The impact of IFRS, and in particular the increased use of fair values, has resulted in greater earnings volatility. In order to provide a more comparable representation of business performance this volatility has been separately analysed for the Group’s insurance and banking businesses. In addition, other IFRS related adjustments applied with effect from 1 January 2005, for which comparatives are not required to be restated, the profit (loss) on sale and closure of businesses and the impact on the Group’s results of businesses sold in 2004 have been separately analysed in the Group’s results. A reconciliation of this ‘comparable’ basis of presentation to the statutory profit before tax is shown on this page.
In terms of delivering the Group strategy, we have established better sales momentum and stronger levels of customer acquisition in our banking businesses and delivered good sales growth in our life assurance business over the course of the year. Our market shares are either stable, or growing, in most of our key product lines. Most importantly, our customer relationship programmes are being effectively implemented and we are delivering higher revenues per customer in our retail and corporate banking businesses.
We have also invested in the development of new pensions and life platforms, and continue to develop our distribution capabilities. We remain well placed to benefit from the anticipated growth in savings and investment product sales over the coming years. The new life platform has already supported the launch of the new partnership with Virgin Money.
Our General Insurance business continued its successful development, delivering a 22 per cent growth in profits, supported by improvements to both the claims and combined ratios. The results reflect continued successful cross-sales to franchise customers in both retail and business banking as well as continued investment in our service performance, direct channel business and claims processing.
By adopting these corporate responsibility policies we aim to provide a better return for our shareholders.
Whilst the Group has demonstrated strong cost control during 2005, we have also identified a number of key initiatives which collectively have the potential to significantly improve our cost:income ratio over the next few years whilst also improving operational efficiency and speed of execution. These self-funding initiatives will capture significant group wide synergies and fall broadly into three categories: • improving our operational efficiency and management accountabilities through organisational redesign and process re-engineering; • consolidating similar back-office operations and achieving cost reductions through standardising the way we operate and manage back-office processes across the Group; and
Following the embedding of the risk governance framework and the repositioning of specialist risk functions closer to the business in 2004, the focus for 2005 has been the development of a new risk framework which clearly aligns our risk taking to the objectives and priorities of Lloyds TSB Group and facilitates more effective decision making. The Group’s ability to take risks which are well understood, consistent with our strategy and plans and appropriately remunerated, is a key driver of shareholder return.
Divisional risk functions use the standard language when reporting risks centrally, to enable risk aggregation, and when assessing risk levels of new products, change initiatives or business plans. Divisional risk committees monitor their risk levels against their risk appetite seeking to ensure effective mitigating action is being taken where appropriate. Divisional risk reports are reviewed by divisional executive committees to ensure divisional senior management are satisfied with the overall risk profile, risk accountabilities and progress on any necessary mitigating actions.
The Group includes product and service risk within the wider definition of strategy risk and the two categories are described in further detail below.
The risk of reductions in earnings and/or value, through financial or reputational loss, from the inherent characteristics, management or distribution of products or services, or from failure to meet or better customer expectations and competitor offerings.
The Group’s policy is to maintain good corporate governance arrangements, as it believes this is consistent with the Group’s objective of maximising shareholder value over time. This includes the means by which risks are effectively managed in order to enable successful implementation of the Group’s strategy. The Group’s high level governance arrangements are described on pages 43 to 45. These arrangements reflect the Group’s policy which is that the board adheres to the principles contained in the Combined Code on corporate governance, issued by the Financial Reporting Council, when determining and reviewing its governance arrangements. The directors review the application of the principles and provisions of the Code annually.
In January 2006, it was announced that Mr van den Bergh had decided to retire as chairman of the Group at the annual general meeting in May. Sir Victor Blank will become deputy chairman on 1 March and, subject to shareholder approval of his election as a director at the annual general meeting, will succeed Mr van den Bergh as chairman.
None of the other directors at 31 December 2005 had options to acquire shares in Lloyds TSB Group plc or its subsidiaries.
At each balance sheet date liability adequacy tests are performed to ensure the adequacy of insurance and participating investment contract liabilities. In performing these tests current best estimates of future contractual cash flows and claims handling and administration expenses, as well as investment income from the assets backing such liabilities, are used. Any deficiency is immediately charged to profit or loss by establishing a provision for losses arising from liability adequacy tests.
Other income (net of fee and commission expense) 1,605 571 13,288 13,859 1,628 (37) – 17,055
Cost: Exchange and other adjustments 2 (1) (46) (45) Adjustments on acquisition and disposal of businesses (10) (13) – (23)
Insurance contract liabilities, substantially all of which relate to business written in the United Kingdom, are comprised as follows: Gross Reinsurance Net Gross Reinsurance Net £m £m £m £m £m £m
The movements in non-life insurance contract liabilities and reinsurance assets over the year have been as follows: Gross Reinsurance Net
These securities constitute limited partnership interests in Lloyds TSB Capital 1 L.P., a Jersey limited partnership in which Lloyds TSB (General Partner) Limited, a wholly owned subsidiary, is the general partner. Non-cumulative income distributions accrue at a fixed rate of 7.375 per cent per annum up to 7 February 2012; thereafter they will accrue at a rate of 233 basis points above EURIBOR, to be set annually.
b Analysis of cash and cash equivalents as shown in the balance sheet 2005 2004 £m £m
Included within cash and cash equivalents at 31 December 2005 is £8,860 million (2004: £7,920 million) held within the Group’s life funds, which is not immediately available for use in the business. In addition, mandatory reserve deposits of £288 million (2004: £245 million) are also held with local central banks in accordance with statutory requirements; these deposits are not available to finance the Group’s day-to-day operations.
Accounting changes effective from 1 January 2004 and which impact 2004 comparatives: Consolidation (IAS 27 and SIC-12)
Accruals and deferred income 3,206 – – – – – – – – (3,206) –
The country of registration/incorporation is also the principal area of operation for each of the above subsidiaries except as follows: Lloyds TSB Bank plc operates principally in the UK but also through branches in Belgium, Dubai, Ecuador, Gibraltar, Hong Kong, Japan, Luxembourg, Malaysia, Monaco, Netherlands, Paraguay, Singapore, Spain, Switzerland, Uruguay and the USA.