be recorded as CSM within the insurance
contract balance. The results from the models used to calculate the post-tax
impact on accumulated profit have been through validation processes by the
company which have enabled us to present the range above. Further checks and
system refinements are being undertaken as part of the production of the
transition balance sheet which will be reported as part of our interim results
for the six month period ending 30 June 2023. The implementation of the
comprehensive end state control environment will continue as Just introduces
business as usual controls throughout the first half of 2023, and in the
meantime we have only presented the impact on accumulated profits of the Group
at transition.
The impact of the transition to IFRS 17 will be to de-recognise profits that
were previously taxed under IFRS 4, thereby creating a tax loss. Transition
relief for tax purposes was enacted in December 2022 which spreads relief for
the tax loss over a ten year period. The Group anticipates full recovery of
this tax loss against profits to be earned in future years.
Under IFRS 17, new business profits and changes in non-economic assumptions
will be recognised in the income statement over the lifetime of the contracts.
The timing of the recognition of the CSM in the income statement will be
determined based on services that are provided, and the risk adjustment for
non-financial risk as the related risk expires. The Group expects that, even
though the total profit recognised over the lifetime of the contracts will
not change, it will emerge more slowly under IFRS 17. Under IFRS 4, profits
are currently recognised in the income statement account on initial
recognition of the contracts. The different timing of profit recognition will
result in an increase in liabilities on adoption of IFRS 17 because a portion
of profits previously recognised and accumulated in equity under IFRS 4 will
be included in the measurement of the liabilities under IFRS 17.
Disclosures
IFRS 17 requires extensive new financial statement disclosures. The format of
the Statement of Comprehensive Income will be fundamentally altered to report
a net profit or loss from insurance services separately from the investment
result. New detailed disclosures will include a roll-forward from the prior
period of the insurance balances split by component, including risk adjustment
and CSM. Information on the expected CSM emergence pattern will be provided,
as well as disclosures about significant judgements made when applying IFRS
17.
ii) IFRS 9 'Financial instruments'
Background
IFRS 9 'Financial instruments' replaces IAS 39 Financial Instruments:
Recognition and Measurement and is effective for accounting periods beginning
on or after 1 January 2018. However, the Group has met the relevant criteria
and has applied the temporary exemption from IFRS 9 for annual periods before
1 January 2023, the date at which IFRS 17 becomes effective. Consequently, the
Group will apply IFRS 9 commencing 1 January 2023, with comparative periods
restated. The IFRS 9 standard is applicable to financial assets and financial
liabilities and covers the classification, measurement, impairment and
de-recognition of financial assets and liabilities together with a new hedge
accounting model.
Financial assets
The Group's business model is to manage financial instruments on a fair value
basis. The Group will therefore adopt the approach allowed within the standard
to continue to measure the majority of its financial assets at fair value
through profit or loss. This remains appropriate as it is consistent with the
Group's business model and the management of the underlying instruments. The
Group is investigating the opportunity to create a separate amortised cost
portfolio of newly acquired surplus assets which would back the CSM reserve
which is not interest rate sensitive.
For the residual financial assets which are measured at amortised cost, IFRS 9
operates an expected credit loss model rather than an incurred credit loss
model. Providing for an expected credit loss on our existing financial assets,
measured at amortised cost, is not expected to have a material impact on Group
shareholders' funds.
Financial liabilities
As explained above in the section on IFRS 17, the existing reinsurance
deposit-back IAS 39 financial liabilities will move to within the scope of
IFRS 17. Other than this, IFRS 9 retains the requirements in IAS 39 for the
classification and measurement of financial liabilities, and hence there are
no further changes required in this area.
Hedge accounting
The Group does not currently apply hedge accounting and therefore will not be
impacted by the new requirements of IFRS 9.
The following amendments to existing standards in issue have not been adopted
by the Group and are not expected to have a significant impact on the
financial statements.
· IAS 1, Presentation of financial statements - Amendments in
respect of disclosures of accounting policies (effective 1 January 2023, not
yet endorsed);
· IAS 1, Presentation of financial statements - Amendments in
respect of the classification of liabilities as current or non-current
(effective 1 January 2024, not yet endorsed);
· IAS 8, Accounting policies - Amendments in respect of the
definition of accounting estimates (effective 1 January 2023, not yet
endorsed);
· IAS 12, Income taxes - Amendments in respect of deferred tax
related to assets and liabilities arising from a single transaction (effective
1 January 2023, not yet endorsed).
1.2 Significant accounting policies and the use of judgements, estimates and assumptions
The preparation of financial statements requires the Group to select
accounting policies and make estimates and assumptions regarding items
reported in the Consolidated statement of comprehensive income, Consolidated
statement of financial position, other primary statements and Notes to the
consolidated financial statements.
The major areas of judgement in applying accounting policies are as follows.
Accounting policy Item involving judgement Critical accounting judgement
1.6 Classification of insurance and investment contracts Assessment of significance of insurance risk transferred.
A contract is classified as an insurance contract if it transfers significant
insurance risk from the policyholder to the insurer, or from the cedent to the
reinsurer in the case of a reinsurance contract. Insurance risk is significant
if an insured event could cause an insurer to pay significant additional
benefits to those payable if no insured event occurred.
Any contracts that do not include the transfer of significant insurance risk
are classified as investment contracts.
1.17 Classification of financial investments Classification of financial investments and determining whether an active
market exists for a financial investment.
Financial investments classified at fair value through profit or loss include
those that are designated as such by management on initial recognition as they
are managed on a fair value basis.
Management's assessment of the market activity of a financial investment
determines the fair value hierarchy of the valuation method used to determine
the fair value of the financial investment.
1.17 Measurement of fair value of loans secured by residential mortgages, including The use of a variant of the Black-Scholes option pricing formula with real
measurement of the no-negative equity guarantees world assumptions.
The measurement of the no-negative equity guarantee underlying the fair value
of loans secured by mortgages uses a variant of the Black-Scholes option
pricing formula, which has been adapted to use real world assumptions instead
of risk neutral assumptions due to the lack of relevant observable market
inputs to support a risk neutral valuation approach.
The table below sets out those items the Group considers most susceptible to
changes in critical estimates and assumptions. Management applies judgement in
making estimates and assumptions that are applied to the balances described in
the table below.
Accounting policy and notes Item involving estimates and assumptions Critical estimates and assumptions
1.17, 17(a) and (d) Measurement of fair value of loans secured by residential mortgages, including The critical estimates used in valuing loans secured by residential mortgages
measurement of the no-negative equity guarantees include the projected future receipts of interest and loan repayments and the
future costs of administering the loan portfolio.
The key assumptions used as part of the valuation calculation include future
property prices and their volatility, mortality, the rate of voluntary
redemptions and the liquidity premium added to the risk-free curve and used to
discount the mortgage cash flows.
The critical estimates used in valuing investments in illiquid financial
assets include the projected future cashflows from settlement of the
Measurement of fair value of Financial investments - illiquids investment. The key assumption used as part of the valuation calculation is
the discount rate which includes a credit spread allowance associated with the
asset. The redemption and default assumptions are derived from the assumptions
for the Group's bond portfolio.
1.17, 17(a) and (d)
1.18, 17(a) and (d), 23, 27 Measurement of reinsurance assets and deposits received from reinsurers The critical estimates used in measuring the value of reinsurance assets
arising from reinsurance arrangements include the projected future cash flows arising from reinsurers' share of the
Group's insurance liabilities.
The key assumptions used in the valuation include discount rates, as described
below, and assumptions around the reinsurers' ability to meet its claim
obligations.
Deposits received from reinsurers are measured in accordance with the
reinsurance contract and taking account of an appropriate discount rate for
the timing of the expected cash flows of the liabilities.
For deposits received from reinsurers measured at fair value through profit or
loss, the key assumption used in the valuation is the discount rate.
1.21, 23(b) Measurement of insurance liabilities arising from writing Retirement Income The critical estimates used in measuring insurance liabilities include the
insurance projected future Retirement Income payments and the cost of administering
payments to policyholders.
The key assumptions are the discount rates and mortality experience used in
the valuation of future Retirement Income payments, and level and inflation of
costs of administration.
The valuation discount rates are derived from yields on supporting assets
after deducting allowances for default. Mortality assumptions are derived from
the appropriate standard mortality tables and adjusted to reflect the future
expected mortality experience of the policyholders. Maintenance expenses are
determined from expense analyses and are assumed to inflate at market-implied
rates.
All estimates are based on management's knowledge of current facts and
circumstances, assumptions based on that knowledge and predictions of future
events and actions. Actual results may differ significantly from those
estimates. Where relevant the impact of COVID-19 has been considered and
detail included in the relevant note disclosures.
1.3 Consolidation principles
The consolidated financial statements incorporate the assets, liabilities,
results and cash flows of the Company and its subsidiaries.
Subsidiaries are those investments over which the Group has control. The Group
has control over an investee if all of the following are met: (1) it has power
over the investee; (2) it is exposed, or has rights, to variable returns from
its involvement with the investee; and (3) it has the ability to use its power
over the investee to affect its own returns. Subsidiaries are consolidated
from the date on which control is transferred to the Group and are excluded
from consolidation from the date on which control ceases. All inter-company
transactions, balances and unrealised surpluses and deficits on transactions
between Group companies are eliminated. Accounting policies of subsidiaries
are aligned on acquisition to ensure consistency with Group policies.
The Group uses the acquisition method of accounting for business combinations.
Under this method, the cost of acquisition is measured as the aggregate of the
fair value of the consideration at the date of acquisition and the amount of
any non-controlling interest in the acquiree. The excess of the consideration
transferred over the identifiable net assets acquired is recognised as
goodwill.
The Group uses the equity method to consolidate its investments in joint
ventures and associates. Under the equity method of accounting the investment
is initially recognised at fair value and adjusted thereafter for the
post-acquisition change in the Group's share of net assets of the joint
ventures and associates.
1.4 Segments
The Group's segmental results are presented on a basis consistent with
internal reporting used by the Chief Operating Decision Maker ("CODM") to
assess the performance of operating segments and the allocation of resources.
The CODM has been identified as the Group Executive Committee.
An operating segment is a component of the Group that engages in business
activities from which it derives income and incurs expenses.
Operating segments, where certain materiality thresholds in relation to total
results from operating segments are not exceeded, are combined when
determining reportable segments. For segmental reporting, the arranging of
guaranteed income for life contracts, providing intermediary mortgage advice
and arranging, plus the provision of licensed software, are included in the
Other segment along with Group activities, such as capital and liquidity
management, and investment activities.
1.5 Foreign currencies
Transactions in foreign currencies are translated to sterling at the rates of
exchange ruling at the date of the transaction. Monetary assets and
liabilities denominated in foreign currencies are translated into sterling at
the rates of exchange ruling at the end of the financial year. Foreign
exchange gains and losses resulting from the settlement of such transactions
and from the translation of monetary assets and liabilities denominated in
foreign currencies are recognised in profit or loss.
The assets and liabilities of foreign operations are translated to sterling at
the rates of exchange at the reporting date. The revenues and expenses are
translated to sterling at the average rates of exchange for the year. Foreign
exchange differences arising on translation to sterling are accounted for
through other comprehensive income.
1.6 Classification of insurance and investment contracts
The measurement and presentation of assets, liabilities, income and expenses
arising from Retirement Income contracts issued and associated reinsurance
contracts held is dependent upon the classification of those contracts as
either insurance or investment contracts.
A contract is classified as insurance only if it transfers significant
insurance risk. Insurance risk is significant if an insured event could cause
an insurer to pay significant additional benefits to those payable if no
insured event occurred. A contract that is classified as an insurance contract
remains an insurance contract until all rights and obligations are
extinguished or expire. DB, GIfL, Care Plan and Protection policies currently
written by the Group are classified as insurance contracts.
Any contracts not considered to be insurance contracts under IFRS are
classified as investment contracts. Capped Drawdown pension business is
classified as investment contracts as there is no transfer of longevity risk
due to the premium protection option within these fixed term contracts. Capped
Drawdown contracts are no longer marketed by the Group. Loans secured by
residential mortgages ("LTM's") are accounted for as financial instruments in
accordance with IAS 39.
1.7 Premium revenue
Premium revenue in respect of individual GIfL contracts is accounted for when
the liability to pay the GIfL contract is established.
Premium revenue in respect of Defined Benefit De-risking contracts is
accounted for when the Company becomes "on risk", which is the date from which
the policy is effective. If a timing difference occurs between the date from
which the policy is effective and the receipt of payment, the amount due for
payment but not yet received is recognised as a receivable in the Consolidated
statement of financial position.
Premium revenue in respect of Care Plans and Protection policies is accounted
for when the insurance contract commences.
Deposits collected under investment contracts are not accounted for through
the Consolidated statement of comprehensive income, except for fee income and
attributable investment income, but are accounted for directly through the
Consolidated statement of financial position as an adjustment to the
investment contract liability.
Reinsurance premiums payable in respect of reinsurance treaties are accounted
for when the reinsurance premiums are due for payment under the terms of the
contract.
1.8 Net investment income
Investment income consists of interest receivable for the year and realised
and unrealised gains and losses on financial assets and liabilities at fair
value through profit or loss.
Interest income is recognised as it accrues.
Realised gains and losses on financial assets and liabilities occur on
disposal or transfer and represent the difference between the proceeds
received net of transaction costs and the original cost.
Unrealised gains and losses arising on financial assets and liabilities
represent the difference between the carrying value at the end of the year and
the carrying value at the start of the year or purchase value during the year,
less the reversal of previously recognised unrealised gains and losses in
respect of disposals made during the year.
1.9 Revenue from contracts with customers
Revenue from contracts with customers is recognised at the amount that
reflects the consideration to which the Group expects to be entitled in
exchange for the services provided. Revenue from contracts with customers
comprises commission on GIfL contracts, commission on LTM advances and other
income which includes investment management fees, administration fees and
software licensing fees.
Fee income excludes facilitated adviser charges collected on behalf of
advisers.
1.10 Claims paid
Claims paid includes policyholder benefits and claims handling expenses.
Policyholder benefits are accounted for when due for payment. Death claims are
accounted for when notified.
Reinsurance claim recoveries are accounted for in the same period as the
related claim.
1.11 Acquisition costs
Acquisition costs comprise direct costs, such as commission, and indirect
costs of obtaining and processing new business. Acquisition costs are not
deferred as they relate to single premium business.
1.12 Finance costs
Finance costs on deposits received from reinsurers are recognised as an
expense in the period in which they are incurred.
Interest on loans and borrowings is accrued in accordance with the terms of
the loan agreement. Issue costs are added to the loan amount and interest
expense is calculated using the effective interest rate method.
1.13 Employee benefits
Defined contribution plans
The Group operates a defined contribution pension scheme. The assets of the
scheme are held separately from those of the Group in funds managed by a third
party. Obligations for contributions to the defined contribution pension
scheme are recognised as an expense in profit or loss when due.
Share-based payment transactions
Equity-settled share-based payments to employees are measured at the fair
value of the equity instruments at grant date, determined using stochastic and
scenario-based modelling techniques where appropriate. The fair value of each
scheme, based on the Group's estimate of the equity instruments that will
eventually vest, is expensed in the Consolidated statement of comprehensive
income on a straight-line basis over the vesting period, with a corresponding
credit to equity.
At each balance sheet date, the Group revises its estimate of the number of
equity instruments that will eventually vest as a result of changes in
non-market-based vesting conditions, and recognises the impact of the revision
of original estimates in the Consolidated statement of comprehensive income
over the remaining vesting period, with a corresponding adjustment to equity.
Where a leaver is entitled to their scheme benefits, this is treated as an
acceleration of the vesting in the period they leave. Where a scheme is
modified before it vests, any change in fair value as a result of the
modification is recognised over the remaining vesting period. Where a scheme
is cancelled, this is treated as an acceleration in the period of the vesting
of all remaining options.
1.14 Intangible assets
Intangible assets consist of goodwill, which is deemed to have an indefinite
useful life, Present Value of In-Force business ("PVIF"), acquired and
internally generated intellectual property (including PrognoSys™), and
purchased and internally developed software, which are deemed to have finite
useful lives.
