Interim Report - 18 of 24 | RNS | Ticker

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Interim Report - 18 of 24

RNS Announcement

RNS Number : 2049X

HSBC Holdings PLC

26 August 2015

Risk management of insurance operations

The majority of the risk in our insurance business derives from manufacturing activities and can be categorised as insurance risk and financial risk. Insurance risk is the risk, other than financial risk, of loss transferred from the holder of the insurance contract to the issuer (HSBC). Financial risks include market risk, credit risk and liquidity risk.

There have been no material changes to the policies and practices for the management of risks arising in our insurance operations described in the Annual Report and Accounts 2014.

A summary of our policies and practices regarding the risk management of insurance operations, our insurance model and the main contracts we manufacture are provided on page 231 of the Annual Report and Accounts 2014.

Risk management of insurance operations in the first half of 2015

We measure the risk profile of our insurance manufacturing businesses using an economic capital approach. Under this approach, assets and liabilities are measured on a market value basis and capital is held to ensure that there is less than a 1 in 200 chance of insolvency during the coming year given the risks that the businesses are exposed to. This approach is aligned to the measurement approach for market, credit and insurance risks in the economic capital
model in the European Solvency II insurance capital regulations applicable from 2016.

The risk profile of our life insurance manufacturing businesses did not change materially during 1H15 despite the decrease in liabilities under insurance contracts to $69bn (31 December 2014: $74bn).

This reduction arose from the transfer of $5bn of these liabilities to 'Liabilities of disposal groups held for sale' during the period when we announced the plan to sell our operations in Brazil (including the entire insurance business there).

Asset and liability matching

A principal tool used to manage exposures to both financial and insurance risk, in particular for life insurance contracts, is asset and liability matching. In many markets in which we operate it is neither possible nor appropriate to follow a perfect asset and liability matching strategy. For long-dated non‑linked contracts, in particular, this results in a duration mismatch between assets and liabilities. We therefore structure portfolios that support liabilities under non-linked contracts with due consideration to the risk exposure to HSBC and the capital requirements.

The table below shows the composition of assets and liabilities by contract type and demonstrates that there were sufficient assets to cover the liabilities to policyholders, in each case at 30 June 2015.

Balance sheet of insurance manufacturing subsidiaries by type of contract

	Insurance contracts				Investment contracts			Other
	With DPF	Unit- linked	Annuities	Other	With DPF	Unit- linked	Other	assets and liabilities	Total
	$m	$m	$m	$m	$m	$m	$m	$m	$m

Financial assets	30,199	7,351	1,272	6,359	22,570	2,587	4,027	5,862	80,227
- trading assets	-	-	3	-	-	-	-	-	3
- financial assets designated at fair value	4,563	7,157	343	699	6,778	2,174	1,924	1,136	24,774
- derivatives	42	1	-	2	100	-	11	63	219
- financial investments	22,784	-	830	5,478	13,902	-	1,425	4,663	49,082
- other financial assets	2,810	193	96	180	1,790	413	667	-	6,149

Reinsurance assets	199	239	-	754	-	-	-	-	1,192
PVIF	-	-	-	-	-	-	-	5,363	5,363
Other assets and investment properties	828	11	24	109	739	12	26	12,887	14,636

Total assets at 30 June 2015	31,226	7,601	1,296	7,222	23,309	2,599	4,053	24,112	101,418

Liabilities under investment contracts:	-	-	-	-	-	2,558	3,786	-	6,344
- designated at fair value	-	-	-	-	-	2,558	3,786	-	6,344

Liabilities under insurance contracts	30,914	7,541	1,237	6,493	23,309	-	-	-	69,494
Deferred tax	12	-	8	4	-	-	-	1,131	1,155
Other liabilities	-	-	-	-	-	-	-	13,837	13,837

Total liabilities	30,926	7,541	1,245	6,497	23,309	2,558	3,786	14,968	90,830

Total equity	-	-	-	-	-	-	-	10,588	10,588

Total equity and liabilities at 30 June 2015	30,926	7,541	1,245	6,497	23,309	2,558	3,786	25,556	101,418

