E.5. Credit risk
Credit risk refers to the economic impact from downgrades and defaults of fixed income securities or counterparty on the Group’s financial strength. Furthermore, a general rise in spread level, due to credit crunch or liquidity crisis, impacts the financial strength of the Group.
The Group has adopted guidelines to limit the credit risk of the investments. These favour the purchase of investment-grade securities and encourage the diversification and dispersion of the portfolio.
For the rating assessment of an issue or issuer, ratings from rating agencies are used. Securities without an external rating are given an internal one based on the Group’s own credit analysis. In most cases internal ratings are based on external rating of the Parent Company or its adjusted external rating due to subordination of the instrument. All internal ratings are in accordance with GPH’s assessment. In line with Generali Group principles, the Group uses the second best external rating for each counterparty in all calculations and in the system of credit limits.
To manage the level of credit risk, the Group deals with counterparties with a good credit standing and enters into master netting agreements whenever possible. Master netting agreements provide for the net settlement of contracts with the same counterparty in the event of default.
The Group sets up complex system of limits to manage credit risk and monitors compliance with these limits on a daily basis. The system includes e.g. issuer/counterparty limits according to their credit quality, limits on rating categories and concentration limits.
The Group’s assets relevant for the credit risk exposure are shown in the following table. This table presents the Group’s overall exposure to the credit risk (carrying amounts):
| (CZK million) | 31. 12. 2014 | 31. 12. 2013 restated |
|---|---|---|
| Loans and advances | 5,942 | 3,051 |
| Bonds | 149,265 | 136,883 |
| Reinsurance assets | 9,977 | 10,291 |
| Receivables | 6,940 | 7,498 |
| Cash and cash equivalents | 5,050 | 7,272 |
| Total | 177,174 | 164,995 |
Of which relates to Transformed fund
| (CZK million) | 31. 12. 2014 | 31. 12. 2013 |
|---|---|---|
| Loans and advances | 300 | 1,001 |
| Bonds | 83,799 | 71,650 |
| Receivables | 727 | 585 |
| Cash and cash equivalents | 1,132 | 1,239 |
| Total | 85,958 | 74,475 |
A more detailed analysis of the carrying amounts for selected positions is provided in following table. The positions of reinsurance assets are not included in this analysis, as they are neither past due nor impaired.
| Other loans and receivables - carrying amount | Receivables - carrying amount | |||
|---|---|---|---|---|
| (CZK million) | 31. 12. 2014 | 31. 12. 2013 restated | 31. 12. 2014 | 31. 12. 2013 restated |
| Neither past due nor impaired – carrying amount | 5,885 | 2,994 | 4,416 | 4,673 |
| Past due but not impaired – carrying amount | – | – | – | – |
| Individually impaired – carrying amount | 57 | 57 | 2,524 | 2,825 |
| Gross amount | 6,542 | 7,442 | 3,858 | 4,014 |
31 days to 90 days after maturity | – | – | 2,014 | 2,017 |
91 days to 180 days after maturity | – | – | 282 | 335 |
181 days to 1 year after maturity | – | – | 297 | 330 |
Over 1 year after maturity | 6,542 | 7,442 | 1,265 | 1,332 |
| Allowance for impairment | (6,485) | (7,385) | (1,334) | (1,375) |
| Amounts not included in analysis | – | – | – | 186 |
| Total receivables | 5,942 | 3,051 | 6,940 | 7,498 |
Loans and advances that are neither past due nor impaired, consists mostly of receivables from term deposits and reverse repurchase agreements with banks.
Of which relates to Transformed fund
| Other loans and receivables - carrying amount | Receivables - carrying amount | |||
|---|---|---|---|---|
| (CZK million) | 31. 12. 2014 | 31. 12. 2013 | 31. 12. 2014 | 31. 12. 2013 |
| Neither past due nor impaired – carrying amount | – | 1,001 | 726 | 585 |
| Past due but not impaired – carrying amount | – | – | – | – |
| Individually impaired – carrying amount | – | – | – | – |
| Total receivables | 300 | 1,001 | 726 | 585 |
The Group places term deposits with selected financial institutions which had as at 31 December 2014 rating from AA- to BBB-
(31 December 2013: AA- to BB or were not rated, but assessed internally. Moderate portion of term deposits evaluated via internal rating is placed with PPF banka a.s. a related party (see note F.29.3.). There were no past due or impaired term deposits either in 2014 or 2013.
