152 JUST GROUP PLC Annual Report and Accounts 2019
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS CONTINUED
33 FINANCIAL AND INSURANCE RISK MANAGEMENT continued Cash flow forecasts over the short, medium and long term are regularly prepared to predict and monitor liquidity levels in line with limits set on the minimum amount of liquid assets required. The table below summarises the maturity profile of the financial liabilities, including both principal and interest payments, of the Group based on remaining undiscounted contractual obligations:
Within one year or payable on demand £m
No fixed term £m
More than five years £m
One to five years £m
2019
74.8 585.0 773.3 10.2 115.0 871.2
– – – –
Subordinated debt
Derivative financial liabilities
62.8
–
–
Obligations for repayment of cash collateral received
270.5 975.3 3,002.7
Deposits received from reinsurers
–
–
–
14.5
Reinsurance finance
15.7
57.3 134.9
–
Reinsurance funds withheld
Within one year or payable on demand £m
No fixed term £m
More than five years £m
One to five years £m
2018
Subordinated debt
40.8 10.4
203.8
672.0 486.9
– – – –
Derivative financial liabilities
86.1
Obligations for repayment of cash collateral received
3.4
–
–
Deposits received from reinsurers
316.6 1,156.4 3,675.6
Reinsurance finance
–
–
–
30.6
Reinsurance funds withheld
16.3
59.9
148.8
–
34 CAPITAL The net assets of the Group at 31 December 2019 on an IFRS basis were £2,321.0m (2018: £1,663.8m). The Group manages capital on a regulatory basis. Since 1 January 2016, the Group has been required to comply with the requirements established by the Solvency II Framework directive as adopted by the Prudential Regulation Authority (“PRA”) in the UK, and to measure and monitor its capital resources on this basis. The Group and its regulated subsidiaries are required to maintain eligible capital, or “Own Funds”, in excess of the value of their Solvency Capital Requirements (“SCR”). The SCR represents the risk capital required to be set aside to absorb 1 in 200 year stress tests of each risk type that the Group is exposed to, including longevity risk, property risk, credit risk and interest rate risk. These risks are all aggregated with appropriate allowance for diversification benefits. In December 2015, Just Retirement Group plc and JRL received approval to calculate their Solvency II capital requirements using a full internal model. The capital requirement for the ex-Partnership business is assessed using the standard formula. Following the merger of Just Retirement and Partnership, the capital requirement for Just Group plc is calculated using a partial internal model. The surplus of Own Funds over the SCR is called “Excess Own Funds” and this effectively acts as working capital for the Group. The overriding objective of the Solvency II capital framework is to ensure there is sufficient capital within the insurance company to protect policyholders and meet their payments when due. In managing its capital the Group undertakes stress and scenario testing to consider the Group’s capacity to respond to a series of relevant financial, insurance, or operational shocks or changes to financial regulations should future circumstances or events differ from current assumptions. The review also considers mitigating actions available to the Group should a severe stress scenario occur, such as raising capital, varying the volumes of new business written and a scenario where the Group does not write new business. The Group’s capital position can be adversely affected by a number of factors, in particular factors that erode the Group’s capital resources and/or which impact the quantum of risk to which the Group is exposed. In addition, any event which erodes current profitability and is expected to reduce future profitability and/or make profitability more volatile could impact the Group’s capital position, which in turn could have a negative effect on the Group’s results of operations. In order to allow a Matching Adjustment (“MA”) under Solvency II on Lifetime Mortgage (“LTM”) assets, Just Retirement Limited (“JRL”) restructures its LTMs through a Special Purpose Entity (“SPE”). This SPE issues LTM notes to JRL that are MA-eligible due to their fixed cash flows (“the Senior Notes”). The equity tranche of this restructuring (“the Junior Note”) is not MA-eligible. The regulatory environment for LTMs has evolved since the adoption of Solvency II through the publication of SS3/17 “Solvency II: Equity Release Mortgages”, and PS19/19 “Solvency II: Equity Release Mortgages – Part 2”. SS3/17, originally issued in July 2017 and subsequently updated by PS31/18 “Solvency II: Equity Release Mortgages” issued in December 2018, became effective in December 2019 and introduced a new key element, the effective value test (“EVT”). This acts as a regulatory diagnostic validation test which the PRA expects firms to conduct as a means of monitoring compliance with Solvency II requirements relating to the calculation of the Fundamental Spread (“FS”) and thus the MA in the case where MA liabilities are matched with restructured ERMs. In assessing the Group’s capital position, matters currently under development by the PRA have been taken into account.
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