144 JUST GROUP PLC Annual Report and Accounts 2020
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS continued
27 OTHER FINANCIAL LIABILITIES continued (c) Reinsurance finance
The reinsurance finance has been established in recognition of the loan obligation to the reinsurers under the Group’s reinsurance financing arrangements, the repayment of which are contingent upon the emergence of surplus under either the old Solvency I or IFRS valuation rules. During the year the Group repaid all of the outstanding loan obligation under the reinsurance financing arrangements (see note 29). (d) Reinsurance funds withheld Reinsurance funds withheld are measured and valued in accordance with the reinsurance contract, which takes into account an appropriate discount rate for the timing of expected cash flows. During the year the Group recaptured all of the business reinsured on a funds withheld basis resulting in a nil balance at the end of the year (see note 29). 28 DERIVATIVE FINANCIAL INSTRUMENTS The Group uses various derivative financial instruments to manage its exposure to interest rates, counterparty credit risk, property risk, inflation and foreign exchange risk.
2020
2019
Asset fair value £m
Liability fair value £m
Notional amount £m
Asset fair value £m
Liability fair value £m
Notional amount £m
Derivatives
267.7 194.5 4,557.5
Foreign currency swaps
54.8
96.3 2,035.1 30.7 3,644.8 120.6 2,165.8
484.3
76.8 6,798.5
Interest rate swaps
157.3
25.6 228.2 3,238.4
Inflation swaps Forward swaps
10.7 10.1
8.9 3.6 9.9
0.1
93.8
0.8
612.4
3.3 730.0
Put option on property index (NNEG hedge)
4.0 0.1
– –
80.0 66.9
9.8
–
Total return swaps
Total
800.0 512.7 15,418.2
237.0
248.4 8,605.0
The Group’s derivative financial instruments are not designated as hedging instruments and changes in their fair value are included in profit or loss. 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 2020, the Company had pledged collateral of £97.8m (2019: £103.1m) of which £nil were gilts and European Investment Bank bonds (2019: £nil) and had received cash collateral of £377.4m (2019: £62.8m). Amounts recognised in profit or loss in respect of derivative financial instruments are as follows: Year ended 31 December 2020 £m Year ended 31 December 2019 £m Movement in fair value of derivative instruments 298.7 85.2 Realised losses on interest rate swaps closed 29.0 44.7 Total amounts recognised in profit or loss 327.7 129.9 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 small schemes and GIfL business and quota share for DB partnering business, as follows: • DB was reinsured at 75% for underwritten schemes, and 90% for non-underwritten schemes during 2020. From 1 January to 30 June 2019, DB was initially reinsured at 55% for underwritten schemes, and 75% for non-underwritten schemes and was part of a subsequent increase in reinsurance on 1 July 2019, as detailed below. From 1 July 2019 the DB reinsurance share for new business was increased to 75% for underwritten schemes, and 90% for non-underwritten schemes. • DB partnering: The Group completed its first DB partnering transaction during 2020 which was 100% reinsured. • GIfL was reinsured at 90% during 2020. New business in 2019 was reinsured at 75% but was part of a subsequent increase in reinsurance on 30 June 2020, as detailed below. • Care new business was not reinsured in 2020 or 2019. In-force business is reinsured under longevity swap and quota share treaties. The quota share reinsurance treaties have deposit back or premium withheld arrangements to remove the majority of the reinsurer credit risk. During 2020 the Group increased the reinsurance on certain JRL GIfL business written between 1 January 2016 and 31 December 2019 from 75% to 100%. The increased cover was effective from 30 June 2020. In 2019 the Group increased the reinsurance on JRL DB in-force business to 100% (from 55% for underwritten schemes and 75% for non-underwritten schemes) for all schemes written between 1 January 2016 and 30 June 2019. The increased cover was effective from 1 July 2019. Within the Group’s subsidiary, JRL, there are a number of quota share treaties with financing arrangements, which were originally entered into for the capital benefits under the old Solvency I regime (the financing formed part of available capital). The repayment of this financing is contingent upon the emergence of surplus under the Solvency I or IFRS valuation rules. These treaties were closed to new business prior to the introduction of Solvency II on 1 January 2016 but the Group retained a capital benefit under Solvency II from the financing arrangements as these form part of the transitional calculations. Under IFRS the financing element is included within other financial liabilities (see note 27(c)). These treaties also allow JRL to recapture business once the financing loan from the reinsurer has been fully repaid. Once a recapture becomes effective, JRL retains 100% of the risk on business recaptured. During the year the Group made additional repayments so as to fully repay all financing loans and trigger the recapture of all remaining financing treaties. In aggregate, recaptures during the year (including those occurring as a result of these additional repayments) resulted in a decrease of reinsurance assets of £940.0m and a reduction of equal amount in the deposits received from reinsurers recognised within other financial liabilities.
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