174 | Just Group PLC | Annual Report and Accounts 2024
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS continued
16. FAIR VALUE OF FINANCIAL ASSETS AND LIABILITIES continued Sensitivity analysis
The sensitivities disclosed in this note only consider the impact of the change in these assumptions on the fair value of the investment assets. Some of these sensitivities would also impact the yield on assets and hence the valuation discount rate used to determine the insurance contract liabilities. For some of these sensitivities, the impact on the value of insurance contract liabilities and hence profit before tax is included in note 22(h). Reasonably possible alternative assumptions for unobservable inputs used in the valuation model either as at the valuation date or from a suitable recent reporting period where appropriate to do so could give rise to significant changes in the fair value of the assets. The Group has estimated the impact on fair value to changes to these inputs as follows:
Principal assumption 1
31 December 2024 £m
31 December 2023 £m
Financial investments Investment funds
Note
Sensitivity applied
(i)
credit spreads credit spreads credit spreads credit spreads
+100bps +100bps +100bps +100bps
(11)
(10)
Debt securities and other fixed income securities Loans secured by commercial mortgages
(ii)
(420)
(293)
(iii) (iv)
(27)
(27)
Long income real estate
(114)
(158)
downgrade of residential ground rents to BBB
Long income real estate
(iv)
credit rating
(4)
(11)
Infrastructure loans
(v)
credit spreads
+100bps
(87)
(78)
1 S ensitivities are determined by reference to the movement in credit spreads where the valuation models used discount the expected cash flows using a discount rate which includes a credit spread allowance associated with the asset. For sensitivity analysis of lifetime mortgages, please refer to 16(d)(vi). (i) Investment funds Investment funds classified as Level 3 are structured entities that operate under contractual arrangements which allow a group of investors to invest in a pool of corporate loans without any one investor having overall control of the entity. Discount rates are the most significant assumption applied in calculating the fair value of investment funds. The average discount rate used is 8% (2023: 10%). (ii) Debt securities and other fixed income securities In line with market practice, fixed-income securities are generally valued using independent pricing services such as Bloomberg and Thomson Reuters. When pricing data is unavailable from pricing services, prices are sourced from external asset managers or internal models and classified as Level 3 under the fair value hierarchy due to the use of significant unobservable inputs. These include private placement bonds, asset-backed securities and illiquid corporate bonds. (iii) Loans secured by commercial mortgages Loans secured by commercial mortgages are valued using a discounted cash flow model. The contractual cash flows are discounted by a risk-free discount rate with additional spreads to allow for credit and illiquidity risks. The additional spreads used in the discount rate are calculated using an internally developed methodology, which takes into consideration the credit rating of each loan and refers to external market spread indices to assess market movements in spreads and the impact of changes in credit ratings. (iv) Long income real estate Long income real estate is valued using discounted cash flow analysis using assumptions based on the repayment of the underlying loan. Principal assumptions underlying the calculation of long income real estate In determining the credit spreads for the valuation of residential ground rents, the Group has taken a market participant approach, which requires consideration of the assumptions, including those about risk, that a market participant would make at the balance sheet date for valuing such assets. The Group notes the significant uncertainty regarding the outcome of the previous Government consultation and the 2024 King’s Speech regarding restriction of residential ground rents as explained in the Risk Management report. The Group included an adjustment to the valuation of its residential ground rents portfolio in 2023 to reflect this uncertainty in the fair value that a market participant would be willing to exchange such assets. The value of these assets was adjusted to reflect an expected increase in credit spread and consequential increase the credit risk deduction for defaults. The Group has not made any change to the approach for determining this adjustment as at 31 December 2024 but figures have been refreshed to reflect current economic conditions. As explained in note 30, the Group continues to monitor the new Government’s agenda regarding residential ground rent assets. The Group has performed additional sensitivity analysis over the residential ground rents within the long income real estate portfolio. The sensitivity of residential ground rents to more significant adverse changes in credit quality has been evaluated in light of the potential scenarios proposed in the previous Government consultation. As shown in the sensitivities table above, an additional sensitivity has been performed under the scenario that the credit rating of the Group’s holding in residential ground rents reduces to BBB.
Powered by FlippingBook