16 Market risk.

16 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

Share-
holder
2013
£m

Non profit non-unit linked
2013
£m

With-
profits
2013
£m

Total
2013
£m

Share-
holder
2012
£m

Non profit non-unit linked
2012
£m

With-
profits
2012
£m

Total
2012
£m

United Kingdom

570

69

1,663

2,302

523

1,411

1,934

North America

12

722

734

129

416

545

Europe

307

3

846

1,156

177

883

1,060

Japan

260

260

254

254

Asia Pacific

72

549

621

169

647

816

Other

55

109

164

60

125

185

Listed equities

1,016

72

4,149

5,237

1,058

3,736

4,794

Unlisted UK equities

23

11

43

77

11

59

70

Holdings in unit trusts

394

348

742

166

364

530

Total equities

1,433

83

4,540

6,056

1,235

4,159

5,394

(b) Debt securities

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

Total debt securities and accrued interest1

Share-
holder
2013
£m

Non profit non-unit linked
2013
£m

With-
profits
2013
£m

Total
2013
£m

Share-
holder
2012
£m

Non profit non-unit linked
2012
£m

With-
profits
2012
£m

Total
2012
£m

1.

For financial 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 (2013: £616m; 2012: £812m), cash equivalents (2013: £384m; 2012: £265m) and derivative liabilities (2013: £(17)m; 2012: £(102)m).

United Kingdom

1,079

13,099

4,661

18,839

1,009

11,569

5,547

18,125

USA

2,542

7,237

1,009

10,788

2,462

8,394

1,085

11,941

Netherlands

428

1,736

583

2,747

606

1,661

543

2,810

France

299

1,382

1,705

3,386

429

1,313

1,729

3,471

Germany

380

411

480

1,271

335

316

696

1,347

GIIPS:

 

 

 

 

 

 

 

 

– Ireland

37

234

222

493

18

271

219

508

– Italy

150

636

75

861

108

636

104

848

– Portugal

16

15

31

3

13

16

– Spain

85

178

66

329

68

192

59

319

Rest of Europe

422

1,299

1,012

2,733

445

1,191

1,070

2,706

Rest of World

241

2,693

696

3,630

186

2,601

678

3,465

CDO

1,098

1,098

1,097

1,097

 

5,679

30,018

10,509

46,206

5,669

29,254

11,730

46,653

 

 

 

 

 

 

 

 

 

Analysed as1

 

 

 

 

 

 

 

 

Debt securities

5,624

29,618

10,357

45,599

5,608

28,875

11,557

46,040

Accrued interest

55

400

152

607

61

379

173

613

 

5,679

30,018

10,509

46,206

5,669

29,254

11,730

46,653

(c) Additional disclosures on shareholder and non profit non-unit linked debt securities exposure

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

Analysed by sector

2013
£m

2013
%

2012
£m

2012
%

Sovereigns, Supras and Sub-Sovereigns

6,502

18

6,328

18

Banks:

 

 

 

 

– Tier 1

105

223

1

– Tier 2 and other subordinated

698

2

776

2

– Senior

2,169

6

2,243

6

Financial Services:

 

 

 

 

– Tier 1

5

4

– Tier 2 and other subordinated

251

1

67

– Senior

1,041

3

1,127

3

Insurance:

 

 

 

 

– Tier 1

152

142

– Tier 2 and other subordinated

625

2

575

2

– Senior

552

2

645

2

Utilities

4,329

12

4,177

12

Consumer Services and Goods & Health Care

3,716

10

3,966

12

Technology and Telecoms

2,333

7

2,337

7

Industrials & Oil and Gas

3,626

10

3,825

11

Property

1,053

3

698

2

Asset backed securities:

 

 

 

 

– Traditional

1,395

4

1,512

4

– Securitisations and debentures

6,047

17

5,181

15

CDO

1,098

3

1,097

3

Total

35,697

100

34,923

100

(XLS:) Market risk – Analysis of Sovereigns, Supras and Sub-Sovereigns

Analysis of Sovereigns, Supras and Sub-Sovereigns

2013
£m

2012
£m

Market value by region

 

 

United Kingdom

3,725

3,552

USA

664

470

Netherlands

194

423

France

220

299

Germany

472

380

GIIPS:

 

 

– Greece

– Ireland

7

6

– Italy

323

312

– Portugal

16

4

– Spain

14

47

Rest of Europe

661

669

Rest of World

206

166

Total

6,502

6,328

(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 2013

As at 31 December 2013

Shareholder

Euro
£m

US Dollar
£m

Japanese Yen
£m

Other
£m

Functional currency
£m

Carrying value
£m

Total assets

713

(35)

65

298

10,875

11,916

Total liabilities

667

29

6,902

7,598

Net assets/(liabilities)

46

(64)

65

298

3,973

4,318

1.

For risk management purposes, bespoke consolidated CDOs are considered on a net basis. Accordingly, the table above presents derivative liabilities of £17m as a deduction to non profit non-unit linked investments and other liabilities.

Non profit non-unit linked

 

 

 

 

 

 

Total assets

677

712

36,090

37,479

Total liabilities1

537

487

35,093

36,117

Net assets/(liabilities)

140

225

997

1,362

With-profits

 

 

 

 

 

 

Total assets

531

740

268

1,074

15,157

17,770

Total liabilities

(10)

10

2

20

17,726

17,748

Net assets/(liabilities)

541

730

266

1,054

(2,569)

22

(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

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.

Non profit non-unit linked

 

 

 

 

 

 

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

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)

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
2013
£m

Impact on
equity
2013
£m

Impact on pre-tax profit
2012
£m

Impact on
equity
2012
£m

10% Euro appreciation

19

15

(4)

(3)

10% US Dollar appreciation

16

13

(29)

(22)

The credit profile of the Group’s assets exposed to credit risk is shown in Note 17. 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.

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