Goodwill represents the excess of the cost of an acquisition over the fair
value of the Group's share of the net assets of the acquired subsidiary and
represents the future economic benefit arising from assets that are not
capable of being individually identified and separately recognised. Goodwill
is measured at initial value less any accumulated impairment losses. Goodwill
is not amortised but assessed for impairment annually or when circumstances or
events indicate there may be uncertainty over the carrying value.
For the purpose of impairment testing, goodwill has been allocated to
cash-generating units and an impairment is recognised when the carrying value
of the cash-generating unit exceeds its recoverable amount. Impairment losses
are recognised directly in the Consolidated statement of comprehensive income
and are not subsequently reversed.
Other intangible assets are recognised if it is probable that future economic
benefits attributable to the asset will flow to the Group, and are measured at
cost less accumulated amortisation and any impairment losses. For intangible
assets with finite useful lives, impairment testing is performed where there
is an indication that the carrying value of the assets may be subject to an
impairment. An impairment loss is recognised where the carrying value of an
intangible asset exceeds its recoverable amount.
PVIF, representing the present value of future profits from the purchased
in-force business, is recognised upon acquisition and is amortised over its
expected remaining economic life up to 16 years on a straight-line basis. PVIF
is within the scope of IFRS 4.
PrognoSys™ is the Group's proprietary underwriting engine. The Group has
over two million person-years of experience collected over 20 years of
operations. It is enhanced by an extensive breadth of external primary and
secondary healthcare data and medical literature.
Costs that are directly associated with the production of identifiable and
unique software products controlled by the Group are capitalised and
recognised as an intangible asset. Direct costs include the incremental
software development team's employee costs. All other costs associated with
researching or maintaining computer software programmes are recognised as an
expense as incurred.
Intangible assets with finite useful lives are amortised on a straight-line
basis over their useful lives up to 16 years. The useful lives are determined
by considering relevant factors, such as usage of the asset, potential
obsolescence, competitive position and stability of the industry.
The useful economic lives and the methods used to determine the cost of
intangibles acquired in a business combination are as follows:
Intangible asset Estimated useful economic life Valuation method
PVIF Up to 16 years Estimated value in-force using European embedded value model
Intellectual property 12 - 15 years Estimated replacement cost
The useful economic lives of intangible assets recognised by the Group other
than those acquired in a business combination are as follows:
Intangible asset Estimated useful economic life
PrognoSys™ 12 years
Software 3 years
1.15 Property, plant and equipment
Land and buildings are measured at their revalued amounts less any subsequent
depreciation, and impairment losses. Valuations are performed periodically but
at least triennially to ensure that the fair value of the revalued asset does
not differ materially from its carrying value. A revaluation surplus is
recognised in other comprehensive income and credited to the revaluation
reserve in equity. A revaluation deficit is recognised in profit or loss,
except to the extent that it offsets an existing surplus on the same asset
recognised in the revaluation reserve. Reversals of revaluation deficits
follow the original classification of the deficit in the Statement of
comprehensive income.
All other property, plant and equipment is measured at cost less accumulated
depreciation and impairment losses. Depreciation is calculated on a
straight-line basis to write down the cost to residual value over the
estimated useful lives.
The useful lives over which depreciation is charged for all categories of
Property, plant and equipment are as follows:
Property, plant and equipment Estimated useful economic life
Land Indefinite - Land is not depreciated
Buildings 25 years
Computer equipment 3 - 4 years
Furniture and fittings 2 - 10 years
1.16 Investment property
Investment property includes property that is held to earn rentals and/or for
capital appreciation. Investment property is initially recognised at cost,
including any directly attributable transaction costs and subsequently
measured at fair value.
Investment property held by the Group relates to the Group's investment in a
Jersey Property Unit Trust ("JPUT"). Cost represents the transaction price
paid for the investment in the JPUT. Although the Group obtained control of
the JPUT, the investment was not accounted for as a Business Combination
because substantially all of the fair value of the gross assets acquired was
concentrated in a single identifiable asset or group of similar identifiable
assets. As such, no goodwill was recognised and the cost of the group of
assets was allocated to the individual identifiable assets and liabilities on
the basis of their relative fair values at the date of purchase.
Fair value is the price that would be received to sell a property in an
orderly transaction between market participants at the measurement date. The
subsequent measurement of fair value reflects, among other things, rental
income from current leases and other assumptions that market participants
would use when pricing investment property under current market conditions.
Gains and losses arising from the change in fair value are recognised as
income or an expense in the Consolidated statement of comprehensive income.
Where investment property is leased out by the Group, rental income from these
operating leases is recognised as income in the Consolidated statement of
comprehensive income on a straight-line basis over the period of the lease.
1.17 Financial investments
Classification and measurement
The Group continues to apply IAS 39, prior to adoption of IFRS 9 concurrently
with IFRS 17 in 2023. Investments are classified at fair value through profit
and loss; including those assets designated by management as such on
inception, as they are managed on a fair value basis, and also derivatives
that are classified as held for trading. Financial investments include loans
secured by residential mortgages ("LTM's") which are classified as financial
assets. Investments are measured at fair value with any gains and losses
recognised in Net investment income in the Consolidated statement of
comprehensive income. Transaction costs are recognised in Other operating
expenses when incurred.
The Group does not apply hedge accounting.
Recognition and derecognition
Regular-way purchases and sales of investments are recognised on the trade
date, which is the date that the Group commits to purchase or sell the assets.
Amounts payable or receivable on unsettled purchases or sales are recognised
in other payables or other receivables respectively. Loans secured by
residential mortgages are recognised when cash is advanced to borrowers.
Financial investments are derecognised when our rights to the contractual cash
flows expire or the IAS 39 derecognition criteria for transferred financial
assets are met. The criteria include assessment of rights and obligations to
the cash flows and assessment of the transfer of substantially all the risks
and rewards of ownership.
Collateral
The Group receives and pledges collateral in the form of cash or securities in
respect of derivative, reinsurance or other contracts such as securities
lending. Cash collateral received that is not legally segregated from the
Group is recognised as an asset with a corresponding liability for the
repayment in other financial liabilities. Cash collateral pledged that is
legally segregated from the Group is derecognised and a receivable for its
return is recorded in the Consolidated statement of financial position.
Non-cash collateral received is not recognised as an asset unless it qualifies
for derecognition by the transferor. Non-cash collateral pledged continues to
be recognised in the Consolidated statement of financial position within the
appropriate asset classification when the Group continues to control the
collateral and receives the economic benefit.
The Group has various reinsurance collateral arrangements including funds
withheld, funds transferred and premium deposit-back arrangements. The
recognition/derecognition of the collateral assets is determined by the IAS 39
recognition/derecognition criteria. An assessment is made of the contractual
terms, including consideration of the Group's exposure to the economic
benefits. See accounting policy 1.18 and note 29 for further details.
Determination of fair value
The financial investments measured at fair value are classified into the
three-level hierarchy described in note 17 on the basis of the observability
of the inputs that are significant to the fair value measurement of the
financial investment concerned.
The Group uses current bid prices to value its investments with quoted prices.
Actively traded investments without quoted prices are valued using prices
provided by third parties. If there is no active established market for an
investment, the Group applies an appropriate valuation technique as described
below.
The Group holds certain financial investments which are not quoted in active
markets. These include loans secured by residential mortgages, derivatives and
other financial investments for which markets are not active. When the markets
are not active, there is generally no or limited observable market data that
can be used in the fair value measurement of the financial investments. The
determination of whether an active market exists for a financial investment
requires management's judgement. For all listed fixed maturity securities, a
third party fixed income liquidity provider is used to determine whether there
is an active market for a particular security.
If the market for a financial investment of the Group is not active, the fair
value is determined using valuation techniques. The Group establishes fair
value for these financial investments by using quotations from independent
third parties or internally developed pricing models. The valuation technique
is chosen with the objective of arriving at a fair value measurement which
reflects the price at which an orderly transaction would take place between
market participants on the measurement date. The valuation techniques include
the use of recent arm's length transactions, reference to other instruments
that are substantially the same, discounted cash flow analysis and option
pricing models. The valuation techniques may include a number of assumptions
relating to variables such as credit risk and interest rates and, for loans
secured by mortgages, mortality, future expenses, voluntary redemptions and
house price assumptions. Changes in assumptions relating to these variables
impact the reported fair value of these financial instruments positively or
negatively.
Deferral of IFRS 9
IFRS 4, Insurance contracts, permits the deferral of the application of IFRS 9
until accounting periods commencing on 1 January 2023 to align with the
effective date of IFRS 17, the replacement insurance contracts standard. The
option to defer the application of IFRS 9, which the Group has continued to
adopt for 2022, is subject to meeting criteria relating to the predominance of
insurance activity.
Eligibility for the deferral approach was based on an assessment of the
Group's liabilities as at 31 December 2016, the end of the annual period
during which the acquisition of Partnership Assurance Group plc took place and
the most recent period of significant change in the magnitude of the Group's
activities. At this date, the Group's liabilities connected with insurance
exceeded the 90% threshold required for the carrying amount of the Group's
total liabilities. In the Statement of financial position at this date, the
Group's total liabilities were £22,283.9m and liabilities connected with
insurance were £21,497.7m, consisting of insurance contracts within the scope
of IFRS 4 of £15,748.0m, investment contract liabilities of £222.3m, and
amounts within other financial liabilities and insurance payables which arise
in the course of writing insurance business of £5,527.4m, giving a
predominance ratio of 96%.
1.18 Reinsurance
Reinsurance assets and liabilities
Amounts recoverable from reinsurers are measured in a consistent manner with
insurance liabilities and are classified as reinsurance assets. If a
reinsurance asset is impaired, the carrying value is reduced accordingly and
that impairment loss is recognised in the Consolidated statement of
comprehensive income. Reinsurance longevity swap arrangements are classified
as either reinsurance assets or reinsurance liabilities based on the net
position on the swap at the reporting date.
Amounts receivable/payable
Where reinsurance contracts entered into by the Group include longevity swap
arrangements, such contracts are settled on a net basis and amounts receivable
from or payable to the reinsurers are included in the appropriate heading
under either Insurance and other receivables or Insurance and other payables.
Amounts due on quota share reinsurance contracts are included within Insurance
and other payables.
Financial liabilities
The Group has reinsurance collateral arrangements whereby the reinsurer
deposits back the reinsurance premium. An assessment against the IAS 39
recognition/derecognition criteria is made based on the collateral terms
within the reinsurance contracts in order to conclude whether such deposit
assets are recognised on the Group's balance sheet. Where the assets are
recognised the Group also recognises an obligation for the repayment of the
collateral. This obligation is not exposed to longevity risk and is only
exposed to financial risk. As such it is unbundled from the IFRS 4 Reinsurance
contract balance and is classified in accordance with IAS 39 within Other
financial liabilities. The obligation for the return of deposits received from
reinsurers is designated at fair value through profit or loss in order to
avoid an accounting mismatch with the valuation of the associated IFRS 4
reinsurance balance.
The obligation is subsequently valued using an appropriate discount rate for
the timing of expected cash flows. The resulting gain or loss is recognised in
Net investment income. Interest is charged on the liability in accordance with
the terms of the reinsurance contracts and is recognised in Finance costs.
1.19 Cash and cash equivalents
Cash and cash equivalents in the Consolidated statement of cash flows consist
of amounts reported in Cash available on demand in the Consolidated statement
of financial position and also cash equivalents that are reported in Financial
investments in the Consolidated statement of financial position.
Cash available on demand includes cash at bank and in hand and deposits held
at call with banks. Additional cash equivalents reported in the Consolidated
statement of cash flows include other short-term highly liquid investments
with less than 90 days' maturity from the date of acquisition. These do not
meet the definition of Cash available on demand and are therefore reported in
Financial investments (note 16).
1.20 Equity
The difference between the proceeds received on issue of the shares, net of
share issue costs, and the nominal value of the shares issued is credited to
the share premium account.
Interim dividends are recognised in equity in the period in which they are
paid. Final dividends require shareholder approval prior to payment and are
therefore recognised when they have been approved by shareholders.
Where the Company purchases shares for the purposes of employee incentive
plans, the consideration paid, net of issue costs, is deducted from equity.
Upon issue or sale, any consideration received is credited to equity net of
related costs.
The reserve arising on the reorganisation of the Group represents the
difference in the value of the shares in the Company and the value of shares
in Just Retirement Group Holdings Limited for which they were exchanged as
part of the Group reorganisation in November 2013.
Loan notes are classified as either debt or equity based on the contractual
terms of the instruments. Loan notes are classified as equity where they do
not meet the definition of a liability because they are perpetual with no
fixed redemption or maturity date, they are only repayable on liquidation,
conversion is only triggered under certain circumstances of non-compliance,
and interest on the notes is non-cumulative and cancellable at the discretion
of the issuer.
1.21 Insurance liabilities
Measurement
Long-term insurance liabilities arise from writing Retirement Income
contracts, including Defined Benefit De-risking solutions, Guaranteed Income
for Life products, long-term care insurance, and protection insurance. Their
measurement uses estimates of projected future cash flows arising from
payments to policyholders plus the costs of administering them. This is in
accordance with the SORP on Accounting for Insurance Business issued by the
ABI in December 2005 (amended in December 2006) and withdrawn with effect for
accounting periods beginning on or after 1 January 2015, but which continues
to apply to the Group as the grandfathered existing accounting policy under
IFRS 4. Valuation of insurance liabilities is derived using mortality
assumptions taken from the appropriate mortality tables and adjusted to
reflect actual and expected experience, expense level and inflation
assumptions, discounted using discount rates, adjusted for default allowance.
The assumptions in the valuation are set on a prudent basis.
Liability adequacy test
Insurance liabilities are subject to adequacy testing to ensure the carrying
amount is sufficient to cover the current estimate of future cash flows. Any
deficit is immediately charged to the Consolidated statement of comprehensive
income.
1.22 Investment contract liabilities
Investment contracts are measured at fair value through profit or loss in
accordance with IAS 39. The fair value of investment contracts is estimated
using an internal model and determined on a policy-by-policy basis using a
prospective valuation of future retirement income benefit and expense cash
flows.
1.23 Loans and borrowings
Loans and borrowings are initially recognised at fair value, net of
transaction costs, and subsequently amortised through profit or loss over the
period to maturity at the effective rate of interest required to recognise the
discounted estimated cash flows to maturity.
1.24 Taxation
The current tax expense is based on the taxable profits for the year, using
tax rates substantively enacted at the Consolidated statement of financial
position date, and after any adjustments in respect of prior years. Current
and deferred tax is charged or credited to Profit or loss unless it relates to
items recognised in Other comprehensive income or directly in equity.
Provision is made for deferred tax liabilities, or credit taken for deferred
tax assets, using the liability method, on all material temporary differences
between the tax bases of assets and liabilities and their carrying amounts in
the consolidated financial statements. Deferred tax assets and liabilities are
measured using substantively enacted rates based on the timings of when they
are expected to reverse.
Deferred tax assets are recognised to the extent that it is probable that
future taxable profit will be available against which the temporary
differences can be utilised.
2 Net investment Expense
Year ended Year ended
31 December 31 December
2022 2021
£m £m
Interest income:
Assets at fair value through profit or loss 637.9 572.1
Movement in fair value:
Financial assets and liabilities designated on initial recognition at fair (4,311.0) (832.1)
value through profit or loss
Derivative financial instruments (note 28) (1,105.4) 129.7
Total net investment expense (4,778.5) (130.3)
3 Acquisition costs
Year ended Year ended
31 December 31 December
2022 2021
£m £m
Commission 15.9 17.2
Other acquisition expenses 39.6 31.4
Total acquisition costs 55.5 48.6
4 Other operating expenses
Year ended Year ended
31 December 31 December
2022 2021
£m £m
Personnel costs (note 9) 106.3 101.5
Investment expenses and charges 30.1 16.8
Depreciation of property, plant and equipment (note 14) 3.3 4.2
Amortisation of intangible assets (note 13) 20.5 20.4
Impairment of property, plant and equipment (note 14) - 0.3
Other costs 49.0 50.0
Total other operating expenses 209.2 193.2
Other costs include reassurance management fees, professional fees, and IT and
marketing costs.
Reconciliation of Other operating expenses to Management expenses
Management expenses are costs that are incurred in the routine running of the
business and is included as an APM.
