134 JUST GROUP PLC Annual Report and Accounts 2020
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS continued
17 FAIR VALUE continued Mortality
Mortality assumptions have been derived with reference to England &Wales population mortality using the CMI 2017 data set and model mortality tables for base table rates and improvements for years up to 2019 and CMI 2019 for mortality improvements for calendar year 2020 onwards (2019: CMI 2017 mortality tables for both base table rates and mortality improvements). These base mortality and improvement tables have been adjusted to reflect the expected future mortality experience of mortgage contract holders, taking into account the medical and lifestyle evidence collected during the sales process and the Group’s assessment of how this experience will develop in the future. This assessment takes into consideration relevant industry and population studies, published research materials and management’s own experience. The Group has considered the possible impact of the COVID-19 pandemic on its mortality assumptions, but has kept these unchanged at 31 December 2020 save for the change in underlying reference tables to CMI 2019. Further details of the matters considered in relation to mortality assumptions at 31 December 2020 are set out in note 23(b). Property prices The COVID-19 pandemic has had a very significant impact on the UK economy during 2020, and has created uncertainty in the UK property market, which was effectively closed to transactions through a period in quarters one and two of the year. The Group’s policy is to calculate the value of a property by taking the latest valuation and indexing this value using the Office for National Statistics (“ONS”) monthly index for the property’s location. As a result of COVID-19, the publication of these indices was temporarily suspended in the early part of 2020. However, this was resumed in the second half of 2020 such that the approach in place at 31 December 2020 is unchanged from previous periods. In addition, the Group applies adjustments to allow for potential underperformance of individual properties relative to the indexed valuation. The appropriateness of this valuation basis is regularly tested on the event of redemption of mortgages. The sensitivity of loans secured by mortgages to a fall in property prices is included in the table of sensitivities below. Future property prices In the absence of a reliable long-term forward curve for UK residential property price inflation, the Group has made an assumption about future residential property price inflation based upon available market and industry data. These assumptions have been derived with reference to the long-term expectation of the UK consumer price inflation, “CPI”, plus an allowance for the expectation of house price growth above CPI (property risk premium) less a margin for a combination of risks including property dilapidation and basis risk. An additional allowance is made for the volatility of future property prices. This results in a single rate of future house price growth of 3.3% (2019: 3.8%), with a volatility assumption of 13% per annum (2019: 13%). The setting of these assumptions includes consideration of future long and short-term forecasts, the Group’s historical experience, benchmarking data, and future uncertainties including the possible impact of Brexit on the UK property market. As noted above, the Group has considered the uncertainties in relation to the property market as a result of the COVID-19 pandemic. The impact of the pandemic on long-term property prices is uncertain at the current time without consensus that the pandemic will alter the long-term prospects of the housing market. However, in light of the additional short-term uncertainty introduced and having considered the available benchmarking data available over 2020, the Group has reduced its future house price growth assumption by 0.5% at 31 December 2020 compared to previous periods. The property volatility assumption has been maintained at the same level as assumed at 31 December 2019. The sensitivity of loans secured by mortgages to changes in future property price growth, and to future property price volatility, are included in the table of sensitivities below. Voluntary redemptions Assumptions for future voluntary redemption levels are based on the Group’s recent analyses and external benchmarking. The assumed redemption rate varies by duration and product line between 0.5% and 4.1% for loans in JRL (2019: 0.5% and 4.1%) and between 0.6% and 6.8% for loans in PLACL (2019: 0.6% and 6.8%). No changes are assumed with regard to the COVID-19 experience. Liquidity premium The liquidity premium at initial recognition is set such that the fair value of each loan is equal to the face value of the loan. The liquidity premium partly reflects the illiquidity of the loan and also spreads the recognition of profit over the lifetime of the loan. The liquidity premiums are determined at an individual loan level. Once calculated, the liquidity premium remains unchanged at future valuations except when further advances are taken out. In this situation, the single liquidity premium to apply to that loan is recalculated allowing for all advances. The average liquidity premium for loans held within JRL is 2.87% (2019: 2.85%) and for loans held within PLACL is 3.20% (2019: 3.21%). The movement over the period observed in JRL is driven by new loan originations more than offsetting the sold portfolio, both having a higher liquidity premium than the average spread on the back book of business. Sensitivity analysis Reasonable possible alternative assumptions for unobservable inputs used in the valuation model 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:
Immediate property price fall -10%
Future property price growth -0.5%
Future property price volatility +1%
Maintenance expenses +10%
Base mortality -5%
Mortality improvement +0.25%
Voluntary redemptions +10%
Liquidity premium +10bps
Loans secured by residential mortgages net increase/(decrease) in fair value (£m)
(5.9) (6.6)
34.3 28.7
15.6 (136.1) 14.0 (110.4)
(103.7)
(64.5) (57.7)
(13.2) (11.7)
(93.1) (91.5)
2020 2019
(86.6)
These sensitivity factors are determined via financial models. The analysis has been prepared for a change in each variable with other assumptions remaining constant. In reality such an occurrence is unlikely due to correlation between the assumptions and other factors. It should be noted that some of these sensitivities are non-linear and larger or smaller impacts should not be simply interpolated or extrapolated from these results. For example, the impact from a 5% fall in property prices would be slightly less than half of that disclosed in the table above.
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