IFRS 7 in the insurance industry - Treasury.nl · There are no significant differences between IFRS 7, IFRS 4, IAS 1 and their Hong Kong equivalents. 4 IFRS in the Insurance Industry

IFRS 7 in the insurance industry

Executive summary 1

Introduction 2

Fair value 4

Credit crisis 6

Risk management disclosures 8

Presentation of risk management disclosures 8

Credit risk 9

Liquidity risk 11

Market risk 14

Other issues 17

Categories and classes of financial instruments 17

Capital management disclosures 18

Treatment of unit linked business 22

Conclusion 24

Appendix one: Fair value disclosure and FAS 157 25

Appendix two: Pillar III of Solvency II 34

Contents

1Executive summary

Executive summary

IFRS 7 Financial Instruments: Disclosures requires companies to provide disclosure on financial instruments, the associated risks and how those risks are managed. The disclosure should be based on information provided internally to management to show how the entity controls these risks.

The purpose of this publication is to show how IFRS 7 has been applied in the insurance industry, highlighting challenges faced by insurance companies in applying the standard and drawing comparisons between them. Our report is based on an analysis of the IFRS 7 specific disclosures in the annual financial statements of sixteen of the largest insurers reporting under IFRS.

The key findings outlined in this publication are:

• A conflict exists in IFRS 7 between the standard’s stated objective that requires information to be disclosed as seen ‘through the eyes of management’, and certain minimum disclosure requirements set out in the standard. The minimum requirements of IFRS 7 are sometimes unhelpful and can be a distraction to providing meaningful information.

• As preparers apply judgment in deciding how to present and disclose risk management information, this results in a variety of different approaches being adopted. Hence, the IFRS 7 disclosures provided by insurers are not consistent and provide limited opportunity to draw comparisons. For example:

Some insurers disclosed the − maturity analysis of insurance and investment contract liabilities on an estimated cash flow basis while others disclosed it on a contractual cash flow basis.

Quantitative disclosures about the − sensitivity of profit or loss and equity to changes in market risk were presented using different underlying bases.

Quantitative disclosures on what is − managed as capital also varied between insurers with some insurers making reference to the proposed capital requirements under Solvency II while others did not.

Some insurers excluded − unit linked business from their market risk disclosures; a few included these; and others were silent on the treatment adopted.

• In light of recent developments in the financial markets, IFRS 7 provided insurers with an opportunity to provide information on the quality of their assets and exposure to financial risks. The depth and proportion of disclosure provided relating to the credit crisis varied significantly between insurers. Some insurers provided very detailed information on asset quality, sub-prime exposure and the extent to which fair value was determined using unobservable market inputs, while others provided significantly less.

• Anecdotally, there appears to be a degree of consensus among users that fair value disclosures enhance transparency and the understanding of risks faced by the entity. Fair value is perceived, by standard setters and others, to be relevant in explaining the amount, timing and uncertainty of future cash flows; and, in relation to this, disclosures about how fair value is determined are useful. Unlike FAS 157 Fair Value Measurements in the US, IFRS 7 does not explicitly require a quantitative analysis of the sources of fair value of financial instruments; although some insurers chose to provide this information in a format similar to the disclosures adopted by FAS 157 reporters.

IFRS in the Insurance Industry2

Introduction

This publication provides an overview of the disclosures made by major insurers reporting under International Financial Reporting Standards (IFRS) for the 31 December 2007 year end relating to IFRS 7 Financial Instruments: Disclosures. The publication also takes into account associated disclosures under the consequential amendments made to IAS 1 Presentation of Financial Statements and IFRS 4 Insurance Contracts on the adoption of IFRS 7 by the International Accounting Standards Board (IASB).

Our analysis is based on a survey of sixteen of the largest insurers reporting under IFRS. We initially selected the top ten IFRS reporting insurance companies from the Fortune 500 global rankings for 2007 1. To this sample we added the two largest IFRS reporting insurers in Australia, China and South Africa to achieve representative coverage of IFRS reporters in the global insurance market.

IFRS 7 seeks to provide information to enhance the users’ understanding of the significance of financial instruments to an entity’s financial position, performance and cash flows; the risks associated with those financial instruments and how an entity manages those risks. It incorporates the disclosure requirements relating to financial instruments that were previously set out in IAS 32 Financial Instruments: Disclosure and Presentation and IAS 30 Disclosures in the Financial Statements of Banks and Similar Financial Institutions, so that all financial instrument disclosure requirements are located in a single standard.

IFRS 7 introduces the need to disclose:

• enhanced balance sheet and income statement details ‘by category’ 2 and ‘by class’3

• a liquidity risk maturity analysis showing the remaining contractual maturity for financial liabilities

• information relating to the credit quality of financial assets that are neither past due nor impaired

• quantitative disclosures illustrating the sensitivity of profit or loss and equity to changes in key market risk variables, and

• the processes that the company uses to manage and measure its risks.

The IAS 1 amendments require insurance companies to define their objectives, policies and processes for managing capital. IAS 1 now also requires quantitative data about what the insurer regards as capital, whether the insurer has complied with any externally imposed capital requirements and, if it has not complied, the consequences of such non-compliance.

The IFRS 4 amendments require specific risk disclosures in respect of insurance contract assets and liabilities as if they were financial instruments falling under the requirements of IFRS 7. These disclosures enable the user to evaluate the nature and extent of risks arising from insurance contracts. Previously IFRS 4 required an insurer to disclose information to assist users in understanding the amount, timing and uncertainty of future cash flows from insurance contracts.

The recent credit crisis, which resulted from reduced liquidity and led to concerns about the valuation of complex financial instruments like asset backed securities, heightened the need for transparency in financial reporting. The change brought about by IFRS 7 was a step in the right direction as it required increased information about financial instruments at a time when their value was under scrutiny. Analysts and shareholders became especially anxious to understand the true exposures of companies to instruments that the market now considers to be high risk. In response, many insurers and other financial institutions have enhanced disclosures about such instruments and in this publication we highlight some of the credit crisis related disclosures made by insurers in our sample.

1 Fortune 500 global rankings are based on Revenue. Listings can be accessed using the following address: http://money.cnn.com/magazines/fortune/global500/2007/industries/#I

2 These are the categories that are defined in IAS 39 Financial Instruments: Recognition and Measurement i.e. financial assets at fair value through profit or loss, held-to-maturity investments, loans and receivables, available-for-sale financial assets, financial liabilities at fair value through profit or loss and financial liabilities measured at amortized cost.

3 Paragraph 6 of IFRS 7 requires financial instruments to be grouped into classes that are appropriate to the nature of the information disclosed and that take into account the characteristics of those financial instruments.

3Introduction

The new US reporting standard FAS 157 Fair Value Measurements introduced additional disclosures surrounding fair value measurements. These disclosures provide additional information about financial instruments carried at fair value based on valuation models that make use of unobservable market inputs. Some IFRS reporters included similar quantitative disclosures in their financial statements. We note in Appendix one the key differences that exist between the disclosure requirements of IFRS 7 and the respective US GAAP standards.

Solvency II, a new regulatory framework applicable to insurers in the European Union is to take effect within the next few years. The introduction of Solvency II may further expand risk management disclosures under its third pillar of public disclosure. Appendix two considers the extent of overlap between the Solvency II Draft Directive requirements and those required by IFRS.

Figure 1 lists the insurance companies that were selected for analysis in our survey. The information used in this publication has been extracted from the audited disclosures included in the financial statements, unless otherwise mentioned.

AEGON NV (AEGON)4 5 Allianz Group (Allianz)4 5 AMP Limited (AMP)6

Aviva plc (Aviva)4 5 AXA Group(AXA)4 5 China Life Insurance Company Limited (China Life)7

CNP Assurances (CNP)4 Assicurazioni Generali S.p.A ING Verzekeringen (Generali)4 (Insurance) NV (ING)4

Munich Re Group(Munich Re)4 Old Mutual plc (Old Mutual)4 Ping An Insurance (Group) Company of China, Ltd (Ping An)5

Prudential plc (Prudential)4 QBE Insurance Group Limited Sanlam Limited (Sanlam)5 (QBE)6

Zurich Financial Services Group (Zurich)5

Figure 1 - Insurance companies selected for the analysis

4 Financial statements prepared in accordance with International Financial Reporting Standards (IFRS) as adopted by the European Union (EU).5 Financial statements prepared in accordance with IFRS as issued by the International Accounting Standard Board (IASB).6 Financial statements prepared in accordance with Australian Accounting Standards which include Australian equivalents to International Financial Reporting

Standards (AIFRS) and comply with International Financial Reporting Standards.7 Financial statements prepared in accordance with Hong Kong Financial Reporting Standards. There are no significant differences between IFRS 7, IFRS 4, IAS 1 and

their Hong Kong equivalents.


Fair value

In this section we analyze the sources of fair value information used to make the quantitative disclosures required by IFRS 7.

Quantitative fair value disclosuresIFRS 7 retains the IAS 32 disclosure requirements that relate to the methodology and significant assumptions applied to determine the fair value for the different classes of financial assets and financial liabilities where disclosure is required of:

• whether fair value is based on quoted prices or valuation techniques

• whether fair value is based on valuation techniques that include assumptions that are not supported by market prices or rates, and, if so, the amount of the change in fair value recognized in profit or loss that arises from the use of the valuation technique, and

• for financial instruments valued using valuation techniques that include inputs not supported by market prices or quotes, the effect of using reasonably possible alternative assumptions.

As further explained in Appendix one, the US GAAP standard FAS 157 provides a useful way to analyze fair value information according to source of the inputs used to determine fair value. It introduces a ‘fair value hierarchy’, requiring disclosure of the value of balance sheet amounts valued using quoted prices (unadjusted) in active markets for identical assets or liabilities (Level 1), those using valuation techniques with observable input (Level 2), and those using valuation techniques with unobservable input(Level 3). From the sample of insurers included in our survey, five insurers presented fair value information under IFRS using a format similar to the fair value hierarchy in FAS 157. These insurers generally did not follow the prescriptive definitions in FAS 157 for what falls within Levels 1, 2 or 3 but applied IFRS principles in defining what fell into each category. Four of these insurers presented these disclosures in the notes to the financial statements, with one providing the information in the preliminary results announcement. Some examples are provided in extracts 1 to 4.

Extract 1 – AEGON Annual Report 2007, page 134

134

DERIVATIVES EMBEDDED IN INSURANCE AND INVESTMENT

CONTRACTS

Certain bifurcated embedded derivatives in insurance and investment

products are not quoted in active markets and their fair values are

determined by using valuation techniques. Because of the dynamic

and complex nature of these cash flows, stochastic techniques under

a variety of market return scenarios are often used. A variety of

factors are considered, including expected market rates of return,

market volatility, correlations of market returns, discount rates and

actuarial assumptions.

The expected returns are based on risk-free rates, such as the current

London Inter-Bank Offered Rate (LIBOR) forward curve or the current

rates on local government bonds. Market volatility assumptions for

NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS OF AEGON GROUP NOTE 3

each underlying index are based on observed market implied volatility

data or observed market performance. Correlations of market returns

across underlying indices are based on actual observed market

returns and relationships over a number of years preceding the

valuation date. The current risk-free spot rate is used to determine

the present value of expected future cash flows produced in the

stochastic projection process.

Assumptions on customer behavior, such as lapses, included in the

models are derived in the same way as the assumptions used to

measure insurance liabilities.

FAIR VALUE MEASUREMENT

The fair values of the general account financial instruments carried at

fair value were determined as follows:

Amounts in EUR million

Published price

quotations in an active

market 1

Valuation technique-

based on market

observable inputs 2

Valuation technique-not based on market

observable inputs 3

2007 Total

Published price

quotations in an active

market 1

Valuation technique-

based on market

observable inputs 2

Valuation technique-not based on market

observable inputs 3

2006 Total

Financial assets

Available for sale assets 58,675 38,090 1,282 98,047 58,955 41,492 1,448 101,895

Financial assets at fair value through profi t or loss 3,079 3,330 1,454 7,863 4,376 3,317 1,855 9,548

Derivatives (7) (238) (600) (845) 12 223 (455) (220)

Borrowings – 980 – 980 – 938 – 938

1 Included in this category are fi nancial assets and liabilities that are measured in whole or in part by reference to published quotes in an active market. A fi nancial instrument is regarded as quoted in an active market if quoted prices are readily and regularly available from an exchange, dealer, broker, industry group, pricing service or regulatory agency and those prices represent actual and regularly occurring market transactions on an arm’s length basis. Main asset classes included in this category are fi nancial assets for which the fair value is obtained via pricing vendors or binding broker quotes and assets for which the fair value is determined by reference to indices.

2 Included in this category are fi nancial assets and liabilities that are measured using a valuation technique based on assumptions that are supported by prices from observable current market transactions in the same instrument or based on available market data. Main asset classes included in this category are fi nancial assets for which pricing is obtained via pricing services but where prices have not been determined in an active market, fi nancial assets with fair values based on broker quotes, investments in hedge funds, private equity funds with fair value obtained via fund managers and assets that are valued using own models whereby the majority of assumptions are market observable.

3 Not based upon market observable input means that fair values are determined in whole or in part using a valuation technique (model) based on assumptions that are neither supported by prices from observable current market transactions in the same instrument nor are they based on available market data. Main asset classes in this category are hedge funds, private equity funds and limited partnerships.

Valuation techniques are used to the extent that observable inputs

are not available, thereby allowing for situations in which there is

little, if any, market activity for the asset or liability at the measurement

date. However, the fair value measurement objective remains the

same, that is, an exit price from the perspective of AEGON. Therefore,

unobservable inputs reflect AEGON’s own assumptions about the

assumptions that market participants would use in pricing the asset

or liability (including assumptions about risk). These inputs are

developed based on the best information available, which might

include AEGON’s own data.

