TIDM81XM
RNS Number : 0325C
Scottish Widows plc
25 April 2012
25 April, 2012
SCOTTISH WIDOWS PLC
PUBLICATION OF THE ANNUAL REPORT AND ACCOUNTS FOR THE YEAR ENDED
31 DECEMBER 2011
Scottish Widows plc has today published its Annual Report and
Accounts for the year ended 31 December 2011 (the "Accounts") which
will shortly be available on the Scottish Widows website at
www.scottishwidows.co.uk Copies of the Accounts have also been
submitted to the National Storage Mechanism and will shortly be
available for inspection at www.hemscott.com/nsm.do
ADDITIONAL INFORMATION REQUIRED BY DISCLOSURE AND TRANSPARENCY
RULE 6.3.5 (DTR 6.3.5)
The information below, which is extracted from the 2011 Annual
Report and Accounts, is solely for the purpose of complying with
DTR 6.3.5 and the requirements it imposes on issuers as to how to
make public annual financial reports. This constitutes the material
required by DTR 6.3.5 to be communicated to the media in unedited
full text through a Regulatory Information Service. This material
is not a substitute for reading the full Annual Report and
Accounts. Page numbers and cross-references in the extracted
information below refer to page numbers and cross-references in the
2011 Annual Report and Accounts.
STATEMENT OF DIRECTORS' RESPONSIBILITIES FOR PREPARING THE
FINANCIAL STATEMENTS
The Directors are responsible for keeping adequate accounting
records that are sufficient to show and explain the Company's
transactions and disclose with reasonable accuracy at any time the
financial position of the Company and the Group and enable them to
ensure that the financial statements comply with the Companies Act
2006 and, as regards the Group financial statements, Article 4 of
the IAS Regulation. They are also responsible for safeguarding the
assets of the Company and the Group and hence for taking reasonable
steps for the prevention and detection of fraud and other
irregularities.
The Directors are responsible for the maintenance and integrity
of the Company's website www.scottishwidows.co.uk. Legislation in
the United Kingdom governing the preparation and dissemination of
financial statements may differ from legislation in other
jurisdictions.
Each of the Directors, whose names are listed on page 3, confirm
that, to the best of their knowledge:
- the Group and Company financial statements, which have been
prepared in accordance with IFRSs as adopted by the EU, give a true
and fair view of the assets, liabilities, financial position and
profit of the Group and Company; and
- the Directors' Report on pages 4 to 7 includes a fair review
of the development and performance of the business and the position
of the Group and Company, together with a description of the
principal risks and uncertainties that it faces.
PRINCIPAL RISKS AND UNCERTAINTIES
42. Risk management
The principal activity of the Group is the undertaking of
ordinary long-term insurance and savings business and associated
investment activities in the United Kingdom. The Group offers a
wide range of life insurance products such as annuities, pensions,
whole life, term life and investment type products through
independent financial advisers, the Lloyds Banking Group network
and direct sales. The Company also reinsures business with
subsidiary undertakings and with insurance entities external to the
Group. This includes the majority of the pensions linked business,
which is reinsured to the Company's subsidiary, SWUF, the annuity
business which is reinsured to the Company's subsidiary SWA, and
new protection business, which is reinsured to the Company's
subsidiary, CMIG.
The Group assesses the relative costs and concentrations of each
type of risk through the Individual Capital Assessment ("ICA") and
material issues are escalated to the Insurance Risk Committee and
the Insurance Executive Committee.
This note summarises these risks and the way in which the Group
manages them.
(a) Governance framework
The Group is part of Lloyds Banking Group ("LBG"), which has
established a risk management function with responsibility for
implementing the Lloyds Banking Group risk management framework
within the Group.
Responsibility for the setting and management of risk appetite
and risk policy resides with the Board of each Group company. The
Board manages risks in line with LBG and Insurance Division risk
policies. The Board has delegated operational implementation to the
Insurance Executive Committee.
The approach to risk management ensures that there is effective
independent checking or "oversight" of key decisions through the
operation of a "three lines of defence" model. The first line of
defence is line management, who have direct accountability for risk
decisions. The Risk function provide oversight and challenge and
form the second line of defence. Internal Audit constitutes the
third line of defence, which provides the required independent
assurance to the Audit Committee and the Board that risks within
the Group are recognised, monitored and managed within acceptable
parameters.
An enterprise-wide risk management framework for the
identification, assessment, measurement and management of risk is
in place. The framework is in line with Lloyds Banking Group's risk
management principles and covers the full spectrum of risks that
the Group and Company are exposed to. Under this framework, risks
are categorised according to an approved Lloyds Banking Group risk
language which has been adopted across the Group. This covers the
principal financial risks faced by the Group, including the
exposures to market, insurance, credit, financial soundness and
operational risk. The performance of the Group, its continuing
ability to write business and the strategic management of the
business depend on its ability to manage these risks.
Policy owners, identified from appropriate areas across the
business, are responsible for drafting the Lloyds Banking Group and
Insurance risk policies, for ensuring that they remain up-to-date
and for facilitating any changes. These policies are subject to at
least an annual review, or earlier if deemed necessary. Limits are
prescribed within which those responsible for the day to day
management of each Group company can take decisions. Line
management are required to follow prescribed reporting procedures
to the bodies responsible for monitoring compliance with policy and
controlling the risks.
(b) Risk appetite
The Board has defined the methodology for the management of risk
appetite and approved appropriate limits. Limits are defined for
the Scottish Widows Group as a whole and for the individual risk
components. The limits are defined in terms of the amount of
capital required to be held to cover certain specified stressed
scenarios.
Exposure to each type of risk is monitored against prescribed
limits and the results of these tests are reported to the Boards of
the relevant companies. Where the exposure to any risk exceeds a
trigger amount, the Insurance Executive Committee must approve an
action plan to reduce the exposure or the Scottish Widows Group
Board must approve a revised limit.
(c) Financial risks
The Group writes a variety of insurance and investment contracts
which are subject to a variety of financial risks, as set out
below. Contracts can be either single or regular premium and
conventional (non-profit), with-profits or unit-linked in
nature.
The Group is exposed to a range of financial risks through its
financial assets, financial liabilities, reinsurance assets and
insurance and investment contract liabilities. In particular, the
key financial risk is that long-term investment proceeds are not
sufficient to fund the obligations arising from its insurance and
investment contracts. The most important components of financial
risk are market, insurance, credit and financial soundness
risk.
The market risks that the Group primarily faces due to the
nature of its investments and liabilities are interest rate,
equity, property and foreign exchange risk.
The Group manages these risks in a numbers of ways, including
risk appetite assessment and monitoring of capital resource
requirements. In addition, the Principles and Practices of
Financial Management ("PPFM") set out the way in which the
with-profits business is managed. The Group also uses financial
instruments (including derivatives) as part of its business
activities and to reduce its own exposure to market risk and credit
risk.
For with-profits business, subject to minimum guarantees,
policyholders' benefits are influenced by the smoothed investment
returns on assets held in the With Profits Funds. The smoothing
cushions policyholders from daily fluctuations in investment
markets. This process is managed in accordance with the published
PPFM's.
The Group bears financial risk in relation to the guaranteed
benefits payable under these contracts. The amount of the
guaranteed benefits increases as additional benefits are declared
and allocated to policies.
For unit-linked business, policyholders' benefits are closely
linked to the investment returns on the underlying internal funds.
In the short term, profit and equity are therefore largely
unaffected by investment returns on assets in internal unit-linked
funds as any gains or losses will be largely offset by changes in
the corresponding insurance and investment contract liabilities,
provided that there is appropriate matching of assets and
liabilities within these funds. However, any change in the market
value of these funds will have an indirect impact on the Group and
Company through the collection of annual management and other fund
related charges. As markets rise or fall, these charges rise or
fall correspondingly.
