• Good income growth. Income, net of insurance claims, increased by 12 per cent, exceeding cost growth of 6 per cent.**
• Continued strong growth in Business Banking with a 26 per cent growth in profit before tax. Lloyds TSB has retained its leading position as the bank of choice for start-up businesses.
UK Retail Banking - Before provisions for customer redress 1,549 1,470 - Provisions for customer redress – (150)
Report of the independent auditors on the consolidated financial statements 62
Report of the independent auditors on the parent company financial statements 121
Maarten van den Bergh retired as chairman of Lloyds TSB Group at the end of the last annual general meeting, having served the Group so well over five years. I want to pay tribute to Maarten’s tremendous contribution and to thank him on behalf of the board, the staff and the shareholders.
Total income, net of insurance claims 1,596 1,469 Operating expenses (646) (607) Insurance grossing adjustment 23 18
Future mortality, morbidity, lapse and paid-up rate assumptions are reviewed each year and are based on an analysis of past experience and on management’s view of future experience. These assumptions are intended to represent a best estimate of future experience as at 31 December 2006.
We believe that corporate responsibility, built around the creation of employee motivation, customer satisfaction and brand loyalty, has a major part to play in supporting our business strategy. Our commitment to corporate responsibility helps promote trust in the Lloyds TSB brand and reinforces customer loyalty and advocacy. Lloyds TSB is rooted in local communities throughout the UK and we take our responsibilities to those communities very seriously. By investing in the communities where we operate we not only create economic value but also make a positive social contribution. Through the Lloyds TSB Foundations, one per cent of the Group’s pre-tax profits, averaged over three years, is distributed to local charities.
Business risk functions report to their respective managing director, who in turn reports to the group executive directors
• internal factors (i.e. resource capability and availability, customer treatment, service level agreements, products and funding and the risk appetite of other risk categories).
3 Averages are calculated on a monthly basis from the consolidated financial data of Lloyds TSB Group.
Sir Julian Horn-Smith� �†+ Joined the board in 2005. Held a number of senior and general management appointments in Vodafone from 1984 to 2006 including a directorship of that company from 1996 and deputy chief executive officer from 2005. Previously held positions in Rediffusion from 1972 to 1978, Philips from 1978 to 1982 and Mars GB from 1982 to 1984. Chairman of The Sage Group. Aged 58.
As a consequence of the proposed changes in policy, the composition of the remuneration package in 2007 will be as follows: In 2007, approximately 69 per cent (72 per cent for the group chief executive) of an executive director’s potential direct remuneration (salary, annual bonus, long-term incentives and pension) will be performance related, based upon maximum opportunity. The value of long-term incentives is the expected value calculated by using a ‘binomial’ model, which is a widely accepted methodology for this purpose.
Other share plan T A Dial 242,825 242,825 (see page 61) 1/6/2008 30/11/2008 h a) Sharesave.
Effects of exchange rate changes on cash and cash equivalents (148) (20)
The consolidated financial statements have been prepared in accordance with International Financial Reporting Standards (‘IFRS’) as adopted by the European Union (‘EU’). IFRS comprises accounting standards prefixed IFRS issued by the International Accounting Standards Board (‘IASB’) and those prefixed IAS issued by the IASB’s predecessor body as well as interpretations issued by the International Financial Reporting Interpretations Committee and its predecessor body. The EU endorsed version of IAS 39 ‘Financial Instruments: Recognition and Measurement’ relaxes some of the hedge accounting requirements; the Group has not taken advantage of this relaxation.
(iii) Amendment to IAS 39 ‘Financial Instruments: Recognition and Measurement’ and IFRS 4 ‘Insurance Contracts – Financial Guarantee Contracts’. Since 1 January 2006, all of the Group’s financial guarantee contracts have been accounted for as financial instruments. This change has had no material effect upon the Group’s financial statements.
All of the Group’s non-participating investment contracts are unit-linked. In accordance with industry practice, these contracts are accounted for as financial liabilities whose value is contractually linked to the fair values of financial assets within the Group’s unitised investment funds. The value of the unit-linked financial liabilities is determined using current unit prices multiplied by the number of units attributed to the contract holders at the balance sheet date. Their value is never less than the amount payable on surrender, discounted for the required notice period where applicable.
The preparation of financial statements requires management to make judgements, estimates and assumptions that affect the reported amounts of assets, liabilities, income and expenses. Due to the inherent uncertainty in making estimates, actual results reported in future periods may be based upon amounts which differ from those estimates. Estimates, judgements and assumptions are continually evaluated and are based on historical experience and other factors, including expectations of future events that are believed to be reasonable under the circumstances. Revisions to accounting estimates are recognised in the period in which the estimate is revised and in any future periods affected. The accounting policies deemed critical to the Group’s results and financial position, based upon materiality and significant judgements and estimates, are discussed below.
There are two components of the Group’s loan impairment provisions: individual and collective. All impaired loans which exceed a certain threshold, principally within the Group’s corporate banking business, are individually assessed for impairment having regard to expected future cash flows including those that could arise from the realisation of security. The determination of these provisions often requires the exercise of considerable judgement by management involving matters such as local economic conditions and the resulting trading performance of the customer and the value of the security held, for which there may not be a readily accessible market. The actual amount of the future cash flows and their timing may differ significantly from the assumptions made for the purposes of determining the impairment provision and consequently these provisions can be subject to variation as time progresses and the circumstances of the customer become clearer.
* Reinsurance balances receivable are reported within other assets (note 26).
New business 2,316 – 2,316 Changes in existing business 215 11 226 33 Unallocated surplus within insurance businesses The movement in the unallocated surplus within long-term insurance business over the year can be analysed as follows: £m £m
Settlement balances 475 779 Unitholders’ interest in Open Ended Investment Companies 4,583 3,296 Other creditors and accruals 5,927 5,768 35 Retirement benefit obligations Charge to the income statement: 2006 2005 £m £m
The expected return on plan assets was determined by considering the expected returns available on the assets underlying the current investment policy. Expected yields on fixed interest investments are based on gross redemption yields at the balance sheet date. Expected returns on equity and property investments reflect long-term real rates of return experienced in the respective markets.
Present value of unfunded obligations 110 112 Unrecognised actuarial losses (10) (11)
The Group also carries provisions in respect of its obligations relating to UIC Insurance Company Limited (‘UIC’), which is in provisional liquidation. The Group has indemnified a third party against losses in the event that UIC does not honour its obligations under a reinsurance contract, which is subject to asbestosis and pollution claims in the US. The ultimate cost of settling the Group’s exposure in respect of the insurance business of UIC and the timing remains uncertain. The provision held represents management’s current best estimate of the cost after having regard to the financial condition of UIC and actuarial estimates of future claims.
Expected volatility is a measure of the amount by which the Group’s shares are expected to fluctuate during the life of an option. The expected volatility is estimated based on the historical volatility of the closing daily share price over the most recent period that is commensurate with the expected life of the option. The historical volatility is compared to the implied volatility generated from market traded options in the Group’s shares to assess the reasonableness of the historical volatility and adjustments made where appropriate.
Deposits placed by key management personnel attracted interest rates of up to 5.2 per cent (2005: 4.5 per cent).