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AnnuAl RepoRt And Accounts

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									AnnuAl RepoRt And Accounts
             For the year ended 31 December 2009
LV= by numbers

                   Underlying profit              Capital resources



     +
         £44.2m                           £0.9bn

                 Life – new business              General insurance
         Annual premium equivalent                premium income




         £92.2m                        £811.1m
                      Number of
           members and customers       Overall customer satisfaction




                3.8m                              96%
                                  Annual report and accounts 2009

                          2    LV= by numbers




                                                                        01 Business overview
                          5    Chairman’s statement

                          8    Chief Executive’s statement
 Investment performance




15.4%                     13   Business review




                                                                        02 Performance
Funds under management
                          19   Life business




                                                                        03 Our businesses
                          22   General insurance

                          26   Asset management



£7.7bn
                          29   Supporting our businesses




                                                                        04 Group support and CSR
                          36   Corporate social responsibility
    Number of employees




   3,993                  41   Corporate governance
                                                                        05 Corporate governance

                          48   Directors’ report

                          52   Directors’ report on remuneration

                          56   Jargon buster




                          59   The numbers
                                                                        06 The numbers




                                                                    3
                    I love LV= car insurance
                    because I get up to 75%
                    no claims discount.




                                  We look after

                                  1.6m     vehicles




Business overview
Chairman’s statement                                         Annual report and accounts 2009




                                                                                                       01 Business overview
                                                                                                       02 Performance
Dennis Holt
                                     Our markets
Chairman                             By the end of 2009 the sense of crisis within global
                                     economies in general, and financial services in particular,
                                     had eased somewhat, although conditions still remain
                                     fragile. Unemployment is high, consumer confidence is
                                     uncertain, and stock markets rightly worry about the risks
                                     of a ‘double dip’ recession. All of these issues affect the
                                     markets in which LV= operates.




                                                                                                       03 Our businesses
                                     At the same time the competitive landscape has changed
                                     after the carnage of the past two years. Well known
                                     financial services brands have disappeared from the High
                                     Street, while other major providers have been seriously
                                     weakened. Consumer choice is significantly reduced as
                                     a result.

                                     Whilst Governments and businesses strive to embed a
                                     recovery there is a recognition that we should not return
                                     to the excesses of the past decade or so, when rampant
                                     consumption was fuelled by easy credit with insufficient




                                                                                                       04 Group support and CSR
                                     regard for the longer term. At a personal level we are
                                     more aware of the need to protect the things that we
                                     value – family, health, financial security. At a corporate
                                     level there is a renewed focus on effective risk
                                     management and disciplined growth.

                                     LV= entered this turbulent period with a strong capital
                                     base, a prudent approach to balance sheet quality and
                                     a clear strategic agenda. We emerge in a position of
                                     relative strength, with the skills and resources to deliver
                                     sustainable value to our members.                                 05 Corporate governance




  Group strategy
                                                                                                       06 The numbers




  To create value for our members,
  for the benefit of our members.




                                                                                                   5
    Chairman’s statement
         We have a clear strategy and significant
         financial strength, so we are well-placed
         to continue the growth and improvements
         of recent years.



                                       Our performance
                                       As a friendly society owned by our members, our commitment
                                       is to grow value for you. We measure this in two key ways:
                                       n   Firstly, we commit to growing our with-profits fund
                                           in line with our internal asset allocation benchmark.
                                           2009 saw an excellent outcome in volatile markets,
                                           outperforming the benchmark by 2%. Across short,
                                           medium and long term measures (1, 3, 5 and 10
                                           years) LV= has outperformed the with-profits
                                           benchmark, delivering tangible value to policyholders.
                                       n   Secondly, we aim to grow Enterprise Value
                                           (our internal estimate of an equivalent to market
                                           value for a quoted company). At a group level this fell
                                           by 14% in 2009. This reflects the cost of protection
                                           provided to members’ investment returns, staff pensions
                                           commitments and reserve strengthening to recognise
                                           more volatile market conditions.


                                       Our members
                                       We were pleased to welcome 55,765 new members
                                       to the group during 2009, bringing the total number of
                                       members to 1.09m as at 31 December 2009. We also
                                       continued to refresh our Member Panel throughout the
                                       year, and membership of the LV= online community grew
                                       by 72% to around 6,300 people.



    How we measure
    our performance
    against strategy
     We measure the relative returns
     on our with-profits fund and
     the growth in Enterprise Value.


                                                     The LV= online community




6
                                                                                      Annual report and accounts 2009




                                                                                                                               01 Business overview
                                                                                                                               02 Performance
Our people                                                     The future
As the business has grown, both organically and                Our life business now has well-established positions
through acquisitions, staff numbers have increased to          as a leading provider in the protection and retirement
around 4,000 in locations throughout the UK. We invest         markets, with award-winning products and strong customer
significantly to support their development and skills,         satisfaction ratings. Our general insurance business
and are determined to maintain our strong benchmarking         is now a significant player delivering profitable growth,
positions in external surveys of customer satisfaction and     having fully integrated the Highway Insurance business
employee engagement. On your behalf, I thank our people        that we acquired in 2008. And our asset management




                                                                                                                               03 Our businesses
for their commitment to your interests.                        business is growing third party funds under management
                                                               as well as delivering strong returns to our own members.
4k
                 3,824      3,993
3k


2k    2,151
     2007       2008      2009         Number of employees
 0




                                                                                                                               04 Group support and CSR
Your board
There has been significant debate in the UK and
elsewhere on the need to strengthen corporate governance
standards. LV= subscribes fully to both the spirit and the
substance of these developments, as described elsewhere        Our strategy remains consistent and enduring, to deliver
in this Report.                                                value to you, our members, by being professional,
                                                               disciplined and above all focused on the needs and
Steven Daniels retired from his role as an executive
                                                               expectations of our customers.
director on the board on 30 September 2009 after
13 years’ service. I would like to record our appreciation
                                                                                                                               05 Corporate governance
for his significant contribution to LV=.
                                                                                                                               06 The numbers




              Steven Daniels, Group Chief Investment Officer




                                                                                                                           7
    Chief Executive’s statement




                                              Against the backdrop of a turbulent year for financial
    Mike Rogers                               markets and the real economy LV= performed creditably
    Group Chief Executive                     and made good strategic progress. Our group underlying
                                              profit rose by £41.9m to £44.2m driven by a strong
                                              turnaround in general insurance. Group loss before tax was
                                              £91.4m (2008: loss of £258.3m) reflecting investment
                                              fluctuations, the impact of protecting members’ asset
                                              share with-profits returns and various basis changes.

                                          m
                                         50


                                                            £44.2m
                                         40


                                         30


                                         20


                                         10


                                                 £2.3m                            Group underlying profit
                                          0
                                                 2008        2009




                                                 2008        2009
                                          0
                                                                                   Group loss before tax
                                                           -£91.4m
                                        100


                                        150


                                        200


                                        250    -£258.3m


                                        300
                                          m


      our purpose
      We are here to help people look
      after what they love in life.




8
                                                                                  Annual report and accounts 2009




                                                                                                                            01 Business overview
                                                          We will continue to offer effective
                                                          insurance, protection, retirement
                                                          and investment solutions.




                                                                                                                            02 Performance
Strategy                                                   2009 Performance
Our goal remains unchanged – to grow member value          Overall investment returns for with-profits members were
for the benefit of our members. We achieve our goal        excellent in absolute and relative terms with fund growth
by helping people to look after what they love in life     of 15.4%, 2% over market benchmark.
through our insurance, protection and investment
                                                           In general insurance we completed the integration of
solutions. We are careful to choose markets to compete
                                                           Highway and moved into profit 12 months ahead of
in that are consistent with our goal and where we have
                                                           plan. Excellent sales growth from all our brands and a
the scale, distribution reach and skills to deliver
                                                           strong underwriting performance from LV= was offset by




                                                                                                                            03 Our businesses
competitive advantage.
                                                           suppressed investment returns and the need to strengthen
                                                           Highway’s reserves post acquisition. Our general insurance
                                                           business benefits members directly through shared costs,
                                                           an ongoing return on debt funding provided by the Society,
                                                           and the prospect of future capital growth and dividend
                                                           payments. We now have over 2.5m policies in force and
                                                           we won various awards in 2009 including a Consumer
                                                           Intelligence Gold award and a Moneywise ‘most trusted’
                                                           award for home insurance.




                                                                                                                            04 Group support and CSR
Over the last four years we have reviewed our business
portfolio in line with our strategy leading us to:
n   Close our banking and worksite marketing operations
n   Sell our in-house IFA business
n   Close our face-to-face direct sales force                                                                               05 Corporate governance
n   Invest in our general insurance operations
n   Grow our life business in specialist protection
    and retirement opportunities
n   Upgrade our investment management platform and
    develop a third party funds management franchise.
                                                                                                                            06 The numbers




                                                                                                                        9
     Chief Executive’s statement
              2009 was a year of considerable progress,
              with significant achievements across all
              our business areas.




     In life underlying sales grew strongly in a difficult market    In asset management, as well as turning in good
     and operating earnings held up well. We consolidated our        investment performance our retail funds are now available
     position as a market leader in areas of specialist protection   on 13 leading platforms, wraps and bonds. More than half
     and retirement such as income protection and enhanced           of our retail funds ranked in the first or second quartile
     annuities. Of particular note was the winning of a number       of their competitor sectors during 2009. We have also
     of new partnership deals to broaden our distribution reach,     received at least ‘A’ ratings from Standard & Poors for
     including ASDA for our popular over 50s life insurance          9 out of our 15 retail funds.
     plan. Our determination to continue to seek innovative
                                                                     The orderly run-down of our banking operations progressed
     development of with-profits products saw the launch of our
                                                                     well and within the provisions established at the time of
     Flexible Growth Bond with several million pounds invested
                                                                     our closure decision. We have seen significant de-risking
     by the year end.
                                                                     of our banking exposure in the last three years with
                                                                     outstanding loan and credit card balances falling from
                                                                     £531m at the end of 2006 to £77m today.




10
                                                                                        Annual report and accounts 2009




                                                                                                                                      01 Business overview
                                                                                                                                      02 Performance
The future
We continue to believe that our investment strength,
mutual values, increasingly powerful brand and selected
business franchises will serve members well in terms
of future returns.

Regulatory developments will have a significant impact
on our markets and operations over the next three years.
The FSA’s Retail Distribution Review has the potential




                                                                                                                                      03 Our businesses
to drive substantive change amongst the financial advice
community on which we rely for many of our life and
asset management sales.                                                      Roger Dix, Group Chief Risk Officer
Solvency II is an important EU programme for insurers.          During 2009 the FSA wrote to all with-profits mutual
It aims to deliver improved risk-based regulatory supervision   insurance firms to clarify the correct interpretation of their
of firms and capital requirements, that better reflect          rules in the context of a decline in new with-profits business
the actual economic risks being run. Complying with             and the need to treat customers fairly. At LV= we continue
Solvency II will involve considerable changes to systems        to write material volumes of new with-profits business and
and processes at substantial cost. Benefits will include        have plans to increase this further in coming years.
faster financial reporting and enhanced rigour in our




                                                                                                                                      04 Group support and CSR
enterprise-wide risk management. The exact impact
on future capital requirements is not yet fully clear but       Outlook
we are monitoring the position carefully to assess for          Given the high level of personal and sovereign debt we
any impact on our strategy or that of our competitors.          remain cautious about prospects for the UK economy and
One of the lessons of the financial crisis was the              mindful that financial markets are susceptible to further
importance of good risk management in ensuring that             shocks. In general insurance we have seen substantial
firms could survive an appropriate degree of stress             rate hardening continue into 2010, helping to offset low
from both individual risk events and, more importantly,         investment returns, while sales in our life business have
combinations of events. We have invested significantly          started 2010 well. With our growing brand strength,
in our risk capabilities over the last three years and          strong levels of customer satisfaction and highly                     05 Corporate governance
during 2009 we appointed a new group chief risk officer         engaged employees, we are well placed to thrive in
who attends all board meetings and is a member of the           a challenging environment.
Executive Committee.
                                                                                                                                      06 The numbers




                                                                                                                                 11
         I love my house
         because home is
         where the heart is.




                               We look after

                               0.5m    homes




02
Performance
Business review                                               Annual report and accounts 2009




                                                                                                         01 Business overview
                                                                                                         02 Performance
Keith Abercromby
                                       Overview
Group Finance Director                 In market conditions which continued to be challenging
                                       in 2009, LV= delivered strong investment performance
                                       to members, a return of 15.4%, 2.0% above market
                                       benchmark. The focus for 2009 was to deliver this strong
                                       return to members whilst managing our capital position
                                       and continuing to develop our ongoing businesses.