Year ended Year ended
31 December 31 December
2022 2021
£m £m
Total other operating expenses 209.2 193.2
Investment expenses and charges (30.1) (16.8)
Reassurance management fees (7.1) (8.4)
Amortisation of acquired intangible assets (18.0) (18.0)
Other costs (0.8) (2.6)
Total management expenses 153.2 147.4
Fees payable for services provided by the Group's auditor during the year, net
of VAT and expenses, are as follows:
Year ended Year ended
31 December 31 December
2022 2021
£000 £000
Fees payable for the audit of the Parent Company and consolidated accounts 616 550
Fees payable for other services:
The audit of the Company's subsidiaries pursuant to legislation 3,042 1,876
Audit-related assurance services 705 656
Other assurance services 48 65
Other non-audit services not covered above 1 -
Auditor remuneration 4,412 3,147
Total 4,412 3,147
Fees payable for the audit of the Company's subsidiaries pursuant to
legislation includes fees of £1.7m (2021: £0.45m) for audit activities
related to the implementation of IFRS 17. Audit-related assurance services
mainly include fees relating to the audit of the Group's Solvency II
regulatory returns and review procedures in relation to the Group's interim
results.
5 Finance costs
Year ended Year ended
31 December 31 December
2022 2021
£m £m
Interest payable on deposits received from reinsurers 74.7 78.7
Interest payable on subordinated debt 54.5 55.6
Other interest payable 3.5 2.5
Total finance costs 132.7 136.8
The interest payable on deposits received from reinsurers is as defined by the
respective reinsurance treaties and calculated with reference to the
risk-adjusted yield on the relevant backing asset portfolio.
6 Segmental reporting
Segmental analysis
The operating segments from which the Group derives income and incurs expenses
are as follows:
· the writing of insurance products for distribution to the at- or
in-retirement market and the DB de-risking market;
· the arranging of guaranteed income for life contracts and
lifetime mortgages through regulated advice and intermediary services and the
provision of licensed software to financial advisers, banks, building
societies, life assurance companies and pension trustees.
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 two revenue streams of the professional services business, HUB represents
the other two operating segments. The HUB operating segments are not currently
sufficiently significant to separate to disclose as a reportable segment. In
the segmental profit table below, the single reportable segment for Insurance
is reconciled to the total Group result by including an 'Other' column which
includes the non-reportable segments plus the other companies' results. This
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.
The internal reporting used by the CODM includes segmental information
regarding premiums and profit. Material product information is analysed by
product line and includes shareholder funded DB, GIfL, DB Partnering, Care
Plans, Protection, LTM and Drawdown products. Further information on the DB
partnering transactions is included in the Business Review. The information on
adjusted operating profit and profit before tax used by the CODM is presented
on a combined product basis within the insurance operating segment and is not
analysed further by product.
Adjusted operating profit
The Group reports adjusted operating profit as an alternative measure of
profit which is used for decision making and performance measurement. Adjusted
operating profit 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.
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.
Segmental reporting and reconciliation to financial information
Year ended 31 December 2022 Year ended 31 December 2021
Insurance Other Total Insurance Other Total
£m £m £m £m £m £m
New business operating profit 233.2 - 233.2 224.7 - 224.7
In-force operating profit 113.1 2.9 116.0 87.3 2.7 90.0
Other Group companies' operating results - (15.2) (15.2) - (15.1) (15.1)
Development expenditure (9.4) (2.3) (11.7) (4.2) (2.6) (6.8)
Reinsurance and financing costs (87.5) 14.2 (73.3) (89.1) 6.0 (83.1)
Underlying operating profit 249.4 (0.4) 249.0 218.7 (9.0) 209.7
Operating experience and assumption changes 86.9 - 86.9 28.0 - 28.0
Adjusted operating profit/(loss) before tax 336.3 (0.4) 335.9 246.7 (9.0) 237.7
Non-recurring and project expenditure (11.7) (0.4) (12.1) (14.8) (0.2) (15.0)
Investment and economic (losses)/profits (658.5) 19.3 (639.2) (248.6) (2.6) (251.2)
Interest adjustment to reflect IFRS accounting for Tier 1 notes as equity 27.3 (11.3) 16.0 28.1 (3.0) 25.1
Profit/(loss) before amortisation costs and tax (306.6) 7.2 (299.4) 11.4 (14.8) (3.4)
Amortisation of acquired intangibles - (18.0) (18.0) - (18.0) (18.0)
Loss before tax (306.6) (10.8) (317.4) 11.4 (32.8) (21.4)
Investment and economic losses of £639.2m in 2022 (2021: £251.2m), were
principally driven by rising interest rates.
Product information analysis
Premium information relating to the Group's products is presented below:
Year ended Year ended
31 December 31 December
2022 2021
£m £m
Defined Benefit De-risking Solutions ("DB") 2,566.9 1,934.6
Guaranteed Income for Life contracts ("GIfL") 519.7 688.2
Defined benefit de-risking partnering ("DB partnering") 258.6 -
Care Plans ("CP") 44.1 51.1
Protection 2.0 2.2
Gross premiums written 3,391.3 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 year for
these products is shown below:
Year ended Year ended
31 December 31 December
2022 2021
£m £m
LTM advances 538.3 528.2
Drawdown deposits and other investment products 14.0 1.1
Reconciliation of gross premiums written to Retirement Income sales
Retirement Income sales is a collective term for GIfL, DB and Care Plan and
can be seen in the Business Review.
Year ended Year ended
31 December 31 December
2022 2021
£m £m
Gross premiums written 3,391.3 2,676.1
Protection sales excluded from Retirement Income sales (2.0) (2.2)
DB Partnering funded (258.6) -
Retirement Income sales 3,130.7 2,673.9
7 Income tax
Year ended Year ended
31 December 31 December
2022 2021
£m £m
Current taxation
Current year - 0.8
Adjustments in respect of prior periods 8.5 (0.4)
Total current tax 8.5 0.4
Deferred taxation
Deferred tax recognised for losses in period (84.4) -
Origination and reversal of temporary differences (2.6) (5.7)
Adjustment in respect of prior period (8.4) -
Remeasurement of deferred tax - change in UK tax rate 1.2 (0.3)
Total deferred tax (94.2) (6.0)
Total income tax recognised in profit or loss (85.7) (5.6)
Deferred tax assets are recognised at the rate at which they are expected to
be utilised. On 3 March 2021, the Government announced an increase in the rate
of corporation tax to 25% from 1 April 2023. The change in tax rate was
substantively enacted in May 2021.
Reconciliation of total income tax to the applicable tax rate
Year ended Year ended
31 December 31 December
2022 2021
£m £m
Loss on ordinary activities before tax (317.4) (21.4)
Income tax at 19%, (2021: 19%) (60.3) (4.1)
Effects of:
Expenses not deductible for tax purposes 1.4 1.0
Remeasurement of deferred tax - change in UK tax rate 1.2 (0.3)
Unrecognised deferred tax asset - 0.1
Impact of future tax rate on tax losses (23.3) -
Adjustments in respect of prior periods 0.1 (0.4)
Other (4.8) (1.9)
Total income tax recognised in profit or loss (85.7) (5.6)
Income tax recognised in other comprehensive income
Year ended Year ended
31 December 2022 31 December
£m 2021
£m
Revaluation of land and buildings 0.2 -
Total deferred tax 0.2 -
Total income tax recognised in other comprehensive income 0.2 -
Income tax recognised directly in equity
Year ended Year ended
31 December 31 December
2022 2021
£m £m
Current taxation
Relief on Tier 1 interest - (4.8)
Relief on cost of redeeming Tier 1 notes - (9.6)
Other - (0.6)
Total current tax - (15.0)
Deferred taxation
Relief on Tier 1 interest (3.2) -
Relief in respect of share-based payments (1.3) -
Total deferred tax (4.5) -
Total income tax recognised directly in equity (4.5) (15.0)
Taxation of life insurance companies was fundamentally changed following the
publication of the Finance Act 2012. Since 1 January 2013, life insurance tax
has been based on financial statements; prior to this date, the basis for
profits chargeable to corporation tax was surplus arising within the Pillar 1
regulatory regime. Cumulative differences arising between the two bases, which
represent the differences in retained profits and taxable surplus which are
not excluded items for taxation, are brought back into the computation of
taxable profits. However, the legislation provides for transitional
arrangements whereby such differences are amortised on a straight-line basis
over a ten year period from 1 January 2013. Similarly, the resulting
cumulative transitional adjustments for tax purposes in adoption of IFRS are
amortised on a straight-line basis over a ten year period from 1 January 2016.
The tax charge for the year to 31 December 2022 includes profits chargeable to
corporation tax arising from amortisation of transitional balances of £2.5m
(2021: £2.5m).
8 Remuneration of Directors
Information concerning individual Directors' emoluments, interests and
transactions is given in the Directors' Remuneration Report. For the purposes
of the disclosure required by Schedule 5 to the Companies Act 2006, the total
aggregate emoluments of the Directors in the year was £5.2m (2021: £3.9m).
Employer contributions to pensions for Executive Directors for qualifying
periods were £nil (2021: £nil). The aggregate net value of share awards
granted to the Directors in the year was £2.4m (2021: £2.0m). The net value
has been calculated by reference to the closing middle-market price of an
ordinary share at the date of grant. Two Directors exercised share options
during the year with an aggregate gain of £0.9m (2021: two Directors
exercised options with an aggregate gain of £0.6m).
9 Staff numbers and costs
The average number of persons employed by the Group (including Directors)
during the financial year, analysed by category, was as follows:
Year ended Year ended
31 December 31 December 2021
2022 Number
Number
Directors 10 9
Senior management 124 123
Staff 990 944
Average number of staff 1,124 1,076
The aggregate personnel costs were as follows:
Year ended Year ended
31 December 31 December
2022 2021
£m £m
Wages and salaries 85.6 82.3
Social security costs 10.2 9.9
Other pension costs 4.6 4.3
Share-based payment expense 5.9 5.0
Total personnel costs 106.3 101.5
10 Employee benefits
Defined contribution pension scheme
The Group operates a defined contribution pension scheme. The pension cost
charge for the year represents contributions payable to the fund and amounted
to £4.6m (2021: £4.3m).
Employee share plans
The Group operates a number of employee share option plans. Details of those
plans are as follows:
Just Retirement Group plc 2013 Long Term Incentive Plan ("LTIP")
The Group has made awards under the LTIP to Executive Directors and other
senior managers. Awards are made in the form of nil-cost options which become
exercisable on the third anniversary of the grant date, subject to the
satisfaction of service and performance conditions set out in the Directors'
Remuneration Report. Options are exercisable until the tenth anniversary of
the grant date. Options granted are subject to a two year holding period after
the options have vested.
The options are accounted for as equity-settled schemes.
The number and weighted-average remaining contractual life of outstanding
options under the LTIP are as follows:
Year ended Year ended
31 December 2022 31 December 2021
Number of options Number of options
Outstanding at 1 January 22,403,125 19,264,506
Granted 8,563,671 6,795,784
Forfeited (1,149,299) (868,418)
Exercised (2,679,669) (1,351,472)
Expired (1,202,105) (1,437,275)
Outstanding at 31 December 25,935,723 22,403,125
Exercisable at 31 December 4,740,542 3,853,927
Weighted-average share price at exercise (£) 0.81 1.02
Weighted-average remaining contractual life (years) 1.09 1.19
The exercise price for options granted under the LTIP is nil.
During the year to 31 December 2022, awards of LTIPs were made on 24 March
2022 and 12 April 2022. The weighted-average fair value and assumptions used
to determine the fair value of the LTIPs and the buy-out options granted
during the year are as follows:
Fair value at grant date £0.80
Option pricing models used Black-Scholes, Stochastic, Finnerty
Share price at grant date £0.89
Exercise price Nil
Expected volatility - TSR performance March awards - 53.13%, April awards - 52.96%
Expected volatility - holding period March awards - 47.14%, April awards - 44.09%
Option life 3 years + 2 year holding period
Dividends HUB LTIP awards - 1.69%, Other - Nil
Risk-free interest rate - TSR performance March awards - 1.46%, April awards - 1.62%
Risk-free interest rate - holding period March awards - 1.45%, April awards - 1.61%
A Stochastic model is used where vesting is related to a total shareholder
return target, a Black-Scholes option pricing model is used for all other
performance vesting targets, and a Finnerty model is used to model the holding
period.
For awards subject to a TSR performance condition, expected volatility has
been calculated using historic volatility of the Company and each company in
the TSR comparator group, where available, over the period of time
commensurate with the remainder of the performance period immediately prior to
the date of grant. For awards with a holding period condition, expected
volatility has been calculated using historic volatility of the Company over
the period of time commensurate with the holding period immediately prior to
the date of grant.
Deferred share bonus plan ("DSBP")
The DSBP is operated in conjunction with the Group's short-term incentive plan
for Executive Directors and other senior managers of the Company or any of its
subsidiaries, as explained in the Directors' Remuneration Report. Awards are
made in the form of nil-cost options which become exercisable on the third
anniversary, and until the tenth anniversary, of the grant date.
The options are accounted for as equity-settled schemes.
The number and weighted-average remaining contractual life of outstanding
options under the DSBP are as follows:
Year ended Year ended
31 December 2022 31 December 2021
Number of options Number of options
Outstanding at 1 January 5,788,003 5,094,921
Granted 1,313,916 1,432,610
Forfeited - -
Exercised (1,103,280) (739,528)
Outstanding at 31 December 5,998,639 5,788,003
Exercisable at 31 December 1,652,826 1,683,566
Weighted-average share price at exercise (£) 0.83 0.93
Weighted-average remaining contractual life (years) 0.84 0.93
The exercise price for options granted under the DSBP is nil.
During the year to 31 December 2022, awards of DSBPs were made on 24 March
2022. The weighted-average fair value and assumptions used to determine the
fair value of options granted during the year under the DSBP are as follows:
Fair value at grant date £0.89
Option pricing model used Black-Scholes
Share price at grant date £0.89
Exercise price Nil
Expected volatility Nil
Option life 3 years
Dividends Nil
Risk-free interest rate Nil
Save As You Earn ("SAYE") scheme
The Group operates SAYE plans for all employees, allowing a monthly amount to
be saved from salaries over either a three or five year period that can be
used to purchase shares in the Company at a predetermined price. The employee
must remain in employment for the duration of the saving period and satisfy
the monthly savings requirement (except in "good leaver" circumstances).
Options are exercisable for up to six months after the saving period.
The options are accounted for as equity-settled schemes.
The number, weighted-average exercise price, weighted-average share price at
exercise, and weighted-average remaining contractual life of outstanding
options under the SAYE are as follows:
Year ended 31 December 2022 Year ended 31 December 2021
Number of options Weighted-average exercise price Number of options Weighted-average exercise price
£ £
Outstanding at 1 January 14,779,553 0.44 15,516,003 0.41
Granted 1,924,649 0.71 1,149,350 0.74
Forfeited (791,758) 0.46 (1,081,602) 0.42
Cancelled (526,561) 0.59 (363,145) 0.45
Exercised (2,337,700) 0.50 (408,488) 0.45
Expired (130,043) 0.79 (32,565) 0.84
Outstanding at 31 December 12,918,140 0.45 14,779,553 0.44
Exercisable at 31 December 233,954 0.59 278,130 0.60
Weighted-average share price at exercise 0.72 0.93
Weighted-average remaining contractual life (years) 1.22 1.66
The range of exercise prices of options outstanding at the end of the year are
as follows:
2022 2021
Number of options outstanding Number of options outstanding
£0.38 9,949,082 11,119,351
£0.52 395,051 2,443,437
£0.71 1,718,536 -
£0.74 787,780 1,079,922
£1.07 66,166 66,166
£1.18 1,525 70,677
Total 12,918,140 14,779,553
During the year to 31 December 2022, awards of SAYEs were made on 20 April
2022. The weighted-average fair value and assumptions used to determine the
fair value of options granted during the year under the SAYE are as follows:
Fair value at grant date £0.41
Option pricing model used Black-Scholes
Share price at grant date £0.93
Exercise price £0.71
Expected volatility - 3 year scheme 54.24%
Expected volatility - 5 year scheme 48.39%
Option life 3.37 or 5.37 years
Dividends 1.62%
Risk-free interest rate - 3 year scheme 1.70%
Risk-free interest rate - 5 year scheme 1.72%
Expected volatility has been calculated using historic volatility of the
Company over the period of time commensurate with the expected term of the
awards immediately prior to the date of grant.
