FINANCIAL STATEMENTS
STRATEGIC REPORT
GOVERNANCE
• reviewed material areas in which significant judgements have been applied or there has been discussion with the external auditor; • reviewed the assumptions critical to assessing the value of assets and liabilities, in particular insurance liabilities and lifetime mortgages; • reviewed documentation prepared in support of the going concern basis and longer-term viability assessment, including the impact of COVID-19; • reviewed the existing nine key performance indicators (“KPIs”) used by the Group to assess its financial performance and approved the addition of a new KPI to measure return on equity to reflect the strategic focus on this measure to create value for shareholders; • reviewed the alternative performance measures (“APMs”) used by the Group and how these are disclosed within the Annual Report and Accounts; • reviewed the 31 December 2021 Group Annual Report and Accounts and the half-year statements to 30 June 2021; • assessed whether the Group Annual Report and Accounts, taken as a whole, is fair, balanced and understandable and provides the information necessary for shareholders to assess the Group’s performance, business model and strategy and concluded that they are; and • oversaw the preparation and review of the Group Solvency and Financial Condition Report (“SFCR”) as at 31 December 2020, the Group and Solo Regular Supervisory Reports and the Annual Quantitative Reporting Templates prior to submission to the Prudential Regulation Authority (“PRA”) in April 2021.
To assist with the execution of their duties, the Committee considered reports from the Group Chief Financial Officer and the Group Chief Actuary. It also reviewed reports from the external auditor on the outcomes of their half-year review and year-end audit. The Committee encouraged the external auditor to display the necessary professional scepticism its role requires throughout the year. The Committee was pleased to advise the Board that the judgements and assumptions are appropriate and that the Group Annual Report and Accounts for the year ended 31 December 2021 are fair, balanced and understandable, and provide the necessary information for shareholders to assess the Group’s position, prospects, business model and strategy. Accounting standards No new accounting standards were introduced during 2021 and accounting amendments did not have any material impact on the Group. The Committee continued to monitor the progress of the project to implement IFRS 17 and received regular status updates and training on the new requirements. The Committee also reviewed additional disclosures on IFRS 17 developments for inclusion in the Group Annual Report and Accounts. Work continues in parallel to develop Just’s systems solution for computation of the new IFRS 17 accounting data. Significant accounting judgements The key areas of judgement considered by the Committee in relation to the 31 December 2021 Group Annual Report and Accounts, and how these were addressed, are set out in the following table.
SIGNIFICANT JUDGEMENTS
APPROACH
ACTION
The length of time the Group’s Retirement Income customers and Lifetime Mortgage customers will live, and therefore the projected cash flows for Retirement Income and Lifetime Mortgage assets, are key assumptions when valuing the Group’s insurance liabilities and Lifetime Mortgages.
Longevity experience is a key area of focus for the Board and the Committee, and the Board receives regular reports on the actual against the expected number of deaths and the likely causes, by condition, of any positive or negative divergence as well as the output of industry studies. The expected impact on future mortality rates over the short and long termwas considered. As mortality experience in 2020 and 2021 has been distorted by the impact of COVID-19, the Committee concluded that it does not provide any meaningful insight in respect of future mortality trends or of base mortality. The Committee determined that the allowance for future mortality improvements using the CMI 2019 model source remained appropriate as at 31 December 2021 and concluded that the base mortality assumptions still represented a reasonable best estimate view of medium to long-termmortality trends. Since the prior year, SONIA has replaced LIBOR as the benchmark risk-free rate in the UK, which has impacted the calculation of the current spread default allowance. The Committee concluded to adopt the SONIA derivation of the current spread and partially offset the lower level of SONIA rates compared with LIBOR rates by decreasing the IFRS prudence margin. Overall, this resulted in an immaterial increase to the IFRS prudent credit default allowance. The Committee reviewed the other key assumptions and determined that they should remain unchanged. The potential impact of COVID-19 was considered and it was concluded that no adjustment was required for any elevated rate of default or downgrade from the economic effects of COVID-19 due to sufficient prudence within the existing methodology.
LONGEVITY ASSUMPTIONS
Credit default assumptions are used to determine the valuation rate of interest used in the calculation of insurance contract liabilities. The Group’s asset portfolio includes a material amount of illiquid assets. For corporate bonds, credit default assumptions are calculated taking into account both historical default experience for each rating class and the current spread on the asset. For Lifetime Mortgages it is captured using the expected no-negative equity guarantee (“NNEG”) shortfalls. For other illiquid assets including infrastructure and ground rents, credit default assumptions are set to a proportion of the equivalent corporate bond default allowance.
CREDIT DEFAULT ASSUMPTIONS
85
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