FINANCIAL STATEMENTS
STRATEGIC REPORT
GOVERNANCE
21 SHARE CAPITAL continued Consideration for the acquisition in 2016 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 31 December 2021 £m
Year ended 31 December 2020 £m
294.0 325.0
At 1 January
294.0
Issued in the year
– – –
(2.6)
Issue costs, net of tax Redeemed in the year
(294.0)
At 31 December
322.4
294.0
On 16 September 2021 the Group issued £325m 5.0% perpetual restricted Tier 1 contingent convertible notes, incurring issue costs of £2.6m, net of tax, and concurrently redeemed its £300m 9.375% perpetual restricted Tier 1 contingent convertible notes issued in 2019 (£294.0m net of issue costs, net of tax) at a cost of £341.0m, net of tax. The loss on redemption of the 2019 notes of £47.0m (net of tax) has been recognised directly in equity. During the year, interest of £25.2m (2020: £28.1m) was paid 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 commencing 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
2021 £m
2020 £m
21,812.9 (2,533.5) 19,279.4
Gross insurance liabilities Net reinsurance assets Net insurance liabilities
21,118.4 (2,865.5) 18,252.9
Reinsurance in the table above includes reinsurance assets net of reinsurance liability positions that can arise on longevity swaps which are presented as liabilities in the Consolidated statement of financial position. (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.
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