STRATEGIC REPORT
GOVERNANCE
financial statements
33 FINANCIAL AND INSURANCE RISK MANAGEMENT continued (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 index-linked Retirement Income contracts. Its impact is managed through the application of disciplined cost control over management expenses and through matching inflation-linked assets 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. (c) Credit risk Credit risk arises if another party fails to perform its financial obligations to the Group, including failing to perform them in a timely manner. 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. • Counterparties in derivative contracts. The Group uses financial instruments to mitigate interest rate 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 28). • 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. • Cash balances – credit risk on cash assets is managed by imposing restrictions over the credit ratings of third parties with whom cash is deposited. • Credit risk for loans secured by residential mortgages has been considered within “property risk” above. The following table provides information regarding the credit risk exposure for financial assets of the Group, which are neither past due nor impaired at 31 December:
UK gilts £m
AAA £m
AA £m
A £m
BBB £m
BB or below £m
Unrated £m
Total £m
2022
– –
1,169.8
– –
– –
– –
4.6
–
1,174.4
Units in liquidity funds
–
–
421.0
421.0
Investment funds
306.0
698.2 1,582.5 3,262.6 5,120.6
400.6
– 11,370.5
Debt securities and other fixed income securities
– – – – – – – – –
– – – –
99.4
773.0
20.0
15.1
0.1
907.6
Deposits with credit institutions
– – –
– – –
– – –
– – –
5,305.9 5,305.9
Loans secured by residential mortgages Loans secured by commercial mortgages
583.7 246.9
583.7 246.9
Loans secured by ground rents
71.2
97.4
141.7
733.9
12.2 22.3
–
1,056.4
Infrastructure loans
– – – –
– –
–
–
111.9
134.2
Other loans
1,669.9
606.7
– – –
–
2,276.6
Derivative financial assets
126.9
197.1
3.7
204.4 322.8
532.1 322.8
Reinsurance
–
–
–
Insurance and other receivables
Total
306.0 1,939.2 1,906.2 6,044.3 6,484.9
454.8 7,196.7 24,332.1
177
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