Strategic Report | Governance | Financial Statements | 27
INVESTMENT AND ECONOMIC MOVEMENTS
CAPITAL MANAGEMENT The Group’s capital coverage ratio was estimated to be 197% at 31 December 2023, including a formal recalculation of transitional measures on technical provisions (“TMTP”) (31 December 2022: 199% including a formal recalculation of TMTP). The Solvency II capital coverage ratio is a key metric and is considered to be one of the Group’s KPIs.
Year ended 31 December 2022 £m (restated)
Year ended 31 December 2023 £m
(5)
Change in interest rates
(536)
44
Narrower/(Wider) credit spreads Property growth experience
(51) (23)
31 December 2023 1 £m
31 December 2022 2 £m
(13)
Unaudited
66 92
Other
73
3,104
Own funds
2,757
Investment and economic movements
(537)
(1,577) 1,527 197%
Solvency Capital Requirement
(1,387) 1,370 199%
Excess own funds
Investment and economic movements were positive at £92m (2022: £537m loss). Movements in risk free rates during 2023 have had a negligible effect due to the implementation of a revised interest rate hedging strategy in the latter part of 2022 and across 2023. This includes the purchase of £2.5bn of long dated gilts held at amortised cost under IFRS. This approach has significantly reduced 1 the IFRS exposure whilst also containing our Solvency II sensitivity to future interest rate movements (see estimated Group Solvency II sensitivities below). In the second half of 2021 and across 2022, as rates rose and the solvency position strengthened, we gradually reduced the swap based interest rate hedging to a broadly economically neutral position. In 2023, we recorded £5m of losses in relation to interest rates (2022: loss of £536m due to rising interest rates under from the previous hedging strategy, which was originally designed to protect the solvency position). Credit spreads narrowed during 2023, leading to a £44m positive movement (2022: credit spreads widened leading to a negative movement of £51m). The LTM portfolio property growth was c.2% during 2023, with our diversified portfolio performing a little below the 3.3% annual long-term property growth assumption (2022: 3.3% annual property growth assumption). Other includes positives from corporate bond default experience, investment return on surplus assets being above our assumption and backbook optimisation. 1 S ee note 26 for interest rate sensitivities, with a 100 bps increase in interest rates resulting in a pre tax loss of £(40)m and a 100 bps decrease in interest rates resulting in a pre tax profit increase of £49m. STRATEGIC EXPENDITURE Strategic expenditure was £17m (2022: £7m). This included increased investment to scale and bring to market various retail related propositions, costs in relation to Consumer Duty, final implementation costs for IFRS 17 and preparations for an internal model update. UNDERLYING EARNINGS PER SHARE Underlying EPS (based on underlying operating profit after attributed tax) has increased to 27.9 pence (2022: 20.2 pence per share).
Solvency coverage ratio 1
1 S olvency II capital coverage ratios as at 31 December 2023 and 31 December 2022 includes a formal recalculation of TMTP at the respective dates. 2 T his is the reported regulatory position as included in the Group’s Solvency and Financial Condition Report as at 31 December 2022. The Group has approval to apply the matching adjustment and TMTP in its calculation of technical provisions and uses a combination of an internal model and the standard formula to calculate its Group Solvency Capital Requirement (“SCR”). MOVEMENT IN EXCESS OWN FUNDS 1 The business is delivering sufficient ongoing capital generation to support deployment of capital to capture the significant growth opportunity available in our chosen markets, provide returns to our capital providers and further investment in the strategic growth of the business. The table below analyses the movement in excess own funds, in the year to 31 December 2023.
At 31 December 2022 £m (restated)
At 31 December 2023 2 £m
Unaudited
1,370
Excess own funds at 1 January
1,168
Operating In-force surplus net of TMTP amortisation
168
174
(49) (27)
Financing costs
(57) (23)
Group and other costs
Cash generation
92
94
(35)
New business strain 2
(60)
Underlying organic capital generation Management actions and other items Total organic capital generation 3
57 69
34
105 139
Year ended 31 December 2022 (restated)
Year ended 31 December 2023
126
Non-operating Strategic expenditure
Underlying operating profit after attributable tax (£m) Weighted average number of shares (million)
(13) (19) (22)
(5)
288
208
Dividends
(16)
1,032
1,032
Economic movements Regulatory changes
117
27.9
Underlying EPS 1 (pence)
20.2
109
–
1 Alternative performance measure, see glossary for definition.
(24)
Capital actions 4 Excess own funds
(33)
1,527
1,370
EARNINGS PER SHARE Earnings per share (based on net profit/(loss) after tax, see note 14) has increased to 11.3 pence (2022: 36.3 pence per share loss).
1 All figures are net of tax, and include a formal recalculation of TMTP where applicable. 2 New business strain calculated based on pricing assumptions. 3 O rganic capital generation includes surplus from in-force, new business strain, overrun and other expenses, interest and other operating items. It excludes economic variances, regulatory changes, dividends and capital issuance. 4 Capital actions are the effect of Tier 2 buyback (2023 and 2022) and includes the positive effect (if any) from release of Solvency II tiering restrictions.
Year ended 31 December 2022 (restated)
Year ended 31 December 2023
117
Earnings (£m)
(375)
1,032
Weighted average number of shares (million)
1,032
11.3
EPS (pence)
(36.3)
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