11 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 year. The weighted-average number of ordinary shares excludes shares
held by the Employee Benefit Trust on behalf of the Company to satisfy future
exercises of employee share scheme awards.
Year ended 31 December 2022 Year ended 31 December 2021
Earnings Weighted- average number of shares Earnings Earnings (restated) Weighted- average number of shares Earnings
£m million per share £m million per share (restated)pence
pence
(Loss)/profit attributable to equity holders of Just Group plc (231.1) - - (15.0) - -
Coupon payments in respect of Tier 1 notes (net of tax) (13.6) - - (20.4) - -
Loss on redemption of Tier 1 notes (net of tax) - - - (47.0) - -
Basic (loss)/profit attributable to ordinary equity holders of Just Group plc (244.7) 1,032.4 (23.70) (82.4) 1,033.7 (7.97)
Effect of potentially dilutive share options1 - - - - - -
Diluted (loss)/profit attributable to ordinary equity holders of Just Group (244.7) 1,032.4 (23.70) (82.4) 1,033.7 (7.97)
plc
1 The weighted-average number of share options for the year ended 31
December 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 23.3 million share options.
During the current year, the FRC conducted a limited scope review of the
Company's 2021 Annual Report and Accounts in accordance with Part 2 of the FRC
Corporate Reporting Review Operating Procedures. The review covered only those
aspects of the Annual Report and Accounts that relate to the application of
IAS 33, 'Earnings per Share', and compliance with its requirements.
As a result of this review, the Directors reconsidered the accounting for the
loss on redemption of the Restricted Tier 1 ("RT1") notes redeemed in 2021.
Judgement is required in determining the treatment the RT1 notes in
application of IAS 33 'Earnings Per Share'. The rights associated with the RT1
notes are such that the notes are deemed similar to preference shares.
Therefore the requirements in IAS 33 to adjust Earnings for redemption gains
and losses apply to the RT1 notes in addition to the Company's existing
treatment of the coupon payments which were deducted from earnings in the 2021
Annual Report. This note has therefore been restated to correct the treatment
of the loss on redemption of the 2019 Restricted Tier 1 notes identified
during their review.
The table showing the calculation of the numerator has been amended to include
this; losses for the purposes of calculating EPS were previously reported as
£(35.4)m and have been restated to £(82.4)m. Following on from this, EPS and
diluted EPS have both been restated to use the restated Earnings figure.
Previously, Losses Per Share was disclosed as (3.42) pence and diluted Losses
Per Share was disclosed as (3.42) pence. Losses Per Share is now disclosed as
(7.97) pence and Diluted Losses Per Share as (7.97) pence. There is no impact
on Adjusted Earnings per share.
12 Dividends and appropriations
Dividends and appropriations paid in the year were as follows:
Year ended Year ended
31 December 31 December
2022 2021
£m £m
Final dividend
Final dividend in respect of prior year end (1.0 pence per ordinary share, 10.4 -
paid on 17 May 2022)
Interim dividend
Interim dividend in respect of current year end (0.5 pence per ordinary share, 5.2 -
paid on 2 September 2022)
Dividends paid on the vesting of employee share schemes - -
Total dividends paid 15.6 -
Coupon payments in respect of Tier 1 notes1 16.9 25.2
Total distributions to equity holders in the period 32.5 25.2
1 Coupon payments on Tier 1 notes are treated as an appropriation of
retained profits and, accordingly, are accounted for when paid.
Subsequent to 31 December 2022, the Directors proposed a final dividend for
2022 of 1.23 pence per ordinary share (2021: 1.0 pence) and together with the
interim dividend of 0.5 pence per ordinary share paid in 2 September 2022
amounting to £17.9m (2021: £10.4m) in total. Subject to approval by
shareholders at the Company's 2023 AGM, the dividend will be paid on 17 May
2023 to shareholders on the register of members at the close of business on 14
April 2023, and will be accounted for as an appropriation of retained earnings
in year ending 31 December 2023.
13 Intangible assets
Acquired intangible assets
Year ended 31 December 2022 Goodwill £m Present value of in-force business Distribution network Brand Intellectual property Software Leases PrognoSys™ £m Software £m Total
£m £m £m £m £m £m £m
Cost
At 1 January 2022 34.9 200.0 - - 2.0 - - 5.9 25.0 267.8
Additions - - - - - - - - 4.6 4.6
Disposals - - - - - - - 0.4 (0.4) -
At 31 December 2022 34.9 200.0 - - 2.0 - - 6.3 29.2 272.4
Amortisation and impairment
At 1 January 2022 (0.8) (125.4) - - (0.7) - - (3.1) (18.1) (148.1)
Disposals - - - - - - - - - -
Charge for the year - (17.9) - - (0.1) - - (0.5) (2.0) (20.5)
At 31 December 2022 (0.8) (143.3) - - (0.8) - - (3.6) (20.1) (168.6)
Net book value at 31 December 2022 34.1 56.7 - - 1.2 - - 2.7 9.1 103.8
Net book value at 31 December 2021 34.1 74.6 - - 1.3 - - 2.8 6.9 119.7
Acquired intangible assets
Year ended 31 December 2021 Goodwill £m Present value of in-force business £m Distribution network Brand Intellectual property Software £m Leases £m PrognoSys™ £m Software £m Total
£m £m £m £m
Cost
At 1 January 2021 34.9 200.0 26.6 5.6 2.0 11.1 2.0 5.9 18.4 306.5
Additions - - - - - - - - 6.6 6.6
Disposals - - (26.6) (5.6) - (11.1) (2.0) - - (45.3)
At 31 December 2021 34.9 200.0 - - 2.0 - - 5.9 25.0 267.8
Amortisation and impairment
At 1 January 2021 (0.8) (107.6) (26.6) (5.6) (0.6) (11.1) (2.0) (2.6) (16.1) (173.0)
Disposals - - 26.6 5.6 - 11.1 2.0 - - 45.3
Charge for the year - (17.8) - - (0.1) - - (0.5) (2.0) (20.4)
At 31 December 2021 (0.8) (125.4) - - (0.7) - - (3.1) (18.1) (148.1)
Net book value at 31 December 2021 34.1 74.6 - - 1.3 - - 2.8 6.9 119.7
Net book value at 31 December 2020 34.1 92.4 - - 1.4 - - 3.3 2.3 133.5
The amortisation and impairment charge is recognised in other operating
expenses in profit or loss.
Impairment testing
Goodwill is tested for impairment in accordance with IAS 36, Impairment of
Assets, at least annually.
The Group's goodwill of £34.1m at 31 December 2022 represents £1.0m
recognised on the 2018 acquisition of HUB Pension Consulting (Holdings)
Limited, £0.3m recognised on the 2016 acquisition of the Partnership
Assurance Group and £32.8m on the 2009 acquisition by Just Retirement Group
Holdings Limited of Just Retirement (Holdings) Limited, the holding company of
Just Retirement Limited ("JRL").
The existing goodwill has been allocated to the insurance segment as the
cash-generating unit. The recoverable amounts of goodwill have been determined
from value-in-use. The key assumptions of this calculation are noted below:
2022 2021
Period on which management approved forecasts are based 5 years 5 years
Discount rate (pre-tax) 12.7% 10.5%
The value-in-use of the insurance operating segment is considered by reference
to the latest business plans over the next five years, which reflect
management's best estimate of future cash flows based on historical
experience, expected growth rates and assumptions around market share,
customer numbers, expense inflation and mortality rates, including an
allowance for the mortality rates basis changes due to COVID-19. The discount
rate was determined using a weighted average cost of capital approach, with
appropriate adjustments to reflect a market participant's view. The outcome of
the impairment assessment is that the goodwill in respect of the insurance
operating segment is not impaired and that the value-in-use is higher than the
carrying value of goodwill.
Any reasonably possible changes in assumptions will not cause the carrying
value of the goodwill to exceed the recoverable amounts.
Other intangible assets with finite useful economic lives are tested for
impairment when there is an indication that the carrying value of the asset
may be subject to an impairment.
The Group's PVIF of £56.7m at 31 December 2022 represents the present value
of future profits from the purchased in-force business of £46.4m recognised
on the 2016 acquisition of Partnership Assurance Group and £10.3m on the 2009
acquisition of Just Retirement (Holdings) Limited, the holding company of Just
Retirement Limited. The remaining useful economic lives of the Group's PVIF
ranges from between two to three years. There are no indications of impairment
of the carrying values of PVIF or other intangible assets with finite useful
economic lives.
PVIF is an intangible asset within the scope of IFRS 4 and is assessed at
least annually, together with the insurance contract liabilities, which are
subject to the required liability adequacy test.
14 Property, plant and equipment
Year ended 31 December 2022 Freehold land and buildings Computer equipment Furniture and fittings Right-of-use assets Total
£m £m £m £m £m
Cost or valuation
At 1 January 2022 10.8 10.6 6.3 6.7 34.4
Acquired during the year - 0.9 2.6 8.1 11.6
Revaluations (0.9) - - - (0.9)
At 31 December 2022 9.9 11.5 8.9 14.8 45.1
Depreciation and impairment
At 1 January 2022 (0.5) (8.6) (6.1) (5.0) (20.2)
Eliminated on revaluation 0.8 - - - 0.8
Impairment - - - - -
Depreciation charge for the year (0.4) (1.0) (0.1) (1.8) (3.3)
At 31 December 2022 (0.1) (9.6) (6.2) (6.8) (22.7)
Net book value at 31 December 2022 9.8 1.9 2.7 8.0 22.4
Net book value at 31 December 2021 10.3 2.0 0.2 1.7 14.2
Year ended 31 December 2021 Freehold land and buildings Computer equipment Furniture and fittings Right-of-use assets Total
£m £m £m £m £m
Cost or valuation
At 1 January 2021 14.3 9.9 6.3 6.1 36.6
Acquired during the year - 0.7 - 0.6 1.3
Transfer to held for sale (3.5) - - - (3.5)
At 31 December 2021 10.8 10.6 6.3 6.7 34.4
Depreciation and impairment
At 1 January 2021 (0.1) (7.2) (5.9) (2.9) (16.1)
Impairment (0.3) - - - (0.3)
Depreciation charge for the year (0.5) (1.4) (0.2) (2.1) (4.2)
Transfer to held for sale 0.4 - - - 0.4
At 31 December 2021 (0.5) (8.6) (6.1) (5.0) (20.2)
Net book value at 31 December 2021 10.3 2.0 0.2 1.7 14.2
Net book value at 31 December 2020 14.2 2.7 0.4 3.2 20.5
Included in freehold land and buildings is land of value £2.3m (2021:
£2.8m).
The Company's freehold land and buildings are stated at their revalued
amounts, being the fair value at the date of revaluation less any subsequent
accumulated depreciation and subsequent accumulated impairment losses. The
fair value measurements of freehold land and buildings as at 11 November 2022
were performed by Hurst Warne & Partners Surveyors Ltd, independent
valuers not related to the Company. Hurst Warne & Partners Surveyors Ltd
is registered for regulation by the Royal Institution of Chartered Surveyors
("RICS"). The valuation process relies on expert judgement which is heightened
due to the macroeconomic related uncertainty. The valuer has sufficient
current local knowledge of the particular market, and the knowledge, skills
and understanding to undertake the valuation competently. The fair value of
the freehold land was undertaken using a residual valuation assuming a new
build office on each site to an exact equivalent size as currently and
disregarding the possibility of developing any alternative uses or possible
enhancements. The fair value of the buildings was determined based on open
market comparable evidence of market rent. The fair value measurement of
revalued land and buildings has been categorised as Level 3 within the fair
value hierarchy based on the non-observable inputs to the valuation technique
used.
Revaluations during 2022 comprise a loss of £0.5m recognised in profit or
loss, a gain of £0.5m recognised in other comprehensive income (gross of tax
of £0.3m), partially reversing previously recognised gains of £4.3m (gross
of tax of £0.7m), and the elimination of depreciation on the revaluations of
£0.8m.
If freehold land and buildings were stated on the historical cost basis, the
carrying values would be land of £3.6m (2021: £3.6m) and buildings of £4.4m
(2021: £4.6m).
Right-of-use assets are property assets leased by the Group (see note 26).
15 Investment property
Year ended Year ended
31 December 31 December
2022 2021
£m £m
At 1 January 69.6 -
Recognised on acquisition of the Jersey Property Unit Trust (see note 35) - 70.6
Net loss from fair value adjustment (29.3) (1.0)
At 31 December 40.3 69.6
Investment properties are leased to tenants. Investment properties are valued
using discounted cash flow analysis using assumptions based on the repayment
of the underlying loan. The valuation model discounts the expected future cash
flows using a discount rate which includes a credit spread allowance
associated with that asset. The redemption and default assumptions are derived
from the assumptions for the Group's bond portfolio.
Minimum lease payments receivable on leases of investment properties are as
follows (undiscounted cashflows):
2022 2021
£m £m
Within 1 year 1.1 1.1
Between 1 and 2 years 1.1 1.1
Between 2 and 3 years 1.1 1.1
Between 3 and 4 years 1.1 1.1
Between 4 and 5 years 1.1 1.1
Later than 5 years 127.7 128.8
Total 133.2 134.3
16 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
2022 2021 2022 2021
£m £m £m £m
Units in liquidity funds 1,174.4 1,310.5 1,174.4 1,310.5
Investment funds 421.0 301.8 407.8 290.5
Debt securities and other fixed income securities 11,370.5 12,924.0 13,229.7 12,141.7
Deposits with credit institutions 907.6 52.9 907.6 52.9
Loans secured by residential mortgages 5,305.9 7,422.8 4,265.6 4,328.7
Loans secured by commercial mortgages 583.7 677.8 643.4 686.3
Loans secured by ground rents 246.9 189.7 356.3 185.9
Infrastructure loans 1,056.4 993.1 1,205.8 858.0
Other loans 134.2 117.9 131.0 115.0
Derivative financial assets 2,276.6 691.2 - -
Total 23,477.2 24,681.7 22,321.6 19,969.5
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. However as they do not meet the definition of
Cash available on demand, liquidity funds are reported within Financial
investments. Liquidity funds do however meet the definition of cash
equivalents for the purposes of disclosure in the Consolidated statement of
cash flows.
Deposits with credit institutions with a carrying value of £892.4m (2021:
£50.3m) have been pledged as collateral in respect of the Group's derivative
financial instruments. Amounts pledged as collateral are deposited with the
derivative counterparty.
Derivatives are reported within Financial investments where the derivative
valuation is in an asset position, or alternatively within Other financial
liabilities where the derivative is in a liability position.
17 FINANCIAL ASSETS AND LIABILITIES MEASURED AT FAIR VALUE
This note explains the methodology for valuing the Group's financial assets
and liabilities measured at fair value, including financial investments, and
provides disclosures in accordance with IFRS 13, Fair value measurement,
including an analysis of such assets and liabilities categorised in a fair
value hierarchy based on market observability of valuation inputs.
(a) Determination of fair value and fair value hierarchy
All assets and liabilities for which fair value is measured or disclosed in
the financial statements are categorised within the fair value hierarchy
described as follows, based on the lowest level input that is significant to
the fair value measurement as a whole.
Level 1
Inputs to Level 1 fair values are unadjusted quoted prices in active markets
for identical assets and liabilities that the entity can access at the
measurement date.
Level 2
Inputs to Level 2 fair values are inputs other than quoted prices included
within Level 1 that are observable for the asset or liability, either directly
or indirectly. If the asset or liability has a specified (contractual) term, a
Level 2 input must be observable for substantially the full term of the
instrument. Level 2 inputs include the following:
· quoted prices for similar assets and liabilities in active
markets;
· quoted prices for identical assets or similar assets in markets
that are not active, the prices are not current, or price quotations vary
substantially either over time or among market makers, or in which very little
information is released publicly;
· inputs other than quoted prices that are observable for the asset
or liability; and
· market-corroborated inputs.
Level 3
Inputs to Level 3 fair values include some 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.
Assessment of the observability of pricing information
All Level 1 and 2 assets continue to have pricing available from actively
quoted prices or observable market data.