The potential effect of using reasonably possible alternative

assumptions for valuing financial instruments would not have a

significant impact on AEGON’s net profit.

The total net amount of changes in fair value recognized in net income

of the financial instruments of which the valuation technique includes

non market observable inputs amount to EUR 57 million.

IMPAIRMENT OF FINANCIAL ASSETS

There are a number of significant risks and uncertainties inherent in

the process of monitoring investments and determining if impairment

exists. These risks and uncertainties include the risk that the Group’s

5Fair value

Extract 2 – ING Annual Report 2007, page 68

Extract 3 – ING Annual Report 2007, pages 68 & 69

Extract 4 – ING Annual Report 2007, pages 68 & 69


Credit crisis

The past few months have seen significant turmoil in the world’s economic markets due to defaults in the US sub-prime mortgages market resulting in large asset write downs by financial institutions. These mortgages were often then packaged into complex financial instruments and sold onto other financial institutions and large companies, including insurers. The second-round impact of the credit crisis been a significant reduction in liquidity in the capital and money markets as financial institutions become increasingly risk averse. In light of these developments, this section documents some of the disclosures made by insurers that referred to the credit crisis, either directly or through assets impacted by the inability to repay amounts due.

Amid increasing concern on the part of regulators and investors about exposures to risky assets, many financial institutions took actions to reassure the market. The majority of the insurers in our sample provided disclosure on sub-prime exposure, with the level of detail disclosed varying significantly. A summary of the nature of disclosures is presented in figure 2.

7

4

5Quantitative disclosure provided on sub-prime exposure

No material sub-prime exposure

No specific disclosure on credit crisis

Figure 2 - Types of disclosures on credit crisis

Of the seven insurers who provided quantitative disclosure on sub-prime exposure, three provided this information in their preliminary result announcements, however only one of the three provided comparative information.

AEGON provided audited disclosures on its exposure to Alt-A8 risk as well as monoline exposure. Extract 5 from AEGON’s financial statements shows the sub-prime mortgage exposure by rating and by vintage.

Extract 5 - AEGON Annual Report 2007, page 63

AEGON ANNUAL REPORT 2007 | 63

Chapter three OUR BUSINESSES

CREDIT RISK CONCENTRATION

The tables 18 - 20 on page 71 - 73 present specific credit

risk concentration information for general account

financial assets. Included in the bonds and money market

investments are EUR 1,846 million in assets classified as

held-to maturity and are therefore carried at amortized

cost (2006: EUR 1,502 million). Of the EUR 1,846 million

assets held-to-maturity, EUR 1,579 million are government

bonds (2006: EUR 1,294 million), EUR 8 million is ABS

exposure (2006: EUR 8 million) and EUR 259 million is

Corporate exposure (2006: EUR 200 million).

ADDITIONAL INFORMATION ON AEGON USA’S

EXPOSURE

AEGON USA exposureIn EUR million

ABSs – Housing related 2,840

Residential mortgage backed securities 5,039

Commercial mortgage backed securities 4,544

ABS – Housing

ABS housing securities are secured by pools of residential

mortgage loans, primarily those which are categorized as

subprime. The unrealized loss is primarily due to decreased

liquidity and increased credit spreads in the market

combined with significant increases in expected losses on

loans within the underlying pools. Expected losses within

the underlying pools are generally higher than original

expectations, primarily in certain later-vintage adjustable

rate mortgage loan pools, which has led to some rating

downgrades in these securities.

ABS – Subprime mortgage exposure

AEGON USA categorizes asset backed securities issued by

a securitization trust as having subprime mortgage

exposure when the average credit score of the underlying

mortgage borrowers in a securitization trust is below 660.

AEGON USA also categorizes asset backed securities

issued by a securitization trust with second lien mortgages

as subprime mortgage exposure, even though a significant

percentage of second lien mortgage borrowers may not

necessarily have credit scores below 660. AEGON USA

does not currently invest in or originate whole loan

residential mortgages. As of December 31, 2007, the

amortized cost of investments backed by subprime

mortgage loans was EUR 2,866 million and the market

value was EUR 2,524 million.

Table 9 provides the market values of AEGON’s subprime

mortgage exposure by rating and by vintage.

In addition, AEGON USA has exposure to asset backed

securities collateralized by manufactured housing loans.

The market value of these securities is EUR 200 million

with an amortized cost balance of EUR 193 million. All but

one position have vintages of 2003 or prior. These

amounts are not included in the subprime mortgage

exposure in table 9.

Table 9

Subprime mortgage exposure

Market value by quality In EUR million AAA AA A BBB < BBB Total

Subprime mortgages - Fixed rate 1,016 66 – – – 1,082

Subprime mortgages - Floating rate 314 528 9 1 – 852

Second lien mortgages 1 539 32 13 2 4 590

TOTAL 1,869 626 22 3 4 2,524

74.0% 24.8% 0.9% 0.1% 0.2% 100.0%

Market value by vintage In EUR million Pre-2004 2004 2005 2006 2007 Total

Subprime mortgages - Fixed rate 455 146 149 131 201 1,082

Subprime mortgages - Floating rate 69 26 232 295 230 852

Second lien mortgages 1 122 42 66 147 213 590

TOTAL 646 214 447 573 644 2,524

25.6% 8.5% 17.7% 22.7% 25.5% 100.0%1 Second lien collateral primarily composed of loans to prime and Alt-A borrowers.

8 Alt-A mortgage loans are regular residential mortgage loans in the US market where the risk profile falls between prime and sub-prime.

7Credit crisis

AXA also provided disclosure on sub-prime assets, Alt-A risk and monoline exposure but this information did not form part of the audited financial statements. Prudential and Old Mutual provided similar information in their preliminary results announcement.

Aviva presented detailed disclosures, in extract 6, on asset quality in their preliminary results. This was presented by showing a table of all assets with cross references provided to further analysis including: percentage of assets carried at fair value, percentage for which valuation depended on unobservable inputs, and exposure to sub-prime counterparties.

Extracts of the analysis of debt instruments by a fair value hierarchy defined by Aviva in the Preliminary Results (Level 1: quoted prices in active markets; Level 2: valued using models with significant observable market parameters; Level 3: valued using models with significant unobservable market parameters) and by rating has been replicated in extract 6.

Extract 6 - Aviva Preliminary Results 2007, pages 117 & 119.

Aviva plc page 117

7.5. Financial Investments

Financial investments are an integral element of an insurance business.

Aviva holds very large quantities of high quality bonds, primarily to match our liability to make guaranteed payments to policyholders. Some credit risk is taken, partly to boost returns to policyholders and partly to optimise the risk/return profile for shareholders. The risks are consistent with the products we offer and the related investment mandates, and are in line with ourrisk appetite.

The Group also holds significant quantities of equities. Many of these are held in participating funds or unit linked funds, wherethey form an integral part of the investment expectations of policyholders and follow well-defined investment mandates. Some equities are also held in shareholder funds and the staff pension schemes, where the holdings are designed to maximise long-term returns with an acceptable level of risk. The vast majority of equity investments are valued at quoted market prices.

The Group’s credit risk policy restricts the exposure to individual counterparties across all types of risk.

The fair values of investments are based on quoted bid prices or amounts derived from cash flow models. Fair values for unlisted equity securities are estimated using applicable price/earnings or price/cash flow ratios refined to reflect the specificcircumstances of the issuer. Securities, for which fair values cannot be measured reliably, are recognised at cost less impairment.

Where it is determined that the market in which a price is quoted has become inactive, the quoted price is assessed against either independent valuations or internally modelled valuations which take into account other market observable information. Where the quoted price differs sufficiently from these reassessed prices, the fair value recognised on the balance sheet is based on this adjusted valuation. However, if these reassessed prices confirm that the quoted price remains appropriate, then the fair value recognised on the balance sheet continues to be the quoted price.

The Group classifies its investments as either financial assets at fair value through profit or loss (FV) or financial assets available for sale (AFS). The classification depends on the purpose for which the investments were acquired, and is determined by local management at initial recognition. In general, the FV category is used as, in most cases, the Group’s investment or risk management strategy is to manage its financial investments on a fair value basis. The AFS category is used where the relevant long-term business liability (including shareholders funds) is passively managed.

Investments classified as FV and AFS are subsequently carried at fair value. Changes in the fair value of FV investments are included in the income statement in the period in which they arise. Changes in the fair value of securities classified as AFS,except for impairment losses, are recorded in a separate investment valuation reserve in equity. Where investments classified as AFS are sold or impaired, the accumulated fair value adjustments are transferred out of the investment valuation reserve to the income statement.

To test for impairment, the Group reviews the carrying value of its investments on a regular basis. If the carrying value of aninvestment is greater than the recoverable amount, the carrying value is reduced through a charge to the income statement in the period of impairment.

For listed investments classified as AFS, the Group performs an objective review of the current financial position and prospectsof the issuer on a regular basis, to identify whether any impairment provision is required. This review takes into account thelikelihood of the current market price recovering to former levels. For unlisted investments classified as AFS, the Group considers the current financial position of the issuer and the future prospects in identifying the requirement for an impairmentprovision. For both listed and unlisted AFS securities identified as being impaired, the cumulative unrealised net loss previously recognised within the AFS reserve is transferred to realised losses for the year.

Less than 1.5% of financial investments (less than 1% of total assets recorded at fair value) are fair valued using models withsignificant unobservable market parameters. Where estimates are used these are based on a combination of independent third party evidence and internally developed models, calibrated to market observable data where possible. Whilst such valuations are sensitive to estimates it is believed that changing one or more of the assumptions for reasonably possible alternative assumptions would not change the fair value significantly.

7.5.1. Debt Instruments

Fair Value measurement

Level 1 Level 2 Level 3 Total£m £m £m £m

Debt Securities - TotalUK government 18,747 20 - 18,767Non-UK government 27,054 1,535 74 28,663Corporate - UK 12,988 282 4 13,274Corporate - non-UK 27,483 8,993 669 37,145Other 12,775 7,880 513 21,168Total Debt Securities 99,047 18,710 1,260 119,017

83.2% 15.7% 1.1%

Fair Value Hierarchy

Aviva plc page 119

AAA AA A BBBLess than

BBB Not-Rated Total£m £m £m £m £m £m £m

Debt Securities - TotalUK government 18,732 21 - - - 14 18,767 Non-UK government 17,492 3,610 6,349 381 - 831 28,663 Corporate - UK 2,030 4,046 3,204 1,892 58 77 11,307 Corporate - non-UK 9,831 13,725 12,582 6,134 1,013 2,295 45,580 Sub-prime RMBS 75 5 1 3 1 - 85 Sub-prime CDO 5 - - 2 - - 7 Sub-prime ABS 56 - - 1 - - 57 Alt-A 209 5 - - - - 214 CDO 187 65 155 83 - 128 618 CLO 75 14 - 3 - 32 124 RMBS 2,653 141 21 16 4 6 2,841 ABS 1,159 75 80 13 15 102 1,444 CMBS 1,245 317 100 75 - - 1,737 ABCP - conduit 309 - - - - 126 435 ABCP - SIV 40 - - - - - 40 ABFRN 107 26 2 2 1 7 145Wrapped credit 748 16 25 - - - 789 Certificates of Deposit - 514 98 - - - 612 Private Placements 124 370 959 929 40 897 3,319 Other 146 347 1,239 297 137 715 2,881 Less Debt Securities reported as Cash equivalents (524) - - - - (124) (648)Total Debt Securities 54,699 23,297 24,815 9,831 1,269 5,106 119,017

46.0% 19.6% 20.7% 8.3% 1.1% 4.3%

Ratings

AAA AA A BBBLess than

BBB Not-Rated Total£m £m £m £m £m £m £m

Debt Securities - Policyholder assetsUK government 3,565 - - - - 13 3,578Non-UK government 1,430 192 757 47 - 228 2,654 Corporate - UK 1,350 371 313 167 12 13 2,226 Corporate - non-UK 292 2,145 923 282 61 411 4,114 Sub-prime RMBS 30 1 - 1 1 - 33 Sub-prime CDO - - - - - - - Sub-prime ABS 7 - - - - - 7 Alt-A - - - - - - - CDO 24 10 1 5 - 16 56 CLO 37 2 - - - 6 45 RMBS 320 10 1 2 - 1 334ABS 94 4 2 1 - 16 117 CMBS 33 36 4 1 - - 74 ABCP - conduit 220 - - - - 35 255 ABCP - SIV 21 - - - - - 21 ABFRN 37 15 2 - - 1 55 Wrapped credit 61 16 - - - - 77 Certificates of Deposit - 409 98 - - - 507 Private Placements - 10 15 17 - - 42 Other 22 58 1,051 17 - 112 1,260 Less Debt Securities reported as Cash equivalents (355) - - - - (35) (390)Debt Securities - Policyholder assets 7,188 3,279 3,167 540 74 817 15,065

47.7% 21.8% 21.0% 3.6% 0.5% 5.4%

Ratings


Risk management disclosures

Presentation of risk management disclosuresThis section discusses the presentation of risk management disclosures. There are various ways to analyze risk management disclosures and our analysis is restricted to the following risk management disclosures as presented by the insurers:

• the location of the risk management disclosures, i.e. whether the disclosures are presented in the financial statements or in a separate report to the financial statements

• the number of pages devoted to disclosing how the risks are managed, and

• whether the different categories of financial instruments and related income and expense are presented in the primary financial statements, i.e. on the face of the balance sheet and the income statement or in the notes to the financial statements.

