GOVERNANCE
FINANCIAL STATEMENTS
strategic report
£ 336 m ADJUSTED OPERATING
199 % SOLVENCY II CAPITAL COVERAGE RATIO 1 2021: 164%, up 35 percentage points
1.73 p DIVIDEND Annualised 2021: 1.5 pence per share, up 15%
PROFIT BEFORE TAX 2021: £238m, up 41%
The Group operates in attractive markets, with solid structural growth drivers. By leveraging our strong capabilities, brand and reputation we are well placed to take advantage of the expected boost in demand for our products following the rise in long term interest rates during 2022. We will continue to innovate, risk select and price with discipline, ensuring our business model delivers long-term value for customers and shareholders. The Business Review presents the results of the Group for the year ended 31 December 2022, including IFRS and unaudited Solvency II information. The business continues to benefit from the strong positive progress achieved in previous years, in particular, a transformed, low capital intensity new business model, combined with a strengthened and increasingly resilient capital base. After right sizing the cost base, we continue to maintain strong cost discipline across the business and are investing to enable the business to scale efficiently. We are also diversifying the asset portfolio backing our customer commitments by originating an increasing proportion of illiquid assets to back the new business in line with our investment strategy. The DB business goes from strength to strength as the £5bn pipeline at the half year stage translated into the strongest six months of DB sales on record for Just. The drivers behind this momentum remain and we expect a very busy 2023, as we execute on small, medium and larger transactions, while maintaining pricing discipline and capital flexibility. The steep rise in interest rates during 2022 has had a positive impact as it further reduces DB scheme funding deficits, thereby making de-risking transactions more affordable. Many schemes are already or approaching fully funded sooner than they had expected, and hence able to accelerate their de-risking plans. Post year end, in February 2023, we completed our largest transaction to date at £513m, and have signed or are exclusive on a number of other medium sized deals. In July, utilising our DB partnering model, we reinsured the investment as well as longevity risks on just over half of a £484m transaction, our largest deal of the year. After allowing for the upfront origination fee received from our external reinsurance partner, this transaction created £24m of new business profit and was in aggregate marginally capital generative for Just. This capital light transaction is an example of our innovation – it increases our participation in the above £100m transaction size segment, where we have significant opportunity to grow, and generates upfront fee income to offset new business capital strain. This type of transaction is repeatable, scalable and provides optionality going forward, with employee benefit consultants (“EBCs”) supportive as the external capital increases overall market capacity. During 2022, underlying operating profit was £249m (2021: £210m), a rise of 19%, ahead of our medium term annualised profit growth target. Rising interest rates during 2022 boosted the return on surplus assets, thereby increasing in-force operating profit, up 29% to £116m, while proactive management of our debt profile in September 2021 and November 2022 has materially reduced finance costs. Shareholder funded Retirement Income sales 2 of £3,131m were 17% higher than 2021, as a 33% increase in DB business was offset by a 24% decline in GIfL/Care volumes. New business profit, which includes the DB partner origination fee, was up 4% at £233m (2021: £225m), translating to a new business margin of 7.4% (2021: 8.4%) on shareholder funded premiums. The higher interest rates that benefited the in-force operating profit during the year, also reduces the size of each individual DB transaction as well as reducing the new business margin. The significant rise, of c.275bps in long term interest rates during 2022 also led to IFRS losses of £510m from hedges used to protect the Solvency II balance sheet. These hedges had produced profits as interest rates fell in
previous years. During the year, we actively reduced the level of interest rate hedging as the capital position strengthened, with the sensitivity at year end 2022 now close to zero (c.£7m of IFRS profit for a 100 basis point increase in long term rates compared to £526m loss at year end 2021). Cumulatively since 2018, we have incurred a net loss of £226m (pre-tax) on interest rate hedging as profits when rates fell in 2019/2020 were more than offset by losses incurred as rates rose more significantly over the past two years. Other economic variances included negatives from widening credit spreads (£112m) and property growth experience (£22m), which at 2% for the year was a little below our long term 3.3% annual growth assumption (2021: 3.3%). We also incurred a £95m loss on asset timing variance, which is expected to reverse as we acquire the desired asset mix during the first half of 2023 and a £49m loss from the third and final LTM portfolio sale in February 2022. Taken together, these investment and economic losses of £639m, when combined with other items led to an overall loss after tax for the year of £232m (2021: loss of £16m). The Group’s Solvency II capital position strengthened significantly during the year, increasing by 35 percentage points to 199% (31 December 2021: 164% 1 ). Rising rates drove most of the increase, by reducing the solvency capital requirement (“SCR”) and risk margin, although this in turn leads to a smaller unwind subsequently through in-force surplus. Despite reduced unwind of capital following the rise in rates, underlying organic capital generation (“UOCG”) during 2022 was robust at £29m (2021: £51m), marking three years of positive underlying organic capital generation. Within this, capital strain from writing new business increased to £60m, reflecting the significantly higher volumes of business written during the year. New business strain at 1.9% of premium (2021: 1.5% of premium) is based on target asset mix, with any timing differences taken as an investment variance. This low level of new business strain is due to our continued focus on strong pricing discipline, risk selection and business mix. Sustainable growth through a capital self- sufficiency business model continues to be a central pillar of how we run the business. Furthermore, management actions were £15m (2021: £16m) and other, driven by a longevity assumption change, was £90m. When added to the UOCG this leads to a total of £134m of organic capital generation (2021: £93m), which boosted the capital coverage ratio by 5 percentage points. The solvency sensitivity to property was further reduced following completion of our third and final planned LTM portfolio sale in February 2022, and remains within risk appetite. No further portfolio sales are anticipated. Recognising the resilience and strengthened financial position of the Group, we recommenced dividends at FY 2021 and paid a £16m distribution to shareholders during the year. In 2023, as legislation is finalised within the Financial Services and Markets bill, we expect further clarification from the PRA following HM Treasury’s announcement to reform Solvency II and introduce a new Regulatory Framework for financial services following the UK’s exit from the European Union. The Chancellor’s Autumn Statement in November very positively outlined a 65% reduction in the risk margin (which will help to reduce the size and volatility of the solvency balance sheet), measures to widen eligibility criteria for matching adjustment assets, such as callable bonds or assets with a construction phase where the commencement of cashflows is not exactly certain, and no changes to the fundamental spread of the matching adjustment, which remains a critical component of the Solvency UK regulatory regime. We are very supportive of and keen to see swift progress on the proposed reforms, which will better enable insurers to support the economy and the government’s various agendas including “levelling up”, decarbonisation and, increased investment in science and technology. We await further detail on timing and implementation.
1 Solvency II capital coverage ratios as at 31 December 2021 and 31 December 2022 include a recalculation of TMTP as at the respective dates. 2 The retirement income sales included in this new business margin has been calculated based on the July DB partnering premium after deducting the DB partner share.
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