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| Name | Symbol | Market | Type |
|---|---|---|---|
| Scottish Wid 43 | LSE:40VY | London | Bond |
| Price Change | % Change | Price | Bid Price | Offer Price | High Price | Low Price | Open Price | Traded | Last Trade | |
|---|---|---|---|---|---|---|---|---|---|---|
| 0.00 | 0.00% | 0 | - |
From Dec 2019 to Dec 2024
TIDM40VY
RNS Number : 4276T
Scottish Widows Limited
29 March 2016
29 March, 2016
SCOTTISH WIDOWS LIMITED
PUBLICATION OF THE ANNUAL REPORT AND ACCOUNTS FOR THE YEAR ENDED 31 DECEMBER 2015
Scottish Widows Limited has published its Annual Report and Accounts for the year ended 31 December 2015 (the "Accounts") which will shortly be available on the Scottish Widows website at www.scottishwidows.co.uk Copies of the Accounts have also been submitted to the National Storage Mechanism and will shortly be available for inspection at www.morningstar.co.uk/uk/NSM
ADDITIONAL INFORMATION REQUIRED BY THE DISCLOSURE AND TRANSPARENCY RULES ("DTR")
The information below is extracted from the Accounts and constitutes the material required by DTR 6.3.5 to be communicated to the media in unedited full text through a Regulatory Information Service. This material is not a substitute for reading the full Accounts and is provided solely for the purposes of complying with DTR 6.3.5. Page numbers and cross-references in the extracted information below refer to page numbers and cross-references in the Accounts.
STATEMENT OF DIRECTORS' RESPONSIBILITIES
The Directors are responsible for preparing the Group Strategic Report, the Directors' Report and the financial statements in accordance with applicable law and regulations.
Company law requires the Directors to prepare financial statements for each financial year. Under that law, the Directors have prepared the Group and Parent Company financial statements in accordance with International Financial Reporting Standards ("IFRSs") as adopted by the European Union. Under company law, the Directors must not approve the financial statements unless they are satisfied that they give a true and fair view of the state of affairs of the Group and Company and of the profit or loss of the Group for that period.
In preparing these financial statements, the Directors are required to:
- select suitable accounting policies and then apply them consistently; - make judgments and accounting estimates that are reasonable and prudent;
- state whether applicable IFRSs as adopted by the European Union have been followed, subject to any material departures disclosed and explained in the financial statements; and
- prepare the financial statements on the going concern basis, unless it is inappropriate to presume that the Company will continue in business.
The Directors are responsible for keeping adequate accounting records that are sufficient to show and explain the Company's transactions and disclose with reasonable accuracy at any time the financial position of the Company and the Group and enable them to ensure that the financial statements comply with the Companies Act 2006 and, as regards the Group financial statements, Article 4 of the IAS Regulation. They are also responsible for safeguarding the assets of the Company and the Group and hence for taking reasonable steps for the prevention and detection of fraud and other irregularities.
The Directors are responsible for the maintenance and integrity of these financial statements as presented on the Company's website www.scottishwidows.co.uk. Legislation in England and Wales governing the preparation and dissemination of financial statements may differ from legislation in other jurisdictions.
Each of the Directors whose names are listed on page 3 confirms that, to the best of their knowledge:
- the Group and Company financial statements, which have been prepared in accordance with IFRSs as adopted by the EU, give a true and fair view of the assets, liabilities, financial position and profit of the Group and Company; and
- the Strategic Report on pages 4 to 8, and the Directors' Report on pages 9 to 11 include a fair review of the development and performance of the business and the position of the Group and Company, together with a description of the principal risks and uncertainties that it faces.
PRINCIPAL RISKS AND UNCERTAINTIES
The management of the business and the execution of the Company's and Group's strategy are subject to a number of risks. The financial risk management objectives and policies of the Company and Group and the exposure to market, insurance, credit, capital, liquidity, regulatory & legal, conduct, people, governance, operational and financial reporting risks are set out in note 36. As a result of the Insurance Business Transfer Scheme, the risks affecting the Insurance division predominantly reside with the Company going forwards.
The Group, like other insurers, is subject to legal proceedings in the normal course of business and the industry-wide environment of increased regulatory, legislative and oversight requirements. Whilst it is not practicable to forecast or determine the final results of all pending or threatened legal proceedings, management does not believe that such proceedings, including litigation, will have a material effect on the results and financial position of the Group except for the German insurance business litigation, for which a provision has been established, as discussed earlier in this report and set out in note 26.
36. Risk management
The principal activity of the Group is the undertaking of ordinary long-term insurance and savings business and associated investment activities in the United Kingdom. The Group offers a wide range of life insurance products such as annuities, pensions, whole life, term life and investment type products through independent financial advisors, the LBG network and direct sales. The Company also reinsures business with insurance entities external to the Group.
The Group assesses the relative costs and concentrations of each type of risk through the Individual Capital Assessment ("ICA") and material issues are escalated to the Insurance Risk Committee and the Insurance Executive Committee.
This note summarises these risks and the way in which the Group manages them.
(a) Governance framework
The Group is part of LBG, which has established a risk management function with responsibility for implementing the LBG risk management framework within the Group.
Responsibility for the setting and management of risk appetite and risk policy resides with the Board of each Group company. The Board manages risks in line with LBG and Insurance risk policies. The Board has delegated certain risk matters to the Insurance Risk Oversight Committee with the operational implementation of these being assigned to the Insurance Risk Committee.
The approach to risk management aims to ensure that there is effective independent checking or "oversight" of key decisions through the operation of a "three lines of defence" model. The first line of defence is line management, who have direct accountability for risk decisions. The Risk function provides oversight and challenge and forms the second line of defence.
Internal Audit constitutes the third line of defence, whose objective is to provide the required independent assurance to the Audit Committee and the Board that risks within the Group are recognised, monitored and managed within acceptable parameters.
An enterprise-wide risk management framework for the identification, assessment, measurement and management of risk is in place. The framework is in line with LBG's risk management principles and covers the full spectrum of risks that the Group and Company are exposed to. Under this framework, risks are categorised according to an approved LBG risk language which has been adopted across the Group. This covers the principal risks faced by the Group, including the exposures to market, insurance, credit, capital, liquidity, regulatory & legal, conduct, people, governance, operational and financial reporting risks. The performance of the Group, its continuing ability to write business and the strategic management of the business depend on its ability to manage these risks.
Policy owners, identified from appropriate areas across the business, are responsible for drafting the LBG and Insurance risk policies, for ensuring that they remain up-to-date and for facilitating any changes. These policies are subject to at least an annual review, or earlier if deemed necessary. Limits are prescribed within which those responsible for the day to day management of each Group company can take decisions. Line management are required to follow prescribed reporting procedures to the bodies responsible for monitoring compliance with policy and controlling the risks.
(b) Risk appetite
Risk appetite is the amount and type of risk that the Board is prepared to seek, accept or tolerate and is fully aligned to Group and LBG strategy. The Board has defined a framework for the management of risk and approved a set of risk appetite statements that cover financial risks (earnings, capital, insurance, credit, market and liquidity), operational risks, people, conduct risks, regulatory & legal risks, financial reporting and governance risks. The risk appetite statements set limits for exposures to the key risks faced by the business. Risk appetite is reviewed at least annually by the Board.
Experience against Risk Appetite is reported monthly (by exception) and quarterly (in full) to the IRC, quarterly (by exception) to the ROC and bi-annually (by exception) to the Insurance Board. Copies are also supplied regularly to the Group's regulators as part of the close and continuous relationship. Reporting focuses on ensuring, and demonstrating to the Board, and their delegate the IROC, that the Group is run in line with approved risk appetite. Any breaches of risk appetite require clear plans and timescales for resolution.
(c) Financial risks
The Group writes a variety of insurance and investment contracts which are subject to a variety of financial risks, as set out below. Contracts can be either single or regular premium and conventional (non-profit), with profits or unit-linked in nature.
(MORE TO FOLLOW) Dow Jones Newswires
March 29, 2016 09:36 ET (13:36 GMT)
The Group is exposed to a range of financial risks through its financial assets, financial liabilities, assets arising from reinsurance contracts and liabilities arising from insurance and investment contracts. In particular, the key financial risk is that long-term investment proceeds are not sufficient to fund the obligations arising from its insurance and investment contracts. The most important components of financial risk are market, insurance, credit, capital and liquidity risk.