Where the Group receives broker/asset manager quotes and the information is
given a low BVAL score, the investments are classified as level 3 as are
assets valued internally.
Debt securities and financial derivatives are valued using independent pricing
services or third party broker quotes are classified as Level 2.
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.
(b) Analysis of assets and liabilities held at fair value according to fair value hierarchy
2022 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
Units in liquidity funds 1,169.8 4.6 - 1,174.4 1,304.9 5.6 - 1,310.5
Investment funds - 82.6 338.4 421.0 - 68.5 233.3 301.8
Debt securities and other fixed income securities 3,843.7 5,904.0 1,622.8 11,370.5 4,302.5 7,172.0 1,449.5 12,924.0
Deposits with credit institutions 892.4 15.2 - 907.6 50.3 2.6 - 52.9
Loans secured by residential mortgages - - 5,305.9 5,305.9 - - 7,422.8 7,422.8
Loans secured by commercial mortgages - - 583.7 583.7 - - 677.8 677.8
Loans secured by ground rents - - 246.9 246.9 - - 189.7 189.7
Infrastructure loans - - 1,056.4 1,056.4 - - 993.1 993.1
Other loans - 22.3 111.9 134.2 15.6 12.6 89.7 117.9
Derivative financial assets - 2,276.6 - 2,276.6 - 682.7 8.5 691.2
Financial investments 5,905.9 8,305.3 9,266.0 23,477.2 5,673.3 7944.0 11,064.4 24,681.7
Investment property - - 40.3 40.3 - - 69.6 69.6
Assets classified as held for sale - - - - - - 3.1 3.1
Total financial assets 5,905.9 8,305.3 9,306.3 23,517.5 5,673.3 7,944.0 11,137.1 24,754.4
Liabilities held at fair value through profit or loss
Derivative financial liabilities - 3,004.1 19.1 3,023.2 - 386.1 8.6 394.7
Obligations for repayment of cash collateral received 592.8 30.3 - 623.1 311.7 14.5 - 326.2
Deposits received from reinsurers - - 1,603.9 1,603.9 - - 2,144.7 2,144.7
Other financial liabilities 592.8 3,034.4 1,623.0 5,250.2 311.7 400.6 2,153.3 2,865.6
Investment contract liabilities - - 32.5 32.5 - - 33.6 33.6
Fair value of loans and borrowings at amortised cost - 704.2 - 704.2 - 936.8 - 936.8
Total financial liabilities 592.8 3,738.6 1,655.5 5,986.9 311.7 1,337.4 2,186.9 3,836.0
Other than freehold land and buildings classified as held for sale in 2021 and
disposed of in 2022, there are no non-recurring fair value measurements as at
31 December 2022 (2021: nil).
(c) Transfers between levels
The Group's policy is to assess pricing source changes and determine transfers
between levels as of the end of each half-yearly reporting period. During 2021
the Group enhanced its methodology over the levelling of financial
instruments, and in 2022, it continued to use this methodology which improved
the pricing sources resulting in transfers of £1,421.7m from Level 2 to Level
1 (2021: £2,820.8m), and saw the pricing quality fall for £368.2m which
moved from Level 1 to Level 2 (2021: £13.3m). A further £122.9m saw the
pricing quality also improve so were moved from Level 3 to Level 2. In the
prior year £49.9m moved from Level 2 to Level 3 as the pricing quality fell.
(d) Level 3 assets and liabilities measured at fair value
Reconciliation of the opening and closing balances of Level 3 financial assets
and liabilities.
Year ended 31 December 2022 Investment funds Debt securities and other fixed income securities £m Loans secured by residential mortgages £m Loans secured by commercial mortgages £m Loans secured by ground rents Infra-structure loans Other loans Derivative financial assets Investment contract liabilities Derivative financial liabilities Deposits received from reinsurers £m
£m £m £m £m £m £m £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/deposits 106.6 716.0 538.3 91.5 217.6 369.4 - - (14.0) - (0.9)
Transfers to Level 2 - (122.9) - - - - - - - - -
Sales/redemptions/payments (17.7) (101.1) (542.7) (134.4) (11.2) (21.6) (14.3) - 11.4 - 192.9
Disposal of a portfolio of LTMs1 - - (750.8) - - - - - - - -
Recognised in profit or loss in net investment income
Realised gains and losses - - (87.0) (2.2) - - - - - - -
Unrealised gains and losses 16.2 (303.3) (1,433.9) (49.1) (149.2) (286.1) 36.5 (8.5) - (10.5) 423.5
Interest accrued - (15.4) 159.2 0.1 - 1.6 - - - - (74.7)
Change in fair value of liabilities recognised in profit or loss - - - - - - - - 3.7 - -
At 31 December 2022 338.4 1,622.8 5,305.9 583.7 246.9 1,056.4 111.9 - (32.5) (19.1) (1,603.9)
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 31 December 2021 Investment funds Debt securities and other fixed income securities £m Loans secured by residential mortgages £m Loans secured by commercial mortgages £m Loans secured by ground rents Infra-structure loans Other loans Derivative financial assets Investment contract liabilities Derivative financial liabilities Deposits received from reinsurers £m
£m £m £m £m £m £m £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/deposits 84.9 281.4 528.2 169.0 72.4 79.1 46.1 - (1.1) - (1.2)
Transfers from Level 2 - 49.9 - - - - - - - - -
Sales/redemptions/payments - (87.9) (508.9) (49.4) - (17.7) - - 11.1 - 202.9
Disposal of a portfolio of LTMs1 - - (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.
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% (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 +100bps
net increase/(decrease) in fair value (£m)
2022 (9.4)
2021 (8.9)
Debt securities and other fixed income securities
Fixed income securities, in line with market practice, are generally valued
using an independent pricing service. These valuations are determined using
independent external quotations from multiple sources and are subject to a
number of monitoring controls, such as monthly price variances, stale price
reviews and variance analysis. Pricing services, where available, are used to
obtain the third party broker quotes. When prices are not available from
pricing services, prices are sourced from external asset managers or internal
models and classified as Level 3 under the fair value hierarchy due to the use
of significant unobservable inputs. These include private placement bonds and
asset backed securities as well as less liquid corporate bonds.
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.
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
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)
2022 (138.1)
2021 (124.6)
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.
Cash flow models are used in the absence of a deep and liquid market for loans
secured by residential mortgages. The bulk sales of the portfolios of Just
LTMs over the past three years 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 23(b).
Maintenance expenses
Assumptions for future policy expense levels are based on the Group's recent
expense analyses. The assumed future expense levels incorporate an annual
inflation rate allowance of 3.9% (2021: 4.2%).
Mortality
Mortality assumptions have been derived with reference to England & Wales
population mortality using the CMI 2021 model for mortality improvements.
These base mortality and improvement tables have been adjusted to reflect the
expected future mortality experience of mortgage contract holders, taking into
account the medical and lifestyle evidence collected during the sales process
and the Group's assessment of how this experience will develop in the future.
This assessment takes into consideration relevant industry and population
studies, published research materials and management's own experience. The
Group has considered the possible impact of the COVID-19 pandemic on its
mortality assumptions and has included an allowance for the expected future
direct and indirect impacts of this. Further details of the matters considered
in relation to mortality assumptions at 31 December 2022 are set out in note
23(b).
Property prices
The approach in place at 31 December 2022 is to calculate the value of a
property by taking the latest Automated Valuation Model "AVM" result,
typically as at 30 September 2022 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. To the extent that this reflects market values as
at 31 December 2022, no additional short-term adjustment is allowed for.
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%
(2021: 3.3%), with a volatility assumption of 13% per annum (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 impacts of Brexit, the
COVID-19 pandemic and a higher interest and inflation rate economic
environment on the UK property market. House price growth over 2022 continued
to be strong initially, but has experienced falls in the latter part of the
year. Whilst it is becoming more likely that short term falls in property
prices may be experienced, at this stage our view is that there is no clear
indication of a change in 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 (2021: 0.5% and 4.1%) and between
0.6% and 6.8% for loans in PLACL (2021: 0.6% and 6.8%).
In the prior period, a separate provision for potential higher short-term
experience arising from additional remortgaging activity was also allowed for.
The sharp increase in loan interest rates observed over the year and
reductions in maximum loan-to-value ratios available for new business
significantly reduce the opportunities for customers to benefit from
remortgaging. Consequently, this separate provision has been removed.
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. The average liquidity
premium for loans held within JRL is 3.2% (2021: 3.04%) and for loans held
within PLACL is 3.5% (2021: 3.51%). The movement over the period observed in
both JRL and PLACL is 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 improvement Immediate property Future property Future property Voluntary redemptions Liquidity premium
net increase/(decrease) in fair value (£m) +10% mortality +0.25% price price price +10% +10bps
-5% fall growth volatility
-10% -0.5% +1%
2022 (5.2) (13.9) (6.3) (75.2) (48.5) (32.1) 19.7 (47.8)
2021 (6.5) 22.7 10.5 (114.6) (82.3) (53.2) (5.2) (78.0)
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. Sensitivities are generally of
a smaller magnitude compared to the prior period due to the discounting effect
of interest rate rises over the period. These interest rate rises also
underpin the directional change in the mortality and voluntary redemption
sensitivities.
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
23(e).
Other limitations in the above sensitivity analysis include the use of
hypothetical market movements to demonstrate potential risk that only
represents the Group's view of reasonably possible near-term market changes
that cannot be predicted with any certainty.
Loans secured by commercial mortgages
Loans secured by commercial mortgages are valued using discounted cash flow
analysis using assumptions based on the repayment of the underlying loan.
Principal assumptions 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.
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)
2022 (19.2)
2021 (25.0)
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 assumptions 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.
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)
2022 (77.9)
2021 (59.2)
Infrastructure loans
Infrastructure loans 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.
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)
2022 (71.7)
2021 (96.6)
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.
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)
2022 (1.1)
2021 (0.9)
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 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 5.67% (2021: 2.73%).
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 5.89% and 4.2% respectively
(2021: 2.87% and 1.03% 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 252bps (2021: 219bps) 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 27(b)). The Group has
estimated the impact on fair value to changes to these inputs as follows:
Deposits received from reinsurers Credit spreads +100bps Discount rates +100bps
net increase/(decrease) in fair value (£m)
2022 (39.9) (111.2)
2021 (72.4) (196.1)
18 Deferred tax
2022 2021
Asset Liability Total Asset Liability Total
£m £m £m £m £m £m
Transitional tax 1.0 - 1.0 - (1.5) (1.5)
Intangible assets (15.0) - (15.0) - (17.0) (17.0)
Land and buildings (1.0) - (1.0) - (0.8) (0.8)
Tax losses and other 108.2 - 108.2 - 14.0 14.0
Total deferred tax 93.2 - 93.2 - (5.3) (5.3)
The transitional tax asset of £1.0m (2021: liability of £1.5m) represents
the transitional adjustments for the purposes of adopting IFRS which is
amortised over ten years from 1 January 2016. In the prior year, this was
offset by the adjustment arising from the change to the tax rules for life
companies which was amortised over ten years from 1 January 2013.
Deferred tax assets have been recognised because it is probable that these
assets will be recovered. The losses arising in 2022 were principally from
investment and economic losses driven by rising interest rates. Previously,
the Group took an active approach to hedging its interest rate exposure. In
the second half of 2021 and first half of 2022, as rates rose and our solvency
position strengthened, we gradually reduced the interest rate hedging to a
broadly neutral position for our IFRS balance sheet during the second half of
2022. Our revised approach is to allow the solvency position to fluctuate as
interest rates move, and hence minimise the economic cost should rates rise as
they did in 2022 before we had neutralised the hedging. Economic losses were
also realised on the third and final portfolio sale of LTMs.
The movement in the net deferred tax balance was as follows:
Year ended Year ended
31 December 31 December
2022 2021
£m £m
Net balance at 1 January (5.3) (11.3)
Recognised in profit or loss 94.2 6.0
Recognised in equity 4.5 -
Recognised in other comprehensive income (0.2) -
Net balance at 31 December 93.2 (5.3)
The Group has unrecognised deferred tax assets of £6.3m, (2021: £6.2m).
19 Insurance and other receivables
2022 2021
£m £m
Receivables arising from insurance and reinsurance contracts 295.4 20.0
Finance lease receivables 0.8 2.3
Other receivables 26.6 13.1
Total insurance and other receivables 322.8 35.4
Receivables arising from insurance contracts, reinsurance contracts and also
other receivables are accounted for at amortised cost, which approximates fair
value. The timing of settlements for December 2022 transactions has resulted
in an increase to receivables arising from Insurance contracts in the period.
The credit rating of these balances is disclosed in note 33.
Insurance and other receivables expected to be recovered after more than one
year are £59.7m (2021: £0.7m in respect of finance lease receivables).
20 Cash and cash equivalents
2022 2021
£m £m
Cash available on demand 482.0 510.2
Units in liquidity funds 1,174.4 1,310.5
Cash and cash equivalents in the Consolidated statement of cash flows 1,656.4 1,820.7
Units in liquidity funds comprise wholly of units in funds which invest in
very short dated liquid assets. However as they do not meet the definition of
Cash available on demand, liquidity funds are reported within financial
investments (see note 16). Liquidity funds do however meet the definition of
cash equivalents for the purposes of disclosure in the Consolidated statement
of cash flows.
21 Share capital
The allotted, issued and fully paid ordinary share capital of Just Group plc
is detailed below:
Number of £0.10 ordinary shares Share Share Merger Total
capital premium reserve £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 165,888 - 0.1 - 0.1
At 31 December 2022 1,038,702,932 103.9 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
The company does not have a limited amount of authorised share capital.
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.
22 Tier 1 notes
Year ended Year ended
31 December 31 December
2022 2021
£m £m
At 1 January 322.4 294.0
Issued in the year - 325.0
Issue costs, net of tax - (2.6)
Redeemed in the year - (294.0)
At 31 December 322.4 322.4
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) was recognised directly in equity.
During the year, interest of £16.9m was paid to holders of the 2021 notes
(2021: interest of £25.2m to holders of 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.
23 Insurance contracts and related reinsurance
Insurance liabilities
2022 2021
£m £m
Gross insurance liabilities 18,332.9 21,812.9
Net reinsurance assets (1,981.1) (2,533.5)
Net insurance liabilities 16,351.8 19,279.4
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.
(a) Terms and conditions of insurance contracts
The Group's long-term insurance contracts, written by the Group's life
companies, Just Retirement Limited ("JRL") and Partnership Life Assurance
Company Limited ("PLACL"), include Retirement Income (Guaranteed Income for
Life ("GIfL"), Defined Benefit ("DB"), and Care Plans), and whole of life and
term protection insurance.
The valuation of insurance liabilities are agreed by the Board using
recognised actuarial valuation methods proposed by the Group's Actuarial
Reporting function. In particular, a prospective gross premium valuation
method has been adopted for major classes of business.
Although the process for the establishment of insurance liabilities follows
specified rules and guidelines, the liabilities that result from the process
remain uncertain. As a consequence of this uncertainty, the eventual value of
claims could vary from the amounts provided to cover future claims. The Group
seeks to provide for appropriate levels of contract liabilities taking known
facts and experiences into account but nevertheless such liabilities remain
uncertain.
The estimation process used in determining insurance liabilities involves
projecting future annuity payments and the cost of maintaining the contracts.
For non-annuity contracts, the liability is determined as the sum of the
discounted value of future benefit payments and future administration expenses
less the expected value of premiums payable under the contract.
(b) 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 over the
past three years. High COVID-19 mortality rates in 2020 and early 2021
contributed significantly to positive mortality experience variances in those
respective reporting periods, whereas during 2022 rates 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.
An allowance for future effects of COVID-19 has been implemented through a
combination of using the latest CMI 2021 improvement model and applying an
overlay to increase short term mortality rates but which tapers to zero in the
long-term. The CMI 2021 improvement model has been used with core parameters,
placing no weight on 2020 and 2021 experience. The overlay applies multipliers
to mortality rates for each calendar year, uniformly across all ages. 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 keeping its assumptions under regular review.
Mortality assumptions have been set by reference to appropriate standard
mortality tables. These tables have been adjusted to reflect the future
mortality experience of the policyholders, taking into account the medical and
lifestyle evidence collected during the underwriting process, premium size,
gender and the Group's assessment of how this experience will develop in the
future. The assessment takes into consideration relevant industry and
population studies, published research materials, and management's own
industry experience.
