Notes to the consolidated financial statements 31-40
31 – Direct capital instrument
| Notional amount | 2005 £m |
2004 £m |
|---|---|---|
| 5.9021% £500 million direct capital instrument | 500 | 500 |
| 4.7291% €700 million direct capital instrument | 490 | 490 |
| 990 | 990 |
The euro and sterling direct capital instruments (the DCIs) were issued on 25 November 2004, and issue costs of £9 million have been charged to reserves. The DCIs have no fixed redemption date but the Company may, at its sole option, redeem all (but not part) of the DCIs at their principal amount on 28 November 2014 and 27 July 2020 for the euro and sterling DCIs respectively, or on any respective coupon payment date thereafter. In addition, under certain circumstances defined in the terms and conditions of the issue, the Company may at its sole option:
(i) redeem all (but not part) of the DCIs at their principal amount at any time prior to 28 November 2014 and 27 July 2020 for the euro and sterling DCIs respectively;
(ii) substitute at any time all (but not some only) of the DCIs for, or vary the terms of the DCIs so that they become, Qualifying Tier 1 Securities or Qualifying Upper Tier 2 Securities;
(iii) substitute all (but not some only) of the DCIs for fully paid non-cumulative preference shares in the Company. These preference shares could only be redeemed on 28 November 2014 in the case of the euro DCIs and on 27 July 2020 in the case of the sterling DCIs, or in each case on any dividend payment date thereafter. The Company has the right to choose whether or not to pay any dividend on the new shares, and any such dividend payment will be non-cumulative.
The Company has the option to defer coupon payments on the DCIs on any relevant payment date. Deferred coupons shall be satisfied only in the following circumstances, all of which occur at the sole option of the Company:
(i) Redemption; or
(ii) Substitution by, or variation so they become, alternative Qualifying Tier 1 Securities or Qualifying Upper Tier 2 Securities; or
(iii) Substitution by preference shares.
No interest will accrue on any deferred coupon. Deferred coupons will be satisfied by the issue and sale of ordinary shares in the Company at their prevailing market value, to a sum as near as practicable to (and at least equal to) the relevant deferred coupons. In the event of any coupon deferral, the Company will not declare or pay any dividend on its ordinary or preference share capital.
32 – Other reserves
| Currency translation reserve (see accounting
policy D) £m |
Owner-occupied properties reserve (see accounting
policy N) £m |
Investment valuation reserve (see accounting
policy R) £m |
Hedging instruments reserve (see accounting policy S) £m | Equity compensation reserve (see accounting
policy Y) £m |
Total £m |
|
|---|---|---|---|---|---|---|
| Balance at 1 January 2004 | – | 104 | 439 | – | – | 543 |
| Arising in the year: | ||||||
| Fair value gains/(losses) | – | 47 | (64) | 20 | – | 3 |
| Fair value (gains)/losses transferred to profit | – | – | 109 | – | – | 109 |
| Fair value (gains)/losses transferred to retained earnings on disposals | – | 18 | – | – | – | 18 |
| Reserves credit for equity compensation plans (note 28d) | – | – | – | – | 21 | 21 |
| Foreign exchange rate movements | 57 | – | – | – | – | 57 |
| Aggregate tax effect – shareholder tax | – | (23) | 14 | (6) | – | (15) |
| Balance at 31 December 2004 | 57 | 146 | 498 | 14 | 21 | 736 |
| Arising in the year: | ||||||
| Fair value gains/(losses) | – | 32 | (65) | (19) | – | (52) |
| Fair value (gains)/losses transferred to profit | – | – | 411 | – | – | 411 |
| Share of fair value changes in joint ventures and associates taken to equity | – | 2 | – | – | – | 2 |
| Impairment losses on revalued assets | – | – | (45) | – | – | (45) |
| Reserves credit for equity compensation plans (note 28d) | – | – | – | – | 22 | 22 |
| Foreign exchange rate movements | (2) | – | – | 19 | – | 17 |
| Aggregate tax effect – policyholder tax | – | 3 | – | – | – | 3 |
| Aggregate tax effect – shareholder tax | – | (4) | 45 | 5 | – | 46 |
| Balance at 31 December 2005 | 55 | 179 | 844 | 19 | 43 | 1,140 |
The above reserves are shown net of minority interests.
33 – Retained earnings
| 2005 £m |
2004 £m |
|
|---|---|---|
| Balance at 1 January | 1,709 | 1,055 |
| Profit for the year attributable to equity shareholders | 1,767 | 1,275 |
| Actuarial gains and losses on pension schemes (note 42) | (547) | (145) |
| Dividends and appropriations (note 14) | (657) | (570) |
| Shares issued in lieu of dividends | 100 | 103 |
| Transaction costs on issue of direct capital instrument | – | (9) |
| Aggregate tax effect | 226 | – |
| Other movements | (1) | – |
| Balance at 31 December | 2,597 | 1,709 |
The shares issued in lieu of dividends are in respect of the transfer to retained earnings from the ordinary dividend account, arising from the treatment of shares issued in lieu of the 2004 final and 2005 interim dividends, as explained in note 27(b).
34 – Minority interests
Minority interests at 31 December comprised:
| 2005 £m |
2004 £m |
|
|---|---|---|
| Equity shares in subsidiaries | 320 | 388 |
| Share of earnings | 153 | 197 |
| Share of other reserves | 399 | 68 |
| 872 | 653 | |
| Preference shares in General Accident plc | 250 | 250 |
| Preference shares in other subsidiaries | 6 | 7 |
| 1,128 | 910 |
35 – Insurance liabilities
(a) Carrying amount
Insurance liabilities at 31 December comprise:
| 2005 | 2004 | |||||
|---|---|---|---|---|---|---|
| Long-term business £m |
General insurance and health £m |
Total £m |
Long-term business £m |
General insurance and health £m |
Total £m |
|
| Long-term business provisions | ||||||
| Participating | 59,958 | – | 59,958 | 58,304 | – | 58,304 |
| Unit-linked non-participating | 17,999 | – | 17,999 | 15,227 | – | 15,227 |
| Other non-participating | 36,473 | – | 36,473 | 32,960 | – | 32,960 |
| 114,430 | – | 114,430 | 106,491 | – | 106,491 | |
| Outstanding claims provisions | 605 | 10,641 | 11,246 | 730 | 10,727 | 11,457 |
| Provision for claims incurred but not reported | – | 2,324 | 2,324 | – | 2,023 | 2,023 |
| 605 | 12,965 | 13,570 | 730 | 12,750 | 13,480 | |
| Provision for unearned premiums | – | 5,381 | 5,381 | – | 4,923 | 4,923 |
| Provision arising from liability adequacy tests | – | 48 | 48 | – | 33 | 33 |
| Other technical provisions | 16 | 32 | 48 | 2 | 87 | 89 |
| Total | 115,051 | 18,426 | 133,477 | 107,223 | 17,793 | 125,016 |
| Less: Obligations to staff pension schemes transferred to provisions (note 41a) | (875) | – | (875) | (813) | – | (813) |
| AVIF recognised in realistic liabilities | – | – | – | (81) | – | (81) |
| 114,176 | 18,426 | 132,602 | 106,329 | 17,793 | 124,122 | |
(b) Long-term business liabilities
(i) Business description
The Group underwrites long-term business in a number of countries as follows:
- In the United Kingdom mainly in
- “with-profit” funds of CGNU Life Assurance, Commercial Union Life Assurance, and the With Profit and Provident Mutual funds of Norwich Union Life & Pensions (“NUL&P”), where the with-profits policyholders are entitled to at least 90% of the distributed profits, the shareholders receiving the balance;
- “non-profit” funds of Norwich Union Annuity and NUL&P, where shareholders are entitled to 100% of the distributed profits. Shareholder profits on unitised with-profit business written by Norwich Union Life & Pensions and on stakeholder unitised with-profit business are derived from management fees and policy charges, and emerge in the non-profit funds.
