Notes

Note 15 - Financial risk

 

The purpose of the risk management system is to ensure that material risks are managed in accordance with the Company’s corporate objectives and risk carrying capacity. The risk management system consists of the following components:

Risk appetite and limits: Overall Risk Appetite and Comfort Zone (target range for capitalisation) are defined in accordance with risk carrying capacity and corporate objectives. This cascades into limits by risk type and legal entities. This forms the basis for all risk management, monitoring and reporting.

Risk policies: There are group policies describing the processes and procedures for managing material risk exposures. The purpose of the policies is to ensure consistent and adequate risk and capital management.

Risk management cycle: Material risks are identified, assessed regulary, managed proactively, monitored regulary and reported to relevant responsible body.        

Main financial risks

Insurance risk

Insurance risk arises from the underwriting activities (“premium risk”) and existing insurance liabilities (“reserve risk”). Gard is a high capacity provider of risk mitigation products and services to industrial customers. While parts of Gard’s portfolio are high frequency and low severity, many of the covers provided by Gard are “catastrophic” in their nature: High exposures and therefore potentially very high severity. A small number of claims represent a large share of the claims cost in any year. The insurance risk profile is managed by having limits on the risks written and mitigated through reinsurance.                                              

Market risk                                                                                

Market risk consists of equity risk, interest rate risk, credit risk, currency risk, real estate risk, and alternatives risk.

Equity beta risk

The risk of economic losses resulting from deviations in the value of market indices from their expected values. The equity portfolio is broadly diversified. Compared to a global benchmark portfolio based on market capitalizations, the equity portfolio is skewed towards emerging markets and smaller companies, which is expected to have a higher volatility than the global market as a whole. Through a portable alpha program, parts of the equity market exposure are hedged into fixed income exposure through a rolling equity futures program.

Interest rate risk

The risk of economic losses resulting from deviations in actual interest rates from expected interest rates. The term structure of interest bearing assets in the Gard group is matched to the expected duration of the liabilities. The sensitivity analysis of the bond assets of the Gard group has been modelled by reference to a reasonable approximation of the weighted average interest rate sensitivity of the investments held.

Credit risk

The risk of economic losses resulting from the default of third parties.                                                                                                                                                    

The following table shows information regarding credit risk exposure as at 20.02.2017, by classifying assets according to the median rating amongst the three market leading providers, Standard & Poor's, Moody's and Fitch. This principle is in line with new Solvency ll requirements. AAA is the highest possible rating. The US long-term sovereign credit rating is considered to be AAA due to an applied median approach. 

Credit risk exposure in balance sheet
       
  Parent company Consolidated accounts
  As at As at As at As at
Amounts in USD 000's 20.02.17 20.02.16 20.02.17 20.02.16
         
Bonds        
AAA 141,705 103,477 505,496 423,925
AA  19,015 65,032 57,672 180,838
A 65,279 59,864 196,943 173,338
BBB 74,689 81,294 243,824 256,377
BB 12,136 15,280 36,702 47,261
3,394 5,973 9,985 17,140
CCC/lower 1,179 1,013 3,252 2,793
Not rated 0 0 0 0
Total bonds 317,398 331,933 1,053,875 1,101,671
         
Financial derivative assets        
A 3,674 7,596 9,420 15,839
Total financial derivative assets 3,674 7,596 9,420 15,839
         
Cash included in other financial investments        
AAA 0 0 0 0
AA 0 0 0 0
A 112,897 22,562 177,946 57,825
Total cash included in other financial investments 112,897 22,562 177,946 57,825
         
Other financial investments        
A 69,031 55,793 131,659 103,386
Total other financial investments 69,031 55,793 131,659 103,386
         
Reinsurers` share of gross claim reserve        
AA 18,900 17,068 80,325 79,070
A 411,857 433,660 178,015 205,852
BBB 10,756 13,047 32,062 41,491
Not rated 0 0 2,916 836
Total reinsurers' share of gross claim reserve 441,512 463,775 293,317 327,249
         
