Deepening customer relationships Improving customer service Improving processing efficiency Delivering earnings momentum
Continuing to grow a successful business is the best way for Lloyds TSB to create value for all our stakeholders and to contribute to the wider economy. We maintain one of the largest community investment programmes in the UK, supporting our customers and staff, and making a significant contribution to the local communities in which we operate. Since 1997, the Lloyds TSB Foundations have received over £250 million from the Group’s pre-tax profits to distribute to community groups and in 2006 they will receive in excess of £30 million.
Our capital position remains robust. At the end of December 2005, the total capital ratio was 10.9 per cent and the tier 1 capital ratio was 7.9 per cent. During the year, risk-weighted assets increased by 10 per cent to £144.9 billion, reflecting good levels of growth in consumer lending and mortgages and strong growth in our Corporate Markets businesses. We continue to plan for risk-weighted asset growth of mid-to-high single digits over the next few years, and expected profit retentions remain sufficient to support this level of risk-weighted asset growth. We are also significantly improving our balance sheet management and capital efficiency, moving from a ‘buy and hold’ model towards an ‘origination and distribution’ framework. In this context we are planning to initiate a rolling residential mortgage securitisation programme in the second half of 2006.
– Personal loan balances increased by 3 per cent to £11.0 billion.
Profit before tax, excluding customer redress provisions and the strengthening of reserves for mortality, from the Group’s life, pensions and OEICs business increased by 12 per cent to £683 million. The Group’s strategy to improve its returns by focusing on more profitable, less capital intensive, business whilst constantly seeking to improve process and distribution efficiency has led to a 19 per cent increase in new business contribution to £224 million. As a result of this improved capital efficiency and strong sales of pensions and single premium investments, the life and pensions new business margin increased to 29.7 per cent (2004: 28.6 per cent).
Profit before tax, on a comparable basis, from our general insurance operations increased by £37 million, or 22 per cent, to £209 million. Operating income, net of claims, increased by 13 per cent compared with cost growth of 4 per cent. Good progress continues to be made in implementing new platforms for underwriting and claims processes.
• Excellent profit growth. Profit before tax, on a comparable basis, increased by 20 per cent to £1,504 million.
Divisional risk officers provide oversight of risk management activity within each of the Group’s operating divisions. Reporting directly to the group executive directors responsible for the divisions and the chief risk director, their day-to-day contact with business management, business operations and risk initiatives seeks to provide an effective risk oversight mechanism.The direct reporting line to the chief risk director enables the Group to maintain a wide ranging and current perspective on material risks facing the Group and provides a mechanism to share best risk management practice.
• Surplus assets are held primarily in three portfolios; the surplus in the non-profit fund within the Long-Term Fund of Scottish Widows plc, assets in shareholder funds of life assurance companies and an investment portfolio within the general insurance business
The Group seeks to use appropriate accounting policies, consistently applied and supported by reasonable and prudent judgements and estimates. Each reporting entity within the Group has a finance function which is responsible for the production of financial, management and regulatory information. It is the responsibility of Group Finance to produce consolidated information for use internally and to meet external regulatory and statutory reporting requirements. Group Finance requires businesses and reporting entities to follow common processes and reporting standards.
The estimated financial position of the With-Profits Fund of Scottish Widows at 31 December 2005, calculated on a ‘realistic’ basis, is given in the following table, in the form that the information will be reported to the FSA. As a result of the capital support arrangements, it is considered appropriate to also disclose the ‘realistic’ financial position of the Long-Term Fund of Scottish Widows as a whole, which consists of both the With-Profits Fund and the Non-Profit Fund.
With-Profits Long-Term With-Profits Long-Term Fund Fund Fund Fund £m £m £m £m
The model includes a matrix of the correlations between each of the underlying modelled asset types. The correlations used are consistent with long-term historical returns. The most significant non-economic assumptions included in the model are management actions (in respect of investment policy and bonus rates), guaranteed annuity option take up rates and assumptions regarding persistency (both of which are based on recent actual experience), and assumptions regarding mortality (which are based on recent actual experience and industry tables).
Each resolution considered at the annual general meeting in 2005 was decided on a poll. Votes representing some 50 per cent of the total number of shares in issue were cast and each resolution was passed by a substantial majority. Details of the poll results are available from the company secretary.