                                       Underlying profit grew to £44.2m (2008: £2.3m)




                                                                                                         03 Our businesses
                                       reflecting continued growth, in particular in general
                                       insurance. In difficult market conditions we continued
                                       to grow market share.

                                       The statutory result has narrowed to a loss before
                                       tax of £91.4m (2008: £258.3m) after deducting
                                       the costs of buying equity protection in 2009,
                                       basis changes, reserve strengthening and short
                                       term investment fluctuations.


                                       LV= with-profits




                                                                                                         04 Group support and CSR
                                       investment performance
                                       The market turmoil of 2008 continued into 2009 with
                                       market lows in March. Against this, we took the decision
                                       to use £82m of our capital to purchase protection against
                                       equity market falls. Members’ policies benefited from this
                                       by approximately £450m from the market lows in March.
                                       This compares with similar hedging used in 2002/2003
                                       at a cost of £87m. In that instance the cost was not
                                       taken out of capital but was charged against members’             05 Corporate governance
                                       investment policies.

                                       Following the early turmoil, global stockmarkets began
                                       to rally in March and continued strongly for most of the
                                       year. Although there was a brief lull in the markets
                                       mid-year, market optimism about a recovery from recession
                                       kept the recovery going for most of the rest of the year.
                                       Conversely, fixed interest markets, which had performed

   our finance                         well in the previous year, produced relatively stagnant
                                       returns as confidence in a global economic recovery grew.

   team’s role                         Against this background, the group delivered strong
                                                                                                         06 The numbers




                                       investment performance.
   Managing the financial health of
   LV= and providing clear financial
   information as to where we are,
   and where we are going.



                                                                                                    13
     Business review




     The performance of the with-profits asset shares is detailed below against the relevant market indices. The overall performance
     is measured against the weighted benchmarks set by the board:
     Return (%) on investments                                                2009              2009           2008           2008
                                                                         LV= Actual       The Market      LV= Actual     The Market
     UK equities                                                            28.7%              30.1%        (31.7%)         (29.9%)
     International equities                                                 21.6%              15.1%        (20.2%)         (15.6%)
     Alternative investments                                                 (1.5%)             5.6%          2.1%           10.0%
     Property investments                                                     3.7%              0.4%        (21.8%)         (23.1%)
     Gilts and Bonds                                                          6.0%              1.2%          7.2%            8.7%
     Cash and cash equivalents                                                0.5%              0.5%          4.8%            4.8%
     Total return                                                           15.4%              13.4%        (17.8%)         (16.3%)



     At the end of 2009 (and 2008), the with-profits asset shares were invested as shown on the following charts.


     Investments as at 31 December 2009                                Investments as at 31 December 2008




                                                                                                                 Gilts and Bonds
                                                                                                      Cash and cash equivalents
                                                                                                                      UK equities
                                                                                                            International equities
                                                                                                         Alternative investments
                                                                                                            Property investments



14
                                                                                      Annual report and accounts 2009




                                                                                                                                   01 Business overview
                                                                                                                                   02 Performance
At the end of 2008, policyholders within the RNPFN fund,       You will see that our general insurance business is
which the group acquired as a ring-fenced fund in 2001,        continuing its strong development. Excluding the impact
were granted LV= membership rights. Those members              of the Highway acquisition in late 2008, gross written
who have RNPFN with-profits policies have benefited from       premiums increased by 27.6% on 2008 (compared with
returns of 8.3% in 2009 (2008: minus 5.3%) for that            18.5% growth in 2008) and the benefit of good underwriting
fund. This fund is more defensively managed than the           disciplines together with the favourable prior year claims
LV= equivalent, reflecting both the closed and segregated      run off started to come through. This generated a profit for
nature of the book.                                            the year of £7.0m compared to losses over recent years
                                                               whilst the business was gearing up. We expect further
The future investment climate remains uncertain and




                                                                                                                                   03 Our businesses
                                                               growth in profits in 2010 and beyond.
further volatility cannot be ruled out. Although some
sentiment-driven indicators suggest confidence returning to    The life business was operating in a difficult market
consumers and the economy, much of the hard economic           environment which hampered sales of pension,
data lags behind. Base rates are likely to remain low          protection and investment products. Against such a
for some time yet, so the low inflation/low interest rate      background, growth in annual premium equivalent sales
environment is set to continue. A clear result in the          by almost 8% to £92.2m was a creditable performance.
general election will undoubtedly help in terms of market
                                                               Asset management again reported a loss reflecting its
confidence. But whatever the outcome, LV= has a solid
                                                               continued drive to develop itself as an attractive home for
financial foundation and an efficient operating base from
                                                               retail and wholesale funds. It is expected that losses will
which to prosper in the months and years ahead.
                                                               continue in 2010 as the development phase continues.




                                                                                                                                   04 Group support and CSR
                                                               It is pleasing to see that, in 2009, we have made some
Results for 2009                                               recovery of the losses incurred from our banking business.
The table below shows how our underlying profit is split       The profit of £5.5m comes almost exclusively from
between our businesses. In line with market practice,          better than anticipated recoveries on bad debts and
underlying profit excludes the impact of basis changes         the satisfactory conclusion of our exposure to payment
and reserve releases/(strengthening) and short term            protection insurance redress costs. Outstanding banking
investment fluctuations on the capital funds.                  liabilities fell from £309m to £77m during the year.
                                                               We anticipate that we will complete our exit from banking
Profit
                                                               over the next two years.
£m                                         2009     2008                                                                           05 Corporate governance
Life                                        37.7      37.7     In 2009, basis changes and reserve strengthening have
General insurance                             7.0    (30.1)    cost £77.9m. This was driven by a number of factors,
Asset management                             (4.7)     (6.7)   key amongst them being an increase in the margin we
Other                                         4.2       1.4    deduct from the yield on corporate bonds to reflect credit
Underlying Profit                           44.2        2.3    risk, further strengthening of our expense reserves and
Basis and reserve changes                  (77.9)     74.6     revisions to our valuation methodology. A change in our
Amortisation of intangibles                (22.1)    (14.1)    assessment of mortality and morbidity assumptions was
Operating (loss)/profit                   (55.8)      62.8     a key reason for the reserve releases in 2008.
Cost of equity protection                  (82.0)         –
Short term investment fluctuations          46.4   (321.1)     Proposed regulatory changes for 2012 (Solvency II)
Statutory loss before tax                  (91.4) (258.3)      are expected to strengthen significantly reserving
                                                                                                                                   06 The numbers




Taxation                                     (3.3)    57.9     requirements for the insurance industry. Final requirements
Pension scheme actuarial losses, net       (77.5)     (1.6)    for Solvency II remain uncertain whilst details emerge
Transfer from UDS                         172.2     202.0      during 2010 and 2011.
Total comprehensive income                      –         –    The loss before tax also incorporates the cost of the
                                                               amortisation of intangibles, cost of the equity protection
                                                               and short term investment fluctuations. This comes to a
                                                               loss before tax of £91.4m (2008: £258.3m).


                                                                                                                              15
     Business review




     Further to this, the staff pension scheme also impacts           heavily on assumptions about the future, as life insurance
     on LV=’s capital. Market movements, in particular                contracts can last for 25 years, 50 years, or longer.
     corporate bonds, have led to a net capital charge of             Therefore we benchmark our provisioning techniques and
     £77.5m. Together with the impact of tax, this has led            assumptions against other similar businesses, to ensure
     to an overall transfer from the Unallocated Divisible            that we are taking an appropriate and prudent view.
     Surplus (‘UDS’) of the group of £172.2m (2008: £202.0m)
                                                                      These assumptions are summarised in notes 19 and
     leaving a UDS of £945.1m (2008: £1,117.3m).
                                                                      35 to the accounts on pages 98 and 115.
                                                                      For the general insurance liabilities, which generally have a
     How we approach key areas                                        much shorter duration, the main concerns are around the
     of judgement                                                     cost of personal injury claims which can run to millions of
     Of course in coming to these results, we have had to make        pounds each and take years to settle. Again we use our
     some significant judgements about the value of our assets        own experience to set such provisions and we also use
     and liabilities. It is therefore right to explain what these     an independent firm of actuaries to validate the internally
     are and how we come to our conclusions. The notes to             calculated level of provisions. The analysis of claims
     the accounts on page 64 set out in some detail where we          development in note 3 to the accounts on pages 78
     make significant judgements but, in brief, these are around      and 79 shows how our assessment changes over time.
     the valuation of banking assets (loans and credit card
     balances), insurance and staff pension scheme liabilities,       Investments
     and the value of our financial investments.                      Dealing with investments, we use prices from properly
                                                                      liquid markets wherever possible. However, some assets,
     Insurance                                                        such as certain corporate debt instruments where the market
     Insurance liabilities are calculated by actuaries using          is less liquid, venture capital investments and property,
     industry standard techniques to produce a ‘realistic’ view       are not readily marketable, and so have no observable
     of the future liability of the group. In the life business and   market price on a day-to-day basis. For property assets,
     for the staff pension scheme, these techniques rely              we use external valuers who survey our properties and
                                                                      apply the current market metrics to derive a market price.
16
                                                                                      Annual report and accounts 2009




                                                                                                                                     01 Business overview
                                                                   Despite the economic storms
                                                                   of 2008 and 2009 we remain
                                                                   very soundly capitalised.




                                                                                                                                     02 Performance
We deduct the costs of disposal in the values taken to the    Our attitude to risk
statement of financial position. For other non-marketable
investments we use the best information we can find to        Intrinsic to any business is risk-taking in order to
ascribe what we believe to be the current value that we       optimise returns. This is particularly apt in insurance
could achieve between a willing buyer and a willing seller.   where, of course, risk is our business. We want to manage
                                                              the risks we take on, so at times we will want to limit our
Banking                                                       exposure because we are either nervous of that particular
                                                              risk at that time, the net exposure is simply too large for us,
Banking assets are assigned a value that reflects the
                                                              or we are not able to earn an acceptable return on that risk.
balances due to us less an allowance for bad debts.