The Group manages these risks in a numbers of ways, including risk appetite assessment and monitoring of capital resource requirements. In addition, the Principles and Practices of Financial Management ("PPFM") set out the way in which the with profits business is managed. The Group also uses financial instruments (including derivatives) as part of its business activities and to reduce its own exposure to market risk and credit risk.
For with profits business, subject to minimum guarantees, policyholders' benefits are influenced by the smoothed investment returns on assets held in the With Profits Funds. The smoothing cushions policyholders from daily fluctuations in investment markets. This process is managed in accordance with the published PPFM's.
The financial risks arising from providing minimum guaranteed benefits are borne in the With Profits Funds, but the Group bears financial risk in relation to the possibility that in extreme market conditions the With Profits Funds might be unable to bear the full costs of the guarantees. The amount of the guaranteed benefits increases as additional benefits are declared and allocated to policies.
For unit-linked business, policyholders' benefits are closely linked to the investment returns on the underlying funds. In the short term, profit and equity are therefore largely unaffected by investment returns on assets in internal unit-linked funds as any gains or losses will be largely offset by changes in the corresponding insurance and investment contract liabilities, provided that there is appropriate matching of assets and liabilities within these funds. However, any change in the market value of these funds will have an indirect impact on the Group and Company through the collection of annual management and other fund related charges. As markets rise or fall, the value of these charges rises or falls correspondingly.
For non-participating business, the principal market risk is interest rate risk, which arises because assets and liabilities may exhibit differing changes in market value as a result of changes in interest rates. Asset and liability matching is used to mitigate the impact of changes in interest rates where the difference is material.
Financial assets and financial liabilities are measured on an ongoing basis either at fair value or at amortised cost. The summary of significant accounting policies (note 1) describes how the classes of financial instruments are measured and how income and expenses, including fair value gains and losses, are recognised.
The timing of the unwind of the deferred tax assets and liabilities is dependent on the timing of the unwind of the temporary timing differences, arising between the tax bases of the assets and liabilities and their carrying amounts for financial reporting purposes, to which these balances relate.
The sensitivity analyses given throughout this note are based on a change in an assumption while holding all other assumptions constant. In practice, this is unlikely to occur as changes in some of the assumptions may be correlated, for example changes in interest rates and changes in market values. The sensitivity analysis presented also represents management's assessment of a reasonably possible alternative in respect of each sensitivity, rather than worst case scenario positions.
(1) Market risk
Market risk is defined as the risk that unfavourable market moves (including changes in and increased volatility of interest rates, market-implied inflation rates, credit spreads and prices for bonds, foreign exchange rates, equity, property and commodity prices and other instruments) lead to reductions in earnings and/or value.
Investment holdings within the Group are diversified across markets and, within markets, across sectors. Holdings of individual assets are diversified to minimise specific risk and large individual exposures are monitored closely. For assets held with unit-linked funds, investments are only permitted in countries and markets which are sufficiently regulated and liquid.
Market risk policy is dependent on the nature of the funds in question, and can be broadly summarised as follows:
-- Assets held in shareholder funds are invested in money market funds, gilts, loans and investment grade bonds to match regulatory capital requirements. The balance of the shareholder fund assets is managed in line with the policies of LBG to optimise shareholder risk and return. This includes suitable use of derivatives to minimise shareholder risk.
-- Unit-linked assets are invested in accordance with the nature of the fund mandates.
-- Conventional non-profit liabilities are "close matched" as far as possible in relation to currency, nature and duration.
-- With Profits Funds are managed in line with the published PPFMs. Benchmarks and minimum and maximum holdings in asset classes are specified to allow limited investment management discretion whilst ensuring adequate diversification. Swaps, swaptions, variable rate bonds and associated additional swap transactions provide significant protection to the With Profits Funds from the effects of interest rate falls in respect of the cost of guaranteed annuity rates.
Below is an analysis of assets and liabilities at fair value through profit or loss and assets and liabilities for which a fair value is required to be disclosed, according to their fair value hierarchy (as defined in note 1 (e)).
Group As at 31 December 2015
Hot Features
Premium
Fair value hierarchy
Level Level Level Total
1 2 3 GBPm
GBPm GBPm GBPm
=========================================== ====== ====== ====== =======
Investment properties - - 4,228 4,228
Equity securities 65,622 171 1,161 66,954
Debt securities 8,557 20,776 6,856 36,189
Derivative financial assets 43 1,990 31 2,064
Total assets 74,222 22,937 12,276 109,435
------------------------------------------- ------ ------ ------ -------
Derivative financial liabilities 40 1,817 - 1,857
Liabilities arising from non-participating
investment contracts - 22,759 - 22,759
Subordinated debt - 1,671 - 1,671
Total liabilities 40 26,247 - 26,287
------------------------------------------- ------ ------ ------ -------
Company As at 31 December 2015
Fair value hierarchy
Level Level Level Total
1 2 3 GBPm
GBPm GBPm GBPm
=========================================== ====== ====== ===== ======
Investment properties - - 315 315
Equity securities 78,939 292 977 80,208
Debt securities 2,119 7,870 6,787 16,776
Derivative financial assets 5 1,950 31 1,986
Total assets 81,063 10,112 8,110 99,285
Derivative financial liabilities 20 1,771 - 1,791
Liabilities arising from non-participating
investment contracts - 22,759 - 22,759
Subordinated debt - 1,688 - 1,688
Total liabilities 20 26,218 - 26,238
------------------------------------------- ------ ------ ----- ------
Group As at 31 December 2014
Fair value hierarchy
Level Level Level Total
1 2 3 GBPm
GBPm GBPm GBPm
=========================================== ====== ====== ===== ======
Investment properties - - 1,125 1,125
Equity securities 33,239 - 272 33,511
Debt securities 5,597 3,992 1,250 10,839
Derivative financial assets 18 833 - 851
Total assets 38,854 4,825 2,647 46,326
------------------------------------------- ------ ------ ----- ------
Derivative financial liabilities 25 539 - 564
Liabilities arising from non-participating
investment contracts - 10,099 - 10,099
Subordinated debt 628 - - 628
Total liabilities 653 10,638 - 11,291
------------------------------------------- ------ ------ ----- ------
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March 29, 2016 09:36 ET (13:36 GMT)
Company As at 31 December 2014
Fair value hierarchy
Level Level Level Total
1 2 3 GBPm
GBPm GBPm GBPm
=========================================== ====== ===== ===== ======
Investment properties - - 536 536
Equity securities 17,203 - 384 17,587
Debt securities 396 1,363 1,162 2,921
Derivative financial assets 4 723 - 727
Total assets 17,603 2,086 2,082 21,771
------------------------------------------- ------ ----- ----- ------
Derivative financial liabilities 22 463 - 485
Liabilities arising from non-participating
investment contracts - 7,230 - 7,230
Subordinated debt 628 - - 628
Total liabilities 650 7,693 - 8,343
------------------------------------------- ------ ----- ----- ------
Transfers between level one and level two
The fair value level of FX Forwards instruments has moved from level one to level two. A total of GBP30m of FX Forwards were transferred from level one to level two during 2015. FX Forwards are short dated instruments that are modelled using current exchange rates and interest rates and are therefore classified as level two in the fair value hierarchy in line with IFRS 13.
A total of GBP287m of investments in equities were transferred from level one to level two during 2015 (2014: GBPnil). These investments relate to private equity fund of funds which are valued using published prices for the funds, however, as the underlying investments within the funds are less liquid, these were moved to level two.
Participating investment contracts are not included above, on the basis that fair value and carrying value would not be materially different.
The derivative securities classified as Level 2 above have been valued using a tri-party pricing model as determined by the Pricing Source Agreement between Aberdeen Asset Management (formally Scottish Widows Investment Partnership - SWIP) and State Street. Prices are sourced from external sources, counterparties, and the Investment Manager (Aberdeen Asset Management). Where the primary value is within tolerance of the secondary value, the primary value will be utilised.
