Our results in 2004 reflect a higher quality of earnings. The five Latin American businesses that we sold had impacted adversely on our performance, incurring losses amounting to more than £200 million over the five years to 2003, equivalent to a negative return on equity of some 28 per cent. In addition, the earnings lost from the strategic sale of our businesses in New Zealand and Brazil were replaced within a year, as the Group’s organic growth strategy continued to deliver.
Goodwill The current Group policy of amortising goodwill arising on acquisitions after 1 January 1998, with the exception of the goodwill which arose on the acquisition of Scottish Widows, will cease. Instead, all goodwill will be subject to impairment testing annually, or more frequently if events or circumstances indicate that it might be impaired. This change in policy will result in increased volatility of future earnings in the event that impairment losses are identified.
Insurance Under IFRS, investment contracts without discretionary participation features (DPF) do not meet the definition of an insurance contract and are accounted for as financial instruments. The Group’s life assurance business will continue to account for insurance contracts and DPF investment contracts as it has under UK GAAP. The significant IFRS impacts are the removal of that portion of the UK GAAP embedded value which represents the value of in-force business relating to investment contracts, the recognition of an asset for deferred acquisition costs (DAC) in connection with writing new investment contract business and the deferral of fee income (as discussed above), which for the life assurance business represents up-front income in respect of investment contracts sold. The DAC asset is amortised over the lives of the related contracts. For the Group’s general insurance operation, claims equalisation provisions are no longer permitted under IFRS. The majority of the required adjustments will be made against retained earnings at
Leasing IFRS requires income from finance leases to be credited to the income statement so as to give a constant pre-tax rate of return on the net cash invested; UK GAAP requires a constant post-tax rate of return. In addition, IFRS requires depreciation on operating lease assets to be charged on the same basis as for tangible fixed assets which for the Group is a straight-line basis. Under UK GAAP depreciation is charged so as to give a constant rate of return on the leased asset.
Directors Biographical details of directors are shown on pages 40 and 41. Particulars of their emoluments and interests in shares in the Company are given on pages 47 to 57.
This is a report made by the board of Lloyds TSB Group plc, on recommendation of the remuneration committee. The role of the remuneration committee is shown on page 44.
Service agreements Lloyds TSB Group’s policy is for executive directors to have service agreements with notice periods of no more than one year. All current executive directors are entitled to receive 12 months’ notice from the Company, but would be required to give six months’ notice if they wished to leave. As the chairman and deputy chairman are regarded as employees, they are entitled to receive up to eight weeks’ notice.
Notice to be given by the Company Salary from 1 January 2005 Date of service agreement
The cash column under ‘other benefits’ includes flexible benefits payments (4 per cent of basic salary), the housing allowance and tax planning allowance for Mr Daniels, pension contributions for those in the defined contribution scheme (Mrs Weir and Mr Tate) and an additional payment in respect of the contribution to the separate fund relating to Mr Fairey’s pension. The separate fund, which was mentioned in previous annual reports, was established to cover pension obligations of those who joined the Group after 1 June 1989 and who are subject to the Inland Revenue cap relating to pensions, introduced by the Finance Act 1989. The amount shown for Mr Targett relates primarily to his relocation expenses. The non cash column includes amounts relating to the use of a company car, private medical insurance and life insurance cover. It also includes the value of any matching shares which are received under the terms of shareplan, through which employees have the opportunity to purchase shares up to a maximum of £125 per month and receive matching shares on a one for one basis up to a maximum value of £30 per month, rounded down to the nearest whole share.
To the members of Lloyds TSB Group plc We have audited the financial statements which comprise the consolidated profit and loss account, the consolidated balance sheet, the Company balance sheet, the consolidated cash flow statement, the statement of total recognised gains and losses and the related notes which have been prepared under the accounting policies set out on pages 65 to 68. We have also audited the disclosures required by Part 3 of Schedule 7A to the Companies Act 1985 contained in the directors’ remuneration report under the headings directors’ emoluments, directors’ pensions and directors’ interests in share options (‘the auditable part’).
Interest receivable: Interest receivable and similar income arising from debt securities 423 389 63 452 Other interest receivable and similar income 9,972 8,484 1,213 9,697
Returns on investments and servicing of finance: – Dividends paid to equity minority interests 49d (24) (14) – Payments made to non-equity minority interests 49d (44) (81) – Interest paid on subordinated liabilities (loan capital) (606) (600) Net cash outflow from returns on investments and servicing of finance (674) (695)
Provisions for bad and doubtful debts (673) – – – (193) – (866) – (866) Amounts written off fixed asset investments – – – – (52) – (52) – (52) Loss on sale of businesses – – – – (15) – (15) – (15)
The trading results of the businesses sold in 2004 were not material to the Group. Discontinued operations in 2003 comprised the businesses in New Zealand, Brazil and France sold in that year.
Balances arising from derivatives used for trading purposes (note 47) 2,015 2,489 Balances arising from derivatives used for hedging purposes 254 475 Settlement balances 40 54 Other assets 911 926 28 Prepayments and accrued income 2004 2003 £m £m
This analysis details the components of embedded value income for 2004 and the comparative period. These numbers are not comparable in all respects to the analysis of life and pensions profitability given on page 16, in the operating and financial review, since that analysis includes certain items which are accounted for outside of the embedded value calculations. In addition, comparatives in the operating and financial review have been restated to reflect the impact of the introduction, in 2004, of the management of the Group’s distribution channels as profit centres.
Liabilities Denominated in sterling 171,587 153,769 Denominated in other currencies 53,492 48,165
f) At the callable date the coupon on these Notes will be reset by reference to the applicable five year benchmark gilt rate.
In addition, during the year the directors approved the allotment at par of 400 6 per cent non-cumulative redeemable preference shares of 25p each. The shares, which are redeemable at the option of the Company at any time, carry the rights to a fixed rate non-cumulative preferential dividend at a rate of 6 per cent per annum; no dividend shall be payable in the event that the directors determine that prudent capital ratios would not be maintained if the dividend were paid. Upon winding up, the shares rank equally with any other preference shares issued by the Company.
During 2003 one officer purchased a car from the Group for a total consideration of £27,000.
The latest full valuations of these schemes were carried out as at 30 June 2002; these have been updated to 31 December 2004 by qualified independent actuaries. The last full valuations of other group schemes were carried out on a number of different dates; these have been updated to 31 December 2004 by qualified independent actuaries or, in the case of the Scottish Widows Retirement Benefits Scheme, by a qualified actuary employed by Scottish Widows.
Market value of assets 11,664 10,603 Present value of scheme liabilities (14,851) (13,658)
The notional principal amount does not represent the Group’s real exposure to credit risk, which is limited to the current cost of replacing contracts at current market rates should the counterparties default.
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