The standard requires that the qualitative data is presented ‘through the eyes of management’ using, where possible, information provided to management. However, there are also minimum disclosure requirements set out in IFRS 7. It is fair to say that this twin approach has not been totally successful. In some cases, the minimum disclosure requirements of IFRS 7 appear to conflict with the requirement to present information from a management perspective, as noted in the liquidity risk disclosures – see ‘liquidity risk’ below. Also, there is intrinsic difficulty in presenting management risk information if it is not based on IFRS financial measures, given that it must be audited.

Presentation of risk management disclosures in notes or a separate report to the financial statementsParagraph 31 of IFRS 7 requires an entity to ‘disclose information that enables users of its financial statements to evaluate the nature and extent of risks arising from financial instruments to which the entity is exposed at the reporting date’. The Application Guidance, which is an integral part of the standard, requires the risk management disclosure to be made either in the financial statements or incorporated by cross-reference from another report. This should be available to users of the financial statements on the same terms as the financial statements and at the same time.

Twelve of the sixteen insurers in our sample presented the IFRS 7 disclosures in the notes to the financial statements, while the remainder presented the required information in a separate report to the financial statements and referenced to the relevant pages in the notes to the financial statements.

Number of pages provided for risk management disclosuresThe number of pages of audited risk management disclosures provided by the insurers in our sample ranged from 9 to 37 pages in 2007. (This compares to a range between 4 and 30 pages in 2006). Most of the insurers in our sample provided between 11 and 20 pages of disclosure in 2007.

The percentage increase in the number of pages of risk management disclosures provided in 2007 compared to 2006 is illustrated in figure 3.

0

1

2

3

4

5

6

7

8

Percentage increase in number of pages compared to prior year

Nu

mb

er o

f in

sure

rs

Figure 3 - Increase in number of pages of risk management disclosures from 2006 to 2007

9Risk management disclosures

Credit risk In the analysis of the credit risk disclosures, we consider how:

• own credit risk is presented when financial liabilities have been designated at fair value through profit or loss, and

• credit quality and risk concentration information in relation to financial instruments are disclosed.

Credit risk is defined in IFRS 7 as ‘the risk that one party to a financial instrument will cause a financial loss for the other party by failing to discharge an obligation’. Paragraph 36 of IFRS 7 requires disclosure of the amount that best represents an entity’s ‘maximum exposure to credit risk at the reporting date without taking account of any collateral held or other credit enhancements’. Information is also required about ‘the credit quality of financial assets that are neither past due nor impaired’ and ‘the carrying amount of financial assets that would otherwise be past due or impaired whose terms have been renegotiated’.

Own credit risk relating to financial liabilities at fair value through profit or lossIn matching the concepts of fair value and credit risk; IAS 39 states that the fair value of a financial liability should also reflect the credit risk relating to that liability. Paragraph 10 of IFRS 7 states that if an entity designates a financial liability at fair value through profit or loss, disclosure is required of the amount of change in the fair value of the financial liability that is attributable to changes in the liability’s credit risk, both during the period and cumulatively. The entity is also required to disclose the method applied to determine the change in fair value due to credit risk.

Most insurers designated only unit-linked liabilities as at fair value through profit or loss. Since the value of these liabilities are linked to the assets backing them, this usually has very little impact on the results of the insurer. For this reason disclosures provided about financial liabilities designated at fair value through profit or loss tend to be more limited than those provided by reporters in the banking industry.

When an entity is bound by contractual obligation to deliver under a contract, a credit risk evaluation includes changes in its own credit risk. Two insurers in our sample made specific reference to the consideration of their own credit risk when measuring the fair value of financial liabilities through profit or loss. Extract 7 provides one such example.

Extract 7 - Allianz Annual Report 2007, page 189

Credit qualityParagraph 36(c) of IFRS 7 requires an entity to disclose information about the credit quality of financial assets with credit risk that are neither past due nor impaired. In this regard, paragraph 23(a) of the Implementation Guidance states that an entity may disclose ‘an analysis of credit exposures using external or internal credit grading system’.


Figure 4 indicates the number of insurers who have disclosed their analysis of credit quality using an internal system, external rating agencies, a combination of both, or have not provided this disclosure.

0

1

2

3

4

5

6

7

8

9

10

Internal External Both Not stated

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Figure 4 – Types of grading system used to disclose credit quality

Rating rangeFrom the sample of insurers in our analysis, the rating range that was disclosed is set out in figure 5.

Insurer Rating range

AEGON Sovereign exposure, AAA, AA, A, BBB, BB, B, CCC or lower

Allianz AAA, AA+ to AA-, A+ to A-, BBB+ to BBB-

AMP AAA, AA, A, BBB, below BBB

Aviva AAA, AA, A, BBB, Speculative 9

AXA AAA, AA, A, BBB, BB and lower, other

China Life Not disclosed

CNP AAA, AA, BBB, <BBB

Generali AAA, AA, A, BBB

ING AAA, AA, A, BBB, BB, B, CCC and problem grade

Munich AAA, AA, A, BBB or lower

Old Mutual AAA to BBB, BB and lower

Ping An Included a reference to the Chinese rating system

Prudential AAA, AA+ to AA-, A+ to A-, BBB+ to BBB-, Other

Aaa, Aa1 to Aa3, A1 to A3, Baa1 to Baa3, other

QBE AAA, AA, A, BBB, Speculative9

Sanlam AAA, AA+, AA, AA-, A+, A, A-, BBB

Zurich AAA, AA, A, BBB, BB and below

Figure 5 – Rating range

9 Speculative refers to items outside the range of AAA to BBB.


Concentration of riskParagraph 34 of IFRS 7 requires disclosure of concentration of credit risk. Paragraph B8 of the Application Guidance clarifies that ‘concentrations of risk arise from financial instruments that have similar characteristics and are affected similarly by changes in economic or other conditions’. These shared characteristics may include exposure to industry sector or geographical area as stated in the examples in paragraph 18 of the Implementation Guidance.

In figure 6, we illustrate the number of insurers analyzed in our sample who disclosed their concentration of risk on:

• an industry sector basis

• by geographic area

• both industry sector and geographic area

• another unique basis such as product line, or

• have not presented the disclosure.

0

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3

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5

6

7

8

Industry Geographic Both Other None

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Figure 6 – Basis of presentation of concentration of risk

Liquidity riskThis section considers how the companies in our sample present the maturity of their financial instruments, with specific focus on:

• whether the cash flows were presented on estimated or contractual cash flow basis

• the time bands used to prepare the analyses, and

• if the insurer chose to present maturity analyses for financial assets even though this is not mandatory under IFRS 7.


Estimated vs. contractual cash flowsParagraph 39 of IFRS 7 requires a maturity analysis of financial liabilities to be presented based on the remaining contractual maturities. The Application Guidance to the standard clarifies that the maturity analysis should be prepared on the basis of undiscounted cash flows. This means the numbers in the maturity analysis will not necessarily reconcile to the carrying value in the balance sheet.

Paragraph 39(d) of IFRS 4, however, permits disclosure of the maturity analysis of recognized insurance liabilities based on the estimated timing of the net cash outflows from such contracts. This does not need to be based on undiscounted cash flows. In our sample of insurers, three provided the maturity analysis for insurance contracts based on undiscounted contractual cash flows. One of these insurers provided the life segment of their business on a contractual basis with the non-life business being presented on an estimated basis. In addition, three of the companies who provided the maturity analysis for insurance contracts based on estimated cash flows presented it on an undiscounted basis.

For investment contract liabilities, both with and without discretionary participation features, the Application Guidance as currently drafted seems to imply that the maturity analysis should be provided on a contractual undiscounted basis. However, this information is difficult to obtain and, arguably, is of little value. For this or other reasons, many insurers chose to provide information on a different basis. Over a third of the companies in our survey provided a maturity analysis for investment contracts with discretionary participation features based on expected discounted cash flows. Paragraph 3(d) of IFRS 7 scopes out insurance liabilities (although not investment liabilities) from its requirements, this probably explains our observation of the more pragmatic disclosure made by some of the insurers in our sample.

Time bandsThe time bands used in the maturity analysis varied between insurers. The majority of the insurers used the following bands:

• less than one year

• one to five years

• six years to ten years, and

• greater than eleven years.

The variation of time bands for the rest of the entities surveyed ranged from less than three months to greater than twenty years, with two insurers using the ‘open ended’ or ‘no maturity’ category.

Maturity analysis for financial assetsIFRS 7 does not require entities to produce contractual maturity analyses for financial assets, although an asset maturity analysis was previously required under IAS 32. Of the insurers included in our survey, eleven provided an asset maturity analysis for some, if not all, of the financial assets included on their balance sheets. The remaining five insurers did not provide maturity analysis for financial assets.

ING prepared a maturity analysis for the entire balance sheet split between assets and liabilities, as shown in extract 8. When an asset or liability is either non-monetary or does not have a contractual maturity date, this has been entered into the ‘Maturity not applicable’ column. We believe this is useful disclosure for the users of financial statements as it links financial assets with financial liabilities to show the entity’s net maturity exposure.


Extract 8 - ING Annual Report 2007, page 54


Market riskWe investigate how insurers present sensitivity analyses for market risk disclosures, specifically concentrating on:

• the measurement basis used, and

• the variation in the range of changes to the risk variables used to present the sensitivity analyses.

Measurement basisWith the adoption of IFRS 7 and revisions to IFRS 4, insurers were able to use a measurement basis other than IFRS in presenting the impacts of reasonably possible changes to key variables as part of their market and insurance risk disclosures. IFRS states that if alternative bases are used these must be the same as those used by management for internal reporting to control and manage its market risk. Insurers therefore have the option of providing sensitivity analyses based on IFRS profit/loss and equity, or a choice of measures such as economic capital, embedded value (EV) or value at risk (VAR) depending on the basis they use to manage risks.

In addition, insurers are able to use more than one analytical technique for disclosing sensitivities for different business segments if that is how risk is managed. For example, risks may be managed differently in a life and non-life segment of a company. Generali, for instance, has disclosed the sensitivities for its non-life segment on an IFRS basis and for its life segment on an EV basis.

The majority of the insurers in our sample used an IFRS basis to disclose the sensitivity of their market based risks. However a number of insurers did state that internally they used EV, individual capital assessments, financial condition reports and VAR to manage risk in addition to IFRS measures. A summary of the insurers and the bases they used to disclose their sensitivity analyses is presented in figure 7.

Insurer Basis

AEGON IFRS

Allianz IFRS

AMP IFRS

Aviva IFRS and EV

AXA EV

China Life IFRS

CNP IFRS

Generali IFRS (non-life) and EV (life)

ING IFRS10

Munich Re EV and IFRS

Old Mutual* EV and IFRS 11

Ping An* IFRS12 and VAR13

Prudential IFRS

QBE IFRS

Sanlam IFRS and EV

Zurich IFRS

Figure 7 – Bases used by insurers to present sensitivity analyses

10 Although our survey has been based on the ING Insurance financial statements it is worth noting that in the ING Group financial statements the sensitivity analyses have also been disclosed on Capital at Risk, Earnings at Risk and Economic Capital bases.

11 For currency risk only12 For the currency and interest rate risk sensitivities13 For the price risk sensitivities* Sensitivities for banking operations have been disclosed using VAR


Extracts 9 to 11 from Ping An’s Annual Report have been replicated below to illustrate how different analytical techniques have been used for to demonstrate sensitivities to price risk(using VAR techniques), interest rate and currency risk (both showing impact on IFRS profit and equity).

Sensitivity to market risk using VAR techniques:Extract 9 - Ping An Annual Report 2007, page 145

Notes to Financial Statements

Ping An Insurance (Group) Company of China, Ltd.

Annual Report 2007

144

As at December 31, 2007

41. RISK AND CAPITAL MANAGEMENT (Continued)

(2) Market risk (Continued)

(a) Foreign currency risk (Continued)

December 31, 2006

Hong Kong Others RMBUS dollar dollar (RMB equivalent

(in million) RMB (Original) (Original) equivalent) Total

Due to banks and otherfinancial institutions 3,676 127 469 – 5,138

Assets sold under agreementsto repurchase 13,436 – – – 13,436

Customer deposits 71,210 608 6 – 75,960Investment contract liabilities

for policyholders 262 – – – 262Policyholder dividend payable

and provisions 4,107 – – – 4,107Insurance contract liabilities 308,466 11 28 – 308,580Income tax payable 691 – – – 691Other liabilities 6,512 59 23 – 6,996

Total 408,360 805 526 – 415,170

The exchange rates of the Group are analyzed as follows by currency:

December 31, 2007 December 31, 2006

USD HKD USD HKD

Exchange rate 7.3046 0.9364 7.8087 1.0047

(b) Price risk

The Group’s price risk exposure relates to financial assets and financial liabilities whose values willfluctuate as a result of changes in market prices (other than those arising from interest rate risk orforeign currency risk), principally available-for-sale financial assets and financial assets at fair valuethrough profit or loss.

The above investments are exposed to price risk because of changes in market prices, whetherthose changes are caused by factors specific to the individual financial instrument or its issuer, orfactors affecting all similar financial instruments traded in the market.

The Group managed price risks by diversification of investments, setting limits for investments indifferent securities, etc.

The Group uses the 10-day market price value-at-risk (“VaR”) technique to estimate its risk exposurefor listed equity securities and equity investments funds. The Group adopts 10-day as the holdingperiod on the assumption that not all the investments can be sold in one day. Moreover, the VaRcalculation is made based on normal market condition and a 99% confidence interval.


Annual Report 2007

145



(b) Price risk (Continued)

The analysis below is the impact on equity for listed equity securities and equity investments fundswith 10-day reasonable market fluctuation in using risk value module in the normal market.

(in RMB million) December 31, 2007 December 31, 2006

Listed stocks and equity investment funds 14,495 4,241

(c) Interest rate risk

Interest rate risk is the risk that the value/future cash flows of a financial instrument will fluctuatebecause of changes in market interest rates.

