24 | Just Group PLC | Annual Report and Accounts 2023
BUSINESS REVIEW continued
OUTLOOK The outlook for the economy continues to evolve, reflecting macro- economic and political events including the trajectory of central bank rates to reduce and control inflation, and a UK election by the end of 2024. The 2022/23 interest rate increases have led to a flat-lining of the economy in 2023, predicted to be followed by a gradual recovery. We expect these macro forces to have a negligible effect on the Group’s business model, with the normalisation of long-term interest rates continuing to drive demand for our products. Sensitivities of our capital position to long-term interest rates is included on page 28. The Group is closely monitoring the Government consultation regarding restriction of ground rent for existing residential leases announced in November 2023 and the impact of this on the Group’s £176m portfolio of residential ground rents. For further information on the Group’s approach to reflecting the uncertainty associated with the Consultation in the year end valuation of residential ground rents see note 1.7. We have a strong and resilient capital base, with a low-strain business model that is generating sufficient capital on an underlying basis to fund our ambitious growth plans, whilst also paying a shareholder dividend that is expected to grow over time.
TANGIBLE NET ASSETS / RETURN ON EQUITY (UNDERLYING) The return on equity in the year to 31 December 2023 was 13.5% (2022: 10.3%), based on underlying operating profit after attributed tax of £288m (2022: £208m) arising on average adjusted tangible net assets of £2,133m (2022: £2,025m). Tangible net assets are reconciled to IFRS total equity as follows:
31 December 2022 £m (restated)
31 December 2023 £m
IFRS total equity attributable to ordinary shareholders
883
783
(41)
Less intangible assets
(47)
2
Tax on amortised intangible assets Add back contractual service margin
3
1,959
1,611
(488)
Adjust for tax on contractual service margin
(399)
Tangible net assets
2,315 224p 13.5%
1,951 190p 10.3%
Tangible net assets per share Return on equity % (underlying)
ALTERNATIVE PERFORMANCE MEASURES AND KEY PERFORMANCE INDICATORS
UNDERLYING OPERATING PROFIT Underlying operating profit is the core performance metric on which we have based our target 15% growth, per annum, on average, over the medium term. 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 unpredictable and can vary substantially from period to period. 2023 underlying operating profit grew by 47% to £377m (2022: £257m), as we strongly outperformed against our medium-term target, driven by pricing discipline and positioning in buoyant markets. We set the 15% profit growth target from the 2021 baseline (£211m), and given the strong growth in 2023, we are confident that we can add a further 15% to the 2023 level during 2024, and thereby double underlying operating profit in three years instead of five. Year ended 31 December 2023 £m Year ended 31 December 2022 £m (restated) Change % New business profit 355 266 33% CSM amortisation (62) (61) (2)% Net underlying CSM increase 293 205 43% In-force operating profit 191 156 22% Other Group companies’ operating results (22) (16) (38)% Development expenditure (17) (15) (13)% Finance costs (68) (73) 7% Underlying operating profit 377 257 47%
The Group uses a combination of alternative performance measures (“APMs”) and IFRS statutory performance measures. The Board believes that the use of APMs gives a more representative view of the underlying performance of the Group. The Directors have concluded that the principles used as a basis for the calculation of the APMs remain appropriate, although due to the adoption of new accounting standards the reconciliation from APMs’ to IFRS reported results has changed. Just Group has been growing strongly for a number of years and regards the writing of profitable new business contracts as a key objective for management. As a result, in management’s view, the use of an alternative performance measure which includes the value of profits deferred for recognition in future periods is a more meaningful measure than IFRS profits under IFRS 17 which now exclude the profits from new business sales. Further information on our APMs can be found in the glossary, together with a reference to where the APM has been reconciled to the nearest statutory equivalent. KPIs are regularly reviewed against the Group’s strategic objectives, which have remained unchanged following the adoption of IFRS 17, which has also not impacted the Group dividend policy. The Group’s KPIs are discussed in more detail on the following pages. The Group’s KPIs are shown below: 2023 2022 (restated) Change Retirement Income sales 1 £3,893m £3,131m 24% New business profit 1 £355m £266m 33% Underlying operating profit 1 £377m £257m 47% IFRS profit / (loss) before tax £172m £(494)m n/a Return on equity 1 13.5% 10.3% 3.2pp Tangible net asset value per share 1 224p 190p 34p New business strain 1 (as % of premium) 0.9% 1.9% +1pp New business strain 1 £(35)m £(60)m 42% Underlying organic capital generation 1 £57m £34m 68% Solvency II capital coverage ratio 2 197% 199% -2pp 1 Alternative performance measure, see glossary for definition. 2 S olvency II capital coverage ratios as at 31 December 2023 (estimated) and 31 December 2022 includes a formal recalculation of TMTP at the respective dates.
1 See reconciliation to IFRS profit before tax further in this Business Review.
NEW BUSINESS PROFIT New business profit was up 33% at £355m (2022: £266m), as shareholder funded Retirement Income sales rose 24% to £3,893m (2022: £3,131m). The new business margin achieved was 9.1% (2022: 8.5%). As the year progressed, we increasingly risk selected, which combined with strong pricing discipline, a wider panel of reinsurers able to offer bespoke terms, market insight and our streamlined bulk quotation service all contributed towards higher margins. We are also increasingly benefiting from scale and strong cost control leading to operating leverage.
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