                                                                                                                                     03 Our businesses
We model our banking portfolios and simulate the impact       We set limits that we are prepared to accept on business
of various economic scenarios in coming to a view of likely   risks, which we calculate based on the regulatory capital
bad debts, based both on our past experience in similar       utilised in supporting that risk. If we exceed that limit we
circumstances and our view of the future prospects for        will take appropriate mitigating actions such as changing
our borrowers. The modest release of bad debt provisions      investment policy or taking out reinsurance, so that we
this year suggests that we have been marginally too           can come back within our appetite for that risk.
cautious in recent years, as experience has been better
                                                              In terms of the governance of our risk exposures,
than our expectations.
                                                              we split our efforts into three key streams –
Overseeing these processes is the group’s audit, risk and     financial risks (those inherent in the businesses we
compliance committee, which reviews the methodologies         are in), operational risks (the risks inherent in the way




                                                                                                                                     04 Group support and CSR
used and the results coming from those methodologies,         that we operate) and strategic risks (the risks of being
as part of their scrutiny of these accounts.                  in our businesses). Financial and operational risks
                                                              are managed by business units with escalation to
                                                              group level if certain criteria are exceeded. The overall
                                                              effort on controlling risk now comes under the oversight
                                                              of Roger Dix, our group chief risk officer. The group audit
                                                              risk and compliance committee provides advice to the
                                                              board on risk matters. Strategic risk issues are monitored
                                                              by the group executive committee, again with help from
                                                              Roger Dix and the main board.
                                                                                                                                     05 Corporate governance


                                                              Our capital strength
                                                              Financial strength of financial institutions gained greater
Key performance indicators                                    attention in 2009, particularly following the collapse of
                                                              some leading banking and financial services providers in
In addition to profits, the board monitors other
                                                              the UK and across the world.
indicators of performance such as sales, brand awareness,
employee retention, membership numbers, funds under           While we have weathered the economic storms of 2008/9,
management and a number of change initiatives that            we cannot be complacent about our capital position. It is
have a significant impact on the strategy of the group.       essential that we maintain a strong financial position so we
The board also monitors what we call Enterprise Value,
                                                                                                                                     06 The numbers




                                                              can protect the interests of current policyholders against
which is our internal estimate of the market value of the     further financial turbulence, and give new customers the
group, to ensure that we continue to develop the business     confidence that we will be there to pay their benefits when
in a way that will benefit members. In addition the board     they become due.
keeps a careful eye on the group’s capital and liquidity
position. The development of these indicators is discussed    Whilst we remain soundly capitalised, the impact of the
elsewhere in this Report.                                     growth in the business and the £172.2m transfer from
                                                              the UDS has been to reduce our multiple of FSA required
                                                              capital on a ‘realistic’ basis from 2.1 to 1.6.

                                                                                                                                17
                 We love that LV= looks after our savings,
                 so we can get away from it all.




                                                  We look after

                                                  2.6m
03
                                                     savings and
                                                    investments
                                                       policies



Our businesses
          Life business                                                             Annual report and accounts 2009




                                                                                                                              01 Business overview
                                                                                                                              02 Performance
          Rodney Cook
                                                           Strategy
          Managing Director of Life and Pensions           Our life and pensions business strategy remains focused
                                                           on establishing LV= as a leading provider in the protection
                                                           and retirement markets, with a reputation for true value
                                                           and service excellence.

APE (m)
   100
                     £92.2m
                                                           2009 performance
            £85.8m




                                                                                                                              03 Our businesses
                                                           Despite a fragile economic environment, we continued
                                                           to expand our propositions, increase our sales and invest
     50
                                                           in delivering our longer term strategic goals. At the same
                                                           time, we managed our expenses tightly. These efforts
           2008      2009      Annual premium equivalent   helped us meet the challenging business targets we set
      0
                                                           ourselves, which was even more satisfying given the depth
                                                           of the recession.

                                                           Bucking the general market, we increased our yearly
APE (m)
                                                                                                         .
                                                           new business income by 7.5% to £92.2m APE* We also
      4                                                    increased our market share across most of our target
                     £3.3m




                                                                                                                              04 Group support and CSR
            £2.6m                                          product areas.


     2
                                                           Increased sales
                                                           and wider distribution
           2008      2009          50 Plus new business
     0                                                     IFAs remained our largest distribution channel,
                                                           contributing 92% (90% in 2008) of our total new business
                                                           value. Yet, over the course of the year, we successfully
                                                           secured a number of new partnerships for distribution
                                                           of LV= products. These included ASDA, Openwork,
                                                                                                                              05 Corporate governance
                                                           Standard Life Direct, and the Norwich & Peterborough
                                                           Building Society.

                                                           Volumes of our already popular 50 Plus plan remained
                                                           strong despite new entrants joining the direct to consumer
                                                           life insurance market. Our market share held at around
                                                           9%, with new business sales increasing by 27% to
                                                           £3.3m, boosted by partnerships with ASDA and
                                                           selected IFA firms. We also increased our online
            life business                                  presence, offering plans through well-known website
                                                           aggregators such as moneysupermarket.com.
            strategy
                                                                                                                              06 The numbers




                                                           * Annual premium equivalent – annual premiums plus 10%
                                                             of single premiums received.
            Establishing LV= as a leading provider
            in the protection and retirement
            markets, with a reputation for true
            value and service excellence.



                                                                                                                         19
     Life business




     Our retirement solutions business model has                2009 was an outstanding year for LV= in the equity
     proved resilient and is well placed for any recovery.      release market, with advances increasing almost
     2009 saw competitors reporting falling sales volumes,      threefold from 2008 to over £72m. At the beginning of
     weakened financial strength and, in some cases,            2009, we introduced pricing related to the customer’s age,
     their withdrawal from key markets. So we are pleased       which enabled us to provide greater choice and keener
     to have increased sales by 8% whilst continuing to         rates. Our market share went up to around 8% and LV=
     broaden our propositions.                                  is now established as one of the UK’s four largest equity
                                                                release lenders.
     We re-vamped our flagship pension product,
     the Flexible Transitions Account, enabling more            On the individual protection front, our overall sales
     flexibility, transparent pricing, additional investment    increased impressively by 13% to £17.7m. Our targeted
     options, along with improved adviser tools and online      pricing in the term assurance market proved effective
     functionality. This launched in March, and further         and enabled us to increase our share of quotations
     enhancements were introduced throughout the year.          (for intermediated business) to its highest levels ever
                                                                at over 6%. Our reputation as a leader in the income
                                                                protection field continues to grow. Industry business
                                                                figures for 2009 showed we were the largest provider
                                                                of income protection through IFAs, and our overall total
                                                                market share was 10.2%.

                                                                In August, we re-entered the with-profits investment
                                                                market, launching a new generation unitised with-profits
                                                                bond, with optional investment guarantees called the
                                                                Flexible Guarantee Bond. We tested consumer and adviser
                                                                appetite by distributing the bond through a limited number
     Our specialist annuity proposition held up well, despite   of adviser firms. We will continue the trial into 2010 to
     the turmoil caused by Quantitative Easing to bond prices   check we have a sustainable business operating model
     on which annuity rates are based. We maintained market     before expanding the offering.
     share and our position in the UK’s top three enhanced
     annuity providers. Active re-pricing and improved tools
     and processes helped preserve competitive pricing
     positions, as did refreshing our with-profits options
     for those who want investment related income.                                                            2008       2009


                       Annual premium equivalent by product                                                   Sales by channel
     APE (m)                                                            %
        100                                                           100

                                                                                                                 90%         92%
         80                                                            80

                                                        £70m
         60                                     £65m                   60


         40                                                            40


         20                                                            20
               £16m    £18m
                                 £5m     £4m                                  4%      3%      5%         5%
          0                                                             0
                 Protection      Savings/          Retirement                 Partnerships      Direct                 IFA
                                 investments                                                                    Rounded to nearest %

20
                                                                                        Annual report and accounts 2009




                                                                                                                                      01 Business overview
                                                                                                                                      02 Performance
Improved customer service                                       The challenges ahead
and industry recognition                                        Although we have started to see improvements in general
In 2009, we made significant progress in our operational        market levels and sentiment, we will undoubtedly face
transformation programme. The programme aims to                 economic challenges in 2010. The recession will lead to
reduce expenditure and improve service levels for all our       both challenges and opportunities as weaker providers and
customers. We reviewed and improved numerous aspects            distributors look to others to protect their financial future.
of our customer and adviser services throughout the year.       The industry will hope for stability and sensible policy
We have also been active in industry initiatives to educate     decisions from the government and regulators that will give




                                                                                                                                      03 Our businesses
consumers about their choices at retirement and to shorten      some certainty, which customers and businesses like ours
pension transfer times.                                         require for long-term planning decisions. This will include
                                                                the Retail Distribution Review, an important ongoing policy
The most important measure of our commitment to true            development being driven by the FSA.
value and service excellence is the satisfaction of our
customers. We undertake regular research among our              We will continue to broaden and enhance our product
customers and are an active member of the Association of        range and improve services for customers and advisers.
British Insurers’ (ABI) Customer Impact Scheme, chairing        Alongside continuing improvement, there will be specific
the working party.                                              process enhancements to our pensions and equity release
                                                                business and key product launches in annuities and
We are encouraged by our increase of 5% in our customer         protection. We will also continue to trial and extend our
satisfaction score over 2008.                                   return to the with-profits investment market.




                                                                                                                                      04 Group support and CSR
Our customer satisfaction results under the ABI scheme
meant that LV= outperformed the average industry scores
across all three scheme customer promises.

We are delighted to have secured the top rating of five stars
from Defaqto for five key products in our equity release,
pension and protection product lines. These independent,
industry-recognised ratings reflect product quality.

Once again, we are proud that a number of our
products and services were recognised by the industry.                                                                                05 Corporate governance
Other achievements included:
n   Gold Standard Award Winner – Protection – Incisive
    Media Gold Standard Awards 2009
n   Innovation Award Winner – for Mortgage & Lifestyle
    Protection – Investment Life & Pensions Moneyfacts
    Awards 2009
n   Best Lifetime Mortgage Lender – Your Mortgage
    Awards 2009
                                                                                                                                      06 The numbers




n   Technology Administration Service Award Winner –
    Lifetime annuities (conventional, impaired and enhanced)
    – TAS Awards 2009
n   Best IFA marketing Campaign – Protection – IFA Census
    Campaign Awards 2009




                                                                                                                                 21
     General insurance




     John O’Roarke                                              Review of 2009
     Managing Director of General Insurance                     In a year of turmoil in financial markets our general
                                                                insurance business demonstrated its resistance to
                                                                recessionary pressures by turning in a very strong
                                                                performance. Our premium income grew strongly across
                                                                all the channels in which we operate and the business
                                                                beat its break-even target, reporting an underlying profit
                                                                for 2009 of £7.0m.
                            Gross written premiums by channel
      £m                                                        Our achievement of profitable trading, ahead of schedule,
     400
                                                   £399m        was particularly satisfying in a year when investment
                                                                returns were substantially reduced by economic
     300                                                        conditions. The reduced investment return was more
                                                                than compensated for by loss ratio improvements –
     200                                                        achieved through highly targeted pricing, tight control
              £185m                   £181m                     over claims leakage and fraud and the favourable
                                                                run off of prior year claims.
     100
                                                                The very strong growth in premium income reflects
                         £46m
                                                                the benefits of our strategy of establishing strong
       0
               Direct   Aggregator   Partnership    Broker      stakes in all of the major distribution channels
                                                                including direct to customer, broker, affinity and
                                                                corporate partnerships.

                                                                In our direct-to-customer business, the LV=
                                                                ‘green heart’ brand has become increasingly well-known,
                                                                attracting record numbers of new customers in 2009.
                                                                Our high profile advertising campaigns helped us to grow
                                                                car insurance sales by 27% and home insurance by 18%
                                                                compared to 2008.

                                                                The brand itself has generated extraordinarily
                                                                positive feedback evidenced by LV= being awarded
                                                                the ‘Personal Lines Brand of the Year’ award in the
                                                                Insurance Times 2009 Gold Awards, which we achieved
                                                                in November.




