STRATEGIC REPORT
27
Operating experience and assumption changes The Group has paid close attention to developments as the COVID-19 vaccine programme rolls out across the population, which began with its customer base, many of whom are in the most vulnerable category. However, the long-term impact of the COVID-19 pandemic on those who recovered from the disease, the efficacy of the various vaccines and secondary impacts such as delayed diagnosis for other illnesses or behavioural changes need to be considered when reviewing long-term assumptions, in particular in respect of property and mortality. The Group considered the early experience of the COVID-19 pandemic as part of the annual basis review in December 2020, and will continue to assess its long-term assumptions during 2021. Sensitivity analyses are shown in notes 17 and 23 which set out the impact on the IFRS results from changes to key assumptions, including property and mortality. Overall, positive operating experience and assumption changes of £46.2mwere reported in 2020 (2019: £42.2m). Within this £46.2m figure, operating experience was £20.1m, primarily due to data and modelling updates, offset by the reinsurance changes applied during 2020, specifically, the increased reinsurance coverage on GIfL business and the reinsurance implementation for our first DB partnering scheme. These combined to a net positive £15.7m. Positive mortality experience for guaranteed income due to higher than expected deaths during the period was offset by a negative LTM experience in relation to early redemptions arising from both mortality and also moves into long-term care and voluntary redemptions, resulting in a net positive £6.8m. Various other items totalled a negative £2.4m. There were a number of assumption changes including the adoption of CMI 2019 across our product range, which led to a net £61.9m longevity reserve release as the guaranteed income release outweighed LTM strengthening. Offsetting this release, calibration and other modelling refinements led to a £31.7m strengthening. The review of other assumptions led to a £4.0m reserve strengthening, resulting in net assumption changes of £26.2m. Other Group companies’ operating results The operating result for other Group companies was a loss of £17.1m in 2020 compared to a loss of £13.1m in 2019. Development expenditure Development expenditure mainly relates to product development and new initiatives, such as new capital light products. Development expenditure also relates to distribution improvements such as online capability and digital access. Development expenditure has fallen as project expenditure concludes. Reinsurance and finance costs Reinsurance and finance costs 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. The increase for the period is due to a full 12 month run-rate from the Restricted Tier 1 notes issued in March 2019 and the £125m Tier 2 notes issued in October 2019. It also includes the coupon from the Green £250m Tier 2 notes issued in October 2020. 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 an interest cost on an adjusted operating profit basis.
31 December 2020 £m
31 December 2019 £m
Change %
Solvency II capital coverage ratio 2
156%
141%
IFRS net assets
2,490.4
2,321.0
7
1 Alternative performance measure, see glossary for definition. 2 Estimated, after allowing for a notional recalculation of TMTP as at 31 December 2020.
ADJUSTED OPERATING PROFIT
Year ended 31 December 2020 £m
Year ended 31 December 2019 £m
Change %
199.2
New business operating profit In-force operating profit Underlying operating profit
182.0
9
97.8
84.4 16
297.0
266.4
11
Operating experience and assumption changes Other Group companies’ operating results
46.2
42.2
9
(17.1)
(13.1) (10.3) (66.6)
(31)
(7.3)
Development expenditure Reinsurance and finance costs
29
(79.5)
(19)
Adjusted operating profit before tax 1
239.3
218.6
9
1 See reconciliation to IFRS profit before tax on page 28.
Adjusted operating profit before tax Adjusted operating profit before tax of £239.3m increased by 9% in 2020 (2019: £218.6m). Within this, underlying operating profit, the sum of new business operating profit and in-force operating profit, rose 11% to £297.0m. Operating experience variance and assumption changes increased to £46.2m in 2020 (2019: £42.2m) and were broadly in line with the previous year. Finance costs increased by 19% to £79.5m, driven by a full 12 month run-rate from the Restricted Tier 1 notes issued in March 2019. New business operating profit New business operating profit has increased by 9% to £199.2m (2019: £182.0m). This reflects a 12% increase in Retirement Income sales to £2,145.3m (2019: £1,918.1m), with a strong performance in the second half of the year, particularly in DB, while GIfL/Care sales returned to a normalised run-rate following the easing of lockdown restrictions in June. The new business margin achieved on Retirement Income sales during the period was 9.3% (2019: 9.5%), reflecting adjustments made to the asset mix backing the new business and increased longevity reinsurance as part of the Group’s capital self-sufficiency objective. The Group continues to focus on pricing discipline and risk selection, and is benefiting from lower acquisition costs due to business mix and cost reductions. Management expenses Management expenses have decreased by 6% to £159.3m (2019: £169.0m). This is due to strengthened procurement and cost controls, elimination of certain vacant roles, selective hiring, and lower marketing and distribution costs due to the effect of remote working and social distancing. Furthermore, previous property rationalisation savings have come through for the full 12 months. In-force operating profit In-force operating profit increased by 16% to £97.8m (2019: £84.4m), reflecting growth in profit from the Group’s growing in-force book of business and higher surplus assets, while maintaining control of policy maintenance costs. The effect of widening credit spreads and downgrades during the year further added to in-force operating profit.
RETIREMENT INCOME SALES
Year ended 31 December 2020 £m
Year ended 31 December 2019 £m
Change %
Defined Benefit De-risking Solutions (“DB”) Guaranteed Income for Life Solutions (“GIfL”)
1,507.9
1,231.3
22
585.9
615.7
(5)
51.5
Care Plans (“CP”)
71.1
(28)
Retirement Income sales
2,145.3
1,918.1
12
Powered by FlippingBook