STRATEGIC REPORT
31
Net premium revenue Net premium revenue decreased from £2,712.2m to £2,360.6m, driven by the reduction in gross premiums written, plus the impact of the reinsurance recaptures made during the year, and reinsurance premiums ceded. Net investment income Net investment income increased from £142.6m to £1,451.7m in 2019. The main components of investment income are interest earned and changes in fair value of the Group’s corporate bond, mortgage and other fixed income assets. During 2019, risk-free rates have decreased and credit spreads have narrowed, giving rise to unrealised gains on the Group’s mortgage and corporate bond assets. This is in contrast to the prior year, where risk-free rates increased and credit spreads widened, leading to unrealised losses. Net claims paid Net claims paid increased to £861.1m, from £749.9m in 2018, reflecting Change in insurance liabilities was £2,237.8m for the current year, compared to £1,689.0m in 2018. The increase compared to 2018 mainly reflects the growth in gross insurance liabilities due to the change in valuation interest rate, driven by the fall in risk-free rates as noted above. Acquisition costs Acquisition costs have decreased from £52.4m in 2018 to £35.2m in 2019, mainly as a result of the planned reduction in volumes of Retirement Income sales and LTM advances. Other operating expenses Other operating expenses decreased from £254.8m in 2018 to £227.8m for the current year. This reduction reflects the benefit of the cost- saving initiatives carried out during the year. Finance costs The Group’s overall finance costs decreased from £202.8m in 2018 to £186.7m in 2019. The main driver relates to a reduction in reinsurance deposits (described in the notes opposite), which have fallen in line with the planned recaptures made. This decrease has been partly offset by a full year’s interest on the Group’s Tier 3 loan notes issued in February 2018, and interest on the new Tier 2 loan notes issued in October 2019. Note that the coupon on the Group’s Restricted Tier 1 notes is recognised as a capital distribution directly within equity and not within finance costs. This includes reinsurance finance costs as well as the core expense base. Income tax Income tax for the year ended 31 December 2019 was £66.2m (2018: tax credit of £21.2m), with an effective tax rate of 18.0% in line with corporation tax rates (2018: effective tax rate of 24.8%). The effective tax rate for the prior year was affected by one-off adjustments relating to the recognition of deferred tax in relation to tax overpaid in prior periods. the growth of the in-force book. Change in insurance liabilities
HIGHLIGHTS FROM CONDENSED CONSOLIDATED STATEMENT OF COMPREHENSIVE INCOME The table below presents the Condensed consolidated statement of comprehensive income for the Group, with key line item explanations.
Year ended 31 December 2019 £m
Year ended 31 December 2018 £m
1,921.0
Gross premiums written
2,176.9
2.8
Reinsurance premiums ceded
(8.0)
436.8
Reinsurance recapture Net premium revenue Net investment income
543.3
2,360.6 1,451.7
2,712.2
142.6
12.7
Fee and commission income
8.2
Total revenue Net claims paid
3,825.0
2,863.0
(861.1)
(749.9)
(2,237.8)
Change in insurance liabilities
(1,689.0)
92.2
Change in investment contract liabilities
0.4
(35.2) (227.8) (186.7)
Acquisition costs
(52.4)
Other operating expenses
(254.8) (202.8)
Finance costs
Total claims and expenses Profit/(loss) before tax
(3,456.4)
(2,948.5)
368.6
(85.5)
(66.2)
Income tax
21.2
Profit/(loss) after tax
302.4
(64.3)
Gross premiums written Gross premiums written for the year were £1,921.0m, a decrease of 12% compared to the prior year (2018: £2,176.9m). As discussed above, the year-on-year decrease reflects the Group’s planned reduction in new business volumes in order to preserve capital. Reinsurance recapture The Group’s subsidiary JRL has a number of quota share reinsurance treaties with financing arrangements, which allowed a capital benefit under the old Solvency I regime. These treaties were closed to new business prior to the introduction of Solvency II on 1 January 2016 but the Group retains a capital benefit under Solvency II from the financing arrangements under transitional arrangements. The treaties allow JRL to recapture business once the financing loan from the reinsurer has been repaid. During the year the Group has repaid financing and recaptured business in respect of certain underwriting years, resulting in a decrease of reinsurance assets of £436.8m and a reduction of equal amount in the deposits received from reinsurers recognised within other financial liabilities in the statement of financial position. These movements are reflected in the statement of comprehensive income within net premium revenue and net claims paid respectively.
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