Floating rate instruments expose the Group to cash flow interest risk, whereas fixed interest rateinstruments expose the Group to fair value interest risk.

The Group’s interest risk policy requires it to manage interest rate risk by maintaining an appropriatemix of fixed and variable rate instruments. The policy also requires it to manage the maturities ofinterest bearing financial assets and interest bearing financial liabilities. Interest on floating rateinstruments is repriced at intervals of less than one year. Interest on fixed interest rate instrumentsis priced at inception of the financial instrument and is fixed until maturity.

The analysis below is performed for reasonably possible movements in key variables with all othervariables held constant, for the following financial instruments (excluding the balances of investment-linked contracts), showing the pre-tax impact on profit and equity. The correlation of variables willhave a significant effect in determining the ultimate impact on interest rate risk, but to demonstratethe impact due to changes in variables, variables had to be changed on an individual basis.


Change in Decrease Decrease Decrease Decrease(in RMB million) Interest rate in profit in equity in profit in equity

Bond investmentsHeld-for-trading andavailable-for-sale +50 basis points 153 2,728 144 3,088

Increase in interest income/(expense)

(in RMB million) 2007 2006

Floating rate bonds +50 basis points 55 28Loans and advances

to customers +50 basis points 273 13Customer deposits +50 basis points (380) (29)

Sensitivity to interest rate risk using IFRS measures:Extract 10 - Ping An Annual Report 2007, page 145


Annual Report 2007

145



(b) Price risk (Continued)

The analysis below is the impact on equity for listed equity securities and equity investments fundswith 10-day reasonable market fluctuation in using risk value module in the normal market.

(in RMB million) December 31, 2007 December 31, 2006

Listed stocks and equity investment funds 14,495 4,241

(c) Interest rate risk

Interest rate risk is the risk that the value/future cash flows of a financial instrument will fluctuatebecause of changes in market interest rates.

Floating rate instruments expose the Group to cash flow interest risk, whereas fixed interest rateinstruments expose the Group to fair value interest risk.

The Group’s interest risk policy requires it to manage interest rate risk by maintaining an appropriatemix of fixed and variable rate instruments. The policy also requires it to manage the maturities ofinterest bearing financial assets and interest bearing financial liabilities. Interest on floating rateinstruments is repriced at intervals of less than one year. Interest on fixed interest rate instrumentsis priced at inception of the financial instrument and is fixed until maturity.

The analysis below is performed for reasonably possible movements in key variables with all othervariables held constant, for the following financial instruments (excluding the balances of investment-linked contracts), showing the pre-tax impact on profit and equity. The correlation of variables willhave a significant effect in determining the ultimate impact on interest rate risk, but to demonstratethe impact due to changes in variables, variables had to be changed on an individual basis.


Change in Decrease Decrease Decrease Decrease(in RMB million) Interest rate in profit in equity in profit in equity

Bond investmentsHeld-for-trading andavailable-for-sale +50 basis points 153 2,728 144 3,088

Increase in interest income/(expense)

(in RMB million) 2007 2006

Floating rate bonds +50 basis points 55 28Loans and advances

to customers +50 basis points 273 13Customer deposits +50 basis points (380) (29)

Sensitivity to currency risk using IFRS measures:Extract 11 - Ping An Annual Report 2007, page 142

Notes to Financial Statements


Annual Report 2007

142

As at December 31, 2007


(1) Insurance risk (Continued)

(c) Reinsurance

The Group limits its exposure to losses within insurance operations mainly through participation inreinsurance arrangements. The majority of the business ceded is placed on quota share basis andsurplus basis with retention limits varying by product lines. Amounts recoverable from reinsurers areestimated in a manner consistent with the assumptions used for ascertaining the underlying policybenefits and are presented in the balance sheet as reinsurance assets.

Even though the Group may have reinsurance arrangements, it is not relieved of its direct obligationsto its policyholders and thus a credit exposure exists with respect to reinsurance ceded, to theextent that any reinsurer is unable to meet its obligations assumed under such reinsurance agreements.

(2) Market risk

Market risk is the risk of change in fair value of financial instruments from fluctuation in foreign exchangerates (currency risk), market interest rates (interest rate risk) and market prices (price risk), whether suchchange in price is caused by factors specific to the individual instrument or its issuer or factors affecting allinstruments traded in the market.

(a) Foreign currency risk

Foreign currency risk is the risk of loss resulting from changes in foreign currency exchange rates.Fluctuations in exchange rates between the Renminbi and other currencies in which the Groupconducts business may affect its financial condition and results of operations. The Group seeks tolimit its exposure to foreign currency risk by minimizing its net foreign currency position.

The analysis below is performed for reasonably possible movements in key variables with all othervariables held constant, showing the pre-tax impact on profit and equity (due to changes in fairvalue of currency sensitive non-monetary assets and liabilities measured at fair value, as well asmonetary assets and liabilities). The correlation of variables will have a significant effect in determiningthe ultimate impact on market risk, but to demonstrate the impact due to changes in variables,variables had to be changed on an individual basis.


Change in Decrease Decrease Decrease Decrease(in million) variables in profit in equity in profit in equity

All foreign currencies -5% 504 2,013 667 824

The main non-monetary assets and liabilities measured at fair value, as well as monetary assets andliabilities of the Group, excluding balances of investment-linked contracts, are analyzed as followsby currency:

December 31, 2007

Hong Kong Others RMBUS dollar dollar (RMB equivalent

(in million) RMB (Original) (Original) equivalent) Total

Balances with central bank andstatutory deposits 20,571 18 97 – 20,794

Cash and amounts due frombanks and other financialinstitutions 84,252 235 2,000 15 87,859

Fixed maturity investments 272,522 209 205 – 274,241Equity Investments 87,345 1,340 10,539 21,198 128,197Loans and advances to customers 61,206 243 156 – 63,125Premium receivables 4,148 37 16 – 4,434Reinsurance assets 1,230 148 5 – 2,316Other assets and receivables 6,003 67 126 5 6,615

Total 537,277 2,297 13,144 21,218 587,581

Variation in range of changes to risk variablesThe Application Guidance to IFRS 7 requires sensitivity analyses to show the effect of reasonably possible changes in the relevant risk variable e.g. prevailing market interest rates, equity prices, currency rates. In doing this the company should consider the economic environment in which it operates and the time frame over which it is making the assessment (usually its next annual reporting period). The variation in ranges used by the insurers in our sample for this purpose is set out in figure 8, split between the different market risks:

• interest rate risk

• equity price risk, and

• currency risk.


Interest rate risk 50 basis points change 100 basis points change

Number of insurers 3 1314

Eleven of these insurers provided the analysis for an increase and decrease in interest rates. Five provided the analysis for only an increase in interest rates.

Equity price risk 5% movement 10% movement 15% movement Other

Number of insurers 1 1315 1 116

Twelve of these insurers provided the analysis for an increase and decrease in equity prices. Two provided the analysis for only a decrease in equity prices. One insurer provided the analysis for its life segment for a decrease in equity prices and for its non-life business on an increase and decrease in equity prices.

Currency risk 5% change 10% change 15% change Not provided

Number of insurers 3 9 1 3

Ten of these insurers provided the analysis for an increase and decrease in exchange rates. Three provided the analysis for only a decrease in exchange rates.

Figure 8 - Variation in range of changes to risk variables used by insurers for sensitivity analyses

IFRS 7 is silent on whether effect of sensitivity analyses need to be presented before or after tax. In our sample of insurers we found the following:

• the majority presented interest rate sensitivity analyses before tax

• the majority provided currency risk sensitivity analyses after tax, and

• equity price sensitivity analyses were presented by half of the sample on a before tax basis and by the other half on an after tax basis.

In extract 12, AMP illustrates an equity price risk sensitivity analysis of a 10% increase and decrease in Australian and international equity prices on an after tax basis.

Extract 12 - AMP Annual Report 2007, page 83

22. Risk management and financial instruments information continued

(ii) Currency riskLosses in value may result from translating the AMP group’s capital invested in overseas operations into Australian dollars at balance date (translation risk) or from adverse foreign currency exchange rate movements on specific cash flow transactions (transaction risk).

Subject to materiality discretions, the AMP group:– does not hedge the capital invested in overseas operations, thereby accepting the foreign currency translation risk

on invested capital– converts all corporate debt to Australian dollars through cross-currency swaps– hedges individual investment assets backing shareholder capital, with the exception of the international equities portfolio– hedges expected foreign currency receipts and payments once the value and timing of the expected cash flow is known.

Currency risk sensitivity analysisThe analysis below demonstrates the impact of a 10% movement of currency rates against the Australian dollar with all other variables held constant, on the AMP group’s shareholder profit after tax (due to changes in fair value of currency sensitive monetary assets and liabilities) and equity. It is assumed that the relevant change occurs as at the reporting date.

31 December 2007 31 December 2006

Impact on Impact on Impact on Impact on profit after tax equity profit after tax equityChange in variables $m $m $m $m

10% 3 3 3 3 –10% (3) (3) (3) (3)

The risks faced and methods used for deriving sensitivity information and significant variables did not change from previous periods.

(iii) Equity price riskEquity price risk is the risk that the fair value of equities will decrease as a result of changes in levels of equity indices and the value of individual stocks. The AMP group holds all of its equities at fair value through profi t or loss.

Sensitivity analysisThe analysis below demonstrates the impact of a 10% movement in Australian and International equities. This sensitivity analysis has been performed to assess the direct risk of holding equity instruments, therefore any potential indirect impact on fees from AMP group’s investment linked business has been excluded. It is assumed that the relevant change occurs as at the reporting date.

31 December 2007 31 December 2006

Impact on Impact on Impact on Impact on profit after tax equity profit after tax equityChange in variables $m $m $m $m

10% increase in Australian equities 32 32 49 4910% increase in International equities 25 25 31 3110% decrease in Australian equities (27) (27) (47) (47)10% decrease in International equities (23) (23) (28) (28)

The risks faced and the methods used for deriving sensitivity information and signifi cant variables did not change from previous periods.

(iv) Investment riskInvestment risk is the risk of volatility in the AMP group’s net investment earnings and value that result in a reduced ability to implement corporate strategy. Investment earnings arise from the AMP group’s investment of shareholder capital. Investment classes include equities, property and interest bearing instruments, so the management of investment risk encompasses equity price risk and interest rate risk. AMP Capital Finance Limited, a wholly owned controlled entity, was established as part of the investment risk strategy of the AMP group, to assist business growth through the acquisition of assets to seed new funds or opportunities. AMP group seeks to generate future revenues from the subsequent on-sale of these assets to clients through new or existing funds.

For the purposes of the FRM Policy, investment risk management involves decisions made regarding the allocation of investment assets across asset classes and/or markets and includes the management of risks within these asset classes. Investment risk management relates to the investment allocation decisions made by the AMP group in relation to the investment of shareholder capital.

The investment risk in the shareholder funds are managed by reference to the probability of loss over a one year time horizon at a 99% confidence level (Value at Risk). This loss tolerance is currently set at 3% of shareholder funds (with a tolerance range of + or – 0.5%) under a fat-tailed distribution. Further, the loss tolerance on any single asset may not exceed 0.5%.

AMP FULL FINANCIAL REPORT 2007 83

14 One insurer also provided an analysis for a reasonably possible change in interest rates of 200 basis points.15 One insurer also provided an analysis for a 30% movement in equity price16 Sensitivity disclosed using VAR techniques which is calculated as equity securities/equity investment funds valued at market price x 10 day worst market fluctuation

at 99% level.

17Other issues

Other issues

Categories and classes of financial instrumentsParagraph 8 of IFRS 7 requires disclosure of the carrying amount of financial assets and financial liabilities by category as defined in IAS 39 i.e. ‘fair value through profit or loss’, ‘held-to-maturity’, ‘loans and receivables’, ‘available-for-sale’ and ‘financial liabilities measured at amortized cost’. This information should be disclosed either on the face of the balance sheet or in the notes to the financial statements. Nearly two thirds of the insurers in our sample disclosed this information in the notes to the financial statements with the remainder presenting them on the face of the balance sheet.

Old Mutual provided an analysis of all assets and liabilities on the balance sheet and split those into the different financial instrument categories per IAS 39, with additional disclosure provided in the notes. This clearly identifies which assets and liabilities fall outside the scope of IFRS 7. Refer to extract 13.

Extract 13 - Old Mutual Annual Report 2007, page 181

Old Mutual plc Annual Report and Accounts 2007Notes to the consolidated financial statements 181

Fina

ncia

ls

32 Group balance sheet – categories of financial instruments

The analysis of assets and liabilities into their categories as defined in IAS 39 'Financial Instruments: Recognition and Measurement' (IAS 39) is set out in the following table. For completeness, assets and liabilities of a non-financial nature, or financial assets and liabilities that are specificallyexcluded from the scope of IAS 39, are reflected in the non-financial assets and liabilities category.

