Just Annual Report and Accounts 2019

147

FINANCIAL STATEMENTS

27 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.

2019

2018

Notional amount £m

Liability fair value £m

Asset fair value £m

Notional amount £m

Liability fair value £m

Asset fair value £m

Derivatives

54.8

96.3 2,035.1 30.7 3,644.8

Foreign currency swaps

1.3

131.8 1,186.5 9.5 2,131.8 27.6 1,879.3

157.3

Interest rate swaps

36.2 38.0

10.7 120.6 2,165.8

Inflation swaps Forward swaps

10.1

0.8 612.4

0.6 3.3

9.4

927.6

4.0 0.1

– – –

80.0 66.9

Put option on property index

– – –

80.0

Total return swaps Interest rate futures

1.8

186.0

Total

237.0 248.4 8,605.0

81.2

178.3 6,391.2

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 2019, the Company had pledged collateral of £103.1m (2018: £152.6m) of which £nil were gilts and European Investment Bank bonds (2018: £nil) and had received cash collateral of £62.8m (2018: £3.4m). In addition to the cash collateral received recognised within other financial liabilities (see note 26), certain collateral arrangements within the Group’s subsidiary, PLACL, give rise to collateral of £17.9m (2018: £10.4m) which is not included in the Consolidated statement of financial position of the Group because it is deposited into a ringfenced collateral account that the Group has no control over and does not accrue any of the economic benefit. Amounts recognised in profit or loss in respect of derivative financial instruments are as follows: Year ended 31 December 2019 £m Year ended 31 December 2018 £m Movement in fair value of derivative instruments 85.2 (49.0) Realised losses on interest rate swaps closed 44.7 (16.3) Total amounts recognised in profit or loss 129.9 (65.3) 28 REINSURANCE The Group uses reinsurance as an integral part of its risk and capital management activities. New business was reinsured via longevity swap arrangements as follows: • DB: from 1 January to 30 June 2019 (and the whole of 2018), DB was 55% reinsured for underwritten schemes, and 75% for non-underwritten schemes. From 1 July the reinsurance was increased to 75% for underwritten schemes, and 90% for non-underwritten schemes. • GIfL was 75% reinsured during 2019 and 2018. • Care was not reinsured in 2019 but was 42.5% reinsured in 2018 until closure of the treaty in October 2018. 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. The Group increased the reinsurance on JRL DB in-force business during the year 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 retains 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 26 (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 fully repaid financing loans and recaptured business in respect of certain underwriting years that resulted in a decrease of reinsurance assets of £436.8m and a reduction of equal amount in the deposits received from reinsurers recognised within other financial liabilities. In addition to the deposits received from reinsurers recognised within other financial liabilities (see note 26(b)), certain reinsurance arrangements within the Group’s subsidiary, PLACL, give rise to deposits from reinsurers that are not included in the Consolidated statement of financial position of the Group as described below: • The Group has an agreement with two reinsurers whereby financial assets arising from the payment of reinsurance premiums, less the repayment of claims, in relation to specific treaties, are legally and physically deposited back with the Group. Although the funds are managed by the Group (as the Group controls the investment of the asset), no future benefits accrue to the Group as any returns on the deposits are paid to reinsurers. Consequently, the deposits are not recognised as assets of the Group and the investment income they produce does not accrue to the Group. • The Group has an agreement with one reinsurer whereby assets equal to the reinsurer’s full obligation under the treaty are deposited into a ringfenced collateral account. The Group has first claim over these assets should the reinsurer default, but as the Group has no control over these funds and does not accrue any future benefit, this fund is not recognised as an asset of the Group.

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