JUST GROUP PLC Annual Report and Accounts 2020
26
Business review continued
Reconciliation of IFRS shareholders’ net equity to Solvency II own funds
In addition, we have executed a number of management actions over the period and these are included in the “other” activities. This includes capital generation of £104m from the expansion of GIfL reinsurance completed in June 2020, the second and third no-negative equity guarantee (“NNEG”) hedges entered into during the year and the DB partnering deal entered into in March. Furthermore, positive mortality experience contributed £25m and modelling changes added a further £54m benefit from the adoption of CMI 2019. Other modelling changes Economic movements of £37m resulted from the positive effect from portfolio management and hedging profits arising from lower interest rates more than offsetting the negative property variances and credit migration effects. The small positive property variance of £3m reflected a growth in house prices over 2020 of 3.9%, which was just above our long-term assumption. The cost of credit migration during the year was £42m, or a 2% reduction in our coverage ratio. Since the start of the pandemic over 17% of our issuers, by market value, have been downgraded, £730m of our portfolio has been downgraded by at least one letter, and of this, £167m has been downgraded to sub-investment grade. The credit migration cost was much more than offset by £88m of positive capital impacts frommanagement of the credit portfolio. added a further £19m. Non-operating items There is a small negative from regulatory changes in 2020, primarily arising from the strengthening of the valuation of LTM notes in light of the fall in risk-free rates over the period which was partially offset by the increase in future corporation tax rate to 19%, which has increased own funds and decreased the SCR due to its effect on deferred tax. As a result of additional NNEG hedges and the sale of an LTM portfolio, the property sensitivity has reduced to 14% (2019: 15%). We anticipate that additional management actions will reduce this sensitivity further. Note that the credit quality step downgrade sensitivity below, as well as being a severe stress requiring a significant downgrade in credit quality for 20% of our credit portfolio, also does not allow for the positive impact from credit portfolio management during a time of stress. Sensitivities to economic and other key metrics are shown in the table below. Estimated Group Solvency II sensitivities1
31 December 2020 1 £m
31 December 2019 £m
Unaudited
Shareholders’ net equity on IFRS basis
2,490
2,321
(34)
Goodwill
(34)
(100) (846)
Intangibles
(120) (873)
Solvency II risk margin
2,106
Solvency II TMTP
1,891
Other valuation differences and impact on deferred tax
(1,391)
(1,271)
(5)
Ineligible items
(35)
795
Subordinated debt Group adjustments Solvency II own funds
684
(1)
(1)
3,014
2,562 (1,814)
Solvency II SCR
(1,938)
Solvency II excess own funds
1,076
748
1 These figures allow for a notional recalculation of TMTP as at 31 December 2020.
ALTERNATIVE PERFORMANCE MEASURES AND KEY PERFORMANCE INDICATORS Within the Business Review, the Group has presented a number of alternative performance measures (“APMs”), which are used in addition to IFRS statutory performance measures. The Board believes that the use of APMs gives a more representative view of the underlying performance of the Group. The APMs used by the Group are: organic capital generation, underlying organic capital generation, new business operating profit, in-force operating profit, underlying operating profit, adjusted operating profit, Retirement Income sales, management expenses and adjusted earnings per share. Further information on our APMs can be found in the glossary, together with a reference to where the APM has been reconciled to the nearest statutory equivalent. The Board has also adopted a number of key performance indicators (“KPIs”), which include certain APMs, and which are considered to give an understanding of the Group’s underlying performance drivers. KPIs are regularly reviewed against the Group’s strategic objectives to ensure that we continue to have the appropriate set of measures in place to assess and report on our progress. During 2020 the Group introduced two new KPIs, management expenses, and underlying organic capital generation/ (consumption). In-force operating profit has been discontinued as a KPI. These changes reflect the Group’s focus on monitoring and controlling its costs and growing capital, and provide a balance of KPIs across capital, sales, expenses, profit and net assets. The Group’s KPIs are discussed in more detail within the capital management section above, and on the following pages.
Unaudited
%
£m
Solvency coverage ratio/excess own funds at 31 December 2020 -50 bps fall in interest rates (with TMTP recalculation)
156
1,076
1 1
94 21
+100 bps credit spreads
Credit quality step downgrade (with TMTP recalculation)2
(13)
(201)
+10% LTM early redemption
2
21
The Group’s KPIs are shown below:
-10% property values (with TMTP recalculation)3
(14) (13)
(247) (236)
Year ended 31 December 2020 £m
Year ended 31 December 2019 £m
-5%mortality
Change %
1 In all sensitivities the EVT deferment rate is maintained at the level consistent with base balance sheet, except for the interest rate sensitivity where the deferment rate reduces in line with the reduction in risk free rates but is subject to the minimum deferment rate floor (0% as at 31 December 2020). 2 Sensitivity shows the impact of an immediate full letter downgrade on 20% of assets where the capital treatment depends on a credit rating (including corporate bonds, commercial mortgages and infrastructure loans) but excludes lifetime mortgage senior notes. All credit assets were grouped into rating class, then 20% of each group were downgraded. 3 After application of NNEG hedges.
Underlying organic capital generation/ (consumption) 1
18
(15)
Organic capital generation 1 Retirement Income sales 1
221.0
36.0
2,145.3
1,918.1 12
New business operating profit 1 Adjusted operating profit before tax 1
199.2 239.3 159.3 236.7
182.0 218.6 169.0
9 9
Management expenses 1 IFRS profit before tax
(6)
368.6 (36)
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