If the primary and secondary values are out of tolerance, then the primary value will be validated against the tertiary value. If it is within tolerance the primary value will be applied. If primary and tertiary values are out with tolerance, then the secondary value is validated against the tertiary value. If secondary and tertiary values are within tolerance, then the secondary value is applied. If they are out of tolerance then the investment manager is notified to allow them to make the final pricing decision.
Assets classified as level 3 comprise private equity investments and property investment vehicles, within equity securities, investment properties, certain loans assets, structured bonds and equity release mortgages within debt securities and prepayment swaps within derivative financial assets.
Private equity investments are valued using the financial statements of the underlying companies prepared by the general partners, adjusted for known cash flows since valuation and subject to a fair value review to take account of other relevant information. Property investment vehicles are valued based on the net asset value of the relevant company which incorporates surveyors' valuations of property. Investment property is independently valued as described in note 16. Valuations are based on observable market prices for similar properties. Adjustments are applied, if necessary, for specific characteristics of the property, such as the nature, location, or condition of the specific asset. If such information is not available alternative valuation methods such as discounted cash flow analysis or recent prices in less active markets are used. Where any significant adjustments to observable market prices are required, the property would be classified as level 3. Whilst such valuations are sensitive to estimates, it is believed that changing one or more of the assumptions to reasonably possible alternative assumptions would not change the fair value significantly.
Loan assets
Loans classified as level 3 are valued using a discounted cash flow model. The discount rate comprises market observable interest rates, a risk margin that reflects credit scores that are calibrated to observed ratings and credit spreads on bonds issued within the same sector, and an incremental liquidity premium that is estimated by reference to historical spreads at origination on similar loans where available and established measures of market liquidity. An expected value approach, based on historical data, is applied to options embedded in the loans. The effect of applying reasonably possible alternative assumptions to the value of these loans would be to decrease the fair value by GBP262m (2014: GBP180m) or increase it by GBP324m (2014: GBP193m).
Structured bond
The structured bond is a bespoke transaction between LBG and the European Investment bank. It is structured as a long chain of swaptions linked to annuity schedules detailed in the product specification. It is valued using the hull white swaption valuation model. The expected cashflows from the asset are impacted by both intrinsic movements in rates and volatility (potential for rates to move into the money in the future). The asset is discounted using the EIB credit curve and an additional illiquidity premium. The effect of applying reasonably possible alternative assumptions to the value of these asset backed securities and covered bonds would be to decrease the fair value by GBP10m (2014: GBP2m) or increase it by GBP10m (2014: GBP3m).
Equity release mortgages
A portfolio of Equity Released Mortgages is securitised through a Special Purpose Vehicle into a Senior Note (A Note) and a Junior Note (B Note). These notes are classified as level 3.
The equity release mortgages are valued using a discounted cashflow approach. Decrements (mortality, voluntary early repayment, entry into long-term care) are used to determine the incidence of cash flows. The discount rate is based on a risk free rate plus a spread to compensate for the risks associated with the loans which is determined on portfolio level. There is a No Negative Equity Guarantee on the mortgages which is valued with a time-dependent Black-Scholes model. The effect of applying reasonably possible alternative assumptions to the value of these loans would be to decrease the fair value by GBP14m or increase it by GBP13m.
Prepayment swap
The Level 3 derivative is a bespoke prepayment swap mitigating prepayment risk within Loan Assets. An expected value approach based on historical data using a stochastic process is applied to value the derivative. The effect of applying a reasonably possible alternative assumption to the value of this asset would be to decrease the fair value by GBPnil or increase it by GBPnil.
The table below shows movements in the assets and liabilities measured at fair value based on valuation techniques for which any significant input is not based on observable market data (level 3 only).
Group
2015 2014
GBPm GBPm GBPm GBPm
===================================== ======= ============= ====== =============
Assets Liabilities Assets Liabilities
Balance at 1 January 2,647 - 2,701 -
Transfers in 27 - 16 -
Transfers out (12) - - -
Purchases 662 - 704 -
Disposals (1,097) - (898) -
Net gains recognised within
net gains on assets and liabilities
at fair value through profit
or loss in the statement of
comprehensive income 94 - 124 -
Transfers in from fellow group
undertakings (see note 40) 9,955 - -
------------------------------------- ------- ------------- ------ -------------
Balance at 31 December 12,276 - 2,647 -
------------------------------------- ------- ------------- ------ -------------
Total unrealised gains for
the period included in the
statement of comprehensive
income for assets and liabilities
held at 31 December 59 - 183 -
------------------------------------- ------- ------------- ------ -------------
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Company
2015 2014
GBPm GBPm GBPm GBPm
=================================== ====== ============= ====== ===============
Assets Liabilities Assets Liabilities
Balance at 1 January 2,082 - 1,601 -
Transfers in 11 - 9 -
Transfers out (9) - - -
Purchases 168 - 678 -
Disposals (675) - (265) -
Net gains (losses) recognised
within net gains (losses)
on assets and liabilities
at fair value through profit
or loss in the statement of
comprehensive income 9 - 59 -
Transfers in from fellow group
undertakings (see note 40) 6,524 - - -
Balance at 31 December 8,110 - 2,082 -
----------------------------------- ------ ------------- ------ -------------
Total unrealised gains/(losses)
for the period included in
the statement of comprehensive
income for assets and liabilities
held at 31 December 29 - 29 -
----------------------------------- ------ ------------- ------ ---------------
Total gains or losses for the period included in the statement of comprehensive income, as well as total gains or losses relating to assets and liabilities held at the reporting date, are presented in the statement of comprehensive income, through net gains/losses on assets and liabilities at fair value through profit or loss.
(i) Equity and property risk
The exposure of the Group's insurance and investment contract business to equity risk relates to financial assets and financial liabilities whose values will fluctuate as a result of changes in market prices other than from interest and foreign exchange fluctuations. This is due to factors specific to individual instruments, their issuers or factors affecting all instruments traded in the market. Accordingly, the Group monitors exposure limits both to any one counterparty, and any one market.
The sensitivity analysis below illustrates how the fair value of future cash flows in respect of equities and properties, net of offsetting movements in insurance and investment contract liabilities, will fluctuate because of changes in market prices at the reporting date.
Impact on
profit after
tax and equity
for the year
2015 2014
GBPm GBPm
===================================== ======== ========
10% (2014: 10%) increase in equity
prices (9) (4)
10% (2014:10%) decrease in property - -
prices
(ii) Interest rate risk
Interest rate risk is the risk that the value of future cash flows of a financial instrument will fluctuate because of changes in interest rates and the shape of the yield curve. Interest rate risk in respect of the Group's insurance and investment contracts arises when there is a mismatch in duration or yield between liabilities and the assets backing those liabilities.
The Group's interest rate risk policy requires that the maturity profile of interest-bearing financial assets is appropriately matched to the guaranteed elements of the financial liabilities.
A fall in market interest rates will result in a lower yield on the assets supporting guaranteed investment returns payable to policyholders. This investment return guarantee risk is managed by matching assets to liabilities as closely as possible. An increase in market interest rates will result in a reduction in the value of assets subject to fixed rates of interest which result in losses may if, as a result of an increase in the level of surrenders, the corresponding fixed income securities have to be sold.
The effect of changes in interest rates in respect of financial assets which back insurance contract liabilities is given in note 35. The effect on the Group of changes in the value of investments held in respect of investment contract liabilities due to fluctuations in market interest rates is negligible as any changes will be offset by movements in the corresponding liability.
The sensitivity analysis below illustrates how the fair value of future cash flows in respect of interest-bearing financial assets, net of offsetting movements in insurance and investment contract liabilities, will fluctuate because of changes in market interest rates at the reporting date.
Impact on
profit after
tax and equity
for the year
2015 2014
GBPm GBPm
======================================== ======== ========
25 basis points (2014: 25 basis points
) increase in yield curves 43 44
25 basis points (2014: 25 basis points
) decrease in yield curves (43) (44)
For the 2015 analysis above, the impacts on profit after tax and equity are different since equity impacts take account of the assets and liabilities transferred to the Group under the Insurance Business Transfer Scheme.
(iii) Foreign exchange risk
Foreign exchange risk relates to the effects of movements in exchange markets including changes in exchange rates.
