HSBC 2015 Annual Report Download - page 187

HSBC HOLDINGS PLC
185
Strategic Report Financial Review Corporate Governance Financial Statements Shareholder Information
changes, the cost of guarantees on closed portfolios
reported in the 2.0% to 4.0% and 4.1% to 5.0% categories
decreased, driven principally by the increased reinvestment
yield assumptions. In addition, there was a closed portfolio
in Hong Kong with a guaranteed rate of 5.0% compared
with the current yield of 4.1%.
Financial return guarantees42
(Audited)
2015 2014
Investment
returns
implied by
guarantee
Current
yields
Cost of
guarantees
Investment
returns
implied by
guarantee
Current
yields
Cost of
guarantees
% %$m % % $m
Capital 0.0 0.0
–
3.8 85 0.0 0.0
–
3.5 81
Nominal annual return 0.1
–
1.9 3.9
–
3.9 40.1
–
2.0 3.6
–
3.6 6
Nominal annual return46 2.0
–
4.0 3.8
–
4.0 603 2.1
–
4.0 3.5
–
4.1 646
Nominal annual return 4.1
–
5.0 3.8
–
4.1 28 4.1
–
5.0 3.5
–
4.1 30
Real annual return47 0.0
–
6.0 5.9
–
6.1 28 0.0
–
6.0 4.7
–
7.5 14
At 31 December 748 777
For footnotes, see page 191.
The following table illustrates the effects of selected
interest rate, equity price and foreign exchange rate
scenarios on our profit for the year and the total equity
of our insurance manufacturing subsidiaries.
Where appropriate, the effects of the sensitivity tests on
profit after tax and equity incorporate the impact of the
stress on the PVIF. The relationship between the profit
and total equity and the risk factors is non-linear and,
therefore, the results disclosed should not be extrapolated
to measure sensitivities to different levels of stress. For the
same reason, the impact of the stress is not symmetrical on
the upside and downside. The sensitivities are stated
before allowance for management actions which may
mitigate the effect of changes in the market environment.
The sensitivities presented allow for adverse changes in
policyholder behaviour that may arise in response to
changes in market rates.
The effects on profit after tax of +/–100 basis points
parallel shifts in yield curves have decreased from 2014 to
2015, driven mainly by rising yields and updates to interest
rate parameters in France. In a low yield environment the
projected cost of options and guarantees described above
is particularly sensitive to yield curve movements. The
market value of available-for-sale bonds is also sensitive to
yield curve movements hence the larger opposite stresses
on equity.
Sensitivity of HSBC’s insurance manufacturing subsidiaries to market risk factors
(Audited)
2015 2014
Effect on
profit
after tax
Effect on
total
equity
Effect on
profit
after tax
Effect on
total
equity
$m $m $m $m
+100 basis points parallel shift in yield curves 39 (474) 290 (345)
–
100 basis points parallel shift in yield curves48 (213) 404 (549) 214
10% increase in equity prices 176 176 180 180
10% decrease in equity prices (158) (158) (153) (153)
10% increase in US dollar exchange rate compared to all currencies 16 16 54 54
10% decrease in US dollar exchange rate compared to all currencies (16) (16) (54) (54)
Credit risk
(Audited)
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 $54bn (2014: $53bn) bond portfolio
supporting non-linked contracts and shareholders’ funds.
The sensitivity of the profit after tax of our insurance
subsidiaries to the effects on asset values of increases
in credit spreads (as modelled in line with the methodology
described below) was a reduction of $2m (2014: $7m). The
sensitivity of total equity was a reduction of $10m (2014:
$9m). The sensitivities are relatively small because the
vast majority 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 (or to total
equity in the case of the held-to-maturity securities). We
calculate the sensitivity 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 quality
(Audited)
The following table presents an analysis of treasury
bills, other eligible bills and debt securities within our
insurance business by internal measures of credit quality.
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 unit-linked liabilities is predominantly borne by
the policyholder. 85.4% (2014: 84.8%) of the assets