For non-participating business, the principal market risk is
interest rate risk, which arises because assets and liabilities may
exhibit differing changes in market value as a result of changes in
interest rates. Asset and liability matching is used to mitigate
the impact of changes in interest rates. Where there is no matching
the difference is not material.
Financial assets and financial liabilities are measured on an
ongoing basis either at fair value or at amortised cost. The
summary of significant accounting policies (note 1) describes how
the classes of financial instruments are measured and how income
and expenses, including fair value gains and losses, are
recognised.
The timing of the unwind of the deferred tax assets and
liabilities is dependent on the timing of the unwind of the
temporary timing differences, arising between the tax bases of the
assets and liabilities and their carrying amounts for financial
reporting purposes, to which these balances relate.
The sensitivity analyses given throughout this note are based on
a change in an assumption while holding all other assumptions
constant. In practice, this is unlikely to occur as changes in some
of the assumptions may be correlated, for example changes in
interest rates and changes in market values. The sensitivity
analysis presented also represents, in accordance with the
requirements of IFRS 7, management's assessment of a reasonably
possible alternative in respect of each sensitivity, rather than
worst case scenario positions.
(1) Market risk
Market risk is the risk of reductions in earnings and/or value,
through financial or reputational loss, from unfavourable market
movements. This risk typically arises from fluctuations in market
prices (equity and property risk), market interest rates (interest
rate risk) and foreign exchange rates (foreign exchange risk),
whether such changes are caused by factors specific to the
individual instrument or its issuer or factors affecting all
instruments traded in the market.
Investment holdings within the Group are diversified across
markets and, within markets, across sectors. Holdings of individual
assets are diversified to minimise specific risk and large
individual exposures are monitored closely. For assets held outwith
unit-linked funds, investments are only permitted in countries and
markets which are sufficiently regulated and liquid.
Market risk policy is dependent on the nature of the funds in
question, and can be broadly summarised as follows:
-- Assets held in shareholder funds are invested in money market
funds, gilts and investment grade bonds to match regulatory capital
requirements. The balance of the shareholder fund assets is managed
in line with the policies of the Lloyds Banking Group to optimise
shareholder risk and return. This includes suitable use of
derivatives to minimise shareholder risk.
-- Unit-linked assets are invested in accordance with the nature of the fund mandates.
-- Conventional non-profit liabilities are "close matched" as
far as possible in relation to currency, nature and duration.
-- With Profits liabilities are managed in line with the
published PPFMs. Benchmarks and minimum and maximum holdings in
asset classes are specified to allow limited investment management
discretion whilst ensuring adequate diversification. Variable rate
bonds and associated additional swap transactions provide
significant protection to the With Profits Funds from the effects
of interest rate falls in respect of the cost of guaranteed annuity
rates.
An analysis of financial assets and financial liabilities at
fair value through income according to their fair value hierarchy
(as defined in note 1 (d)) is given below:
2011
Group
Fair value hierarchy
Level Level Level Total
1 2 3 GBPm
GBPm GBPm GBPm
================================================== ====== ====== ===== ======
Equity securities 51,397 1 776 52,174
Debt securities 18,993 18,587 - 37,580
Deposits with credit institutions - - - -
Other investments - 96 - 96
Derivative financial assets 14 1,376 - 1,390
Total assets 70,404 20,060 776 91,240
-------------------------------------------------- ------ ------ ----- ------
Derivative financial liabilities 32 1,130 - 1,162
Non-participating investment contract liabilities - 26,374 - 26,374
Total liabilities 32 27,504 - 27,536
-------------------------------------------------- ------ ------ ----- ------
Company
Fair value hierarchy
Level Level Level Total
1 2 3 GBPm
GBPm GBPm GBPm
================================================== ====== ====== ===== ======
Equity securities 6,702 - 238 6,940
Debt securities 4,077 4,865 - 8,942
Other investments - 747 - 747
Derivative financial assets 2 223 - 225
Investment in subsidiaries at fair value 4,398 77 481 4,956
-------------------------------------------------- ------ ------ ----- ------
Total assets 15,179 5,912 719 21,810
Derivative financial liabilities 8 621 - 629
Non-participating investment contract liabilities - 13,686 - 13,686
-------------------------------------------------- ------ ------ ----- ------
Total liabilities 8 14,307 - 14,315
-------------------------------------------------- ------ ------ ----- ------
2010
Group
Fair value hierarchy
Level Level Level Total
1 2 3 GBPm
GBPm GBPm GBPm
================================================== ====== ====== ===== ======
Equity securities 34,832 - 480 35,312
Debt securities 9,480 11,164 - 20,644
Deposits with credit institutions 1,287 - - 1,287
Other investments - 162 - 162
Derivative financial assets 13 301 - 314
Total assets 45,612 11,627 480 57,719
-------------------------------------------------- ------ ------ ----- ------
Derivative financial liabilities 14 439 - 453
Non-participating investment contract liabilities - 16,226 - 16,226
Total liabilities 14 16,665 - 16,679
-------------------------------------------------- ------ ------ ----- ------
Company
Fair value hierarchy
Level Level Level Total
1 2 3 GBPm
GBPm GBPm GBPm
================================================== ====== ====== ===== ======
Equity securities 12,471 - 202 12,673
Debt securities 5,618 4,510 - 10,128
Deposits with credit institutions 10 - - 10
Other investments - 707 - 707
Derivative financial assets 2 175 - 177
Investment in subsidiaries at fair value 145 89 417 651
Total assets 18,246 5,481 619 24,346
-------------------------------------------------- ------ ------ ----- ------
Derivative financial liabilities 5 329 - 334
Non-participating investment contract liabilities - 13,852 - 13,852
Total liabilities 5 14,181 - 14,186
-------------------------------------------------- ------ ------ ----- ------
Of the debt securities classified as Level 2 above, GBP1,263m of
the Company assets and GBP2,026m of the Group assets (2010:
GBP1,083m Company and GBP1,145m Group) have been valued using a
modelled price or based on a price from a single broker. The models
used to derive these prices use only observable data and are
therefore level 2 rather than level 3. The remaining assets are
priced using prices obtained via a price vendor. This vendor
obtains prices from a number of different market makers in
corporate bonds and calculates a consensus price to give the best
reflection of the market price on that day. On the basis that this
price may not be based on actual trades and as information
regarding the volume of individual trades is not readily available,
these assets have been classified as level 2 rather than level
1.
The derivative securities classified as Level 2 above have been
valued using a tri-party pricing model as determined by the Pricing
Source Agreement between SWIP and State Street. Prices are sourced
from external sources, counterparties, and the Investment Manager.
Where the primary value is within tolerance of the secondary value,
the primary value will be utilised. If the primary and secondary
values are out of tolerance, then the primary value will be
validated against the tertiary value. If it is within tolerance the
primary value will be applied. If primary and tertiary values are
outwith tolerance, then the secondary value is validated against
the tertiary value. If secondary and tertiary values are within
tolerance, then the secondary value is applied. If they are out of
tolerance then the investment manager is notified to allow them to
make the final pricing decision.
Assets classified as level 3 comprise private equity investments
and property investment vehicles. Private equity investments are
valued using the financial statements of the underlying companies
prepared by the general partners, adjusted for known cash flows
since valuation and subject to a fair value review to take account
of other relevant information. Property investment vehicles are
valued based on the net asset value of the relevant company which
incorporates surveyors' valuations of property. Whilst such
valuations are sensitive to estimates, it is believed that changing
one or more of the assumptions to reasonably possible alternative
assumptions would not change the fair value significantly.
The table below shows movements in the assets and liabilities
measured at fair value based on valuation techniques for which any
significant input is not based on observable market data (level 3
only).
