JUST GROUP PLC Annual Report and Accounts 2021
INDEPENDENT AUDITORS’ REPORT continued
Key audit matter
How our audit addressed the key audit matter
Valuation of investments classified as Level 3 under IFRS 13, including Lifetime Mortgages (Group) Refer to Group Audit Committee Report, Accounting policy 1.17 Financial investments and note 17 Financial assets and liabilities measured at fair value.
The valuation of investments classified as Level 3 is typically calculated using a discounted cash flowmodel with significant unobservable inputs. This is inherently complex and requires expert judgement. Furthermore, the balances are material to the financial statements. This comprises investments in certain illiquid debt instruments, commercial mortgages and Lifetime Mortgages. For Lifetime mortgages, an internal model which projects the future cash flow expected to arise is used to value each mortgage. This is based on a current valuation of the underlying property. The future cash flows allow for expected future expenses, mortality and voluntary redemption experience and any potential repayment shortfalls due to the existence of the NNEG. A key judgement in the assessment of the NNEG is the best estimate future house price growth assumption. The illiquidity premium used within the discount rate is set at outset for each mortgage to ensure there is no day 1 gain and it is unchanged thereon unless there are further advances.
We performed the following audit procedures to test the valuation of the investments classified as Level 3 (excluding Lifetime Mortgages): • Tested the design and, where applicable, the operating effectiveness of controls related to the valuation of investments; and • Obtained independent confirmations from third party asset managers (where relevant). For a sample of positions, we performed the following procedures: • Engaged our valuation experts to assess the reasonableness and appropriateness of the internal or external valuation methodology applied; • Performed an independent revaluation and investigated any variances outside of our tolerable threshold; and • Tested inputs into the valuation to external sources, where possible. For Lifetime Mortgages, we performed the following audit procedures: • Tested the design and, where applicable, the operating effectiveness of controls related to the accuracy and completeness of data used in the modelling of Lifetime Mortgages; • For a sample of mortgages, agreed data used in the modelling of Lifetime Mortgages to policyholder documentation; • Understood the process and tested controls in place over the determination of the valuation, including those relating to model inputs, model operation and extraction and consolidation of results from the valuation model; • Assessed the appropriateness of current property prices by obtaining evidence to support the latest property value used (based on valuations by Hometrack AVM or property surveyors) and recalculating the application of the Nationwide indices to property data; • Using our actuarial specialists, applied our industry knowledge and experience to assess the appropriateness of the methodology, model and assumptions used to measure the NNEG component against recognised actuarial practices; • Evaluated the appropriateness of significant economic assumptions, including the property price inflation assumption and property price volatility assumptions used within the valuation process, with reference to market data and industry benchmarks where available; • Evaluated the Group’s historic redemptions data used to prepare the Group’s mortality, morbidity and voluntary redemptions experience analysis, together with industry data on expectations of future mortality improvements and assessed whether this supports the assumptions adopted. This includes the adjustment applied in 2021 to reflect higher expected short term redemption rates; • Performed testing over the actuarial model calculations. We have placed reliance on our model baselining carried out as part of our first year audit, whereby we independently replicated the asset cash flows for a sample of loans in order to validate that the model calculations were operating as intended. In 2021 we performed additional procedures over changes in the model and tested the analysis of change in modelled results, to assess whether the model continued to operate as expected; • Assessed the valuation implications (if any) from the Group’s recent portfolio sales including the transaction after the balance sheet date; and • Used the results of the PwC benchmarking survey to further challenge the assumptions and modelling approach adopted, relative to the Group’s industry peers. We have also considered the adequacy of the Group’s disclosures in relation to the valuation of those assets designated Level 3, in particular the sensitivity of the valuations adopted to alternative assumptions. Based on the work performed and the evidence obtained, we consider the valuation of level 3 assets to be appropriate.
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