GOVERNANCE
FINANCIAL STATEMENTS
strategic report
Management expenses Management expenses have increased by 4% to £153m for the year ended 31 December 2022 (2021: £147m). Following the end of a formal three year cost reduction programme in 2021, management expenses continue to be contained. We have maintained a sharp focus on cost control, with selective investment in the business, such as the Investments and DB functions as we continue to build in-house capability to write larger DB transactions on a more frequent basis, and investing in the HUB Destination Retirement business. Going forward, premium and business growth is expected to outpace costs, thus further improving operational leverage. In-force operating profit In-force operating profit increased by 29% to £116m for the year ended 31 December 2022 (2021: £90m). Aside from the positive impact of credit spread widening, the Group’s in-force operating profit also benefited from the impact of rising rates, which has boosted the return on surplus assets. Other Group companies’ operating results The operating result for other Group companies was a loss of £15m (2021: loss of £15m). These costs arise from the holding company, Just Group plc, and the HUB group of businesses. Development expenditure Development expenditure of £12m for the year ended 31 December 2022 (2021: £7m), mainly relates to product development, proposition enhancement and new initiatives. It also includes preparations for the new insurance accounting standard IFRS 17 and distribution improvements such as online capability and digital access. Reinsurance and finance costs Finance costs have decreased by 12% to £73m (2021: £83m). These 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 decrease for the period is due to the opportunistic refinancing in September 2021 of the 2019 issued Restricted Tier 1 bond, with a new £325m Sustainability Restricted Tier 1 bond. This discrete bond refinancing reduced the interest costs on the RT1 component of the capital structure by £12m pre-tax per annum, while also lengthening the bond maturity to 2031. In November 2022, the Group tendered for and cancelled £76m of 9% tier 2 debt due in 2026, which will lead to additional interest savings in 2023 as the Group further optimises its capital structure and debt profile. During the first half of 2022, the Group entered into a new five year revolving credit facility, with improved commercial terms. The facility has increased from £200m to £300m, with flexibility for this to grow as the balance sheet expands over time. This facility has not been drawn upon in 2022. Operating experience and assumption changes Over the past two years, the Group has actively continued to assess the potential impact of COVID-19 on longer term mortality and has increasingly incorporated COVID-19 experience data and medical understanding into our pricing and reserving assumptions, as it became available. As usual, the Group carried out a full basis review in December 2022, and has updated its longevity reserving using the CMI 2021 mortality tables (2021: CMI 2019) and reviewing mortality rates experienced over the past three years. The Group continues to allow for future improvements in long-term mortality, but with nearer term mortality also reflecting the heightened mortality being experienced post pandemic. Our assessment of the long-term impact of the pandemic on the population, including the health of those who have recovered from the disease, the future efficacy of the various vaccines and secondary impacts such as delayed diagnosis for other illnesses or behavioural changes continues to evolve. However, these factors, combined with the winter flu season, longer NHS waiting lists and inflation pressures on incomes are undoubtedly contributing to continued elevated deaths across the population, which we have sought to reflect in our year end assumption. There were a number of very minor changes to the Group’s other assumptions in 2022. Sensitivity analysis is shown in notes 17 and 23, which sets out the impact on the IFRS results from changes to key assumptions, including mortality and property.
Overall, operating experience and assumption changes were £87m (2021: £28m). The Group reported negative operating experience of £5m in 2022 (2021: positive £33m), as positive annuitant mortality experience and modelling adjustments were more than offset by increased early redemptions within our LTM book, above our redemption assumption, as customers took advantage of the competitive rates on offer to refinance before rates rose and thus reducing interest roll-up. Assumption changes resulted in a £92m release (2021: £5m strengthening), and were almost entirely driven by the mortality assumption change, as per above. Adjusted operating profit before tax Adjusted operating profit before tax, was £336m (2021: £238m). Adjusted operating profit before tax is the sum of underlying operating profit and operating experience and assumption changes. 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 a finance cost on an adjusted operating profit basis.
RETIREMENT INCOME SALES
Year ended 31 December 2022 £m
Year ended 31 December 2021 £m
Change %
Defined Benefit De-risking Solutions (“DB”) Guaranteed Income for Life Solutions (“GIfL”) and Care Plans (“CP”)
2,567
1,935
33
564
739
(24)
Retirement Income sales
3,131
2,674
17
The structural growth drivers that underpin our markets are unchanged. Shareholder funded Retirement Income sales for the year ended 31 December 2022 rose 17% to £3,131m (2021: £2,674m). In early 2021, we expanded our proposition in the DB de-risking market to meet fully the needs of schemes and trustees by adding DB deferred capability, which enabled us to increase our access to the c.£1.5tn DB market opportunity. Prior to 2022, scheme funding levels across the industry had been steadily improving primarily due to increased contributions from sponsors, and therefore more schemes were able to afford full scheme de-risking and buyout (with deferreds) as opposed to pensioner only de-risking. During 2022, rising interest rates accelerated the funding gap closure, which means that more schemes will commence the process to be “transaction ready” and hence bring business forward into the 2023 and medium term pipeline from ordinarily expecting to transact in the second half of the decade. Our efforts in 2021 were recognised by being named “Risk Management Provider of the Year” at the Pensions Age awards in February 2022. Shareholder funded DB sales were £2,567m, an increase of 33%. Activity levels were significantly ahead of the comparable period as we closed 56 transactions (2021: 29 transactions) aided by our proprietary bulk quotation service and repeat business. This level of transaction activity is estimated to reflect over a quarter of all transactions in the market – a very strong endorsement of our DB new business franchise. In July, we completed a £484m deal utilising our DB partnering model. Adding the £259m DB partner premium to Just’s shareholder funded DB sales led to total DB market volumes of £2,826m, up 46% on prior year. We expect industry volumes for 2022 to be c.£30bn (2021: £27.7bn), and therefore our market volume share to be close to 10%. Our confidence in substantial market growth in 2023 is underpinned by Lane Clark Peacock (“LCP”) who anticipate that DB market volumes could exceed the record £44bn achieved in 2019, while Willis Towers Watson expect in excess of £40bn of Buy-in/Buy-out DB transactions. Our near term actively quoting pipeline is over £6bn, and we expect a busy year with a greater number of medium and large transaction opportunities coming to market. However, the long-term growth opportunity is very substantial with LCP forecasting up to £600bn of DB Buy-in and Buy-out transactions over the decade to 2032, as funding deficits in the largest schemes are closed. Indeed, over the next three years, more than £200bn could transact, similar to the amount that transacted during the last decade. We will take advantage of this very strong
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