- In France, where the majority of policyholders’ benefits are determined by investment performance, subject to certain guarantees, and shareholders’ profits are derived largely from management fees. In addition, a substantial number of policies participate in investment returns, with the balance being attributable to shareholders.
- In the Netherlands, the balance of profits, after providing appropriate returns for policyholders and after tax, accrues for the benefit of the shareholders. The bases for determining returns for policyholders are complex, but are consistent with methods and criteria followed generally in the Netherlands. In addition, a substantial number of policies provide benefits which are determined by investment performance, subject to certain guarantees, and shareholders’ profits are derived largely from management fees.
- In other overseas operations.
(ii) Group practice
The long-term business provision
is calculated separately for each of the Group’s life operations. The
provisions for overseas subsidiaries have generally been included on the basis
of local regulatory requirements, mainly using the net premium method, modified
where necessary to reflect the requirements of the Companies Act.
Material judgement is required in calculating the provisions and is exercised particularly through the choice of assumptions where there is discretion over these. In turn, the assumptions used depend on the circumstances prevailing in each of the life operations. Provisions are most sensitive to assumptions regarding discount rates and mortality/morbidity rates.
Bonuses paid during the year are reflected in claims paid, whilst those allocated as part of the bonus declaration are included in the movements in the long-term business provision.
(iii) Methodology and assumptions
There are two main
methods of actuarial valuation of liabilities arising under long-term insurance
contracts – the net premium method and the gross premium method – both
of which involve the discounting of projected premiums and claims.
Under the net premium method, the premium taken into account in calculating the provision is determined actuarially, based on the valuation assumptions regarding discount rates, mortality and disability. The difference between this premium and the actual premium payable provides a margin for expenses. This method does not allow for voluntary early termination of the contract by the policyholder, and so no assumption is required for persistency. Explicit provision is made for vested bonuses (including those vesting following the most recent fund valuation), but no such provision is made for future regular or terminal bonuses. However, this method makes implicit allowance for future regular or terminal bonuses already earned, by margins in the valuation discount rate used.
The gross premium method uses the amount of contractual premiums payable and includes explicit assumptions for interest and discount rates, mortality and morbidity, persistency and future expenses. These assumptions can vary by contract type and reflect current and expected future experience. Explicit provision is made for vested bonuses and explicit allowance is also made for future regular bonuses, but not terminal bonuses.
The principal assumptions in the United Kingdom, France and the Netherlands are:
(a) United Kingdom
With-profit business The valuation of with-profit business has changed
significantly during 2005 in accordance with the realistic basis set out by
the UK’s Financial Services Authority, adjusted to remove the shareholders’ share
of future bonuses.
The key elements of the Realistic Balance Sheet methodology are the with-profit benefit reserve (WPBR) and the present value of the expected cost of any payments in excess of the WPBR (referred to as the cost of future policy-related liabilities). The realistic liability for any contract is equal to the sum of the WPBR and the cost of future policy-related liabilities. The WPBR for an individual contract is generally calculated on a retrospective basis, and represents the accumulation of the premiums paid on the contract, allowing for investment return, taxation, expenses and any other charges levied on the contract.
For a small proportion of business, the retrospective approach is not available or inappropriate, so a prospective valuation approach is used instead, including allowance for anticipated future regular and final bonuses.
The items included in the cost of future policy related liabilities include:
- Maturity Guarantees;
- Smoothing (which can be negative);
- Guaranteed Annuity Options;
- GMP underpin on Section 32 transfers; and
- Expected payments under Mortgage Endowment Promise.
In the Provident Mutual and With-Profit funds in NUL&P, this is offset by the expected cost of charges to WPBR to be made in respect of guarantees.
The cost of future policy-related liabilities is determined using a market-consistent approach, mainly based on a stochastic model calibrated to market conditions at the end of the reporting period. Non-market-related assumptions (for example, persistency, mortality and expenses) are based on experience, adjusted to take into account future trends. Where policyholders have valuable guarantees, options or promises, then future persistency is assumed to improve, and future take-up rates of guaranteed annuity options are assumed to increase.
The principal assumptions underlying the cost of future policy related liabilities are as follows:
Future investment return A “risk-free” rate equal to the spot yield on gilts, plus a margin of 0.1% is used. The rates vary, according to the outstanding term of the policy, with a typical rate as at year end 2005 being 4.23% for a policy with ten years outstanding.
Volatility of investment return The volatility of returns is assumed to be distributed as follows:
| Financial investment | Volatility |
|---|---|
| Equities | 20% (for UK stocks) |
| Property | 15% |
| Gilts | 3.25% (NUL&P WP)/4.75% (other WP funds) |
| Corporate bonds | 5.25% (NUL&P WP)/6.75% (other WP funds) |
Future regular bonuses Annual bonus assumptions for 2006 have been set consistently with the year end 2005 declaration. Future annual bonus rates reflect the principles and practices of the fund. In particular, the level is set with regard to the projected margin for final bonus and the change from one year to the next is limited to a level consistent with past practice.
