22 Investment property This note gives details of the properties we hold for long-term rental yields or capital appreciation.

Transcription

1 164 Annual report and accounts 22 Investment property This note gives details of the properties we hold for long-term rental yields or capital appreciation. Freehold Leasehold Carrying At 1 January 8,552 1,405 9,957 9,848 1,790 11,638 Impact of the adoption of IFRS 10 1 (543) (350) (893) Additions Capitalised expenditure on existing properties Fair gains/(losses) (396) (79) (475) Disposals 2 (888) (248) (1,136) (940) (207) (1,147) Transfers from property and equipment (note 21) Foreign exchange rate movements (145) (5) (150) Freehold Leasehold At 31 December 8,207 1,244 9,451 8,552 1,405 9,957 Less: Assets classified as held for sale (18) (18) Restated ,207 1,244 9,451 8,534 1,405 9,939 1 Comprises the impact of adoption of IFRS 10 and the resulting consolidation and deconsolidation of entities based on the revised definition and criteria of control outlined in accounting policy D see note 1 for further details. 2 Disposals include investment property sold as part of the disposal of the US Life business in. The majority of investment property in the UK is d at least annually by external chartered surveyors in accordance with the guidance issued by The Royal Institution of Chartered Surveyors or using internal valuations and estimates during the intervening period. For other investment property, valuations are produced by local qualified staff of the Group or external qualified professional rs in the countries concerned. In the event of a material change in market conditions between the valuation date and balance sheet date, adjustments are made to reflect any material changes in fair. Values are calculated using a discounted cash flow approach and are based on current rental income plus anticipated uplifts at the next rent review, lease expiry, or break option taking into consideration lease incentives and assuming no further growth in the estimated rental of the property. This uplift and the discount rate are derived from rates implied by recent market transactions on similar properties where available. The fair of investment properties leased to third parties under operating leases at 31 December was 9,447 million (2012: 10,822 million). Future contractual aggregate minimum lease rentals receivable under the non-cancellable portion of these leases are given in note 54(b)(i). 23 Fair methodology This note explains the methodology for valuing our assets and liabilities measured at fair, and for fair disclosures. It also provides an analysis of these according to a fair hierarchy, determined by the market observability of valuation inputs. (a) Basis for determining fair hierarchy All assets and liabilities for which fair is measured or disclosed in the financial statements are categorised within the fair hierarchy described as follows, based on the lowest level input that is significant to the fair measurement as a whole: Inputs to fair s are quoted prices (unadjusted) in active markets for identical assets and liabilities that the entity can access at the measurement date. Inputs to fair s are inputs other than quoted prices included within that are observable for the asset or liability, either directly or indirectly. If the asset or liability has a specified (contractual) term, a input must be observable for substantially the full term of the instrument. inputs include the following: Quoted prices for similar assets and liabilities in active markets. Quoted prices for identical or similar assets and liabilities in markets that are not active, the prices are not current, or price quotations vary substantially either over time or among market makers, or in which little information is released publicly. Inputs other than quoted prices that are observable for the asset or liability (for example, interest rates and yield curves observable at commonly quoted intervals, implied volatilities, and credit spreads). Market-corroborated inputs. Where we use broker quotes and no information as to the observability of inputs is provided by the broker, the investments are classified as follows: Where the broker price is validated by using internal models with market observable inputs and the s are similar, we classify the investment as. In circumstances where internal models are not used to validate broker prices, or the observability of inputs used by brokers is unavailable, the investment is classified as. Inputs to fair s are unobservable inputs for the asset or liability. Unobservable inputs may have been used to measure fair 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 measurement objective remains the same, i.e. an exit price at the measurement date from the perspective of a market participant that holds the asset or owes the liability. Therefore, unobservable inputs reflect the assumptions the business unit considers that market participants would use in pricing the asset or liability. Examples are investment properties, certain private equity investments and private placements.

