JUST GROUP PLC Annual Report and Accounts 2021
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS continued
1 SIGNIFICANT ACCOUNTING POLICIES continued 1.17 Financial investments continued
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 in the Consolidated statement of financial position with a corresponding liability for the repayment in other financial liabilities. Non-cash collateral received is not recognised in the Consolidated statement of financial position unless it qualifies for derecognition by the transferor. Certain reinsurance arrangements involve premiums being deposited back with the Group. The recognition of such collateral is assessed based on the terms of the arrangement, including consideration of the Group’s exposure to the economic benefits. See note 28 for further details. 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’s policy is to derecognise financial investments when our rights when the contractual cash flows expire or it is deemed that substantially all the risks and rewards of ownership have been transferred. Use of fair value The Group uses current bid prices to value its investments with quoted prices. Actively traded investments without quoted prices are valued using prices provided by third parties. If there is no active established market for an investment, the Group applies an appropriate valuation technique as described below. Determining the fair value of financial investments when the markets are not active The Group holds certain financial investments which are not quoted in active markets and include loans secured by residential mortgages, derivatives and other financial investments for which markets are not active. When the markets are not active, there is generally no or limited observable market data that can be used in the fair value measurement of the financial investments. The determination of whether an active market exists for a financial investment requires management’s judgement. Fixed maturity securities, in line with market practice, are generally valued using an independent pricing service. These valuations are determined using independent external quotations frommultiple 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 treated as level 3 under the fair value hierarchy. 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. The financial investments measured at fair value are classified into the three-level hierarchy described in note 17 on the basis of the lowest level of inputs that are significant to the fair value measurement of the financial investment concerned. 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 2021, 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 certain amounts within other financial liabilities and insurance payables which arise in the course of writing insurance business of £5,527.4m, giving a predominancy ratio of 96%. 1.18 Reinsurance Reinsurance assets and liabilities Amounts recoverable from reinsurers are measured in a consistent manner with insurance liabilities or relevant financial 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. Financial liabilities Where reinsurance contracts entered into by the Group require deposits received from reinsurers to be repaid, such amounts are classified as “deposits received from reinsurers” and included in other financial liabilities in the Consolidated statement of financial position. Where the liability carries no insurance risk, it is initially recognised at fair value at the date the deposited asset is recognised and subsequently remeasured at fair value at each balance sheet date. Fair value is determined as the amount repayable discounted from the first date that the amount is required to be paid. The resulting gain or loss is recognised in the Consolidated statement of comprehensive income.
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