153
FINANCIAL STATEMENTS
34 CAPITAL continued The minimum EVT parameters applicable at December 2021 were published in September 2019: 13% volatility and a 0.5% deferment rate. The PRA will update the minimum parameterisation every six months (in March and September) and PS19/19 confirmed the link between the deferment rate and long-term real interest rates. This link helps remove some of the potential interest rate volatility introduced by the EVT although in practice there will be exposure to the lag from the half yearly updates. An additional source of uncertainty arises from the PRA’s judgment over the parameterisation. For example the PRA has indicated that they would normally expect to update the deferment rate in 50bp steps and they would not expect the deferment rate to be negative so the link with real interest rates is not absolute. PS19/19 established that firms could use a phasing-in period, whereby a minimum deferment rate of 0% could be used until 31 December 2021 with no PRA approval required to do so. The Group regularly engages with the PRA on these regulatory developments. The updated regulatory framework set out in SS3/17 and PS19/19 prompted Just to restructure and update its internal LTM securitisation (which had been designed prior to SS3/17) to better meet the revised regulatory expectations. This included a significant undertaking in the second half of 2019 to update the methodology used to determine the internal rating, amount and spread on the LTM notes used to enable LTM assets to be eligible for matching adjustment. A restructure was effected on 31 December 2019 which involved a redemption of existing notes, a restructuring and an issuance of new LTM notes. JRL nowmaintains a single pool of LTMs tranched into 11 internally-rated and MA-eligible securitised Senior notes held within JRL’s MA portfolio, and one enlarged non-MA-eligible Junior note held in JRL’s non-MA portfolio. These notes will be regularly incremented for new LTM originations. The restructure removes much of the uncertainty on the level of MA relating to LTMs in the regulatory balance sheet. Following the restructure Just passes the PRA EVT with a material buffer (0.67%) over the minimum deferment rate of zero required at 31 December 2019 and volatility of 13% in line with the requirement. The restructuring has led to a reduction in MA which has resulted in an increase in technical provisions of approximately £300m of which approximately 44% relates to pre-2016 business and hence is partly offset by an increase in the TMTP and tax effects. The restructure has effectively accelerated recognition of some of the expected impact of complying with the new regulations applicable in 2021. The expected cost of satisfying the EVT at a parameterisation of 13%/1% (which includes a 0.5% buffer over the PRA’s ultimate expectation of 0.5% as published in September 2019) rather than our current level of 13%/0.67% depends on economic conditions but would have been £80m at 31 December 2019, after allowing for the TMTP and tax offset. The Group continues to engage in discussion with the PRA around its SCR methodology treatment, including the requirements for how the EVT would be applied in stress scenarios as set out in PS19/19. The PRA expects firms’ SCR treatments to be updated for EVT under stress by 2021. At year-end 2019, our calculations indicate that the SCR currently held should be sufficient to pass an EVT in stress validation test. Therefore our previous planning assumption, of an increase in SCR of c.£130m (unaudited) to allow for EVT under stress by 2021, has been removed. Uncertainty remains as to how the introduction of an EVT in stress will ultimately be implemented by the industry and Just. The ultimate impact will also depend on the economic conditions at the time. Although there is still more work to do to fully adopt the 2021 regulatory requirements, the restructuring of the mortgage notes represents a significant step towards ensuring the continuing compliance of our matching adjustment approach with the PRA’s framework in a post EVT world. It also provides a basis for discussion with the PRA on the potential MA benefit of NNEG risk transfer transactions. Just has an approved partial internal model to calculate the Group Solvency Capital Requirement, which it reviews for continued appropriateness. In 2020 it expects to review the model to reflect changes in the risk profile of the balance sheet arising from the requirements of PS19/19 and other business developments. Given that the Group continues to experience a high level of regulatory activity and intense regulatory supervision, there is also the risk of PRA intervention, not limited to the matters described in the paragraphs above, which could negatively impact on the Group’s capital position. As a result of the matters described above, a risk remains that the Group could, in order to better manage its capital position, further reduce new business volumes or close to new business. These are decisions that the Board keeps under regular review as it continuously monitors the impact of new business on the firm’s actual and future expected capital position. The Group has completed a number of actions in relation to capital during the year: • In March 2019 the Group raised a total of £375m new capital (before issue costs), through a £300m Restricted Tier 1 notes issuance and through a £75m equity placing, which can be used to support the Group’s capital requirements. • In August 2019 the Group entered into a reinsurance transaction with RGA to reduce Just Retirement Limited’s exposure to longevity risk (and the associated capital requirements) for DB business written since the implementation of Solvency II, which is effective from 1 July 2019. • In October 2019 the Group raised further new capital through the issue of £125m 8.125% Tier 2 loan notes (before issue costs) and completed a tender for £37m of the existing £100m 9.5% Partnership Tier 2 notes. The Group has announced that it will call the remaining £67m Partnership Tier 2 notes at their first call date in March 2020, resulting in a net increase in Tier 2 capital of £25m (before costs) once the redemption of the PLACL notes is completed. • The Group has significantly reduced new business strain through a planned reduction in new business volumes, re-pricing and cost reductions. The Group also recognises the need to continue to strengthen its capital position and has a range of potential actions available. These include: • Reduction in new business strain is planned through DB partner business which is much less capital intensive. • Additional reinsurance of existing business to release risk margin and SCR in respect of that business. • On-going cost savings are planned with a target to eliminate expense overruns by the end of 2021. • The Group remains in discussion with the PRA to establish satisfactory regulatory treatment for the NNEG risk transfer transactions already completed. There is also the potential to pursue further NNEG risk transfer transactions. • New business strain could be further reduced by reducing the volume of new business written or by changing the mix of new business. • The Board continues to review the optimal capital mix, subject to market liquidity and availability. For example, the Group currently has a material amount of unutilised Tier 2 debt capacity. The Board recognises that the successful implementation of some of these potential or planned actions are not wholly within the control of the Group. Further information on the matters considered by the Directors at 31 December 2019 in relation to capital and going concern is included in note 1.1, Basis of preparation.
Powered by FlippingBook