Governance Financial Statements
Strategic Report
31
TANGIBLE NET ASSETS/RETURN ON EQUITY (UNDERLYING) The return on equity in the year to 31 December 2024 was 15.3% (2023: 13.5%), based on underlying operating profit after attributed tax of £378m (2023: £288m) arising on average adjusted tangible net assets of £2,475m (2023: £2,133m). Tangible net assets are reconciled to IFRS total equity as follows:
MOVEMENT IN CSM The total movement in CSM represents the net underlying increase of profit deferral in CSM during the year before any transfers to CSM in respect of operating experience and assumption changes recognised in the current year. The new business profit of £460m deferred in CSM is three times higher than the CSM in-force release (£154m). This provides a healthy level of replacement profit, and demonstrates the value of new business written during the year relative to the CSM release from existing business. This strong growth dynamic increases the CSM store of value, which predictably releases into the recurring in-force profit in future years. CSM amortisation is the release from the CSM reserve into profit as services are provided, net of accretion (unwind of discount) on the CSM reserve balance (see below). £71m of net CSM amortisation (2023: £62m) is a £154m release of CSM into profit, offset by £83m of interest accreted to the CSM. The £154m CSM release into profit (2023: £129m) represents 6.2% (2023: 6.2%) of the CSM balance immediately prior to release. Accretion at locked in rates on the CSM balance was £83m (2023: £67m), adding 3.4% (2023: 3.4%) to the CSM. The rate of accretion reflects the interest rates locked in on IFRS 17 transition and prevailing rates for subsequent new business written. IN-FORCE OPERATING PROFIT In-force operating profit represents investment returns earned on surplus assets, the release of allowances for credit default, CSM amortisation, release of risk adjustment allowance for non-financial risk and other items. Taken together, these are the key elements of the operating profit from insurance activities on an IFRS 17 basis.
31 December 2024 £m
31 December 2023 £m
IFRS total equity attributable to ordinary shareholders
924
883
Less intangible assets
(40)
(41)
Tax on amortised intangible assets Add back contractual service margin Adjust for tax on contractual service margin
1
2
2,328
1,959
(578)
(488)
Tangible net assets
2,635 254p 15.3%
2,315 224p 13.5%
Tangible net assets per share Return on equity % (underlying)
UNDERLYING OPERATING PROFIT Underlying operating profit is a core performance metric on which we measure the year to year performance of the business. It includes the value of profits deferred for recognition in future periods. Underlying operating profit captures the performance and running costs of the business including interest on the capital structure, but excludes operating experience and assumption changes, which by their nature are less predictable and can vary substantially from period to period. 2024 underlying operating profit grew by 34% to £504m (2023: £377m), as we strongly outperformed against both the prior year and our profit growth target. We set the 15% per annum profit growth target from the 2021 baseline (£211m), and significantly outperformed a more than doubling of underlying operating profit in three years instead of five.
Year ended 31 December 2024 £m
Year ended 31 December 2023 £m
Change %
Investment return earned on surplus assets Release of allowances for credit default
133
100
33
29 71
28 62
4
Year ended 31 December 2024 £m
Year ended 31 December 2023 £m
CSM amortisation
15
Change %
Release of risk adjustment for non-financial risk/Other In-force operating profit
3
1 n/a
New business profit CSM amortisation
460
355
30 15 33 24
236 24 The in-force operating profit increased by 24% to £236m (2023: £191m), driven by a significant increase in investment return, as a result of a greater amount of surplus assets. The higher release of allowance for credit default reflects growth in the investment portfolio that backs the insurance guarantees we provide to our customers. Increase in CSM amortisation is due to growth in the CSM release offset by the higher accretion as noted earlier. 191 OTHER GROUP COMPANIES’ OPERATING RESULTS Other Group companies operating results of £17m (2023: £15m) include the net cost of corporate and proposition related initiatives in the HUB group of businesses and the Group’s holding companies. This reflects the Group’s commitment to investing in delivery against our longer-term strategic priorities.
(71)
(62)
Net underlying CSM increase
389 236
293 191
In-force operating profit Other Group companies’ operating results¹
(17) (35) (69)
(15) (24) (68)
13 46
Development costs and other¹
Finance costs
1
Underlying operating profit 2 34 1 The classification of costs within Other group companies operating results and Development costs and other has been aligned with the presentation in Solvency II. 2 See reconciliation to IFRS profit before tax further in this Business Review. 504 377 NEW BUSINESS PROFIT New business profit was up 30% at £460m (2023: £355m) driven by 36% increase in shareholder funded Retirement Income sales to £5.3bn (2023: £3.9bn). Despite the significantly higher volumes, we continued to focus on risk selection, which combined with strong pricing discipline, market insight and internally originating increasing quantities of illiquid assets all contributed towards offsetting the headwind of tighter credit spreads. New business margin decreased to 8.7% (2023: 9.1%), but was in-line with the recent average.
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