Amounts not included in the analysis consist of receivables related to taxation, which are not relevant for credit risk exposure.
The following tables show the Group’s exposure to credit risk for bonds and reinsurance assets:
Rating of bonds
| 31. 12. 2014 | 31. 12. 2013 restated | |||
|---|---|---|---|---|
| (CZK million) | Fair value | weight (%) | Fair value | weight (%) |
| AAA | 2,960 | 2.0% | 2,924 | 2.1% |
| AA | 95,474 | 63.5% | 83,935 | 60.9% |
| A | 16,585 | 11.0% | 16,720 | 12.1% |
| BBB | 24,180 | 16.1% | 19,979 | 14.5% |
| Non-investment grade | 3,572 | 2.4% | 4,721 | 3.4% |
| Not-rated | 7,590 | 5.0% | 9,610 | 7.0% |
| Total | 150,361 | 100.0% | 137,889 | 100.0% |
Of which relates to Transformed fund
| 31. 12. 2014 | 31. 12. 2013 | |||
|---|---|---|---|---|
| (CZK million) | Fair value | weight (%) | Fair value | weight (%) |
| AAA | 41 | 0.0% | 85 | 0.1% |
| AA | 67,186 | 80.2% | 56,194 | 78.4% |
| A | 4,462 | 5.3% | 5,406 | 7.5% |
| BBB | 10,259 | 12.2% | 8,684 | 12.1% |
| Non-investment grade | 1,372 | 1.6% | 1,281 | 1.8% |
| Not-rated | 479 | 0.6% | – | 0.0% |
| Total | 83,799 | 100.0% | 71,650 | 100.0% |
The bond rating shown above corresponds to the second best rating available from external rating agencies. Such a rating is then converged to S&P scale.
The total amount of bonds includes also unquoted bonds which are classified as Loans (see note F.3.3.)
Rating of reinsurance assets
| 31. 12. 2014 | 31. 12. 2013 | |||
|---|---|---|---|---|
| (CZK million) | Amount | weight (%) | Amount | weight (%) |
| AAA | – | 0.0% | – | 0.0% |
| AA | 126 | 1.3% | 42 | 0.4% |
| A | 547 | 5.5% | 142 | 1.4% |
| BBB | 57 | 0.6% | 2 | 0.0% |
| Non-investment grade | – | 0.0% | – | 0.0% |
| Captive reinsurance | 9,074 | 90.9% | 9,193 | 89.3% |
| Not-rated | 173 | 1.7% | 912 | 8.9% |
| Total | 9,977 | 100.0% | 10,291 | 100.0% |
The rating of reinsurance assets shown above corresponds to the second best rating available from external rating agencies. Such a rating is then converged to S&P scale.
There were no past due or impaired reinsurance assets in either 2014 or 2013.
The individual business units of the Group hold collateral for loans and advances to banks in the form of securities as part of reverse repurchase agreements, collateral for loans and advances to non-banks in the form of pledge over property, received notes and guarantees. Reverse repurchase agreements were realized with PPF banka a.s. which is related party.The following table shows the fair value of collateral held by the Group for Loans and advances to banks and non-banks:
Fair value of collateral for loans and advances to banks and non-banks:
| (CZK million) | 31. 12. 2014 | 31. 12. 2013 |
|---|---|---|
| Against individually impaired | 20 | 20 |
Property | 20 | 20 |
| Against neither past due nor impaired | 4,482 | 745 |
Debt securities | 4,425 | 711 |
| Other | 57 | 34 |
| Total | 4,502 | 765 |
Of which relates to Transformed fund
| (CZK million) | 31. 12. 2014 | 31. 12. 2013 |
|---|---|---|
| Against individually impaired | – | – |
| Against neither past due nor impaired | 300 | – |
Debt securities | 300 | – |
| Total | 300 | – |
Concentrations of credit risk arise where groups of counterparties have similar economic characteristics that would cause their ability to meet their contractual obligations to be similarly affected by changes in economic or other conditions.
