STRATEGIC REPORT
GOVERNANCE
financial statements
33 FINANCIAL AND INSURANCE RISK MANAGEMENT continued (d) Liquidity risk Liquidity risk is the risk of loss because the Group, although solvent, does not have sufficient financial resources available to it in order to meet its obligations as they fall due. The investment of cash received from Retirement Income sales into corporate bonds, gilts and lifetime mortgages, and commitments to pay policyholders and other obligations, requires liquidity risks to be taken. 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; and • ensuring financial support can be provided across the Group. Liquidity risk is managed by holding assets of a suitable maturity 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 Retirement Income liabilities can be reasonably estimated and liquidity can be arranged to meet this expected outflow through asset-liability matching and new business premiums. 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. Policyholders are able to redeem mortgages, albeit at a cost. The mortgage assets are considered illiquid, as they are not readily saleable due to the uncertainty about their value and the lack of a market in which to trade them individually. 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. Cash flow forecasts include an assessment of the impact of a 1-in-200 year event on the Group’s long term liquidity and the minimum cash and cash equivalent levels required to cover enhanced stresses. Derivative stresses have been revised to take into account the market volatility caused by COVID-19, and focus on the worst observed movements over the last 40 years, in shorter periods from one day up to and including one month. During the year 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. Interest is payable on any drawdown loans at a rate of SONIA plus a margin of between 1.00% and 1.50% per annum depending on the Group’s unsecured issuer rating provided by any of Fitch, S&P and Moody’s. 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
More than five years £m
One to five years £m
2022
7.8
30.7
0.7
Investment contract liabilities
65.0 28.3
559.8
855.3
Subordinated debt
324.5 2,651.3
Derivative financial liabilities
623.1 182.0
–
–
Obligations for repayment of cash collateral received
651.3 1,772.3
Deposits received from reinsurers
Within one year or payable on demand £m
More than five years £m
One to five years £m
2021
Investment contract liabilities
10.2 71.8
21.1
1.5
Subordinated debt
684.2
899.2 344.6
Derivative financial liabilities
7.3
41.9
Obligations for repayment of cash collateral received
326.2 192.0
–
–
Deposits received from reinsurers
679.8
1,924.0
179
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