2 165 Annual report and accounts 23 Fair methodology continued The majority of the Group s assets and liabilities measured at fair are based on quoted market information or observable market data. 16.6% of assets and 0.9% of liabilities measured at fair are based on estimates and recorded as. 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. Third-party valuations using significant unobservable inputs validated against internally modelled valuations are classified as, where there is a significant difference between the third-party price and the internally modelled. Where the difference is insignificant, the instrument would be classified as. (b) Changes to valuation techniques: There were no changes in the valuation techniques during the year compared to those described in the 2012 annual consolidated financial statements, other than those noted below. (c) Comparison of the carrying amount and fair s of financial instruments Set out below is a comparison of the carrying amounts and fair s of financial instruments, excluding assets classified as held for sale. These amounts may differ where the asset or liability is carried on a measurement basis other than fair, e.g. amortised cost. Fair Assets Loans (note 24) 23,811 23,879 24,311 24,537 Investments (note 27) Fixed maturity 124, , , ,160 Equity 37,326 37,326 33,065 33,065 Other investments (including derivatives) 31,250 31,250 27,518 27,518 liabilities Non-participating investment contracts (note 42(a)) 48,140 48,140 43,741 43,741 Net asset attributable to unitholders 10,362 10,362 9,983 9,983 Borrowings (note 50) 8,222 7,819 8,324 8,179 Derivative liabilities (note 51) 1,188 1,188 1,643 1,643 Fair of the following assets and liabilities approximate to their carrying amounts: Receivables Cash and cash equivalents Payables and other financial liabilities The equivalent assets to those above, which are classified as held for sale d) Fair hierarchy analysis An analysis of assets and liabilities measured at amortised cost and fair categorised by fair hierarchy is given below: Fair hierarchy Carrying amount Sub-total fair Fair Amortised cost Recurring fair measurements Investment Property (note 22) 9,451 9,451 9,451 Loans (note 24) 3,115 15,362 18,477 5,402 23,879 investments measured at fair (note 27) Fixed maturity 74,904 40,602 8, , ,385 Equity 36, ,326 37,326 Other investments (including derivatives) 24,077 4,283 2,890 31,250 31,250 assets of operations classified as held for sale 2, ,675 2, ,009 48,384 37, ,564 5, ,966 liabilities measured at fair Non-participating investment contracts 1 (note 42(a)) 47, ,140 48,140 Net asset attributable to unit holders 10, ,362 10,362 Borrowings (note 50) ,313 6,506 7,819 Derivative liabilities (note 51) ,188 1,188 liabilities of operations classified as held for sale ,290 2, ,003 6,535 67,538 1 In addition to the balances in this table, included within Reinsurance Assets in the Statement of Position and note 44 are 2,048 million of non-participating investment contracts, which are legally reinsurance but do not meet the definition of a reinsurance contract under IFRS. These assets are financial instruments measured at fair through profit and loss and are classified as level 1 assets. Restated Carrying amount carrying Strategic report Governance IFRS statements Other information Fair hierarchy fair Non-recurring fair measurements 1 Properties occupied by group companies (note 21) Properties occupied by group companies classified as held for sale Non-recurring fair measurements are those that are required or permitted by other IFRS to be measured at fair in the statement of financial position in particular circumstances. Owner occupied property is red in accordance with IAS 16.

3 166 Annual report and accounts 23 Fair methodology continued Owner-occupied properties are stated at their red amounts, as assessed by qualified external rs in line with the Group s policy. The fair s stated in the table above are as at 31 December. Further details on the valuation of these properties can be found in note (Restated) 1,2 Fair hierarchy Sub-total fair Amortised cost Less: Assets of operations classified as held for sale Statement of financial position investments and loans measured at fair (notes 24 & 27) Loans 18,973 18,973 8,961 (3,397) 24,537 Fixed maturity 108,107 43,588 10, ,777 (33,617) 128,160 Equity 33, ,313 (1,248) 33,065 Other investments (including derivatives) 20,533 5,650 2,885 29,068 (1,550) 27, ,250 68,441 13, ,131 8,961 (39,812) 213,280 Liabilities Non-participating investment contracts (note 42 (a)) 3 45, ,299 1,400 (3,958) 43,741 Borrowings (note 50) 1,332 1,332 6,992 (145) 8,179 Derivative liabilities (note 51) 122 1, ,751 (108) 1,643 45,154 3, ,382 8,392 (4,211) 53,563 2 This table was prepared in accordance with IFRS 7. 3 In addition to the balances in this table, included within Reinsurance Assets in the Statement of Position and note 44 are 1,581 million of non-participating investment contracts, which are legally reinsurance but do not meet the definition of a reinsurance contract under IFRS. These assets are financial instruments measured at fair through profit and loss and are classified as level 1 assets. Assets and liabilities for which fair is disclosed The table below shows the fair and fair hierarchy for those assets and liabilities not carried at fair but for which fair is disclosed in the notes. These exclude any assets or liabilities held for sale. Fair hierarchy fair Assets and liabilities not carried at fair Loans 1,021 4,313 5,334 Borrowings 5, ,027 6,909 Investments classified as Please see note 23(a) for a description of typical inputs. Fixed income assets, in line with market practice, are generally d 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. Where pricing services providers are used, a single valuation is obtained and applied. When prices are not available from pricing services, quotes are sourced from brokers. Other level 2 investments, including Unit Trusts, are d using net assets s which are deemed to be observable market inputs. e) Transfers between levels of the fair hierarchy For recurring fair measurements, the Group determines whether transfers have occurred between the levels of the fair hierarchy by re-assessing categorisation (based on the lowest level input that is significant to the fair measurement as a whole) at the end of the year. to 2 For the year to 31 December, transfers of financial assets from fair hierarchy to amounted to 29.4 billion (2012: 1.3 billion). The transfers from to arose primarily in the UK and Ireland ( 26.9 billion) as a result of the enhanced understanding of pricing vendor methodologies for the fair hierarchy level classification of certain debt. Other transfers from level 1 to 2 arose mainly from changes in the level of market activity for specific assets in Asia ( 1.2 billion) and Europe ( 1.3 billion). to 1 Transfers from to of 1.1 billion (2012: 0.3 billion) arose in France ( 0.5 billion), Ireland ( 0.4 billion), and Spain ( 0.2 billion) and were due to improvements in pricing sourcing or increasing liquidity of underlying investments.

