186 | Just Group PLC | Annual Report and Accounts 2023
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS continued
20. FAIR VALUE OF FINANCIAL ASSETS AND LIABILITIES continued Sensitivity analysis
Reasonably possible alternative assumptions for long income real estate are a +100 basis point change in credit spreads. Given the ongoing Government consultation regarding residential ground rents, 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 Government consultation. 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. 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 sensitivity of the valuation of ground rents is determined by reference to movement in credit spreads. The Group has estimated the impact on fair value to changes to these inputs as follows:
Long income real estate net increase/(decrease) in fair value (£m)
Credit spread +100bps
Residential ground rent downgraded to BBB
2023 2022
(158)
(11)
(78)
N/A
(vi) Infrastructure loans Infrastructure loans are valued using discounted cash flow analyses. Principal assumptions underlying the calculation of infrastructure loans classified at Level 3 Credit spreads The valuation model discounts the expected future cash flows using a discount rate which includes a credit spread allowance associated with that asset. Sensitivity analysis 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 sensitivity of the valuation of infrastructure loans is determined by reference to movement in credit spreads. The Group has estimated the impact on fair value to changes to these inputs as follows:
Infrastructure loans net increase/(decrease) in fair value (£m)
Credit spreads +100bps
2023 2022
(78) (72)
(vii) Other loans Other loans classified as Level 3 are mainly commodity trade finance loans. These are valued using discounted cash flow analyses. Principal assumptions underlying the calculation of other loans classified at Level 3 Credit spreads The valuation model discounts the expected future cash flows using a discount rate which includes a credit spread allowance associated with that asset. Sensitivity analysis The sensitivity of fair value to changes in credit spread assumptions in respect of other loans is not material. (viii) Investment contract liabilities Investment contracts are valued using an internal model and determined on a policy-by-policy basis using a prospective valuation of future retirement income benefit and expense cash flows. Principal assumptions underlying the calculation of investment contract liabilities Valuation discount rates The valuation model discounts the expected future cash flows using a discount rate derived from the assets hypothecated to back the liabilities. The discount rate used for the fixed term annuity product treated as investment business is based on a curve where 6.88% is the one-year rate and 5.47% is the five-year rate (31 December 2022: 5.67%). Sensitivity analysis The sensitivity of fair value to changes in the discount rate assumptions in respect of investment contract liabilities is not material and is linked to the value of the contract.
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