The standard tables which underpin the mortality assumptions are summarised in
the table below.
2022 2021
Individually underwritten Guaranteed Income for Life Solutions (JRL) Modified E&W Population mortality, with CMI 2021 model mortality Modified E&W Population mortality, with CMI 2019 model mortality
improvements improvements
Individually underwritten Guaranteed Income for Life Solutions (PLACL) Modified E&W Population mortality, with CMI 2021 model mortality Modified E&W Population mortality, with CMI 2019 model mortality
improvements improvements
Defined Benefit (JRL) Modified E&W Population mortality, with CMI 2021 model mortality Modified E&W Population mortality, with CMI 2019 model mortality
improvements. Medically underwritten unchanged from 2021 improvements for standard underwritten business; Reinsurer supplied tables
underpinned by the Self-Administered Pension Scheme ("SAPS") S1 tables, with
modified CMI 2009 model mortality improvements for medically underwritten
business
Defined Benefit (PLACL) Modified E&W Population mortality, with CMI 2021 model mortality Modified E&W Population mortality, with CMI 2019 model mortality
improvements improvements
Care Plans and other annuity products (PLACL) Unchanged from 2021 Modified PCMA/PCFA or modified E&W Population mortality with CMI 2019
model mortality improvements
Protection (PLACL) Unchanged from 2021 TM/TF00 Select
All references to the use of the CMI 2019 or CMI 2021 models relate to
improvements for calendar year 2020 onwards.
The long-term improvement rates in the CMI 2021 model are 2.0% for males and
1.75% for females (2021: 2.0% for males and 1.75% for females). The period
smoothing parameter in the modified CMI 2021 model has been set to 7.0 (2021:
7.0). The addition to initial rates ("A") parameter in the model varies
between 0% and 0.25% depending on product (2021: between 0% and 0.25%
depending on product). All other CMI model parameters are the defaults (2021:
other parameters set to defaults).
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 17 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 31 December 2022. The considerations around COVID-19 and
macro-economic factors for property prices affecting the NNEG are as described
in note 17.
Valuation discount rates - gross liabilities 2022 2021
% %
Individually underwritten Guaranteed Income for Life Solutions (JRL) 5.67 2.73
Individually underwritten Guaranteed Income for Life Solutions (PLACL) 5.89 2.87
Defined Benefit (JRL) 5.67 2.73
Defined Benefit (PLACL) 5.89 2.87
Other annuity products (PLACL) 4.20 1.03
Term and whole of life products (PLACL) 4.12 1.03
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 the NNEG from LTMs was 79 bps
in JRL and 66bps in PLACL (2021: 64bps and 63bps respectively).
Future expenses
Assumptions for future policy expense levels, expressed as a per plan charge
for GIfL and a per scheme member charge for DB, are determined from the
Group's recent expense analyses. The assumed future policy expense levels
incorporate an annual inflation rate allowance of 4.15% (2021: 4.45%) derived
from the long-term expected retail price and consumer price indices implied by
inflation swap rates and an additional allowance for earnings inflation.
Long-term inflation expectations have fallen during the period, resulting in a
decrease in the inflation rate allowance.
Inflation
Assumptions for annuity escalation are required for LPI, RPI and CPI index
linked liabilities, the majority of which are within the Defined Benefit
business. The inflation curve assumed in each case is that which is implied by
market swap rates, taking into account any escalation caps and/or floors
applicable. A change in approach since 31 December 2021, to using a mark to
model basis for LPI inflation instead of the previous approach which utilised
market prices that were not actively traded, has been implemented.
(c) Movements
The following movements have occurred in the insurance contract balances
during the year.
Year ended 31 December 2022 Gross Reinsurance Net
£m £m £m
At 1 January 2022 21,812.9 (2,533.5) 19,279.4
Change due to new premiums 2,982.5 (202.8) 2,779.7
Change due to new claims (1,494.0) 231.6 (1,262.4)
Unwinding of discount 612.7 (73.6) 539.1
Changes in economic assumptions (5,418.7) 515.1 (4,903.6)
Changes in non-economic assumptions (164.1) 95.2 (68.9)
Other movements 1.6 (13.1) (11.5)
At 31 December 2022 18,332.9 (1,981.1) 16,351.8
Year ended 31 December 2021 Gross Reinsurance £m Net
£m £m
At 1 January 2021 21,118.4 (2,865.5) 18,252.9
Change due to new premiums 2,298.1 33.8 2,331.9
Change due to new claims (1,478.1) 239.0 (1,239.1)
Unwinding of discount 488.8 (62.1) 426.7
Changes in economic assumptions (595.1) 135.4 (459.7)
Changes in non-economic assumptions (9.8) - (9.8)
Other movements (9.4) (14.1) (23.5)
At 31 December 2021 21,812.9 (2,533.5) 19,279.4
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 year
Economic assumption changes
The principal economic assumption changes impacting the movement in insurance
liabilities during the year 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 the effect of any change in the underlying assets over the period,
for example due to purchases to support new business and trading for risk
management purposes. For the year to 31 December 2022, changes in discount
rates resulted in a net reduction of insurance liabilities of £4,659m (2021:
£813m) which was due to large increases in risk-free rates over the period
(e.g. the 10-year risk-free rate increased by 276bps) 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 year to 31
December 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 £153.3m (2021: £348m). This includes an impact of a
£49m reduction in respect of the change in approach since 31 December 2021 to
the derivation of the annuity escalation curves required for LPI linked
liabilities and is a reduction in liabilities.
Non-economic assumption changes
The principal non-economic assumption changes impacting the movement in
insurance liabilities during the year relate to mortality assumptions for both
JRL and PLACL products. Note that impacts quoted below relate specifically to
the liability cash flow impact of these changes; any resulting change to the
discount rate is captured above.
Mortality
The mortality bases applied are outlined above in note 23(b). A decrease in
future expectations of longevity decreases the carrying value of the Group's
insurance liabilities.
(d) Estimated timing of net cash outflows from insurance contract liabilities
The following table shows the insurance contract balances analysed by
duration. The total balances are split by duration of payments in proportion
to the policy cash flows estimated to arise during the year.
Expected cash flows (undiscounted) Carrying value (discounted) £m
2022 Within 1-5 years 5-10 years Over Total
1 year £m £m 10 years £m
£m £m
Gross 1,505.9 5,884.3 6,954.4 20,876.9 35,221.5 18,332.9
Reinsurance (209.4) (762.1) (801.7) (1,567.4) (3,340.6) (1,981.1)
Net 1,296.5 5,122.2 6,152.7 19,309.5 31,880.9 16,351.8
2021 Expected cash flows (undiscounted) Carrying
value (discounted) £m
Within 1-5 years 5-10 years Over Total
1 year £m £m 10 years £m
£m £m
Gross 1,435.4 5,465.3 6,356.3 16,893.6 30,150.6 21,812.9
Reinsurance (201.7) (733.5) (786.3) (1,650.8) (3,372.3) (2,533.5)
Net 1,233.7 4,731.8 5,570.0 15,242.8 26,778.3 19,279.4
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.
(e) Sensitivity analysis
The Group has estimated the impact on profit before tax for the year in
relation to insurance contracts and related reinsurance from reasonably
possible changes in key assumptions relating to financial assets and 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 17. 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.
Sensitivities are generally of a smaller magnitude compared to the prior
period due to the discounting effect of interest rate rises over the period.
The reduction in the interest rate sensitivity is further due to the change in
the interest rate hedging position adopted. The mortality and voluntary
redemption sensitivities are further impacted by the interest rate increases
observed during the period, as mentioned in the sensitivities to loans secured
against residential mortgages in note 17.
Sensitivity factor Description of sensitivity factor applied
Interest rate and investment return The impact of a change in the market interest rates by +/- 1% (e.g. if a
current interest rate is 5%, the impact of an immediate change to 4% and 6%
respectively). The test consistently allows for similar changes to both assets
and liabilities
Expenses The impact of an increase in maintenance expenses by 10%
Base mortality rates The impact of a decrease in base table mortality rates by 5% applied to both
Retirement Income liabilities and loans secured by residential mortgages
Mortality improvement rates The impact of a level increase in mortality improvement rates of 0.25% for
both Retirement Income liabilities and loans secured by residential mortgages
Immediate property price fall The impact of an immediate decrease in the value of properties by 10%
Future property price growth The impact of a reduction in future property price growth by 0.5%
Future property price volatility The impact of an increase in future property price volatility by 1%
Voluntary redemptions The impact of an increase in voluntary redemption rates on loans secured by
residential mortgages by 10%
Credit defaults The impact of an increase in the credit default assumption of 10bps
Impact on profit before tax (£m)
Interest Interest Maintenance expenses Base Mortality improvement +0.25% Immediate property Future property Future property Voluntary redemptions Credit
rates rates +10% mortality price fall price price volatility +10% defaults
+1% -1% -5% -10% growth +1% +10bps
-0.5%
2022 Assets (1,545.4) 1,837.6 (5.2) (13.4) (6.0) (62.6) (37.1) (25.6) 19.2 -
Liabilities 1,552.7 (1,848.6) (27.0) (111.3) (81.9) (34.3) (32.2) (16.1) (30.1) (123.2)
Total 7.3 (11.0) (32.2) (124.7) (87.9) (96.9) (69.3) (41.7) (10.9) (123.2)
2021 Assets (2,602.0) 3,118.9 (6.5) 23.8 7.5 (90.8) (59.2) (41.2) (6.2) (0.0)
Liabilities 2,076.3 (2,492.5) (33.7) (140.6) (104.4) (67.7) (67.7) (22.5) (64.2) (151.6)
Total (525.7) 626.4 (40.2) (116.8) (96.9) (158.5) (126.9) (63.7) (70.4) (151.6)
24 Investment contract liabilities
Year ended Year ended
31 December 31 December
2022 2021
£m £m
At 1 January 33.6 42.8
Deposits received from policyholders 14.0 1.1
Payments made to policyholders (11.4) (11.1)
Change in contract liabilities recognised in profit or loss(1) (3.7) 0.8
At 31 December 32.5 33.6
1 This represents the £2.6m in the consolidated statement of
comprehensive income less the impact for foreign exchange translation.
(a) Terms and conditions of investment contracts
The Group has written Capped Drawdown products for the at-retirement market.
These products are no longer available to new customers. In return for a
single premium, these contracts pay a guaranteed lump sum on survival to the
end of the fixed term. There is an option at outset to select a lower sum at
maturity and regular income until the earlier of death or maturity. Upon death
of the policyholder and subject to the option selected at the outset, there
may be a return of premium less income received or income payable to a
dependant until the death of that dependant. Capped Drawdown pension business
is classified as investment contracts as there is no transfer of longevity
risk due to the premium protection option within these fixed term contracts.
(b) Principal assumptions underlying the calculation of investment contracts
Valuation discount rates
Valuation discount rate assumptions for investment contracts are set with
regard to yields on supporting assets. The yields on lifetime mortgage assets
are derived using the assumptions described in note 17 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.
Our underlying default methodology allows for the impact of credit rating
downgrades and spread widening and hence we have maintained the same
methodology at 31 December 2022.
Valuation discount rates 2022 2021
% %
Investment contracts 5.67 2.73
25 Loans and borrowings
Carrying value Fair value
2022 2021 2022 2021
£m £m £m £m
£250m 9.0% 10 year subordinated debt 2026 (Tier 2) issued by Just Group plc 173.6 249.2 187.8 323.5
£125m 8.125% 10 year subordinated debt 2029 (Tier 2) issued by Just Group plc 122.5 122.2 130.1 165.6
£250m 7.0% 10.5 year subordinated debt 2031 non-callable 5.5 years (Green 248.5 248.4 244.7 287.2
Tier 2) issued by Just Group plc
£230m 3.5% 7 year subordinated debt 2025 (Tier 3) issued by Just Group plc 154.7 154.5 141.6 160.5
Total loans and borrowings 699.3 774.3 704.2 936.8
The £250m 7.0% bond is callable after October 2025. The maturity analysis in
note 33(d) assumes it is called at the first possible date.
On 15 October 2020, the Group completed the issue of £250m Green Tier 2
capital via a 7.0% sterling denominated BBB rated 10.5 year, non-callable 5.5
year bonds issue, interest payable semi-annually in arrears. The bonds have a
reset date of 15 April 2026 with optional redemption any time from 15 October
2025 up to the reset date. The proceeds of the issue have been used in part to
finance the purchase of £75m of the £230m 3.5% 7 year subordinated debt 2025
(Tier 3) issued by the Group in 2018.
The Group also has an 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 1.50% and 2.75% per annum depending on the Group's ratio of net debt
to net assets.
Movements in borrowings during the year were as follows:
Year ended Year ended
31 December 31 December
2022 2021
£m £m
At 1 January 774.3 773.5
Repayment of Just Group plc Tier 2 subordinated debt (76.0) -
Financing cash flows (76.0) -
Amortisation of issue costs 1.0 0.8
Non-cash movements 1.0 0.8
At 31 December 699.3 774.3
26 Lease liabilities
Lease liabilities are in respect of property assets leased by the Group
recognised as right-of-use assets within property, plant and equipment on the
Consolidated statement of financial position. The Group has elected not to
recognise right-of-use assets and lease liabilities for short-term leases of
less than 12 months and leases of low value assets.
Movements in lease liabilities during the year were as follows:
Year ended Year ended
31 December 31 December
2022 2021
£m £m
At 1 January 3.9 6.9
Lease payments (3.0) (3.7)
Financing cash flows (3.0) (3.7)
New Lease 7.6 -
Rent increase - 0.6
Disposal - -
Interest 0.1 0.1
Non-cash movements 7.7 0.7
At 31 December 8.6 3.9
Lease liabilities are payable as follows:
2022 2021
£m £m
At 31 December
Less than one year 1.1 3.0
Between one and five years 6.8 1.0
More than five years 0.8 -
8.7 4.0
Interest (0.1) (0.1)
Total lease liability 8.6 3.9
27 Other financial liabilities
The Group has the following other financial liabilities which are measured at
fair value through profit or loss:
Note 2022 2021
£m £m
Derivative financial liabilities (a) 3,023.2 394.7
Obligations for repayment of cash collateral received (a) 623.1 326.2
Deposits received from reinsurers (b) 1,603.9 2,144.7
Total other liabilities 5,250.2 2,865.6
(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: recognition and measurement. Deposits
received from reinsurers are measured in accordance with the reinsurance
contract, taking into account an appropriate discount rate for the timing of
expected cash flows of the liabilities.
The amount of deposits received from reinsurers and reinsurance funds withheld
that is expected to be settled more than one year after the Consolidated
statement of financial position date is £1,421.9m (2021: £1,952.7m).
28 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 (see note 33).
2022 2021
Derivatives Asset Liability Notional amount Asset Liability Notional amount
fair value fair value £m fair value fair value £m
£m £m £m £m
Foreign currency swaps 412.9 1,320.3 12,662.5 243.4 247.2 8,069.4
Interest rate swaps 1,407.6 1,580.0 13,647.9 169.9 44.9 9,117.7
Inflation swaps 437.5 79.7 4,293.4 261.8 92.5 4,580.0
Forward swaps 5.0 10.5 546.3 1.8 3.4 213.9
Total return swaps 13.6 13.5 - 5.8 5.8 -
Put options on property index (NNEG hedges) - 19.2 705.0 8.5 0.9 705.0
Total 2,276.6 3,023.2 31,855.1 691.2 394.7 22,686.0
The Group's derivative financial instruments are not designated as hedging
instruments and changes in their fair value are included in profit or loss.
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 31 December 2022, the Group had pledged collateral of £1,286.2m (2021:
£61.3m), of which £393.8m were corporate bonds and European Investment Bank
bonds (2021: £11m) and had received cash collateral of £623.1m (2021:
£326.2m).
29 Reinsurance
The Group uses reinsurance as an integral part of its risk and capital
management activities.
New business is reinsured via longevity swap arrangements for DB and GIfL
business and quota share for DB partnering business, as follows:
· DB was reinsured at 90% for non-underwritten schemes in 2021 and
2022.
· DB Partnering was reinsured at 100% for the scheme completed in
2022.
· GIfL was reinsured at 90% in 2021 and 2022.