Group
2011 2010
GBPm GBPm GBPm GBPm
=================================== ====== ============= ============== =============
Assets Liabilities Assets Liabilities
Balance at 1 January 541 - 398 -
Adjustment on acquisition 387 - -
Net gains or losses recognised
within net gains and losses
on assets and liabilities
at fair value though income
in the statement of comprehensive
income (201) - 62 -
Purchases 50 - 81 -
Balance at 31 December 777 - 541 -
----------------------------------- ------ ------------- -------------- -------------
Total gains and losses for
the period included in the
statement of comprehensive
income for assets and liabilities
held at 31 December (201) - 62 -
----------------------------------- ------ ------------- -------------- -------------
Company
2011 2010
GBPm GBPm GBPm GBPm
=================================== ====== ============= =================== =============
Assets Liabilities Assets Liabilities
Balance at 1 January 653 558 -
Total net gains or losses
recognised within net gains
and losses on assets and
liabilities at fair value
though income in the statement
of comprehensive income 45 - 33 -
Purchases 21 - 62 -
Balance at 31 December 719 - 653 -
----------------------------------- ------ ------------- ------------------- -------------
Total gains and losses for
the period included in the
statement of comprehensive
income for assets and liabilities
held at 31 December 45 - 33 -
----------------------------------- ------ ------------- ------------------- -------------
Total gains or losses for the period included in the statement
of comprehensive income, as well as total gains or losses relating
to assets and liabilities held at the reporting date, are presented
in the statement of comprehensive income, through net gains and
losses on assets and liabilities at fair value through income and
net fair value gains and losses on assets and liabilities at fair
value through income respectively.
(i) Equity risk
The exposure of the Group's insurance and investment contract
business to equity risk relates to financial assets and financial
liabilities whose values will fluctuate as a result of changes in
market prices other than from interest and foreign exchange
fluctuations. This is due to factors specific to individual
instruments, their issuers or factors affecting all instruments
traded in the market. Accordingly, the Group monitors exposure
limits both to any one counterparty and any one market.
The sensitivity analysis below illustrates how the fair value of
future cash flows in respect of equities and properties, net of
offsetting movements in insurance and investment contract
liabilities, will fluctuate because of changes in market prices at
the reporting date.
Impact on profit after tax
and equity for the year
2011 2010
GBP m GBP m
============================ ============== =============
9.8% (2010: 3.9%) increase
in equity prices 1 (3)
9.8% (2010: 3.9%) decrease
in equity prices (1) 3
2.9% (2010: 1.7%) increase
in property prices - -
2.9% (2010: 1.7%) decrease
in property prices - -
(ii) Interest rate risk
Interest rate risk is the risk that the value of future cash
flows of a financial instrument will fluctuate because of changes
in interest rates and the shape of the yield curve. Interest rate
risk in respect of the Group's insurance and investment contracts
arises when there is a mismatch in duration or yield between
liabilities and the assets backing those liabilities.
The Group's interest rate risk policy requires that the maturity
profile of interest-bearing financial assets is appropriately
matched to the guaranteed elements of the financial
liabilities.
A fall in market interest rates will result in a lower yield on
the assets supporting guaranteed investment returns payable to
policyholders. This investment return guarantee risk is managed by
matching assets to liabilities as closely as possible.
An increase in market interest rates will result in a reduction
in the value of assets subject to fixed rates of interest which may
result in losses if, as a result of an increase in the level of
surrenders, the corresponding fixed income securities have to be
sold.
The effect of changes in interest rates in respect of financial
assets which back insurance contract liabilities is given in note
41. The effect on the Group of changes in the value of investments
held in respect of investment contract liabilities due to
fluctuations in market interest rates is negligible as any changes
will be offset by movements in the corresponding liability.
The sensitivity analysis below illustrates how the fair value of
future cash flows in respect of interest-bearing financial assets,
net of offsetting movements in insurance and investment contract
liabilities, will fluctuate because of changes in market interest
rates at the reporting date.
Impact on profit after
tax and equity for the
year
2011 2010
GBP m GBP m
============================ ============ ============
25 basis points (2010:
25 basis points) increase
in yield curves 31 (8)
25 basis points (2010:
25 basis points) decrease
in yield curves (33) 5
(iii) Foreign exchange risk
Foreign exchange risk relates to the effects of movements in
exchange markets including changes in exchange rates. The overall
risk to the Group is minimal due to the following:
-- The Group's principal transactions are carried out in pounds sterling;
-- The Group's financial assets are primarily denominated in the
same currencies as its insurance and investment contract
liabilities; and
-- Other than shareholder funds, all non-linked investments of
the non-profit funds are in sterling or are currency matched. The
effect on the Group of changes in the value of investments held in
respect of investment contract liabilities due to fluctuations in
foreign exchange rates is negligible as any changes will be offset
by movements in the corresponding liability.
(2) Insurance risk
Insurance risk is the risk of reductions in earnings and/or
value through financial or reputational loss due to fluctuations in
the timing, frequency and severity of insured events and to
fluctuations in the timing and amount of claim settlements. The
principal risk the Group faces under insurance contracts is that
the actual claims and benefit payments exceed the amounts expected
at the time of determining the insurance liabilities.
The nature of the Group's business involves the accepting of
insurance risks which primarily relate to mortality, morbidity,
persistency and expenses. Each company within the Group which
transacts new business underwrites policies to ensure an
appropriate premium is charged for the risk or that the risk is
declined.
The Group principally writes the following types of life
insurance contracts:
-- Life assurance - where the life of the policyholder is
insured against death or permanent disability, usually for
pre-determined amounts
-- Annuity products - where typically the policyholder is
entitled to payments which cease upon death
-- Morbidity products - where the policyholder is insured
against the risk of contracting a defined illness
For contracts where death is the insured risk, the most
significant factors that could increase the overall level of claims
are epidemics or widespread changes in lifestyle, such as eating,
smoking and exercise habits, resulting in earlier or more claims
than expected. The possibility of a pandemic, for example one
arising from Swine Flu, is regarded as a potentially significant
mortality risk.
For contracts where survival is the insured risk, the most
significant factor is continued improvement in medical science and
social conditions that would increase longevity.
For contracts with fixed and guaranteed benefits and fixed
future premiums, there are no mitigating terms and conditions that
significantly reduce the insurance risk accepted. For participating
investment contracts, the participating nature of these contracts
results in a significant portion of the insurance risk being shared
with the policyholder.
Insurance risk is also affected by the policyholders' right to
pay reduced or no future premiums, to terminate the contract
completely or to exercise a guaranteed annuity option. As a result,
the amount of insurance risk is also subject to policyholder
behaviour. On the assumption that policyholders will make decisions
that are in their best interests, overall insurance risk will
generally be aggravated by policyholder behaviour. For example, it
is likely that policyholders whose health has deteriorated
significantly will be less inclined to terminate contracts insuring
death benefits than those policyholders who remain in good
health.
The Group has taken account of the expected impact of
policyholder behaviour in setting the assumptions used to measure
insurance and investment contract liabilities.
The principal methods available to the Group to control or
mitigate longevity, mortality and morbidity risk are through the
following processes:
-- Underwriting (the process to ensure that new insurance proposals are properly assessed);
-- Pricing-to-risk (new insurance proposals would usually be
priced in accordance with the underwriting assessment);
-- Claims management;
-- Product design;
-- Policy wording; and
-- The use of reinsurance and other risk mitigation techniques.
Rates of mortality and morbidity are investigated annually based
on the Group's recent experience and future mortality assumptions
are set using the latest population data available. Each Company's
reinsurance arrangements are reviewed at least annually.
