Strategic Report | Governance | Financial Statements | 25
CSM AMORTISATION IFRS 17 introduces a new concept of the Contractual Service Margin to the statement of financial position. CSM amortisation represents 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). £62m of net CSM amortisation (2022: £61m) represents a £129m release of CSM into profit, offset by £67m of interest accreted to the CSM. The £129m CSM release into profit (2022: £95m) represents 6.2% (2022: 5.6%) of the CSM balance immediately prior to release. The increase during the year represents growth in the CSM reserve from an additional year of new business profit, and the longevity assumption change at 31 December 2023 which was also deferred to the CSM reserve. Accretion on the CSM balance amounted to £67m (2022: £35m), which represents 3.4% (2022: 2.1%) of the opening plus new business CSM balance. CSM accretion is calculated using locked-in discount rates. The increase during the period reflects the higher interest rates applicable on the forward rates locked in curve at transition on 31 December 2021 for the new business written pre-2021 as well as higher interest rates applicable to the new business written since the end of 2021. The higher accretion is also due to the increase in CSM balance following the FY 22 longevity assumption changes. NET UNDERLYING CSM INCREASE This represents the net underlying increase of profit deferral to 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 deferred to CSM (£355m) to CSM in-force release (£129m) multiple of 3 times reflects the very high and healthy level of replacement profit, and demonstrates the value of new business written during the year relative to the gross CSM release from existing business. This strong growth dynamic increases the CSM store of value to release into in-force profit in future years. 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. Taken together, these are the key elements of the IFRS 17 basis operating profit from insurance activities.
DEVELOPMENT EXPENDITURE Development expenditure of £17m (2022: £15m), relates mainly to investment in systems capability, in addition to various business line and functional transformation. FINANCE COSTS Finance costs have decreased by 7% to £68m (2022: £73m). These include the coupon on the Group’s Restricted Tier 1 notes, as well as the interest payable on the Group’s Tier 2 and Tier 3 notes. Finance costs have reduced following the November 2022 tender and associated offers, which resulted in the subsequent cancellation of £100m 9% tier 2 debt, paid from excess Group liquidity. In 2022, the Group entered into a new five-year revolving credit facility, with improved commercial terms. The facility has increased from £200m to £300m, with flexibility for this to grow as the balance sheet expands over time. This facility has not been drawn upon in 2022 or 2023. On a statutory IFRS basis, the Restricted Tier 1 coupon is accounted for as a distribution of capital, consistent with the classification of the Restricted Tier 1 notes as equity, but the coupon is included as a finance cost on an underlying and adjusted operating profit basis.
RETIREMENT INCOME SALES
Year ended 31 December 2023 £m
Year ended 31 December 2022 £m
Change %
Defined Benefit De-risking Solutions (“DB”) 1 Guaranteed Income for Life Solutions (“GIfL”) 2 Retirement Income sales (shareholder funded) DB Partner (funded reinsurance) 1 Total Retirement Income sales
2,999
2,567 17%
894
564 59%
3,893
3,131 24% 259 61% 3,390 27%
416
4,309
1 A dding the DB shareholder funded and Partner business leads to total DB de-risking segment volumes of £3,415m (2022: £2,826m). 2 GIfL includes UK GIfL, South Africa GIfL and Care Plans. The structural drivers and trends in our markets underpin our confidence that we can continue to deliver attractive returns and growth rates over the long-term. We are extremely well positioned to take advantage of the growth opportunities available in both of our chosen markets. Over the past two years, rising interest rates have accelerated the closure of DB scheme funding gaps, and therefore more schemes are able to begin the process to be “transaction ready”, accelerating business into our short/medium-term pipeline that previously would have been expected to transact in the second half of the decade. The retail GIfL market had its busiest year since 2014, with the Open market, where Just competes, showing particularly strong growth, driven by the customer rate available and advisers shopping around. The level of long-term interest rates directly influences the customer rate we can offer, with the higher rates in 2023 enhanced by our individual medical underwriting. This increases the value of the guarantee to customers, making the product more attractive relative to other forms of retirement income. We will take advantage of this very strong market backdrop through our low-strain new business model, which enables us to fund our ambitious growth plans through underlying organic capital generation. When combined with our proven ability to originate high-quality illiquid assets, shareholder capital invested in new business adds substantially to increasing the existing shareholder value.
Year ended 31 December 2022 £m (restated)
Year ended 31 December 2023 £m
Change %
Investment return earned on surplus assets Release of allowances for credit default
94
61 54%
28 62
26 8% 61 2%
CSM amortisation
Release of risk adjustment for non-financial risk / Other In-force operating profit
7
8 (13)%
191
156 22%
The in-force operating profit increased by 22% to £191m (2022: £156m), driven by a significant increase in investment return, as a result of higher interest rates, on a greater amount of surplus assets. The higher release of allowance for credit default reflects the growth in the investment portfolio that backs the insurance guarantees we provide to our customers. CSM amortisation, reflects growth in the CSM release offset by the higher accretion as noted earlier. OTHER GROUP COMPANIES’ OPERATING RESULTS The operating result for Other Group companies was a loss of £22m (2022: loss of £16m). These costs arise from the holding company, Just Group plc, and the HUB group of businesses. The increase in losses was driven by upfront investment in the Destination Retirement proposition and other development initiatives.
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