74 JUST GROUP PLC Annual Report and Accounts 2019
AUDIT Committee REPORT continued
Significant judgements
Approach
Action
The discount rate is set with regard to yields on supporting assets.
The Committee reviewed the discount rate derivation methodology, including allowances for risk-adjustments, using information provided by management. This included benchmarking against other industry practitioners. It was determined that the current methodology and allowance for risk-adjustments should remain unchanged from the 2018 year-end.
THE DISCOUNT RATE USED TO CALCULATE THE GROUP’S INSURANCE LIABILITIES, REINSURANCE ASSETS AND DEPOSITS FROM REINSURERS
The return on bond assets is adjusted for valuation purposes to allow for credit risk on each bond by considering the “spread” – the difference between the gross redemption yield and the yield on an equivalent duration “risk-free” reference instrument. The Group sets the credit risk as a fixed minimum component plus a percentage of the spread, calibrated significantly in excess of historic default rates which are provided by the leading rating agencies. The yield on lifetime mortgage assets is adjusted to allow for the risks associated with these assets – namely, the potential shortfall resulting from the no-negative equity guarantee (“NNEG”). The length of time the Group’s Retirement Income customers and Lifetime Mortgage customers will live, and therefore the projected cash flows for Retirement Income and Lifetime Mortgage assets, are key assumptions when valuing the Group’s insurance liabilities and Lifetime Mortgages. The values of the Group’s Lifetime Mortgages are reliant on a range of assumptions, of which the key ones are future house price growth and house price volatility. These assumptions determine the expected shortfall on redemption in respect of the NNEG which is given to all lifetime mortgage customers. Small changes in these assumptions (particularly future house price volatility) can have a significant impact on the overall asset valuation.
Longevity experience is a key area of focus for the Board and the Committee, and the Board receives regular reports on the actual against 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 Committee reviewed the longevity assumptions and confirmed they should remain unchanged from 2018 year-end. The Committee reviewed both these key assumptions including detailed analyses from management. It was determined that the assumptions for property price future inflation and property price volatility should remain unchanged from the 2018 year-end. This included consideration of the potential impact of the UK’s withdrawal from the European Union on UK property prices. The Committee reviewed, and challenged as appropriate, the detailed analysis and agreed with the proposals. In addition to the internal analysis management commissioned two independent external firms to produce long-term forecasts for future property price growth to support the assumptions made which the Committee reviewed and helped support their decision making. During 2019 management also assessed the appropriateness of using the ONS index to determine property prices and on reviewing the analysis the committee concluded that it was appropriate to continue to use the ONS index to determine property prices at the valuation date. 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 2019 accounts the Committee considered whether any of the investment in subsidiaries should be impaired. The shortfall between the Group’s market capitalisation and IFRS net assets was an indicator of impairment, and after reviewing the recoverable amounts for the Group’s investments in subsidiaries, an impairment of £96m was recognised in respect of the investment relating to PLACL.
LONGEVITY ASSUMPTIONS
THE PROPERTY ASSUMPTIONS USED TO VALUE THE GROUP’S LIFETIME MORTGAGES
Management use the Office of National Statistics (the “ONS”) index to determine current property prices. The ONS index uses publicly available sales information.
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.
INVESTMENT IN SUBSIDIARIES
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