STRATEGIC REPORT
29
Operating assumption changes and other operating items were £51.1m positive overall. The Group has updated its maintenance and investment expense assumptions, leading to a positive contribution at 31 December 2019 of £55.4m, of which £26.1m relates to maintenance expense assumptions. The Group has also modelled allowances for LTM early redemption charges, which has given rise to a further positive contribution of £97.0m. These have been offset by a strengthening of the Group’s LTM voluntary redemption assumptions to reflect recent adverse experience which has led to a £116.5m charge at 31 December 2019. Other items include improvements made to data, models and minor assumptions. The prior year operating experience and assumption changes charge of £33.5m was mainly in relation to updates to the Group’s mortality assumptions and mortgage voluntary redemptions assumptions at 31 December 2018. Other Group companies’ operating results The operating result for other Group companies was a loss of £13.1m in 2019 compared to a loss of £14.6m in 2018. The benefit of actions taken during 2019 to reduce our cost base is starting to come through, with the full run-rate benefit expected in 2020. Included within this line item is the operating result for the HUB group of companies which generated a loss of £3.9m in 2019 but has made significant progress towards profitability during the year. Development expenditure Development expenditure mainly relates to product development and new initiatives. These include the Just for You Lifetime Mortgage range, which gives additional flexibility to take a cash lump sum, or release cash as and when it is needed from a pre-agreed facility, or to choose to service some or all of the monthly interest. The Secure Lifetime Income solution for investment platforms enables financial advisers to offer their clients a guaranteed income for life solution within a self invested personal pension. Both of these are now available to new customers. The development costs of less capital-intensive products, such as our new DB De-risking partnership business are also included here. Reinsurance and finance costs The increase in reinsurance and finance costs for the period relates to the coupon on the Group’s £300m Restricted Tier 1 notes issued in March 2019, and the coupon on the Group’s £125m Tier 2 notes. 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 an interest cost on an adjusted operating profit basis.
ALTERNATIVE PERFORMANCE MEASURES Within the Financial Review, the Group has presented a number of 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: organic capital generation, new business operating profit, in-force operating profit, underlying operating profit, adjusted operating profit, Retirement Income sales 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.
ADJUSTED OPERATING PROFIT
Year ended 31 December 2019 £m
Year ended 31 December 2018 £m
change %
182.0
New business operating profit In-force operating profit Underlying operating profit
243.7 (25) 71.7 18 315.4 (16)
84.4
266.4
Operating experience and assumption changes Other Group companies’ operating results
42.2
(33.5)
N/A
(13.1) (10.3) (66.6)
(14.6)
(10)
Development expenditure Reinsurance and finance costs
(8.7)
18 38
(48.3)
218.6
Adjusted operating profit before tax 1
210.3
4
1 See reconciliation to IFRS profit before tax in the IFRS results section of this Financial Review.
ADJUSTED OPERATING PROFIT BEFORE TAX Adjusted operating profit before tax of £218.6m increased by 4% in 2019 with continued growth in in-force operating profit and positive operating experience and assumption changes more than offsetting the reduced new business operating profit and higher financing costs. New business operating profit New business operating profit has decreased by 25%, from £243.7m in 2018 to £182.0m in 2019. This mainly reflects the planned decrease in the level of Retirement Income sales written, in order to reduce new business strain as part of the Group’s commitment to improving capital efficiency. Retirement Income sales for 2019 were £1,918.1m (year ended 31 December 2018: £2,173.5m). The overall margin achieved on Retirement Income sales in 2019 was 9.5%, down from 11.2% in 2018. The reduction in margin for 2019 was expected, following the changes to IFRS property assumptions made at 31 December 2018, and the reduction in the LTM backing ratio for new business in order to reduce capital strain. Margins have improved slightly over the course of the year, with good resilience shown in light of the price increases to accommodate the LTM regulatory changes. In-force operating profit In-force operating profit has increased by 18% compared to the prior year, from £71.7m to £84.4m, reflecting growth in profit from the Group’s growing in-force book of business, and the return on the Group’s surplus assets. Operating experience and assumption changes Operating experience and assumption changes contributed a positive variance of £42.2m for 2019, compared to a negative variance of £33.5m in the prior year. Operating experience variances resulted in a charge of £8.9m for 2019 (2018: £1.4m charge), of which £8.4m has arisen from adverse mortality and redemption experience on mortgages (after allowance for early redemption charges).
RETIREMENT INCOME SALES
Year ended 31 December 2019 £m
Year ended 31 December 2018 £m
change %
Defined Benefit De-risking Solutions (“DB”) Guaranteed Income for Life Solutions (“GIfL”)
1,231.3
1,314.2
(6)
615.7
786.5
(22)
71.1
Care Plans (“CP”)
72.8
(2)
Retirement Income sales
1,918.1
2,173.5
(12)
As part of the Group’s commitment to achieving organic capital generation, during 2019 we chose to write less new business in order to reduce new business capital strain. Retirement Income sales decreased by 12%, from £2,173.5m in 2018 to £1,918.1m in 2019, with reductions across all lines. The defined benefit de-risking market remains strong and almost doubled in 2019, being estimated to exceed £40bn (2018: £24.2bn), driven by a number of very large transactions. The Group closed its US care business during 2019, which had been loss-making.
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