STRATEGIC REPORT
27
I am pleased to present my first Financial Review since joining the Group in January. CAPITAL MANAGEMENT Just Group plc estimated Solvency II capital position
£m
(5%)
136% 2%
(3%)
26%
156% (15%)
141%
1,200
900
600
The Group’s solvency coverage ratio was estimated at 141% at 31 December 2019, after recalculation of transitional measures on technical provisions (“TMTP”) (2018: 136% including notional recalculation of TMTP). Steps taken by the Group during the year to reduce new business strain and expenses and identify management actions to de-risk the balance sheet have led to positive organic capital generated of £36m. The new equity, Restricted Tier 1 and Tier 2 capital raised during the year benefited capital resources by a net amount of £452m.
300
577
36
(42)
(56) Economic movements
452
967 Closing ratio before regulatory changes
(219)
748
Opening excess own funds
Organic capital generation
Closing excess own funds
Regulatory changes
Accelerated TMTP amortisation
Capital raised
Organic capital generation Positive £36m of organic capital generation is a significant improvement on the £165m of capital consumption in 2018. This reflects focused new business pricing discipline, cost reductions and reinsurance which have halved new business strain. In-force surplus has continued to increase as the size of the in-force book grows, more than offsetting the increase in finance cost from the new debt instruments issued in the year. “Other” activities in the movement in excess own funds table includes the impact of basis changes, the expansion of DB reinsurance completed in August 2019, and internal model changes. Regulatory changes The updated regulatory expectations for equity release mortgages set out in SS3/17 and PS19/19 have had a significant impact on the Group’s capital position. Overall, the impact of these regulatory changes was a reduction in capital resources of £219m in 2019 with a further cost of £80m envisaged to fully meet the new requirements by the end of 2021. Just has restructured and updated its internal Lifetime Mortgage (“LTM”) securitisation to meet better the revised regulatory framework. The restructure was effected on 31 December 2019, and involved the redemption of existing notes and issuance of new LTM notes. The restructure removes much of the uncertainty on the level of matching adjustment (“MA”) relating to LTMs in the regulatory balance sheet. Following the restructure Just passes the PRA effective value test (“EVT”) with a material buffer (0.67%) over the minimum deferment rate of zero required at 31 December 2019. The SCR at the end of 2019 is also sufficient to cover our estimate of the impact of EVT in stress under PS19/19. Our expectation for the future cost of moving by the end of 2021 to a MA position meeting the EVT with a volatility of 13% and deferment rate of 1%, is £80m. The £219m 2019 cost and £80m envisaged future cost compares to our £350m estimate at 30 June 2019. The regulatory changes of £219m in 2019 have had a negative impact of 15% on the Group’s capital coverage ratio. Whilst the Group continues to experience a high level of regulatory supervision, there is a risk of further negative impacts on the Group’s capital position. We continue to work closely with the PRA on various aspects of our capital model, in particular as we apply the new regulatory requirements for LTMs.
31 December 2019 £m
31 December 2018 1 £m
Unaudited
Capital resources Own funds
2,562
2,172
(1,814)
Solvency Capital Requirement
(1,595)
Excess own funds
748
577
Solvency coverage ratio
141%
136%
1 These figures allow for a notional recalculation of TMTP as at 31 December 2018.
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 waterfall chart and table below analyse the movement in the capital growth over 2019.
2019 £m 577
2018 £m 596
Unaudited
Excess own funds at 1 January
Operating In-force surplus net of TMTP amortisation3
150
125
(74) (47) (44)
New business strain
(160)
Finance cost
(31) (45) (54)
Expenses
51
Other
Total organic capital generation/ (consumption) 2 Non-operating Accelerated TMTP amortisation
36
(165)
(42)
(58)
(219)
Regulatory changes Economic movements
–
(56)
(2)
452
230
RT1, T2 and equity issuance, net of costs 4
–
Ordinary dividend
(24)
Excess own funds at 31 December
748
577
1 All figures are net of tax, and assumptions allow for a notional recalculation of TMTP as at 31 December 2018. 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 2019 figure is net of £37m repayment in respect of PLACL’s Tier 2 bond tender in October 2019.
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