Mortality Mortality assumptions are set with regard to recent company experience and general industry trends. Since 2004, there have been some changes to the adjustments to the base tables for annuities in payment in order to reflect more closely the actual experience of this business.
| 2005 | Mortality table used 2004 |
|
|---|---|---|
| Assurances, pure endowments and deferred annuities before vesting | Nil or AM92/AF92 or AM80/AF80 adjusted |
Nil or AM92/AF92 or AM80/ AF80 or A67/70 adjusted |
| Pensions business after vesting and pensions annuities in payment | PCMA00/PCFA00 or PMA92/PFA92 adjusted plus allowance for future mortality improvement |
PMA80/PFA80 or PMA92/PFA92 adjusted plus allowance for future mortality improvement |
Non-profit business Conventional non-profit contracts, including those written in the with-profit funds, are valued using gross premium methods which discount projected future cash flows. The cash flows are calculated using the amount of contractual premiums payable, together with explicit assumptions for investment returns, inflation, discount rates, mortality, morbidity, persistency and future expenses. These assumptions vary by contract type and reflect current and expected future experience. All contracts are assumed to continue for the contractual term.
For unit-linked and some unitised with-profit business, the provisions are valued by adding a prospective non-unit reserve to the bid value of units. The prospective non-unit reserve is calculated by projecting the future non-unit cash flows on the assumption that future premiums cease, unless it is more onerous to assume that they continue. Where appropriate, allowance for persistency is based on actual experience.
Valuation discount rate assumptions are set with regard to yields on the supporting assets and the general level of long-term interest rates as measured by gilt yields. An explicit allowance for risk is included by restricting the yields for equities and properties with reference to a margin over long-term interest rates or by making an explicit deduction from the yields on corporate bonds, mortgages and deposits, based on historical default experience of each asset class. A further margin for risk is then deducted for all asset classes.
The provisions held in respect of guaranteed annuity options are a prudent assessment of the additional liability incurred under the option on a basis and method consistent with that used to value basic policy liabilities, and includes a prudent assessment of the proportion of policyholders who will choose to exercise the option.
For all non-profit business, including annuities, valuation discount rate assumptions are set with regard to yields on the supporting assets and the general level of long-term interest rates as measured by gilt yields. An explicit allowance for risk is included by restricting the yields for equities and properties with reference to a margin over long-term interest rates or by making an explicit deduction from the yields on corporate bonds, mortgages and deposits, based on historical default experience of each asset class. A further margin for risk is then deducted for all asset classes.
The changes in the valuation discount rates since 2004 reflect the changes in the yields on the supporting assets.
| Valuation discount rates | ||
|---|---|---|
| 2005 | 2004 | |
| Assurances | ||
| Life conventional non-profit | 2.9% to 3.6% | 3.2% to 4.0% |
| Pensions conventional non-profit | 3.6% to 4.0% | 4.0% to 4.5% |
| Deferred annuities | ||
| Non-profit – in deferment | 3.6% to 4.6% | 4.0% to 5.5% |
| Non-profit – in payment | 3.6% | 4.0% |
| Annuities in payment | ||
| Convention annuity | 4.0% to 4.6% | 4.7% to 5.3% |
| Non-unit reserves | ||
| Life | 3.2% | 3.5% |
| Pensions | 3.9% | 4.3% |
Mortality assumptions are set with regard to recent company experience and general industry trends. Since 2004, there have been changes to the base tables in order to reflect more closely actual experience.
| Mortality tables used | ||
|---|---|---|
| 2005 | 2004 | |
| Assurances | ||
| Non-profit | AM80/AF80 or AM92/AF92 or TM92/TF92 adjusted for smoker status and age/sex specific factors |
AM80/AF80 or AM92/AF92 or TM92/TF92 adjusted for smoker status and age/sex specific factors |
| Pure endowments and deferred annuities before vesting | Nil or AM80/AF80 or AM92/AF92 adjusted | Nil or AM80/AF80 or AM92/AF92 adjusted |
| General annuity business after vesting | IML00/IFL00 adjusted plus allowance for future mortality improvement | IM80/IF80 adjusted plus allowance for future mortality improvement |
| Pensions business after vesting | PCMA00/PCFA00 adjusted plus allowance for future mortality improvement | PMA80/PFA80 adjusted plus allowance for future mortality improvement |
| Annuities in payment | ||
| General annuity business | IML00/IFL00 adjusted plus allowance for future mortality improvement | IMA80/IFA80 adjusted plus allowance for future mortality improvement |
| Pensions business | PCMA00/PCFA00 adjusted plus allowance for future mortality improvement | PMA80/PFA80 adjusted plus allowance for future mortality improvement |
(b) France
The majority of provisions arise from a single premium savings product and are based on the accumulated fund value, adjusted to maintain consistency with the value of the assets backing the policyholder liabilities. The net premium method is used for prospective valuations, in accordance with local regulation, where the valuation assumptions depend on the date of issue of the contract. The valuation discount rate also depends on the original duration of the contract and mortality rates are based on industry tables. There have been some reductions to valuation discount rates in 2005.
| Valuation discount rates | Mortality tables used | ||
|---|---|---|---|
| 2005 | 2004 | 2005 and 2004 | |
| Life assurances | 1.75% to 4.5% | 2.5% to 4.5% | PM60-64, TD73-77, TD 88/90 |
| Annuities | 1.75% to 4.5% | 2.5% to 4.5% | TPRV (prospective table) |
(c) Netherlands
On transition to IFRS, the valuation of most long-term insurance and participating investment contracts was changed from existing methods that generally used historic assumptions to an active basis using current market interest rates. A liability adequacy test is performed in line with IFRS requirements, using investment values and future investment income. Where assets are valued at market value, then the future investment income is based on expected market-based investment yields.
| Valuation discount rates | Mortality tables used | |
|---|---|---|
| 2005 and 2004 | 2005 and 2004 | |
| Life assurances | actual swap rate | GBM 61-65, GMB 71-75, GBM/V 76-80, GBM 80-85, GBM/V 85-90 and GBM/V 90-95 |
| Annuities in deferment and in payment | actual swap rate | GBMV 76-80, GBMV 85-90, GBMV 95-00, Coll 1993/2003 and DIL 98, plus further allowance for future mortality improvement |
(d) In all countries, local generally-accepted interest rates and published standard mortality tables are used for different categories of business as appropriate. The tables are based on relevant experience and show mortality rates, by age, for specific groupings of people.
Movements
The following movements have occurred in the long-term business provisions during the year:
| 2005 £m |
2004 £m |
|
|---|---|---|
| Carrying amount at 1 January | 106,491 | 96,228 |
| Provisions in respect of new business | 6,589 | 5,839 |
| Expected change in existing business provisions | (2,703) | (3,164) |
| Variance between actual and expected experience | 3,784 | 1,680 |
| Impact of operating assumption changes | (1,034) | 377 |
| Impact of economic assumption changes | 2,411 | 1,004 |
| Other movements | 340 | 227 |
| Change in liability recognised as an expense | 9,387 | 5,963 |
| Portfolio transfers, acquisitions and disposals | (360) | 924 |
| Foreign exchange rate movements | (684) | 289 |
| Effect of adjusting to FRS 27 realistic basis | – | 3,087 |
| Other movements | (404) | – |
| Carrying amount at 31 December | 114,430 | 106,491 |
The effect of changes in the main assumptions is given in note 39.
