Interim results - 6 months ended 30 June 2007
A Group capital structure
Sensitivity analysis
The sensitivity of the Group's shareholders’ funds on an EEV basis at 30 June 2007 to a 10% fall in global equity markets or a rise of 1% in global interest rates is as follows:
| 31 December 2006 £bn | 30 June 2007 £bn | Equities down 10% £bn | Interest rates up 1% £bn | |
|---|---|---|---|---|
| 19.7 | Long-term savings1 | 20.5 | 19.6 | 19.8 |
| 6.2 | General insurance and other | 6.2 | 5.6 | 6.0 |
| (5.0) | Borrowings2 | (4.0) | (4.0) | (4.0) |
| 20.9 | Shareholders’ funds | 22.7 | 21.2 | 21.8 |
These sensitivities assume a full tax charge/credit on market value assumptions.
- Assumes EEV assumptions adjusted to reflect revised bond yields.
- Comprising internal, external and subordinated debt, net of corporate tangible net assets.
The table above incorporates the effect on the value of the pension scheme assets of a 10% decrease in equity and a 1% increase in fixed income bond yields. The latter sensitivity also assumes an equivalent movement in both inflation and discount rate (i.e. no change to real interest rates) and, therefore, incorporates the offsetting effects of these items on the pension scheme liabilities. A 1% increase in the real interest rate only has the effect of reducing the pension scheme liability by £1.5 billion thereby enhancing shareholders’ funds by £1.1 billion (after deducting tax).
Risk management – Equity hedges
The following table shows the material equity derivatives currently within the Group’s shareholder funds that are used as part of a long-term strategy to manage equity risk. It excludes derivatives used for portfolio management purposes:
| Derivative | Notional £bn1 | Market fall required before protection starts2 | Outstanding Duration |
|---|---|---|---|
| (a) | 0.8 | 19% | 3-5 months |
| (b) | 0.4 | 17% | 9-21 months |
Notes:
- The notional amount represents the market value as at 30 June 2007 of the equities covered by the hedge.
- The ‘market fall before protection starts’ shows the percentage the market could fall from the 30 June 2007 positions before the derivative moves into the money.
- We use different methods to reduce the cost of derivatives. We have limited the downside protection on derivative (a) and we have created a zero cost collar by selling some of the upside on derivative (b).
