17 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.

Exposure to worldwide equity markets

Share­holder
2014
£m

Non profit non-unit linked
2014
£m

With-profits
2014
£m

Total
2014
£m

Share­holder
2013
£m

Non profit non-unit linked
2013
£m

With-profits
2013
£m

Total
20131
£m

1.

This has been restated to reflect the adoption by the group of IRFS 10, ‘Consolidated Financial Statements’. Further details are contained in Note 1.

United Kingdom

564

188

1,354

2,106

570

69

1,663

2,302

North America

327

16

713

1,056

139

722

861

Europe

301

68

662

1,031

307

3

846

1,156

Japan

80

261

341

55

260

315

Asia Pacific

183

7

500

690

72

549

621

Other

31

179

210

55

109

164

Listed equities

1,486

279

3,669

5,434

1,198

72

4,149

5,419

Unlisted UK equities

98

38

136

23

11

43

77

Holdings in unit trusts

307

358

665

388

314

702

Total equities

1,891

279

4,065

6,235

1,609

83

4,506

6,198

(b) Debt securities

Total debt securities and accrued interest1

Share­holder
2014
£m

Non profit non-unit linked
2014
£m

With-profits
2014
£m

Total
2014
£m

Share­holder
20132
£m

Non profit non-unit linked
20132
£m

With-profits
20132
£m

Total
20132
£m

1.

For financial risk management purposes, bespoke consolidated CDOs are considered net. For presentation in the Consolidated Balance Sheet the components of the CDOs are shown within non profit non-unit linked investments (2014: £971m; 2013: £616m), cash equivalents (2014: £nil; 2013: £384m) and derivative assets/(liabilities) (2014: £23m; 2013: £(17)m).

2.

This has been restated to reflect the adoption by the group of IFRS 10, ‘Consolidated Financial Statements’. Further details are contained in Note 1.

United Kingdom

966

20,055

4,015

25,036

1,079

13,099

4,661

18,839

USA

2,324

9,515

919

12,758

2,542

7,237

1,009

10,788

Netherlands

272

1,910

377

2,559

428

1,736

583

2,747

France

314

1,412

1,573

3,299

299

1,382

1,705

3,386

Germany

304

378

467

1,149

380

411

480

1,271

Greece

Ireland

27

276

66

369

37

234

222

493

Italy

128

301

59

488

150

636

75

861

Portugal

10

1

11

16

15

31

Spain

48

212

58

318

85

178

66

329

Russia

18

19

4

41

1

10

11

Rest of Europe

307

1,857

721

2,885

421

1,299

1,002

2,722

Brazil

18

139

40

197

3

83

34

120

Rest of World


338

3,542

577

4,457

238

2,610

662

3,510

CDOs

1,120

95

1,215

1,098

1,098

 

5,074

40,737

8,971

54,782

5,679

30,018

10,509

46,206

Analysed as1

 

 

 

 

 

 

 

 

Debt securities

5,033

40,261

8,860

54,154

5,624

29,618

10,357

45,599

Accrued interest

41

476

111

628

55

400

152

607

 

5,074

40,737

8,971

54,782

5,679

30,018

10,509

46,206

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

 

2014
£m

2014
%

2013
£m

2013
%

Sovereigns, Supras and Sub-Sovereigns

9,249

20

6,502

18

Banks:

 

 

 

 

– Tier 1

26

105

– Tier 2 and other subordinated

621

1

698

2

– Senior

2,221

5

2,169

6

Financial Services:

 

 

 

 

– Tier 1

5

– Tier 2 and other subordinated

132

251

1

– Senior

1,138

3

1,041

3

Insurance:

 

 

 

 

– Tier 1

129

152

– Tier 2 and other subordinated

375

1

625

2

– Senior

704

2

552

2

Utilities

5,824

13

4,329

12

Consumer Services and Goods and Health Care

4,726

10

3,716

10

Technology and Telecoms

2,836

6

2,333

7

Industrials and Oil and Gas

4,928

11

3,626

10

Property

2,126

5

1,053

3

Asset backed securities:

 

 

 

 

– Traditional

1,234

3

1,395

4

– Securitisations and debentures

8,422

18

6,047

17

CDOs

1,120

2

1,098

3

Total

45,811

100

35,697

100

Analysis of Sovereigns, Supras and Sub-Sovereigns

2014
£m

2013
£m

Market value by region

 

 

United Kingdom

6,267

3,725

USA

772

664

Netherlands

153

194

France

138

220

Germany

417

472

Greece

Ireland

8

7

Italy

96

323

Portugal

9

16

Spain

10

14

Russia

28

1

Rest of Europe

922

660

Brazil

64

13

Rest of World

365

193

Total

9,249

6,502

(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.

As at 31 December 2014

 

Euro
£m

US Dollar
£m

Japanese Yen
£m

Other
£m

Functional currency
£m

Carrying value
£m

Shareholder

 

 

 

 

 

 

Total assets

459

1,062

21

401

10,813

12,756

Total liabilities

512

1,327

1

6,985

8,825

Net assets/(liabilities)

(53)

(265)

21

400

3,828

3,931

1.

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

Non profit non-unit linked

 

 

 

 

 

 

Total assets

801

11,294

41

38,439

50,575

Total liabilities1

676

10,963

37,533

49,172

Net assets/(liabilities)

125

331

41

906

1,403

With-profits

 

 

 

 

 

 

Total assets

397

1,338

246

1,079

12,566

15,626

Total liabilities

7

608

27

14,964

15,606

Net assets/(liabilities)

390

730

246

1,052

(2,398)

20

As at 31 December 2013

 

Euro
£m

US Dollar
£m

Japanese Yen
£m

Other
£m

Functional currency
£m

Carrying value
£m

Shareholder

 

 

 

 

 

 

Total assets

713

92

120

298

10,876

12,099

Total liabilities

667

156

55

6,903

7,781

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

2.

This has been restated to reflect the adoption by the group of IRFS 10, ‘Consolidated Financial Statements’. Further details are contained in Note 1.

With-profits

 

 

 

 

 

 

Total assets

531

740

268

1,074

15,168

17,781

Total liabilities

(10)

10

2

20

17,737

17,759

Net assets/(liabilities)2

541

730

266

1,054

(2,569)

22

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

Currency sensitivity test

Impact on pre-tax profit
2014
£m

Impact on equity
2014
£m

Impact on pre-tax profit
2013
£m

Impact on equity
2013
£m

10% Euro appreciation

7

6

19

15

10% US Dollar appreciation

7

5

16

13

The credit profile of the group’s assets exposed to credit risk is shown in Note 18. 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.