(c) General insurance and health liabilities
Provisions for outstanding claims
Significant delays occur in the notification and settlement of claims and a substantial measure of experience and judgement is involved in assessing outstanding liabilities, the ultimate cost of which cannot be known with certainty at the balance sheet date. The reserves for general insurance and health are based on information currently available; however, it is inherent in the nature of the business written that the ultimate liabilities may vary as a result of subsequent developments.
Provisions for outstanding claims are established to cover the outstanding expected ultimate liability for losses and loss adjustment expenses (LAE) in respect of all claims that have already occurred. The provisions established cover reported claims and associated LAE, as well as claims incurred but not yet reported and associated LAE.
Outstanding claims provisions are based on undiscounted estimates of future claim payments, except for the following classes of business for which discounted provisions are held:
| Rate | Mean term of liabilities | ||||
|---|---|---|---|---|---|
| Country | Class | 2005 | 2004 | 2005 | 2004 |
| Netherlands | Permanent health and injury | 3.21% | 3.27% | 7 years | 10 years |
No equalisation or catastrophe reserves have been recognised. This treatment differs from UK GAAP and is explained in note 1 on the first time adoption of IFRS.
The net outstanding claims provisions before discounting were £13,014 million (2004: £12,816 million). The period of time which will elapse before the liabilities are settled has been estimated by modelling the settlement patterns of the underlying claims.
Assumptions
Outstanding claims provisions are estimated based on known facts at the date of estimation. Case estimates are generally set by skilled claims technicians, applying their experience and knowledge to the circumstances of individual claims. The ultimate cost of outstanding claims is then estimated by using a range of standard actuarial claims projection techniques, such as the Chain Ladder and Bornhuetter-Ferguson methods. The main assumption underlying these techniques is that a company’s past claims development experience can be used to project future claims development and hence ultimate claims costs. As such, these methods extrapolate the development of paid and incurred losses, average costs per claim and claim numbers based on the observed development of earlier years and expected loss ratios.
Historical claims development is mainly analysed by accident period, although underwriting or notification period is also used where this is considered appropriate. Claim development is separately analysed for each geographic area, as well as by each line of business. Certain lines of business are also further analysed by claim type or type of coverage. In addition, large claims are usually separately addressed, either by being reserved at the face value of loss adjuster estimates or separately projected in order to reflect their future development.
In most cases, no explicit assumptions are made regarding future rates of claims inflation or loss ratios. Instead, the assumptions used are those implicit in the historic claims development data on which the projections are based. Additional qualitative judgement is used to assess the extent to which past trends may not apply in the future, for example, to reflect one-off occurrences, changes in external or market factors such as public attitudes to claiming, economic conditions, levels of claims inflation, judicial decisions and legislation, as well as internal factors such as portfolio mix, policy conditions and claims handling procedures in order to arrive at the estimated ultimate cost of claims that represents the likely outcome, from the range of possible outcomes, taking account of all the uncertainties involved.
Movements
The following changes have occurred in the general insurance and health claims provisions during the year:
| 2005 £m |
2004 £m |
|
|---|---|---|
| Carrying amount at 1 January | 12,750 | 12,378 |
| Impact of changes in assumptions | (6) | (30) |
| Claim losses and expenses incurred in the current year | 7,124 | 6,770 |
| Increase/(decrease) in estimated claim losses and expenses incurred in prior years | (372) | (234) |
| Incurred claims losses and expenses | 6,746 | 6,506 |
| Less: | ||
| Payments made on claims incurred in the current year | (3,379) | (3,120) |
| Payments made on claims incurred in prior years | (3,407) | (3,244) |
| Recoveries on claim payments | 263 | 233 |
| Claims payments made in the year, net of recoveries | (6,523) | (6,131) |
| Other movements in the claims provisions | (9) | 27 |
| Changes in claims reserve recognised as an expense | 214 | 402 |
| Gross portfolio transfers, acquisitions and disposals | (153) | 2 |
| Foreign exchange rate movements | 146 | 32 |
| Other gross movements | 8 | (64) |
| Carrying amount at 31 December | 12,965 | 12,750 |
The effect of changes in the main assumptions is given in Note 39.
(d) Loss development tables
The tables that follow present the development of claim payments and the estimated ultimate cost of claims for the accident years 2001 to 2005. The upper half of the tables shows the cumulative amounts paid during successive years related to each accident year. For example, with respect to the accident year 2001, by the end of 2005 £5,966 million had actually been paid in settlement of claims. In addition, as reflected in the lower section of the table, the original estimated ultimate cost of claims of £6,590 million was re-estimated to be £6,754 million at 31 December 2005. This increase from the original estimate is due to the combination of a number of factors, including claims being settled for larger amounts than originally estimated. The original estimates will also be increased or decreased, as more information becomes known about the individual claims and overall claim frequency and severity.
In the year of adoption of IFRS, only five years are required to be disclosed. This will be increased in each succeeding additional year, until ten years of information is included.
The Group aims to maintain strong reserves in respect of its non-life and health business in order to protect against adverse future claim experience and development. As claims develop and the ultimate cost of claims become more certain, the absence of adverse claims experience will then result in a release of reserves from earlier accident years, as shown in the loss development tables below. However, in order to maintain strong reserves, the Group transfers much of this release to current accident year (2005) reserves where the development of claims is less mature and there is much greater uncertainty attaching to the ultimate cost of claims. The release from prior accident year reserves during 2005 is also due to an improvement in the estimated ultimate cost of claims.
