E.5. Credit risk
| In CZK million, as at 31 December | Note | 2015 | 2014 |
|---|---|---|---|
| Bonds and Loans | 60,932 | 69,862 | |
Bonds available-for-sale | F.3.3. | 53,427 | 56,357 |
Bonds at fair value through profit or loss | F.3.4. | 3,194 | 7,043 |
Loans (fair value) | F.3.2. | 4,311 | 6,462 |
| Trade and other receivables | F.5. | 6,086 | 6,036 |
| Reinsurance assets | F.4. | 9,790 | 9,954 |
| Total | 76,808 | 85,852 |
Credit risk refers to the economic impact, from downgrades and defaults of fixed income securities or counterparties, on the company’s financial strength. Furthermore, a general rise in spread level, due to a credit crunch or liquidity crisis, impacts the financial strength of a company.
The Company 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 Company’s own credit analysis. In most cases internal ratings are based on external rating of parent company or its adjusted external rating due to subordination of the instrument. All internal ratings are in accordance with GCEE’s assessment. In line with Generali Group principles, Company uses the second best external rating for each counterparty in all calculations and the system of credit limits.
To manage the level of credit risk, the Company 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 Company 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 following tables show the Company’s credit quality of its financial assets at fair value.
Rating of bonds and loans
| In CZK million, as at 31 December | 2015 | 2014 |
|---|---|---|
| AAA | 2,916 | 2,899 |
| AA | 24,726 | 27,541 |
| A | 5,930 | 11,482 |
| BBB | 11,587 | 13,383 |
| BB | 5,940 | 2,168 |
| Non-rated | 9,833 | 12,389 |
| Total | 60,932 | 69,862 |
Rating of reinsurance assets
| In CZK million, as at 31 December | 2015 | 2014 |
|---|---|---|
| AA | 110 | 126 |
| A | 222 | 546 |
| BBB | – | 57 |
| Captive reinsurance | 8,553 | 9,053 |
| Non-rated | 905 | 172 |
| Total | 9,790 | 9,954 |
There were no past due or impaired reinsurance assets either in 2015 or 2014.
The following table shows the Company’s exposure to credit risk for loans and receivables:
| In CZK million, as at 31 December | Loans and advances | Trade and other receivables | ||
|---|---|---|---|---|
| 2015 | 2014 | 2015 | 2014 | |
| Individually impaired – carrying amount | – | 57 | 1,788 | 2,356 |
Gross amount | 117 | 6,542 | 3,065 | 3,808 |
31 days to 90 days after maturity | – | – | 1,023 | 2,038 |
91 days to 180 days after maturity | – | – | 369 | 267 |
181 days to 1 year after maturity | – | – | 448 | 199 |
Over 1 year after maturity | 117 | 6,542 | 1,225 | 1,304 |
Allowance for impairment | (117) | (6,485) | (1,277) | (1,452) |
| Past due but not impaired – carrying amount | – | – | 402 | 391 |
| Neither past due nor impaired – carrying amount | 4,115 | 6,195 | 3,896 | 3,289 |
| Total Amortised costs | 4,115 | 6,252 | 6,086 | 6,036 |
| Total Fair value | 4,311 | 6,462 | 6,086 | 6,036 |
The Company held no past due or impaired bonds either in 2015 or in 2014.
Individually impaired receivables consist mostly of receivables from direct insurance, receivables from intermediaries, from reinsurance operations (trade and other receivables category) and receivables from matured loans and bonds not repaid (loans and advances category). These receivables are assessed according to their seniority and collection method – each receivable is individually assessed using these criteria and an allowance for impairment is stated accordingly.
Loans and advances and other investments, that are neither overdue nor impaired, consist mostly of receivables from term deposits and reverse repurchase agreements with banks. Neither past due nor impaired trade and other receivables consist mostly of receivables from insurance premiums and reinsurance receivables.
The most significant part of receivables past due but not impaired are reinsurance receivables.
The Company holds 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.
The following table shows the fair value of collateral held:
| In CZK million, as at 31 December | Loans and advances to banks and nonbanks | |
|---|---|---|
| 2015 | 2014 | |
| Against individually impaired | 20 | 20 |
Property | 20 | 20 |
| Against neither past due nor impaired | 2,300 | 3,925 |
Debt securities | 2,300 | 3,925 |
| Total | 2,320 | 3,945 |
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 table shows the economic and geographic concentration of credit risk of bonds and loans:
| In CZK million, as at 31 December | 2015 | 2014 | ||
|---|---|---|---|---|
| CZK million | in % | CZK million | in % | |
| Economic concentration | ||||
| Public sector | 36,198 | 59.41 | 39,584 | 56.66 |
| Financial | 19,146 | 31.42 | 26,140 | 37.42 |
| Utilities | 2,851 | 4.68 | 2,316 | 3.32 |
| Energy | 951 | 1.56 | 1,054 | 1.50 |
| Consumer Discretionary | 567 | 0.93 | – | – |
| Telecommunication services | 412 | 0.68 | 339 | 0.49 |
| Materials | 440 | 0.72 | 233 | 0.33 |
| Industrial | 367 | 0.60 | 196 | 0.28 |
| Total | 60,932 | 100.00 | 69,862 | 100.00 |
| In CZK million, as at 31 December | 2015 | 2014 | ||
|---|---|---|---|---|
| CZK million | in % | CZK million | in % | |
| Geographic concentration | ||||
| Czech republic | 33,902 | 55.65 | 40,410 | 57.84 |
| Rest of Europe | 6,325 | 10.38 | 3,651 | 5.23 |
| Russia | 5,425 | 8.90 | 7,784 | 11.14 |
| Other central-eastern European countries | 3,181 | 5.22 | 3,994 | 5.72 |
| Poland | 3,140 | 5.15 | 3,663 | 5.24 |
| Slovakia | 2,945 | 4.83 | 3,173 | 4.54 |
| Austria | 1,542 | 2.53 | 1,578 | 2.26 |
| Netherlands | 1,368 | 2.25 | 1,291 | 1.85 |
| Slovenia | 1,221 | 2.00 | 1,433 | 2.05 |
| USA | 967 | 1.59 | 1,408 | 2.02 |
| United Kingdom | 672 | 1.10 | 1,014 | 1.45 |
| Rest of world | 244 | 0.40 | 463 | 0.66 |
| Total | 60,932 | 100.00 | 69,862 | 100.00 |
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.