Persistency risk is the risk associated with the ability to
retain long-term business and the ability to renew short-term
business. The Group aims to reduce its exposure to persistency risk
through revising the commission structure on future product
developments and undertaking various initiatives to promote
customer loyalty. These initiatives are aimed both at the point of
sale and through direct contact with existing policyholders, for
example through annual statement information packs.
Further information on assumptions, changes in assumptions and
sensitivities in respect of insurance and participating investment
contracts is given in note 41.
(3) Credit risk
Credit risk is the risk of reductions in earnings and/or value,
through financial or reputational loss, as a result of the failure
of the party with whom the Group or Company has contracted to meet
its obligations.
Investment counterparty default risk arises primarily from
holding invested assets to meet liabilities, and reinsurer default
credit risk primarily arises from exposure to reinsurers.
Credit risk in respect of unit-linked funds is borne by the
policyholders and credit risk in respect of With Profits funds is
largely borne by the policyholders. Consequently, the Group has no
significant exposure to credit risk for those funds.
For non-linked funds investments, limits on the exposure to a
single entity are specified and monitored. Bond exposures are
managed through credit rating bands and maximum exposures to
individual assets and sectors are set. Assets are restricted to
securities in a specified list of countries, and limits applicable
to property portfolios are set to prevent concentration of exposure
to single tenants and single buildings.
Shareholder funds are managed in line with the Insurance Credit
Risk Policy and the wider Lloyds Banking Group Credit Risk Policy
and the principles are the same as those outlined above in respect
of non-linked funds.
Reinsurance is primarily used to reduce insurance risk. However,
it is also sought for other reasons such as improving
profitability, reducing capital requirements and obtaining
technical support. In addition, reinsurance is also used to offer
Investment Fund Links which we are unable to provide through other
means. The Group's reinsurance strategy is to reduce the volatility
of profits through the use of reinsurance whilst managing the
insurance and credit risk within the constraints of the risk
appetite limits.
The Group has reinsurance on all significant lines of business
where mortality or morbidity risk exceeds set retention limits.
This does not, however, discharge the Group's liability as primary
insurer. If a reinsurer fails to pay a claim for any reason, the
Group remains liable for the payment to the policyholder. All new
material reinsurance treaties are subject to Board approval and all
reinsurance arrangements are reviewed annually to ensure that the
reinsurance strategy is being achieved. This includes an assessment
of the exposure to each reinsurer to ensure that it is within the
defined limit.
Policies are treated as lapsed when payments from the
policyholder have not been received for three consecutive months
and the policyholder has not provided further information in
respect of the non-payment of premiums.
Exposure to other trade debtors is assessed on a case by case
basis, using a credit rating agency where appropriate.
The tables below analyse financial assets subject to credit risk
using Standard & Poor's rating or equivalent.
Group - As at 31 December 2011
BBB Not
Total AAA AA A or lower rated
GBP GBP GBP GBP GBP GBP
m m m m m m
======================== ======= ======= ======= ======= ========== =======
Assets arising
from reinsurance
contracts held 4,720 - 529 4,105 9 77
Debt securities 37,580 22,214 2,330 7,215 5,126* 695
Deposits with - - - - - -
credit institutions
Derivative
financial instruments 1,390 - - 1,390 - -
Loans and receivables 19,077 1,920 8,437 7,642 124 954
Cash at bank 989 12 94 883 - -
------------------------ ------- ------- ------- ------- ---------- -------
Total 63,756 24,146 11,390 21,235 5,259 1,726
------------------------ ------- ------- ------- ------- ---------- -------
*Of which GBP4,109m is BBB rated.
Amounts classified as "not rated" in the above tables are not
rated by Standard and Poor's or an equivalent rating agency.
Included in the loans and receivables balance above is GBP4m
(2010: GBP451m) in respect of assets that were past due but not
impaired at the reporting date. There were no impaired assets at 31
December 2011 or 31 December 2010. No terms in respect of financial
assets had been renegotiated at 31 December 2011 or 31 December
2010.
As at 31 December 2010
BBB Not
Total AAA AA A or lower rated
GBP GBP GBP GBP GBP GBP
m m m m m m
======================== ======= ======= ====== ====== ========== =======
Debt securities 20,644 13,278 1,426 3,405 2,411* 124
Deposits with
credit institutions 1,287 1,287 - - - -
Derivative
financial instruments 314 - 1 313 - -
Loans and receivables 2,124 102 20 901 68 1,033
Assets arising
from reinsurance
contracts held 2,328 - - - - 2,328
Cash and cash
equivalents 505 - - 505 - -
------------------------ ------- ------- ------ ------ ---------- -------
Total 27,202 14,667 1,447 5,124 2,479 3,485
------------------------ ------- ------- ------ ------ ---------- -------
*Of which GBP2,340m is BBB rated.
Amounts which were past due but not impaired are analysed as
follows:
Group - As at 31 December 2011
Total Less 1 - 3 3 - 12 More
than months months than
1 month 12 months
GBP m GBP m GBP m GBP m GBP m
============== ====== ========= ======== ======== ===========
Loans and
receivables 4 2 - 1 1
Total 4 2 - 1 1
-------------- ------ --------- -------- -------- -----------
As at 31 December 2010
Total Less 1 - 3 3 - 12 More
than months months than
1 month 12 months
GBP m GBP m GBP m GBP m GBP m
============== ====== ========= ======== ======== ===========
Loans and
receivables 451 104 87 184 76
Total 451 104 87 184 76
-------------- ------ --------- -------- -------- -----------
Company - As at 31 December 2011
BBB Not
Total AAA AA A or lower rated
GBP GBP GBP GBP GBP GBP
m m m m m m
======================= ======= ====== ==== ====== ========== =======
Assets arising
from reinsurance
contracts held 33,017 - 404 4,002 - 28,611
Debt securities 8,942 5,932 342 1,566 1,069* 33
Derivative financial
instruments 225 - - 225 - -
Loans and receivables 1,980 39 7 336 31 1,567
Cash and cash
equivalents 48 - - 48 - -
----------------------- ------- ------ ---- ------ ---------- -------
Total 44,212 5,971 753 6,177 1,100 30,211
----------------------- ------- ------ ---- ------ ---------- -------
*Of which GBP1,046m is BBB rated.
Amounts classified as "not rated" within loans and receivables
and amounts due from reinsurers in respect of non-participating
investment contracts include GBP1,135m (2010: GBP1,242m) due from
other Group companies which are not rated by Standard & Poor's
or an equivalent rating agency.
Company - As at 31 December 2010
BBB Not
Total AAA AA A or lower rated
GBP GBP GBP GBP GBP GBP
m m m m m m
======================= ======== ====== ==== ====== ========== ========
Debt securities 10,128 7,222 602 1,287 992* 25
Deposits with
credit institutions 10 10 - - - -
Derivative financial
instruments 177 - 1 176 - -
Assets arising
from reinsurance
contracts held 25,937 - - - - 25,937
Loans and receivables 4,077 50 4 838 29 3,156
Cash and cash
equivalents 42 - - 42 - -
----------------------- -------- ------ ---- ------ ---------- --------
Total 40,371 7,282 607 2,343 1,021 29,118
----------------------- -------- ------ ---- ------ ---------- --------
*Of which GBP938m is BBB rated.
Amounts classified as "not rated" in the above tables are not
rated by Standard and Poor's or an equivalent rating agency.
Included in the loans and receivables balance above is GBP1m
(2010: GBP158m) is respect of assets that were past due but not
impaired at the reporting date. There were no impaired assets at 31
December 2011 or 31 December 2010. No terms in respect of financial
assets had been renegotiated at 31 December 2011 or 31 December
2010.
