198 | Just Group PLC | Annual Report and Accounts 2024
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS continued
28. FINANCIAL AND INSURANCE RISK MANAGEMENT continued (ii) Property risk
The Group’s exposure to property risk arises from the provision of lifetime mortgages which creates an exposure to the UK residential property market. A substantial decline or sustained underperformance in UK residential property prices, against which the Group’s lifetime mortgages are secured, could result in the mortgage debt at the date of redemption exceeding the proceeds from the sale of the property. Demand for lifetime mortgage products may also be impacted by a fall in property prices. It may diminish consumers’ propensity to borrow and reduce the amount they are able to borrow due to reductions in property values. The risk is managed by controlling the loan value as a proportion of the property’s value at outset and obtaining independent third party valuations on each property before initial mortgages are advanced. Lifetime mortgage contracts are also monitored through dilapidation reviews. House prices are monitored and the impact of exposure to adverse house prices (both regionally and nationally) is regularly reviewed. Further mitigation is through management of the volume of Lifetime Mortgages, including disposals, in the portfolio in line with the Group’s LTM backing ratio target, and the establishment of the NNEG hedges. A sensitivity analysis of the impact of residential property price movements is included in note 16(d)(vi) and note 22(h). The Group is also exposed to commercial property risk indirectly through the investment in loans secured by commercial mortgages. Mitigation of such risk is covered by the credit risk section below. (iii) Inflation risk Inflation risk is the risk of change in the value of assets or liabilities arising from changes in actual or expected inflation or in the volatility of inflation. Exposure to long-term inflation occurs in relation to the Group’s own management expenses and its writing of index-linked Retirement Income contracts. The Group continues to manage inflation risk through the application of disciplined cost control over management expenses and matching inflation-linked assets including inflation swaps, and inflation-linked liabilities for the long-term inflation risk. (iv) Currency risk Currency risk arises from changes in foreign exchange rates which affect the value of assets denominated in foreign currencies. Exposure to currency risk could arise from the Group’s investment in non-sterling denominated assets. The Group invests in fixed income securities denominated in US dollars and other foreign currencies for its financial asset portfolio. All material Group liabilities are in sterling. As the Group does not wish to introduce foreign exchange risk into its investment portfolio, derivative or quasi-derivative contracts are entered into to mitigate the foreign exchange exposure as far as possible. The Group invests in non-sterling denominated assets; any foreign exchange exposure is managed through foreign currency swaps in order to minimise this risk exposure. (c) Credit risk Credit risk arises if another party fails to perform its financial obligations to the Group, including failure to perform them in a timely manner, and is managed through credit concentration limits and collateral arrangements. Climate-related matters may affect the ability of counterparties to meet their obligations in the future, see further information in the Strategic report Sustainability: TCFD report. Credit risk exposures arise from: • Holding fixed income investments. The risk of default (where the counterparty fails to pay back the capital and/or interest on a corporate bond) is mitigated by investing only in higher quality or investment grade assets. Concentration of credit risk exposures is managed by placing limits on exposures to individual counterparties, sectors and geographic areas. The Group holds a portion of its fixed income investments as loans secured against a variety of types of collateral including but not limited to commercial real estate and commercial ground rents as well as residential ground rents. • Counterparties in derivative contracts. The Group uses financial instruments to mitigate interest rate, inflation and currency risk exposures. It therefore has credit exposure to various counterparties through which it transacts these instruments, although this is usually mitigated by collateral arrangements (see note 15). • Reinsurance treaties. Reinsurance is used to manage longevity risk and to fund new business but, as a consequence, credit risk exposure arises should a reinsurer fail to meet its claim repayment obligations. Credit risk on reinsurance balances is mitigated by the reinsurer depositing back more than 100% of premiums ceded under the reinsurance agreement and/or through robust collateral arrangements. • Reinsurance concentration risk: to reduce risk, the Group ensures it trades with a wide range of counterparties to diversify exposures. • Cash balances. Credit risk on cash assets is managed by imposing restrictions over the credit ratings of third parties with whom cash is deposited, as well as the balances permitted. • Credit risk for lifetime mortgages secured on residential property has been considered within “property risk” above.
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