The risk oversight committee comprises Mr van den Bergh (chairman), Mr Brown and Sir Julian Horn-Smith. All non-executive directors are also invited to attend meetings if they wish. The risk oversight committee’s duties include overseeing the development, implementation and maintenance of the Group’s overall risk governance framework, risk appetite, risk strategy and policies, to ensure they are in line with emerging regulatory, corporate governance and industry best practice. The committee also oversees the Group’s risk exposures; facilitates the involvement of non-executive directors in risk issues and aids their understanding of these issues; oversees adherence to Group risk policies and standards and considers any material amendments to them; and reviews the work of the Group Risk division. The risk oversight committee reports to the board on its deliberations after each meeting.
As a result of this review, the remuneration committee has decided to: • Adopt the FTSE 20 as the comparator group used to benchmark the overall competitiveness of our remuneration package, providing a more realistic comparison in terms of company size and a key market for talent. Measured by market capitalisation, the Group is currently positioned around the median of this comparator group.
Column (c) is the transfer value of the deferred pension in column (a) calculated as at 31 December 2005 based on factors supplied by the actuary of the relevant Lloyds TSB Group pension scheme in accordance with actuarial guidance note GN11. The underlying bases used to arrive at the factors have not changed during the year.
* These share options lapsed when Mr Ayliffe left the board.
Interest and similar income 12,589 10,707 Interest and similar expense (6,918) (5,597)
Comparatives for financial instruments The Group has chosen not to restate comparatives for IAS 32 and IAS 39, but to reflect the impact of these standards and designation of financial assets through adjustments to shareholders’ equity as at 1 January 2005. At this date the Group has designated various financial assets as at fair value through profit or loss or as available-for-sale. The Group has applied UK GAAP to financial instruments and hedging transactions for its 2004 comparatives.
Further information on the principal differences between IFRS and FRS 27 and the Group’s previous accounting policies and the effect of their adoption on the Group’s previously published information is given in note 54.
Assets are reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount may not be recoverable. In the event that an asset’s carrying amount is determined to be greater than its recoverable amount it is written down immediately.
The rate used to discount the resulting cash flows is equivalent to the market yield at the balance sheet date on high quality bonds with a similar duration to the schemes’ liabilities. This rate is potentially subject to significant variation. At 31 December 2005 the discount rate used was 4.8 per cent; a reduction of 0.2 per cent would result in an increase in the net deficit of approximately £650 million and in the net cost of approximately £15 million, while an increase of 0.2 per cent would reduce the net deficit by approximately £600 million and the net cost by approximately £15 million.
Changes in life insurance policyholder liabilities: – Reinsurers’ share 33 (1)
Audit and audit related fees 10.4 12.8 Tax advisory 0.6 0.8 Other non-audit fees – Due diligence 0.3 0.9
a Analysis of charge for the year 2005 2004 £m £m
Foreign tax: Current tax on profit for the year 78 118 Adjustments in respect of prior years (8) (2)
Trading Exchange rate contracts: Spot, forwards and futures 145,591 1,515 1,345
Lending to banks 2,510 2,483 Money market placements with banks 29,146 29,366
From 1 January 2005 (upon the implementation of IAS 32 and IAS 39), the Group is required to disclose its available-for-sale financial assets separately on the face of the balance sheet. Details of the balance sheet carrying value of these assets held at 31 December 2005 are: £m
These comprise capitalised software enhancements. Amounts are amortised over periods of up to five years, being their estimated useful lives, using the straight-line method. Other intangible assets are reviewed for impairment whenever events or any changes in circumstances indicate that the carrying amount may not be recoverable. In the event that an asset’s carrying amount is determined to be greater than its recoverable amount, it is written down immediately.
Change in unallocated surplus recognised in the income statement 92 £m £m
Exchange and other adjustments (2) 4 Income statement charge (note 13) 491 269
The weighted average share price at the time that the options were exercised during 2005 was 490.15 pence (2004: 423.80 pence). The weighted average remaining contractual life of options outstanding at the end of the year was 7.4 years (2004: 7.7 years).
Net assets acquired: Other assets 8 – Tangible fixed assets 8 – Other liabilities (3) –
Restated consolidated balance sheet (reconciliation of equity) at 1 January 2005 (includes effects of IAS 32, IAS 39 and IFRS 4)
Intangible assets 28 – – – – – – – – – 28
The key management personnel of the Group and parent company are the same. The relevant disclosures are given in note 49 to the consolidated financial statements.
Investment in subsidiaries 10,753 – (5,164) – – 5,589 Loans to subsidiaries 1,723 – – – – 1,723 Deferred tax asset – – – – 6 6
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