GOVERNANCE
FINANCIAL STATEMENTS
strategic report
Reinsurance assets and liabilities Reinsurance assets decreased to £2.3bn at 31 December 2022 (2021: £2.8bn) due to the increase in the valuation rate of interest over the period. Since the introduction of Solvency II in 2016, the Group has increased its use of reinsurance longevity swaps rather than quota share treaties for shareholder funded business, albeit the DB partnering business is written via quota share. Reinsurance liabilities relate to liability balances in respect of the Group’s longevity swap arrangements. Other assets Other assets increased to £1.4bn at 31 December 2022 (2021: £0.9bn). These assets include cash, investment in associate, deferred tax assets, insurance receivables and intangible assets. Insurance liabilities Insurance liabilities decreased to £18.3bn at 31 December 2022 (2021: £21.8bn). The decrease in liabilities arose from the new business premiums written during the year, which was more than offset by an increase to the valuation rate of interest over the period. Other financial liabilities Other financial liabilities increased to £5.3bn at 31 December 2022 (2021: £2.9bn). These liabilities mainly relate to collateral deposits received from reinsurers, together with derivative liabilities and other cash collateral received. The increase from the prior year relates to higher amounts of derivatives and collateral, given the market volatility. Other liabilities Other liability balances decreased to £784m at 31 December 2022 (2021: £861m) due to the £76m repayment of the Tier 2 debt. IFRS net assets The Group’s total equity at 31 December 2022 was £2.2bn (2021: £2.4bn). Total equity includes the Restricted Tier 1 notes of £322m (after issue costs) issued by the Group in September 2021. Including negative effects of Solvency II interest rate hedging on the IFRS results, total equity attributable to ordinary shareholders decreased from £2,120m to £1,823m resulting in net asset value per ordinary share of 179 pence (2021: 204 pence). DIVIDENDS In line with our stated policy to grow the dividend over time, the Board is recommending a final dividend of 1.23 pence per share bringing the total dividend for the year ended 31 December 2022 to 1.73 pence per share, representing a 15% increase on the annualised dividend (2021: 1.0 pence, recommenced dividend and represents a final dividend only).
The sector analysis of the Group’s financial investments portfolio is shown below and continues to be well diversified across a variety of industry sectors.
31 December 2022 %
31 December 2022 £m
31 December 2021 %
31 December 2021 £m
270
1.3
Basic materials
264
1.1
Communications and technology Auto manufacturers Consumer (staples including healthcare) Consumer (cyclical)
1,327
6.5 1.2 5.1 0.7 2.6 5.5 3.0 4.7 2.1 7.8 3.1
1,430
6.0 1.3
250
319
1,012
1,174
4.8 0.8 2.6
142 535
187 633
Energy Banks
1,120
1,192
11.3
607 956
Insurance
845 481
3.5 2.0
Financial – other
Real estate including REITs
437
661
2.8
1,596
Government
2,415
10.1
622
Industrial
920
1.2 9.6
2,266
11.0
Utilities
2,302
Commercial mortgages Ground rents1 Infrastructure
584 291
2.9 1.4 9.0 0.2
678 263
2.8 1.1 6.1 0.2
1,811
1,474
42
Other
38
Corporate/ government bond total Lifetime mortgages
13,868
68.1 26.1
15,276
63.6 30.9
5,306 1,174
7,423 1,311
5.8
Liquidity funds
5.5
Investments portfolio
20,348
100.0
24,010
100.0
Derivatives and collateral 2
3,169
741
23,517
Total 1
24,751
1 Includes direct ground rents and also an investment in a property unit trust which holds ground rent generating assets which are included in investment properties in the IFRS consolidated statement of financial position. 2 More than 99% of the derivative assets are comprised of interest rate swaps, foreign exchange swaps to hedge the currency risk on non-GBP investments, and inflation swaps. In addition, collateral in the form of corporate bonds and cash has been posted in relation to the Group’s hedging activity. Further details are available in note 16 and note 28 of the financial statements. Derivatives are used to manage risks on the balance sheet, and we seek to be economically neutral on interest rate, currency and inflation risks. The derivatives and collateral total has increased primarily due to an increased number of positions as part of our dynamic interest rate hedging strategy. Interest rate swap assets have accounted for the vast majority of the increase, as they rose by £1,238m to £1,408m, while foreign exchange swaps rose by £170m to £413m, and inflation swaps rose by £176m to £438m. In relation to the interest rate, foreign exchange and inflation derivative assets, compensating increases in the swap liability positions means that the overall swap exposure in relation to these categories is limited to a net liability of £722m (2021: net asset £291m). Increased collateral requirements from the hedging activity drove the increase in deposits with credit institutions (2022: £908m, 2021: £53m), and is almost all in relation to interest rate swaps. Combining the 2022 net derivative liability and deposits held at credit institutions (predominantly collateral) is a net asset of £186m (2021: net asset of £343m). Other swap assets and liabilities are negligible. In accordance with accounting standards these derivatives are not offset. Given that the net asset/liability is not represented in the financial investments total on the balance sheet, to aid comparability, the percentage of financial investments does not include derivatives and collateral.
ANDY PARSONS Group Chief Financial Officer
31
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