Just group PLC | Annual Report and accounts 2022
GROUP AUDIT COMMITTEE REPORT continued
SIGNIFICANT JUDGEMENTS
APPROACH
ACTION
Longevity experience is a key area of focus for the Board and the Committee, and the Board receives regular reports on the actual against the expected number of deaths and the likely causes, by condition, of any positive or negative divergence as well as the output of industry studies. The expected impact on future mortality rates over the short and long term was considered. Mortality experience has been volatile and significantly higher in aggregate than expected since March 2020 as a result of the COVID-19 pandemic. Analysis indicates that the pandemic will have enduring, direct and indirect influences on future mortality experience. It was therefore considered appropriate to make explicit allowance in the Group’s assumptions for the impact of the pandemic on future mortality experience. The Committee considered the deep dive review carried out on the methodology and concluded it was appropriate. The Committee reviewed the key assumptions including detailed analyses from management. Whilst there is additional short term uncertainty over property valuation, there is no clear indication of longer term effects. It was determined that the assumptions for property price volatility and future house price growth should remain unchanged from the 2021 year end. In 2022, the Group changed valuation of illiquid assets to be based on internal models following the introduction of a new treasury management system. Previously, valuations were from third party asset managers. The Committee reviewed management’s approach for commercial mortgages and ground rents. A key consideration of the valuation is the derivation of the spread over risk free rates with limited market data available and significant illiquidity in these asset classes. The Committee approved management’s approach. The carrying value of this asset is assessed through the consideration of the in-force and new business cash flows of the underlying subsidiary companies. The Committee reviews assessments, the recoverability of the balances reported and appropriateness of accounting policies, as part of its work on financial reporting. As part of the preparation of the 2022 Annual Report and Accounts, the Committee considered whether any of the investment in subsidiaries should be impaired. After reviewing the recoverable amounts for the Group’s investments in subsidiaries, the Committee agreed with management’s assessment that no impairment was required for any investments in subsidiaries. The Committee reviewed the key credit default assumptions used for corporate bonds, LTMs and other illiquid classes, which were consistent with 2021 reporting, and concluded that they should remain unchanged.
The length of time the Group’s Retirement Income customers and Lifetime Mortgage (“LTM”) customers will live, and therefore the projected cash flows for Retirement Income and LTM assets, are key assumptions when valuing the Group’s insurance liabilities and LTMs.
LONGEVITY ASSUMPTIONS
The valuation of loans secured by residential mortgages is determined using internal models which project future cash flows expected to arise from each loan. Future cash flows allow for assumptions relating to future expenses, future mortality experience, voluntary redemptions and repayment shortfalls on redemption of the mortgages due to the no-negative equity guarantee (“NNEG”) taking into account assumed future house price growth. The asset is valued at loan amount at issuance and assumes the spread above risk free rate calculated as at that point in time remains fixed for the lifetime of the loan. The valuation of level 3 mark to model investments include unobservable inputs. They can involve significant judgement and utilise complex models. The level of valuation uncertainty differs by asset class and can be influenced by the illiquidity of the asset, the nature of the unobservable inputs and the complexity of the valuation model required. The largest illiquid asset for the Group is LTMs and is disclosed above. Just Group plc’s investment in subsidiary undertakings is a significant asset and underpins the net equity reported by Just Group plc in its individual Parent Company financial statements. The Group’s policy is to hold investments at cost and assess annually for indicators of impairment. Credit default assumptions are used to determine the valuation rate of interest used in the calculation of insurance contract liabilities. The Group’s asset portfolio includes a material amount of illiquid assets. For corporate bonds, credit default assumptions are calculated taking into account both historical default experience for each rating class and the current spread on the asset. For LTMs it is captured using the expected NNEG shortfalls. For other illiquid assets including infrastructure and ground rents, credit default assumptions are set to a proportion of the equivalent corporate bond default allowance. The 2022 financial statements include quantitative and qualitative disclosures of transitioning to the new standard. IFRS 17 represents a material change in accounting for the Group in 2023 and accordingly the estimated impact on transition has been disclosed in note 1 to the financial statements.
LIFETIME MORTGAGE VALUATION
VALUATION OF COMPLEX INVESTMENTS
INVESTMENT IN SUBSIDIARIES
CREDIT DEFAULT ASSUMPTIONS
As noted under the heading ‘Accounting Standards’ the Committee held several sessions during the year on IFRS 17 training and reviewing proposed methodologies. The Committee reviewed the proposed disclosures’ compliance with accounting standards (IAS 8). The Committee also considered the appropriateness of the qualitative and quantitative disclosures and the range provided for the impact on the opening balance sheet in the context of the progress of the implementation project.
IFRS 17 INSURANCE CONTRACTS NEW ACCOUNTING POLICY DISCLOSURES
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