4 167 Annual report and accounts 23 Fair methodology continued Transfer to/from Transfers out of mainly relate to improvements in the market liquidity of certain debt held by our business in France ( 1.9 billion), which were transferred to, as observable prices became available. The transfers into (shown below) primarily relate to UK mortgage loans ( 14.6 billion) and investment property ( 9.5 billion) as follows: 9.9 billion of UK commercial mortgage loans. Following a reassessment of inputs management has deemed the illiquidity premium used to these mortgage loans to be a significant, unobservable input. 2.6 billion of UK equity release mortgage loans. During, the discounted cash flow model used to certain equity release mortgage loans has been revised, incorporating a greater number of inputs relevant to calculating a fair of these mortgages. Within this model, credit risk assumptions are derived from market data with adjustments applied to ensure they are relevant to the mortgage portfolio, but these are not fully market observable. As a result, these assets have been classified as and transferred from. 2.1 billion of UK securitised mortgage loans and certain non-securitised equity release mortgage loans. Market transactions used in the valuation of these loans are infrequent and, as a result, prices are no longer classified as market observable. In the absence of any additional market transactions the mortgage loans have been reclassified from to. 9.5 billion investment property. Following the adoption of IFRS 13, investment property is now included within the fair hierarchy. Due to the irregularity of similar transactions, management has concluded that significant inputs into the valuation methodology are non-market observable, and classified investment property within. We have also transferred 0.5 billion of property funds into to reflect the valuation of underlying property assets. Also included within transfers into loans are 0.8 billion of non-recourse loans held by the UK business that were reclassified from to. This was due to the enhancement of the valuation model to include an illiquidity premium which is deemed to be an unobservable input. For the year to 31 December, transfers of financial liabilities between fair hierarchies included the reclassification of 0.5 billion (2012: nil) of securitised mortgage loan notes from to in line with the reclassification of the related securitised mortgage loans referred to above. f) Further information on assets and liabilities: The table below shows movement in the assets and liabilities measured at fair : Investment Property Loans Debt Equity Other investments (including derivatives) Assets assets of operations classified as held for sale Nonparticipating investment contracts Derivative liabilities Liabilities Borrowings Opening balance at 1 January 9, , (443) (58) net (losses)/gains recognised in the income statement (36) (39) (13) net gains recognised in other comprehensive income 1 19 Purchases 1, (50) Issuances (11) Disposals 1 (1,527) (11) (897) (737) Transfers into 9,482 15, (482) Transfers out of (2,089) (119) 184 Reclassification to held for sale (3) (159) 162 Foreign exchange movements (31) (3) Balance at 31 December 9,451 15,362 8, , (63) (482) 1 Disposals include the disposal of the US business in ( 609 million assets and 270 million liabilities) (Restated) 1,2 Debt Equity Other investments (including derivatives) Investments Opening balance at 1 January , ,945 11,368 (292) net gains recognised in the income statement net gains recognised in other comprehensive income Purchases 1, ,499 (18) Issuances 1 1 (23) Disposals (767) (29) (755) (1,551) Transfers into (184) Transfers out of (149) (3) (12) (164) Impact of IFRS10 restatement 6 6 Foreign exchange rate movements (258) (14) (37) (309) 12 Balance at 31 December , ,885 13,440 (501) Less: Amounts classified as held for sale (120) (396) (516) 9, ,489 12,924 (501) 2 This table was prepared in accordance with IFRS 7. liabilities Strategic report Governance IFRS statements Other information

5 168 Annual report and accounts 23 Fair methodology continued net gains recognised in the income statement in the year ended 31 December in respect of assets measured at fair amounted to 108 million (2012: 959 million), with net losses in respect of liabilities of 13 million (2012: gains 4 million). Included in this balance are 73 million (2012: 1,030 million) of net gains attributable to those assets and 13 million (2012: 3 million) of losses attributable to those liabilities still held at the end of the year. The principal investments classified as, and the valuation techniques applied to them, are: Commercial mortgage loans held by our UK Life business amounting to 9.9 billion, d using a Portfolio Credit Risk Model (PCRM). This model calculates a Credit Risk Adjusted Value (CRAV) for each mortgage. The risk adjusted cash flows are discounted using a yield curve, taking into account the term dependent gilt yield curve, and global assumption for the liquidity premium. The mortgage loans have been classified as as the liquidity premium is not deemed to be market observable. Equity release and UK securitised mortgage loans held by our UK Life business amounting to 4.7 billion, d using Discounted Cash Flow models (DCF). Cash flows are adjusted for credit risk and discounted using a yield curve and global assumptions for the liquidity premium. The mortgage loans have been classified as as assumptions used to derive the credit risk and property risk are not deemed to be market observable. Investment property amounting to 9.5 billion. In the UK, the majority of investment property is d at least annually by external chartered surveyors in accordance with guidance issued by The Royal Institution of Chartered Surveyors, and using estimates during the intervening period. For other investment property, valuations are produced by local qualified staff of the Group or external qualified professional rs in the countries concerned. Fair s are determined using an income method, by which own lease agreement cash-flows are adjusted for anticipated uplifts, and discounted by rates implied by recent market transactions for similar properties where available. These inputs are deemed unobservable. Structured bond-type and non-standard debt products held by our business in France amounting to 7.1 billion (2012: 8.6 billion), for which there is no active market. These bonds are d either using counterparty or broker quotes. These bonds are validated against internal or third-party models. These bonds have been classified as because either (i) the thirdparty models included a significant unobservable liquidity adjustment or (ii) differences between the valuation provided by the counterparty and broker quotes and the validation model were sufficiently significant to result in a classification. At 31 December, the s reported in respect of these products were the lower of counterparty and broker quotes and internally modelled valuations. Private equity investment funds amounting to 1.1 billion (2012: 1.3 billion), together with external hedge funds held principally by businesses in the UK and France amounting to 1.1 billion (2012: 1.3 billion), and property funds amounting to 0.5 billion are d based on external reports received from the fund manager. Where these valuations are at a date other than balance sheet date, as in the case of some private equity funds, we make adjustments for items such as subsequent draw-downs and distributions and the fund manager s carried interest. investments including a collateralised loan obligation of 0.4 billion (2012: nil) and UK non-recourse loans of 0.8 billion (2012: nil) have been d using internally developed discounted cash flow models. Investments including debt held by our French business of 0.7 billion (2012: nil) and notes issued by loan partnerships held by our UK Life business amounting to 0.3 billion (2012: 1.0 billion), have been d using third party or counterparty valuations. Other investments amount to 1.1 billion (2012: 0.9 billion) and relate to a diverse range of different types of held by a number of businesses throughout the Group. liabilities include 0.5 billion (2012: nil) of securitised mortgage loan notes which are d using a similar technique to the related securitised mortgage assets. Where possible, the Group tests the sensitivity of the fair s of investments to changes in unobservable inputs to reasonable alternatives. Where possible of valuations for investments are sourced from independent third parties and, where appropriate, validated against internally-modelled valuations, third-party models or broker quotes. Where third-party pricing sources are unwilling to provide a sensitivity analysis for their valuations, the Group undertakes, where feasible, sensitivity analysis on the following basis: For third-party valuations validated against internally-modelled valuations using significant unobservable inputs, the sensitivity of the internally modelled valuation to changes in unobservable inputs to a reasonable alternative is determined. For third-party valuations either not validated or validated against a third-party model or broker quote, the third-party valuation in its entirety is considered an unobservable input. Sensitivities are determined by flexing inputs of internal models to a reasonable alternative, including the yield, NAV multiple, IRR or other suitable valuation multiples of the financial instrument implied by the third-party valuation. For example, for a fixed income security the implied yield would be the rate of return which discounts the security s contractual cash flows to equal the third-party valuation. On the basis of the methodology outlined above, the Group is able to perform sensitivity analysis for 35.7 billion of the Group s investments. For these investments, changing unobservable valuation inputs to a reasonable alternative would result in a change in fair by ± 1.8 billion. Of the 1.5 billion investments for which sensitivity analysis is not provided, 0.6 billion relates to investments held in unit-linked and participating funds in France where investment risk is predominantly borne by policyholders and therefore shareholder profit before tax is insensitive to reasonable change in fair of these investments. The remaining 0.9 billion of investments are held predominantly to back non-linked shareholder business and it is estimated that a 10% change in valuation of these investments would increase or reduce shareholder profit before tax by 90 million.