Receivables        
A 49,691 21,992 25,000 7,158
BBB 1,449 3,615 1,768 4,474
Not rated 13,571 37,615 156,579 223,539
Total receivables 64,711 63,223 183,347 235,170
         
Cash and cash equivalents        
AA 38,852 68,642 137,187 171,725
0 0 35,157 932
BB 0 0 154 0
BBB 23 23 3,672 1,894
Not rated 0 0 18 21
Total cash and cash equivalents 38,875 68,665 176,189 174,572
         
Other financial assets presented in balance sheet*        
AAA 0 0 0 0
A 9,248 6,005 23,210 20,084
Not rated 28,809 27,950 0 0
Total other financial assets presented in balance sheet 38,057 33,955 23,210 20,084
         
* Includes loan to subsidiaries and other financial assets.        

Alternatives risk

The risk thatthe actual return of investments due to active management decisions by the asset managers will be lower than expected. Active asset managers, who are aiming to outperform a given benchmark, manage most of Gard’s investment mandates. The ability to outperform also comes with the risk of significant underperformance versus the benchmark, which is referred to as alternatives risk. Through the portable alpha programme, most of the alternatives risk is skewed towards active equity managers, but also include a global tactical allocation fund, which is exposed to different types of asset classes with a macro-based approach.

Real estate risk

The risk of economic losses resulting from deviations in the value of real estate investments from their expected values. The global real estate exposure includes own buildings and both indirect and direct investments in real estates. The indirect investment is through purchasing equities of listed real estate companies whereas through the direct exposure the Company own real estate properties through a pool together with other investors.

Currency risk

The risk of economic losses resulting from actual currency rates differing from expected currency rates. The currency exposure on the asset side is matched to the assumed currency exposure of liabilities. The assumed currency exposure to liabilities differs from the accounting exposure to currencies because the reserving currency is not always the actual currency of the future cash flow. There is an acceptable mismatch between the currency exposure on assets and on liabilities. The currency exposure is managed through a rolling forward program.

Currency split balance sheet        
  Parent company Consolidated accounts
  As at As at As at As at
Amounts in USD 000's 20.02.17 20.02.16 20.02.17 20.02.16
         
Assets        
USD 1,550,568 1,510,371 2,388,877 2,420,525
EUR 102,238 100,116 135,191 138,117
GBP 68,768 65,696 86,662 84,828
Other 217,565 221,529 436,401 361,887
Total assets 1,939,139 1,897,710  3,047,131 3,005,357
         
Equity and liabilities        
USD 1,737,084 1,645,804 2,697,272 2,420,230
EUR 95,990 100,052 143,196 138,117
GBP 91,134 95,616 86,799 84,819
Other 14,931 56,238 119,864 362,190
Total equity and liabilities 1,939,139 1,897,710 3,047,131 3,005,357
         
Net asset exposure        
USD (186,516) (135,434) (308,395) 294
EUR 6,248 64 (8,005) 0
GBP (22,366) (29,920) (137) 9
Other 202,634 165,291 316,537 (303)
         
Net exposure in %        
USD -10% -7% -10% 0%
EUR 0% 0% 0% 0%
GBP -1% -2% 0% 0%
Other 10% 9% 10% 0%

Counterparty default risk                                                                                                                                                                          

The risk that actual credit losses will be higher than expected due to the failure of counterparties to meet their contractual debt obligations. The main sources of counterparty default risk are reinsurers, cash deposits at banks, derivative counterparties, and receivables from policyholders.

The credit exposure on the Gard group`s reinsurance programme is in line with the guidelines of only accepting reinsurers with an A- or higher rating. The Gard group is, however, faced with BBB rating exposure through the IG Pooling Agreement. Among the thirteen clubs, four have ratings of BBB.                                                                                                                                                        

Banks and custodians are in line with the guidelines with a credit rating of at least A/Stable.                                                                                          

The Gard group also has counterparty risk towards counterparties through the financial derivative overlay programme used to manage market risk exposures. Common risk mitigation techniques are exercised in order to minimise the counterparty risk in relation to the holding of derivative contracts. The credit risk in respect of receivables is handled by group policies and by close follow up. Outstanding receivables can be netted off against outstanding claims payments to reduce the risk of doubtful debts.