US corporate bonds are held within the annuity portfolio, the cash flows of which are hedged to ensure close matching of the annuity liabilities is maintained. Foreign exchange risk arises on these investments as there may be a mismatch in fair values of the bonds and derivatives resulting from movements in US dollar - sterling exchange rates.
With the exception of these holdings, the overall risk to the Group is minimal due to the following:
-- The Group's principal transactions are carried out in pounds sterling;
-- The Group's financial assets are primarily denominated in the same currencies as its insurance and investment contract liabilities; and
-- Other than shareholder funds, all non-linked investments of the non-profit funds are in sterling or are currency matched. The effect on the Group of changes in the value of investments held in respect of investment contract liabilities due to fluctuations in foreign exchange rates is negligible as any changes will be offset by movements in the corresponding liability.
The fair value of US dollar assets and liabilities, net of offsetting movements in insurance and investment contract liabilities, will fluctuate because of changes in exchange rates at the reporting date, however sensitivity analysis has identified a GBPnil impact in 2015 on profit after tax and equity (2014: GBPnil)
(2) Insurance risk
Insurance risk is defined as the risk of adverse developments in the timing, frequency and severity of claims for insured/underwritten events and in customer behaviour, leading to reductions or volatility in earnings and/or value.
The principal risk the Group faces under insurance contracts is that the actual claims and benefit payments exceed the amounts expected at the time of determining the insurance liabilities.
The nature of the Group's business involves the accepting of insurance risks which primarily relate to mortality, longevity, morbidity, persistency and expenses. Each company within the Group which transacts new business underwrites policies to ensure an appropriate premium is charged for the risk or that the risk is declined.
The Group principally writes the following types of life insurance contracts:
- Life assurance - where the life of the policyholder is insured against death or permanent disability, usually for pre-determined amounts;
- Annuity products - where typically the policyholder is entitled to payments which cease upon death; and
- Morbidity products - where the policyholder is insured against the risk of contracting a defined illness.
For contracts where death is the insured risk, the most significant factors that could increase the overall level of claims are epidemics or widespread changes in lifestyle, such as eating, smoking and exercise habits, resulting in earlier or more claims than expected. The possibility of a pandemic, for example one arising from Ebola, is regarded as a potentially significant mortality risk. For contracts where survival is the insured risk, the most significant factor is continued improvement in medical science and social conditions that would increase longevity.
For contracts with fixed and guaranteed benefits and fixed future premiums, there are no mitigating terms and conditions that significantly reduce the insurance risk accepted. For participating investment contracts, the participating nature of these contracts results in a significant portion of the insurance risk being shared with the policyholder.
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Insurance risk is also affected by the policyholders' right to pay reduced or no future premiums, to terminate the contract completely or to exercise a guaranteed annuity option. As a result, the amount of insurance risk is also subject to policyholder behaviour. On the assumption that policyholders will make decisions that are in their best interests, overall insurance risk will generally be aggravated by policyholder behaviour. For example, it is likely that policyholders whose health has deteriorated significantly will be less inclined to terminate contracts insuring death benefits than those policyholders who remain in good health.
The Group has taken account of the expected impact of policyholder behaviour in setting the assumptions used to measure insurance and investment contract liabilities.
The principal methods available to the Group to control or mitigate longevity, mortality and morbidity risk are through the following processes:
-- Underwriting (the process to ensure that new insurance proposals are properly assessed);
-- Pricing-to-risk (new insurance proposals would usually be priced in accordance with the underwriting assessment);
-- Claims management; -- Product design; -- Policy wording; and -- The use of reinsurance and other risk mitigation techniques.
Rates of mortality and morbidity are investigated annually based on the Group's recent experience and future mortality assumptions are set using the latest population data available. Where they exist, the reinsurance arrangements of each company in the Group are reviewed at least annually.
Persistency risk is the risk associated with the ability to retain long-term business and the ability to renew short-term business. The Group aims to reduce its exposure to persistency risk by undertaking various initiatives to promote customer loyalty. These initiatives are aimed both at the point of sale and through direct contact with existing policyholders, for example through annual statement information packs.
Further information on assumptions, changes in assumptions and sensitivities in respect of insurance and participating investment contracts is given in note 35.
(3) Credit risk
The risk that counterparties with whom we have contracted, fail to meet their financial obligations, resulting in loss to the Group.
Investment counterparty default risk arises primarily from holding investment assets, and reinsurer default credit risk primarily arises from exposure to reinsurers.
Credit risk in respect of unit-linked funds is borne by the policyholders and credit risk in respect of With Profits Funds is largely borne by the policyholders. Consequently, the Group has no significant exposure to credit risk for those funds.
For non-linked funds investments, limits on the exposure to a single entity are specified and monitored. Bond exposures are managed through credit rating bands and maximum exposures to individual assets and sectors are set. Assets are restricted to securities in a specified list of countries, and limits applicable to property portfolios are set to prevent concentration of exposure to single tenants and single buildings. Loan assets held in the annuity portfolio, that have been purchased from LBG as part of the Group's investment strategy to invest in low risk higher yielding illiquid assets, are monitored using established robust processes and controls.
Shareholder funds are managed in line with the Insurance Credit Risk Policy and the wider LBG Credit Risk Policy and the principles are the same as those outlined above in respect of non-linked funds.
Reinsurance is primarily used to reduce insurance risk. However, it is also sought for other reasons such as improving profitability, reducing capital requirements and obtaining technical support. In addition, reinsurance is also used to offer Investment Fund Links which we are unable to provide through other means. The Group's reinsurance strategy is to reduce the volatility of profits through the use of reinsurance whilst managing the insurance and credit risk within the constraints of the risk appetite limits.
The Group has reinsurance on all significant lines of business where mortality, morbidity or property risks exceed set retention limits. This does not, however, discharge the Group's liability as primary insurer. If a reinsurer fails to pay a claim for any reason, the Group remains liable for the payment to the policyholder. All new material reinsurance treaties are subject to Board approval and reinsurance arrangements are reviewed annually to ensure that the reinsurance strategy is being achieved.
Policies are treated as lapsed when payments from the policyholder have not been received for three consecutive months and the policyholder has not provided further information in respect of the non-payment of premiums.
Exposure to other trade receivables is assessed on a case by case basis, using a credit rating agency where appropriate.
The tables below analyse financial assets subject to credit risk using Standard & Poor's rating or equivalent.
Group As at 31 December 2015
BBB Not
Total AAA AA A or lower rated
GBPm GBPm GBPm GBPm GBPm GBPm
======================== ======= ======= ======= ======= ========== =======
Assets arising
from reinsurance
contracts held 8,396 - 121 2,094 33 6,148
Debt securities 36,189 10,905 6,939 9,706 8,562 77
Derivative
financial instruments 2,064 - 2 969 1,019 74
Loans and receivables 12,799 303 3,909 6,120 684 1,783
Cash at bank 2,106 114 518 780 304 390
Total 61,554 11,322 11,489 19,669 10,602 8,472
------------------------ ------- ------- ------- ------- ---------- -------
Group As at 31 December 2014
BBB
or Not
Total AAA AA A lower rated
GBPm GBPm GBPm GBPm GBPm GBPm
======================= ======= ====== ====== ====== ======= =======
Assets arising
from reinsurance
contracts held 340 - 59 281 - -
Debt securities 10,839 5,864 1,803 2,134 1,027 11
Derivative financial
instruments 851 - - 780 70 1
Loans and receivables 1,377 168 15 847 6 341
Cash at bank 705 - 351 298 10 46
----------------------- ------- ------ ------ ------ ------- -------
Total 14,112 6,032 2,228 4,340 1,113 399
----------------------- ------- ------ ------ ------ ------- -------
Company As at 31 December 2015
BBB Not
Total AAA AA A or lower rated
GBPm GBPm GBPm GBPm GBPm GBPm
======================== ======= ====== ====== ======= ========== =======
Assets arising
from reinsurance
contracts held 8,396 - 121 2,094 33 6,148
Debt securities 16,776 4,499 3,110 5,693 3,377 97
Derivative
financial instruments 1,986 - 2 968 1,011 5
Loans and receivables 4,885 7 9 3,407 683 779
Cash at bank 880 - 461 112 285 22
Total 32,923 4,506 3,703 12,274 5,389 7,051
------------------------ ------- ------ ------ ------- ---------- -------
Company As at 31 December 2014
BBB Not
Total AAA AA A or lower rated
GBPm GBPm GBPm GBPm GBPm GBPm
======================== ======= ===== ====== ====== ========== =======
Assets arising
from reinsurance
contracts held 1,004 - - 222 31 751*
Debt securities 2,921 574 765 1,385 195 2
Derivative
financial instruments 727 - - 703 24 -
Loans and receivables 776 5 13 727 6 25
Cash at bank 381 - 258 113 10 -
Total 5,809 579 1,036 3,150 266 778
------------------------ ------- ----- ------ ------ ---------- -------
* Relates to the company's subsidiary, CMMF
Amounts classified as "not rated" within assets arising from reinsurance contracts held principally relate to amounts due from other Group companies which are not rated by Standard & Poor's or an equivalent rating agency.
