An established insurer and secure counterparty
Strong counterparty credentials matter. So it’s important we can demonstrate our financial security.
Just Group plc (our holding company) is a FTSE listed specialist UK financial services company with a market capitalisation of over £1.2 billion as at 27 March 2018. We are a leader in the individual retirement income, lifetime mortgage and defined benefit de-risking markets and have helped more than 500,000 customers to achieve improved outcomes in retirement. We are trusted to manage over £18 billion of retirement savings.
Since we entered the defined benefit de-risking market in 2012, we have established an enviable track record, having successfully insured benefits for over 140 transactions with total premiums of over £4.0bn (correct as at 30 June 2017).
One of the reasons we entered this exciting long-term growth market is because it’s well suited to our asset liability matching. Particularity for lifetime mortgages, where returns are realised over the longer term and are well matched to the liabilities of defined benefit schemes.
Fitch, a global leader in credit ratings gave our principle insurance subsidiary Just Retirement Limited (JRL) an inaugural Insurer Financial Strength rating of ‘A+’ (strong) in August 2017. Simultaneously, they assigned JRL a long-term Insurer Default Rating (IDR) of ‘A’ and Just Group plc (the ultimate holding company) an IDR of ‘A’. These ratings reflect the strength of our capitalisation, leverage position, investment risk and asset-liability management - all of which Fitch assess as very strong.
They consider the Group’s investment risk to be low, due to a conservative investment strategy focussing on investment grade assets and loans primarily secured by lifetime mortgages manufactured by our retail business.
Fitch views our exposure to no-negative equity guarantees on our lifetime mortgage business as limited, as a result of strict controls on the maximum loan-to-value ratios we offer on the mortgage advances.
This IFS rating denotes that Fitch have a low expectation of ceased or interrupted payments and indicates a strong capacity to meet policyholder and contract obligations.
We believe these attributes add-up to us being a strong counterparty for DB de-risking. Our partners and customers can be confident we’ll meet our contractual obligations and make the payments agreed in our policies, both now and in the future.
First, we work in some of the UK’s most attractive financial services growth markets. The defined benefit de-risking segment offers a huge opportunity for which only a handful of companies have the expertise to compete. Our addressable market for Guaranteed Income for Life should grow as conduct regulation is moving in our favour and shopping around via the Open Market continues to increase.
Second, we enjoy a competitive advantage in our markets, based on our hard-to-replicate intellectual property in medical underwriting, powerful distribution franchise and expertise at lifetime mortgage origination. We have a proven ability to originate lifetime mortgages. This creates an attractive matching asset in which to invest our Guaranteed Income for Life and defined benefit premiums.
And thirdly, we understand the value of capital and will continue to manage it carefully. We combine lifetime mortgages with cash, fixed income, infrastructure and other assets, and then match those assets efficiently against a regular flow of defined benefit transactions. It’s an important part of our business and capital model. The returns we generate are realised over decades and enable us to offer attractive pricing for bulk annuities to the trustees of defined benefit schemes.
This is a simple yet effective business model. In August 2017, Fitch rated our main operating life company – Just Retirement Limited - as A+ financially strong, with a stable outlook.
Capital efficient model and capital strength
Our business model is strong and differentiated and is constructed to enable us to increase our access to customers, select profitable risks and use capital efficiently.
Our synergistic suite of products results in an efficient and balanced use of capital.
The Solvency II regime came into effect on 1 January 2016 and Just Retirement Limited (JRL), the Group’s primary insurance business, was one of a small number of insurance companies to receive approval from the Prudential Regulation Authority (PRA) to use our own internally developed solvency model. The internal model enables us to calculate our capital requirements more accurately than a standard model and approval is only granted to companies who have met the PRA’s high standards.
The Group’s capital position has benefited from our continued focus on margin and pricing discipline together with careful asset liability management. The Group’s Solvency Capital Requirement coverage ratio was estimated at 141% at 31 December 2017 after the effect of the required TMTP recalculation at year end. This has fallen from the 151% reported at 31 December 2016 but this figure did not assume any TMTP recalculation. If we had anticipated the TMTP recalculation within the 31 December 2016 figure the comparative SCR coverage would have been 148% on a comparable basis. Additionally, as expected, the SCR coverage ratio was impacted by new business strain from the strong new business volumes written during the year.
Since the year end, the Group’s capital position has been further strengthened by the successful issue of £230m 7 year Tier 3 capital in February 2018. If this Tier 3 capital had been in issue at the year end, the SCR coverage ratio would have benefitted by circa 15 percentage points, increasing to an estimated 156% at 31 December 2017. The increase in risk-free rates since 31 December 2017 has also had a beneficial effect on the Group’s capital position.
