Strategic Report Governance
Financial Statements
201
(d) Liquidity risk Liquidity risk is the risk of loss because the Group does not have sufficient suitable assets available to meet its financial obligations as they fall due. The Group is exposed to liquidity risk as part of its business model and its desire to manage its exposure to inflation, interest rates and currency risks using derivatives. Exposure to liquidity risk arises from: • maintaining and servicing collateral requirements arising from the changes in market value of financial derivatives used by the Group; • needing to realise assets to meet liabilities during stressed market conditions; • increasing cash flow volatility in the short term giving rise to mismatches between cash flows from assets and requirements from liabilities; • needing to support liquidity requirements for day-to-day operations; • higher than expected funding requirements on existing LTM contracts, or lower redemptions than expected; and • ensuring financial support can be provided across the Group. Liquidity risk continues to be managed by holding assets of a suitable maturity, collateral eligibility and marketability to meet liabilities as they fall due. The Group’s short-term liquidity requirements to meet annuity payments are predominantly funded by investment coupon receipts, and bond principal repayments. There are significant barriers for policyholders to withdraw funds that have already been paid to the Group in the form of premiums. Cash outflows associated with insurance liabilities including any pension commencement lump sum payments can be reasonably estimated and liquidity can be arranged to meet this expected outflow through asset-liability matching. The cash flow characteristics of the Lifetime Mortgages are reverse when compared with Retirement Income products, with cash flows effectively representing an advance payment, which is eventually funded by repayment of principal plus accrued interest. Borrowers are able to redeem mortgages, albeit with payment of an early redemption charge. The mortgage assets themselves are considered illiquid, as they are not readily saleable due to the complexity of valuation and the lack of a market in which to trade them. Cash flow forecasts over the short, medium and long term are regularly prepared to predict and monitor liquidity levels in line with limits set on the minimum amount of liquid assets required. Short-term stresses, periods from one day up to and including one month, take into account market volatility and focus on the worst observed movements over the last 40 years. Cash flow forecasts include an assessment of the impact to a range of scenarios including 1-in-200 shocks on the Group’s long-term liquidity and the minimum cash and cash equivalent levels required to cover enhanced stresses. The Group increased its undrawn Revolving Credit Facility during the period from £300m to £400m for general corporate and working capital purposes. Interest is payable on any drawn amounts at a rate of SONIA plus a margin of between 0.81% and 1.94% per annum depending on the Group’s ratio of net debt to net assets and the outcomes of certain sustainability performance targets. The table below summarises the maturity profile of the financial liabilities, including both principal and interest payments, of the Group based on remaining undiscounted contractual obligations:
Within one year or payable on demand £m
One to five years £m
Five to ten years £m
Over ten years £m
Total £m
31 December 2024
Investment contract liabilities
4
50
–
–
54
Subordinated debt
209
439
138
428
1,214
Derivative financial liabilities
3,142 3,357
9,393
7,031
19,452
39,018
Repurchase obligation
626
–
–
3,983
Obligations for repayment of cash collateral received
662 327
– –
– –
– –
662 327
Other payables
Within one year or payable on demand £m
One to five years £m
Five to ten years £m
Over ten years £m
Total £m
31 December 2023
Investment contract liabilities
7
38
–
– –
45
Subordinated debt
47
598
285
930
Derivative financial liabilities
1,463 2,178
4,273
5,725
17,642
29,103
Repurchase obligation
478
–
–
2,656
Obligations for repayment of cash collateral received
532
– –
– –
– –
532
Other payables
11
11
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