· Care new business was not reinsured in 2021 or 2022.
In-force business is reinsured under longevity swap and quota share treaties.
The quota share reinsurance treaties have deposit back or other collateral
arrangements to remove the majority of the reinsurer credit risk, as described
below. The majority of longevity swaps also have collateral arrangements, for
the same purpose.
In addition to the deposits received from reinsurers recognised within other
financial liabilities (see note 27(b)), certain reinsurance arrangements give
rise to deposits from reinsurers that are not included in the Consolidated
statement of financial position of the Group as described below:
· The Group has an agreement with two reinsurers whereby financial
assets arising from the payment of reinsurance premiums, less the repayment of
claims, in relation to specific treaties, are legally and physically deposited
back with the Group. Although the funds are controlled by the Group, no future
benefits accrue to the Group as any returns on the deposits are paid to
reinsurers. Consequently, the deposits are not recognised as assets of the
Group and the investment income they produce does not accrue to the Group.
· The Group has an agreement with one reinsurer whereby assets
equal to the reinsurer's full obligation under the treaty are deposited into a
ringfenced collateral account. The Group has first claim over these assets
should the reinsurer default, but as the Group has no control over these funds
and does not accrue any future benefit, this fund is not recognised as an
asset of the Group.
· The Group has an agreement with one reinsurer whereby assets
equal to the reinsurer's full obligation under the treaty are either deposited
into a ringfenced collateral account of corporate bonds, or held under a funds
withheld structure of Lifetime Mortgages. The latter are legally and
physically held by the Group. Although the funds are managed by the Group (as
the Group controls the investment of the asset), no future benefits accrue to
the Group as returns on the assets are paid to reinsurers. Consequently, the
lifetime mortgages are not recognised as assets of the Group and the
investment income they produce does not accrue to the Group. The reinsurer
also deposits cash into a bank account held legally by the Group to fund
future Lifetime Mortgages but as this cash is ringfenced for issued Lifetime
Mortgage quotes agreed by the reinsurer, it is also not recognised as an asset
by the Group.
· The Group has an agreement with one reinsurer whereby assets
equal to the reinsurer's full obligation under the treaty are deposited into a
ringfenced collateral account of notes/shares issued through the dedicated
Investment vehicle. The investments in the vehicle are restricted only for the
purpose of this reinsurance. Consequently, the collateralised assets are not
recognised as assets of the Group and the investment income they produce does
not accrue to the Group. The reinsurer also deposits cash into a bank account
held legally by the Group to fund reinsurance claims but as this cash is
ringfenced for the reinsurer purpose, it is also not recognised as an asset by
the Group.
2022 2021
£m £m
Deposits held in trust 568.7 491.7
The Group is exposed to a minimal amount of reinsurance counterparty default
risk in respect of the above arrangements and calculates a counterparty
default reserve accordingly. At 31 December 2022, this reserve totalled £2.0m
(2021: £3.4m).
30 Insurance and other payables
2022 2021
£m £m
Payables arising from insurance and reinsurance contracts 31.7 22.0
Other payables 230.8 71.3
Total insurance and other payables 262.5 93.3
Other payables include unsettled investment purchases, which have increased in
the period as a result of cash liability for recognised investment trades. All
amounts are due within one year.
31 Commitments
Capital commitments
The Group had no capital commitments as at 31 December 2022 (2021: £nil).
32 Contingent liabilities
There are no contingent liabilities as at 31 December 2022 (2021: £nil).
33 Financial and insurance risk management
This note presents information about the major financial and insurance risks
to which the Group is exposed, and its objectives, policies and processes for
their measurement and management. Financial risk comprises exposure to market,
credit and liquidity risk.
(a) Insurance risk
The Group's insurance risks include exposure to longevity, mortality and
morbidity and exposure to factors such as withdrawal levels and management and
administration expenses. The writing of long-term insurance contracts requires
a range of assumptions to be made and risk arises from these assumptions being
materially inaccurate. The Group's main insurance risk arises from adverse
experience compared with the assumptions used in pricing products and valuing
insurance liabilities.
Individually underwritten GIfL policies 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 writing long term insurance policies. In the event that early repayments
on LTMs 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 exposure to morbidity risk as the LTM is repayable when the customer
moves into long-term care.
Management of insurance risk
Underpinning the management of insurance risk are:
· The use of controls around the development of suitable products
and their pricing;
· Adherence to approved underwriting requirements;
· The development and use of medical information including
PrognoSys™ for both pricing and reserving to provide detailed insight into
longevity risk;
· The use of reinsurance to reduce longevity risk. The Group
retains oversight of the overall exposures and monitors that the aggregation
of risk ceded is within the reinsurance counterparty risk appetite;
· The assessment and recalibration of adequacy of risk based
capital;
· Review and approval of assumptions used by the Board;
· Regular monitoring and analysis of actual experience; and
· Monitoring of expense levels.
Concentrations of insurance risk
Improved longevity arises from enhanced medical treatment and improved life
circumstances. Concentration risk to individuals groups whose longevity may
improve faster than the population is managed by writing business across a
wide range of different medical and lifestyle conditions to avoid excessive
exposure. Reinsurance is also an important mitigant to concentrations of
insurance risk.
(b) Market risk
Market risk is the risk of loss or of adverse change in the financial
situation 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. Market risk is implicit in the insurance
business model and arises from exposure to interest rates, property markets,
inflation and exchange rates. The Group is not exposed to equity risk. Some
very limited equity risk exposure arises from investment into credit funds
which have a mandate which allows preferred equity to be held. Changes in the
value of the Group's investment portfolio will also affect the Group's
financial position. In addition 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.
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 Group's Market Risk Policy sets out the Group's 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 arising from the changes in the
values of assets or liabilities as a result of changes in risk-free interest
rates. The Group seeks to limit its exposure through appropriate asset and
liability matching and hedging strategies. The Group actively hedges its
interest rate exposure to protect balance sheet positions on both Solvency II
and economic bases in accordance with its risk appetite framework and
principles.
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.
The following table indicates the earlier of contractual repricing or maturity
dates for the Group's significant financial assets.
2022 Less than One Five Over No Total
one year to five years to ten years ten years fixed term £m
£m £m £m £m £m
Units in liquidity funds 1,174.4 - - - - 1,174.4
Investment funds 82.7 338.3 - - - 421.0
Debt securities and other fixed income securities 676.2 1,424.5 2,405.0 6,864.7 - 11,370.4
Deposits with credit institutions 907.6 - - - - 907.6
Loans secured by residential mortgages - - - - 5,305.9 5,305.9
Loans secured by commercial mortgages 67.1 338.5 125.1 53.0 - 583.7
Loans secured by ground rents - - - 246.9 - 246.9
Infrastructure loans - 24.2 160.3 871.9 - 1,056.4
Other loans 1.5 117.9 6.4 8.5 - 134.3
Derivative financial assets 51.8 157.4 322.3 1,745.1 - 2,276.6
Total 2,961.3 2,400.8 3,019.1 9,790.1 5,305.9 23,477.2
2021 Less than One Five Over No Total
one year to five years to ten years ten years fixed term £m
£m £m £m £m £m
Units in liquidity funds 1,310.5 - - - - 1,310.5
Investment funds 68.4 233.4 - - - 301.8
Debt securities and other fixed income securities 733.5 1,920.0 2,345.9 7,924.6 - 12,924.0
Deposits with credit institutions 52.9 - - - - 52.9
Derivative financial assets 8.0 62.7 96.4 524.1 - 691.2
Loans secured by residential mortgages - - - - 7,422.8 7,422.8
Loans secured by commercial mortgages 43.4 395.0 189.8 49.6 - 677.8
Loans secured by ground rents - - - 189.7 - 189.7
Infrastructure loans - 25.3 123.5 844.3 - 993.1
Other loans 0.9 108.3 3.2 5.5 - 117.9
Total 2,217.6 2,744.7 2,758.8 9,537.8 7,422.8 24,681.7
A sensitivity analysis of the impact of interest rate movements on profit
before tax is included in note 23(e).
(ii) Property risk
The Group's exposure to property risk arises from the provision of lifetime
mortgages which creates an exposure to the UK residential property market. A
substantial decline or sustained underperformance in UK residential property
prices, against which the Group's lifetime mortgages are secured, could result
in the mortgage debt at the date of redemption exceeding the proceeds from the
sale of the property.
Demand for lifetime mortgage products may also be impacted by a fall in
property prices. It may diminish consumers' propensity to borrow and reduce
the amount they are able to borrow due to reductions in property values.
The risk is managed by controlling the loan value as a proportion of the
property's value at outset and obtaining independent third party valuations 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 year 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 17 and note 23(e). These notes also discuss the Group's
consideration of the impact of COVID-19 on property assumptions at 31 December
2022.
The Group is also exposed to commercial property risk indirectly through the
investment in loans secured by commercial mortgages. Mitigation of such risk
is covered by the credit risk section below.
(iii) Inflation risk
Inflation risk is the risk of change in the value of assets or liabilities
arising from changes in actual or expected inflation or in the volatility of
inflation. Exposure to long term inflation occurs in relation to the Group's
own management expenses and its writing index-linked Retirement Income
contracts. Its impact is managed through the application of disciplined cost
control over management expenses and through matching inflation-linked assets
and inflation-linked liabilities for the long term inflation risk.
(iv) Currency risk
Currency risk arises from changes in foreign exchange rates which affect the
value of assets denominated in foreign currencies.
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 and 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 mitigate 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. 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. Concentration of credit risk exposures is managed by placing limits on
exposures to individual counterparties, sectors and geographic areas.
· 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 28).
· Reinsurance treaties. 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 arrangements.
· 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
31 December:
2022 UK gilts AAA AA A BBB BB or below Unrated Total
£m £m £m £m £m £m £m £m
Units in liquidity funds - 1,169.8 - - - 4.6 - 1,174.4
Investment funds - - - - - - 421.0 421.0
Debt securities and other fixed income securities 306.0 698.2 1,582.5 3,262.6 5,120.6 400.6 - 11,370.5
Deposits with credit institutions - - 99.4 773.0 20.0 15.1 0.1 907.6
Loans secured by residential mortgages - - - - - - 5,305.9 5,305.9
Loans secured by commercial mortgages - - - - - - 583.7 583.7
Loans secured by ground rents - - - - - - 246.9 246.9
Infrastructure loans - 71.2 97.4 141.7 733.9 12.2 - 1,056.4
Other loans - - - - - 22.3 111.9 134.2
Derivative financial assets - - - 1,669.9 606.7 - - 2,276.6
Reinsurance - - 126.9 197.1 3.7 - 204.4 532.1
Insurance and other receivables - - - - - - 322.8 322.8
Total 306.0 1,939.2 1,906.2 6,044.3 6,484.9 454.8 7,196.7 24,332.1
2021 UK gilts AAA AA A BBB BB or below Unrated Total
£m £m £m £m £m £m £m £m
Units in liquidity funds - 1,304.9 - - - 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 4,268.0 6,337.6 388.4 8,733.4 25,214.4
There are no financial assets that are either past due or impaired.
The credit rating for Cash available on demand at 31 December 2022 was between
a range of AA and BB (2021: between a range of AA and BB).
The carrying amount of those assets subject to credit risk represents the
maximum credit risk exposure.
In the tables below, the amounts of assets or liabilities presented in the
Consolidated Balance Sheet are offset first by financial instruments that have
the right of offset under master netting arrangement or similar arrangements
with any remaining amount reduced by cash and securities collateral.
2022 Balance Sheet Related Cash Securities collateral Net
£m financial collateral(2) pledged amount
Instruments(1) £m £m £m
£m
Derivative assets 2,277 (1,766) (491) (5) 15
Derivative liabilities (3,023) 1,766 783 444 (30)
1 Related financial instruments represents outstanding amounts with
the same counterparty which, under agreements such as the ISDA Master
Agreement, could be offset and settled net following certain predetermined
events.
2 Cash and securities held may exceed target levels due to the
complexities of operational collateral management, timing and agreements in
place with individual counterparties.
2021 Balance Sheet Related Cash Securities collateral Net
£m financial collateral2 pledged amount
Instruments1 £m £m £m
£m
Derivative assets 691 (369) (311) - 11
Derivative liabilities (395) 380 26 - -
1 Related financial instruments represents outstanding amounts with
the same counterparty which, under agreements such as the ISDA Master
Agreement, could be offset and settled net following certain predetermined
events.
2 Cash and securities held may exceed target levels due to the
complexities of operational collateral management, timing and agreements in
place with individual counterparties. This may result in over /
under-collateralisation of derivative positions. The amount of collateral
reported in the table above is restricted to the value of the associated
derivatives recognised in the Statement of Financial Position.
(d) Liquidity risk
Liquidity risk is the risk of loss because the Group, although solvent, does
not have sufficient financial resources available to it in order to meet its
obligations as they fall due.
The investment of cash received from Retirement Income sales into corporate
bonds, gilts and lifetime mortgages, and commitments to pay policyholders and
other obligations, requires liquidity risks to be taken.
Exposure to liquidity risk arises from:
· maintaining and servicing collateral requirements arising from
the changes in market value of financial derivatives used by the Group;
· 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; and
· ensuring financial support can be provided across the Group.
Liquidity risk is managed by holding assets of a suitable maturity and
marketability to meet liabilities as they fall due. The Group's short-term
liquidity requirements to meet annuity payments are predominantly funded by
investment coupon receipts, and bond principal repayments. 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 long term
liquidity and the minimum cash and cash equivalent levels required 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 from one day up to and
including one month.
During the year the Group 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.
The table below summarises the maturity profile of the financial liabilities,
including both principal and interest payments, of the Group based on
remaining undiscounted contractual obligations:
2022 Within one One to More than
year or five years five years
payable on demand £m £m
£m
Investment contract liabilities 7.8 30.7 0.7
Subordinated debt 65.0 559.8 855.3
Derivative financial liabilities 28.3 324.5 2,651.3
Obligations for repayment of cash collateral received 623.1 - -
Deposits received from reinsurers 182.0 651.3 1,772.3
2021 Within one year or payable on demand One to More than
£m five years five years
£m £m
Investment contract liabilities 10.2 21.1 1.5
Subordinated debt 71.8 684.2 899.2
Derivative financial liabilities 7.3 41.9 344.6
Obligations for repayment of cash collateral received 326.2 - -
Deposits received from reinsurers 192.0 679.8 1,924.0
34 Capital
Group capital position
The Group's estimated capital surplus position at 31 December 2022 was as
follows:
Solvency Minimum Group Solvency
Capital Requirement
Capital Requirement
20221 20212 2022 2021
£m £m £m £m
Eligible Own Funds 2,757 3,004 2,152 2,263
Solvency Capital Requirement (1,387)3 (1,836) (388)3 (482)
Excess Own Funds 1,3703 1,168 1,7643 1,781
Solvency coverage ratio 199%3 164% 555%3 469%
1 Estimated regulatory position. Solvency II capital coverage ratios
as at 31 Dec 2021 and 31 Dec 2022 include a recalculation of transitional
measures on technical provisions ("TMTP") as at the respective dates.
2 This is the reported regulatory position as included in the Group's
Solvency and Financial Condition Report as at 31 December 2021.
3 Unaudited.
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 estimated and
therefore subject to change. It is also unaudited.
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 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.
The Group regularly assesses a wide range of actions to improve the capital
position and resilience of the business.
To improve resilience to property risk, we have significantly reduced the
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 stops writing new business.
EVT compliance
At 31 December 2022, Just passed the PRA EVT with a buffer of 1.53%
(unaudited) over the current minimum published deferment rate of 2.0%
(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 primarily due to rise in risk
free rates.
Management regularly assesses the level of buffer above the minimum deferment
rate and considers appropriateness of the buffer against an established
framework.
Regulatory developments
The PRA approved the Group's major model change application on 28 November
2022. We are planning to apply to the PRA to bring the PLACL SCR calculation
onto the internal model.
In November 2022, HMT published its response to the consultation on the review
of Solvency II and set out its plans for reform. The key elements of the
reform for the Group relate to the risk margin and the Matching Adjustment. We
welcome the reduction in risk margin to a more appropriate level and that we
hope that the proposed expansion of the matching adjustment criteria enables
us to invest in a wider range of assets, in particular to help support
investment in the UK economy. However, the detailed expectations underlying
the reforms still needs to be developed and the implementation date has not
been set. The Group will engage with PRA and HMT consultations in 2023 as
appropriate.
