HSBC 2011 Annual Report Download - page 179

177
Overview Operating & Financial Review Corporate Governance Financial Statements Shareholder Information
The following table illustrates the effects of
various interest rate, equity price, foreign exchange
rate and credit spread scenarios on our profit for the
year and total equity of our insurance manufacturing
subsidiaries.
Where appropriate, we include the impact of the
stress on the PVIF in the results of the sensitivity
tests. The relationship between the values of certain
assets and liabilities and the risk factors may be non-
linear and, therefore, the results disclosed cannot be
extrapolated to measure sensitivities to different
levels of stress. The sensitivities are stated before
allowance for management actions which may
mitigate the effect of changes in market rates, and
for any factors such as policyholder behaviour that
may change in response to changes in market risk.
Sensitivity of HSBC’s insurance manufacturing subsidiaries to risk factors
(Audited)
2011 2010
Effect on
profit for
the year
Effect on
total
equity
Effect on
profit for
the year
Effect on
total
equity
US$m US$m US$m US$m
+ 100 basis points parallel shift in yield curves ........................... 108 (178) 72 (132)
– 100 basis points parallel shift in yield curves ........................... (115) 191 (86) 131
10% increase in equity prices ....................................................... 106 106 76 76
10% decrease in equity prices ...................................................... (164) (164) (76) (76)
10% increase in US dollar exchange rate
compared to all currencies ....................................................... 31 31 21 21
10% decrease in US dollar exchange rate
compared to all currencies ....................................................... (31) (31) (21) (21)
Sensitivity to credit spread increases ........................................... (30) (75) (31) (74)
Credit risk
(Audited)
Our exposure to credit risk products is included in
the tables showing exposures to life and non-life
insurance risk on pages 172 and 173.
Credit risk can give rise to losses through
default and can lead to volatility in our income
statement and balance sheet figures through
movements in credit spreads, principally on the
US$44.4bn (2010: US$43.3bn) non-linked bond
portfolio.
As tabulated above, the sensitivity of the net
profit after tax of our insurance subsidiaries to the
effects of increases in credit spreads is similar to
2010. The balance and related movement are small
because about 80% of the debt securities held by our
insurance subsidiaries are classified as either held
to maturity or available for sale, and consequently
any changes in the fair value of these financial
investments, absent impairment, would have no
effect on the profit after tax. We calculate the
sensitivity using simplified assumptions based on a
one-day movement in credit spreads over a two-year
period. A confidence level of 99%, consistent with
our Group VAR, is applied. Credit spreads have
generally widened from the levels observed at the
end of 2010; however, the expected increase this
would generally cause has been offset by a
refinement made to the calculation to better reflect
how the risk is shared with the policyholder.
Consequently, the sensitivity reported is consistent
with that seen in 2010.
Credit quality
(Audited)
The following table presents an analysis of treasury
bills, other eligible bills and debt securities within
our insurance business by measures of credit quality.
The five credit quality classifications are defined in
the Appendix to Risk on page 188. Only assets
supporting liabilities under non-linked insurance
and investment contracts and shareholders’ funds
are included in the table as financial risk on assets
supporting linked liabilities is predominantly borne
by the policyholder. 86.6% (2010: 90.5%) of the
assets included in the table are invested in
investments rated as strong.