GOVERNANCE
FINANCIAL STATEMENTS
strategic report
Movement in excess own funds 1 The table below analyses the movement in excess own funds, in the year ended 31 December 2022.
We also incurred a £95m loss on asset timing variance, largely on investments backing new business completed in December, which is expected to reverse as we lengthen the duration of our assets to achieve the targeted asset mix during the first few months of 2023 and a £49m loss from the third and final LTM portfolio sale in February 2022. Other notable economic variances include a refinement of LPI curve 1 methodology (£49m) and the lack of corporate bond defaults offset by wider credit spreads (loss of £112m) and negative property growth experience (loss of £22m). 1 Insurance liabilities for inflation-linked products and inflation-linked assets require an assumption for future expectations of inflation. These assumptions are derived using a mark to model basis. This represents a change in approach since 31 December 2021 which utilised market prices that are not actively traded. Further details and sensitivities to changes in property assumptions are given in notes 17 and 23 of the financial statements. Amortisation of acquired intangibles Amortisation of acquired intangibles for the year ended 31 December 2022 were £18m (2021: £18m), these mainly relate to the acquired in-force business asset relating to Partnership Assurance Group plc, which is being amortised over ten years in line with the expected run-off of the in-force business.
2022 £m
2021 £m
Unaudited
1,168
Excess own funds at 1 January
1,076
Operating In-force surplus net of TMTP amortisation
174
191
(60) (57) (28)
(40) (71) (29)
New business strain 2
Finance cost
Group and other costs
Underlying organic capital generation Management actions and other items Total organic capital generation 3
29
51 42 93
105 134
Non-operating Dividend
(16)
–
–
Regulatory changes Economic movements
(38)
117
56
CAPITAL MANAGEMENT Just Group plc estimated Solvency II capital position
Effect of Tier 2 debt buyback (2022) and RT1 refinancing (2021), net of costs
(33)
(19)
The Group’s coverage ratio was estimated at 199% at 31 December 2022 after a formal recalculation of transitional measures on technical provisions (“TMTP”), an increase of 35 percentage points, driven by the substantial rise in interest rates in 2022 (31 December 2021: 164% after a formal biennial recalculation of TMTP). The Solvency II capital coverage ratio is a key metric and is considered to be one of the Group’s KPIs.
Excess own funds at 31 December
1,370
1,168
1 All figures are net of tax, and include a recalculation of TMTP as at the respective dates. 2 New business strain calculated based on pricing assumptions. 3 Organic capital generation includes surplus from in-force, new business strain and other expenses, interest and other operating items. It excludes economic variances, regulatory changes, dividends and capital issuance. Underlying organic capital generation During 2022, we delivered £29m of underlying organic capital generation (2021: £51m, 2020: £18m). The decrease was primarily due to the effect of rising interest rates on the solvency balance sheet, which leads to a smaller SCR and risk margin and hence unwind into the In-force surplus net of TMTP amortisation, an increase in new business strain reflecting higher volumes of new business, both offset by lower financing costs. The business continues to deliver sufficient ongoing capital generation to support decisions on capital deployment between profitable growth, providing returns to our capital providers and further investment in the strategic growth of the business. Underlying organic capital generation continues to benefit from the ongoing focus across the business on minimising new business capital strain. During 2022, new business strain increased by £20m to £60m, which represents 1.9% of new business premium (2021: 1.5%), well within our target of below 2.5% of premium. This outperformance was driven by continued pricing discipline and risk selection, including DB deferred business and a greater weighting towards small and medium transactions within the sales mix. Due to careful management of the capital budget in the first half of the year, we deployed capital in the seasonally busier second half of the year. We expect seasonality to be less pronounced in 2023, given that the DB market could potentially be a record year as a result of scheme funding deficits closing or being eliminated due to the rise in interest rates over the past 12 months. In-force surplus after TMTP amortisation was down 9% to £174m, primarily due to higher interest rates which reduces the amount of capital available (via lower SCR and risk margin) to release and the cumulative effect of the three LTM portfolio sales, which were more capital intensive than the assets that replaced them. Group and other costs including development, non- recurring and non-life costs were £28m (2021: £29m), reflecting strong cost control. Finance costs at £57m (2021: £71m) were 20% lower reflecting a reduced coupon on the RT1 debt, after the opportunistic early re-financing of that debt in September 2021. Interest costs will fall further in 2023 following the £76m tier 2 debt tender completion in November 2022. Management actions at £15m (2021: £16m) further augment underlying organic capital generation and are combined with assumption changes including mortality into management actions and other items, which contributed a total of £105m to the capital surplus. Adding underlying organic capital generation and management actions and other items led to a total of £134m from organic capital generation, which added 5% to the capital coverage ratio.
31 December 2022 £m
31 December 2021 £m
Unaudited
2,757
Own funds
3,004
(1,387) 1,370 199%
Solvency Capital Requirement
(1,836)
Excess own funds
1,168 164%
Solvency coverage ratio 1
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.
The Group has approval to apply the matching adjustment and TMTP in its calculation of technical provisions and uses a combination of an internal model and the standard formula to calculate its Group Solvency Capital Requirement (“SCR”).
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