Maximum credit exposure
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The maximum credit risk exposure of the Group in the event of other parties failing to perform their obligations is detailed below. No account is taken of any collateral held and the maximum exposure to loss, which includes amounts held to cover unit-linked and With Profits funds liabilities, is considered to be the balance sheet carrying amount.
Group 2015 2014
Maximum Offset Net Maximum Offset Net
exposure exposure exposure exposure
==========================
GBPm GBPm GBPm GBPm GBPm GBPm
========================== ========= ====== ========= ========= ====== =========
Loans and receivables 12,799 - 12,799 1,377 - 1,377
Investments at fair
value through profit
or loss:
Debt Securities 36,189 - 36,189 10,839 - 10,839
Assets arising from
reinsurance contracts
held 8,396 - 8,396 340 - 340
Derivative financial
instruments 2,064 - 2,064 851 - 851
Cash and cash equivalents 2,106 - 2,106 705 - 705
-------------------------- --------- ------ --------- --------- ------ ---------
At 31 December 61,554 - 61,554 14,112 - 14,112
-------------------------- --------- ------ --------- --------- ------ ---------
Company 2015 2014
Maximum Offset Net Maximum Offset Net
exposure exposure exposure exposure
==========================
GBPm GBPm GBPm GBPm GBPm GBPm
========================== ========= ====== ========= ========= ====== =========
Loans and receivables 4,885 - 4,885 776 - 776
Investments at fair
value through profit
or loss:
Debt Securities 16,776 - 16,776 2,921 - 2,921
Assets arising from
reinsurance contracts
held 8,396 - 8,396 1,004 - 1,004
Derivative financial
instruments 1,986 - 1,986 727 - 727
Cash and cash equivalents 880 - 880 381 - 381
-------------------------- --------- ------ --------- --------- ------ ---------
At 31 December 32,923 - 32,923 5,809 - 5,809
-------------------------- --------- ------ --------- --------- ------ ---------
(i) Concentration risk
Credit concentration risk
Credit concentration risk relates to the inadequate diversification of credit risk. The Group requires strict control on the use of derivatives by each fund as set out in the Insurance Derivatives Risk Policy ("DRP").
Credit risk is managed through the setting and regular review of counterparty credit and concentration limits on asset types which are considered more likely to lead to a concentration of credit risk. For other asset types, such as UK government securities or investments in funds falling under the Undertakings for Collective Investment in Transferable Securities "UCITS" Directive, no limits are prescribed as the risk of credit concentration is deemed to be immaterial. This policy supports the approach mandated by the PRA for regulatory reporting.
At 31 December 2015 and 31 December 2014, the Group did not have any significant concentration of credit risk with a single counterparty or group of counterparties where limits applied. With the exception of Government bonds and UCITS funds, the largest aggregated counterparty exposure is 1.9% (2014: 1.6% of the Group's total assets).
Liquidity concentration risk
Liquidity concentration risk arises where the Group is unable to meet its obligations as they fall due or do so only at an excessive cost, due to over-concentration of investments in particular financial assets or classes of financial asset.
As most of the Group's invested assets are diversified across a range of marketable equity and debt securities in line with the investment options offered to policyholders it is unlikely that a material concentration of liquidity concentration could arise.
This is supplemented by active liquidity management in the Group, to ensure that even under stress conditions the Group has sufficient liquidity as required to meet its obligations. This is delegated by the Board to and monitored through the Insurance Finance Committee ("IFC"), the Insurance Risk Committee ("IRC"), Insurance Shareholder Investment Management Committee ("ISIM") and Banking and Liquidity Operating Committee ("BLOC").
(ii) Collateral management
Collateral in respect of derivatives
The requirement for collateralisation of OTC derivatives, including the levels at which collateral is required and the types of asset that are deemed to be acceptable collateral, are set out in a Credit Support Annex ("CSA"), which forms part of the International Swaps and Derivatives Association ("ISDA") agreement between the Company and the counterparty.
The CSA will require collateralisation where any net exposure to a counterparty exceeds the OTC counterparty limit, which must be established in accordance with the DRP. The aggregate uncollateralised exposure to any one counterparty must not exceed limits specified in the DRP. Where derivative counterparties are related, the aggregate net exposure is considered for the purposes of applying these limits.
Acceptable collateral is defined in each instance and must take into account the quality and appropriateness of the proposed collateral as well as being acceptable to the entity receiving the collateral. Collateral may include cash, corporate bonds, supranational debt and government debt.
Assets with the following carrying amounts have been pledged in accordance with the terms of the relevant CSAs entered into in respect of various OTC derivative contracts:
2015 2014
GBPm GBPm GBPm GBPm
================================ ====== ======== ====== ========
Group Company Group Company
Financial assets:
Investments at fair value
through profit or loss 322 322 44 33
Cash and cash equivalents 273 273 77 75
-------------------------------- ------ -------- ------ --------
Total 595 595 121 108
-------------------------------- ------ -------- ------ --------
Collateral pledged in form of financial assets, is continued to be recognised in the balance sheet as the Group and Company retains all risks and rewards of the transferred assets. The Group and the Company has the right to recall any collateral pledged provided that this is replaced with alternative acceptable assets. The counterparty has right to repledge or sell the collateral in the absence of default by the Group and Company.
Cash collateral pledged where the counterparty retains the risks and rewards is derecognised from the balance sheet and a corresponding receivable is recognised for its return.
Where the Group and Company receives collateral in form of financial instruments for which counterparty retains all risks and rewards, it is not recognised in the balance sheet. The fair value of financial assets accepted as collateral for OTC derivatives but not recognised in the balance sheet amounts to GBP471m (2014: GBP263m) by the Group and GBP471m (2014: GBP259m) by the Company, all of which is permitted to be sold or repledged in the absence of default. However the policy of the Group and Company is not to repledge assets, and hence no collateral was sold or repledged by the Group or Company during the year or in the prior year.
Where the Group and Company receives collateral in form of cash, it is recognised in the balance sheet along with a corresponding liability to repay the amount of collateral received within other financial liabilities. The amount of cash collateral received by the Group and Company amounts to GBP425m (2014: GBP163m) and GBP416m (2014: GBP124m) respectively.
Collateral in respect of Stock Lending
The Group and Company lend financial assets held in its portfolio to other institutions. The Insurance Investment Strategy Committee (IISC) and its sub-committee Investment Management Operational Review Committee (IMOR) are responsible for setting the parameters of stock lending. Stock lending is permitted in accordance with the Insurance Stock Lending Policy. All stock lending takes place on an open/call basis, enabling the loan to be recalled at any time within the standard settlement terms of the market concerned
The financial assets lent do not qualify for derecognition as the Group and Company retains all risks and rewards of the transferred assets except for the voting rights. The aggregate carrying value of securities on loan by the Group is GBP4,658m (2014 GBP3,503m) and by the Company is GBP550m (2014: GBP111m).
It is Group's and Company's practice to obtain collateral in stock lending transactions. The accepted collateral can include cash, equities, certain bonds and money market instruments. On a daily basis, the fair value of collateral is compared to the fair value of stock on loan. The value of collateral must always exceed the value of stock on loan.
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Where the Group and Company receives collateral in form of financial instruments for which counterparty retains all risks and rewards, it is not recognised in the balance sheet. The fair value of financial assets accepted as collateral but not recognised in the balance sheet amounts to GBP3,998m (2014: GBP3,739m) by the Group and GBP440m (2014: GBP115m) by the Company. The Group and the Company is not permitted to sell or repledge the collateral in the absence of default.