The following tables show the economic and geographic concentration of credit risk of bonds:
Geographic concentration
| 31. 12. 2014 | 31. 12. 2013 restated | |||
|---|---|---|---|---|
| (CZK million) | Total amount | weight (%) | Total amount | weight (%) |
| Czech Republic | 105,490 | 70.2% | 97,622 | 70.8% |
| Russia | 10,364 | 6.9% | 9,764 | 7.1% |
| Other CEE countries | 20,310 | 13.5% | 12,429 | 9.0% |
| Netherlands | 1,675 | 1.1% | 1,639 | 1.2% |
| Other EU countries | 8,094 | 5.4% | 7,771 | 5.6% |
| USA | 3,566 | 2.4% | 7,941 | 5.8% |
| Other world countries | 862 | 0.6% | 723 | 0.5% |
| Total | 150,361 | 100.0% | 137,889 | 100.0% |
Of which relates to Transformed fund
| 31. 12. 2014 | 31. 12. 2013 | |||
|---|---|---|---|---|
| (CZK million) | Total amount | weight (%) | Total amount | weight (%) |
| Czech Republic | 68,839 | 82.1% | 56,861 | 79.4% |
| Russia | 2,507 | 3.0% | 2,505 | 3.5% |
| Other CEE countries | 8,110 | 9.7% | 4,356 | 6.1% |
| Netherlands | 357 | 0.4% | 437 | 0.6% |
| Other EU countries | 1,657 | 2.0% | 897 | 1.3% |
| USA | 2,123 | 2.5% | 6,392 | 8.9% |
| Other world countries | 206 | 0.2% | 201 | 0.3% |
| Total | 83,799 | 100.0% | 71,650 | 100.0% |
Economic concentration
| 31. 12. 2014 | 31. 12. 2013 restated | |||
|---|---|---|---|---|
| (CZK million) | Total amount | weight (%) | Total amount | weight (%) |
| Public sector | 113,541 | 75.5% | 96,478 | 70.0% |
| Financial | 28,675 | 19.1% | 33,915 | 24.6% |
| Energy | 1,837 | 1.2% | 1,749 | 1.3% |
| Utilities | 4,333 | 2.9% | 3,861 | 2.8% |
| Materials | 872 | 0.6% | 594 | 0.4% |
| Telecommunication services | 566 | 0.4% | 113 | 0.1% |
| Industrial | 537 | 0.4% | 1,179 | 0.9% |
| Total | 150,361 | 100.0% | 137,889 | 100.0% |
Of which relates to Transformed fund
| 31. 12. 2014 | 31. 12. 2013 | |||
|---|---|---|---|---|
| (CZK million) | Total amount | weight (%) | Total amount | weight (%) |
| Public sector | 72,701 | 86.8% | 60,063 | 83.8% |
| Financial | 7,154 | 8.5% | 8,015 | 11.2% |
| Energy | 759 | 0.9% | 285 | 0.4% |
| Utilities | 1,978 | 2.4% | 1,924 | 2.7% |
| Materials | 638 | 0.8% | 377 | 0.5% |
| Telecommunication services | 227 | 0.3% | – | 0.0% |
| Industrial | 342 | 0.4% | 986 | 1.4% |
| Total | 83,799 | 100.0% | 71,650 | 100.0% |
The risk characteristics of each bond or loan are taken into account when assessing economic and geographic concentration. The amounts reflected in the tables represent the maximum accounting loss that would be recognised as at the end of the reporting period if the counter parties failed completely to perform as contracted and any collateral or security proved to be of no value. The amounts, therefore, greatly exceed incurred losses, which are included in the allowance for uncollectibility.
E.5.1. Credit Value at Risk
The principal tool used to measure and control credit risk exposure within the Group’s investment portfolios is Credit Value at Risk (CVaR).
Credit Value at Risk represents the potential losses from adverse changes in credit factors for a specified time period and confidence level. The approach is based on the JP Morgan Credit Metrics methodology using transition matrices and Monte-Carlo simulations of rating transitions. This methodology covers credit risk within the full context of the portfolio and includes changes in value caused not only by possible default events, but also by changes in credit quality. The CVaR is calculated for a one-year time horizon at a 99.5% confidence level.