           General insurance
           strategy
           Continue to provide product innovation
           and service excellence, and become a
           top five general insurer.



22
                                                                                     Annual report and accounts 2009




                                                                                                                                01 Business overview
                                               Our brand generated positive feedback
                                               evidenced by an award for ‘Personal Lines
                                               Brand of the Year.’




                                                                                                                                02 Performance
                                                                                                                                03 Our businesses
             New car insurance advertising




                                                                                                                                04 Group support and CSR
A great year for LV= Broker                                   In small business insurance, our focus on offering great
                                                              cover backed up by best-in-class service has resulted
The 2008 acquisition of Highway Insurance accelerated         in very strong growth and exceptional broker support.
our strategy to build a new force in the broker channel.      Sales more than doubled to £24m and
In 2009, we warmly welcomed our Highway colleagues into       we were voted the UK’s best provider of         BEST FOR

the LV= group and sought to leverage the complementary        ‘Small Package (Property and Liability)’
strengths of our businesses. We made strong progress in       insurance in Incisive Media’s ‘Insurance
capturing projected cost and efficiency benefits and expect   360’ survey of over 600 general insurance
                                                                                                           SMALL PACKAGE

these to contribute more than £10m each year. The broker      brokers. Our small business insurance
market reaction to the acquisition has been overwhelmingly    offering was also strengthened when we opened two new             05 Corporate governance
positive and resulted in Highway’s premium income growing     offices in Birmingham and Glasgow, bringing our regional
by more than 21% to £287m.                                    network to a total of nine branches across the UK.
ABC Insurance, which is a brand we use for our car            Finally, while retaining the separate brands and products
insurance product sold through brokers, also had a very       of Highway and ABC, we have created an ‘umbrella’ brand
successful year. The AA and BGL Group joined our broker       of LV= Broker which we use for industry communications
relationships helping to double total broker-sourced car      and which reinforces our commitment to this channel.
insurance sales to 330,000 policies.
                                                                                                                                06 The numbers




                                                                                                                           23
     General insurance




     Working in partnership                                            In March we were delighted to secure a brand new
                                                                       partnership deal with ASDA, the UK’s second largest
     Affinity and Corporate Partnerships remain a key part of          supermarket chain. Through Britannia Rescue, part of LV=,
     our strategy. 2009 saw the first full year of trading with        we are now the exclusive provider of stand-alone roadside
     Nationwide Building Society, which appointed LV= as               rescue products to ASDA customers. This partnership
     its exclusive provider of car, travel and small business          generated over 10,000 sales in 2009 and looks set to
     insurance. The strength of the Nationwide brand has               deliver strong growth in 2010.
     become even more compelling in times of financial
     instability and by the end of the year we had sold over
     140,000 car, travel and small business policies to
     Nationwide customers.




                                                                       Our LV= Frizzell business, which has for so long been the
                                                                       first choice insurer for civil servants and union members,
                                                                       had another strong year. Working together with the CSMA
                                                                       Club and unions such as Unison and Unite, we provided
                                                                       over half a million car and home policies to their members
                                                                       in 2009.



                                                                                                  The % of policies by product type
     Products
          Motor

          Home

          Travel

              Pet

            Road
          rescue

           SME



                    0    10        20        30        40         50    60        70         80   %

          %
     80
24
     70
                                                                                     Annual report and accounts 2009




                                                                                                                                    01 Business overview
                                                      Affinity and Corporate Partnerships
                                                      remain a key part of our strategy.




                                                                                                                                    02 Performance
Customer satisfaction                                         Looking to the future
and industry awards                                           Some of the challenges in 2009 look set to persist into
We have continued to remain firmly focused on delivering      2010. Investment returns are likely to remain lower than
the best possible service for our customers and trading       the longer term average as interest rates are held down to
partners. Working through an independent agency TNS           support economic recovery. Claims costs will continue to be
we actively solicited feedback from 10,000 customers.         adversely affected by the activities of accident management
The results of this research in 2009 showed that our          companies, which in 2009, resulted in excessive personal
customer satisfaction scores are at record levels and by      injury and third-party damage cost inflation. More positively,




                                                                                                                                    03 Our businesses
the year end 95% of our customers had said they were          the market has recognised that margins have been eroded
either satisfied, very satisfied or extremely satisfied.      and premium rates have increased accordingly. We expect
                                                              to see further rate hardening in 2010.
Further recognition of our commitment to service excellence
came in December 2009 when our general insurance call         The strength of our multi-channel model has positioned
centres were awarded the coveted title of Customer Service    us extremely well to benefit from challenging conditions and
Contact Centre of the Year at the prestigious National        we expect to report continued growth in customer numbers
Customer Service Awards. Other awards in 2009 included:       and strongly improving profitability in 2010 and beyond.

n   Which? Magazine award for ‘People’s Choice’ for best
    customer satisfaction levels – January 2009




                                                                                                                                    04 Group support and CSR
n   Your Money award for online travel insurance –
    June 2009
n   Which? Best Buy travel insurance – June 2009
n   Which? Best Buy for home insurance – July 2009
n   Moneywise award for most trusted home insurer
    – July 2009
n   Moneywise award for best home insurer – July 2009
n   Which? Best Buy for breakdown – August 2009                                                                                     05 Corporate governance

n   Which? Best Buy for home insurance – August 2009
                                                                                                                                    06 The numbers




                                                                                                                               25
     Asset management




                                                 As if we needed reminding, the ability for investors –
     Ann Roughead                                and financial markets – to look to the future was in sharp
     Managing Director of LV= Asset Management   focus during 2009. Despite the continuation of dire
                                                 economic conditions, and immediately following one of
                                                 the worst years for equity markets in 2008, global equity
                                                 markets raced ahead during 2009. From a low point
                                                 in March, when a number of banks ignited investors’
                                                 confidence by releasing better than expected results,
                                                 equity markets enjoyed an almost unbroken run to the end
                                                 of the year. For 2009 as a whole, equity market returns well
                                                 in excess of 20% in sterling terms were the norm. On the
                                                 flip side we saw fixed interest markets, which had fared well
                                                 the previous year, produce relatively stagnant returns as
                                                 confidence grew in a global economic recovery.

                                                 Against this background, LV= Asset Management (LVAM)
                                                 delivered strong investment performance – ahead of
                                                 our benchmark index – and continued to grow its retail
                                                 funds business.




                                                 LVAM is approximately halfway through its five-year growth
                                                 plan and, during 2009, achieved better results compared

       our purpose                               to its targeted profitability thanks to a combination of cost
                                                 control and asset growth. However, our success in bringing
                                                 new assets into the group was mixed – we were boosted by
        Generate strong long-term investment     institutional success while our retail sales were slower than
        returns on behalf of members.            planned – but that is the nature of asset management,
                                                 particularly in a ‘start up’ phase, as LVAM is.
        Grow third party funds
        under management.




26
                                                                                       Annual report and accounts 2009




                                                                                                                                    01 Business overview
                                                     LV= Asset Management delivered strong
                                                     investment performance – ahead of
                                                     our benchmark index – and continued
                                                     to grow its retail funds business.




                                                                                                                                    02 Performance
2009 saw many positive achievements for                         Elsewhere, the operational model we established last year
LVAM, including:                                                is performing well, with service levels exceeding targets
                                                                and the incidence of regulatory breaches significantly
Strong investment performance on behalf of the
                                                                reduced, and well below the industry average. We were also
Society was significantly ahead of our benchmark
                                                                delighted to have attracted a well-known fund management
index, driving positive returns for members and
                                                                team to LVAM, to improve our UK Equity offering for both
contributing to the group’s Enterprise Value.
                                                                internal mandates and our retail proposition. From the start
In monetary terms, this out-performance has
                                                                of 2010 this team will become a major focus of our sales
added approximately £55m to members’ fund assets
                                                                and marketing effort, and we have high hopes for success
this year. Perhaps more importantly, the systems,




                                                                                                                                    03 Our businesses
                                                                in attracting new clients to LV=.
procedures and controls LVAM has put in place
over the last two years are allowing us to generate
strong returns while keeping a firm hold on risk.               Outlook for 2010
This is of significant benefit not only to customers
                                                                In many ways 2010 will be a watershed year for LVAM.
of our own business, but to those of other business
                                                                In 2008 we were ‘under construction’, in 2009 we
areas within LV=, on whose behalf we manage assets.
                                                                demonstrated ‘proof of concept’, and 2010 will be
Distribution of our Retail Funds increased far beyond           our year for ‘delivery’.
expectations in 2009, with LVAM products now available
                                                                We are confident that the development of LVAM as a
via 13 leading platforms and wraps – the main channel for
                                                                recognised asset management house will continue,
IFA sales. Just as importantly, we now have a nationwide




                                                                                                                                    04 Group support and CSR
                                                                and will benefit the group as a whole in enhancing
field sales team, allowing us to service advisers locally and
                                                                member value.
promote LVAM more effectively. We also ended the year
with 60% of our retail funds achieving external recognition     Most importantly, none of the great strides we have
in the form of Standard & Poors Fund Management Ratings,        made – and will continue to make – are possible without
making LVAM one of the most highly rated fund managers          the dedicated team of just over 60 people who share my
in the UK. These factors – none of which existed 12 months      passion to make LVAM the success we know it will be.
ago – position LVAM very well going into 2010.

Retail sales momentum is building. In part, this reflects
the attractive proposition we have developed, which is
focused on working with financial advisers to provide                                                                               05 Corporate governance
meaningful long-term investment solutions for customers,
rather than simply ‘selling products.’ We are also seeing
the mix of active clients broaden significantly. Whereas a
year ago LVAM was almost entirely dependent on internal
clients, we are now beginning to see regular flows from a
variety of individual IFAs, strategic partners, discretionary
and multi-manager clients, which improves the stability
and value of LVAM’s business. However, it should be
noted that building a sustainable retail business remains
a ‘slow burn’ activity and time is needed to position LVAM
                                                                                                                                    06 The numbers




as a long term solution provider for our target audience of
IFAs and distributors.

We have seen the trade press publishing increasingly
positive – and unsolicited – comments on LVAM’s progress.
Particularly pleasing are the comments from our peers in
the asset management industry, who make reference to
the team we have built, the proposition we have developed,
and the waves we are making in the industry.

                                                                                                                               27
                It was easy
                to protect our
                income with LV=.




                       We pay out
                       £23,000
                         a day in critical
                        illness payments




04
Group support
and CSR
Supporting our businesses                                        Annual report and accounts 2009




                                                                                                              01 Business overview
                                                                                                              02 Performance
                                          Introduction
Richard Rowney
Group Chief Operating Officer             Providing the support infrastructure and services to
                                          help our life, general insurance and asset management
                                          businesses run smoothly, is a key part of maintaining
                                          a cost-effective business. The LV= Strategic Support
                                          Units are the ‘engine room’, providing the processes,
                                          systems and services needed to deliver great value,
                                          and ensure we are easy to do business with.




                                                                                                              03 Our businesses
                                          Building awareness of LV=
                                          Our brand is a key component in attracting new members
                                          and customers to LV=, helping to make us stronger and
                                          more profitable.

                                          In 2009 we continued the shift towards more visible
                                          media – such as television, outdoor and online advertising
                                          – and away from direct mail. This has improved people’s
                                          awareness of LV= and made more people more likely to buy




                                                                                                              04 Group support and CSR
                                          from us. In the year ahead we plan to spread the word still
                                          further, including new TV advertising that talks about what
                                          we stand for, our values and qualities, rather than just our
                                          products and pricing.




