212 | Just Group PLC | Annual Report and Accounts 2023
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS continued
34. FINANCIAL AND INSURANCE RISK MANAGEMENT continued (iii) Significant reinsurance collateral arrangements The quota share reinsurance treaties have deposit back or other collateral arrangements to remove the majority of the reinsurer credit risk, as described below. The majority of longevity swaps also have collateral arrangements, for the same purpose. The Group has received deposits from reinsurers that are recognised as part of the cash flows from the reinsurance contract and are included in the measurement of reinsurance balances within note 26. Whereas certain reinsurance arrangements give rise to deposits from reinsurers that are not included in the Consolidated statement of financial position of the Group as described below: • The Group has an agreement with two reinsurers whereby financial assets arising from the payment of reinsurance premiums, less the repayment of claims, in relation to specific treaties, are legally and physically deposited back with the Group. Although the funds are controlled by the Group, no future benefits accrue to the Group as any returns on the deposits are paid to reinsurers. Consequently, the deposits are not recognised as assets of the Group and the investment income they produce does not accrue to the Group. • The Group has an agreement with one reinsurer whereby assets equal to the reinsurer’s full obligation under the treaty are deposited into a ring-fenced collateral account. The Group has first claim over these assets should the reinsurer default, but as the Group has no control over these funds and does not accrue any future benefit, this fund is not recognised as an asset of the Group. • The Group has an agreement with one reinsurer whereby assets equal to the reinsurer’s full obligation under the treaty are either deposited into a ring-fenced collateral account of corporate bonds, or held under a funds withheld structure of Lifetime Mortgages. The latter are legally and physically held by the Group. Although the funds are managed by the Group (as the Group controls the investment of the asset), no future benefits accrue to the Group as returns on the assets are paid to reinsurers. Consequently, the lifetime mortgages are not recognised as assets of the Group and the investment income they produce does not accrue to the Group. The reinsurer also deposits cash into a bank account held legally by the Group to fund future lifetime mortgages but as this cash is ring-fenced for issued lifetime mortgage quotes agreed by the reinsurer, it is also not recognised as an asset by the Group. • The Group has agreements with two reinsurers whereby assets equal to the reinsurers’ full obligation under the treaties are deposited into ring-fenced collateral accounts of notes/shares issued through the dedicated Investment vehicles. The investments in these vehicles are restricted only for the purpose of these reinsurance agreements. Consequently, the collateralised assets are not recognised as assets of the Group and the investment income they produce does not accrue to the Group. The reinsurers also deposit cash into a bank account held legally by the Group to fund reinsurance claims but as this cash is ring-fenced for the reinsurers purpose, it is also not recognised as an asset by the Group. 2023 £m 2022 £m Deposits held in trust 787 569 The collateral that is not recognised in the Consolidated statement of financial position does not represent a cash flow within the IFRS 17 contract boundaries. The Group is exposed to a minimal amount of reinsurance counterparty default risk in respect of reinsurance arrangements and calculates an allowance for counterparty default in the reinsurance future cash flows accordingly. At 31 December 2023, this liability totalled £8m (2022: £2m). (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. 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 is 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 reversed 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. During 2022 the Group replaced the existing revolving credit facility with a new and undrawn revolving credit facility of up to £300m for general corporate and working capital purposes available until 13 June 2025.
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