21 IFRS sensitivity analysis


Impact on pre-tax group profit net of reinsurance

Impact on group equity net of reinsurance

Impact on pre-tax group profit net of reinsurance

Impact on group equity net of reinsurance

Economic sensitivity





Long-term insurance





1% increase in interest rates





1% decrease in interest rates





1% increase in long term inflation expectations





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





10% decrease in listed equities





10% fall in property values





10bps increase in credit default assumption





10bps decrease in credit default assumption










Non-economic sensitivity





Long-term insurance





1% decrease in annuitant mortality





5% increase in assurance mortality




Default of largest external reinsurer










General Insurance





Single storm event with 1 in 200 year probability





Subsidence event – worst claims ratio in last 30 years





5% decrease in overall claims ratio





5% surplus over claims liabilities





For any single event with claims in excess of £30m (2013: £43m) but less than £466m (2013: £456m), the ultimate cost to Legal & General Insurance Limited (LGI) would be £30m plus 50% of the £5m XS £30m layer (2013: £43m). 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 75% of claims between £35m and £80m, 75% of claims between £80m and £190m and 45% of claims between £190m and £457m. 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 £252m (2013: £210m), with an estimated total cost to LGI of £317m (2013: £287m) and to the group of £538m (2013: £481m).

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. Modelling improvements have been made in the year which more accurately isolate the impacts of discrete assumptions changes. This, coupled with the increase in the group’s annuity liabilities have led to an increase in the reported 2014 sensitivities for interest rates and inflation. No yield floors have been applied in the estimation of the stresses, despite the current low interest rate environment.

Interest rate and inflation expectation have historically shown positive correlation and have therefore been presented next to each other.

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.

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 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 assurance mortality stress represents an increase in mortality/morbidity rates for assurance contracts by 5%.

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 external reinsurer, the reinsurer stress shown is equal to the technical provisions ceded to the external reinsurer and represents the impact of the default of largest external reinsurer at an entity level.

Details of IGD sensitivity analysis can be found in Table 2 of Note 30.

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.