                                                                                                              05 Corporate governance




    our role                                          New brand advertising


    Enhancing member value by ensuring
    our businesses operate efficiently.
                                                                                                              06 The numbers




                                                                                                         29
     Supporting our businesses




     Sponsorship
     Sponsorship also plays an important role in building
     a stronger LV= brand, giving us another platform for
     advertising, plus editorial exposure in the media,
     and opportunities for building relationships with key
     partners such as IFAs and brokers, to help boost sales.

     Last year we made some exciting additions to our
     portfolio. We took on the title sponsorship of rugby
     union’s Anglo-Welsh tournament, now called the LV= Cup,
     and this builds on the existing profile we have in rugby
     through our support for the Harlequins Rugby Union Club.
                                                                 Harlequins Rugby Club in play
     And in the run up to the 2010 Winter Olympics,
     we announced that our road rescue company Britannia
     Rescue would be sponsoring the British Bobsleigh
     Association. This new sponsorship is a great opportunity
     for us to support home grown talent, and highlight the
     speedy service that Britannia Rescue offers to customers.

     We also continued our title sponsorship of cricket’s
     most prestigious domestic competition, the LV= County
     Championship. Our partnership with cricket now spans
     almost a decade, and we receive huge levels of media
     exposure year-on-year throughout the summer months.




                                                                 The Britannia Rescue bobsleigh




                                                                 A LV= County Championship match




30
                                  01 Business overview   02 Performance   03 Our businesses   04 Group support and CSR   05 Corporate governance   06 The numbers




                                                                                                                                                                                                                 31
Annual report and accounts 2009




                                                                                                                                                                    Northampton Saints, LV= Cup champions 2010
     Supporting our businesses




     LV.com                                                        In 2010 we will be focusing on the huge increase across
                                                                   the world in ‘social media’ activity, to ensure that LV=
     Our online functions and capability have come on in leaps     increases its exposure in this area to build both our
     and bounds in the last year.                                  brand and corporate reputation.
     We re-branded and re-designed our website in 2009,
     making it sharper and easier to navigate, and the number      Reducing complaints
     of people visiting LV.com rose 20% during the year.
                                                                   Whilst the number of our members and customers grew
     We also dramatically improved our position on the             by 12% during 2009, the number of complaints fell by
     major search engines people use when they want to buy         11%. In addition, data published by the Financial
     insurance. And we increased the proportion of life products   Ombudsman Service (they deal with more serious
     sold direct to customers through our website, from 5% of      complaints) showed that LV= is in a strong position
     the total in 2008 to 66% this year.                           compared with its competitors.




32
                                                                                Annual report and accounts 2009




                                                                                                                            01 Business overview
                                                   Members can save 8% on car,
                                                   home, travel and pet insurance.




                                                                                                                            02 Performance
Connecting with members
and customers                                            Members automatically qualify for discounts on general
                                                         insurance products and enhancements on some of our
We work hard to maintain clear and transparent           life products.
dialogue with our members, through official
communications such as the AGM.                          Insurance                       off motor, home,
We also operate a Member Panel comprising 40                                      pet and travel insurance
well-informed members, with whom we meet twice
a year to discuss LV= performance and to get their




                                                                                                                            03 Our businesses
views on our plans. And we have an established
online community, now numbering over 6,000 users,
where members and customers can interact with us
online and give feedback on our products and services.
                                                         Saving and               Flexible Savings Plan
                                                         investing                extra added to investment

                                                                                  LVAM ISAs          off set up fee

                                                                                  Flexible Guaranteed Bond
                                                                                              added to investment




                                                                                                                            04 Group support and CSR
                                                         Protection               50 Plus plan         added to
                                                                                  amount of life cover

                                                                                  Flexible Protection Plan
                                                                                  off premiums

            Member communications


                                                         Member Care Line and Support Fund                                  05 Corporate governance
                                                         The Member Care Line is a free benefit for LV= members
                                                         that offers 24 hour confidential telephone advice on day
                                                         to day problems. Coupled with that, the Member Support
                                                         Fund provides one-off financial grants to members who
                                                         find themselves, through no fault of their own, in severe
                                                         financial difficulties. Run on our behalf by an independent
                                                         committee of members, grants of £54,000 were made in
                                                         2009, more than double the previous year’s amount.


                                                         Grants
                                                                                                                            06 The numbers




                                                         £000
                                                           60
                                                                                              £54,000
                                                           40
                                                                 £32,440
                                                           20                  £20,904
                                                            0
                                                                2007          2008          2009


                                                                                                                       33
     Supporting our businesses




     Developing our people                                         In 2009 we launched a new website to help us recruit the
                                                                   best talent and as a result we received over 20,000 new
     Great service to members can only be delivered by             job applications in the year.
     committed and talented employees, and we worked hard
     in 2009 to strengthen our management team, and develop        The Corporate Research Foundation confirmed once again
     talent and potential among our people. We are delighted       that we are one of the top 100 companies in the UK to
     that ‘employee engagement’ – an externally audited guide      work for. We were also highly commended
     to the commitment and motivation of our employees –           for the ‘best centre to work for’ in the ccf
     rose to 80%. This puts us alongside companies that are        european call centre awards 2009, and
     considered to be ‘high performing’.                           commended in the ‘multi channel contact
                                                                   centre’ category.
     These are the four key values which are embedded into our
     business. We challenge our employees to bring these to life
     in everything they do:



     Make it feel special
                                                                   LV= people by numbers
     treat people like family                                                   employees at year end

                                                                            employee engagement
     Know your stuff
                                                                            took part in a new apprenticeship scheme


     don’t wait to be asked                                                 people turnover

                                                                         people who have been with LV= for 25 years or more

                                                                                   hours of training took place

                                                                                 awards given through our new
                                                                   recognition scheme




                      “LV= has a great atmosphere
                           where people are
                          recognised not only
                            for what they do,
                              but how they
                                 do it."


34
                        Dan Turner – Life Team Manager
                                                               Our office locations




                                                                                                                                                 01 Business overview
                                                                                                                                                 02 Performance
Managing risks and change
                                                                                           10
We have improved the way we tackle financial crime,
and now have even stronger defences across LV=
against criminal and fraudulent activity. Big strides have
also been made in our business continuity arrangements
to ensure we can cope with any disaster or sudden threat                    2

to our operational capability, with all LV= sites now having
comprehensive, tested plans in place. We have also




                                                                                                                                                 03 Our businesses
                                                                                                                  15
implemented a strong operational risk management model,                                                          13
including a compliance monitoring team, to ensure we are                                                18       20
consistently managing any business risks in the best way
for our members and customers.
                                                                                                             3
We also have a prioritised and professional approach
to change management that keeps us focused on key                                                                                      14
                                                                                                                            12 5
business requirements.
                                                                                                                                   1
                                                                                                    7   6                   16
                                                                                                                            8    17
IT




                                                                                                                                                 04 Group support and CSR
                                                                                                                       11
                                                                                                                 4
Our in-house IT team, supported by outside providers,                                           9           19

keeps our systems and processes running so that our
members and customers can buy our products and use
our services. IT has also played an important part in
2009 in integrating into LV= the businesses that we have
acquired, such as Highway Insurance, and in our business       1      Basildon                                       GI*
continuity improvements.                                       2      Belfast                                        Life
                                                               3      Birmingham                                     Broker/Life
                                                               4      Bournemouth                                    GI*/Life/Broker/
                                                                                                                     Support areas               05 Corporate governance
                                                               5      Brentwood                                      GI*
                                                               6      Bristol                                        GI*
                                                               7      Cardiff                                        Life
                                                               8      Croydon                                        GI*
                                                               9      Exeter                                         Life
                                                               10     Glasgow                                        Broker
                                                               11     Hedge End, Southampton                         Life
                                                               12     Hitchin                                        Life
The strategic support units in LV= worked hard together        13     Huddersfield                                   Britannia Rescue
                                                                                                                                                 06 The numbers




in 2009 to build our brand, keep things running smoothly,      14     Ipswich                                        GI*
make us more efficient, and reduce costs. Those are all key    15     Leeds (x2)                                     GI*/Broker
components in enabling us to drive the business forward        16     Cheapside, London                              LVAM/Life
and deliver better value to our members over the long term.
                                                               17     Maidstone                                      Broker
                                                               18     Manchester                                     Broker/Life
                                                               19     Newtown, Poole                                 Support area
                                                               20     Sheffield                                      Broker

                                                               *
                                                                   GI: General insurance                                                    35
     Corporate social responsibility




                                             Social responsibility is integral to our brand and corporate
                                             strategy. Our focus is on ‘protecting children and their
                                             future’, and this supports our core purpose of helping
                                             people to look after what they love in life.

                                             Our group-wide programme is complemented by what our
                                             employees do in their local communities. We are fortunate
                                             to have employees who are prepared to commit their time
                                             to help good causes, and a recent employee survey showed
                                             that 82% felt we were socially responsible.


                                             Supporting good causes
                                             During 2009 we have focused on four main activities:
                                             n   We raised £90,000 in 2009 through
                                                 a series of events for Great Ormond
                                                 Street Children’s Hospital’s ‘Kiss it
                                                 Better’ appeal. Their appeal is raising
                                                 money for research into the causes
                                                 and treatment of childhood cancer.
                                                 Our employees’ efforts also saw us
                                                 breaking a Guinness World Record
                                                 by collecting 952 used and unwanted mobile phones
                                                 in a week, which were then recycled or reused to raise
                                                 money for the appeal.




     corporate social
     responsibility
     strategy
     Protecting children and their future.



36
                                                                                      Annual report and accounts 2009




                                                                                                                                      01 Business overview
                                             We raised £90,000 in 2009 for Great
                                             Ormond Street Children’s Hospital.




                                                                                                                                      02 Performance
n   We continued our long-standing                             Working with local communities
    sponsorship of LV= Streetwise
    and LV= KidZone. In 2009 13,000                            We continue to support local communities through
    children aged between five and                             sponsorship and employee volunteering.
    twelve visited the award winning                           In 2008 we launched our sponsorship of the Chartered
    interactive education centre                               Management Institute’s Introductory Certificate in
    LV= Streetwise, that uses real                             Team Leading. We have now increased our sponsorship
    life street, transport and home                            to nine schools situated close to our main offices,
    situations to teach children how to stay safe.             and extended our support to include business mentoring




                                                                                                                                      03 Our businesses
    Last summer, LV= KidZone helped reunite                    and work experience.
    182 lost children with their families when they
    became separated on Bournemouth’s beaches.




                                                                                                                                      04 Group support and CSR
                                                               We encourage our employees to become involved in their
                                                               local communities, and recognise it helps them to develop
n   We raised £13,000 through our members AGM votes,           new social and practical skills that they can use at work.
    with the money split between two children’s charities,     This has often meant employees have used their holiday
    Home Start and Make-a-Wish.                                to undertake voluntary work. Recognising this, we launched
                                                               a new volunteering policy in 2009. We match up to two                  05 Corporate governance
                                                               and a half days’ holiday for time spent on community
                                                               based activities.

                                                               Many of our departments participate in community days.
                                                               For instance, Woolgrove School for pupils with moderate
                                                               learning difficulties is near our Hitchin office. Our employees
n   We also offer our skills and resources to charitable       spent the day clearing the school’s sensory garden and
    activities. We supported Children in Need and Comic        helping the children stock the garden with new plants.
    Relief by offering our expertise in running call centres
    to take donations. 375 employees volunteered handling      Through our employee matching scheme, in 2009 we have
    nearly 7,200 calls, and collecting £270,000.               matched pound for pound £98,000.
                                                                                                                                      06 The numbers




                                                                                                                                 37
     Corporate social responsibility
        Our Bournemouth head
        office increased its recycled
        material by 200%.



