STRATEGIC REPORT
25
The Business Review presents the results of the Group for the year ended 31 December 2020, including IFRS and Solvency II information The business has made strong positive progress over 2020, despite the considerable impact from COVID-19 on daily life and the economy. Our core products have proved resilient, with the DB market continuing to remain active throughout lockdown and the retail market building steadily after an initial slowdown. Advisers and customers have adapted well to new virtual ways of doing business. Most importantly, the capital position of the Group has strengthened during the year as we have built the Solvency II capital coverage ratio (“coverage ratio”) to 156% as at 31 December 20201 from 141% at the end of 2019, and 136% at the end of 20181. This strong result has been enabled by the completion of significant management actions, successful capital raising and the impressive improvement in underlying capital generation. All of this combined has improved the capital coverage ratio, and at the same time offset the various negative regulatory costs including accelerated TMTP amortisation. We have delivered consistently on management actions that improve the solvency capital position and reduce the sensitivity of the solvency balance sheet to UK house prices. During 2020 we have completed two NNEG hedges, sold a portfolio of LTMs, increased GIfL longevity reinsurance and announced a DB partnering agreement. Underlying organic capital generation is now in a healthy positive position, which is an important milestone. This has been achieved through both a further reduction in new business strain to 2.2% (from 3.9% in 2019) and a focus on costs that has reduced the expense overrun by £10m year on year to £8m. The balance sheet has proved extremely resilient as movements in the financial markets have had limited impact on the Group’s capital position during the year. House price growth has been slightly ahead of our long-term assumptions. Active hedging of the Group’s interest rate exposure has also minimised any impact from the c.60bps reduction in long-term interest rates since the start of the year. Credit downgrades affecting over 6% of the Group’s corporate bond portfolio have led to a c.2% reduction in the coverage ratio, but were more than offset by the positive capital impacts from portfolio management. The Green Bond issue underscores the Group’s commitment to diversifying our illiquid portfolio as the proceeds are earmarked for investment in renewable energy and green infrastructure projects. At this time, the outlook for the economy and continued progress of the COVID-19 pandemic both continue to be uncertain, but the position has improved substantially from the initial impact felt in the first half of 2020. The longer-term impact from the pandemic on policyholder mortality is still unknown. The Group remains exposed to the impact of further downgrades and future defaults on its corporate bond portfolio as well as to a potential fall in UK house prices. The impacts over 2020 have been minimal compared to initial market fears. 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 these financial statements.
31 December 2020 1 £m
31 December 2019 £m
Unaudited
3,014
Own funds
2,562 (1,814)
(1,938) 1,076 156%
Solvency Capital Requirement
Excess own funds
748
Solvency coverage ratio
141%
1 These figures allow for a notional recalculation of TMTP as at 31 December 2020. Without this recalculation, the Group’s regulatory solvency capital ratio as at 31 December 2020 was estimated at 155%. See also note 35, Capital. The Group has approval to apply the matching adjustment, volatility 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 funds1 The table below analyses the movement in the capital growth over 2020.
2020 £m 748
2019 £m 577
Unaudited
Excess own funds at 1 January
Operating In-force surplus net of TMTP amortisation3
164
150
(48) (66) (32)
New business strain
(74) (47) (44)
Finance cost
Expenses
Underlying organic capital generation/ (consumption)
18
(15)
203 221
Other
51 36
Total organic capital generation 2 Non-operating Accelerated TMTP amortisation
(24) (19)
(42)
Regulatory changes Economic movements
(219)
37
(56)
113
RT1, T2 and equity issuance, net of costs 4 Excess own funds at 31 December
452 748
1,076
1 All figures are net of tax, and assumptions allow for a notional recalculation of TMTP as at 31 December 2020. 2 Organic capital generation/(consumption) includes surplus from in-force, new business strain, overrun and other expenses, interest and other operating items. It excludes economic variances, regulatory changes, accelerated TMTP amortisation, and capital issuance. 3 The in-force line excludes the accelerated amortisation of a portion of TMTP which has been shown separately. 4 2020 figure is £250m new Tier 2 capital raised in October 2020, net of tender for £75m of the Group’s Tier 3 loan notes, and net of the repayment of PLACL’s Tier 2 bond which was called in March 2020. 2019 figure is net of £37m repayment in respect of PLACL’s Tier 2 bond tender in October 2019. Organic capital generation Positive £221m of organic capital generation is a very significant improvement on the £36m of capital generation in 2019. During 2020, the Group reached an inflection point as we became organically capital generative on an underlying basis for the first time, an important milestone for the Group. The improvement to an underlying organic capital generation of £18m (2019: £15m consumption) was as a result of a number of initiatives. New business strain is down, which reflects a focus on new business pricing discipline, capital optimisation and further longevity reinsurance. In-force surplus has continued to increase as the size of the in-force book grows, offsetting the increase in finance cost from the new debt instrument issued. Continued focus on costs has reduced expense overruns by £10mwhen compared to 2019. We remain confident that the 2020 overruns of £8mwill be eliminated by the end of 2021.
1 These figures allow for a notional recalculation of TMTP as at 31 December 2018 and 2020.
CAPITAL MANAGEMENT Just Group plc estimated Solvency II capital position The Group’s coverage ratio was estimated at 156% at 31 December 2020, after notional recalculation of transitional measures on technical provisions (“TMTP”) (31 December 2019: 141%). Steps taken by the Group during the period to reduce new business strain and expenses and implement management actions to de-risk the balance sheet have led to positive organic capital generated of £221m. In addition the Group has raised a net £113m of subordinated debt, which has added six percentage points to the coverage ratio. The Solvency II capital coverage ratio is a key metric and is considered to be one of the Group’s key performance indicators (“KPIs”).
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