Operational risk                                                                                                                                                                          

The risk that actual economic losses arising from inadequate or failed internal processes, personnel and systems, or external events exceed expected losses. The most important internal processes concerning operational risk are underwriting including pricing, claims handling, reserving, reinsurance, and investments.                                

Liquidity risk                                                                                                                                                                          

The risk that cash and other liquid assets are insufficient to meet financial obligations when they fall due. In respect of catastrophic events there is also a liquidity risk associated with the timing differences between gross cash outflows and expected reinsurance recoveries. Liquidity risk arises primarily due to the unpredictability of the timing of payment of insurance liabilities and the illiquidity of the assets held or when market depth is insufficient to absorb the required volumes of assets to be sold, resulting in asset sale at a discount. The risk is mitigated through a credit facility with Nordea Bank AB (publ), filial i Norge and a cash pool agreement between Gard P. & I. (Bermuda) Ltd., Gard Marine & Energy Limited, Gard AS and AS Assuransegården improves access to liquidity across the legal entities.

Age analysis of receivables after provision for bad debt        
  Parent company Consolidated accounts
  As at As at As at As at
Amounts in USD 000's 20.02.17 20.02.16 20.02.17 20.02.16
         
Not due 58,385 59,411 155,317 207,783
0-60 days 3,063 1,020 19,398 13,940
61-90 days 185 1,668 1,630 5,482
Above 90 days 3,079 1,123 7,003 7,965
Total 64,711 63,223 183,347 235,170

Impaired receivables                                                                                                                                                              

As at 20 February 2017 there are impaired receivables in the parent company of USD 1.7 million (20 February 2016 USD 1.7 million) and there are impaired receivables in the consolidated accounts of USD 7.3 million (20.02.16 USD 6.7 million), related to past due. No collateral is held as security for the impaired receivables, but the receivables can be deducted from future claim payments if any. Impairment allowance is included in net operating expenses.                                                                                                         

Analysis of provision for bad debt        
  Parent company Consolidated accounts
  As at As at As at As at
Amounts in USD 000's 20.02.17 20.02.16 20.02.17 20.02.16
         
Balance as at the beginning of the period 1,691 1,703 6,719 6,837
Provision for receivables impairment 461 13 899 64
Receivables written off during the year as uncollectable (261) (252) (205) (3,297)
Unused amounts reversed (133) 169 (161) 3,045
Exchange adjustment 2 58 17 70
Balance as at the end of the period

1,760

1,691 7,269 6,719

The creation and release of provisions for impaired receivables has been included in 'Other insurance related expenses' in the income statement. Amounts charged to the allowance account are generally written off, when there is no expectation of recovering additional cash.

Maturity profile

The following tables set out the maturity profile of liabilities combining amounts expected to be recovered within one year, between one and five years and more than five years. Liabilities not covered by IFRS 7 are classified as other liabilities in the tables.

The Gard group maintains highly marketable financial instruments and diverse assets that can be easily liquidated in the event of an unforeseen interruption of cash flow. This, combined with the credit facility and cash pool to meet liquidity needs, gives a presentation of how assets and liabilities have been matched.

       Parent company
  Within 1 1-5 More than No maturity As at 20.02.17
Amounts in USD 000's year years 5 years date Total
           
Income tax payable 4,409 0 0 0 4,409
Payables and accruals 62,482 0 0 0 62,482
Other payables 135,716 0 0 0 135,716
           
       Parent company
  Within 1 1-5 More than No maturity As at 20.02.16
Amounts in USD 000's year years 5 years date Total
           
Income tax payable 4,853 0 0 0 4,853
Payables and accruals 64,681 0 0 0 64,681
Other payables 68,469 0 0 0 68,469
           
       Consolidated accounts
  Within 1 1-5 More than No maturity As at 20.02.17
Amounts in USD 000's year years 5 years date Total
           
