Governance Financial Statements
Strategic Report
35
Sensitivities to economic and other key metrics are shown in the table below.
UNDERLYING ORGANIC CAPITAL GENERATION AND NEW BUSINESS STRAIN
The Group is focused on sustainable growth, whereby the various costs of the business including TMTP amortisation, finance and other costs, and new business strain is funded through the cash generation from the existing in-force book. In 2024, we have delivered £23m of underlying organic capital generation (2023: £57m), as the 36% increase in shareholder funded new business led to a higher amount of new business strain. Management actions and other items, including the impact of the move to a full internal model, increased the capital surplus by £58m (2023: £69m). This led to a total of £81m from organic capital generation (2023: £126m). In-force surplus after TMTP amortisation was up 6% to £178m, as growth in assets was offset by lower release from the risk margin reserve. The Solvency UK reforms led to a welcomed c.60% reduction in risk margin balance, which boosted the surplus by an upfront £107m in 2023, however, that prudent margin is no longer available to release annually into future capital generation. Group and other costs including non-life costs were £11m (2023: £8m), reflecting the non-insurance subsidiaries. Finance costs were flat at £48m. Cash generation available to support new business was £119m (2023: £111m). The Group continues to maximise the growth opportunities available to increase shareholder value. In 2024, due to writing £5.3bn of shareholder funded new business (2023: £3.9bn), new business strain increased to £71m (2023: £35m), which represents 1.3% of new business premium (2023: 0.9% of premium), well within our target of below 2.5% of premium, and outperforming the 5 year average (1.5%). This is due to a continued combination of focused risk selection and DB/GIfL business mix based on our market insight, pricing discipline, operational gearing and originating sufficient quantities of high-quality illiquid assets. Development costs and other were £25m (2023: £19m). NON-OPERATING ITEMS Changes in capital surplus were as follows. Together, economic movements summed to a £49m increase. This is derived from the £(10)m effect of the increase in long term interest rates at year end, but as the SCR fell more relative to the Own Funds, it resulted in a five percentage point increase in the capital coverage ratio. Property price growth experience was a little below the 3.3% long-term growth assumption, which led to a £(19)m decrease, while various economic and timing variances lead to a £78m increase. Payment of shareholder dividends during 2024 cost £23m, while strategic expenses reduced the capital surplus by a further £17m. Regulatory changes relate to the Solvency UK reforms for matching adjustment attestation and other items as explained in note 30. Capital actions refer to the effect of raising £400m Tier 2 debt in September 2024, the proceeds of which were used to fully repay £250m (nominal) of Tier 2 debt in September/October 2024 and £155m (nominal) of Tier 3 debt in February 2025. There were no capital restrictions following the Tier 3 repayment or deferred tax assets in the proforma closing excess own funds. PROFORMA GROUP SOLVENCY II SENSITIVITIES The property sensitivity for an immediate 10% fall in UK house prices has reduced to 6% (31 December 2023: 10%). This reduction has been driven by modelling refinements following implementation of the internal model on the Partnership business. We expect that a reduced LTM backing ratio on new business will contain the Solvency II sensitivity to house prices within risk appetite. The credit quality step downgrade sensitivity has slightly reduced due to credit spreads narrowing during the period, which decreases the cost of trading the 10% of our credit portfolio 3 assumed to be downgraded back to their original credit rating.
At 31 December 2024
Excess own funds £m
CCR %
Unaudited
Proforma solvency coverage ratio/excess own funds at 31 December 2024 1,2,3,4
204
1,561
-50bps fall in interest rates (with TMTP recalculation)
(4)
59
+50bps increase in interest rates (with TMTP recalculation)
4
(59)
+100bps credit spreads (with TMTP recalculation)
11
106 (89)
(6)
Credit quality step downgrade 5 -10% property values (with TMTP recalculation) 6
(6) (8)
(84)
-5% mortality (129) 1 The sensitivities above are determined by applying stresses to single risk factors. Stresses to multiple risk factors at the same time can create more severe outcomes than on individual factors as reported above. 2 In all sensitivities the Effective Value Test (“EVT”) deferment rate is allowed to change subject to the minimum deferment rate floor of 3.5% as at 31 December 2024. 3 The results do not include the impact of capital tiering restriction, if applicable. 4 Sensitivities are applied to the reported proforma capital position which includes a TMTP recalculation. 5 Credit migration stress covers the cost of an immediate big letter downgrade (e.g. AAA to AA or A to BBB) on 10% of all assets where the capital treatment depends on a credit rating (including corporate bonds, long income real estate/income strips; but lifetime mortgage senior notes are excluded). Downgraded assets are assumed to be traded to their original credit rating, so the impact is primarily a reduction in Own Funds from the loss of value on downgrade. The impact of the sensitivity will depend upon the market levels of spreads at the balance sheet date. In addition, for residential ground rents, the Group has identified that the impact of downgrading the entire portfolio to BBB would reduce Excess own funds (the capital surplus) by £22m and CCR% by two percentage points. 6 After application of NNEG hedges.
RECONCILIATION OF IFRS EQUITY TO SOLVENCY OWN FUNDS
31 December 2024 £m
31 December 2023 £m
IFRS net equity
1,246 2,328
1,203 1,959
CSM
Goodwill
(34)
(34)
Intangibles
(6)
(7)
Solvency risk margin
(194)
(196)
409
637
Solvency TMTP 1
Other valuation differences and impact on deferred tax
(1,316)
(1,059)
Ineligible items
(3)
(5)
Subordinated debt Group adjustments Solvency own funds 1
643
619 (13)
(18)
3,055
3,104
(1,494)
(1,577)
Solvency SCR 1
Proforma solvency excess own funds 1,2
1,561
1,527
1 Solvency capital coverage ratios as at 31 December 2024 and 31 December 2023 includes a recalculation of TMTP. 2 2024 capital position is presented on a proforma basis after the impact of the February 2025 repayment of Tier 3 subordinated debt.
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