Strategic Report Governance
Financial Statements
153
Financial investments are derecognised when our rights to the contractual cash flows expire or the IFRS 9 derecognition criteria for transferred financial assets are met. The criteria include assessment of rights and obligations to the cash flows, an assessment of the transfer of substantially all the risks and rewards of ownership and an assessment of whether the Group has retained control of the investment. Collateral The Group receives and pledges collateral in the form of cash or securities in respect of derivative, repurchase, reinsurance or other contracts such as securities lending. Cash collateral received that is not legally segregated from the Group is recognised as an asset with a corresponding liability for the repayment in other financial liabilities. Cash collateral pledged that is legally segregated from the Group is derecognised and a receivable for its return is recorded in the Consolidated statement of financial position. Non-cash collateral received is not recognised as an asset unless it qualifies for derecognition by the transferor. Non-cash collateral pledged continues to be recognised in the Consolidated statement of financial position within the appropriate asset classification when the Group continues to control the collateral and receives the economic benefit. Where non-cash collateral pledged continues to be recognised by the Group but the counterparty is permitted to sell or re-pledge the collateral, the non-cash collateral assets are classified separately within the Financial instruments note. The Group has various reinsurance collateral arrangements including funds withheld, funds transferred and premium deposit-back arrangements. The recognition/derecognition of the collateral assets is determined by the IFRS 9 recognition/derecognition criteria. An assessment is made of the contractual terms, including consideration of the Group’s exposure to the economic benefits. See note 28(c)(iii) for further details. Where collateral is recognised in the Group’s Consolidated statement of financial position, such as premium deposit- back arrangements, the liability for the repayment of the deposit is recognised as a cash flow within the boundary of the insurance contract. 1.13.3. Investment return Investment return on financial assets consists of interest receivable for the year and realised and unrealised gains and losses on financial assets and liabilities at FVTPL. Interest income is recognised as it accrues on the effective interest method and is reported separately for each classification of financial instruments. Realised gains and losses on financial assets and liabilities occur on disposal or transfer and represent the difference between the proceeds received net of transaction costs, and the original cost. Unrealised gains and losses arising on financial assets and liabilities measured at fair value through profit or loss represent the difference between the carrying value at the end of the year and the carrying value at the start of the year or purchase value during the year, less the reversal of previously recognised unrealised gains and losses in respect of disposals made during the year. 1.13.4. Use of fair value The Group uses current bid prices to value its investments with quoted prices. Actively traded investments without quoted prices are valued using prices provided by third parties. If there is no active established market for an investment, the Group applies an appropriate valuation technique as described below. Determining the fair value of financial investments when the markets are not active The Group holds certain financial investments which are not quoted in active markets including LTMs, derivatives and other illiquid investments for which markets are not active. When the markets are not active, there is generally no or limited observable market data that can be used in the fair value measurement of the financial investments. The determination of whether an active market exists for a financial investment requires management’s judgement. Fixed-maturity securities, in line with market practice, are generally valued using an independent pricing service. These valuations are determined using independent external quotations from multiple sources and are subject to a number of monitoring controls, such as monthly price variances, stale price reviews and variance analysis. Pricing services, where available, are used to obtain the third-party broker quotes. When prices are not available from pricing services, prices are sourced from external asset managers or internal models using both market observable and unobservable inputs. Financial investments using these valuation techniques are classified as Level 3 under the fair value hierarchy. These valuation techniques involve judgement with regard to the valuation models used and the inputs to these models can lead to a range of plausible valuations for financial investments. For further details of determining fair value hierarchy see note 16. If the market for a financial investment of the Group is not active, the fair value is determined using valuation techniques. The Group establishes fair value for these financial investments by using internally developed pricing models validated against independent price verifications where possible. The valuation technique is chosen with the objective of arriving at a fair value measurement which reflects the price at which an orderly transaction would take place between market participants on the measurement date. The valuation techniques include the use of recent arm’s length transactions, reference to other instruments that are substantially the same, discounted cash flow analysis and option pricing models. The valuation techniques may include a number of assumptions relating to variables such as credit risk and interest rates and, for lifetime mortgages, mortality, future expenses, voluntary redemptions and house price assumptions. These assumptions can be impacted by climate change transition risk, noting, for example, the Group’s investment in residential and commercial mortgages secured on properties. Financial investments measured at fair value are classified into the three-level hierarchy described in note 16 on the basis of the lowest level of inputs that are significant to the fair value measurement of the financial investment concerned.
Powered by FlippingBook