13 Market risk.

(i) Investment performance risk

(a) Equity securities

The Group controls its exposure to geographic price risks by using internal country credit ratings. These ratings are based on macroeconomic data and key qualitative indicators. The latter take into account economic, social and political environments. The table below indicates the Group’s exposure to different equity markets around the world. Unit linked equity investments are excluded from the table as the risk is retained by the policyholder.

(XLS:) Market risk – exposure to worldwide equity markets

Exposure to worldwide equity markets

Share­holder
2012
£m

Non profit non–unit linked
2012
£m

With–profits
2012
£m

Total
2012
£m

Share­holder
2011
£m

Non profit non–unit linked
2011
£m

With–profits
2011
£m

Total
2011
£m

United Kingdom

523

1,411

1,934

458

1,392

1,850

North America

129

416

545

746

746

Europe

177

883

1,060

117

558

675

Japan

254

254

402

402

Asia Pacific

169

647

816

50

566

616

Other

60

125

185

39

39

Listed equities

1,058

3,736

4,794

625

3,703

4,328

Unlisted UK equities

11

59

70

15

82

97

Holdings in unit trusts

166

364

530

273

479

752

Total equities

1,235

4,159

5,394

913

4,264

5,177

The Group holds shareholder and non profit non–unit linked property investments totalling £773m (2011: £606m), of which £769m (2011: £601m) are located in the UK.

A 10% reduction in the value of listed equities would result in a reduction in pre–tax profit attributable to shareholders of £106m (2011: £63m). The impact on the with–profits fund has not been provided as the reduction would be offset by a change in the unallocated divisible surplus.

(b) Debt securities

(XLS:) Market risk – total debt securities and accrued interest

Total debt securities and accrued interest1

Note

Share­holder
2012
£m

Non profit non–unit linked
2012
£m

With–profits
2012
£m

Total
2012
£m

Share­holder
2011
£m

Non profit non–unit linked
2011
£m

With–profits
2011
£m

Total
2011
£m

1.

For risk management purposes, bespoke consolidated CDOs are considered net. For presentation in the balance sheet the components of the CDOs are shown within non profit non–unit linked investments (2012: £812m; 2011: £897m), cash equivalents (2012: £265m; 2011: £178m) and derivative liabilities (2012: £(102)m; 2011: £(203)m).

United Kingdom

 

1,009

11,569

5,547

18,125

1,309

10,449

5,001

16,759

USA

 

2,462

8,394

1,085

11,941

2,508

8,040

1,076

11,624

Netherlands

 

606

1,661

543

2,810

604

1,226

580

2,410

France

 

429

1,313

1,729

3,471

399

1,124

2,023

3,546

Italy

 

108

636

104

848

109

543

108

760

Germany

 

335

316

696

1,347

316

445

805

1,566

Ireland

 

18

1,315

219

1,552

12

1,163

262

1,437

Spain

 

68

192

59

319

49

187

185

421

Belgium

 

57

27

47

131

56

23

124

203

Portugal

 

3

13

16

4

41

4

49

Greece

 

5

5

Europe – Other

 

388

1,164

1,023

2,575

330

994

1,328

2,652

Rest of World

 

186

2,654

678

3,518

151

2,146

641

2,938

 

 

5,669

29,254

11,730

46,653

5,847

26,381

12,142

44,370

Analysed as1

 

 

 

 

 

 

 

 

 

Debt Securities

10(i)

5,608

28,875

11,557

46,040

5,771

25,993

11,924

43,688

Accrued Interest

10(i)

61

379

173

613

76

388

218

682

 

 

5,669

29,254

11,730

46,653

5,847

26,381

12,142

44,370

(bi) Additional disclosures on shareholder and non profit non–unit linked debt securities exposure

(XLS:) Market risk – debt securities exposure by sector

Analysed by sector

2012
£m

2012
%

2011
£m

2011
%

1.

Tier 1 holdings include £56m (2011: £49m) of preference shares.

Sovereigns, Supras and Sub–Sovereigns

6,328

18

6,188

19

Banks:

 

 

 

 

– Tier 11

223

1

259

1

– Tier 2 and other subordinated

776

2

1,338

4

– Senior

2,243

6

2,234

7

Utilities

4,177

12

3,722

12

Consumer Services and Goods

3,040

9

2,928

9

Financial Services

1,198

3

1,179

4

Technology and Telecoms

2,337

7

2,209

7

Insurance

1,362

4

1,120

3

Industrials

1,816

5

1,515

5

Oil and Gas

2,009

6

1,837

6

Health Care

926

3

786

2

Property

698

2

640

2

Traditional and secured asset backed securities

6,693

19

5,275

16

CDO

1,097

3

998

3

Total

34,923

100

32,228

100

(XLS:) Market risk – analysis of sovereign debt exposures

Analysis of sovereign debt exposures

2012
£m

2011
£m

Market value by region

 

 

United Kingdom

3,552

3,205

USA

470

782

Netherlands

423

468

France

299

317

Italy

312

281

Germany

380

386

Ireland

6

4

Spain

47

29

Belgium

38

40

Portugal

4

3

Greece

Europe – Other

631

602

Rest of World

166

71

Total

6,328

6,188

(XLS:) Market risk – subordinated bank exposures

Group subordinated bank exposures

2012
£m

2012
%

2011
£m

2011
%

1.

The exposure to UK tier 1 debt includes issuances from the UK subsidiaries of European banks where there is no explicit parental guarantee.