Income tax payable 6,613 0 0 0 6,613
Payables and accruals 59,918 0 0 0 59,918
Other payables 256,940 0 0 0 256,940
           
       Consolidated accounts
  Within 1 1-5 More than No maturity As at 20.02.16
Amounts in USD 000's year years 5 years date Total
           
Income tax payable 10,034 0 0 0 10,034
Payables and accruals 61,265 0 0 0 61,265
Other payables 168,590 0 0 0 168,590

Portfolio asset allocation                                                                                                                                                                

The table below sets out the portfolio allocation by exposure to asset classes and the balance sheet categories. Equities and investment funds are divided among the asset classes in the interest of two important assumptions; Investment funds include mutual funds in asset classes such as real estate, corporate bonds and absolute return. Equities include common stocks and an adjustment for a derivative overlay programme. Equity market exposure is sold out through equity index future derivaties in order to maintain total equity market exposure within the desired range, and simultaneously bond exposure is gained through buying interest rate swap contracts.  

  Parent company
  Fair value       As at
Amounts in USD 000's 20.02.17       20.02.17
           
Financial investments   Equity Fixed income Real    estate Other
Equities and investment funds 250,887 218,938 16,088 15,860 0
Bonds 317,398 0 317,398 0 0
Financial derivative assets * 3,674 (89,845) 91,298 0 2,221
Other financial investments ** 181,928 294 352 0 181,282
Total financial investments 753,887 129,387 425,137 15,860 183,503
           
Financial liabilities          
Financial derivative liabilities 3,186 0 777 0 2,409
Financial liabilities incl. in other payables *** 125,949 0 0 0 125,949
Total financial liabilities 129,135 0 777 0 128,358
           
Net financial investments 624,753 129,387 424,360 15,860 55,145
Net per cent 100% 21% 68% 3% 9%
           
  Consolidated accounts
  Fair value       As at
Amounts in USD 000's 20.02.17       20.02.17
           
Financial investments   Equity Fixed income Real    estate Other
Equities and investment funds 935,726 523,912 350,371 61,443 0
Bonds 1,053,875 0 1,053,875 0 0
Financial derivative assets 9,420 (177,628) 180,624 0 6,424
Other financial investments  309,605 458 1,063 0 308,084
Total financial investments 2,308,626 346,743 1,585,933 61,443 314,508
           
Financial liabilities          
Financial derivative liabilities 8,799 0 2,611 0 6,188
Financial liabilities incl. in other payables *** 236,888 0 0 0 236,888
Total financial liabilities 245,687 0 2,611 0 243,076
           
Net financial investments 2,062,939 346,743 1,583,322 61,443 71,432
Net per cent 100% 17% 77% 3% 3%
           
* The asset allocations for financial deriviative assets are stated at their notional values (note 16).   
** 'Other financial investments' includes cash and cash equivalents, accrued income/expense.   
*** See note 18 for spesification of 'Financial liabilities incl. in other payables'.    

 

Financial instruments - sensitivity analysis        
The analysis below is performed for reasonably possible movements in key market variables with all other variables held constant.
         
  Parent company  Consolidated accounts
  As at As at As at As at
Amounts in USD 000's 20.02.17 20.02.16 20.02.17 20.02.16
         
Impact on fixed income portfolio investments given an increase of 50 basis points (6,110) (9,657) (18,956) (26,705)
Impact on equity portfolio given a 10 per cent drop in quoted market prices (12,939) (12,059) (34,674) (36,576)
Impact on total investment portfolio given a change of 10 per cent in foreignexchange rates against USD (24,939) (7,031) (62,947) (29,193)

The sensitivity analysis assumes no correlation between equity price, property market and foreign currency rate risk. It also assumes that all other receivables and payables remain unchanged and that no management action is taken. The Gard group has no significant risk concentrations which are not in line with the overall investment guidelines set by the Company's Board of Directors. Any impact from risk tested in the table above is not, due to tax regulations, assumed to have any taxable impact.

The methods used above for deriving sensitivity information and significant variables have not changed from the previous year.