20 IFRS sensitivity analysis.

20 IFRS sensitivity analysis.
(XLS:) IFRS sensitivity analysis

 

Impact on pre-tax Group profit net of reinsurance
2013
£m

Impact on Group equity net of reinsurance
2013
£m

Impact on pre-tax Group profit net of reinsurance
2012
£m

Impact on Group equity net of reinsurance
2012
£m

Economic sensitivity

 

 

 

 

Long-term insurance

 

 

 

 

1% increase in interest rates

39

32

8

7

1% decrease in interest rates

(11)

(10)

(46)

(35)

Credit spread widens by 100bps with no change in expected defaults

(100)

(76)

(123)

(93)

1% increase in inflation

45

36

(10)

(8)

10% decrease in listed equities

(143)

(114)

(124)

(95)

10% fall in property values

(53)

(41)

(31)

(24)

10bps increase in credit default assumption

(284)

(218)

(282)

(213)

10bps decrease in credit default assumption

292

224

280

212

 

 

 

 

 

Non-economic sensitivity

 

 

 

 

Long-term insurance

 

 

 

 

1% decrease in annuitant mortality

(105)

(80)

(96)

(73)

Default of largest reinsurer

(666)

(512)

(651)

(491)

 

 

 

 

 

General Insurance

 

 

 

 

Single storm event with 1 in 200 year probability

(73)

(56)

(63)

(47)

Subsidence event – worst claims ratio in last 30 years

(55)

(42)

(50)

(37)

5% decrease in overall claims ratio

7

5

8

6

5% surplus over claims liabilities

5

4

5

4

For any single event with claims in excess of £43m (2012: £36m) but less than £456m (2012: £360m), the ultimate cost to Legal & General Insurance Limited (LGI) would be £43m (2012: £36m). The ultimate cost to the Group is greater as a proportion of the catastrophe reinsurance cover is placed with Legal & General Assurance Society Limited, which is exposed to 70% of claims between £43m and £85m, 70% of claims between £85m and £195m and 40% of claims between £195m and £447m. The impact of a 1 in 500 year modelled windstorm and coastal flood event would exceed the upper limit of the catastrophe cover by approximately £210m (2012: £180m), with an estimated total cost to LGI of £287m (2012: £246m) and to the Group of £481m (2012: £346m).

The table shows the impacts on Group pre-tax profit and equity, net of reinsurance, under each sensitivity scenario for the Group. The participating funds have been excluded in the above sensitivity analysis as the impact of the sensitivities on IFRS profit and equity is offset by the movement in the unallocated divisible surplus (UDS). The shareholders’ share of with-profit bonus declared in the year is relatively insensitive to market movements due to the smoothing policies applied.

The above sensitivity analyses do not reflect management actions which could be taken to reduce the impacts. The Group seeks to actively manage its asset and liability position. A change in market conditions may lead to changes in the asset allocation or charging structure which may have a more, or less, significant impact on the value of the liabilities. The analyses also ignore any second order effects of the assumption change, including the potential impact on the Group asset and liability position and any second order tax effects. In calculating the alternative values, all other assumptions are left unchanged, though in practice, items of the Group’s experience may be correlated. The sensitivity of the profit and equity to changes in assumptions may not be linear. These results should not be extrapolated to changes of a much larger order.

The interest rate sensitivity assumes a 100 basis point change in the gross redemption yield on fixed interest securities together with a 100 basis point change in the real yields on variable securities. For the UK long-term funds, valuation interest rates are assumed to move in line with market yields adjusted to allow for the impact of PRA regulations. The interest rate sensitivities reflect the impact of the regulatory restrictions on the reinvestment rate used to value the liabilities of the long-term business.

In the sensitivity for credit spreads, corporate bond yields have increased by 100bps, gilt and approved security yields are unchanged, and there has been no adjustment to the default assumptions.

The inflation stress adopted is a 1% pa increase in inflation resulting in a 1% pa reduction in real yield and no change to the nominal yield. In addition the expense inflation rate is increased by 1% pa.

The equity stress is a 10% fall in listed equity market values. The property stress adopted is a 10% fall in property market value. Rental income is assumed to be unchanged; however the vacant possession value is stressed down by 10% in line with the market value stress. Where property is being used to back liabilities, the valuation interest rate used to place a value on the liabilities moves with the implied change in property yields.

The annuitant mortality stress is a 1% reduction in the mortality rates for immediate and deferred annuitants with no change to the mortality improvement rates.

The credit default stress assumes a +/-10bps stress to the current credit default assumption for unapproved corporate bonds which will have an impact on the valuation interest rates used to discount liabilities. The credit default assumption is set based on the credit rating of the individual bonds in the asset portfolio and their outstanding term using Moody’s global credit default rates.

For the sensitivity to the default of the Group’s largest reinsurer, the reinsurer stress shown is equal to the technical provisions ceded to the reinsurer and represents the impact of the default of largest reinsurer at an entity level.

Details of IGD sensitivity analysis can be found in Table 2 of Note 29.

The Group also uses embedded value financial statements information to manage risk. The effect of alternative assumptions on the long-term embedded value, prepared in accordance with the guidance issued by the European Insurance CFO Forum in October 2005 are contained in Note 8 of the European Embedded Value section.

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