Tier 1

 

 

 

 

United Kingdom1

161

16

139

9

USA

10

1

47

3

Europe

52

5

61

4

Others

12

1

Total tier 1

223

22

259

17

 

 

 

 

 

Lower tier 2

 

 

 

 

United Kingdom

235

24

586

36

USA

312

31

394

25

Europe

100

10

142

9

Others

26

3

68

4

 

 

 

 

 

Upper tier 2

 

 

 

 

United Kingdom

66

7

63

4

USA

2

1

Europe

39

2

Others

2

 

 

 

 

 

Other subordinated

 

 

 

 

United Kingdom

1

USA

32

3

43

3

Europe

2

Others

Total tier 2 and other subordinated

776

78

1,338

83

Total

999

100

1,597

100

(XLS:) Market risk – traditional and secured asset backed securities summary – by security

Traditional and secured asset backed securities summary – by security

2012
£m

2012
%

2011
£m

2011
%

1.

54% (2011: 56%) of Prime RMBS holdings relate to UK mortgages.

2.

60% (2011: 55%) of Sub–prime RMBS holdings have a credit rating of AAA and 94% (2011: 71%) relate to the UK.

Traditional asset backed securities:

 

 

 

 

Residential Mortgage–Backed Securities – Prime1

674

10

680

13

Residential Mortgage–Backed Securities – Sub–prime2

17

20

Commercial Mortgage–Backed Securities

457

7

450

9

Credit Card

162

2

134

3

Auto

113

2

113

2

Consumer Loans

30

40

1

Student Loans

59

1

26

 

1,512

22

1,463

28

Securitisations and debentures:

 

 

 

 

Secured Bond

2,294

34

1,975

37

Commercial Property Backed Bonds

575

9

236

5

Infrastructure/Private Finance Initiative/Social housing

1,570

24

1,168

22

Whole Business Securitisation

431

6

302

6

Other secured holdings

311

5

131

2

 

5,181

78

3,812

72

Total traditional and secured asset backed securities

6,693

100

5,275

100

The two categories above are based on the following definitions: Traditional asset backed securities are securities, often with variable expected redemption profiles issued by Special Purpose Vehicles and typically backed by pools of receivables from loans or personal credit. Debentures are securities with fixed redemption profiles issues by firms typically secured on property and Securitisations are securities with fixed redemption profiles that are issued by Special Purpose Vehicles and secured on revenues from specific assets or operating companies.

(ii) Currency risk

The table below summarises the Group’s exposure to foreign currency exchange risk, in Sterling. The functional currency represents the currency of the primary economic environment in which each of the Group’s subsidiaries operates.

(XLS:) Currency risk – shareholder 2012

As at 31 December 2012

Shareholder

Euro
£m

US Dollar
£m

Japanese Yen
£m

Other
£m

Functional currency
£m

Carrying value
£m

Total assets

865

(151)

55

352

10,938

12,059

Total liabilities

884

152

6,709

7,745

Net assets/(liabilities)

(19)

(303)

55

352

4,229

4,314

(XLS:) Currency risk – non profit non-unit linked 2012

Non profit non-unit linked

 

 

 

 

 

 

1.

For risk management purposes, bespoke consolidated CDOs are considered on a net basis. Accordingly, the table above presents derivative liabilities of £102m as a deduction to non profit non-unit linked investments and other liabilities.

Total assets

1,805

1,292

27

33,209

36,333

Total liabilities1

1,825

1,279

32,127

35,231

Net assets/(liabilities)

(20)

13

27

1,082

1,102

(XLS:) Currency risk – with-profits 2012

With-profits

 

 

 

 

 

 

Total assets

800

466

259

1,115

16,433

19,073

Total liabilities

248

30

2

16

18,801

19,097

Net assets/(liabilities)

552

436

257

1,099

(2,368)

(24)

(XLS:) Currency risk – shareholder 2011 (restated)

As at 31 December 2011 (Restated)

Shareholder

Euro
£m

US Dollar
£m

Japanese Yen
£m

Other
£m

Functional currency
£m

Carrying value
£m

Total assets

721

592

43

81

10,404

11,841

Total liabilities

737

1,272

6,229

8,238

Net assets/(liabilities)

(16)

(680)

43

81

4,175

3,603

(XLS:) Currency risk – non profit non-unit linked 2011 (restated)

Non profit non-unit linked

 

 

 

 

 

 

1.

For risk management purposes, bespoke consolidated CDOs are considered on a net basis. Accordingly, the table above presents derivative liabilities of £203m as a deduction to non profit non-unit linked investments and other liabilities.

Total assets

127

9,728

19

23,197

33,071

Total liabilities1

148

9,795

21,677

31,620

Net assets/(liabilities)

(21)

(67)

19

1,520

1,451

(XLS:) Currency risk – with-profits 2011 (restated)

With-profits

 

 

 

 

 

 

Total assets

320

1,039

411

825

16,677

19,272

Total liabilities

(17)

301

2

3

18,951

19,240

Net assets/(liabilities)

337

738

409

822

(2,274)

32

The Group’s management of currency risk reduces shareholders’ exposure to exchange rate fluctuations. The Group’s exposure to a 10% exchange movement in the US Dollar and Euro on an IFRS basis, net of hedging activities, is detailed below.

Currency sensitivity analysis

(XLS:) Currency sensitivity analysis

Currency sensitivity test

Impact
on pre-tax
profit
2012
£m

Impact on equity
2012
£m

Impact
on pre-tax
profit
2011
£m

Impact on equity
2011
£m

10% Euro appreciation

(4)

(3)

(4)

(3)

10% US Dollar appreciation

(29)

(22)

(75)

(55)

The credit profile of the Group’s assets exposed to credit risk is shown in Note 14. The credit rating bands are provided by independent rating agencies. For unrated assets, the Group maintains internal ratings which are used to manage exposure to these counterparties. Unit linked assets have not been included as shareholders are not directly exposed to risk.