Amounts which were past due but not impaired are analysed as
follows:
As at 31 December 2011
Total Less 1 - 3 3 - 12 More
than months months than
1 month 12 months
GBP m GBP m GBP m GBP m GBP m
============== ====== ========= ======== ======== ===========
Loans and
receivables 1 1 - - -
Total 1 1 - - -
-------------- ------ --------- -------- -------- -----------
As at 31 December 2010
Total Less 1 - 3 3 - 12 More
than months months than
1 month 12 months
GBP m GBP m GBP m GBP m GBP m
============== ====== ========= ======== ======== ===========
Loans and
receivables 158 46 52 55 5
Total 158 46 52 55 5
-------------- ------ --------- -------- -------- -----------
(i) Concentration risk
Credit concentration risk
Credit concentration risk relates to the inadequate
diversification of credit risk. At 31 December 2011 and 31 December
2010, the Group did not have any significant concentration of
credit risk with a single counterparty or group of counterparties
where limits applied.
The Group maintains strict control on the use of derivatives by
each fund as set out in the Insurance Derivatives Risk Policy
("DRP").
Credit risk is managed through the setting and regular review of
counterparty credit and concentration limits on asset types which
are considered more likely to lead to a concentration of credit
risk. For other asset types, such as UK government securities or
investments in funds falling under the UCITS Directive, no limits
are prescribed as the risk of credit concentration is deemed to be
immaterial. This policy supports the approach mandated by the FSA
for regulatory reporting.
At 31 December 2011 and 31 December 2010, the Group did not have
any significant concentration of credit risk with a single
counterparty or group of counterparties where limits applied. With
the exception of Government bonds and UCITS funds, the largest
aggregated counterparty exposure is less than 0.1% (2010: less than
0.1% of the Group's total assets). The Group maintains strict
control limits on the derivative positions held by each fund as set
out in the DRP.
Liquidity concentration risk
Liquidity concentration risk arises where the Group is unable to
meet its obligations as they fall due or do so only at an excessive
cost, due to over-concentration of investments in particular
financial assets or classes of financial asset.
As most of the Group's invested assets are diversified across a
range of marketable equity and debt securities in line with the
investment options offered to policyholders it is highly unlikely
that a material concentration of liquidity concentration could
arise.
This is supplemented by active liquidity management in the
Group, to ensure that even under stress conditions the Group has
sufficient liquidity as required to meet its obligations. This is
delegated by the Board to and monitored through the Shareholder and
With-Profits Investment Management Committee ("SAWPIM"),
Operational Banking Committee and Capital Working Group
("CWG").
(ii) Collateral management
The Group maintains strict control limits on net open derivative
positions, namely the difference between purchase and sale
contracts, by both amount and term. The amount subject to credit
risk at any one time is limited to the current fair value of
instruments that are favourable to the Group (that is, assets),
which in relation to derivatives is only a fraction of the contract
or notional values used to express the volume of instruments
outstanding. For all derivative asset positions, the value of all
collateral held is at least equal to the value of the asset held on
the balance sheet.
Collateral in respect of OTC derivatives
The requirement for collateralisation, including the levels at
which collateral is required and the types of asset that are deemed
to be acceptable collateral, are set out in a Credit Support Annex
("CSA"). A CSA is a bilateral legal agreement which, once signed,
forms part of the International Swaps and Derivatives Association
("ISDA") agreement between the Company and the counterparty.
A CSA must be completed for OTC derivatives as part of the
contracts for such transactions. The CSA will require
collateralisation where any net exposure to a counterparty exceeds
the OTC counterparty limit, which must be established in accordance
with the DRP. The aggregate uncollateralised exposure to any one
counterparty must not exceed limits specified in the DRP. Where
derivative counterparties are related, the aggregate net exposure
is considered for the purposes of applying these limits.
The aggregate exposure, net of any collateralisation, to any one
counterparty, across all life companies, funds and transactions,
should not exceed GBP10m.
Acceptable collateral is defined in each instance and must take
into account the quality and appropriateness of the proposed
collateral as well as being acceptable to the entity receiving the
collateral. Collateral may include the following:
-- Sovereign government debt of developed economies
-- Supranational debt denominated in eligible currencies
-- Corporate bonds denominated in eligible currencies
-- Equities denominated in eligible currencies
-- Cash (this is received and invested in the SWIP Global Liquidity Fund)
Assets with the following carrying amounts have been pledged in
accordance with the terms of the relevant CSAs entered into in
respect of various OTC derivative contracts:
2011 2010
GBP GBP GBP GBP
m m m m
================================ ====== ======== ====== ========
Group Company Group Company
Financial assets:
Investments at fair value
through income 577 497 227 186
Total 577 497 227 186
-------------------------------- ------ -------- ------ --------
The Company has the right to recall any collateral pledged
provided that this is replaced with alternative acceptable assets.
Collateral pledged continues to be recognised on the Company's
balance sheet. No account is taken of collateral held. The policy
of the Company is not to repledge assets. No collateral (2010:
GBPnil) was sold during the year. At 31 December 2010, assets with
a fair value of GBP151m (2010: GBP274m) were available to the
Company to sell in the absence of default by the counterparty. None
of these assets were past due or impaired at 31 December 2011 or 31
December 2010. In the event of default, assets received as
collateral are sold.
Collateral held in respect of OTC derivatives at 31 December
2011 had a fair value of GBP775m (2010: GBP70m).
All collateral held relates to fully performing assets.
Collateral in respect of stocklending
The Group enters into stocklending transactions. The SAWPIM is
responsible for setting the parameters of stocklending and
therefore changes to these parameters. The accepted collateral can
include cash, equities, certain bonds and money market instruments.
On a daily basis, the fair value of collateral is compared to the
fair value of stock on loan. The value of collateral must always
exceed the value of stock on loan. Further information in respect
of collateral relating to stocklending is given in note 46.
Stocklending is permitted in accordance with the Insurance
Credit Risk Policy on stocklending. All stocklending takes place on
an open/call basis, enabling the loan to be recalled at any time
within the standard settlement terms of the market concerned.
The policy requires all lending to be undertaken via a partial
indemnified programme (where the operator of the programme provides
an indemnification against borrower and collateral default). The
partial programme does not cover the re-investment of outright cash
and therefore the policy specifies that the SAWPIM will set
counterparty limits for the re-investment of such balances.
Additionally, the SAWPIM will set limits on the maximum amount
of any security that may be lent and the markets in which lending
can take place.
The policy requires acceptable collateral to be pledged to at
least the value of securities lent and sets specific parameters
over what qualifies as acceptable collateral.
There were no collateraldefaults in respect of stocklending
during the year ended 31 December 2011 (2010: none) which required
a call to be made on collateral.
(4) Financial soundness risk
Financial soundness risk covers the risk of financial failure,
reputational loss or loss of earnings and/or value arising from a
lack of liquidity, funding or capital and/or the inappropriate
recording, reporting or disclosure of financial, taxation and
regulatory information.
(i) Financial and prudential regulatory reporting, tax and
disclosure risks
The Group and Company are exposed to the risk that policies and
procedures are not sufficient to maintain adequate books and
records to support statutory (including the requirement to prepare
consolidated financial statements), regulatory and tax reporting
and to prevent and detect financial reporting fraud.
The Group has developed procedures to ensure that compliance
with both current and potential future requirements are understood
and that policies are aligned to its risk appetite. The Group
maintains a system of internal controls, consistently applied,
providing reasonable assurance that transactions are recorded and
undertaken in accordance with delegated authorities that permit the
preparation and disclosure of financial statements (including
consolidated financial statements), regulatory reporting and tax
returns in accordance with IFRSs, statutory and regulatory
requirements.
The Group undertakes a programme of work designed to support an
annual assessment of the effectiveness of internal controls over
financial reporting, to identify tax liabilities and to assess
emerging legislation and regulation.
(ii) Liquidity risk
Liquidity risk is the risk that the Group will encounter
difficulty in raising funds to meet its financial commitments as
they fall due, or can secure them only at an excessive cost.