Our reserves provide a buffer against scheme members and policyholders living longer than expected.
Our investment strategy enables us to provide attractive returns to customers and to optimise risk-adjusted returns for shareholders. At the same time we can ensure that cashflows from assets under management are sufficient to meet payment obligations to our defined benefit buy-in and buy-out policies and Guaranteed Income for Life customers as they fall due.
We follow a ‘buy-and-maintain plus’ investment strategy, by identifying attractive bonds that meet our criteria and then holding them to maturity to capture the illiquidity premium. This means we can ride out short-term volatility in credit markets, focusing on the underlying cashflows that the bonds produce rather than worrying about fluctuating credit spreads. All this is subject to limits which avoid us concentrating excessively on a particular rating category, industry sector or issuer. Non-sterling exposure is hedged via currency swaps.
The majority of our financial asset portfolio is held in investment grade, fixed income securities, such as government and corporate bonds. The Group also invests in lifetime mortgages, private placements, commercial property mortgages and infrastructure loans.
We are able to exercise a high degree of control over the quality of lifetime mortgages that we advance as these are primarily sourced directly from customers, rather than acquiring books of mortgages from third parties. The loan-to-value ratio of this mortgage portfolio was 29% at 31 December 2017.
Our operating model is complemented by a conservative approach to risk management.
We have extensive experience in delivering accurate longevity estimates alongside prudent reserving. The majority of longevity risk for both defined benefit and Guaranteed Income for Life business is held by high quality re-insurers. Reinsurance is used primarily to manage longevity risk so that we are able to reduce our economic exposure, thus lowering regulatory capital requirements.
It has supported the growth of Just Retirement and Partnership in the past and will help JRL grow successfully in the future.
It achieves this by reducing the capital strain on new business, which boosts the return on capital invested and allows us to generate more profits per unit of capital than we could otherwise do without reinsurance. It also gives us third party validation of our mortality assumptions and underwriting profit.
The graph below shows the percentage of longevity reinsurance for each product line.
The benefits of reinsurance
Top-line growth is facilitated through a reduction in capital required from Just Group plc for new business. This supports a greater new business volume from the available capital base.
Improved capital efficiency of the Group - as reinsurance is a key tool to manage capital post Solvency II. The benefits of the lower cost of capital are shared with customers through more competitive pricing.
Reduction in volatility of our profit stream by protecting it from longevity risk - by ceding a proportion of new business longevity risk to reinsurers which protects our future profitability from increased longevity.
We have negotiated attractive reinsurance terms with a range of reinsurers who get controlled access to our underwriting process. These terms are available to us because:
- Longevity risk, particularly medically underwritten, is a natural hedge to the mortality business they write and is therefore particularly attractive to reinsurers, making it capital efficient for them.
- Longevity based insurance is one of the few areas of growth in developed insurance markets and reinsurers are keen to access the growth markets in which the Group operates.
- Our IP makes us a very credible counterparty to reinsurers who have a strong preference for clients who really understand the risk they are passing on and can accurately underwrite and select those risks.
We have an established reputation for our strong social purpose and for delivering market-leading service quality. We are recognised for our innovation and for championing positive disruption resulting in better outcomes for individual consumers and pension scheme trustees.
In addition to our track record of buy-in and buy-out transactions, the Group has demonstrated its ability to build strong relationships with intermediaries and partners. To date, the Group has been awarded 5 Stars in the Financial Adviser Service awards in the Life and Pensions category 2005-2018 and in the Mortgage Lenders & Packagers category 2008-2017.
Our progressive multi-channel distribution strategy is underpinned by strong brands and award-winning service. Our corporate business, HUB Financial Solutions (HUB) is a strong contributor to the Group growing in prevalence in an evolving market-place. HUB provides professional services to businesses such as insurance companies, banks and building societies and actively seeks to support these businesses introduce a wider range of products to their customers. It provides financial advice, guidance and information services to the customers of these businesses and members of pension schemes who are not served by financial intermediaries.
Our service delivery across the retirement income market is differentiated by our automated underwriting capabilities. This enables us to select and price individual risks across a wide range of medical conditions in an efficient and cost-effective way, allowing a majority of retail customers to receive real-time guaranteed prices.
Our Group has trusted brands, market-leading products, outstanding service quality and a strong social purpose. We are recognised as a market leader for innovation and for championing positive market disruption, resulting in better outcomes for customers. We differentiate ourselves in terms of the way we deal with customers, distributors and regulators in order to create a strong brand and culture which we believe highlight the quality and reliability of our expertise within our chosen markets.