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FINANCIAL STATEMENTS
33 FINANCIAL AND INSURANCE RISK MANAGEMENT continued 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
2019
– 1,378.0
6.0
– –
– –
– –
– 1,384.0
Units in liquidity funds
–
–
–
137.3
137.3
Investment funds
198.1 941.3 1,254.0 3,058.4 4,293.5 156.3 486.2 10,387.8
Debt securities and other fixed income securities
– – – – – – –
– – – – – – –
1.5
63.9
39.2 38.7
– –
–
104.6 237.0
Deposits with credit institutions
0.4 152.0
45.9
Derivative financial assets
– –
– –
– –
– 7,980.5 7,980.5
Loans secured by residential mortgages Loans secured by commercial mortgages
– – – –
494.5 494.5 349.5 880.3 0.5 378.8
40.4
70.7
419.7
Other loans Reinsurance
69.5 303.3
5.5
–
–
–
25.5
25.5
Insurance and other receivables
Total
198.1 2,319.3 1,371.8 3,648.3 4,796.6 156.3 9,519.9 22,010.3
UK gilts £m
AAA £m
AA £m
A £m
BBB £m
BB or below £m
Unrated £m
Total £m
2018
Units in liquidity funds
– –
877.7
4.8
– –
– –
– –
–
882.5 182.0
Investment funds
–
13.7
168.3
Debt securities and other fixed income securities
623.4
832.1
938.3 2,916.7 3,555.9
208.2
443.7 9,518.3
Deposits with credit institutions
– – – – – – –
– – – –
–
111.0
41.6 50.8
– –
0.8
153.4
Derivative financial assets
0.3
30.1
–
81.2
Loans secured by residential mortgages Loans secured by commercial mortgages
– –
– –
– –
– 7,191.5 7,191.5
– – – –
392.3
392.3 749.1 490.4
Other loans Reinsurance
89.1
117.1 189.3
93.3
423.7
25.9
– –
294.2
– –
6.9
Insurance and other receivables
–
–
18.9
18.9
Total
623.4 1,798.9 1,263.5 3,445.3 4,072.0
208.2 8,248.3 19,659.6
The credit rating for Cash and cash equivalents assets at 31 December 2019 was between a range of AA and BB.
The carrying amount of those assets subject to credit risk represents the maximum credit risk exposure. (d) Liquidity risk The investment of Retirement Income cash in corporate bonds, gilts and lifetime mortgages, and commitments to pay policyholders and other obligations, requires liquidity risks to be taken. Liquidity risk is the risk of loss because the Group, although solvent, either does not have sufficient financial resources available to it in order to meet its obligations as they fall due, or can secure them only at excessive cost. Exposure to liquidity risk arises from: • deterioration in the external environment caused by economic shocks, regulatory changes, reputational damage, or an economic shock resulting from Brexit; • realising 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; • maintaining and servicing collateral requirements arising from the changes in market value of financial derivatives used by the Group. Liquidity risk is managed by ensuring that assets of a suitable maturity and marketability are held to meet liabilities as they fall due. The Group’s short-term liquidity requirements are predominantly funded by advance Retirement Income premium payments, investment coupon receipts, and bond principal repayments out of which contractual payments need to be made. 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. • needing to support liquidity requirements for day-to-day operations; • ensuring financial support can be provided across the Group; and
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