Before the effect of reinsurance, the loss development table is:
| Accident Year |
All prior years | 2001 £m |
2002 £m |
2003 £m |
2004 £m |
2005 £m |
Total £m |
|---|---|---|---|---|---|---|---|
| Gross cumulative claim payments | |||||||
| At end of accident year | (3,029) | (2,952) | (2,819) | (2,971) | (3,345) | ||
| One year later | (4,766) | (4,486) | (4,190) | (4,561) | |||
| Two years later | (5,303) | (4,921) | (4,613) | ||||
| Three years later | (5,701) | (5,233) | |||||
| Four years later | (5,966) | ||||||
| Estimate of gross ultimate claims | |||||||
| At end of accident year | 6,590 | 6,250 | 6,385 | 6,891 | 7,106 | ||
| One year later | 6,770 | 6,372 | 6,172 | 6,557 | |||
| Two years later | 6,775 | 6,287 | 6,124 | ||||
| Three years later | 6,798 | 6,257 | |||||
| Four years later | 6,754 | ||||||
| Estimate of ultimate claims | 6,754 | 6,257 | 6,124 | 6,557 | 7,106 | ||
| Cumulative payments | (5,966) | (5,233) | (4,613) | (4,561) | (3,345) | ||
| 3,851 | 788 | 1,024 | 1,511 | 1,996 | 3,761 | 12,931 | |
| Effect of discounting | (22) | (5) | (5) | (5) | (5) | (7) | (49) |
| Present value | 3,829 | 783 | 1,019 | 1,506 | 1,991 | 3,754 | 12,882 |
| Cumulative effect of foreign exchange movements | – | 13 | 18 | 23 | 29 | – | 83 |
| Present value recognised in the balance sheet | 3,829 | 796 | 1,037 | 1,529 | 2,020 | 3,754 | 12,965 |
After the effect of reinsurance, the loss development table is:
| Accident Year |
All prior years £m |
2001 £m |
2002 £m |
2003 £m |
2004 £m |
2005 £m |
Total £m |
|---|---|---|---|---|---|---|---|
| Net cumulative claim payments | |||||||
| At end of accident year | (2,970) | (2,913) | (2,819) | (2,870) | (3,281) | ||
| One year later | (4,624) | (4,369) | (4,158) | (4,378) | |||
| Two years later | (5,088) | (4,779) | (4,565) | ||||
| Three years later | (5,436) | (5,064) | |||||
| Four years later | (5,648) | ||||||
| Estimate of net ultimate claims | |||||||
| At end of accident year | 6,186 | 6,037 | 6,218 | 6,602 | 6,982 | ||
| One year later | 6,333 | 6,038 | 6,093 | 6,266 | |||
| Two years later | 6,321 | 5,997 | 6,037 | ||||
| Three years later | 6,329 | 5,973 | |||||
| Four years later | 6,286 | ||||||
| Estimate of ultimate claims | 6,286 | 5,973 | 6,037 | 6,266 | 6,982 | ||
| Cumulative payments | (5,648) | (5,064) | (4,565) | (4,378) | (3,281) | ||
| 2,417 | 638 | 909 | 1,472 | 1,888 | 3,701 | 11,025 | |
| Effect of discounting | (16) | (4) | (5) | (5) | (5) | (7) | (42) |
| Present value | 2,401 | 634 | 904 | 1,467 | 1,883 | 3,694 | 10,983 |
| Cumulative effect of foreign exchange movements | – | – | 17 | 22 | 29 | – | 68 |
| Present value recognised in the balance sheet | 2,401 | 634 | 921 | 1,489 | 1,912 | 3,694 | 11,051 |
In the loss development tables shown above, the cumulative claim payments and estimates of cumulative claims for each accident year are translated into sterling at the exchange rates that applied at the end of that accident year. The impact of using varying exchange rates is shown at the bottom of each table. Disposals are dealt with by treating all outstanding and IBNR claims of the disposed of entity as “paid” at the date of disposal.
The tables above include information on asbestos and environmental pollution claims provisions from business written before 2001. The claim provisions, net of reinsurance, in respect of this business were £289 million (2004: £224million). These provisions were strengthened during the year by £83 million (2004: £71 million).
(e) Provision for unearned premiums
Movements
The following changes have occurred in the provision for unearned premiums (“UPR”) during the year:
| 2005 £m |
2004 £m |
|
|---|---|---|
| Carrying amount at 1 January | 4,923 | 4,686 |
| Premiums written during the year | 11,017 | 10,562 |
| Less: | ||
| Premiums earned during the year | (10,802) | (10,339) |
| Other movements in UPR | 1 | 9 |
| Changes in UPR recognised as an expense | 216 | 232 |
| Gross portfolio transfers and acquisitions | 174 | 7 |
| Foreign exchange rate movements | 74 | 8 |
| Other movements | (6) | (10) |
| Carrying amount at 31 December | 5,381 | 4,923 |
36 – Reinsurance assets
(a) Carrying amounts
(i) The reinsurance assets at 31 December comprised:
| 2005 £m |
2004 £m |
|
|---|---|---|
| Long-term business | 4,706 | 5,878 |
| General insurance and health | 2,424 | 2,625 |
| Total | 7,130 | 8,503 |
Of the above total, £3,717 million (2004: £4,433 million) is expected to be recovered more than one year after the balance sheet date.
(ii) The following is a summary of the reinsurance assets and related insurance reserves as at 31 December.
| 2005 | 2004 | |||||
|---|---|---|---|---|---|---|
| Gross provisions £m |
Reinsurance assets £m |
Net £m |
Gross provisions £m |
Reinsurance assets £m |
Net £m |
|
| Long-term business provisions | ||||||
| Long-term insurance contracts | (113,555) | 3,816 | (109,739) | (105,678) | 4,304 | (101,374) |
| Participating investment contracts | (47,258) | – | (47,258) | (43,974) | 619 | (43,355) |
| Non-participating investment contracts | (30,051) | 890 | (29,161) | (25,581) | 955 | (24,626) |
| (190,864) | 4,706 | (186,158) | (175,233) | 5,878 | (169,355) | |
| Outstanding claims provisions | (11,246) | 1,859 | (9,387) | (11,457) | 2,140 | (9,317) |
| Provisions for claims incurred but not reported | (2,324) | 82 | (2,242) | (2,023) | 86 | (1,937) |
| (204,434) | 6,647 | (197,787) | (188,713) | 8,104 | (180,609) | |
| Provision for unearned premiums | (5,381) | 482 | (4,899) | (4,923) | 398 | (4,525) |
| Provision arising from liability adequacy tests | (48) | – | (48) | (33) | – | (33) |
| Other technical provisions | (49) | 1 | (48) | (89) | 1 | (88) |
| Totals | (209,912) | 7,130 | (202,782) | (193,758) | 8,503 | (185,255) |
(b) Assumptions
The assumptions used for reinsurance contracts follow those used for insurance contracts.
Reinsurance assets are valued net of an allowance for their recoverability.
