Strategic Report Governance
Financial Statements
161
(a) Investment return Investment return of £128m loss (2023: £2,173m gain) includes interest on the Group’s investment assets of £1,217m (2023: £1,104m) together with mark to market movements on portfolios held at fair value through profit or loss of £1,343m loss (2023: £1,067m gain). The growth in interest income reflects both the Group’s continued investment of new business premiums into additional holdings of fixed income investments and the growth in the amortised cost portfolio of Gilts. The Group invested over £2.4bn (2023: £1.7bn) into illiquid fixed income investments over 2024 including £0.3bn (2023: £0.2bn) in LTMs. The Group invested a further £1.4bn (2023: £2.3bn) into the amortised cost gilts portfolio which has been established. The amortised cost portfolio has been established in tranches over the past two years and now totals £4bn (2023: £3bn); as it is valued at amortised cost the valuation is not sensitive to interest rate movements. The Group’s fixed income and LTM portfolios are long dated and are all exposed to changes in long term risk free rates. Mark to market losses incurred on the Group’s fixed income and LTM portfolios reflect increases in long-term interest rates over the period. In the prior period, expectations of long-term interest rates reduced over the second half of 2023, resulting in mark to market gains over 2023. Interest income and change in valuation of investments is reported separately for assets classified in a portfolio at FVTPL and assets classified in an amortised cost portfolio. The majority of the Group’s investments are classified at FVTPL. (b) Net finance income/(expenses) from insurance contracts Total net finance income from insurance contracts of £480m in 2024 compared with net finance expenses of £2,006m in 2023, with the year on year change primarily driven by the movement in discount rates over the period. The net finance income/(expenses) represents a combination of unwind of discount rates and impact of changes in discount rates for the estimate of present value of future cash flows and risk adjustment, and unwind of discount rates alone for the CSM, which is measured using locked-in discount rates. Finance income/(expense) is recognised for the difference between the impact of changes in valuation measured at current rates vs locked-in rates. Interest accreted Interest accreted of £1,693m (2023: £1,317m) represents the effect of unwinding of the discount rates on the future cash flow and risk adjustment components of the insurance contract liabilities and the effect of interest accretion on the CSM. The increased accretion in the current period compared with the prior year reflects the growth in the size of the insurance portfolio. The future cash flows and risk adjustment are interest rate sensitive and represent a significant majority of the value of insurance contract liabilities. The CSM is measured using historic “locked-in” discount rate curves. The majority of the CSM arises from the fair value approach on transition to IFRS 17 which is measured using the locked-in discount rate curve as at 1 January 2022. This curve is upward sloping in the early years which, combined with an increasing CSM balance attributable to new business and demographic assumption changes, has resulted in increased accretion. Effect of changes in interest rates and other financial assumptions The principal economic assumption changes impacting the movement in insurance liabilities during the year of £2,142m gain (2023: £622m loss) relate to discount rates and inflation. Expectations regarding increases in long-term interest rates primarily explain the current year result observed. In the prior year expectations regarding reductions in long-term interest rates primarily led to finance expenses recognised in the Consolidated statement of comprehensive income. Insurance liabilities for inflation-linked products, most notably Defined Benefit business, and expenses on all products are impacted by changes in future expectations of Retail Price Inflation (“RPI”), Consumers Price Inflation (“CPI”), Linked Price Indexation (“LPI”) and earnings inflation. The relationship between changes in key inputs used in determining the value of net insurance liabilities and financial assets is explained in note 22(h). Effect of measuring changes in estimates at current rates and adjusting the CSM at rates on initial recognition The difference in the measurement of changes in estimates relating to future coverage at current discount rates of £61m loss (2023: £136m gain) compared to locked-in rates of £92m gain (2023: £203m loss), amounting to a £31m gain (2023: £67m loss), is recognised within net finance income. Significant assumption changes in estimates mainly relate to the demographic basis change on a gross of reinsurance basis. (c) Net finance (expenses)/income from reinsurance contracts Net finance expenses from reinsurance contracts of £52m loss (2023: £108m gain) reflects the impact of changes in discount rates and unwinding of discounting. Accretion of £99m (2023: £34m) includes £30m (2023: £12m) accretion of the reinsurance CSM, with the increase reflecting an additional year’s cohort and the upwards shape of the yield curve applying to the in-force business. Consistent with the underlying business, the principal economic assumption changes impacting the movement in reinsurance liabilities relate to discount rates and inflation. The CSM is valued using economic parameters locked-in at point of sale. During the year, the impact of £28m loss (2023: £49m gain) on reinsurance is from demographic assumption changes and updates to the calibration of the risk adjustment.
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