Liquidity risk may result from either the inability to sell
financial assets quickly at their fair values; or from an insurance
liability falling due for payment earlier than expected; or from
the inability to generate cash inflows as anticipated.
Liquidity risk has been analysed as arising from payments to
policyholders (including those where payment is at the discretion
of the policyholder) and non policyholder related activity (such as
investment purchases and the payment of shareholder expenses).
In order to quantify the liquidity risk exposure on all types of
business other than annuity contracts, various stress tests are
considered. Liquidity risk is measured by comparing the projected
outflow in the stress scenario for twelve months of surrenders and
three months of maturities against the sum of liquid resources
available. In conducting this assessment, no account is taken of
future policyholder inflows. The Company had coverage of at least
100% at 31 December 2011 (2010: at least 100%) in all stress
scenarios considered. On a consolidated basis, coverage was at
least 100% at 31 December 2011 (2010: at least 100%).
Liquidity risk in respect of each of the major product areas is
primarily mitigated as follows:
Annuity contracts:
Assets are held which are specifically chosen to correspond to
the expectation of timing of annuity payments. Gilts and corporate
bonds are selected to reflect, as closely as possible, the expected
annuity payments and are regularly rebalanced to ensure that this
remains the case in future.
With-profits contracts
For with-profits business, a portfolio of assets is held in line
with investment mandates which will reflect policyholder
expectations as set out in the published PPFMs.
Liquidity is maintained within the portfolio via the holding of
cash balances and a substantial number of highly liquid assets,
principally gilts and bonds. Management also have the ability to
sell less liquid assets at a reduced price if necessary, with any
loss passed on to policyholder in line with policyholders'
reasonable expectations. Losses are managed and mitigated by
anticipating policyholder behaviour and sales of underlying assets
within funds.
Non-participating contracts
For unit-linked products, portfolios are invested in accordance
with unit fund mandates. Deferral clauses are included in
policyholder contracts to give time, when necessary, to realise
linked assets without being a forced seller. As at 31 December
2011, there are no funds under management subject to deferral.
For non-linked products other than annuity contracts, backing
investments are mostly held in gilts with minimal liquidity risk.
Investments are arranged to minimise the possibility of being a
distressed seller whilst at the same time investing to meet
policyholder obligations. This is achieved by anticipating
policyholder behaviour and sales of underlying assets within
funds.
Shareholder funds
For shareholder funds, liquidity risk is managed in line with
the Insurance Liquidity Risk Policy and the wider Lloyds Banking
Group Funding and Liquidity Risk Policy.
The following tables indicate the timing of the contractual cash
flows arising from the Group and Company's financial liabilities,
as required by IFRS 7. The table is based on the undiscounted cash
flows of financial liabilities based on the earliest date on which
the Company is obliged to pay. The table includes both interest and
principal cash flows.
Liquidity risk in respect of insurance and participating
investment contract liabilities has been analysed based on the
expected pattern of maturities as permitted by IFRS 4 rather than
by contractual maturity. A maturity analysis of non-participating
investment contracts based on expected contract maturities is also
given as it is considered that this analysis provides additional
useful information in respect of the liquidity risk relating to
contracts written by the Group and Company.
Group - As at 31 December 2011
Liabilities Carrying Contractual cash flows (undiscounted)
amount
(discounted)
No stated Less 1-3 3-12 1-5 More
maturity than months months years than
1 month 5 years
GBP GBP GBP GBP GBP GBP GBP
m m m m m m m
------------------- -------------- ---------- --------- -------- -------- ------- ---------
Non-participating
investment
contract
liabilities 26,374 - 26,374 - - - -
External
interests
in mutual
investment
funds 15,928 5,411 10,516 - - - -
Derivative
financial
instruments 1,162 - 23 490 42 213 1,400
Subordinated
debt 1,875 396 - 19 70 930 2,178
Borrowings 7 - 7 - - - -
Other
financial
liabilities 2,235 83 2,102 - - 50 -
------------------- -------------- ---------- --------- -------- -------- ------- ---------
Total 47,581 5,890 39,022 509 112 1,193 3,578
------------------- -------------- ---------- --------- -------- -------- ------- ---------
As at 31 December 2010
Liabilities Carrying Contractual cash flows (undiscounted)
amount
(discounted)
No Less 1-3 3-12 1-5 More
stated than months months years than
maturity 1 month 5 years
GBP m GBP GBP m GBP GBP GBP GBP
m m m m m
------------------- -------------- ---------- --------- -------- -------- ------- ---------
Non-participating
investment
contract
liabilities 16,226 - 16,226 - - - -
External
interests
in mutual
investment
funds 1,839 - 1,839 - - - -
Derivative
financial
instruments 453 - 22 40 (3) 50 70
Subordinated
debt 1,410 - - 852 675 -
Borrowings 11 - 9 - - - -
Other
financial
liabilities 3,131 - 3,097 - - - -
------------------- -------------- ---------- --------- -------- -------- ------- ---------
Total 23,070 - 21,193 40 849 725 70
------------------- -------------- ---------- --------- -------- -------- ------- ---------
The contractual cash flow analysis set out above has been based
on the earliest possible contractual date, regardless of the
surrender penalties that might apply and has not been adjusted to
take account of such penalties.
An analysis of the contractual cash flows in respect of
insurance and investment contract liabilities by expected contract
maturity, on a discounted basis, is shown below:
As at 31 December 2011
Maturity Analysis Less More
for insurance and than 1-3 3-12 1-5 than
investment contracts Total 1 month months months years 5
GBP GBP GBP GBP GBP years
m m m m m GBP
m
============================= ======= ========= ======== ======== ======= =======
Insurance and participating
investment contracts 69,894 600 1,397 4,509 17,337 46,051
Non-participating
investment contracts 26,374 167 269 1,035 4,788 20,115
As at 31 December 2010
Maturity Analysis Less More
for insurance and than 1-3 3-12 1-5 than
investment contract Total 1 month months months years 5
liabilities GBP GBP GBP GBP GBP years
m m m m m GBP
m
============================= ======= ========= ======== ======== ======= =======
Insurance and participating
investment contracts 40,202 226 608 1,978 8,655 28,735
Non-participating
investment contracts 16,226 45 79 197 1,481 14,424
Company - As at 31 December 2011
Liabilities Carrying Contractual cash flows (undiscounted)
amount
(discounted)
No stated Less 1-3 3-12 1-5 More
maturity than months months years than
1 month 5 years
GBP m GBP GBP GBP GBP GBP GBP
m m m m m m
------------------- -------------- ---------- --------- -------- -------- ------- ---------
Borrowings 3 - 3 - - - -
Non-participating
investment
contract
liabilities 13,686 - 13,686 - - - -
Derivative
financial
instruments 628 - 12 - 35 165 1,119
Subordinated
debt 1,424 - - 19 58 880 1,910
Other
financial
liabilities 1,089 - 1,089 - - - -
------------------- -------------- ---------- --------- -------- -------- ------- ---------
Total 16,827 - 14,790 19 93 1,045 3,029
------------------- -------------- ---------- --------- -------- -------- ------- ---------
As at 31 December 2010
Liabilities Carrying Contractual cash flows (undiscounted)
amount
(discounted)
No stated Less 1-3 3-12 1-5 More
maturity than months months years than
1 month 5 years
GBP m GBP GBP m GBP GBP GBP GBP
m m m m m
------------------- -------------- ---------- --------- -------- -------- ------- ---------
Non-participating
investment
contract
liabilities 13,852 - 13,852 - - - -
Derivative
financial
instruments 334 - - 17 (11) 14 (78)
Subordinated
debt 1,410 - - - 852 675
Borrowings 4 - 4 - - - -
Other
financial
liabilities 2,652 - 2,652 - - - -
------------------- -------------- ---------- --------- -------- -------- ------- ---------
Total 18,252 - 16,508 17 841 689 (78)
------------------- -------------- ---------- --------- -------- -------- ------- ---------
The contractual cash flow analysis set out above has been based
on the earliest possible contractual date, regardless of the
surrender penalties that might apply and has not been adjusted to
take account of such penalties.