(c) Movements
The following movements have occurred in the reinsurance asset during the year:
(i) Long-term business
| 2005 £m |
2004 £m |
|
|---|---|---|
| Carrying amount at 1 January | 5,878 | 4,285 |
| Asset in respect of new business | 183 | 397 |
| Expected change in existing business asset | (128) | (109) |
| Variance between actual and expected experience | 257 | 175 |
| Impact of operating assumption changes | (1,178) | 140 |
| Impact of economic assumption changes | 159 | 70 |
| Other movements | 177 | 145 |
| Change in asset recognised as income | (530) | 818 |
| Portfolio transfers and acquisitions | – | 313 |
| Foreign exchange rate movements | (78) | 32 |
| Effect of adjusting provisions to FRS 27 realistic basis | – | 417 |
| Other movements | (564) | 13 |
| Carrying amount at 31 December | 4,706 | 5,878 |
(ii) General insurance and health
| 2005 £m |
2004 £m |
|
|---|---|---|
| Carrying amount at 1 January | 2,196 | 2,541 |
| Impact of changes in assumptions | – | – |
| Reinsurers' share of claim losses and expenses incurred in current year | 146 | 193 |
| Reinsurers' share of claim losses and expenses incurred in prior years | (10) | (158) |
| Reinsurers' share of incurred claim losses and expenses | 136 | 35 |
| Less: | ||
| Reinsurance recoveries received on claims incurred in current year | (48) | (103) |
| Reinsurance recoveries received on claims incurred in prior years | (251) | (244) |
| Reinsurance recoveries received in the year | (299) | (347) |
| Other movements | 5 | 3 |
| Change in reinsurance asset recognised as income | (158) | (309) |
| Reinsurers' share of portfolio transfers and acquisitions | (93) | – |
| Foreign exchange rate movements | 26 | 1 |
| Other movements | (57) | (37) |
| Carrying amount at 31 December | 1,914 | 2,196 |
(iii) Reinsurers’ share of the provision for unearned premiums (“UPR”)
| 2005 £m |
2004 £m |
|
|---|---|---|
| Carrying amount at 1 January | 398 | 348 |
| Premiums ceded to reinsurers in the year | 706 | 744 |
| Less: | ||
| Reinsurers' share of premiums earned during the year | (612) | (688) |
| Other movements in reinsurers' share of UPR | (1) | – |
| Changes in reinsurance asset recognised as income | 93 | 56 |
| Reinsurers' share of portfolio transfers and acquisitions | (6) | 3 |
| Foreign exchange rate movements | 2 | – |
| Other movements | (5) | (9) |
| Carrying amount at 31 December | 482 | 398 |
37 – Liability for investment contracts
(a) Carrying amount
The liability for investment contracts at 31 December comprised:
| 2005 £m |
2004 £m |
|
|---|---|---|
| Long-term business | ||
| Participating contracts | 47,258 | 43,974 |
| Non-participating contracts at fair value | 29,304 | 24,903 |
| Non-participating contracts at amortised cost | 747 | 678 |
| 30,051 | 25,581 | |
| Total | 77,309 | 69,555 |
(b) Long-term business investment liabilities
Investment contracts are those that do not transfer significant insurance risk from the contract holder to the issuer, and are therefore treated as financial instruments under IFRS.
Many investment contracts contain a discretionary participation feature in which the contract holder has a contractual right to receive additional benefits as a supplement to guaranteed benefits. These are referred to as participating contracts and are measured according to the methodology and group practice for long-term business liabilities as described in note 35. They are not measured at fair value as there is currently no agreed definition of fair valuation for discretionary participation features under IFRS. In the absence of such a definition, it is not possible to provide a range of estimates within which a fair value is likely to fall. The IASB has deferred consideration of participating contracts to Phase II of its insurance contracts project.
For participating business, the discretionary participation feature is recognised separately from the guaranteed element and is classified as a liability, referred to as unallocated distributable surplus. Guarantees on long-term investment products are discussed in note 38.
Investment contracts that do not contain a discretionary participation feature are referred to as non-participating contracts and the liability is measured at either fair value or amortised cost.
Most non-participating investment contracts measured at fair value are unit-linked in structure and the fair value liability is equal to the unit reserve plus additional non-unit reserves if required on a fair value basis. For this business, a deferred acquisition cost asset and deferred income reserve liability are recognised in respect of transaction costs and front-end fees respectively, that relate to the provision of investment management services, and which are amortised on a systematic basis over the contract term. The amount of the related deferred acquisition cost asset is shown in note 25 and the deferred income reserve is shown in note 45.
There is a small volume of annuity certain business for which the liability is measured at amortised cost using the effective interest method.
The fair value of contract liabilities measured at amortised cost is not materially different from the amortised cost liability.
(c) Movements in the year
The following movements have occurred in the year:
(i) Participating investment contracts
| 2005 £m |
2004 £m |
|
|---|---|---|
| Carrying amount at 1 January | 43,974 | 36,974 |
| Reserves in respect of new business | 3,467 | 3,284 |
| Expected change in existing business provisions | (1,720) | (1,340) |
| Variance between actual and expected experience | 2,034 | 1,400 |
| Impact of operating assumption changes | 5 | (18) |
| Impact of economic assumption changes | 513 | 47 |
| Other movements | (153) | 73 |
| Change in liability | 4,146 | 3,446 |
| Portfolio transfers and acquisitions | 4 | 2,030 |
| Foreign exchange rate movements | (856) | 304 |
| Effect of adjusting to FRS 27 realistic basis | – | 1,220 |
| Other movements | (10) | – |
| Carrying amount at 31 December | 47,258 | 43,974 |
The effect of changes in main assumptions is given in note 39.
(ii) Non-participating investment contracts
| 2005 £m |
2004 £m |
|
|---|---|---|
| Carrying amount at 1 January | 25,581 | 20,493 |
| Reserves in respect of new business | 5,247 | 3,872 |
| Expected change in existing business provisions | 936 | 769 |
| Variance between actual and expected experience | (1,732) | 160 |
| Impact of operating assumption changes | 2 | – |
| Impact of economic assumption changes | – | 5 |
| Other movements | 93 | 78 |
| Change in liability | 4,546 | 4,884 |
| Portfolio transfers and acquisitions | – | 194 |
| Foreign exchange rate movements | (76) | 10 |
| Carrying amount at 31 December | 30,051 | 25,581 |
The effect of changes in main assumptions is given in note 39.
38 – Financial guarantees and options
As a normal part of their operating activities, various Group companies have given guarantees and options, including investment return guarantees, in respect of certain long-term insurance and fund management products.
(a) UK Life with-profits business
In the UK, life insurers are required to comply with the FSA’s realistic reporting regime for their with-profit funds for the calculation of FSA liabilities. Under the FSA’s rules, provision for guarantees and options within realistic liabilities must be measured at fair value, using market-consistent stochastic models. A stochastic approach includes measuring the time value of guarantees and options, which represents the additional cost arising from uncertainty surrounding future economic conditions.
The material guarantees and options to which this provision relates are:
(i) Maturity value guarantees – Substantially all of the conventional with-profit business and a significant proportion of unitised with-profit business have minimum maturity values reflecting the sums assured plus declared annual bonus. In addition, the guarantee fund has offered maturity value guarantees on certain unit-linked products.