                                   The environment
                                   We take our responsibility for protecting the environment
                                   seriously, helping to preserve the world for future
                                   generations. Our environmental strategy and policy provide
                                   a structured approach across our business to manage,
                                   monitor and minimise our environmental impact.

                                   Improvements in how we talk to our members and customers
                                   have reduced our yearly direct mail volumes by over 75%
                                   since 2005 – that’s the same as 40m fewer mail packs
                                   going in the post each year. Additionally, we only use paper
                                   sourced from sustainable forests.

                                   We now have a ‘binless’ office environment across all
                                   our major sites. Under-the-desk bins have been replaced
                                   by central recycling stations for all recyclable waste.
                                   As a result, office recycling in our Bournemouth head
                                   office has increased 200%.
                                   In 2009 we replaced much of our office furniture to
                                   create a better environment for our people to work in.
                                   We donated our old furniture to charities and government
                                   initiatives across the UK, and 85% of it has been recycled,
                                   reused or refurbished.
                                   We also actively encourage our people to use alternative
                                   modes of transport, by promoting national green travel
                                   initiatives such as National Bike Week and local
                                   liftshare schemes.
                                   In 2010 we will be part of the Government sponsored CRC
                                   Energy Efficiency Scheme which was announced in the
                                   Climate Change Bill. The CRC is central to the UK’s strategy
                                   for improving energy efficiency and reducing carbon dioxide
                                   (CO2) emissions.
                                   We are committed to the continuous improvement of our
                                   environmental management and we look to reduce our
                                   environment impacts wherever it is practical to do so.




38
                                                                               Annual report and accounts 2009




                                                                                                                           01 Business overview
                                                                                                                           02 Performance
                                                                                                                           03 Our businesses
Future developments
We are expanding our social responsibility strategy      As a major South Coast employer, we are also delighted
in 2010, and will take the LV= Streetwise child safety   to be a supporter of the new museum being built to
concept to a wider audience. The LV= Streetwise          house the Mary Rose, the flagship of Henry VIII’s Navy.
Safety Bus will tour the UK attending major events       These initiatives will help to extend public awareness
and County Fairs.                                        of LV= and what we stand for.




            Inside the LV= Streetwise Safety Bus                     An artist’s impression of the Mary Rose Museum        04 Group support and CSR
                                                                                                                           05 Corporate governance
                                                                     by Wilkinson Eyre, Architects
                                                                                                                           06 The numbers




                                                                                                                      39
       I love that being with LV=
       gives me peace of mind.




                                    We welcome

                                    3,700
                                    new members and
                                     customers a day




Corporate governance
Corporate governance                                                                              Annual report and accounts 2009




                                                                                                                                            01 Business overview
We choose to observe the
requirements of the annotated
version of the Combined Code
on Corporate Governance,
even though we are not
formally bound by it.1




                                                                                                                                            02 Performance
Compliance with the                                                       The Board
annotated code for the year                                               Our board now comprises five non-executive and
ended 31 December 2009                                                    three executive directors. All the non-executive
The board considers that we fully comply with the                         directors (apart from the chairman, for whom the
applicable principles and provisions of the Code.                         test of independence is not applicable) are regarded
                                                                          as independent. We therefore satisfy the Code’s
                                                                          recommendation that, excluding the chairman,
The Walker Report                                                         at least half the board should consist of independent




                                                                                                                                            03 Our businesses
                                                                          non-executive directors.
The Walker Report on corporate governance in UK
banks and other financial institutions was published in                   The board is responsible for:
November 2009. The board has carefully considered the
report’s recommendations and their applicability to our
                                                                          n   our strategy;
situation and has made a small number of changes to our                   n   monitoring our performance;
governance practice as a result. For example, the Audit,
Risk and Compliance Committee will separate into an                       n   the approval of major projects and the framework
Audit Committee and a Risk Committee in the second half                       of our internal controls; and
of 2010 under separate chairmen and we will produce a                     n   our overall management which includes looking
specific risk report in next year’s report and accounts.                      after the interests of various stakeholders,




                                                                                                                                            04 Group support and CSR
                                                                              particularly members, other policyholders
                                                                              and customers.

                                                                          There is a clear list of matters which only the board
                                                                          can decide on; other matters are delegated to the
                                                                          group chief executive.

                                                                          In 2009 the board met nine times for formal board
                                                                          meetings, twice on an ad hoc basis to discuss specific
                                                                          issues and twice for strategy sessions. In 2010 the
                                                                          board expects to meet at least ten times and to have
                                                                          two strategy sessions.                                            05 Corporate governance

                                                                          There were no new appointments to the board in 2009.
                                                                          However, on 30 September Steven Daniels resigned
                                                                          from the board after 13 years service as a director and
                                                                          20 years with LV=. The board expresses its gratitude
                                                                          to Steven for his wise counsel over so many years.

                                                                          Under the Society’s Rules all directors are required
                                                                          to stand for re-election at least once every three years,
                                                                          and accordingly Dennis Holt, Mark Austen and
                                                                          Mike Rogers will be offering themselves for re-election
                                                                                                                                            06 The numbers




                                                                          at the 2010 Annual General Meeting.




1
    The Annotated Version of the Combined Code and the best practice guidance were prepared by the Association of Financial Mutuals.



                                                                                                                                       41
     Corporate governance
     Board members




     Stuart Sinclair, (56) Non-Executive Director             Keith Abercromby, (46) Group Finance Director

     Stuart Sinclair was appointed as a non-executive         Keith Abercromby joined LV= in July 2007 as group
     director on 24 September 2008, having formerly been      finance director and was appointed as a director on
     chief operating officer at Aspen Re and holding chief    19 December 2007. Keith held a number of roles within
     executive positions within GE Financial Services and     HBOS, including managing director of Halifax Life and
     Tesco Personal Finance. He is also a non-executive       finance director of HBOS Financial Services. Latterly,
     director of Prudential Health Limited.                   Keith was finance director of Norwich Union’s life division.

     Stuart has chaired the Remuneration and Nominations
     Committee since October 2009.                            Dennis Holt, (61) Chairman

                                                              Dennis Holt was appointed as a non-executive director
     Michael (Mike) Rogers, (45) Group Chief Executive        on 20 September 2006 and as chairman of the board
                                                              on 1 July 2007.
     Mike Rogers joined LV= and was appointed as a director
     and as group chief executive on 5 June 2006.             Dennis is an Associate of the Chartered Institute of
                                                              Bankers and worked for Lloyds TSB plc for over 30 years,
     Mike worked for Barclays Bank for 20 years, holding
                                                              latterly as the main board executive director accountable
     a variety of roles in business banking, wealth
                                                              for the UK Retail Bank. In 2001 he became group chief
     management and retail banking. Latterly he was
                                                              executive of AXA UK plc and a member of the global AXA
     managing director of Barclays UK Retail Banking.
                                                              Executive Committee and performed these roles until his
                                                              retirement in 2006.

                                                              Dennis is deputy chairman of the Bank of Ireland
                                                              and a non-executive director of Principle Insurance
                                                              Holdings, having previously been vice-chairman of
                                                              the Association of British Insurers and chairman
                                                              of its General Insurance Council.



42
                                                                                   Annual report and accounts 2009




                                                                                                                             01 Business overview
                                                                                                                             02 Performance
                                                                                                                             03 Our businesses
                                                                                                                             04 Group support and CSR
Richard Rowney, (39) Group Chief Operating Officer          Gillian (Gill) Nott OBE, (64) Non-Executive Director
                                                            and Senior Independent Director
Richard Rowney joined LV= in February 2007 as chief
operating offer and was appointed as a director on          Gill Nott was appointed as a non-executive director
15 August 2007.                                             on 25 May 2005.

Richard worked for Barclays Bank for 14 years and           Gill was formerly a director of the Financial Services
was small business risk director, chief operating officer   Authority and is currently chairman of Witan Pacific
of premier banking and integration director for the         Investment Trust plc. Gill is also a board member
Woolwich and Barclays’ retail bank. On 1 March 2010         of a number of other investment trusts and venture
                                                                                                                             05 Corporate governance
Richard became managing director of our life business.      capital trusts.

                                                            Gill has chaired the Investment Committee since
Mark Austen, (60) Non-Executive Director                    September 2007.
Mark Austen was appointed as a non-executive director
on 20 September 2006.                                       Ian Reynolds, (66) Non-Executive Director

Mark is a chartered management accountant and               Ian Reynolds is an actuary and chartered director and was
worked for PricewaterhouseCoopers for over 25 years,        appointed as a non-executive director on 3 January 2008.
during which time he became managing partner of
                                                            Ian has had many years’ experience in the insurance
the Global Financial Services Consulting Practice.
                                                            industry, including directorships with HSBC Life, Marks &
Subsequently he spent three years as senior executive
                                                                                                                             06 The numbers




                                                            Spencer Life Assurance and Equitable Life. He has also
for the financial services consulting practice of IBM.
                                                            served as an insurance adviser to the Financial Services
Mark is a non-executive director of Standard Bank plc,
                                                            Authority and was a regulatory consultant for Beachcroft
Temenos Group AG and Mott McDonald Group Ltd.
                                                            Regulatory Consultants.
Mark has chaired the Audit, Risk and Compliance
Committee since September 2007.




                                                                                                                        43
     Corporate governance




                                                                                    Balance of the Board
                                                                                    The board contains an appropriate balance of expertise
                                                                                    in management, investment, administrative and financial
                                                                                    services to meet the requirements of our business.


                                                                                    Appraising the Board’s performance
                                                                                    Every year the performance of board members is reviewed
                                                                                    both individually and as a team. The senior independent
                                                                                    director reviews the performance of the chairman, and the
                                                                                    chairman reviews all other directors. In conducting this
                                                                                    process the views of other board members are sought
                                                                                    and taken into consideration.


                                                                                    Board Committees
                                                                                    The following board committees met during 2009.
                                                                                    n   The Group Audit Risk and Compliance Committee.
                                                                                    n   The Remuneration and Nomination Committee.
                                                                                    n   The Investment Committee.
                                                                                    n   The With-profits Committee.

                                                                                    The terms of reference for the board committees are
                                                                                    reviewed each year and published on our website LV.com.




     Board and Committee membership and attendance in 2009
                            Liverpool Victoria   Group Audit, Risk   Remuneration and          Remuneration and        Investment   With-profits
                            Friendly Society     and Compliance      Nomination Committee      Nomination Committee    Committee    Committee
                            Board                Committee           (sitting as the           (sitting as the
                                                                     Remuneration Committee)   Nomination Committee)

     Meetings in the year         9                    4                      5                         1                  6            5

     D Holt                       9                   N/A                     5                         1                 6            N/A
     M Austen                     8                    4                     N/A                       N/A                6            N/A
     G Nott                       9                   N/A                     5                         1                 6            N/A
     I Reynolds                   9                    4                     N/A                       N/A               N/A            4
     S Sinclair                   8                    4                      5                         1                N/A           N/A
     M Rogers                     9                   N/A                    N/A                        1                 6            N/A
     K Abercromby                 9                   N/A                    N/A                       N/A                6            N/A
     S Daniels                   7/7                  N/A                    N/A                       N/A               N/A           N/A
     R Rowney                     9                   N/A                    N/A                       N/A               N/A           N/A
     P Nowell                    N/A                  N/A                    N/A                       N/A               N/A            5



44
                                                                                         Annual report and accounts 2009




                                                                                                                                    01 Business overview
                                                                                                                                    02 Performance
Group Audit,                                                     During 2009, the Committee undertook a review of the
                                                                 group’s data security arrangements, began oversight
Risk and Compliance Committee                                    of our preparations for Solvency II and was active
The Group Audit, Risk and Compliance Committee                   in recruiting a new head of internal audit and the
comprises three non-executive directors, currently Mark          establishment of a new chief risk officer position.
Austen (chairman), Ian Reynolds and Stuart Sinclair.
                                                                 In the light of the recommendation of the Walker Report
The Committee meets at least every three months with the         the committee will split into separate Audit and Risk
group chief executive and senior management in finance,          committees from July 2010.
internal audit, risk and compliance and the external auditor.