An analysis of insurance and investment contract liabilities by
expected contract maturity, on a discounted basis, is shown
below:
As at 31 December 2011
Maturity Analysis Less More
for insurance and than 1-3 3-12 1-5 than
investment contract Total 1 month months months years 5
liabilities GBP GBP GBP GBP GBP years
m m m m m GBP
m
============================= ======= ========= ======== ======== ======= =======
Insurance and participating
investment contracts 38,895 285 651 2,301 8,416 27,242
Non-participating
investment contracts 13,686 51 86 208 1,553 11,788
As at 31 December 2010
Maturity Analysis Less More
for insurance and than 1-3 3-12 1-5 than
investment contract Total 1 month months months years 5
liabilities GBP GBP GBP GBP GBP years
m m m m m GBP
m
============================= ======= ========= ======== ======== ======= =======
Insurance and participating
investment contracts 38,066 229 461 2,135 8,663 26,578
Non-participating
investment contracts 13,852 45 79 197 1,482 12,049
(iii) Capital risk
Capital risk is defined as the risk that:
-- the Group, or one of its separately regulated subsidiaries,
has insufficient capital to meet its regulatory capital
requirements;
-- the Group has insufficient capital to provide a stable
resource to absorb all losses up to a confidence level defined in
the risk appetite;
-- the Group loses reputational status by having capital that is
regarded as inappropriate, either in quantity, type or
distribution; and/or
-- the capital structure is inefficient.
The business of several of the companies within the Group is
regulated by the FSA. The FSA specifies the minimum amount of
capital that must be held by each of the regulated companies within
the Group in addition to their insurance liabilities.
Within the Insurance Division, capital risk is actively
monitored by the CWG.
Under the FSA rules, each insurance company within the Group
must hold assets in excess of the higher of:
(i) the Pillar 1 amount, which is calculated by applying fixed
percentages of mathematical reserves and capital at risk; and
(ii) the Pillar 2 amount, which is derived from an economic
capital assessment undertaken by each regulated company, which is
reviewed by the FSA.
The minimum required capital must be maintained at all times
throughout the year. These capital requirements and the capital
available to meet them are regularly estimated in order to ensure
that capital maintenance requirements are being met.
The Group's objectives when managing capital are:
- to comply with the insurance capital requirements set out by
the FSA in the UK;
- to have sufficient further capital to safeguard the Group's
ability to continue as a going concern so that it can continue to
provide returns for the shareholder and benefits for other
stakeholders;
- when capital is needed, to require an adequate return to the
shareholder by pricing insurance and investment contracts according
to the level of risk associated with the business written; and
- to meet the requirements of the Schemes of Transfer.
The Company manages the capital structure and makes adjustments
to reflect changes in economic conditions and the risk
characteristics of the underlying assets. In order to maintain or
adjust the capital structure, the Company may adjust the amount of
dividends paid to the shareholder, return capital to the
shareholder, issue new shares or sell assets.
The Company's capital comprises all components of equity,
movements in which are set out in the statement of changes in
equity and includes subordinated debt (note 35).
The table below sets out the regulatory capital and the required
capital held at 31 December in each year on a Pillar 1 basis. The
current year information is, in general, an estimate that will be
updated once the FSA returns for the year are finalised.
2011 2010
GBP m GBP m
============================= ======= =======
Regulatory capital held 7,958 5,689
Regulatory capital required 4,277 3,022
All minimum regulatory requirements were met during the
year.
(d) Operational risk
Operational risk covers the risk of reductions in earnings
and/or value, through financial or reputational loss, from
inadequate or failed internal processes and systems, operational
inefficiencies, or from people related or external events. By its
very nature, operational risks can arise from a wide range of the
Groups activities that involve people, processes and systems
Customer treatment and processes risk
The risk of reductions in earnings and/or value, through
financial or reputational loss, from inappropriate or poor customer
treatment. Associated risks include poor product design and
development, customer advice, customer service and customer
complaint handling. Customer process risk includes customer
transactions and processing errors due to incorrect capturing of
customer information and/or systems failure.
Customer treatment and how LBG as a whole manages its customer
relationships affects all aspects of the Group's operations and is
closely aligned with achievement of LBG's strategic aim - to create
deep long lasting relationships with its customers. Currently there
is a high level of scrutiny regarding the treatment of customers by
financial institutions from the press, politicians and regulatory
bodies.
People risk
The risk of reductions in earnings and/or value through
financial or reputational loss, from inappropriate resource
management, employee relations, legal action in relation to people,
or health and safety issues.
The Group continues to face risks relating to its ability to
attract, retain and develop high calibre talent as a result of
challenges arising from ongoing regulatory and public interest in
remuneration practices and delivery of LBG's integration
requirements.
Financial crime and security risk
Financial crime risk covers the risk of reduction in earnings
and/or value, through financial or reputational loss, associated
with financial crime and failure to comply with related legal and
regulatory obligations, these losses may include censure, fines or
the cost of litigation. Security risk relates to potential losses
as a result of the theft of, or damage to the Group's assets, the
loss, corruption, misuse or theft of the Group's information assets
or threats or actual harm to the Group's people. This also includes
risks relating to terrorist acts, other acts of war, geographical,
pandemic or other such events.
Organisational infrastructure and change risk
Organisational infrastructure risk covers the risk of reductions
in earnings and/or value, through financial or reputational loss,
resulting from poor internally facing business processes at a
Group, divisional or company level. Organisational infrastructure
in this context embraces the structures, systems and processes that
provide direction, control and accountability for the enterprise.
Change risk comprises the risk of potential loses from change
initiatives failing to deliver to requirements, budget or
timescale, failing to implement change effectively or failing to
realise desired benefits.
Although now over two years into the successful implementation
of the programme, there continue to be delivery of benefits as the
programme moves into its final phase of execution.
Supplier management risk
The risk of reductions in earnings and/or value through
financial or reputational loss from services with outsourced
partners or third party suppliers.
IT Systems risk
The risk of reductions in earnings and/or value through
financial or reputational loss resulting from the development,
delivery and maintenance of effective IT solutions.
(e) Legal and regulatory risks
Legal and regulatory risk is the risk of reductions in earnings
and/or value, through financial or reputational loss, from failing
to comply with the laws, regulations or codes applicable.
A provision is held in respect of German litigation. This is
discussed further in note 32.
The Group also faces a number of legal and regulatory risks,
reflecting the volume and pace of change within the UK. This
impacts the Group both operationally, in terms of costs of
compliance and uncertainty about regulatory expectations, and
strategically, through pressure on key earnings streams. The latter
could potentially result in major changes to business and pricing
models, particularly in the UK retail market. Business planning
processes continue to reflect change to the regulatory
environment.
Regulators are interested in protecting the rights of the
policyholders and ensuring that the Group is satisfactorily
managing affairs for the benefit of the policyholders. Regulators
are also keen to ensure that the Group maintains appropriate
solvency levels to meet unforeseen liabilities arising from
reasonably foreseeable economic shocks or natural disasters. As
such, the Group is subject to regulatory requirements which
prescribe and impose certain restrictive provisions.
RELATED PARTY TRANSACTIONS
43. Related party transactions
(a) Ultimate parent and shareholding
The Group's immediate parent undertaking is Scottish Widows
Financial Services Holdings, a company registered in the United
Kingdom. Scottish Widows Financial Services Holdings has taken
advantage of the provisions of the Companies Act 2006 and has not
produced consolidated financial statements.