Where the Group and Company receives collateral in form of cash, it is recognised in the balance sheet along with a corresponding liability to repay the amount of collateral received within other financial liabilities. The amount of cash collateral received by the Group and Company amounts to GBP963m (2014: GBP14m) and GBP135m (2014: GBP4m) respectively.
There were no defaults in respect of stock lending during the year ended 31 December 2015 (2014: none) which required a call to be made on collateral.
Collateral in respect of Reverse Repurchase Agreement
The Group and Company entered into Reverse Repurchase Agreements whereby it purchased financial instruments with an agreement to resell them back to the counterparty at an agreed price. These transactions are in effect collateralised loans and are reported accordingly. The cash on loan is recognised as Loans and Receivables. The amount of cash on loan in this regard is GBP963m (2014: GBP14m) for the Group and GBP135m (2014: GBP4m) for Company.
The financial assets received as collateral are not recognised on the balance sheet as the counterparty retains all risks and rewards. The fair value of financial assets accepted as collateral amounted to is GBP1,009m (2014: GBP15m) for the Group and GBP142m (2014: GBP4m) for Company.
Collateral in respect of Repurchase Agreement
Collateral pledged in respect of a repurchase agreement with HBOS treasury continues to be recognised on the Company's balance sheet, the amount pledged was GBP516m (2014: GBP88m) for Group and Company.
Collateral in respect of loans to related parties
The Company has made loans to related parties against which collateral is held. The collateral includes asset backed securities and covered bonds with a fair value of at least 130% of the cash lent.
Collateral amounts held are not recognised as assets. At 31 December 2015, collateral with a fair value of GBP1,846m (2014: GBP768m) was held by the group and GBP1,577m (2014: GBP768m) available to the Group to sell or repledge in the absence of default by the counterparty. Of this, GBP1,846m (2014: GBP569m) was held by the Company and GBP1,577m (2014: GBP569m) available to the Company to sell or repledge in the absence of default by the counterparty, as the remainder had been repledged to other Group companies in return for loans received. No other collateral (2014: GBPnil) was repledged during the year by the Group or Company. The Group and Company have an obligation to return these assets to the pledgor.
(iii) Offsetting
The following tables show financial assets and liabilities which have been set off in the balance sheet and those which have not been set off but for which the Group and the Company has enforceable master netting agreements in place with counterparties. They include Derivatives, Repurchase and Reverse Repurchase arrangements.
a) Derivatives
The derivative assets and liabilities in the tables below consist of over-the-counter (OTC) and exchange traded derivatives (ETD). The value of gross/net amounts for derivatives in the table below comprises those that are subject to master netting arrangements. The right to set off balances under these master netting agreements or to set off cash and securities collateral only arises in the event of non payment or default and, as a result, these arrangements do not qualify for offsetting under IAS 32. As a result no amount has been set off in the balance sheet. Total derivatives presented in the balance sheet are shown in note 18.
The "financial instruments" amounts in the tables below show the values that can be set off against the relevant derivatives asset and liabilities in the event of default under master netting agreements. In addition, the Group and the Company holds and provides cash and securities collateral in respective of derivative transactions to mitigate credit risks.
In the tables below, the amounts of Derivatives assets or liabilities presented are offset first by financial instruments that have the right of offset under master netting with any remaining amount reduced by the amount collateral.
b) Repurchase and Reverse Repurchase Arrangements
The Group and the Company participates in repurchase (repo) and reverse repurchase arrangements (reverse repo). The gross/net amount in the table shows the relevant assets that the Group and the Company has been transferred to counterparties under these arrangements. Cash and non cash collateral is received by the Group and the Company for securities transferred. Cash collateral may be reinvested by the Group and Company through reverse repurchase arrangements (reverse repo) against non cash collateral.
In the tables below, the amounts that are subject to Repo and Reverse Repo are set off against the amount of collateral received according to the relevant legal agreements, showing the potential net amounts.
The actual fair value of collateral may be greater than amounts presented in the tables below in the case of over collateralisation.
Detailed disclosure on collateral management can be found in the notes below:
Group as at 31 December 2015
Related amounts
where set
off not permitted
in the balance
sheet(2)
Amounts Net Potential
set amounts net amounts
Gross off presented if offset
amounts in the in the of related
of assets balance balance Financial amounts
/ liabilities sheet sheet(1) instruments Collateral permitted
GBPm GBPm GBPm GBPm GBPm GBPm
================= =============== ========= =========== ============= =========== =============
Financial
assets
OTC Derivatives 1,962 - 1,962 (1,089) (854) 19
ET Derivatives 43 - 43 (17) (21) 5
Repo 516 - 516 - (516) -
Reverse Repo 963 - 963 - (963) -
Financial
liabilities
OTC Derivatives (1,727) - (1,727) 1,089 577 (61)
ET Derivatives (40) - (40) 17 23 -
----------------- --------------- --------- ----------- ------------- ----------- -------------
Group as at 31 December 2014
Related amounts
where set
off not permitted
in the balance
sheet(2)
Amounts Net Potential
set amounts net amounts
Gross off presented if offset
amounts in the in the of related
of assets balance balance Financial amounts
/ liabilities sheet sheet(1) instruments Collateral permitted
GBPm GBPm GBPm GBPm GBPm GBPm
================= =============== ========= =========== ============= =========== =============
Financial
assets
OTC Derivatives 814 - 814 (395) (391) 28
ET Derivatives 16 - 16 (2) (14) -
Repo 91 - 91 - (91) -
Reverse Repo 14 - 14 - (14) -
Financial
liabilities
OTC Derivatives (535) - (535) 395 118 (22)
ET Derivatives (15) - (15) 2 15 2
----------------- --------------- --------- ----------- ------------- ----------- -------------
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Company as at 31 December 2015
Related amounts
where set
off not permitted
in the balance
sheet(2)
Amounts Net Potential
set amounts net amounts
Gross off presented if offset
amounts in the in the of related
of assets balance balance Financial amounts
/ liabilities sheet sheet(1) instruments Collateral permitted
GBPm GBPm GBPm GBPm GBPm GBPm
================= =============== ========= =========== ============= =========== =============
Financial
assets
OTC Derivatives 1,954 - 1,954 (1,089) (845) 20
ET Derivatives 5 - 5 (4) (1) -
Repo 516 - 516 - (516) -
Reverse Repo 135 - 135 - (135) -
Financial
liabilities
OTC Derivatives (1,727) - (1,727) 1,089 577 (61)
ET Derivatives (20) - (20) 4 16 -
----------------- --------------- --------- ----------- ------------- ----------- -------------
Company as at 31 December 2014
Related amounts
where set
off not permitted
in the balance
sheet(2)
Amounts Net Potential
set amounts net amounts
Gross off presented if offset
amounts in the in the of related
of assets balance balance Financial amounts
/ liabilities sheet sheet(1) instruments Collateral permitted
GBPm GBPm GBPm GBPm GBPm GBPm
================= =============== ========= =========== ============= =========== =============
Financial
assets
OTC Derivatives 712 - 712 (338) (349) 25
ET Derivatives 1 - 1 - (1) -
Repo 91 - 91 - (91) -
Reverse Repo 4 - 4 - (4) -
Financial
liabilities
OTC Derivatives (464) - (464) 338 106 (20)
ET Derivatives (12) - (12) - 12 -
----------------- --------------- --------- ----------- ------------- ----------- -------------
The following notes are relevant to the tables on preceding page:
1) The value of net amounts presented in the balance sheet for derivatives comprises those derivatives held by the Group and the Company that are subject to master netting arrangements. Total derivatives presented in the balance sheet are shown in note 18.
2) The Group and the Company enters into derivative transactions with various counterparties which are governed by industry standard master netting agreements. The Group and the Company holds and provides cash and securities collateral in respective of derivative transactions covered by these agreements. The right to set off balances under these master netting agreements or to set off cash and securities collateral only arises in the event of non--payment or default and, as a result, these arrangements do not qualify for offsetting under IAS 32.
(ii) Liquidity risk
Liquidity risk is defined as the risk that the Group has insufficient financial resources to meet its commitments as they fall due, or can only secure them at excessive cost.