	Insurance contracts				Investment contracts			Other
	With DPF	Unit- linked	Annuities	Other	With DPF	Unit- linked	Other	assets and liabilities	Total
	$m	$m	$m	$m	$m	$m	$m	$m	$m

Financial assets	28,014	12,043	1,629	5,452	26,657	2,867	4,455	6,064	87,181
- trading assets	-	-	4	-	-	-	-	-	4
- financial assets designated at fair value	4,383	11,760	564	651	7,523	2,411	1,541	2,219	31,052
- derivatives	7	1	-	2	95	-	-	71	176
- financial investments	20,565	-	960	4,421	17,049	-	1,750	3,697	48,442
- other financial assets	3,059	282	101	378	1,990	456	1,164	77	7,507

Reinsurance assets	183	265	-	723	-	-	-	2	1,173
PVIF	-	-	-	-	-	-	-	5,438	5,438
Other assets and investment properties	794	330	19	101	728	11	27	7,813	9,823

Total assets at 30 June 2014	28,991	12,638	1,648	6,276	27,385	2,878	4,482	19,317	103,615

Liabilities under investment contracts:	-	-	-	-	-	2,878	4,276	-	7,154
- designated at fair value	-	-	-	-	-	2,878	3,800	-	6,678
- carried at amortised cost	-	-	-	-	-	-	476	-	476

Liabilities under insurance contracts	28,217	12,518	1,591	5,512	27,385	-	-	-	75,223
Deferred tax	12	-	11	10	-	-	-	1,223	1,256
Other liabilities	-	-	-	-	-	-	-	9,451	9,451

Total liabilities	28,229	12,518	1,602	5,522	27,385	2,878	4,276	10,674	93,084

Total equity	-	-	-	-	-	-	-	10,531	10,531

Total equity and liabilities at 30 June 2014	28,229	12,518	1,602	5,522	27,385	2,878	4,276	21,205	103,615

Financial assets	29,040	11,278	1,517	6,253	24,238	2,561	4,322	5,732	84,941
- trading assets	-	-	3	-	-	-	-	-	3
- financial assets designated at fair value	4,304	11,111	533	782	6,346	2,223	1,684	1,713	28,696
- derivatives	12	1	-	1	101	1	10	73	199
- financial investments	21,152	-	886	5,167	15,677	-	1,807	3,812	48,501
- other financial assets	3,572	166	95	303	2,114	337	821	134	7,542

Reinsurance assets	190	262	-	617	-	-	-	2	1,071
PVIF	-	-	-	-	-	-	-	5,307	5,307
Other assets and investment properties	698	328	23	107	831	7	26	7,383	9,403

Total assets at 31 December 2014	29,928	11,868	1,540	6,977	25,069	2,568	4,348	18,424	100,722

Liabilities under investment contracts:	-	-	-	-	-	2,542	4,155	-	6,697
- designated at fair value	-	-	-	-	-	2,542	3,770	-	6,312
- carried at amortised cost	-	-	-	-	-	-	385	-	385

Liabilities under insurance contracts	29,479	11,820	1,473	6,021	25,068	-	-	-	73,861
Deferred tax	12	-	11	18	-	-	-	1,180	1,221
Other liabilities	-	-	-	-	-	-	-	8,577	8,577

Total liabilities	29,491	11,820	1,484	6,039	25,068	2,542	4,155	9,757	90,356

Total equity	-	-	-	-	-	-	-	10,366	10,366

Total equity and liabilities at 31 December 2014	29,491	11,820	1,484	6,039	25,068	2,542	4,155	20,123	100,722

The Brazilian insurance operations and the UK pensions business are reported as disposal groups held for sale at 30 June 2015. The assets and liabilities of these disposal groups are included in the 'Other assets and liabilities' column of the table above.