The Company's ultimate parent company and ultimate controlling
party is Lloyds Banking Group plc, which is also the parent
undertaking of the largest group of undertakings for which group
accounts are drawn up and of which the Company is a member. Lloyds
TSB Bank plc is the parent undertaking of the smallest such group
of undertakings. Copies of the Lloyds Banking Group plc financial
statements in which the Company is consolidated can be obtained
from the Group Secretary's Department, Lloyds Banking Group plc, 25
Gresham Street, London EC2V 7HN.
(b) Transactions and balances with related parties
Transactions between the Group and other companies in the Lloyds
Banking Group
In accordance with IAS 24 "Related Party Disclosures",
transactions and balances between Group companies have been
eliminated on consolidation and have not been reported as part of
the consolidated financial statements.
The Group has entered into the following transactions with other
related parties during the year and holds the following balances
with other related parties at the end of the year:
Transactions in the Outstanding Balance
Year at 31 December
2011 2010 2011 2010
GBP m GBP m GBP m GBP m
======================================== ========== ========= ============ =======
Relationship
Ultimate parent undertaking:
Shares in ultimate parent undertaking
- book cost - - 113 113
Shares in ultimate parent undertaking
- market value - - 16 16
Customer remediation income and amounts
receivable 18 21 2 1
Expense recharges and amounts payable (328) (251) (50) (56)
Investments and amounts receivable (8) - 178 -
Other related parties:
Bank account balances - - 341 519
Bank charges (15) - - -
Intercompany debtor balances - - 200 890
Investment assets - - 2,038 8,038
Intercompany creditor balances - - (18) (24)
Dividend income and amounts receivable 14 14 - 2
Annual management charges and amounts
receivable 32 35 2 2
Interest income 30 57 3 24
Interest expense 95 - - -
Expense recharges and amounts payable 82 147 (81) 25
Reinsurance commission - 92 - 92
Reinsurance expenses - 35 - 35
Reinsurance claims - 22 - 22
Reinsurance premiums 20 (132) 26 (132)
Rebates on annual management charges (29) (29) (1) (1)
Investment management fees (90) (58) (16) (6)
Commission (22) (11) (2) (4)
Subordinated debt - - (1,371) (800)
Subordinated debt interest paid (1) (24) (12) -
Transactions between the Company and other companies in the
Lloyds Banking Group
The Company has entered into the following transactions with
other related parties during the year and holds the following
balances with other related parties at the end of the year:
Transactions in the Outstanding Balance
Year at 31 December
2011 2010 2011 2010
GBP m GBP m GBP m GBP m
========================================== ========== ========= ========== =========
Relationship
Subsidiary undertaking:
Investment assets - - 3,197 802
Intercompany debtor balances - - 50 45
Dividend income and amounts receivable 36 4 - 1
Contingent loan and interest receivable 8 7 744 630
Reinsurance claims and amounts payable 2,776 2,989 (11) (13)
Investment management fee rebates 7 7 - -
Loan notes and interest receivable 4 4 38 38
Customer remediation income and amounts
receivable - - 69 66
Annual management charges received 28 42 - -
Reinsurance commission 373 195 80 -
Reinsurance premiums (3,383) (3,151) (45) -
Reinsurance claims 30 22 6
Reinsurance expenses - - - 31
Expense recharges and amounts payable (202) (228) (53) (11)
Annual management charges paid (2) (2) - -
Renewal commission and amounts receivable 16 12 2 1
Interest income 19 - - -
Other related parties:
Bank account balances - - 132 140
Investment assets - - 1,208 4,605
Intercompany debtor balances - - 158 890
Intercompany creditor balances - - (21) (13)
Interest income 28 41 3 24
Dividend income and amounts receivable 3 - - -
Reinsurance commission - 92 - 92
Reinsurance expenses - - - 45
Reinsurance premiums - (132) - (132)
Reinsurance claims - 22 - 22
Investment management fees (16) (16) (1) (1)
Commission (5) (4) (25) (11)
Subordinated debt - - (800) (800)
Subordinated debt interest paid (23) (24) - -
Other interest paid (24) - (12) -
The above balances are unsecured in nature and are expected to
be settled in cash.
Transactions between the Group and key management
Key management personnel are those persons having authority and
responsibility for planning, directing and controlling the
activities of the Company which, for the Company, are the Executive
Directors.
Transactions between the key management personnel of the Group
and parties related to them as defined by IAS 24 are as
follows:
Key management compensation:
Group Company
2011 2010 2011 2010
GBP m GBP m GBP m GBP m
======================================= ===== ===== ===== =====
Salaries and other short-term benefits 2.7 1.9 1.0 1.5
Post-employment benefits 0.1 0.1 - 0.1
Share-based payments 1.2 0.4 0.7 0.3
--------------------------------------- ----- ----- ----- -----
Total 4.0 2.4 1.7 1.9
--------------------------------------- ----- ----- ----- -----
Certain members of key management in the Group, including the
highest paid director, provide services to other companies within
the Lloyds Banking Group. In such cases, for the purposes of this
note, figures have been included based on an apportionment to the
Group of the total compensation earned.
Of the amount disclosed above, GBP1.2m Group and GBP0.4m Company
is in respect of Directors of SW (2010: Group GBP1.1m and Company
GBP0.6m). No retirement benefits are accruing for Directors (2010:
two) under defined benefit pension schemes. Two Directors (2010:
one) are paying into a defined contribution scheme.
During the year GBPnil (2010: GBPnil) was paid to Directors of
the Group as compensation for loss of office.
Detail regarding the highest paid Director is as follows:
Group Company
2011 2010 2011 2010
GBP m GBP m GBP m GBP m
======================================== ===== ===== ===== =====
Apportioned aggregate emoluments 0.3 0.2 0.1 0.1
---------------------------------------- ----- ----- ----- -----
Defined benefits pension scheme accrued
benefit at 31 December (all amounts
less than GBP1m) - - - -
---------------------------------------- ----- ----- ----- -----
The highest paid Director exercised share options during the
year and was granted shares in respect of qualifying service during
the year. This was also the case in the prior year.
Other transactions between key management and the companies in
the Lloyds Banking Group:
Deposits
2011 2 2010
--------- ---- --------
GBP000 GBP000
Outstanding at 1 January - 5
Placed during the year - -
Interest earned during the - -
year
Withdrawn during the year - (5)
Outstanding at 31 December - -
----------------------------- --------------- --------
Other
2011 2010
-------- --------
GBP000 GBP000
Value of investments managed
by entities within the Lloyds
Banking Group 2,991 137
Insurance premiums paid - -
Insurance claims received 274 -
Other transactions
HM Treasury
In January 2009, HM Treasury became a related party of the
Company following its subscription for ordinary shares in LBG, the
Company's ultimate parent company, issued under a placing and open
offer. As at 31 December 2011, HM Treasury held a 40.2 percent
(2010: 40.6 percent) interest in LBG's ordinary share capital and,
consequently, HM Treasury remained a related party of the Company
throughout 2011.
There were no material transactions between the Group or Company
and HM Treasury during the year (2010: none) that were not made in
the ordinary course of business or that are unusual in their nature
or conditions. In addition, the Group and Company have entered into
transactions with HM Treasury on an arm's length basis including,
but not exclusively in relation to, the payment of corporation tax
and value added tax.
Further details of the above can also be obtained by contacting
Secretariat, Insurance, Lloyds Banking Group plc, Level 7 Block E,
Port Hamilton, 69 Morrison Street, Edinburgh EH3 8YF.
This information is provided by RNS
The company news service from the London Stock Exchange
END
FR BKPDBKBKDFQB
Bank Nova 25 (LSE:81XM)
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