Liquidity risk may result from either the inability to sell financial assets quickly at their fair values; or from an insurance liability falling due for payment earlier than expected; or from the inability to generate cash inflows as anticipated.
Liquidity risk has been analysed as arising from payments to policyholders (including those where payment is at the discretion of the policyholder) and non policyholder related activity (such as investment purchases and the payment of shareholder expenses).
In order to measure liquidity risk exposure the Group's liquidity is assessed in a stress scenario. Liquidity risk is actively managed and monitored to ensure that, even under stress conditions, the Company Group has sufficient liquidity to meet its obligations and remains within approved risk appetite. Liquidity risk appetite considers two time periods; three month stressed outflows are required to be covered by primary liquid assets; and one year stressed outflows are required to be covered by primary and secondary liquid assets, after taking account of management actions. Primary liquid assets are gilts or cash, and secondary liquid assets are tradable non-primary assets. The stressed outflows also make allowance for the increased collateral that needs to be posted under derivative contracts in stressed conditions. Liquidity risk is actively managed and monitored to ensure that, even under stress conditions, the Group has sufficient liquidity to meet its obligations and remains within approved risk appetite.
Liquidity methodology and reporting has been updated to ensure readiness for Solvency II.
Liquidity risk is managed in line with the Insurance Liquidity Risk Policy and the wider LBG Funding and Liquidity Policy. Liquidity risk in respect of each of the major product areas is primarily mitigated as follows:
Annuity contracts
Assets are held which are specifically chosen to correspond to the expectation of timing of annuity payments. Gilts, corporate bonds, loans and, where required, derivatives are selected to reflect the expected annuity payments as closely as possible and are regularly rebalanced to ensure that this remains the case in future.
With profits contracts
For with profits business, a portfolio of assets is held in line with investment mandates which will reflect policyholders' reasonable expectations.
Liquidity is maintained within the portfolio via the holding of cash balances and a substantial number of highly liquid assets, principally gilts, bonds and listed equities. Management also have the ability to sell less liquid assets at a reduced price if necessary, with any loss being borne within the With Profits Fund. Losses are managed and mitigated by anticipating policyholder claim payments to plan sales of underlying assets within funds.
Non-participating contracts
For unit-linked products, portfolios are invested in accordance with unit fund mandates. Deferral clauses are included in policyholder contracts to give time, when necessary, to realise linked assets without being a forced seller. As at 31 December 2015, there are no funds under management subject to deferral.
For non-linked products other than annuity contracts, backing investments are mostly held in gilts with minimal liquidity risk. Investments are arranged to minimise the possibility of being a distressed seller whilst at the same time investing to meet policyholder obligations. This is achieved by anticipating policyholder behaviour and sales of underlying assets within funds.
Shareholder funds
For shareholder funds, liquidity is maintained within the portfolio via the holding of cash balances and a substantial number of highly liquid assets, principally gilts and bonds.
The following tables indicate the timing of the contractual cash flows arising from the Group and Company's financial liabilities, as required by IFRS 7. The table is based on the undiscounted cash flows of financial liabilities based on the earliest date on which the Company is obliged to pay. The table includes both interest and principal cash flows.
Liquidity risk in respect of liabilities arising from insurance contracts and participating investment contracts has been analysed based on the expected pattern of maturities as permitted by IFRS 4 rather than by contractual maturity. A maturity analysis of liabilities arising from non-participating investment contracts based on expected contract maturities is also given as it is considered that this analysis provides additional useful information in respect of the liquidity risk relating to contracts written by the Group and Company.
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Group As at 31 December 2015
Liabilities Carrying Contractual cash flows
amount
No Less 1-3 3-12 1-5 More
stated than months months years than
maturity 1 month 5
years
GBPm GBPm GBPm GBPm GBPm GBPm GBPm
----------------------- --------- ---------- --------- -------- -------- ------- -------
Liabilities
arising from
non-participating
investment contracts 22,759 - 22,759 - - - -
External interests
in collective
investment vehicles 16,889 16,889 - - - - -
Derivatives
held for trading 1,857 - 41 121 111 500 1,579
Subordinated
debt 1,671 51 - - 92 461 2,528
Borrowings 6 - 4 - - 2 -
Other financial
liabilities 4,484 518 2,455 310 118 1,083 -
----------------------- --------- ---------- --------- -------- -------- ------- -------
Total 47,666 17,458 25,259 431 321 2,046 4,107
----------------------- --------- ---------- --------- -------- -------- ------- -------
Group As at 31 December 2014
Liabilities Carrying Contractual cash flows
amount
No Less 1-3 3-12 1-5 More
stated than months months years than
maturity 1 month 5
years
GBPm GBPm GBPm GBPm GBPm GBPm GBPm
----------------------- --------- ---------- --------- -------- -------- ------- -------
Liabilities
arising from
non-participating
investment contracts 10,099 - 10,099 - - - -
External interests
in collective
investment vehicles 8,868 8,868 - - - - -
Derivatives
held for trading 564 - - 23 16 1 524
Subordinated
debt 628 356 - - 21 95 678
Borrowings 37 37 - - - - -
Other financial
liabilities 526 186 260 - 88 - -
----------------------- --------- ---------- --------- -------- -------- ------- -------
Total 20,722 9,447 10,359 23 125 96 1,202
----------------------- --------- ---------- --------- -------- -------- ------- -------
The contractual cash flow analysis set out above has been based on the earliest possible contractual date, regardless of the surrender penalties that might apply and has not been adjusted to take account of such penalties.
An analysis of the contractual cash flows in respect of insurance and investment contract liabilities by expected contract maturity, on a discounted basis, is shown below:
Group As at 31 December 2015
Less More
Maturity Analysis than 1-3 3-12 1-5 than
for insurance and Total 1 month months months years 5
investment contracts GBPm GBPm GBPm GBPm GBPm years
GBPm
============================= ======== ========= ========= ========= ======== =======
Insurance and participating
investment
contracts 79,716 993 1,006 4,634 20,794 52,289
Non-participating
investment contracts 22,759 397 310 1,414 6,434 14,204
----------------------------- -------- --------- --------- --------- -------- -------
Group As at 31 December 2014
Maturity Analysis Less More
for liabilities arising than 1-3 3-12 1-5 than
from insurance and Total 1 month Months months years 5
investment contracts GBPm GBPm GBPm GBPm GBPm years
GBPm
============================= ======== ========= ============== ========= ======== =======
Insurance and participating
investment
contracts 25,906 253 444 1,865 7,186 16,158
Non-participating
investment contracts 10,099 110 203 917 3,583 5,286
----------------------------- -------- --------- -------------- --------- -------- -------
Company As at 31 December 2015
Liabilities Carrying Contractual cash flows
amount
No stated Less 1-3 3-12 1-5 More
maturity than months months years than
1 month 5 years
GBPm GBPm GBPm GBPm GBPm GBPm GBPm
------------------------ --------- ---------- --------- -------- -------- ------- ---------
Borrowings 4 - 4 - - - -
Liabilities
arising from
non-participating
investment
contracts 22,759 - 22,759 - - - -
Derivative
financial instruments 1,791 - 9 90 108 500 1,579
Subordinated
debt 1,688 52 - - 92 461 2,545
Other financial
liabilities 2,361 538 1,155 - 92 576 -
------------------------ --------- ---------- --------- -------- -------- ------- ---------
Total 28,603 590 23,927 90 292 1,537 4,124
------------------------ --------- ---------- --------- -------- -------- ------- ---------
Company As at 31 December 2014
Liabilities Carrying Contractual cash flows
amount
No stated Less 1-3 3-12 1-5 More
maturity than months months years than
1 month 5 years
GBPm GBPm GBPm GBPm GBPm GBPm GBPm
------------------------ --------- ---------- --------- -------- -------- ------- ---------
Borrowings - - - - - - -
Liabilities
arising from
non-participating
investment
contracts 7,230 - 7,230 - - - -
Derivative
financial instruments 485 - - 22 16 139 539
Subordinated
debt 628 356 - - 21 95 678
Other financial
liabilities 334 128 118 - 88 - -
------------------------ --------- ---------- --------- -------- -------- ------- ---------
Total 8,677 484 7,348 22 125 234 1,217
------------------------ --------- ---------- --------- -------- -------- ------- ---------
The contractual cash flow analysis set out above has been based on the earliest possible contractual date, regardless of the surrender penalties that might apply and has not been adjusted to take account of such penalties.
