28 | Just Group PLC | Annual Report and Accounts 2023
BUSINESS REVIEW continued
Sensitivities to economic and other key metrics are shown in the table below.
UNDERLYING ORGANIC CAPITAL GENERATION AND NEW BUSINESS STRAIN In 2023, we achieved £57m of underlying organic capital generation (2022: £34m). Over the past four years, we have delivered £160m cumulative since we became capital generative on an underlying basis in 2020, while at the same time growing the shareholder backed new business volumes at a 22% compound annual growth rate to £3.9bn in 2023. Underlying organic capital generation (“UOCG”) has benefited from the ongoing focus across the business on minimising new business capital strain. Due to a combination of focused risk selection, pricing discipline, bespoke reinsurance and originating sufficient quantities of high-quality illiquid assets, new business strain has decreased by £25m (40%) even though shareholder funded new business premiums were up 24% year on year to £3.9bn. This level of new business strain represents 0.9% of new business premium (2022: 1.9% of premium), well within our target of below 2.5% of premium. This continued outperformance is driven by our market insight, leading to an origination strategy focussed on business mix within the DB and GIfL units. It also includes the commission received from the DB Partner transaction. In-force surplus after TMTP amortisation was down 3% to £168m, primarily due to higher average interest rates during the year which reduces the amount of capital available (via lower SCR and risk margin) to release. Group and other costs including development and non-life costs were £27m (2022: £23m). Finance costs at £49m were lower (2022: £57m), which reflected the interest savings following the tier 2 debt cancellation previously mentioned. Management actions and other items, primarily a mortality assumption changed, boosted the capital surplus by £69m. This lead to a total of £126m from organic capital generation, which contributed one percentage point to the capital coverage ratio. NON-OPERATING ITEMS Economic movements summed to £(22)m in the capital surplus. The effect to the surplus from the fall in long term interest rates at year end cut-off was relatively small at £(15)m, but resulted in a three percentage point fall in the capital coverage ratio. Property price growth at 2.3% (compared to our annual 3.3% long-term growth assumption) led to a £(11)m decrease in capital surplus, while we established a £(45)m provision for the potential residential ground rent consultation, which may impact valuation of those assets. These three negative items were offset by £49m of positive items, primarily asset trading and timing variances. Regulatory changes resulted in a £109m increase in the surplus following a reduction in the Solvency II risk margin. Offsetting this, in September/October 2023, we completed the repurchase of a further £24m (nominal) of T2 debt via the open market. Shareholder dividend payments totalled £19m, while strategic expenses reduced the capital surplus by a further £13m. The positive benefit from the risk margin reform has added seven percentage points to the capital coverage ratio, which has been offset by the other non-operating items. There were no capital restrictions or deferred tax assets in the 31 December 2023 capital position. ESTIMATED GROUP SOLVENCY II SENSITIVITIES 1,5 The property sensitivity has reduced to 10% (31 December 2022: 12%). We expect that reduced LTM origination and backing ratio on new business will contain the Solvency II sensitivity to house prices at or below this level over time. 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 2023 %
At 31 December 2023 £m
Unaudited
Solvency coverage ratio/excess own funds at 31 December 2023 2
197
1,527
-50bps fall in interest rates (with TMTP recalculation)
(6)
26
+50bps increase in interest rates (with TMTP recalculation)
6
(27)
+100bps credit spreads (with TMTP recalculation)
14
109
(7)
Credit quality step downgrade 3 -10% property values (with TMTP recalculation) 4
(109)
(10) (10)
(141) (147)
-5% mortality
1 In all sensitivities the Effective Value Test (“EVT”) deferment rate is allowed to change subject to the minimum deferment rate floor of 3% as at 31 December 2023 (2.0% as at 31 December 2022) except for the property sensitivity where the deferment rate is maintained at the level consistent with base balance sheet. 2 S ensitivities are applied to the reported capital position which includes a formal TMTP recalculation. 3 C redit 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. 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 by £22m and CCR% by two percentage points. 4 After application of NNEG hedges. 5 The results do not include the impact of capital tiering restriction, if applicable.
RECONCILIATION OF IFRS EQUITY TO SOLVENCY II OWN FUNDS
31 December 2022 £m (restated)
31 December 2023 £m
Unaudited
IFRS net equity
1,203 1,959
1,103 1,611
CSM
(34)
Goodwill
(34) (13)
(7)
Intangibles
(196)
Solvency II risk margin
(456)
637
Solvency II TMTP 1
874
Other valuation differences and impact on deferred tax
(1,059)
(884)
(5)
Ineligible items
(50) 619 (13)
619 (13)
Subordinated debt Group adjustments
Solvency II own funds 1
3,104
2,757
Solvency II SCR 1
(1,577)
(1,387)
Solvency II excess own funds 1
1,527
1,370
1 T he Solvency II capital coverage ratios as at 31 December 2023 (estimated) and 31 December 2022 include a formal recalculation of TMTP at the respective dates.
RECONCILIATION FROM OPERATING PROFIT TO IFRS CONSOLIDATED STATEMENT OF COMPREHENSIVE INCOME The tables below present the reconciliation from the Group’s APM income statement view to the IFRS statement of comprehensive income for the Group. The Group’s results reflect the adoption of IFRS 17 including the restatement of comparatives. For further information on the restatement see note 1 of the Consolidated financial statements.
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