Just group PLC | Annual Report and accounts 2022
BUSINESS REVIEW continued
Other Illiquid assets and Environmental, Social and Governance investing To achieve its optimal mix of assets backing new business, and to further diversify its investments, the Group originates other illiquid assets including infrastructure, real estate investments and private placements. Income producing real estate investments such as ground rents and income strips are typically much longer duration and hence the cash flow profile is very beneficial, especially to match DB deferred liabilities. To date, Just has invested £3.3bn in other illiquid assets, representing 16% of the investments portfolio (excluding derivatives and collateral, 31 December 2021: 13%), as we make continued progress towards our 25% medium term target, driven by new business backing. We have invested in our in-house credit team as we have broadened our illiquid asset origination, and we 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 upcoming Solvency II reforms, when implemented, will increase the investment opportunities available to us to provide long term capital that helps to underpin UK economic growth and productivity. In particular, widening the eligibility criteria for matching adjustment assets to include assets with a construction phase where the commencement of cashflows is not exactly certain is a very welcome development. We are pleased that these reforms can provide support to insurance firms to fund the government’s various agendas including increased investment in infrastructure, science and research and decarbonising the economy. Many of the other illiquids are invested in a range of ESG assets including renewable energy, social housing and local authority loans. During 2022, we invested a further £279m in eligible green and social assets (2021: £146m), and have now completed our total £575m green and social asset allocation commitment arising from the green and sustainability bonds issued in October 2020 and September 2021 respectively. The allocations were spread across 23 green and social investments comprising renewable energy, social housing and green buildings. The Green/Sustainability bond full allocation report is available on www.justgroupplc.co.uk/investors/esg . The following table provides a breakdown by credit rating of financial investments, including privately rated investments allocated to the appropriate rating.
Similar to 2021, credit rating agencies continue to maintain a cautious approach. We continue to position the portfolio with a defensive bias, and in 2022 have experienced ratings stability as 9% of the Group’s bond portfolio was upgraded, offset by 8% being downgraded. The Group continues to have very limited exposure to those sectors that are most sensitive to structural change or macroeconomic conditions, such as auto manufacturers, consumer (cyclical), basic materials, energy and real estate (including REITs). The BBB-rated bonds are weighted towards the most defensive sectors including utilities, communications & technology, and infrastructure. Reflecting this bias, the Group has further increased its infrastructure allocation and selectively added to utilities and commercial ground rent & income strips investments, with some rotational changes as in particular we reduced BBB exposure to communications & technology, industrials, auto manufacturers and energy. Following a reclassification, “Financial – other” now includes short and medium term illiquid assets including SME lending, commodity trade finance and others. During 2022, we originated £1,031m of long term other illiquid assets (2021: £615m), via our roster of specialist asset managers, in addition to funding £519m of lifetime mortgages (2021: £488m). Our investments model demonstrated its flexibility and capabilities as we achieved our target illiquid new business backing ratio of c.50%. We have the flexibility to adjust the asset class allocations, and in 2022, increased our origination of private placements as credit spreads widened, mirroring the public markets. This flexibility enables us to support new business pricing and optimise back book return whilst maintaining strict credit underwriting. Entering 2022, Government investments were elevated as the Group temporarily invested excess cash, which was further added to by the third LTM portfolio sale in February 2022. Excess cash and gilts were recycled into other corporate bonds and illiquid assets during 2022 as opportunities arose. At year end, the Group had ample liquidity. We continue to prudently manage the balance sheet by hedging all foreign exchange and inflation exposure, while managing interest rate, credit and NNEG risk. As previously mentioned, and reflecting the strengthened capital position of the Group, the interest rate hedging was neutralised during the second half of the year. The effect of the hedging was to protect the solvency ratio, but caused economic losses when rates rose and profits when rates fell. Without hedging, interest rate movements will impact the solvency balance sheet, but not IFRS and therefore, we expect that, in future, the IFRS result will be more closely aligned to the operating performance of the business. The loan-to-value ratio of the mortgage portfolio was 37.3% (31 December 2021: 36.1%), reflecting continued strength and resilience across our geographically diversified portfolio, which offsets the interest roll-up. Lifetime mortgages at £5.3bn represent 26% of the investments portfolio and reflects completion of the third and final LTM portfolio sale in February 2022. In total, the Group has disposed of £1.6bn of lifetime mortgages as part of our objective to reduce the sensitivity of the capital position to house price movements, which at a 12% capital coverage ratio impact for an immediate 10% fall in UK house prices is at a level we are comfortable with. Further portfolio sales are not envisaged as the property sensitivity is expected to be contained within risk appetite through maintaining NNEG hedges on c.20% of the portfolio and a new business backing ratio of 10-15%.
31 December 2022 %
31 December 2022 £m
31 December 2021 %
31 December 2021 £m
1,939 1,986 5,968 6,500
8 8
AAA1
2,448 3,194 4,384 6,500
10 13 18 26
AA1 and gilts
25 28
A2
BBB
455
2 6
BB or below
388 414
1 2
1,363 5,306 23,517
Unrated/other
23
Lifetime mortgages
7,423
30
100
Total 2
24,751
100
1 Includes units held in liquidity funds. 2 Includes investment in trust which holds ground rent generating assets which are included in investment properties in the IFRS consolidated statement of financial position.
30
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