(ii) No market valuation reduction (MVR) guarantees – For unitised business, there are a number of circumstances where a “no MVR” guarantee is applied, for example on certain policy anniversaries, guaranteeing that no market value reduction will be applied to reflect the difference between the guaranteed value of the policy and the market value of the underlying assets.
(iii) Guaranteed annuity options – The Group’s UK with-profit funds have written individual and group pensions which contain guaranteed annuity rate options (GAOs), where the policyholder has the option to take the benefits from a policy in the form of an annuity based on guaranteed conversion rates. The Group also has exposure to GAOs and similar options on deferred annuities.
(iv) Guaranteed minimum pension – The Group’s UK with-profit funds also have certain policies which contain a guaranteed minimum level of pensions as part of the condition of the original transfer from state benefits to the policy.
In addition, while these do not constitute guarantees, the Group has made promises to certain policyholders, in relation to their mortgage endowments, that payments on these policies will meet the mortgage value, provided investment returns exceed 6% per annum net of tax between 1 January 2000 and maturity and the investment returns on the free reserves are sufficient to meet the top-up costs.
(b) UK Life non-profit business
The Group’s UK non-profit funds are not subject to the requirements of the FSA’s realistic reporting regime and, therefore, liabilities are evaluated by reference to local statutory reserving rules.
(i) Guaranteed annuity options – Similar options to those written in the with-profit fund have been written in relation to non-profit products. Provision for these guarantees does not materially differ from a provision based on a market-consistent stochastic model, and amounts to £44 million at 31 December 2005 (2004: £47 million).
(ii) Guaranteed unit price on certain products – Certain unit-linked pension products linked to long-term life insurance funds provide policyholders with guaranteed benefits at retirement or death. No additional provision is made for this guarantee as the investment management strategy for these funds is designed to ensure that the guarantee can be met from the fund, mitigating the impact of large falls in investment values and interest rates.
(c) Overseas life businesses
In addition to guarantees written within the Group’s UK life businesses, our overseas businesses have also written contracts containing guarantees and options. Details of the significant guarantees and options provided by overseas life businesses are set out below.
(i) France
Guaranteed surrender value and guaranteed minimum bonuses
Aviva France has written a number of contracts with such guarantees. The guaranteed surrender value is the accumulated value of the contract including accrued bonuses. Bonuses are based on accounting income from amortised bond portfolios, where the duration of bond portfolios is set in relation to the expected duration of the policies, plus income and releases from realised gains on equity-type investments. Policy reserves are equal to guaranteed surrender values. Local statutory accounting envisages the establishment of a reserve, “Provision pour Aléas Financiers” (PAF), when accounting income is less than 125% of guaranteed minimum credited returns. A PAF of £16 million was established at the end of 2005.
The most significant of these contracts is the AFER Eurofund which has total liabilities of £22 billion at 31 December 2005 (2004: £21 billion). The guaranteed bonus on this contract equals 65% of the average of the last two years’ declared bonus rates (or 60% of the TME index rates if higher) and was 3.51% for 2005 (2004: 3.69%) compared with an accounting income from the fund of 4.91% (2004: 5.25%).
Non-AFER contracts with guaranteed surrender values had liabilities of £7 billion (2004: £6 billion) at 31 December 2005 and guaranteed annual bonus rates are between 0% and 4.5% on 97.8% of liabilities. There are higher guarantees in force on some older policies including a small number of policies with a guarantee of 8.5%. For non-AFER business, the accounting income return exceeded guaranteed bonus rates in 2005.
Guaranteed death and maturity benefits
In France, the Group has also sold unit-linked policies where the death and/or maturity benefit is guaranteed to be at least equal to the premiums paid. The reserve held in the Group’s consolidated balance sheet at the end of 2005 for this guarantee is £14 million (2004: £17 million). The reserve is calculated on a prudent basis and is in excess of the economic liability. At the end of 2005, total sums at risk for these contracts were £73 million (2004: £182 million) out of total unit-linked funds of £8 billion (2004: £6 billion). The average age of policyholders was approximately 53. It is estimated that the economic liability would increase by £1 million (2004: £2 million) if yields were to decrease by 1% per annum and by £0.1 million (2004: £1 million) if equity markets were to decline by 10% from year end 2005 levels. These figures do not reflect our ability to review the tariff for this option.
(ii) Netherlands
Guaranteed minimum return at maturity
In the Netherlands, it is market practice to guarantee a minimum return at maturity on traditional savings and pensions contracts. Guarantees on older lines of business are 4% per annum while, for business written since 1 September 1999, the guarantee is 3% per annum. On group pensions business, it is often possible to recapture guarantee costs through adjustments to surrender values or to premium rates.
On transition to IFRS, Delta Lloyd changed the reserving basis for most traditional contracts to reflect current market interest rates, for consistency with the reporting of assets at market value. The cost of meeting interest rate guarantees is allowed for directly in the liabilities.
The total liabilities for traditional business at 31 December 2005 are £8 billion (2004: £8 billion) analysed as follows:
| Liabilities 3% guarantee 31 December 2005 £m |
Restated* Liabilities 3% guarantee 31 December 2004 £m |
Liabilities 4% guarantee 31 December 2005 £m |
Restated* Liabilities 4% guarantee 31 December 2004 £m |
|
|---|---|---|---|---|
| *Restated to reflect the move to the active liability basis under IFRS. | ||||
| Individual | 1,210 | 1,098 | 3,112 | 3,169 |
| Group pensions | 412 | 263 | 3,175 | 3,695 |
| Total | 1,622 | 1,361 | 6,287 | 6,864 |
Delta Lloyd has certain unit-linked contracts which provide a guaranteed minimum return at maturity from 4% pa to 2% pa. Provisions consist of unit values plus an additional reserve for the guarantee. The additional provision for the guarantee was £127 million (2004: £118 million). An additional provision of £77 million (2004: £27 million) in respect of investment return guarantees on group segregated fund business is held. It is estimated that the provision would increase by £293 million (2004: £234 million) if yields were to reduce by 1% pa and by £44 million (2004: £49 million) if equity markets were to decline by 10% from year end 2005 levels.
(iii) Ireland
Guaranteed annuity options
Products with similar GAOs to those offered in the UK have been issued in Ireland. The current net of reinsurance provision for such options is £145 million (2004: £125 million). This has been calculated on a deterministic basis, making conservative assumptions for the factors which influence the cost of the guarantee, principally annuitant mortality and long-term interest rates.
These GAOs are “in the money” at current interest rates but the exposure to interest rates under these contracts has been hedged through the use of reinsurance, using derivatives (swaptions). The swaptions effectively guarantee that an interest rate of 5% will be available at the vesting date of these benefits so there is no exposure to a further decrease in interest rates.