An analysis of liabilities arising from insurance and investment contracts by expected contract maturity, on a discounted basis, is shown below:
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Company As at 31 December 2015
Maturity Analysis Less More
for liabilities arising than 1-3 3-12 1-5 than
from insurance contracts Total 1 month months months years 5
and investment contracts GBPm GBPm GBPm GBPm GBPm years
GBPm
============================= ======== ========= ========= ========= ======== =======
Insurance and participating
investment contracts 79,716 993 1,006 4,634 20,794 52,289
Non-participating
investment contracts 22,759 397 310 1,414 6,434 14,204
----------------------------- -------- --------- --------- --------- -------- -------
Company As at 31 December 2014
Maturity Analysis Less More
for insurance and than 1-3 3-12 1-5 than
investment contract Total 1 month months months years 5
liabilities GBPm GBPm GBPm GBPm GBPm years
GBPm
============================= ======== ========= ========= ========= ======== =======
Insurance and participating
investment contracts 14,039 122 239 1,083 4,142 8,453
Non-participating
investment contracts 7,230 71 136 630 2,512 3,881
----------------------------- -------- --------- --------- --------- -------- -------
(iii) Capital risk
Capital risk is defined as the risk that the Group has a sub-optimal amount or quality of capital or that capital is inefficiently deployed across the Group. The risk that:
- the Group, or one of its separately regulated subsidiaries, has insufficient capital to meet its regulatory capital requirements;
- the Group has insufficient capital to provide a stable resource to absorb all losses up to a confidence level defined in the risk appetite;
- the Group loses reputational status by having capital that is regarded as inappropriate, either in quantity, type or distribution; and/or
- the capital structure is inefficient.
The business of several of the companies within the Group is regulated by the PRA and the Financial Conduct Authority ("FCA"). The PRA specifies the minimum amount of capital that must be held by each of the regulated companies within the Group in addition to their insurance liabilities. Under the PRA rules, each insurance company within the Group must hold assets in excess of the higher of:
(i) the Pillar 1 amount, which is calculated by applying fixed percentages of mathematical reserves and capital at risk; and
(ii) the Pillar 2 amount, which is derived from an economic capital assessment undertaken by each regulated company, which is reviewed by the PRA.
The minimum required capital must be maintained at all times throughout the year. These capital requirements and the capital available to meet them are regularly estimated in order to ensure that capital maintenance requirements are being met.
In addition capital requirements and capital available under Solvency II are estimated in order to ensure that Solvency II capital requirements will be met when Solvency II is introduced.
The Group's objectives when managing capital are:
- to have sufficient capital to safeguard the Group's ability to continue as a going concern so that it can continue to provide returns for the shareholder and benefits for other stakeholders;
- to comply with the insurance capital requirements set out by the PRA in the UK;
- when capital is needed, to require an adequate return to the shareholder by pricing insurance and investment contracts according to the level of risk associated with the business written; and
- to meet the requirements of the Schemes of Transfer.
The capital management strategy is such that the single integrated insurance business (comprising SWG and its subsidiaries, including the Group) will hold capital in line with the stated risk appetite for the business, which is to be able to withstand a one in ten year stress event without breaching the capital requirements. At SWG level it is intended that all surplus capital above that required to absorb a one in ten year stress event will be distributed to LBG.
The Company's capital comprises all components of equity, movements in which are set out in the statement of changes in equity and includes subordinated debt (note 29).
The table below sets out the regulatory capital and the required capital held at 31 December in each year on a Pillar 1 basis. The current year information is taken from the final PRA return.
Company 2015 2014
With Shareholder Total With Shareholder Total
Profit / Non-Profit Profit / Non-Profit
GBPm GBPm GBPm GBPm GBPm GBPm
================== ======= ============= ======= ======= ============= =======
Regulatory
Capital held 5,123 4,305 9,428 1,414 1,798 3,212
Regulatory
Capital Required (4,896) (1,030) (5,926) (1,360) (335) (1,695)
------------------ ------- ------------- ------- ------- ------------- -------
Regulatory
Surplus 227 3,275 3,502 54 1,463 1,517
------------------ ------- ------------- ------- ------- ------------- -------
All minimum regulatory requirements were met during the year.
(d) Operational risk
Operational risk is defined as the risk of loss resulting from inadequate or failed internal processes, people and systems or from external events. There are a number of secondary categories of operational risk including the undernoted:
Financial crime and fraud risk
Financial crime concerns activity related to money laundering, sanctions, terrorist financing and bribery. Fraud covers acts intended to defraud, misappropriate property or circumvent the law. These activities could give rise to risk of reduction in earnings and/or value, through financial or reputational loss. Losses may include censure, fines or the cost of litigation.
Information security and physical security risk
Information security risk relates to the risk of reductions in earnings and/or value, through financial or reputational loss, resulting from theft of or damage to the security of the Group's information and data. Physical security risk relates to the risk to the security of people and property.
Operational resilience risk
Operational resilience risk covers the risk or instances of interruptions to business operations (including critical buildings, critical and core infrastructure and IT systems, suppliers and colleagues), as a consequence of external or internal events due to insufficient resilience, inadequate recovery strategies and/or continuity systems and controls.
Change risk
Change risk is related to the management of change - designing and implementing key projects or programme. Potential loss could arise from failure requirements, budget or timescale; failure to implement change effectively; or failure to realise desired benefits.
Sourcing and service provision risk
Sourcing risk covers the risk of reductions in earnings and/or value through financial or reputational loss from risks associated with activity related to the agreement and management of services provided by third parties including outsourcing.
Service provision risk covers the risks associated with provision of services to a third party and with the management of internal intra-group service arrangements.
IT systems and cyber risk
The risk of reductions in earnings and/or value through financial or reputational loss resulting from the failure to develop, deliver, maintain, or protect against cyber attack, the company's IT solutions. The Directors have embedded a risk framework and monitor the effective operation of this across the Group.
(e) People risk
People risk is defined as the risk that the Group fails to lead, manage and enable colleagues to deliver to customers, shareholders and regulators leading to an inability to deliver the Group's strategy.
(f) Regulatory and Legal risk
Regulatory and legal risk is defined as the risk that the Group is exposed to fines, censure, legal or enforcement action, civil or criminal proceedings in the courts (or equivalent) and risk that the Group is unable to enforce its rights as anticipated.
Regulators aim to protect the rights of customers, ensuring firms satisfactorily manage their affairs for the benefit of customers and that they retain sufficient capital and liquidity. The Group has embedded a risk framework to closely monitor and manage its legal and regulatory risks, and maintains regular interaction with its regulators.
(g) Conduct risk
Conduct risk is defined as the risk of customer detriment or regulatory censure and/or a reduction in earnings/value, through financial or reputational loss, from inappropriate or poor customer treatment or business conduct.
The Group is focused on delivering fair customer outcomes, and has embedded a risk framework to effectively monitor and manage its conduct risks.
(h) Financial reporting risk
(MORE TO FOLLOW) Dow Jones Newswires
March 29, 2016 09:36 ET (13:36 GMT)
Financial reporting risk is defined as the risk that the Group suffers reputational damage, loss of investor confidence and/or financial loss arising from the adoption of inappropriate accounting policies, ineffective controls over financial and regulatory reporting, failure to manage the associated risks of changes in taxation rates, law, ownership or corporate structure and the failure to disclose accurate and timely information.
(i) Governance risk
Governance risk is defined as the risk that the Group's organisational infrastructure fails to provide robust oversight of decision making and the control mechanisms to ensure strategies and management instructions are implemented effectively.
Further details of the above can also be obtained by contacting Secretariat, Insurance, Lloyds Banking Group plc, Level 7 Block E, Port Hamilton, 69 Morrison Street, Edinburgh EH3 8YF.
This information is provided by RNS
The company news service from the London Stock Exchange
END
FR AKCDNNBKDKNB
(END) Dow Jones Newswires
March 29, 2016 09:36 ET (13:36 GMT)
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