HSBC 2009 Annual Report Download - page 93

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as equity markets recovered from declines sustained
in 2008. To the extent that these gains were
attributed to policyholders holding either insurance
contracts or investment contracts with DPF, there
was a corresponding increase in net insurance claims
incurred and movement in liabilities to
policyholders.
Gains less losses from financial investments
were US$192 million lower than in 2008 due to the
non-recurrence of certain disposals in that year,
including MasterCard shares, private equity
investments and the remaining stake in the
Hermitage Fund.
Net earned insurance premiums decreased by
12 per cent. In the UK demand for the insurance-
linked Guaranteed Income Bond fell as HSBC
offered more favourable rates on an alternative
non-insurance deposit product, giving rise to a
US$1.1 billion decrease in insurance premium
income, with a corresponding decrease in ‘Net
insurance claims incurred and movement in
liabilities to policyholders’. Excluding the effect
of a significant re-insurance transaction in 2008
which passed insurance premiums to a third-party
reinsurer, net premiums in France increased despite
a significant reduction in the distribution network
following the disposal of the regional banks in July
2008.
Other operating income increased by 45 per
cent, mainly due to a US$576 million gain on the
sale and leaseback of 8 Canada Square in London
which was effected through the disposal of HSBC’s
entire shareholding in the company which was the
legal owner of the building and long leasehold
interest in 8 Canada Square. In 2008, HSBC reported
a gain of US$416 million representing the equity
deposit on a previously negotiated sale of the
building which ultimately did not complete. In
addition, a change in mortality assumptions in
France resulted in increased PVIF of long-term
insurance business. The growth in revenue also
reflected the non-recurrence of costs associated with
the support of money market funds in the global
asset management business in 2008. Offsetting this
was the non-recurrence of a favourable embedded
value adjustment following HSBC’s introduction of
enhanced benefits to existing pension products in
the UK in 2008, and lower gains on the sale and
leaseback of branches.
Net insurance claims incurred and movement
in liabilities to policyholders increased by
US$2.5 billion. The majority of the movement was
due to the change in liabilities to policyholders
reported above in ‘Financial instruments designated
at fair value’, and the large one-off reinsurance
transaction in France in 2008. In addition, an
increase of US$310 million in claims reserving was
required to reflect a higher incidence and severity
of insurance claims in the UK motor underwriting
business and a higher incidence of credit protection
claims through the reinsurance business in Ireland.
Risk mitigation measures implemented in 2009
included the decision to cease originations of UK
motor insurance business. This was partly offset by
the decrease in liabilities following reduced sales of
the personal customer bond product offering noted
above.
Utilisation of committed overdraft facilities
to commercial customers in the UK only
40 per cent.
Loan impairment charges and other credit risk
provisions rose by 66 per cent to US$5.6 billion as
the impact of weaker economic conditions across
the region fed through to higher delinquency and
default. In Global Banking and Markets, loan
impairment charges and credit risk provisions
increased, with the charges concentrated among a
small number of clients in the financial and property
sectors. The emergence in the year of cash flow
impairment on certain asset-backed debt securities
held within the available-for-sale portfolios added
US$1.1 billion to the charge. Impairment booked on
these exposures reflects mark-to-market losses
which HSBC judges to be significantly in excess of
the likely ultimate cash losses.
In Commercial Banking, loan impairment
charges rose by US$471 million, again reflecting
the economic downturn. The commercial property
portfolio in the UK declined during 2009, reflecting
HSBC’s efforts to reduce risk in this sector. In the
personal sector, deterioration was most evident
in the unsecured portfolios as unemployment rose.
As a result of past management action, unsecured
lending remained a small proportion of HSBC’s
personal lending portfolio, with the bulk of
the portfolio secured in the form of residential
mortgages. Despite some increase in losses in
the residential sector, impairment charges as a
percentage of total lending in this portfolio remained
very low at 0.14 per cent.
Operating expenses were held broadly in line
with 2008. Excluding an accounting gain of
US$499 million following a change in the basis
of delivering death-in-service, ill health and early
retirement benefits for some UK employees,
operating expenses increased slightly despite
efficiency benefits as higher performance-related
awards were made to reflect Global Banking and