“No MVR” guarantees
Certain unitised with-profit policies containing “no MVR” guarantees, similar to those in the UK, have been sold in Ireland.
These guarantees are currently out-of-the-money by £84 million (2004: £79 million). This has been calculated on a deterministic basis as the excess of the current policy surrender value over the discounted value (excluding terminal bonus) of the guarantees. The value of these guarantees is sensitive to the performance of investments held in the with-profit fund. Amounts payable under these guarantees are determined by the bonuses declared on these policies. It is estimated that the guarantees would be out-of-the-money by £74 million (2004: £80 million) if yields were to increase by 1% per annum and by £39 million (2004: £40 million) if equity markets were to decline by 10% from year end 2005 levels.
Return of premium guarantee
In 2005 Hibernian Life has written two tranches of linked bonds with a return of premium guarantee after five or six years. The provision for these at the end of 2005 is £3 million. It is expected that the provision would increase by £4 million if equity markets were to decline by 10% from year end 2005 levels. We would not expect any significant impact on this provision as a result of interest movements.
(iv) Spain and Italy
Guaranteed investment returns and guaranteed surrender values
The Group has also written contracts containing guaranteed investment returns and guaranteed surrender values in both Spain and Italy, where traditional profit-sharing products receive an appropriate share of the investment return, assessed on a book value basis, subject to a guaranteed minimum annual return of up to 6% in Spain and 4% in Italy. Liabilities are generally taken as the face value of the contract plus, if required, an explicit provision for guarantees calculated in accordance with local regulations. At 31 December 2005, total liabilities for the Spanish business were £2 billion (2004: £2 billion) with a further reserve of £20 million (2004: £13 million) for guarantees. Total liabilities for the Italian business were £4 billion (2004: £4 billion), with a further provision of £55 million (2004: £49 million) for guarantees. Liabilities are most sensitive to changes in the level of interest rates. It is estimated that provisions for guarantees would need to increase by £66 million (2004: £56 million) in Spain and £12 million (2004: £14 million) in Italy if interest rates fell by 1% from end 2005 values. Under this sensitivity test, the guarantee provision in Spain is calculated conservatively, assuming a long-term market interest rate of 1.68% and no lapses or premium discontinuances.
(d) In providing these guarantees and options, the Group’s capital position is sensitive to fluctuations in financial variables including foreign currency exchange rates, interest rates, real estate prices and equity prices. Interest rate guaranteed returns, such as those available on guaranteed annuity options (GAOs), are sensitive to interest rates falling below the guaranteed level. Other guarantees, such as maturity value guarantees and guarantees in relation to minimum rates of return, are sensitive to fluctuations in the investment return below the level assumed when the guarantee was made.
39 – Effect of changes in assumptions and estimates during the year
Certain estimates and assumptions used in determining liabilities for insurance and investment contract business were changed from 2004 to 2005, and had the following effect on liabilities and the profit recognised for the year: This disclosure only shows the impact on liabilities and does not allow for offsetting movements in the value of backing assets.
| Assumptions | Effect on profit £m |
|---|---|
| Long-term insurance business | |
| Interest rates | (1,078) |
| Expenses | (12) |
| Persistency rates | 3 |
| Mortality for assurance contracts | 25 |
| Mortality for annuity contracts | (39) |
| Tax and other assumptions | (3) |
| Investment contracts | |
| Interest rates | (11) |
| Expenses | (6) |
| Tax and other assumptions | (2) |
| General insurance and health business | |
| Change in loss ratio assumptions | 2 |
| Change in expense ratio assumptions | 4 |
| Total | (1,117) |
The impact of interest rates for long-term business relates primarily to the UK and the Netherlands. This results from the use of lower valuation interest rates on annuities and other business, reflecting the fall in market interest rates over the year.
The mortality impacts relate primarily to assumption changes in the UK and Ireland.
40 – Tax assets and liabilities
(a) General
Current tax assets and liabilities recoverable or payable in more than one year are £78 million and £339 million (2004: £nil and £435 million) respectively.
(b) Deferred tax
(i) The balances at 31 December comprise:
| 2005 £m |
2004 £m |
|
|---|---|---|
| Deferred tax assets | 1,018 | 908 |
| Deferred tax liabilities | (2,458) | (1,543) |
| Net deferred tax liability | (1,440) | (635) |
(ii) The net deferred tax liability arises on the following items:
| 2005 £m |
2004 £m |
|
|---|---|---|
| Long-term business technical provisions and other insurance items | 1,155 | 991 |
| Deferred acquisition costs | (245) | (210) |
| Unrealised gains/losses on investments | (2,561) | (1,932) |
| Provisions and other timing differences | (223) | (64) |
| Impairment of assets | 1 | – |
| Pensions and other post-retirement obligations | 488 | 275 |
| Unused losses and tax credits | 57 | 318 |
| Other temporary differences | (112) | (13) |
| Net deferred tax liability | (1,440) | (635) |
(iii) The movement in the net deferred tax liability was as follows:
| 2005 £m |
2004 £m |
|
|---|---|---|
| Net liability at 1 January | (635) | (331) |
| Acquisition of subsidiaries | (36) | – |
| Amounts charged to profit (note 12a) | (965) | (271) |
| Amounts credited/(charged) to equity (note 12b) | 262 | (15) |
| Exchange differences | 6 | (4) |
| Other movements | (72) | (14) |
| Net liability at 31 December | (1,440) | (635) |
Deferred tax credited to equity includes amounts in respect of pensions and other post-retirement obligations (£213 million) and unrealised gains on investments (£49 million). The deferred tax charged to the income statement of £965 million represents the remainder of the movements during the year in the items analysed in note 40(b)(ii) above.
Deferred tax assets are recognised for tax loss carry forwards to the extent that realisation of the related tax benefit through future taxable profits is probable. The Group has unrecognised tax losses of £1,035 million (2004: £754 million) to carry forward against future taxable income of the necessary category in the companies concerned. These tax losses will expire as follows; £40 million 5 – 10 years and £35 million 15 – 20 years (2004: £46 million within 5 – 10 years and £12 million within 15 – 20 years). The remaining losses have no expiry date. In addition, the Group has an unrecognised capital loss of £446 million (2004: £376 million). This tax loss can only be offset against future capital gains and has not been recognised in these financial statements. This tax loss has no expiry date.
Deferred tax liabilities of £347 million (2004: £181 million) have not been established for temporary differences associated with investments in subsidiaries and interests in joint ventures and associates (including tax payable on remittance of overseas retained earnings) because the Group can control the timing of the reversal of these differences and it is probable that they will not reverse in the foreseeable future. Such unremitted earnings totalled £1,659 million at 31 December 2005 (2004: £1,185 million).
