32 | Just Group PLC | Annual Report and Accounts 2023
BUSINESS REVIEW continued
The sector analysis of the Group’s financial investments portfolio is shown below and continues to be well diversified across a variety of industry sectors.
To date, Just has invested £4.9bn in other illiquid assets, representing 21% of the Investments portfolio (31 December 2022: 16%), spread across more than 330 investments, both UK and abroad. We have invested in our in-house credit team as we have broadened the illiquid asset origination, and work very closely with our specialist asset managers on structuring to enhance our security, with a right to veto on each asset. We anticipate that the Solvency II reforms, when fully implemented, will increase the investment opportunities available to us through wider matching adjustment eligibility criteria, such as callable bonds, or assets with a construction phase, where the commencement of cash flows is not entirely certain. A PRA consultation paper on the more complex changes to matching adjustment (“MA”) rules and the associated investment flexibility was launched in September, with reforms to take effect in 2024. We expect these MA changes to support the role HM Treasury is expecting from the industry, whereby appropriate reforms could increase investment by tens of billions of pounds in long-term finance that underpins UK economic growth. Internally funded lifetime mortgages were £164m (2022, £519m), primarily due to a much reduced LTM market, which more than halved to £2.6bn, and our ongoing pricing discipline. LTMs remain an attractive asset class, however, in a higher interest rate environment, the capital charge attaching to the LTM NNEG risk becomes onerous. The loan-to- value ratio of the in-force lifetime mortgage portfolio was 38.2% (31 December 2022: 37.3%), reflecting continued performance across our geographically diversified portfolio, which offsets the interest roll-up. Lifetime mortgages at £5.7bn represent 24% of the investments portfolio, which we expect to continue drifting lower over time as we originate fewer new LTMs and diversify the portfolio with other illiquid assets. The 10% Solvency II capital coverage ratio impact for an immediate 10% fall in UK house prices remains at a level we are comfortable with. The following table provides a breakdown by credit rating of financial investments, including privately rated investments allocated to the appropriate rating.
31 December 2022 £m (restated)
31 December 2022 % (restated) 1
31 December 2023 £m
31 December 2023 %
149
0.6
Basic materials Communications and technology Auto manufacturers Consumer staples (including healthcare) Consumer cyclical
270
1.3
1,334
5.6 0.5
1,327
6.6 1.2
130
250
1,405
5.9 0.8 1.6 6.7 3.1 2.4 2.8 7.4 2.3
935 125 535
4.6 0.6 2.6 5.5 3.0 1.7 2.2 7.9 2.9
197 378
Energy Banks
1,606
1,119
735 583
Insurance
607 342
Financial – other Real estate including REITs
660
437
1,767
Government
1,596
543
Industrial
588
2,637
11.0
Utilities
2,266
11.2
Commercial mortgages 2
764
3.2
584
2.9
Long income real estate 3
916
3.8
291
1.4 8.4 0.2
2,473
10.3
Infrastructure
1,702
42
0.2
Other
42
Bond total Other assets
16,319
68.1
13,016
64.4
31 December 2022 £m (restated)
31 December 2022 % (restated)
822
3.4
726
3.6
31 December 2023 £m
31 December 2023 %
5,681 1,141
23.7
Lifetime mortgages
5,306 1,174
26.2
4.8
Liquidity funds Investments portfolio Derivatives and collateral Gilts (interest rate hedging)
5.8
2,252 5,327 7,239 8,083
8
AAA 1
2,154 2,136 6,262 6,544
9 9
18 24 27
AA 1,3 and gilts
23,963
100.0
20,222
100.0
A 1,2,3
27 28
BBB 1,2,3
3,083
3,169
176
1
BB or below 1,2
265
1
2,549
–
5,681
19
Lifetime mortgages
5,306
23
Total
29,595
23,391
837
3
Other assets
724
3
Total 1,2,3
29,595
100
23,391
100
1 R estated to re-allocate various short term illiquid fund assets and cash/investments, primarily from the Financial – other sector. These assets are now in the “Other Assets” category. 2 Includes investment in trusts which are included in investment properties in the IFRS consolidated statement of financial position. 3 Includes direct long income real estate and where applicable, investment in trusts which are included in investments accounted for using the equity method in the IFRS consolidated statement of financial position. Long income real estate include £740m commercial ground rents and £176m residential ground rents. Reinsurance contract assets and liabilities In accordance with IFRS 17, the Group distinguishes between its portfolios of reinsurance contracts which cover longevity and inflation risks and portfolios of reinsurance treaties covering longevity reinsurance alone. The Group’s contracts transferring inflation risk are quota share arrangements which are in asset positions. Since the introduction of Solvency II in 2016, the Group has increased its use of reinsurance swaps rather than quota share treaties and these are in liability positions. Reinsurance assets increased to £1,143m at 31 December 2023 (31 December 2022: £776m) as the funded reinsurance in relation to the DB Partner transaction in December 2023 was partially offset by reinsurance quota share treaties which are in gradual run-off.
1 Includes units held in liquidity funds, derivatives and collateral and gilts (interest rate hedging). 2 Includes investment in trusts which holds long income real estate assets which are included in investment properties and investments accounted for using the equity method in the IFRS consolidated statement of financial position. 3 T he comparative has been restated to re-allocate ground rents and certain SME investment and other funds to the appropriate rating (previously Other unrated). 4 T he residential ground rent portfolio includes £164m rated AAA and £12m rated AA. The Group holds a £176m portfolio of residential ground rents and is monitoring the progress of the Government Consultation regarding existing leases and the impact on the Group’s exposure to these assets. The Group invests in loans secured by residential ground rents, rather than directly in residential leases. These investments are valued at fair value, and reflect our estimate of the impact that the uncertainty from the consultation has had on the fair value of this asset class at the reporting date. The Group acknowledges the significant uncertainty regarding the outcome of the consultation, and that the fair value of these investments may change in the future after the consultation concludes. For further information on the consultation please see the Risk management note on page 67 and the accounting estimates made in note 1.7.
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