£m

Fair value through profit and lossAvailable- Financial

for-sale Held-to- liabilities Non-financial Held-for- financial maturity Loans and amortised assets and

At 31 December 2007 Total trading Designated assets investments receivables cost liabilities

AssetsGoodwill and other intangible assets 5,459 – – – – – – 5,459Mandatory reserve deposits with central banks 615 – – – – 615 – –Property, plant and equipment 608 – – – – – – 608Investment property 1,479 – 359 – – – – 1,120Deferred tax assets 683 – – – – – – 683Investment in associated undertakings

and joint ventures 81 – – – – – – 81Deferred acquisition costs 2,253 – – – – – – 2,253Reinsurers’ share of long-term business

policyholder liabilities 1,394 – 638 – – 16 – 740Deposits held with reinsurers 213 – 184 – – 29 – –Loans and advances 30,687 1,912 1,768 – – 27,007 – –Investments and securities 90,220 1,445 75,171 12,524 650 430 – –Current tax receivable 83 – – – – – – 83Client indebtedness for acceptances 165 – – – – – – 165Other assets 2,181 273 66 – – 1,459 – 383Derivative financial instruments – assets 1,527 1,527 – – – – – –Cash and cash equivalents 3,469 – – 1 – 3,468 – –Non-current assets held-for-sale 1,617 – – – – – – 1,617

142,734 5,157 78,186 12,525 650 33,024 – 13,192

LiabilitiesLong-term business policyholder liabilities 84,251 – 53,745 – – – – 30,506Third party interests in consolidation of funds 3,547 – 3,547 – – – – –Borrowed funds 2,353 – 1,676 – – – 677 –Provisions 499 – – – – – – 499Deferred revenue 462 – – – – – – 462Deferred tax liabilities 1,413 – – – – – – 1,413Current tax payable 320 – – – – – – 320Other liabilities 6,180 1,955 435 – – – 3,184 606Liabilities under acceptances 165 – – – – – – 165Amounts owed to bank depositors 31,817 1,187 4,002 – – – 26,628 –Derivative financial instruments – liabilities 1,716 1,716 – – – – – –Non-current liabilities held-for-sale 414 – – – – – – 414

133,137 4,858 63,405 – – – 30,489 34,385

Paragraph 20 of IFRS 7 also requires the corresponding income and expense by category to either be presented on the face of the income statement or in the notes to the financial statements. All of the insurers in our analysis provided this detail in the notes to the financial statements.


IFRS 7 also requires many of its disclosures to be given by ‘class’ of financial instrument, which is defined as a level of detail that is appropriate to the nature of the information disclosed and the characteristics of the instruments. A class is a lower level of aggregation than a category.

Figure 9 demonstrates the number of classes of financial instruments disclosed by the insurers in our sample.

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3

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6

7

8

1-10 11-15 16-20 21-25

Number of classes of financial instruments

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Figure 9 – Presentation of classes of financial instruments

Capital management disclosures The IAS 1 requirements to present capital disclosures were adopted by the IASB at the same time as IFRS 7 and were provided by most insurers for the first time in 2007. IAS 1 now requires information about capital on both a qualitative and quantitative level. We consider below how insurers present capital management disclosures:

• qualitatively: for objectives, policies and processes for managing capital, and

• quantitatively: for available capital resources, what is managed as capital, local regulatory capital and excess capital resources.

Objectives, policies and processes for managing capital IAS 1 requires an entity to disclose its objectives, policies and processes for managing capital, which forms part of its qualitative disclosures. Extract 14 from Aviva’s annual report illustrates this qualitative requirement.

19Other issues

Extract 14 - Aviva Annual Report 2007, page 54

Aviva plcAnnual Report and

Accounts 2007

Business review continued:

Capital management

54Business

review

Capital

Capital management objectives

Aviva’s capital management philosophy is focused oncapital efficiency and effective risk management to supporta progressive dividend policy and earnings per sharegrowth. Rigorous capital allocation is one of the Group’sprimary strategic priorities and is ultimately governed by the Group Executive Committee.

The Group’s overall capital risk appetite is set and managed with reference to the requirements of arange of different stakeholders including shareholders,policyholders, regulators and rating agencies. In managingcapital we seek to:

– maintain sufficient, but not excessive, financialstrength to support new business growth and satisfythe requirements of our stakeholders;

– optimise our overall debt to equity structure toenhance our returns to shareholders, subject to ourcapital risk appetite and balancing the requirementsof the range of stakeholders;

– retain financial flexibility by maintaining strongliquidity, including significant unutilised committedcredit lines and access to a range of capital markets;

– allocate capital rigorously across the Group, to drivevalue adding growth in accordance with risk appetite;

– increase the dividend on a basis judged prudent, whileretaining capital to support future business growth,using dividend cover on an IFRS operating earningsafter tax basis in the 1.5 to 2.0 times range as a guide.

Capital resources

The primary sources of capital used by the Group are equity shareholders’ funds, preference shares,subordinated debt and borrowings. We also consider and, where efficient to do so, utilise alternative sources of capital such as reinsurance and securitisation in additionto the more traditional sources of funding. Targets areestablished in relation to regulatory solvency, ratings,liquidity and dividend capacity and are a key tool inmanaging capital in accordance with our risk appetite and the requirements of our various stakeholders.

Overall, the Group has significant resources andfinancial strength. The ratings of the Group’s mainoperating subsidiaries are AA/AA- (“very strong”) with astable outlook from Standard & Poor’s, Aa3 (“excellent”)with a stable outlook from Moody’s and A+ (“Superior”)with a stable outlook from AM Best. These ratings reflectthe Group’s strong liquidity, competitive position, capital base, increasing underlying earnings and strategicand operational management. The Group is subject to a number of regulatory capital tests and also employseconomic capital measures to manage capital and risk.

Capital allocation

Capital allocation is undertaken based on a rigorousanalysis of a range of financial, strategic, risk and capitalfactors to ensure that capital is allocated efficiently to value adding business opportunities. A clear managementdecision-making framework, incorporating ongoingoperational and strategic performance review, periodiclonger term strategic and financial planning and robustdue diligence over capital allocation is in place, governedby the Group Executive Committee and Group Capital

Management Committee. These processes incorporatevarious capital profitability metrics, including anassessment of return on capital employed and internalrates of return in relation to hurdle rates to ensure capitalis allocated efficiently and that excess business unit capitalis repatriated where appropriate.

Different measures of capital

In recognition of the requirements of different stakeholders,the Group measures its capital on a number of differentbases, all of which are taken into account when managingand allocating capital across the Group. These includemeasures which comply with the regulatory regimes withinwhich the Group operates and those which the directorsconsider appropriate for the management of the business.The primary measures which the Group uses are:

(i) Accounting basesThe Group reports its results on both an IFRS and aEuropean Embedded Value basis. The directors considerthat the European Embedded Value principles provide amore meaningful measure of the long term underlyingvalue of the capital employed in the Group’s life andrelated businesses. This basis allows for the impact ofuncertainty in the future investment returns more explicitlyand is consistent with the way the life business is pricedand managed. Accordingly, in addition to IFRS, we analyseand measure the net asset value and total capitalemployed for the Group on this basis. This is the basis onwhich Group Return on Equity is measured and againstwhich the corresponding Group target is expressed.

(ii) Regulatory bases Individual regulated subsidiaries measure and reportsolvency based on applicable local regulations, including inthe UK the regulations established by the Financial ServicesAuthority (FSA). These measures are also consolidatedunder the European Insurance Groups Directive (IGD) tocalculate regulatory capital adequacy at an aggregateGroup level. The Group has fully complied with theseregulatory requirements during the year.

(iii) Rating agency basesThe Group’s ratings are an important indicator of financialstrength and maintenance of these ratings is one of thekey drivers of capital risk appetite. Certain rating agencieshave proprietary capital models which they use to assessavailable capital resources against capital requirements, as a component of their overall criteria for assigning ratings.In addition, rating agency measures and targets in respectof gearing and fixed charge cover are also important inevaluating the level of borrowings utilised by the Group.While not mandatory external requirements, in practicerating agency capital measures tend to act as one of the primary drivers of capital requirements, reflecting thecapital strength required in relation to our target ratings.

(iv) Economic basesThe Group also measures its capital using an economiccapital model that takes into account a more realistic set of financial and non-financial assumptions. This model hasbeen developed considerably over the past few years and isincreasingly relevant in the internal management and externalassessment of the Group’s capital resources. The economiccapital model is used to assess the Group’s capital strengthin accordance with the Individual Capital Assessment (ICA)requirements established by the FSA. Further developmentsare planned to meet the emerging requirements of theSolvency II framework and other external agencies.

IAS 1 recognizes that insurers may operate within several jurisdictions, in which case the capital requirements and management thereof should be presented in aggregate or individually to facilitate ease of use. All the insurers within the sample we analyzed operate within several geographic regions, and each region is subject to the regulatory capital requirements dictated by local legislation. An entity is required to disclose whether any externally imposed capital requirements were breached and the consequence of such non-compliance. As might be expected from a sample of major multinational insurers, we observed no disclosure of this kind.

Disclosure of an insurer’s capital management can be viewed as a key factor in assessing the risk profile and the ability of the insurer to counter adverse events. Some insurers took the opportunity to use this disclosure to introduce Solvency II and the risk based capital approach, which will be applicable to European insurers.


Local regulatory capital and excess capital resourcesRegulatory capital requirements and excess capital resources is presented by Old Mutual in extract 15.

Extract 15 - Old Mutual Annual Report and Accounts 2007, Note 48 Financial Risk, Page 208

Old Mutual plc Annual Report and Accounts 2007Notes to the consolidated financial statements208

48 Financial risk continued

(b) Capital risk management(i) Overview The Group actively manages its capital to ensure that entities in the Group will be able to continue as a going concern while maximising the return to shareholders through the optimisation of the debt and equity balance. It is critical that the Group’s capital management policies are aligned with the Group’s overall strategy, business plans and risk appetite. The Group has a business planning process that runs on an annual cycle with regularupdates to projections. It is through this process, which includes risk and sensitivity analyses of forecasts, that the operating businesses gain approvalfrom the Old Mutual plc Board for their requests for capital.

In terms of general policy, each regulated business is required to hold, as a minimum, capital sufficient to meet the requirements of any applicableregulator in the jurisdictions in which it operates, together with such additional capital as management believes is necessary to ensure that obligationsto policyholders and/or clients can always be met on a timely basis. In addition, Old Mutual plc ensures that it can meet its expected capital andfinancing needs at all times, having regard to the Group’s business plans, forecasts and any strategic initiatives.

The Group’s Capital Management Committee (GCMC) reviews the capital structure regularly. As part of the review the committee considers the cost of capital and the risks associated with each class of capital. Based on the recommendations of the committee, the Group will balance its overallcapital structure through the payment of dividends, new share issues, share buybacks as well as the issue of new debt or the redemption of existingdebt. Measures that inform the GCMC’s views on the appropriate level of capital for the Group includes shareholder performance objectives, regulatorycapital requirements, internal economic capital measures, rating agency expectations and general views on maintaining financial flexibility.

The GCMC is a sub-committee of the Executive Committee of the Board, established to set an appropriate framework and guidelines to ensure theappropriate management of capital, to allocate capital to the various businesses, and to monitor return on allocated capital for each business relativeto the agreed hurdle rate. The GCMC comprises the Chief Executive and Group Finance Director of Old Mutual plc together with certain executivesdrawn from Old Mutual plc and/or its subsidiaries. Meetings are held as circumstances require and are the body through which requests for capitalare submitted outside the business plans.

Management regularly monitors the capital requirements of the Group, taking account of future balance sheet growth, profitability, projected dividendpayments and any anticipated regulatory changes, in order to ensure that the Group is at all times able to meet the forecast future minimum capitalrequirements.

(ii) Old Mutual plcOld Mutual plc is the holding company of the Group and is responsible for the raising and allocation of capital in line with the Group’s capitalmanagement policies set out above and for ensuring the operational funding and regulatory capital needs of the holding company and its subsidiariesare met at all times.

(iii) Long-term insurance business operations The regulatory capital position of the Group’s long-term insurance operations, based on latest estimates, is summarised as follows:

£m

At 31 December 2007 At 31 December 2006

SouthSouth United Africa UnitedAfrica States Europe Restated States Europe

Equity shareholders’ funds 3,980 1,191 3,699 4,053 1,253 2,997Adjustments to a regulatory basis:Inadmissible assets (22) (154) (1,049) (20) (140) (897)Other adjustments (831) (570) (1,505) (1,040) (704) (1,156)

Total available capital resources 3,127 467 1,145 2,993 409 944Total capital requirements – local regulatory basis (886) (126) (211) (872) (185) (249)

Overall excess of capital resources over requirements 2,241 341 934 2,121 224 695

£m

At 31 December 2007 At 31 December 2006

SouthSouth United Africa UnitedAfrica States Europe Restated States Europe

Capital position at 1 January 2,993 409 944 3,079 487 –Earnings after tax 535 19 238 1,026 61 (26)Change in admissible assets and other adjustments 194 62 (75) (202) (165) (30)Additions from business combinations – – – – – 991(Capital redemptions)/new capital – (19) 3 – 85 –Dividends (613) – – (232) – –Foreign exchange movements 18 (4) 35 (678) (59) 9

Capital position at 31 December 3,127 467 1,145 2,993 409 944

Notes to the consolidated financial statementsFor the year ended 31 December 2007 continued

What is managed as capitalAlmost all the insurers we reviewed applied their regulatory bases to disclose what they managed as capital. One insurer presented its capital on both an EV basis and the regulatory bases. In contrast, two insurers simply stated that the minimum level of capital had been maintained during the year for each sector based on the local regulatory requirements. This is presented in figure 10.

13

1

12

Regulatory bases

IFRS

EEV

No disclosure made

Figure 10 - Bases used by insurers to disclose capital requirements

21Other issues

Our survey revealed that these IAS 1 capital management disclosures were usually presented as part of the notes to the financial statements or as part of the Management Commentary (front) section of the annual report.

Available capital resourcesExtract 16 provides a reconciliation of what Zurich manages as capital and shows the excess of available capital over the required group solvency capital based on the Swiss Insurance Supervisory Law.

Extract 16 – Zurich Annual Report 2007, page 191

191FINANCIAL REPORT 2007

Zurich Financial Services Group Annual Report 2007

Financial Report 2007

Private Insurance (FOPI). In order to comply with future SST requirements, Zurich has continued to build on itsexisting internal risk based capital model (RBC) and shared it with FOPI. In 2007, Zurich conducted a field testfor each Swiss legal entity as required.