These disposal groups contained a total of $12bn of total liabilities (mainly liabilities under insurance and investment contracts) and $12bn of total assets (mainly financial and reinsurance assets backing these liabilities and the PVIF associated with the insurance contracts) at 30 June 2015. The disposal of the UK pensions business is expected to be completed in the second half of 2015.

Insurance risk

Insurance risk is principally measured in terms of liabilities under the contracts in force.

A principal risk we face is that, over time, the cost of acquiring and administering a contract, claims and benefits may exceed the aggregate amount of premiums received and investment income. The cost of claims and benefits can be influenced by many factors, including mortality and morbidity experience, lapse and surrender rates and, if the policy has a savings element, the performance of the assets held to support the liabilities.

The insurance risk profile and related exposures remain largely consistent with those observed at 31 December 2014.

Footnotes to Risk

Credit risk

1 The amount of loan commitments reflects, where relevant, the expected level of take-up of pre-approved loan offers made by mailshots to personal customers. In addition to those amounts, there is a further maximum possible exposure to credit risk of $70bn (30 June 2014: $60bn; 31 December 2014: $71bn), reflecting the full take-up of loan commitments. The take-up of such offers is generally at modest levels.

2 'Other commercial loans and advances' includes advances in respect of agriculture, transport, energy utilities and ABSs reclassified to 'Loans and advances'.

3 'Loans and advances to customers' includes asset-backed securities that have been externally rated as strong (30 June 2015: $812m; 30 June 2014: $1.8bn; 31 December 2014: $1.2bn), good (30 June 2015: $100m; 30 June 2014: $88m; 31 December 2014: $256m), satisfactory (30 June 2015: $125m; 30 June 2014: $54m; 31 December 2014: $332m), sub-standard (30 June 2015: $102m; 30 June 2014: $220m; 31 December 2014: $94m) and impaired (30 June 2015: $101m; 30 June 2014: $321m; 31 December 2014: $128m).

4 Corporate and commercial includes commercial real estate renegotiated loans of $2,547m (30 June 2014: $3,527; 31 December 2014: $2,724m) of which $656m (30 June 2014: $475m; 31 December 2014: $608m) were neither past due nor impaired, $1m (30 June 2014: $97m; 31 December 2014: $1m) were past due but not impaired and $1,890m (30 June 2014: $2,955m; 31 December 2014: $2,115m) were impaired.

5 'Financial' includes loans and advances to banks.

6 'Currency translation adjustment' is the effect of translating the results of subsidiaries and associates for the previous period at the average rates of exchange applicable in the current period.

7 Negative numbers are favourable: positive numbers are unfavourable.

Liquidity and funding

8 The most favourable metrics are a smaller advances to core funding and a larger stressed one month coverage ratio.

Market risk

9 Portfolio diversification is the market risk dispersion effect of holding a portfolio containing different risk types. It represents the reduction in unsystematic market risk that occurs when combining a number of different risk types, for example, interest rate, equity and foreign exchange, together in one portfolio. It is measured as the difference between the sum of the VaR by individual risk type and the combined total VaR. A negative number represents the benefit of portfolio diversification. As the maximum and minimum occur on different days for different risk types, it is not meaningful to calculate a portfolio diversification benefit for these measures. For presentation purposes, portfolio diversification within the trading portfolio includes VaR-based RNIV.

This information is provided by RNS

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END

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RNS metadata

Title: Interim Report - 18 of 24
Time: 17:32:02
Date: 26 Aug 2015
Category: Results
ID: 2049X

Risk management of insurance operations

Risk management of insurance operations in the first half of 2015

Asset and liability matching

Insurance contracts

Other

Other

Unit-

assets and liabilities

Total

$m

$m

$m

$m

Total assets at 30 June 2015

Total liabilities

Insurance contracts

Other

Other

Unit-

assets and liabilities

Total

$m

$m

$m

$m

Total assets at 30 June 2014

Total liabilities

Total assets at 31 December 2014

Total liabilities

Insurance risk

assets and
liabilities

assets and
liabilities