138 JUST GROUP PLC Annual Report and Accounts 2019
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS CONTINUED
16 FAIR VALUE continued 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 weighted-average liquidity premium for loans held within JRL is 2.85% (2018: 2.75%) and for loans held within PLACL is 3.21% (2018: 3.20%). The movement over the period observed in JRL is driven by new loan originations 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:
Future property price volatility +1%
Future property price growth -0.5%
Immediate property price fall -10%
Liquidity premium +10bps
Voluntary redemptions +10%
Mortality improvement +0.25%
Base mortality -5%
Maintenance expenses +10%
Loans secured by residential mortgages net increase/(decrease) in fair value (£m)
2019 2018
(6.6) (7.1)
28.7 22.4
14.0 (110.4)
(86.6) (79.4)
(57.7) (53.2)
(11.7) (15.1)
(91.5) (86.0)
10.9
(97.1)
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 also be noted that these sensitivities are non-linear and larger or smaller impacts cannot be interpolated or extrapolated from these results. The sensitivities above only consider the impact of the change in these assumptions on the fair value of the asset. Some of these sensitivities would also impact the yield on this asset and hence the valuation discount rates used to determine liabilities. For these sensitivities, the impact on the value of insurance liabilities and hence profit before tax is included in note 22(e). Other limitations in the above sensitivity analysis include the use of hypothetical market movements to demonstrate potential risk that only represents the Group’s view of reasonably possible near-termmarket changes that cannot be predicted with any certainty. Loans secured by commercial mortgages Principal assumption underlying the calculation of loans secured by commercial mortgages Redemption and defaults The redemption and default assumptions used in the valuation of loans secured by commercial mortgages are similar to the Group’s bond portfolio. 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. Interest rates are the most significant assumption applied in calculating the fair value of the loans secured by commercial mortgages. The Group has estimated the impact on fair value to changes to these inputs as follows:
Loans secured by commercial mortgages net increase/(decrease) in fair value (£m)
Interest rates +100bps
2019 2018
(22.9) (19.8)
Other loans Other loans classified as Level 3 are infrastructure loans and commodity trade finance loans. These are valued using discounted cash flow analysis using prudent assumptions based on the repayment of the underlying loan. Principal assumptions underlying the calculation of other loans classified as Level 3 Redemption and defaults The redemption and default assumptions used in the valuation of Level 3 loans are similar to the Group’s bond portfolio. 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 sensitivity of the valuation of other loans to the default assumption is determined by reference to movement in credit spreads. The Group has estimated the impact on fair value to changes to these inputs as follows:
Credit spreads +100bps
Other loans net increase/(decrease) in fair value (£m)
2019 2018
(75.7) (73.4)
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