STRATEGIC REPORT
GOVERNANCE
financial statements
17 FINANCIAL ASSETS AND LIABILITIES MEASURED AT FAIR VALUE continued Infrastructure loans net increase/(decrease) in fair value (£m)
Credit spreads +100bps
2022 2021
(71.7) (96.6)
Other loans Other loans classified as Level 3 are mainly commodity trade finance loans. These are valued using discounted cash flow analyses. 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. 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:
Other loans net increase/(decrease) in fair value (£m)
Credit spreads +100bps
2022 2021
(1.1) (0.9)
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 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 5.67% (2021: 2.73%). 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 5.89% and 4.2% respectively (2021: 2.87% and 1.03% 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 252bps (2021: 219bps) 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:
Deposits received from reinsurers net increase/(decrease) in fair value (£m)
Credit spreads +100bps
Discount rates +100bps
2022 2021
(39.9) (72.4)
(111.2) (196.1)
165
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