STRATEGIC REPORT
35
STRATEGIC OBJECTIVES
RISK OUTLOOK
No Change/Stable Increasing Decreasing
1.
2.
3.
4.
5.
IMPROVE OUR CAPITAL POSITION
TRANSFORM HOW WE WORK
GET CLOSER TO OUR CUSTOMERS & PARTNERS
GENERATE GROWTH IN NEW MARKETS
BE PROUD TO WORK AT JUST
DESCRIPTION AND IMPACT
MITIGATION AND MANAGEMENT ACTION
RISK
The premiums paid by the Group’s customers are invested to enable future benefits to be paid when expected with a high degree of certainty. The economic environment and financial market conditions have a significant influence on the value of assets and liabilities and on the income the Group receives. A further deterioration in the economic environment (resulting, for example, from further outbreaks of COVID-19) could impact on the availability and attractiveness of certain securities and could increase the risk of credit downgrades and defaults in our corporate bond portfolio. There remains a lack of clarity regarding the UK’s future trading arrangements with the EU for financial services which could negatively impact the UK economy. The Group remains exposed to impacts that the UK’s withdrawal has on the UK economy as a whole, including residential house prices, which could stagnate or fall. A fall in residential property values, as a result of the COVID-19 pandemic for example, could reduce the amounts received from equity release redemptions and may also affect the relative attractiveness of the equity release product to customers. The regulatory capital needed to support the possible shortfall on the redemption of equity release mortgages also increases if property values drop. Conversely, significant future rises in property values could increase the incidence of early mortgage redemptions, leading to an earlier receipt of anticipated cash flows with the consequential reinvestment risk. It is possible that the Bank of England could employ negative interest rates as a policy tool to stimulate the economy. It is not clear what effect this would have on customer behaviour or on the market for credit investments or lifetime mortgages. Most defined benefit pension schemes link member benefits to inflation through indexation. As the Group’s defined benefit de-risking business volumes grow, its exposure to inflation risk increases. Market risks may affect the liquidity position of the Group by, for example, having to realise assets to meet liabilities during stressed market conditions or to service collateral requirements due to the changes in market value of financial derivatives. A lack of market liquidity is also a risk to any need that the Group may have to raise capital.
Economic conditions are actively monitored and alternative scenarios modelled to better understand the potential impacts of significant economic changes on the amount of capital required to be held to cover risks, and to inform management action plans. The Group’s strategy is to buy and hold high-quality, lower-risk assets in its investment portfolio to ensure that it has sufficient income to meet outgoings as they fall due. Portfolio credit risk is managed by a combination of Just’s internal investment team and specialist external fund managers, overseen by Just’s own credit specialists, executing a diversified investment strategy in investment grade assets within counterparty limits. In a low interest rate environment, improved returns are sought by diversifying the types, geographies and industry sectors and classes of investment assets. Such diversification creates exposures to foreign exchange risk, which is controlled using derivative instruments. Derivative instruments are also used to reduce exposures to interest rate volatility. The credit exposure to the counterparties with whomwe transact these instruments is mitigated by collateral arrangements. While the Group’s capital models accommodate negative interest rates, there is no historical data to validate their behaviour in such an environment. The Group’s exposure to inflation risk through the defined benefit de-risking business is managed with inflation hedges. Liquidity risk is managed by ensuring that assets of a suitable maturity and marketability are held to meet liabilities as they fall due. Sufficient liquid assets are maintained so the Group can readily access the cash it needs should business cash inflows unexpectedly reduce. There can be some short-term volatility in the Group’s cash flows, which is a consequence of Just’s derivative hedging. Regular cash flow forecasts predict liquidity levels over both the short term and long term and stress tests help us understand any potential periods of strain. Following the extreme market volatility in March and April 2020, Just amended its ultra (one month or less) short-term liquidity requirements to be cash and cash equivalents only, and to keep reserves to cover the worst stresses that have occurred. The Group’s liquidity requirements have been met over the past year and forecasting confirms that this position can reasonably be expected to continue for both investments and business operations.
RISK B RISKS FROM
THE ECONOMIC ENVIRONMENT
Strategic objective
2. 3. 4. 5. 1.
Change in the year
Risk outlook
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