35 Group entities
The Group holds investment in the ordinary shares (unless otherwise stated) of
the following subsidiary undertakings and associate undertakings, which are
all consolidated in these Group accounts. All subsidiary undertakings have a
financial year end at 31 December (unless otherwise stated).
Principal activity Registered office Percentage of nominal share capital and voting rights held
Direct subsidiary
Just Retirement Group Holdings Limited5 Holding company Reigate 100%
Partnership Assurance Group Limited5 Holding company Reigate 100%
Indirect subsidiary
HUB Acquisitions Limited1, 5 Holding company Reigate 100%
HUB Financial Solutions Limited Distribution Reigate 100%
Just Re 1 Limited5 Investment activity Reigate 100%
Just Re 2 Limited5 Investment activity Reigate 100%
Just Retirement (Holdings) Limited5 Holding company Reigate 100%
Just Retirement (South Africa) Holdings (Pty) Limited Holding company South Africa 100%
Just Retirement Life (South Africa) Limited Life assurance South Africa 100%
Just Retirement Limited Life assurance Reigate 100%
Just Retirement Management Services Limited5 Management services Reigate 100%
Just Retirement Money Limited Provision of lifetime mortgage products Reigate 100%
Partnership Group Holdings Limited5 Holding company Reigate 100%
Partnership Holdings Limited5 Holding company Reigate 100%
Partnership Home Loans Limited Provision of lifetime mortgage products Reigate 100%
Partnership Life Assurance Company Limited Life assurance Reigate 100%
Partnership Services Limited5 Management services Reigate 100%
TOMAS Online Development Limited5 Software development Belfast 100%
Enhanced Retirement Limited Dormant Reigate 100%
HUB Digital Solutions Limited Dormant Reigate 100%
Pension Buddy Limited (formerly HUB Online Development Limited) Dormant Belfast 100%
HUB Pension Solutions Limited Dormant Reigate 100%
HUB Transfer Solutions Limited Dormant Reigate 100%
JRP Group Limited Dormant Reigate 100%
JRP Nominees Limited Dormant Reigate 100%
Just Annuities Limited Dormant Reigate 100%
Just Equity Release Limited Dormant Reigate 100%
Just Incorporated Limited Dormant Reigate 100%
Just Management Services (Proprietary) Limited Dormant South Africa 100%
Just Protection Limited Dormant Reigate 100%
Just Retirement Finance plc Dormant Reigate 100%
Just Retirement Nominees Limited Dormant Reigate 100%
Just Retirement Solutions Limited Dormant Reigate 100%
PAG Finance Limited Dormant Jersey 100%
PAG Holdings Limited Dormant Jersey 100%
PASPV Limited Dormant Reigate 100%
PayingForCare Limited Dormant Reigate 100%
PLACL RE 1 Limited Dormant Reigate 100%
PLACL RE 2 Limited Dormant Reigate 100%
TOMAS Acquisitions Limited Dormant Reigate 100%
The Open Market Annuity Service Limited Dormant Belfast 100%
HUB Pension Consulting (Holdings) Limited (formerly Corinthian Group Limited)5 Holding company Reigate 100%
HUB Pension Consulting Limited5 Pension consulting Reigate 100%
Spire Platform Solutions Limited2, 3 Software development Portsmouth 33%4
Associate
Guernsey Property Unit Trust Investment activity Guernsey 60%
Comentis Product development Bristol 13%
1 Class "A" and Class "B" ordinary shares. 2 Class "B" ordinary
shares. 3 30 June year end. 4 Control is based on Board
representation rather than percentage holding.
5 The financial statements of these subsidiary undertakings are exempt from
the requirements of the Companies Act 2006 relating to the audit of individual
financial statements by virtue of Section 479A of the Companies Act 2006.
Registered offices
Reigate office: Belfast office: South Africa office:
Enterprise House 3rd Floor, Arena Building Office G01, Big Bay Office Park
Bancroft Road Ormeau Road 16 Beach Estate Boulevard, Big Bay
Reigate, Surrey RH2 7RP Belfast BT7 1SH Western Cape 7441
Jersey office: Portsmouth office:
44 Esplanade Building 3000, Lakeside North Harbour
St Helier Portsmouth
Jersey JE4 9WG Hampshire PO6 3EN
Consolidated structured entities
In November 2020 the Parent Company invested in a cell of a Protected Cell
Company, White Rock Insurance (Gibraltar) PCC Limited. Financial support
provided by the Group is limited to amounts required to cover transactions
between the cell and the Group. Just is the cell owner of the individual
protected cell and owns the single insurance share associated with the cell.
The Group has provided £10m financial support in the form of a letter of
credit.
In December 2021 the Group invested in a controlling interest in a Jersey
Property Unit Trust (JPUT). The Group has determined that it controls the JPUT
as a result of the Group's ability to remove the Trustees; other than the
Group and the Trustees there are no other parties with decision making rights
over the JPUT. The Group has taken the option within IFRS 3, Business
combinations to apply the concentration test to determine whether the JPUT
represents a business within the scope of IFRS 3. The conclusion of the
concentration test is that the assets of the JPUT are concentrated in the
single identifiable asset of the investment property and as such the
investment by the Group does not represent a business combination (see note
15). The Group has consolidated the results of the JPUT; any excess of
investment purchase price over the fair value of the assets acquired is
allocated against the identifiable assets and liabilities in proportion to
their relative fair values; goodwill is not recognised.
Unconsolidated structured entities
The Group has interests in structured entities which are not consolidated as
the definition of control has not been met based on the investment proportion
held by the Group.
Interests in unconsolidated structured entities include investment funds and
liquidity funds and loans granted to special purpose vehicles "SPVs" secured
by assets held by the SPVs such as commercial mortgages and ground rents.
As at 31 December 2022 the Group's interest in unconsolidated structured
entities, which are classified as investments held at fair value through
profit or loss, are shown below:
2022 2021
£m £m
Loans secured by commercial mortgages 583.7 677.8
Loans secured by ground rents 246.9 189.7
Asset backed securities 7.0 9.5
Investment funds 399.2 301.8
Liquidity funds 1,174.4 1,310.5
Total 2,411.2 2,489.3
The Group's exposure to financial loss from its interest in unconsolidated
structured entities is limited to the amounts shown above. The Group is not
required to provide financial support to the entities, nor does it sponsor the
entities.
Non-controlling interests
On 4 July 2018 the Group subscribed to 33% of the ordinary share capital of
Spire Platform Solutions Limited. The Group has majority representation on the
Board of the company, giving it effective control, and therefore consolidates
the company in full in the results of the Group.
On 17 August 2018 the Group acquired 75% of the ordinary share capital of HUB
Pension Consulting (Holdings) Limited (formerly Corinthian Group Limited). On
22 September 2021 the Group acquired the remaining 25% of the ordinary share
capital at a cost of £52,659.80.
The non-controlling interests of the minority shareholders of Spire Platform
Solutions Limited of £0.6m have been recognised in the year.
Associates
During the year the Group invested £196m for a 60% equity stake in a Guernsey
Property Unit Trust (GPUT) "TP2 Unit Trust", M&G (Guernsey), PO Box 156,
Dorey Court, Admiral Park, St. Peter Port, Guernsey GY1 4EU.
The GPUT is a structured entity as voting rights are not the determining
factor in assessing which party controls the entity. Although the Group has a
majority equity stake, the decisions regarding the relevant activities of the
GPUT are made by the Trustee. Each investor holds veto rights, however these
are not proportionate to the equity holding and as such the veto rights do not
give any investor more power than any other investor. The Group accounts for
this investment as an Associate using the equity method.
In December 2022 the Group invested £1m for a 13% equity stake in Comentis
Ltd, incorporated and registered in England and Wales with company number
13061362 whose registered office is at Henleaze House, Harbury Road, Bristol,
England, BS9 4PN.
The investment includes the right for the Group to appoint a Director to the
board of Comentis Ltd and as a result the investment has been classified as an
Associate and accounted for using the equity method in the Group accounts.
Comentis Ltd has a reporting period ending 31 March which is different to the
Group's year end of 31 December. Given the timing of the acquisition, there is
no impact on the application of the equity method in the Group's 2022
financial statements.
Summarised financial information for associates
2022 Year ended
31 December
2022
£m
Assets
Investment properties 212.0
Trade and other receivables 52.0
Cash and cash equivalents 6.0
Total assets 270.0
Equity
Partners capital 327.0
Retained earnings (57.0)
Total equity 270.0
Reconciliation of carrying value
2022 Year ended
31 December
2022
£m
Investment in associate - GPUT 196.2
Share of associates net income - GPUT (2.9)
Carrying amount - GPUT 193.3
Investment in associate - Comentis 1.0
Carrying amount 194.3
36 Related parties
The Group has related party relationships with its key management personnel
and subsidiary undertakings detailed in note 35.
Key management personnel comprise the Directors of the Company. There were no
material transactions between the Group and its key management personnel other
than those disclosed below.
Key management compensation is as follows:
Year ended Year ended
31 December 31 December
2022 2021
£m £m
Short-term employee benefits 3.0 3.9
Share-based payments 1.7 1.5
Total key management compensation 4.7 5.4
Loans owed by Directors 0.4 0.4
The loan advances to Directors accrue interest fixed at 4% per annum and are
repayable in whole or in part at any time.
37 Ultimate Parent Company and ultimate controlling party
The Company is the ultimate Parent Company of the Group and has no controlling
interest.
38 Post balance sheet events
Subsequent to 31 December 2022, the Directors proposed a final dividend for
2022 of 1.23 pence per ordinary share (2021: 1.0 pence), amounting to £17.9m
(2021: £10.4m) in total. Subject to approval by shareholders at the Company's
2023 AGM, the dividend will be paid on 17 May 2023 to shareholders on the
register of members at the close of business on 14 April 2023, and will be
accounted for as an appropriation of retained earnings in year ending 31
December 2023.
There are no other material post balance sheet events that have taken place
between 31 December 2022 and the date of this report.
Additional Financial Information
The following additional financial information is unaudited.
Solvency II surplus generation
The table below shows the expected future emergence of Solvency II surplus
from the in-force book in excess of 100% of SCR over the next 35 years. The
amounts are shown undiscounted and exclude Excess Own Funds at 31 December
2022 of £1,370m.
The core surplus generation assumes that future property growth is in line
with the best estimate assumption of 3.3%. The cash flow amounts allow for
return on surplus on assets that maintain the current capital coverage ratio.
The cash flow amounts shown are before the interest and principal payments on
all debt obligations. The projection does not allow for the impact of future
new business.
Year Core surplus generation TMTP amortisation Surplus generation
£m £m £m
2023 228 (73) 155
2024 223 (73) 150
2025 215 (73) 142
2026 208 (73) 135
2027 202 (73) 129
2028 198 (73) 125
2029 194 (73) 121
2030 190 (73) 117
2031 186 (73) 113
2032 181 - 181
2033 176 - 176
2034 171 - 171
2035 165 - 165
2036 158 - 158
2037 151 - 151
2038 144 - 144
2039 136 - 136
2040 128 - 128
2041 119 - 119
2042 110 - 110
2043 - 2047 429 - 429
2048 - 2052 254 - 254
2053 - 2057 145 - 145
New business contribution
The table below shows the expected future emergence of Solvency II surplus
arising from 2022 new business at 100% of SCR over 50 years from the point of
sale. It shows the initial Solvency II capital strain in 2022. The amounts are
shown undiscounted.
Year Surplus generation
£m
Point of sale (60.0)
Year 1 15.5
Year 2 15.2
Year 3 15.9
Year 4 16.6
Year 5 17.2
Year 6 17.1
Year 7 17.7
Year 8 17.0
Year 9 16.4
Year 10 16.4
Year 11 16.0
Year 12 16.3
Year 13 16.6
Year 14 16.5
Year 15 16.2
Year 16 15.9
Year 17 15.1
Year 18 14.4
Year 19 14.1
Year 20 13.7
Years 21 to 30 114.3
Years 31 to 40 44.1
Years 41 to 50 18.4
Financial investments credit ratings
The sector analysis of the Group's financial investments portfolio by credit
rating is shown below:
Total % AAA AA A BBB BB or below Unrated
£m £m £m £m £m £m £m
Basic materials 270 1.3 - - 103 157 10 -
Communications and technology 1,327 6.5 100 191 249 741 46 -
Auto manufacturers 250 1.2 - - 218 26 6 -
Consumer (staples including healthcare) 1,012 5.1 127 245 193 354 15 78
Consumer (cyclical) 142 0.7 - 4 13 125 0 -
Energy 535 2.6 - 181 105 160 89 -
Banks 1,120 5.5 35 61 568 456 - -
Insurance 607 3.0 6 142 96 363 (0) -
Financial - other 956 4.7 59 85 270 43 324 175
Real estate including REITs 437 2.1 31 15 96 267 28 -
Government 1,596 7.8 340 782 216 258 - -
Industrial 622 3.1 - 63 71 430 24 34
Utilities 2,266 11.0 - 115 797 1,342 12 -
Commercial mortgages 584 2.9 77 144 253 110 (0) -
Ground Rent 291 1.4 138 7 81 65 (0) -
Infrastructure loans 1,811 9.0 71 103 474 1,137 26 -
Other 42 0.2 - - 42 - 0 -
Corporate/government bond total 13,868 68.1 984 2,138 3,845 6,034 580 287
Lifetime mortgages 5,306 26.1
Liquidity funds 1,174 5.8
Sub-total 20,348 100.0
Derivatives and collateral 3,169
Total 23,517
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 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 the Annual Report and Accounts. The
Board believes that the APMs used give a more representative view of the
underlying performance of the Group. APMs are identified in this glossary
together with a reference to where the APM has been reconciled to its nearest
statutory equivalent. APMs which are also KPIs are indicated as such.
Amortisation and impairment of 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).
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.
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 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 note 4 to the consolidated financial statements.
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.
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 6
to the consolidated financial statements. DB partner premium is not included
in the Retirement Income sales.
Return on equity - an APM and one of the Group's KPIs. Return on equity is
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
operating 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.
Abbreviations
ABI - Association of British Insurers
AGM - Annual General Meeting
APM - alternative performance measure
Articles - Articles of Association
CMI - Continuous Mortality Investigation
Code - UK Corporate Governance Code
CP - Care Plans
CPI - consumer prices index
DB - Defined Benefit De-risking Solutions
DC - defined contribution
DSBP - deferred share bonus plan
EBT - employee benefit trust
EPS - earnings per share
ERM - equity release mortgage
ESG - environment, social and governance
EVT - effective value test
FCA - Financial Conduct Authority
FRC - Financial Reporting Council
GDPR - General Data Protection Regulation
GHG - greenhouse gas
GIfL - Guaranteed Income for Life
Hannover - Hannover Life Reassurance Bermuda Ltd
IFRS - International Financial Reporting Standards
IP - intellectual property
ISA - International Standards on Auditing
JRL - Just Retirement Limited
KPI - key performance indicator
LCP - Lane Clark & Peacock LLP
LPI - limited price index
LTIP - Long Term Incentive Plan
LTM - lifetime mortgage
MA - matching adjustment
MAR - Market Abuse Regulation
NAV - net asset value
NNEG - no-negative equity guarantee
ORSA - Own Risk and Solvency Assessment
PAG - Partnership Assurance Group
PLACL - Partnership Life Assurance Company Limited
PPF - Pension Protection Fund
PRA - Prudential Regulation Authority
PRI - United Nations Principles for Responsible Investment
PVIF - purchased value of in-force
PwC - PricewaterhouseCoopers LLP
REIT - Real Estate Investment Trust
RPI - retail price inflation
SAPS - Self-Administered Pension Scheme
SAYE - Save As You Earn
SCR - Solvency Capital Requirement
SFCR - Solvency and Financial Condition Report
SID - Senior Independent Director
SIP - Share Incentive Plan
SLI - Secure Lifetime Income
SME - small and medium-sized enterprise
STIP - Short Term Incentive Plan
tCO(2)e - tonnes of carbon dioxide equivalent
TMTP - transitional measures on technical provisions
TSR - total shareholder return
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