In the US, required capital is determined to be the ‘company action level risk based capital’ based on theNational Association of Insurance Commissioners risk based capital model. This is a method of measuring theminimum amount of capital approriate for an insurance company to support its overall business operations inconsideration of its size and risk profile. The calculation is based on applying factors to various asset, premium,claim, expense and reserve items, with the factors determined as higher for those items with greater underlyingrisk and lower for less risky items.

The Group’s banking operations, based in Europe, have been subject to the Basel I capital regime up toDecember 31, 2007, and adopted Basel II from January 1, 2008. Under Basel I, required capital is calculated asthe sum of a fixed percentage of the banking operations’ risk weighted assets and capital required for theimpact of market risk exposures. There is a further requirement to maintain sufficient capital to support largeexposures. Under Basel II, required capital is calculated on a risk based approach. As of December 31, 2007, theGroup’s banking operations were in compliance with applicable regulatory capital adequacy requirements andmanagement also expects to be in compliance with Basel II requirements.

The Group endeavours to pool risk and capital as much as possible and, in so doing, benefits in regimes wherediversification benefits are recognized (eg. US, UK and Switzerland).

The Group continues to be subject to Solvency I requirements based on the Swiss Insurance Supervisory Law.The Group’s Solvency I as at December 31, 2007 and 2006 was as follows:

Table 27

In USD millions, as of December 31 2007 2006

Eligible equity

Shareholders’ equity and minority interest 29,177 26,105

Subordinated debt 1 1,580 1,419

Deferred policy acquisition costs net of present value of

profits of acquired insurance contracts (2,614) (2,309)

Dividends, share buy-back and nominal value reduction 2 (3,867) (2,306)

Goodwill and other intangible assets (3,855) (2,309)

Total eligible equity 20,421 20,599

Total required solvency capital 12,498 11,797

Excess margin 7,923 8,802

Solvency ratio 163% 175%

1 Under guidelines issued by FOPI during 2007, only 25% of all subordinated debt issuances are admissible, except for the issuance by Zurich Finance (UK)p.l.c., of which 50% is admissible.

2 Amount for dividend reflects the proposed dividend for the respective financial year, not yet approved by the Annual General Meeting. Includes amountauthorized by Board of Directors for share buy-back program.

From the Group’s perspective, local regulatory requirement for business operations are added to the requirementfor insurance businesses. For some of the Group’s holding companies, which do not have local regulatoryrequirements, the Group uses 8% of assets as a capital requirement.

As of December 31, 2007, the Group and all its subsidiaries were substantially in compliance with applicableregulatory capital adequacy requirements.

In conjunction with the considerations set out above, the Group seeks to maintain the balance between higherreturns on equity, which may be possible with higher levels of borrowing, and the advantages and securityprovided by a sound capital position.

An important influence on the capital levels is the payment of dividends and share buy-backs. On February 14,2007 the Board of Zurich Financial Services AG authorized a share buy-back program. 3,432,500 fully paidshares, with a nominal value CHF 0.10, were bought back during 2007 at an average price of CHF 364 pershare, with a total cost of USD 1 billion. A proposal to cancel these repurchased shares will be submitted to theshareholders at the Annual General Meeting in 2008.


Treatment of unit linked business

A unit-linked contract is a contract under which the investment risk is borne by the policyholders and not by the insurer. The policyholder benefits are determined with reference to the price of units in an investment fund in which the policyholders participate. The exposure for the insurer on such contracts is restricted to the annual management fee, which is based on the value of the underlying investment fund.

In 2007 the treatment of unit linked business for IFRS 7 purposes was an interesting aspect of the risk management disclosures. Some insurers provided reduced market risk disclosures in respect of such assets, owing to the fact that policyholders’ bearing the majority of the market risk on the invested assets and the shareholders’ risk is limited to the extent that income arises from the asset management charges based on the value of the fund. The disclosures by Aviva and AXA illustrate this point (extracts 17 and 18).

Extract 17 - Aviva Annual Report 2007, page 221

55 – Risk management continued

(b) Market riskMarket risk is the risk of adverse financial impact due to changes in fair values or future cash flows of financial instrumentsfrom fluctuations in interest rates, equity prices, property prices, and foreign currency exchange rates. Market risk arises inbusiness units due to fluctuations in both the value of liabilities and the value of investments held. At Group level, it alsoarises in relation to the overall portfolio of international businesses and in the value of investment assets owned directly bythe shareholders.

The Group has established a policy on market risk which sets out the principles that businesses are expected to adopt inrespect of management of the key market risks to which the Group is exposed. The Group monitors adherence to thismarket risk policy and regularly reviews how business units are managing these risks locally, through the Group InvestmentCommittee and ultimately to the Asset Liability Management committee. For each of the major components of marketrisk, described in more detail below, the Group has put in place additional policies and procedures to set out how each riskshould be managed and monitored, and the approach to setting an appropriate risk appetite.

The management of market risk is undertaken in both business units and at Group level. Business units manage marketrisks locally using their market risk framework and within local regulatory constraints. Business units may also beconstrained by the requirement to meet policyholders’ reasonable expectations and to minimise or avoid market risk in anumber of areas. The Group Investment committee is responsible for managing market risk at Group level, and a numberof investment related risks, in particular those faced by them shareholder funds throughout the Group.

The financial impact from changes in market risk (such as interest rates, equity prices and property values) is examinedthrough stress tests adopted in the Individual Capital Assessments (ICA) and Financial Condition Reports (FCR), which bothconsider the impact on capital from variations in financial circumstances on either a remote scenario, or to changes fromthe central operating scenario. Both consider the management actions that may be taken in mitigation of the change incircumstances.

The sensitivity of Group earnings to changes in economic markets is regularly monitored through sensitivities to investmentreturns and asset values in EEV reporting.

The Group market risk policy sets out the minimum principles and framework for matching liabilities with appropriateassets, the approaches to be taken when liabilities cannot be matched and the monitoring processes that are required. The Group has criteria for matching assets and liabilities for all classes of business to minimize the impact of mismatchesbetween the value of assets and the liabilities due to market movements. The local regulatory environment for eachbusiness will also set the conditions under which assets and liabilities are to be matched.

The Group writes unit-linked business in a number of its operations. In unit-linked business, the policyholder bears theinvestment risk on the assets held in the unit-linked funds, as the policy benefits are directly linked to the value of theassets in the fund. The shareholders’ exposure to market risk on this business is limited to the extent that income arisingfrom asset management charges is based on the value of assets in the fund.

Equity price riskThe Group is subject to equity price risk due to daily changes in the market values of its equity securities portfolio. The Group’s shareholders are exposed to the following sources of equity risk:

– direct equity shareholdings in shareholder funds and the Group defined benefit pension funds;

– the indirect impact from changes in the value of equities held in policyholders’ funds from which management chargesor a share of performance are taken;

– its interest in the free estate of long-term funds.

At business unit level, equity price risk is actively managed in order to mitigate anticipated unfavourable marketmovements where this lies outside the risk appetite of either the company in respect of shareholder assets or the fund inrespect of policyholder assets concerned. In addition local asset admissibility regulations require that business units holddiversified portfolios of assets thereby reducing exposure to individual equities. The Group does not have material holdingsof unquoted equity securities.

Equity risk is also managed using a variety of derivative instruments, including futures and options.

Businesses actively model the performance of equities through the use of stochastic models, in particular to understandthe impact of equity performance on guarantees, options and bonus rates.

The Investment Committee actively monitors equity assets owned directly by the Group, which may include some materialshareholdings in the Group’s strategic business partners. Concentrations of specific equity holdings (eg the strategicholdings) are also monitored monthly by the Capital Management Committee.

A sensitivity to changes in equity prices is given in section (g) below.

Aviva plcAnnual Report and Accounts 2007

221Financialstatements

AXA’s exposure to market risk is reduced by its broad range of operations and geographical positions, which provides good risk diversification. Furthermore, a large portion of AXA’s Life & Savings operations involve unit-linked products, in which most of the financial risk is borne directly by policyholders (the shareholder’s value is however still sensitive to financial market evolution).

Extract 18 - AXA Annual Report 2007, page 178

AEGON, AMP, Generali, Munich Re, Old Mutual and Zurich provided similar narratives in their disclosure for the treatment of unit linked business.

In addition, Zurich also excluded unit linked liabilities from the maturity analyses for the liquidity risk disclosures explaining that policyholders can generally surrender their policies at any time causing the underlying assets to be liquidated (extract 19).

Extract 19 - Zurich Annual Report 2007, page 83

188

Consolidated Financial Statements

FINANCIAL INFORMATION

Zurich Financial Services Group Annual Report 2007

Financial Report 2007

Liquidity riskLiquidity risk is the risk that the Group does not have sufficient liquid financial resources to meet its obligationswhen they fall due, or would have to incur excessive costs to do so. Maintaining sufficient available liquid assetsto meet the Group’s obligations as they fall due is an important part of the Group’s financial managementpractice. For this purpose the Group has established Group liquidity management policies and specific guidelinesas to how local businesses have to plan, manage and report their local liquidity.

At Group level, similar guidelines apply and detailed liquidity forecasts based on the local businesses’ input aswell as the Group’s own forecasts are regularly performed. As part of its liquidity management, the Group alsomaintains sufficient cash and cash equivalents to meet expected out flows. In addition, the Group maintains aliquidity buffer and committed borrowing facilities as well as access to diverse funding sources to covercontingencies. A credit downgrade could impact the Group’s commitments and guarantees, thus potentiallyincreasing the Group’s liquidity needs. These contingencies are also included in the Group’s liquiditymanagement. Refer to note 20 for additional information on credit facilities.

The table below provides an analysis of the maturity of reserves for insurance contracts net of reinsurance basedon expected cashflows without considering the surrender values as of December 31, 2007 and 2006. Reservesfor unit-linked contracts amounting to USD 70,075 million and USD 66,008 million at December 31, 2007 and2006, respectively, are not included in the table below, as policyholder can generally surrender their contracts atany time, at which point the underlying unit-linked assets would be liquidated. Risks from the liquidation ofunit-linked assets are borne by the policyholders of unit-linked contracts.

Table 26.16

Maturity schedule in USD millions, as of

of reserves for December 31, 2007

insurance contracts

Reservesfor losses Policyholders’

and loss contractadjustment Future life deposits and

expenses, policyholders’ other funds,net benefits, net net Total

< 1 year 15,590 6,232 1,520 23,342

1 to 5 years 23,185 18,220 2,009 43,414

6 to 10 years 8,393 16,421 1,687 26,501

11 to 20 years 5,424 14,283 2,313 22,020

> 20 years 2,120 15,871 8,182 26,173

Total 54,712 71,027 15,711 141,450

Table 26.17

Maturity schedule in USD millions, as of

of reserves for December 31, 2006

insurance contracts

Reservesfor losses Policyholders’

and loss contractadjustment Future life deposits and

expenses, policyholders’ other funds,net benefits, net net Total

< 1 year 15,236 6,940 1,638 23,814

1 to 5 years 20,998 18,420 2,059 41,477

6 to 10 years 7,136 15,339 1,369 23,844

11 to 20 years 5,400 13,232 1,708 20,340

> 20 years 2,043 21,086 8,903 32,032

Total 50,813 75,017 15,677 141,507

Refer to note 8 for additional information on reserves for insurance contracts.

23Treatment of unit linked business

Sanlam and Old Mutual included unit linked liabilities in their maturity analyses, but as a separate category in the analysis of policyholder liabilities. Sanlam illustrates this in extract 20.

Extract 20 - Sanlam Annual Report 2007, page 278

Sanlam annual report 2007

Notes to the Group Financial Statements continued 278

for the year ended 31 December 2007

R million <1 year 1 – 5years >5 years

Openended Total

15. Long-term policy liabilities (continued)

15.5 Maturity analysis of investment policy contracts

2007Linked and market-related 3 121 8 813 37 162 44 810 93 906Stable bonus 10 7 27 10 959 11 003Non-participating annuities 53 629 157 257 1 096Other non-participating liabilities 694 4 279 4 992 292 10 257

Total investment policies 3 878 13 728 42 338 56 318 116 262

2006Linked and market-related 3 084 12 001 32 563 39 770 87 418Stable bonus 6 10 6 11 135 11 157Non-participating annuities 114 648 195 457 1 414Other non-participating liabilities 3 575 4 618 4 142 23 12 358

Total investment policies 6 779 17 277 36 906 51 385 112 347

Investment policy contracts are classifi ed as at fair value through profi t or loss.

R million <1 year 1 – 5years >5 years

Openended Total

15.6 Maturity analysis of insurance policy contracts

2007Linked and market-related 1 613 6 678 21 931 4 080 34 302Stable bonus 1 677 7 507 27 437 3 741 40 362Reversionary bonus policies 543 2 489 6 393 2 779 12 204Non-participating annuities 2 22 50 21 572 21 646Participating annuities — — — 8 292 8 292Other non-participating liabilities 546 1 091 2 064 7 891 11 592

Total insurance policies 4 381 17 787 57 875 48 355 128 398

2006Linked and market-related 1 555 6 360 21 427 3 377 32 719Stable bonus 1 622 7 058 27 227 3 244 39 151Reversionary bonus policies 509 2 248 6 659 2 466 11 882Non-participating annuities 1 12 19 22 297 22 329Participating annuities — — — 9 054 9 054Other non-participating liabilities 451 247 1 803 7 881 10 382

Total insurance policies 4 138 15 925 57 135 48 319 125 517

R million 2007 2006

15.7 Policy liabilities include the following:Provision for HIV/Aids and other pandemics 3 551 2 945Reduction in earnings caused by using a retrospective HIV/Aids valuation basis instead of a prospective valuation basis (11) —Asset mismatch reserve 1 801 1 576


Conclusion

IFRS 7 disclosures have proved to be a useful mechanism to communicate key information about the quality of financial assets and exposure to financial risks during the current turmoil in financial markets. The disclosures provide information surrounding not only the management but also the measurement of risks to understand the extent of insurers’ exposure to risks such as those arising from the credit crisis.

