Just group PLC | Annual Report and accounts 2022
BUSINESS REVIEW continued
At this time, the outlook for the economy continues to evolve reflecting geopolitical and other macro-economic concerns including the trajectory of interest rates to reduce and control inflation, and associated slowing of the UK and global economies. The key sensitivities of the Group’s capital and financial position to future economic and demographic factors are set out below and in notes 17 and 23 of the financial statements. We expect these macro forces to have a negligible effect on the Group’s business model with demand for our products boosted by higher interest rates. We have a low strain new business model that is generating sufficient underlying capital to fund our ambitious growth plans, whilst also paying a shareholder dividend that is expected to grow over time. alternative performance measures (“APMs”), which are used in addition to IFRS statutory performance measures. The Board believes that the use of APMs gives a more representative view of the underlying performance of the Group. The APMs used by the Group are: return on equity, Retirement Income sales, underlying organic capital generation, new business operating profit, adjusted operating profit before tax, underlying operating profit, management expenses, organic capital generation, in-force operating profit, adjusted earnings and adjusted earnings per share. Further information on our APMs can be found in the glossary, together with a reference to where the APM has been reconciled to the nearest statutory equivalent. ALTERNATIVE PERFORMANCE MEASURES AND KEY PERFORMANCE INDICATORS Within the Business Review, the Group has presented a number of The Board has also adopted a number of key performance indicators (“KPIs”), which include certain APMs, and are considered to give an understanding of the Group’s underlying performance drivers. KPIs are regularly reviewed against the Group’s strategic objectives to ensure that we continue to have the appropriate set of measures in place to assess and report on our progress. In addition, the return on equity (target 10%) and adjusted earnings per share calculations have been updated to be consistent with the 15% medium term growth metric, based on underlying operating profit. This reflects the Group’s focus on profitable and sustainable growth, and provide a balance of KPIs across profit, sales, expenses, capital and net assets. The Group’s KPIs are discussed in more detail on the following pages. The Group’s KPIs are shown below: Year ended 31 December 2022 £m Year ended 31 December 2021 £m Change Return on equity 1 10.7% 8.3% 2.4pp Retirement Income sales 1 3,131 2,674 17% Underlying organic capital generation 1 29 51 (43)% New business operating profit 1 233 225 4% Adjusted operating profit before tax 1 336 238 41% Underlying operating profit 1 249 210 19% IFRS loss before tax (317) (21) 15x Management expenses 1 153 147 4%
RETURN ON EQUITY The return on equity in the year to 31 December 2022 was 10.7% (2021: 8.3%), based on underlying operating profit after attributed tax of £202m (2021: £170m) arising on average tangible net assets of £1,891m (2021: £2,048m).
Tangible net assets are reconciled to IFRS total equity as follows:
31 December 2022 £m
31 December 2021 £m
IFRS total equity
2,178
2,440
(104)
Less intangible assets
(120)
15
Less tax on amortised intangible assets Less equity attributable to Tier 1 noteholders
17
(322)
(322)
Tangible net assets Return on equity
1,767 10.7%
2,015 8.3%
UNDERLYING OPERATING PROFIT AND ADJUSTED OPERATING PROFIT BEFORE TAX Underlying operating profit is the core performance metric on which we have based our target 15% growth, per annum, on average, over the medium term. Underlying operating profit captures the performance and running costs of the business including interest on the capital structure, but excludes operating experience and assumption changes, which by their nature are unpredictable and can vary substantially from period to period. 2022 underlying operating profit grew by 19% to £249m (2021: £210m), which is a very solid start towards our medium term target, albeit year to year, the trajectory may be influenced by timing differences in relation to larger DB transactions. Year ended 31 December 2022 £m Year ended 31 December 2021 £m Change % New business operating profit 233 225 4 In-force operating profit 116 90 29 Other Group companies’ operating results (15) (15) – Development expenditure (12) (7) 71 Reinsurance and finance costs (73) (83) (12) Underlying operating profit 249 210 19 Operating experience and assumption changes 87 28 211 Adjusted operating profit before tax 1 336 238 41 1 New business operating profit is reconciled to IFRS loss (via adjusting operating profit before tax) further in this Business Review. New business operating profit New business operating profit was up 4% at £233m for the year ended 31 December 2022 (2021: £225m), as shareholder funded Retirement Income sales rose 17% to £3,131m (2021: £2,674m). The new business margin achieved on Retirement Income sales during the period was lower at 7.4% (2021: 8.4%). We are achieving similar spreads compared to the prior year, however, due to higher interest rates, the new business profit we recognise is now being discounted at a higher rate than the prior year, and hence the margin is lower.
31 December 2022 £m
31 December 2021
£m Change
Solvency II capital coverage ratio 2
199% 2,178
164% 35pp 2,440 (11)%
IFRS net assets
1 Alternative performance measure, see glossary. The return on equity (target 10%) calculation has been updated to be consistent with the 15% medium term growth metric. 2 Solvency II capital coverage ratios as at 31 December 2021 and 31 December 2022 include a recalculation of TMTP as at the respective dates.
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