30 JUST GROUP PLC Annual Report and Accounts 2020
Business review continued
Financial investments During the last 12 months, financial investments increased by £1.7bn to £23.3bn (2019: £21.6bn). The increase is mainly due to the effect of decreases in risk-free rates during the period, somewhat offset by credit spread widening, but also as a result of investing the Group’s new business premiums. The credit quality of the corporate bond portfolio remains resilient, with 50% of the Group’s corporate bond and gilts portfolio rated A or above (2019: 53%) and continues to be well balanced across a range of industry sectors and geographies. Given the macroeconomic uncertainty, credit rating agencies have proactively taken a cautious approach, and have been slower to restore corporates to a level our fundamental credit analysis supports. The Group has limited exposure to those sectors that are most sensitive to structural change, such as Energy, Auto manufacturers and Consumer (cyclical), while the BBB-rated bonds are weighted towards the sectors least at risk from uncertain macro conditions post COVID-19/Brexit, including Utilities, Communications and Technology, and Infrastructure. Over the past year, the Group actively managed its portfolio and sold £639m of bonds, including those that were most exposed to downgrade. We constantly review the sector allocations, and within those, take the opportunity to trade out of individual names to stay ahead of credit rating agency actions, whilst maintaining diversification. From a sector perspective, the main rotational difference during 2020 was an increase in utilities, infrastructure and commercial mortgages and reduced exposure to banks and basic materials. At 31 December 2020, the Group’s holding in liquidity funds was in line with expectations, as the Group invested its excess year end cash balances into corporate bonds and other fixed income assets, at attractive credit spreads. Combined with an opportunity to improve duration matching in 2020 following the LTM notes restructuring in Q4 2019, new investments in alternative asset classes and proactive management of the Group’s bond portfolio led to a net positive contribution of £46m to Solvency II surplus.
The loan-to-value ratio of the mortgage portfolio at 31 December 2020 was 36.1% (2019: 34.3%). The percentage of lifetime mortgages decreased by 1.4 percentage points to 35.5% of financial investments, following the sale of a £540m portfolio of mortgages to a third party in December 2020. This sale was offset by an increase in the valuation of the remaining LTMs relative to bonds, due to the fall in interest rates as LTMs are typically longer duration. Given the uncertain macro environment, and volatile market conditions, the Group prudently managed its balance sheet and exposure by increasing various hedges, which led to an increase in derivatives and collateral. The following table provides a breakdown by credit rating of financial investments.
31 December 2020 £m
31 December 2020 %
31 December 2019 £m
31 December 2019 %
2,197.3 1,988.8 4,135.5 6,023.4
9.4 8.5
AAA1
2,440.0 1,777.3 3,709.8 5,290.7
11.3
AA1 and gilts
8.2
17.8 25.9
A
17.2 24.5
BBB
408.4 255.3
1.8 1.1
BB or below
194.8 212.9
0.9 1.0
Unrated/Other2
8,261.1
35.5
Lifetime mortgages
7,980.5 21,606.0
36.9
Total
23,269.8 100.0
100.0
1 Includes units held in liquidity funds. 2 Includes internally rated assets and own-rated assets. December 2019 disclosures for privately rated assets have been updated and are shown within the appropriate ratings bucket, where such a rating exists. Previously, these privately rated assets were classified as “Unrated/Other”.
The sector analysis of the Group’s financial investments portfolio at 31 December 2020 is shown below and continues to be well diversified across a variety of industry sectors. 31 December 2020 £m 31 December 2020 % 31 December 2019 £m 31 December 2019 % Basic materials 199.9 0.9 329.8 1.5 Communications and technology 1,188.9 5.1 1,148.2 5.3 Auto manufacturers 385.0 1.7 446.6 2.1 Consumer (staples including healthcare) 976.6 4.2 927.1 4.3 Consumer (cyclical) 112.8 0.5 194.9 0.9 Energy 462.7 2.0 422.7 2.0 Banks 1,422.5 6.1 1,859.7 8.5 Insurance 824.9 3.5 724.2 3.4 Financial – other 462.5 2.0 426.6 2.0 Real estate including REITs 771.3 3.3 450.2 2.1 Government 1,340.4 5.8 1,128.9 5.2 Industrial 839.6 3.6 628.6 2.9 Utilities 2,029.9 8.7 1,708.2 7.9 Commercial mortgages 707.0 3.0 494.5 2.3 Infrastructure 1,220.5 5.2 892.9 4.1 Other 38.0 0.2 76.5 0.4 Corporate/government bond total 12,982.5 55.8 11,859.6 54.9 Lifetime mortgages 8,261.1 35.5 7,980.5 36.9 Liquidity funds 1,128.5 4.8 1,384.0 6.4 Derivatives and collateral 897.7 3.9 381.9 1.8 Total 23,269.8 100.0 21,606.0 100.0
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