                                                                                                                                    03 Our businesses
The key objectives of the Committee are to assist the
board in:                                                        Remuneration and
n   the discharge of its responsibilities in respect of          nomination committee
    external financial reporting;                                Sitting as the Remuneration Committee, the Committee
n   ensuring the independence of the group’s                     met four times during 2009 and is expected to meet
    external auditor;                                            four times in 2010. The Committee is made up of three
                                                                 independent non-executive directors, Stuart Sinclair
n   reviewing the effectiveness of the group’s                   (chairman), Gill Nott and Dennis Holt, with input provided
    control systems;                                             by the HR director and the chief risk officer. On behalf of




                                                                                                                                    04 Group support and CSR
                                                                 the board, the Committee determines:
n   overseeing the group’s enterprise risk management
    framework, together with the setting of risk appetite; and   n   our broad policy on executive remuneration; and

n   monitoring the appropriateness and adequacy of the           n   the specific packages for each of the executive
    plans and resourcing of the internal audit function.             directors and certain senior managers

Other responsibilities of the Committee include:                 More details of the group’s policy on executive and senior
                                                                 management remuneration, and the activities of the
n   reviewing the actuarial assumptions and accounting
                                                                 Committee during the year are set out in the Directors’
    policies for the Annual Report;
                                                                 Report on Remuneration.
n   reviewing the Annual Report and recommending its
                                                                 In its capacity as the Nomination Committee,                       05 Corporate governance
    adoption to the board;
                                                                 the Committee:
n   scrutinising the Individual Capital Assessment prepared      n   evaluates the balance of skills, knowledge and
    by management and recommending its acceptance to                 experience on, and required by, the board for
    the board;                                                       board appointments and certain senior management
n   making recommendations on the appointment,                       roles; and
    reappointment and removal of the external auditor;           n   prepares a description of the role and capabilities
n   agreeing guidelines for using our external auditor               required for any particular appointment.
    for non-audit related work to ensure its continued           Recruitment consultants will usually be instructed
    independence is not prejudiced;                              to help compile a shortlist of candidates for interview
                                                                                                                                    06 The numbers




n   overseeing the group’s regulatory compliance,                for board vacancies. The Committee will then
    receiving reports from the chief risk officer on a wide      recommend appointments to the board for approval.
    range of issues including regulatory change; and             The Nomination Committee is made up of the members
                                                                 of the Remuneration Committee together with the group
n   reviewing the arrangements through which employees           chief executive.
    can raise concerns about possible irregularities relating
    to financial reporting or other matters.



                                                                                                                               45
     Corporate governance




     Investment Committee                                         With-profits Committee
     The Investment Committee comprises three non executive       The With-profits Committee meets at least three times
     directors, currently Gill Nott (chairman), Dennis Holt and   a year, and comprises Peter Nowell, Ian Reynolds and
     Mark Austen, together with the group chief executive,        the managing director of our life business. Peter Nowell,
     the group finance director, the group chief investment       who has extensive relevant industry experience, acts as an
     officer, the managing director of the life business and      independent chairman, and also chairs the Royal National
     the finance director of the general insurance business.      Pension Fund for Nurses Supervisory Board. The role of the
     Representatives of the group’s asset manager normally        With-profits Committee is to:
     attend by invitation.
                                                                  n   Bring independent judgement to the assessment of
     The Committee normally meets at least every three months         compliance with the statement of Principles and Practice
     and is responsible for:                                          of Financial Management; and
     n   Monitoring and reviewing the management of our           n   Monitor how any competing or conflicting interests
         investments by Liverpool Victoria Asset Management           between different groups of policyholder are resolved.
         (LVAM); and
                                                                  The Committee can choose to draw on external professional
     n   Confirming to the board each year that the               advice to deliver its objectives effectively.
         continued appointment of LVAM remains appropriate,
                                                                  During 2009 the Committee also held special meetings
         having regard to its performance and charges relative
                                                                  to consider the impact on the interests of with-profits
         to external alternatives.
                                                                  members of potential business acquisitions and a
                                                                  “Dear CEO” letter from the FSA regarding the conduct
                                                                  of with-profits business by mutual societies.




46
                                                                                        Annual report and accounts 2009




                                                                                                                                     01 Business overview
                                                                                                                                     02 Performance
Group Executive Committee                                       The environment
The group chief executive chairs this weekly committee          We believe that looking after the environment is part of
meeting to monitor our business performance. It also meets      being a responsible business and complements our social
monthly in order to help him meet the responsibilities which    responsibility strategy of ‘protecting our children and their
the board has delegated to him.                                 future’. As such we have an environmental strategy and
                                                                policy to provide a structured approach across all areas
                                                                of our business to manage, monitor and minimise our
Member relations                                                environmental impact. Details of specific environmental




                                                                                                                                     03 Our businesses
The board believes that communicating with members is of        activities can be found on page 38 of this report.
prime importance. We host two Members’ Panel meetings
                                                                We are committed to improving our management of
each year and have developed a programme of regional
                                                                environmental issues and are constantly looking at
member events to encourage members to participate on a
                                                                ways we can reduce our impact on the environment.
nationwide basis. The new Member Panel format described
in the 2008 report has continued to operate successfully,
and seven new members joined the Panel during the year.         External consultancy services
The board will continue to monitor its effectiveness and
                                                                We have commissioned external advisory services in 2009,
make further changes as appropriate. In addition we use
                                                                covering advice in relation to:
digital communications to seek feedback from members.
                                                                    actuarial matters




                                                                                                                                     04 Group support and CSR
                                                                n
More information on member activities can be found on
page 33.                                                        n   pensions
We are also committed to making all communications clear        n   taxation
and easy to understand. The project described in the 2008
report to review and re-write policy documents and other
                                                                n   strategy and acquisitions
customer communications in plain English started last year      n   system reviews
and so far 9,000 documents have been amended. The LV=
website has also been re-designed and refreshed to make         PricewaterhouseCoopers LLP, our external auditor,
it more user-friendly.                                          also provides additional services to the group in line
                                                                with group policy.
                                                                                                                                     05 Corporate governance
Complaints policy                                               In all cases where an external auditor provides
                                                                additional services, steps are taken through the Audit,
We aim to provide an excellent standard of service to our       Risk and Compliance Committee to ensure objectivity
members and customers, but recognise that there may be          and independence is upheld.
occasions where service falls below expectations. Our policy
is to deal with any complaints promptly, fairly and honestly.
Processes are also in place to ensure we swiftly take any
necessary preventative action. Where regulation or guidance
govern complaint procedures, we have taken steps to
ensure we remain compliant. If we are unable to resolve
the matter satisfactorily, the complainant will be advised
                                                                                                                                     06 The numbers




to refer the matter to the Financial Ombudsman Service.




                                                                                                                                47
     Directors’ report




                                    Business activities
     Paul Cassidy                   and future prospects
     Company Secretary
                                    LV= is an incorporated friendly society that, together with
                                    various subsidiaries, carries out insurance and financial
                                    services business in the United Kingdom. The directors
                                    consider that all the activities undertaken by the group
                                    during the year were within its rules and any relevant
     The directors of Liverpool     regulatory permissions.

     Victoria Friendly Society      A review of the business for the year ending 31 December
                                    2009 of recent events and of likely future developments
     Limited present their annual   can be found in the chairman’s and group chief executive’s

     report together with the       statements and in the Business review.

                                    The board sets key performance indicators (KPIs) and
     accounts for the year ended    targets, which it monitors on a regular basis throughout
     31 December 2009.              the year. These KPIs change from time to time to reflect
                                    changing objectives and priorities. During 2009, the KPIs
                                    were focused on:
                                    n   Achieving the target results for each business unit;
                                    n   Increasing third party funds managed by LVAM;
                                    n   Integrating Highway and launching the Nationwide
                                        general insurance partnership;
                                    n   Improving customer satisfaction and advocacy
                                        and growing awareness of the LV= brand;
                                    n   Enhancing our enterprise risk management
                                        framework, operating at all times to required
                                        regulatory standards; and
                                    n   Improving staff engagement while fostering talent
                                        and developing leadership capability.


                                    Board Directors and interests
                                    The current members of the board and details of its various
                                    Committees are shown on pages 42 to 47 together with
                                    their dates of appointment. Steven Daniels also served as
                                    a director until his resignation on 30 September 2009.

                                    We continued to maintain liability insurance cover for our
                                    directors and officers during the year.




48
                                                                                      Annual report and accounts 2009




                                                                                                                                   01 Business overview
                                                                                                                                   02 Performance
With-profits bonus declaration                                Managing risk
We have declared an annual bonus for the year ending          We look to create value for members by maintaining
31 December 2009 at 1% of the sum assured for Industrial      an appropriate balance between the returns that we
Branch business and at 2% of the sum assured for              seek and the level and type of risk we take on in order
conventional Ordinary Branch life business. Interim bonus     to achieve these returns.
rates will also be at these levels. Terminal bonus rate
                                                              Seven principal types of risk have been identified and
changes in 2009 maintained our position at or near the
                                                              the risk appetite for each of these has been defined
top of the market for most products.
                                                              as the amount of regulatory capital required to meet the




                                                                                                                                   03 Our businesses
                                                              capital requirements under the FSA’s Individual Capital
Basis of accounting                                           Assessment. A statement of risk appetite in terms of
                                                              capital consumed by risk class has been agreed with the
These accounts are presented using International Financial
                                                              board during 2009, and tolerance levels are in place to
Reporting Standards, as adopted by the European Union,
                                                              accommodate growth in the business as outlined in the
drawn up on a going concern basis. The directors are
                                                              group’s strategy. During 2010 we intend to develop our
satisfied that the group has adequate resources to continue
                                                              risk appetite further to include earnings at risk where
in business for the foreseeable future and that accordingly
                                                              appropriate. These risks are:
the going concern basis is appropriate. Further details
about the directors’ responsibilities for the accounts are
                                                              n   insurance risk
described below                                               n   market risk




                                                                                                                                   04 Group support and CSR
                                                              n   credit risk

Fixed assets                                                  n   liquidity risk
                                                              n   operational risk
Changes in our fixed assets are shown in note 20
of these accounts.
                                                              n   group risk
                                                              n   strategic risk

Margin of solvency                                            Further information on the risks can be found in note 3
                                                              of these accounts.
Throughout the year and at 31 December 2009 we
held the required capital resources for each business         We recognise the critical importance of having efficient             05 Corporate governance
class as prescribed by the Financial Services Authority.      and effective risk management systems in place.
                                                              Specifically we have:

Auditor                                                       n   Board and executive committees with clear terms
                                                                  of reference, including a board committee with a
A resolution for the reappointment of                             specific risk remit, as described in the Corporate
PricewaterhouseCoopers LLP as auditor will be                     Governance report;
proposed at the 2010 Annual General Meeting.
                                                              n   A clear organisational structure with documented
                                                                  apportionment of responsibilities;
                                                              n   A uniform methodology of risk assessment that is
                                                                                                                                   06 The numbers




                                                                  embedded within all group companies ensuring they
                                                                  operate within agreed tolerances and with appropriate
                                                                  controls in place; and
                                                              n   Regular reviews of risks by senior managers, where the
                                                                  frequency of review is determined by the potential impact
                                                                  of the risk and its likelihood.