Some weaknesses observed in this publication in applying the requirements of IFRS 7 during the 2007 reporting period are outlined below:

• The diversity in approaches to the provision of information (e.g. use of an internal grading system or external source, presentation on an industry or a geographic basis) reduced comparability between insurers.

• Insurers chose to apply disclosures differently, most notably in the area of market risk, liquidity maturity analyses and sensitivity analyses which has reduced the scope for comparability.

• The quantitative disclosures of what an entity manages as capital is presented on the local regulatory bases which differed from the IFRS definition of equity and made comparability between insurers difficult.

• Unit linked business was treated differently by insurers in our sample as some chose to exclude it from the market risk disclosures on the basis that the risk is borne by the policyholders with the shareholders’ risk being limited to the annual management charge.

Some insurers clearly signaled through the financial statement disclosures they made that some of the requirements set out in the US GAAP standard FAS 157 are useful, particularly those surrounding the additional disclosures for items where valuation input has been sourced from unobservable data. These are viewed as providing useful information for the users and we would encourage the IASB to further align its requirements with those found in US GAAP.

We note that in this regard the IASB has recently committed to examining the requirements of, and principles for, disclosure surrounding the valuation of financial instruments to identify areas for improvement; and enhance guidance for the valuation of financial instruments in declining markets. The IASB has set up an advisory panel of experts to discuss these matters and has promised to review IFRS 7 to determine whether the required disclosures effectively reflect the exposure of the company; and the disclosure of potential losses arising from financial instruments with off-balance sheet entities. This is a development to be welcomed.

Appendix one: Fair value disclosure and FAS 157 25

Appendix one: Fair value disclosure and FAS 157

The US Financial Accounting Standards Board (FASB) Statement No. 157 Fair Value Measurements, is effective for insurers reporting under US GAAP for years (and interim periods) ending in 2008. Several financial service institutions, including a few insurers, early adopted this standard in 2007.

FAS 157 defines fair value under US GAAP; it establishes a framework for measuring fair value; and expands disclosure requirements about the use of fair value measurements.

One of the key disclosure requirements in FAS 157 is a tabular presentation that categorizes items recorded at fair value on the balance sheet, including financial instruments, based on the inputs into valuation techniques, using a three level hierarchy:

Unadjusted quoted prices in an active market for identical assets or liabilities (Level 1).•

Quoted prices in markets that are not active or significant inputs that are observable either directly or indirectly • (Level 2). Inputs include the following:

quoted prices for similar assets or liabilities in active markets −

quoted prices for identical or similar assets or liabilities in non-active markets −

inputs other than quoted market prices that is observable, or −

inputs that are derived principally from or corroborated by observable market data through correlation or other means. −

Prices or valuation techniques that require inputs that are both unobservable and significant to the overall fair value • measurement. They reflect management’s own assumptions about the assumptions a market participant would use in pricing the asset or liability (Level 3).

FAS 157 also requires a reconciliation of the beginning and ending balances for any recurring fair value measurements that utilize significant unobservable inputs (i.e. Level 3 inputs). Therefore, any asset or liability (measured at fair value on a recurring basis) that was determined to be based on Level 3 measurements at either the beginning or the end of a reporting period would need to be considered in the reconciliation. To enhance the information provided in the reconciliation with respect to total gains and losses recognized in earnings, the Statement requires the reporting entity to also disclose the change in unrealized gains and losses recognized in earnings for assets and liabilities categorized as Level 3 that are still held at the reporting date. Effectively this requires an entity to distinguish its unrealized gains and losses from its realized gains and losses for Level 3 measurements.

Since IFRS 7 also requires additional disclosure where valuation techniques have been adopted in determining fair value using inputs from unobservable sources, several insurers in our sample chose to use the FAS 157 fair value hierarchy concept in preparing their IFRS disclosures. This suggests that the market perceived the fair value hierarchy to be an effective way to communicate how fair value is determined.

This Appendix summarizes the key disclosure requirements of FAS 157 and identifies the main differences between the disclosures required by IFRS 7 and those required by FAS 157 and other current US GAAP standards. This comparison may also be helpful to any US insurer who is considering the implications of possible conversion to IFRS at some point in the future.

Major disclosure requirements of FAS 157

FAS 157 provides an illustration of the tabular disclosure requirements by fair value hierarchy level as follows:

Assets/liabilities measured at fair value on a recurring basis

Fair value measurements at reporting date using

Quoted prices in active markets for identical assets or liabilities

Significant other observable inputs

Significant unobservable inputs

Total (Level 1) (Level 2) (Level 3)

Description

26

Assets/liabilities measured at fair value on a recurring basis using significant unobservable inputs (Level 3)

Fair value measurements using significant unobservable inputs (Level 3)

Asset type 1 Asset type 2 Total

Beginning balance

Total gains or losses (realized or unrealized)

Included in earnings or changes in net assets

Included in other comprehensive income

Purchases, issuances and settlements

Transfers in and/or out of Level 3

Ending balance

The amount of total gains and losses for the period included in earnings (or changes in net assets)attributable to the change in unrealized gains or losses relating to assets still held at the reporting date

Paragraph 33c of FAS 157 further requires disclosures for assets and liabilities measured at fair value on a nonrecurring basis (i.e. impairment) including the disclosure of fair value amounts by hierarchy level and (on an annual basis) the disclosure of the valuation techniques used to measure fair value and any changes in those techniques. In addition, FAS 157 requires disclosure of the reason for the fair value measurement during the period and for Level 3 nonrecurring measurements, a description of the inputs and the information used to develop the inputs.

IFRS 7 currently requires additional information where valuation techniques have been applied using unobservable inputs. Where such fair values have been recognized, the standard requires presentation of the impacts of using reasonably possible alternative assumptions.

Assets/liabilities measured at fair value on a nonrecurring basis

Fair value measurements using

Quoted prices in active markets for identical assets/liabilities

Significant other observable inputs

Significant unobservable inputs

Total gain/(loss)

Total (Level 1) (Level 2) (Level 3)

Description

A FAS 157 requirement is to distinguish between assets and liabilities measured at fair value on a recurring and nonrecurring basis; whereas IFRS 7 makes no such distinction.

Comparison between main disclosure requirements of IFRS 7 and those in US GAAPUsing extracts of IFRS 7 as the basis, the following table provides a summary of the main characteristics of IFRS 7 where a difference is noted in the US GAAP equivalent. This provides some indication of the additional disclosure requirements for US GAAP reporters who may have to convert to IFRS.


Appendix one continued

27

IFRS 7 US GAAP

1. Disclosure on the face of primary statements

Paragraph 8 of IFRS 7 permits categories of financial assets and financial liabilities; and paragraph 20 of IFRS 7 permits items of income, expense, gains and losses in respect of each category to be disclosed either on the face of the financial statements or in the notes.

Paragraph 17 of FAS 115 allows less flexibility with the placement of required disclosures and states that:

‘An enterprise shall report its investments in available-for-sale securities and trading securities separately from similar assets that are subsequently measured using another measurement attribute on the face of the statement of financial position.’

2. Loans and receivables at fair value

Paragraph 9 of IFRS 7 states that if an entity has designated a loan or receivable at fair value through profit or loss, it shall disclose:

the maximum exposure to credit risk at the reporting • date of the loan or receivable (or group of loans or receivables)

the amount by which any related credit derivatives • or similar instruments mitigate that maximum exposure to credit risk

the amount of change during the period and • cumulatively in the fair value of the loan or receivable (or group of loans or receivables) that is attributable to changes in credit risk (see below), and

the amount of change in the fair value of any related • credit derivative or similar instrument that has occurred during the period and cumulatively since the loan or receivable was designated.

US GAAP does not define a loan and receivable category.

The designation at fair value through profit or loss is not • available under US GAAP.

Statement No. FAS 159, • The Fair Value Option for Financial Assets and Financial Liabilities Including an amendment of FASB Statement No. 115 (FAS 159), permits companies to choose to measure many financial instruments and certain other items at fair value that are not currently required to be measured at fair value, including loans and receivables.

Companies electing FAS 159 are required to disclose:•

management’s reasons for electing a fair value option −

the required FAS 157 disclosures, and −

for loans held as assets that have contractual principal −amounts and for loans that are 90 days or more past due and/or in non-accrual status, additional information regarding aggregate fair value and unpaid principal balance.

3. Compound financial instruments

Where an entity has issued compound financial instruments (containing both a debt and equity element) with multiple embedded derivatives whose values are interdependent, paragraph 17 of IFRS 7 requires the entity to disclose the existence of those features.

FAS 150 Accounting for Certain Financial Instruments with Characteristics of both Liabilities and Equity addresses accounting for compound instruments although US GAAP does not require bifurcation.

28

IFRS 7 US GAAP

4. Items of income, expense, gains or losses

Paragraph 20 of IFRS 7 requires disclosure of the net gains or net losses on:

loans and receivables, and•

financial liabilities measured at amortized cost.•

Paragraph 20 of IFRS 7 requires disclosure of the total interest income and expense (calculated using the effective interest rate method) for financial assets and financial liabilities that are not at fair value though profit or loss.

Paragraph 20 of IFRS 7 requires disclosure of the fee income and expense arising from:

financial assets and financial liabilities that are not at fair • value though profit or loss, and

trust and other fiduciary activities that result in the • holding or investing of assets on behalf of individuals, trusts, retirement benefit plans, and other institutions.

There are no similar disclosure requirements under US

GAAP.

For securities classified as available-for-sale, all reporting

enterprises shall disclose the aggregate fair value, the total

gains for securities with net gains in accumulated other

comprehensive income, and the total losses for securities

with net losses in accumulated other comprehensive

income, by major security type as of each date for which a

statement of financial position is presented. For securities

classified as held-to-maturity, all reporting enterprises shall

disclose the aggregate fair value, gross unrecognized

holding gains, gross unrecognized holding losses, the net

carrying amount, and the gross gains and losses in

accumulated other comprehensive income for any

derivatives that hedged the forecasted acquisition of the

held-to-maturity securities, by major security type as of

each date for which a statement of financial position is

presented.

EITF Issue 03-1 requires disclosure for available-for-sale and held-to-maturity securities subject to Statement 115 of the aggregate amount of unrealized losses and the aggregate related fair values of investments with unrealized losses. These amounts should be segregated into two time periods: time during which the investments has been in an unrealized loss position for (1) less than 12 months and (2) greater than 12 months.

Qualitative information should also be disclosed about why available-for-sale and held-to-maturity securities are temporary. Such qualitative disclosures include the nature of the investments, the cause of the impairments, the severity of the impairments (including the number of securities that are impaired), the duration of the impairments, and the evidence that the investor considered (both positive and negative) in reaching the conclusion that the impairments are temporary.



29

IFRS 7 US GAAP

5. Valuation techniques

Paragraph 27 of IFRS 7 requires an entity to disclose:

the methods and, when a valuation technique is used, the • assumptions applied in determining fair values of each class of financial assets or financial liabilities

whether the fair values are determined directly, in whole • or in part, by reference to published price quotations in an active market or are estimated using a valuation technique

whether the fair values, recognized or disclosed, are • determined in whole or in part using a valuation technique based on assumptions that are not supported by prices from observable current market transactions in the same instrument (i.e. without modification or repackaging) and not based on available observable market data, and

where the above statement applies, the total amount of • the change in fair value estimated using such a valuation technique that was recognized in profit or loss during the period.

Paragraphs 32e and 33d of FAS 157 require disclosure of the valuation techniques used to measure fair value and a discussion of changes in valuation techniques.

Where fair value is measured on a recurring basis using significant unobservable input (Level 3), paragraph 32c of FAS 157 requires a reconciliation the beginning and ending balances, presenting separately:

total realized and unrealized gains and losses included in • income (or changes in net assets)

purchases, issuances and settlements, and•

transfers in and/or out of Level 3.•

For measurements on a nonrecurring basis: fair value measurements using Level 3 inputs, paragraph 33c of FAS 157 requires a description of the inputs and the information used to develop the inputs.

6. Day 1 Profit/Loss

Paragraph 28 of IFRS 7 states that where no active market exists; fair value is determined using valuation techniques where maximum use is made of market input.

The best estimate of fair value at initial recognition is transaction price; which is the price from observable current market transactions or valuation using observable input. The difference between the fair value on initial recognition and the fair value using valuation techniques results in a Day 1 profit or loss, which may only be recognized if all input is sourced from market observable data.

The following disclosure is required by each class of financial instrument:

the accounting policy for recognizing that difference in • profit or loss to reflect a change in factors (including time) that market participants would consider in setting a price, and

the aggregate difference yet to be recognized in profit or • loss at the beginning and end of the period and a reconciliation of changes in the balance of this difference.

FAS 157 allows for the recognition of Day 1 profit or loss in situations where the transaction price is not deemed to represent the fair value of the asset acquired or liability assumed at initial recognition. FAS 157 does not impose any reliability threshold, thereby allowing for the recognition of Day 1 gains and losses on instruments measured at fair value using valuation models that utilize unobservable (Level 3) inputs.

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IFRS 7 US GAAP

7. Disclosure of fair value not required

Paragraph 29 of IFRS 7 states that fair values need not be given for:

investments in unquoted equity instruments, or • derivatives linked to such instruments, which are measured at cost because their fair value cannot be measured reliably

instruments (normally life insurance policies) that contain • a discretionary participation feature, if the fair value of that feature cannot be reliably measured, and

investments when the carrying amount is a reasonable • approximation of fair value.

