3,318 27,024 73,075 103,417
------- -------- -------- ---------
Liabilities
Long-term business provision 6,125 22,200 64,121 92,446
------- -------- -------- ---------
Group financial investments with variable interest rates,
including cash and cash equivalents, insurance instalment
receivables and mortgage loans are subject to cash flow interest
rate risk. This risk is not significant to the Group.
(d) Credit risk
The Group has exposure to credit risk, which is the risk of
non-payment of their obligations by counterparties and financial
markets borrowers. Areas where the Group is exposed to credit risk
are:
-- reinsurers' share of insurance liabilities (excluding
provision for unearned premiums) and amounts due from reinsurers in
respect of claims already paid;
-- deposits held with banks;
-- amounts due from insurance intermediaries and policyholders;
and
-- counterparty default on loans and debt securities.
The carrying amount of financial and reinsurance assets
represents the Group's maximum exposure to credit risk. The Group
structures the levels of credit risk it accepts by placing limits
on its exposure to a single counterparty. Limits on the level of
credit risk are regularly reviewed.
Reinsurance is used to manage insurance risk. This does not,
however, discharge the Group's liability as primary insurer. If a
reinsurer fails to pay a claim for any reason, the Group remains
liable for the payment to the policyholder. The creditworthiness of
reinsurers is considered on a regular basis through the year by
reviewing their financial strength. The Group Reinsurance Security
Committee assesses, monitors and approves the creditworthiness of
all reinsurers, reviewing relevant credit ratings provided by the
recognised credit rating agencies, as well as other publicly
available data and market information. The Committee also monitors
the balances outstanding from reinsurers and maintains an approved
list of reinsurers.
There has been no significant change in the recoverability of
the Group's reinsurance balances during the year with all
reinsurers on the 2014 reinsurance programme having a minimum
rating of 'A-' from Standard & Poor's or an equivalent agency
at the time of purchase, with the exception of MAPFRE RE whose
rating was adversely impacted by the sovereign rating of Spain.
However, MAPFRE RE was upgraded by Standard & Poor's to 'A-' in
February 2014 and then to 'A' in May 2014 with a stable
outlook.
Group cash balances are regularly reviewed to identify the
quality of the counterparty bank and to monitor and limit
concentrations of risk.
The Group's credit risk policy details prescriptive methods for
the collection of premiums and control of intermediary and
policyholder debtor balances. The level and age of debtor balances
are regularly assessed via monthly credit management reports. These
reports are scrutinised to assess exposure in more than one region
in respect of aged or outstanding balances. Any such balances are
likely to be major international brokers who are in turn monitored
via credit reference agencies and considered to pose minimal risk
of default. The Group has no material concentration of credit risk
in respect of amounts due from insurance intermediaries and
policyholders due to the well-diversified spread of such
debtors.
Collateral is held over loans secured by mortgages. The debt
securities portfolio consists of a range of mainly fixed interest
instruments including government securities, local authority
issues, corporate loans and bonds, overseas bonds, preference
shares and other interest-bearing securities. Limits are imposed on
the credit ratings of the corporate bond portfolio and exposures
regularly monitored. Group investments in unlisted securities
represent less than 1% of this category in the current and prior
year. The Group's exposure to counterparty default on debt
securities is spread across a variety of geographical and economic
territories, as follows:
2014 2013
GBP000 GBP000
UK 424,480 463,879
Australia 87,037 93,283
Canada 60,162 58,629
Europe 24,586 26,272
Total 596,265 642,063
--------- ---------
(e) Liquidity risk
Liquidity risk is the risk that funds may not be available to
pay obligations when due. The Group is exposed to daily calls on
its available cash resources mainly from claims arising from
insurance contracts. An estimate of the timing of the net cash
outflows resulting from insurance contracts is provided in note 27
to the full financial statements. The Group has robust processes in
place to manage liquidity risk and has available cash balances,
other readily marketable assets and access to funding in case of
exceptional need. This is not considered to be a significant risk
to the Group.
Non-derivative financial liabilities consist of finance leases,
which are not material to the Group, and other liabilities for
which a maturity analysis is included in note 30 to the full
financial statements.
(f) Currency risk
The Group operates internationally and its main exposures to
foreign exchange risk are noted below. The Group's foreign
operations generally invest in assets and purchase reinsurance
denominated in the same currencies as their insurance liabilities,
which mitigates the foreign currency exchange rate risk for these
operations. As a result, foreign exchange risk arises from
recognised assets and liabilities denominated in other currencies
and net investments in foreign operations. The Group mitigates this
risk through the use of derivatives from time to time.
The Group exposure to foreign currency risk within the
investment portfolios arises from purchased investments that are
denominated in currencies other than sterling.
The Group foreign operations create two sources of foreign
currency risk:
-- the operating results of the Group foreign branches and
subsidiaries in the Group financial statements are translated at
the average exchange rates prevailing during the period; and
-- the equity investment in foreign branches and subsidiaries is
translated into sterling using the exchange rate at the year end
date.
The largest currency exposures with reference to net
assets/liabilities are shown below, representing effective
diversification of resources.
2014 2013
GBP000 GBP000
Aus $ 45,571 Aus $ 43,053
Can $ 34,757 Can $ 33,044
Euro 14,625 Euro 12,828
NZ $ 10,969 US $ 1,479
Japanese Japanese
Yen 1,047 Yen 1,130
(g) Equity price risk
The Group is exposed to equity price risk because of financial
investments held by the Group which are stated at fair value
through profit or loss. The Group mitigates this risk by holding a
diversified portfolio across geographical regions and market
sectors, and through the use of derivative contracts from time to
time which would limit losses in the event of a fall in equity
markets.
The concentration of equity price risk by geographical listing,
before the mitigating effect of derivatives, to which the Group is
exposed is as follows:
2014 2013
GBP000 GBP000
UK 264,716 UK 273,650
Europe 20,442 Europe 19,393
Canada 2,583 Canada 1,909
US 1,950 US 979
Other 214 Other 389
--------- ---------
Total 289,905 Total 296,320
--------- ---------
(h) Market risk sensitivity analysis
The sensitivity of profit and other equity reserves to movements
on market risk variables (comprising interest rate, currency and
equity price risk), each considered in isolation, is shown in the
following table:
Group Potential increase / (decrease) in Potential increase / (decrease) in
profit other equity reserves
Change in
Variable variable 2014 2013 2014 2013
GBP000 GBP000 GBP000 GBP000
Interest rate risk -100 basis points (4,284) (254) (15) (121)
+100 basis points 1,243 (4,769) 18 131
Currency risk -5% 1,388 811 3,794 3,513
5% (1,318) (770) (3,605) (3,337)
Equity price risk +/- 5% 11,379 11,371 - -
The following assumptions have been made in preparing the above
sensitivity analysis:
-- the value of fixed income investments will vary inversely
with changes in interest rates, and all territories experience the
same interest rate movement;
-- currency gains and losses will arise from a change in the
value of sterling against all other currencies moving in
parallel;
-- equity prices will move by the same percentage across all
territories; and
-- change in profit is stated net of tax at the standard rate
applicable in each of the Group's territories.
(i) Capital management
The Group's primary objectives when managing capital are to:
-- comply with the regulators' capital requirements of the
markets in which the Group operates; and
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