FINANCIAL STATEMENTS
STRATEGIC REPORT
GOVERNANCE
17 FINANCIAL ASSETS AND LIABILITIES MEASURED AT FAIR VALUE continued Principal assumptions underlying the calculation of other loans classified as Level 3 Credit spreads The valuation model discounts the expected future cash flows using a discount rate which includes a credit spread allowance associated with that asset. Redemption and defaults The redemption and default assumptions used in the valuation of Level 3 loans are derived from the assumptions for the Group’s bond portfolio. The impact of COVID-19 on expected defaults has been taken into account in the calculation of fair value at 31 December 2021, with no significant impacts
noted to fair values. Sensitivity analysis
Reasonably possible alternative assumptions for unobservable inputs used in the valuation model either as at the valuation date or from a suitable recent reporting period where appropriate to do so could give rise to significant changes in the fair value of the assets. The sensitivity of the valuation of other loans to the default assumption is determined by reference to movement in credit spreads. The Group has estimated the impact on fair value to changes to these inputs as follows:
Credit spreads +100bps
Other loans net increase/(decrease) in fair value (£m)
2021 2020
(0.9) (0.8)
Investment contract liabilities Investment contracts are valued using an internal model and determined on a policy-by-policy basis using a prospective valuation of future retirement income benefit and expense cash flows. Principal assumptions underlying the calculation of investment contract liabilities Valuation discount rates The valuation model discounts the expected future cash flows using a contractual discount rate derived from the assets hypothecated to back the liabilities. The discount rate used for the fixed term annuity product treated as investment business is 2.73% (2020: 2.34%). Sensitivity analysis The sensitivity of fair value to changes in the discount rate assumptions in respect of investment contract liabilities is not material. Deposits received from reinsurers Deposits from reinsurers which have been unbundled from their reinsurance contract and recognised at fair value through profit or loss are measured in accordance with the reinsurance contract and taking into account an appropriate discount rate for the timing of expected cash flows of the liabilities. Principal assumptions underlying the calculation of deposits received from reinsurers Discount rate The valuation model discounts the expected future cash flows using a contractual discount rate derived from the assets hypothecated to back the liabilities at a product level. The discount rates used for individual retirement and individual care annuities were 2.87% and 1.03% respectively (2020: 2.21% and 0.06% respectively). Credit spreads The valuation of deposits received from reinsurers includes a credit spread derived from the assets hypothecated to back these liabilities. A credit spread of 219bps (2020: 205bps) was applied in respect of the most significant reinsurance contract. Sensitivity analysis Reasonably possible alternative assumptions for unobservable inputs used in the valuation model either as at the valuation date or from a suitable recent reporting period where appropriate to do so could give rise to significant changes in the fair value of the liabilities (see note 27(b)). The Group has estimated the impact on fair value to changes to these inputs as follows:
Credit spreads +100bps
Deposits received from reinsurers net increase/(decrease) in fair value (£m)
Interest rates +100bps
(72.4) (80.1)
(196.1) (218.6)
2021 2020
18 DEFERRED TAX
2021
2020
Asset £m
Liability £m
Total £m
Asset £m
Liability £m
Total £m
– – – – –
(1.5)
(1.5)
Transitional tax Intangible assets Land and buildings Other provisions Total deferred tax
– – –
(4.2)
(4.2)
(17.0)
(17.0)
(17.8) (0.8)
(17.8) (0.8)
(0.8)
(0.8)
14.0
14.0
11.5 11.5
–
11.5
(5.3)
(5.3)
(22.8)
(11.3)
155
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