Paragraph 13 of FAS 107 provides for a similar requirement; fair value disclosure is not required for trade receivables and payables when the carrying amount approximates fair value.

Paragraph 8 of FAS 107 provides for the exemptions when disclosure of fair value is not required.

8. Additional disclosures where no fair value

Paragraph 30 of IFRS 7 states that sufficient information should be disclosed to allow the users of financial statements to make judgment about the extent of possible differences between the carrying amount and fair value of financial assets and financial liabilities, where the fair value has not been disclosed; including:

the fact that fair value cannot be reliably measured•

a description of the instruments, their carrying amount, • and an explanation of why fair value cannot be measured reliably

information about the market for the instruments•

information about whether and how the entity intends to • dispose of the instruments, and

for instruments whose fair value previously could not be • reliably measured that are derecognized:

that fact −

their carrying amount at the time of derecognizing, −and

the amount of gain or loss recognized. −

Paragraph 14 of FAS 107 states that if it is not practicable for an entity to estimate the fair value of a financial instrument or a class of financial instruments, the following shall be disclosed:

information pertinent to estimating the fair value of that • financial instrument or class of financial instruments, such as the carrying amount, effective interest rate, and maturity, and

the reasons why it is not practicable to estimate fair • value.

9. Location of disclosures

The disclosures required by paragraphs 31-42 of IFRS 7 as stated in the Application Guidance Appendix B paragraph 6, surrounding the nature and extent of risks arising from financial instruments, should be either given in the financial statements or incorporated by cross-reference from the financial statements to some other statement, such as a management commentary or risk report, that is available to users of the financial statements on the same terms as the financial statements and at the same time. Without the information incorporated by cross-reference, the financial statements re incomplete.

US GAAP requires disclosures regarding fair value in the financial statements.



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IFRS 7 US GAAP

10. Credit risk

Paragraph 36 of IFRS 7 requires the following disclosure by class of financial instrument:

the maximum exposure to credit risk at the reporting date • before taking into account any collateral and credit enhancements

a description of any collateral held as security and credit • enhancements

information about the credit quality of financial assets • that are neither past due nor impaired, and

the carrying amount of financial assets that would • otherwise be past due or impaired whose terms have been renegotiated.

Paragraphs 15A and 15B of FAS 107 dictate similar disclosure except for the requirement to disclose the credit quality of assets that are neither past due nor impaired and the carrying amounts of financial assets whose terms have been renegotiated.

Paragraphs 15A & 15B of FAS 107 also require disclosure of all significant concentrations of credit risk arising from all financial instruments, whether from an individual counterparty or groups of counterparties. Group concentrations of credit risk exist if a number of counterparties are engaged in similar activities and have similar economic characteristics that would cause their ability to meet contractual obligations to be similarly affected by changes in economic or other conditions. The following shall be disclosed about each significant concentration:

Information about the (shared) activity, region, or • economic characteristic that identifies the concentration.

The maximum amount of loss due to credit risk that, • based on the gross fair value of the financial instrument, the entity would incur if parties to the financial instruments that make up the concentration failed completely to perform according to the terms of the contracts and the collateral or other security, if any, for the amount due proved to be of no value to the entity.

The entity’s policy of requiring collateral or other • security to support financial instruments subject to credit risk, information about the entity’s access to that collateral or other security, and the nature and a brief description of the collateral or other security supporting those financial instruments.

The entity’s policy of entering into master netting • arrangements to mitigate the credit risk of financial instruments, information about the arrangements for which the entity is a party, and a brief description of the terms of those arrangements, including the extent to which they would reduce the entity’s maximum amount of loss due to credit risk.

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IFRS 7 US GAAP

11. Financial assets that are either past due or impaired

Paragraph 37 of IFRS 7 requires an entity to disclose by class of financial asset:

an analysis of the age of financial assets that are past due • as at the reporting date but not impaired

an analysis of financial assets that are individually • determined to be impaired as at the reporting date, including the factors the entity considered in determining that they are impaired, and

for the amounts disclosed in both points above, a • description of collateral held by the entity as security and other credit enhancements and, unless impracticable, an estimate of their fair value.

Appendix A - defined terms

Past due: A financial asset is past due when a counterparty has failed to make a payment when contractually due.

US GAAP does not define the concept of assets that are ‘neither past due nor impaired’.

12. Liquidity risk

Paragraph 39 of IFRS 7 states that an entity should disclose:

a maturity analysis for financial liabilities that shows the • remaining contractual maturities, and

a description of how it manages the liquidity risk inherent.•

Paragraph 11 of Appendix B of the Application Guidance of IFRS 7 states that in preparing the contractual maturity analysis for financial liabilities, an entity uses its judgment to determine an appropriate number of time bands. For example, an entity might determine that the following time bands are appropriate:

not later than one month•

later than one month and not later than three months•

later than three months and not later than one year, and•

later than one year and not later than five years.•

Paragraph 20 of FAS 115 states for investments in debt securities classified as available-for-sale and separately for securities classified as held-to-maturity, all reporting enterprises shall disclose information about the contractual maturities of those securities as of the date of the most recent statement of financial position presented.

Maturity information may be combined in appropriate groupings. In complying with this requirement, financial institutions shall disclose the fair value and the net carrying amount (if different from fair value) of debt securities based on at least 4 maturity groupings:

within 1 year•

after 1 year through 5 years•

after 5 years through 10 years, and•

after 10 years.•

Securities not due at a single maturity date, such as mortgage-backed securities, may be disclosed separately rather than allocated over several maturity groupings; if allocated, the basis for allocation also shall be disclosed.



33

IFRS 7 US GAAP

13. Market risk - Sensitivity analysis

Paragraph 40 of IFRS 7 states that unless an entity complies with paragraph 41, it should disclose:

a sensitivity analysis for each type of market risk to which • the entity is exposed at the reporting date, showing how profit or loss and equity would have been affected by changes in the relevant risk variable that were reasonably possible at that date

the methods and assumptions used in preparing the • sensitivity analysis, and

changes from the previous period in the methods and • assumptions used, and the reasons for such changes.

Paragraph 41 of IFRS 7 states that here an entity prepares a sensitivity analysis, such as value-at-risk, that reflects interdependencies between risk variables (e.g. interest rates and exchange rates) and uses it to manage financial risks, it may disclose that analysis in place of the information specified at paragraph 40 above. If this disclosure is given, the effects on profit or loss and equity at paragraph 40 above need not be given.

In these cases the following should also be disclosed:

an explanation of the method used in preparing such a • sensitivity analysis, and of the main parameters and assumptions underlying the data provided, and

an explanation of the objective of the method used and of • limitations that may result in the information not fully reflecting the fair value of the assets and liabilities involved.

Paragraphs B18 –B28 of the Implementation Guidance should be read in conjunction.

Paragraph 15C of FAS 107 encourages but does not require an entity to disclose quantitative information about the market risks of financial instruments that is consistent with the way it manages or adjusts those risks.

Under US GAAP, the sensitivity and value-at-risk disclosures should include the effect of reasonably possible near-term changes in market rates and prices which is similar to the IFRS 7 requirement.

Possible disclosures include:

more details about current positions and perhaps activity • during the period

the hypothetical effects on comprehensive income (or • net assets), or annual income, of several possible changes in market prices

a gap analysis of interest rate repricing or maturity dates•

the duration of the financial instruments, or•

the entity’s value at risk from derivatives and from other • positions at the end of the reporting period and the average value at risk during the year.

Public companies in the US also must comply with the SEC Market Risk disclosures, S-K Item 305:

The underlying concept of the market risk disclosures is similar but S-K permits the entity the choice of disclosure (i.e. tabular presentation, sensitivity analysis, or value-at-risk).

In March 2008, the SEC issued a letter to US public company registrants requesting companies to disclose in the MD&A a discussion of how sensitive the fair value estimates for material assets or liabilities are to the significant inputs used by the technique or model. For example, a company could consider providing a range of values around the fair value amount arrived at to provide a sense of how the fair value estimate could potentially change as the significant inputs vary. To the extent a company provides a range, it should discuss why it believes the range is appropriate, identifying the key drivers of variability, and discussing how it developed the inputs used in determining the range.

In addition, registrants were requested to disclose, if material, a discussion of how increases and decreases in the aggregate fair value of assets and liabilities may affect the company’s liquidity and capital resources.

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Appendix two: Pillar III of Solvency II

Insurers in Europe face the pending implementation of a new regulatory regime under the European Union’s Solvency II project. Solvency II will provide a consistent risk based regulatory framework applicable to insurers and reinsurers across Europe. The framework proposed, uses the following three pillar approach:

Three pillar approach

Pillar I Pillar II Pillar III

Quantitative capital requirements

Solvency capital requirement • (“SCR”)

Minimum capital requirement • (“MCR”)

Qualitative requirements

Internal risk and capital management • standards

Supervisory review process•

Reporting & Disclosure

The ultimate aim of the framework is to ensure financial stability of the insurance industry and the protection of policyholders through the maintenance of prescribed solvency requirements which are better matched to the risks of the company. This serves as motivation for insurance companies to improve their risk management processes and reporting; which aligns to the IFRS 7 requirement that quantitative disclosure should be based on the information provided internally to key management personnel of the company. Under Solvency II, disclosure will be made to the Supervisory Reviewer and on a public basis which should enhance comparability between insurers.

Comparison between IFRS and Solvency II Public disclosure requirements under Pillar IIIIFRS 7 particularly increased the focus on risk including the management and disclosure thereof; and alignment between IFRS and regulatory disclosure requirements under Solvency II will no doubt be useful to European insurers. The presentation of consistent disclosures would reduce implementation costs; possibly improve risk management; disclosure and provide useful information to the users.

We compare the disclosure requirements under Pillar III of Solvency II, sourced from the Solvency II Draft Directive presented by the Commission of European Communities in Brussels on 10 July 2007, with those required by IFRS reporters to illustrate where they are similar.

The first aspect of Pillar III is Public Disclosure which is the qualitative and quantitative information disclosed to the market through an annual report of the entity’s solvency and financial condition. This report must contain the following information:

Pillar III of Solvency II Current practice followed by IFRS reporters

Overview of the business and its • performance: description of the activities, group structure, external environment, objectives, strategy, and financial results.

We believe that majority of this is either included in the risk management note in the financial statements or as part of the management commentary in the annual report. However, a gap analysis should be performed to identify areas where further details will be required as a result of Solvency II.

Governance: description of • governance structures, an evaluation of how adequate they are for the company’s risk profile, and a compliance code including competence and integrity rules.

We believe that majority of this is either included in the risk management note in the financial statements or as part of the management commentary in the annual report.

However, a gap analysis should be performed to identify areas where further details will be required as a result of Solvency II.

Risk management: a description of • each category of risk including details surrounding exposure, concentration, mitigation and sensitivity.

This equates to the paragraphs 31-42 of IFRS 7 disclosure requirements on the nature and extent of risks arising from financial instruments.

Solvency II brings in the consideration of operational risk; which is not included in IFRS 7.

Appendix two: Pillar III of Solvency II 35

Pillar III of Solvency II Current practice followed by IFRS reporters

Valuation methodology and bases: • technical provisions, assets held to cover the technical provisions and capital requirements, as well as other assets and liabilities; including an explanation of any major differences in the methodology and bases for valuation for financial statement purposes.

The ‘critical accounting policies, estimates and judgments’ disclosed in the notes to the financial statements provide this information.

Paragraph 27 of IFRS 7 stipulates that an entity should disclose:

The methods, valuation techniques and assumptions applied in determining • fair value.

Whether fair value is determined by reference to published price quotations in • an active market or estimated using a valuation technique.

Specific capital management requirements, which should include as a minimum:

Own funds: description of the • structure, quality, and amount of own funds, including a comparison analysis of significant variations over the previous year and an explanation of potential major variances in the financial statements.

Paragraph 134 of IAS 1 requires an entity to disclose information that enables users of its financial statements to evaluate the entity’s objectives, policies and processes for managing capital.

Paragraph 135 of IAS 1 requires disclosure of the movement since the prior period.

Capital Requirements: amounts of • MCR and SCR.

Paragraph 135 of IAS 1 requires a quantitative summary about what it manages as capital.

Internal model potentially used by • the company: description of the methodologies for modeling, key assumptions, and other variables to allow understanding of the differences to the standard formula.

Paragraph 135 of IAS 1 states that in order to achieve compliance with paragraph 134, an entity shall disclose:

Qualitative information about its objectives, policies and processes for • managing capital which includes:

a description of what it manages as capital −

when an entity is subject to externally imposed capital requirements, the −nature of those requirements and how those requirements are incorporated into the management of capital, and

how it is meeting its objectives for managing capital. −

Any breach of applicable capital • requirements: explanations (source and consequences) and actions or corrective measures.

Paragraph 135 of IAS 1 states that in order to achieve compliance with paragraph 134, an entity shall disclose:

Whether during the period it complied with any externally imposed capital • requirements to which it is subject.

When the entity has not complied with such externally imposed capital • requirements, the consequences of such non-compliance.

A gap analysis should be performed to identify areas where further details will be required as a result of Solvency II.

Solvency II Supervisory disclosure requirements under Pillar III

The second aspect covered by Pillar III is the Supervisory Reporting, which entails disclosure made by the entity to the

supervisory or regulatory authorities in order to carry out effective supervision of the entity; and should cover at a minimum the

following:

the results of the own risk and solvency assessment •

governance systems and the nature of the business •

valuation principles applied for solvency purposes •

risk exposures and risk management, and •

capital structure and management. •

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