                                                                                                                              49
     Directors’ report




     Internal Control                                                Equal opportunities
     The board has overall responsibility for the group’s internal   We are committed to equal opportunities and the fair
     control systems and for monitoring their effectiveness.         treatment of all our employees. In line with our corporate
     Implementation and maintenance of the internal control          values we undertake to treat all our employees with dignity,
     systems are the responsibility of the executive directors       respect, and consideration.
     and senior management. The performance of the internal
                                                                     We recognise our commitments under the law and are
     control systems is reviewed regularly by the Audit, Risk &
                                                                     committed to providing equal opportunities by ensuring
     Compliance Committee, which takes regular reports from
                                                                     that our practices and procedures follow legal requirements
     the internal audit, compliance and the risk functions.
                                                                     and good practice, as recommended by the Commission
     The group’s internal control systems are designed to            for Racial Equality, the Equal Opportunities Commission,
     manage, rather than eliminate, the risk of failure to meet      and the Disability Rights Commission.
     business objectives and can only provide reasonable,
                                                                     Our policy is to treat all employees and applicants fairly
     and not absolute, assurance against material misstatement
                                                                     and equitably regardless of gender, racial or cultural
     or loss. In assessing what constitutes reasonable
                                                                     grounds, disability, age, marital status, religious beliefs,
     assurance, the board has regard to materiality and to
                                                                     sexual orientation, trade union activity or any other category
     the relationship between the cost of, and benefit from,
                                                                     where discrimination cannot be reasonably justified. We will
     internal control systems.
                                                                     ensure that no requirement or condition will be imposed
     In 2009, the board has undertaken a full annual review of       without justification that could disadvantage individuals on
     the effectiveness of the material controls, as recommended      any of these grounds.
     by the Code and in compliance with the Turnbull guidance.
                                                                     We provide employees with information on issues relevant
     The review incorporated an evaluation of the group’s
                                                                     to their employment and our performance through
     framework and an assessment of any significant internal
                                                                     meetings, regular magazines and an employee intranet.
     control issues that were raised during the year in relation
                                                                     The management team also actively engages with an
     to financial, operational and compliance risk controls.
                                                                     Employee Consultative Forum on issues of importance
     There have been no material control weaknesses identified
                                                                     to employees, including working environment, employee
     during the year requiring disclosure in the Report and
                                                                     facilities, terms of employment and employee safety.
     Accounts. Where any significant control weaknesses were
     identified during the year, necessary actions have been
     taken, or agreed plans are in place and being tracked to        Persons employed by the
     implementation. The system was in place throughout the          society and its subsidiaries
     year and up to the date of approval of the Annual Report
     and Accounts.                                                   The average number of people we employ and our total
                                                                     employee costs are shown in note 14 of the accounts.

     Charitable contributions
                                                                     Membership
     We made charitable donations during 2009 as follows:
                                                                     As at 31 December 2009, we had 1,095,000
     n   £98,000 was matched pound for pound for our                 (2008: 1,137,000) members.
         employee charity fundraising initiatives
                                                                     We make all reasonable and cost effective attempts to
     n   £13,000 was paid to two charities based on proxy            trace and contact members if we believe their address
         votes received for the AGM                                  details are incorrect. When all reminder or tracing
     n   £54,000 was given as grants to members from the             techniques have been exhausted we maintain a record
         Member Support Fund                                         of the relevant member and, if they have an unpaid
                                                                     claim, the policy remains open for payment until we
     n   The members’ telephone helpline was provided at             can re-establish contact.
         a cost of £31,000.

     No political donations were made.
50
                                                                                       Annual report and accounts 2009




                                                                                                                                   01 Business overview
                                                                                                                                   02 Performance
Statement of disclosure                                        n   provide additional disclosures when compliance with
                                                                   the specific requirements in IFRS is insufficient to
of information to auditors                                         enable users to understand the impact of particular
As at the date of this report each director confirms that:         transactions, other events and conditions on the
                                                                   Society and the group’s financial position and financial
1) so far as (s)he is aware, there is no information
                                                                   performance; and
   relevant to the audit of the Society’s accounts for
   the year ending 31 December 2009 of which the               n   state that the Society and the group have complied
   auditor is unaware;                                             with applicable IFRS, subject to any material departures
                                                                   disclosed and explained in the accounts.




                                                                                                                                   03 Our businesses
2) (s)he has taken all steps that (s)he ought to have taken
   in his/her duty as a director to make him/herself aware     The directors are also responsible for maintaining:
   of any relevant audit information and to establish that
                                                               n   proper accounting records which are intended to disclose
   the Society’s auditor is aware of that information.
                                                                   with reasonable accuracy, at any time, the financial
                                                                   position of the Society and the group;
Responsibilities of the Board                                      appropriate internal control systems to safeguard
of Directors for the accounts
                                                               n

                                                                   our assets and to prevent and detect fraud and other
The Friendly Societies Act 1992 (1992 Act) requires                irregularities; and
a friendly society’s Committee of Management to                n   the integrity of the corporate and financial information




                                                                                                                                   04 Group support and CSR
prepare accounts for each accounting period. As we are
                                                                   included on our website LV.com.
incorporated under the 1992 Act our board of directors has
assumed the responsibilities and duties of the Committee       Further details of our internal controls are more fully
of Management in relation to these accounts.                   described opposite.

These accounts must comply with the relevant provisions
of the 1992 Act, and present fairly the financial position,
financial performance and cash flows of the Society and the
group at the end of the accounting period. In carrying out     By order of the board of directors
this duty, the directors have chosen to use International      P B Cassidy, Company Secretary
Financial Reporting Standards (IFRS) as adopted by the         25 March 2010                                                       05 Corporate governance
European Union.

Legislation in the United Kingdom that governs the
preparation and publication of accounts may differ from
legislation in other jurisdictions.

A fair presentation of our accounts in accordance with IFRS
requires our directors to:
n   select suitable accounting policies and ensure they are
    applied consistently;
n   prepare the accounts on a going concern basis, unless
                                                                                                                                   06 The numbers




    it is inappropriate to presume that the Society and the
    group will continue in business;
n   present information, including accounting policies, in a
    manner that provides relevant, reliable, comparable and
    understandable information;




                                                                                                                              51
     Directors’ report on remuneration




     This report has been         Remuneration comittee
     prepared with reference      The responsibilities of the Remuneration Committee include
                                  determining the broad policy for remunerating the executive
     to the requirements of the   directors and agreeing the remuneration of each executive
                                  director and other senior managers.
     Directors’ Remuneration
                                  Stuart Sinclair chairs the Remuneration Committee.
     Report Regulations 2002.     In 2009 the other members were Gill Nott and Dennis Holt.
                                  The group chief executive is also invited to meetings
                                  except when his own remuneration is being considered.
                                  Other people, such as the group chief risk officer and the
                                  human resources director, normally attend meetings by
                                  invitation. The Committee reviews remuneration policy
                                  and strategy at least once a year. All significant incentive
                                  and bonus schemes are established and monitored by
                                  the Committee.


                                  Remuneration policy
                                  Our approach to remuneration policy is designed to support
                                  recruitment, motivation and retention. Remuneration is
                                  considered in the context of the financial services sector
                                  and our individual businesses. Our objective continues
                                  to be to provide total remuneration packages at the
                                  relevant mid-market level with a significant proportion of
                                  total remuneration dependent upon performance, so that
                                  upper quartile remuneration is available for top quartile
                                  performance. This policy is described in more detail
                                  opposite for executive directors.

                                  During 2009 executive remuneration has been the subject
                                  of much public attention and of published guidance and
                                  regulation in the form of the Turner Report from the FSA
                                  and the Walker Report at the request of the Treasury.
                                  The Committee has carefully considered these reports,
                                  and in particular the focus on the link between risk and
                                  financial incentive. The existing practices of the group,
                                  subject to certain minor modifications, are consistent
                                  with all the practices recommended. The Committee will
                                  continue to keep these developments under close scrutiny.




52
                                                                                          Annual report and accounts 2009




                                                                                                                                          01 Business overview
                                                                                                                                          02 Performance
Remuneration policy for                                           Remuneration policy
non-executive directors                                           for executive directors
Fees for the non-executive directors are determined by the        The remuneration of our executive directors comprises
board, based on the responsibility and time committed to          salary, an annual performance bonus, participation in
the group’s affairs and appropriate market comparisons.           long term incentive plans with returns based on group
Individual non-executive directors do not take part in            performance, together with a contributory pension and
discussions regarding their own fees. An example of the           other benefits, as detailed at the end of this Report.
contract of a non-executive director is included in the           Bonus and incentive schemes are designed to provide




                                                                                                                                          03 Our businesses
Corporate Governance section of our website.                      a strong alignment of interest between the individual
                                                                  and the members of the Society.
No other remuneration is paid apart from these non-
pensionable fees, except where we pay authorised                  Remuneration reflects individual experience, responsibilities,
expenses to non-executive directors for the activities they       function and sector, along with individual and company
undertake. Non-executive directors’ contracts state that          performance, and is reviewed each year. Judgements are
either party can give three month’s notice of termination.        based on a range of benchmarking information, mainly from
                                                                  independent external consultants.



The remuneration of individual directors, including that of the chairman and highest paid director, was as follows:




                                                                                                                                          04 Group support and CSR
                                                                                               Other         Total           Total
                                                                  Salary         Bonus       Benefits        2009           2008
                                                                  £’000          £’000         £’000        £’000          £’000

M.J. Rogers                                                        474            405          118          997         1,002
S.M. Daniels (resigned 30 September 2009)                          188            281            8          477           457
R.A. Rowney                                                        256            180           13          449           436
K.W. Abercromby                                                    281             85           12          378           433
D. Holt                                                            142              –            –          142           130
G. Nott                                                             60              –            –           60            55
M.E. Austen                                                         59              –            –           59            57
S. Sinclair                                                         56              –            –           56            15             05 Corporate governance
I. Reynolds                                                         52              –            –           52            52
B. Rose (resigned 18 June 2008)                                      –              –            –            –            32
                                                                 1,568            951          151        2,670         2,669
                                                                                                                                          06 The numbers




                                                                                                                                     53
     Directors’ report on remuneration




     Salary                                                         Long term incentive plan (LTIP)
     Our policy is to pay salaries at the mid-market level          Following a review in 2007 the LTIP was redesigned to
     for satisfactory individual performance, in line with the      ensure it rewards performance in a manner aligned to
     relevant market for the job. This is the only pensionable      members’ interests. This means payment reflects our
     remuneration. Salaries are reviewed once a year with           medium and long term targets to grow Enterprise Value,
     effect from April.                                             which is our best estimate of the market value of the group.
                                                                    This is the benchmark by which we now measure our long-
                                                                    term performance. For any payments to be made under the
     Group annual performance bonus                                 scheme, Enterprise Value must grow at a rate in excess of
     Executive directors are eligible to receive an annual          a risk weighted return, taking account of prevailing interest
     non-pensionable performance bonus if they achieve a            and inflation rates, on the group’s capital. A further review
     number of financial, business and personal objectives.         of the scheme was undertaken in 2009 to ensure it better
     These are all linked to the achievement of our                 reflects the outcomes that individuals can most directly
     strategic objectives.                                          influence at divisional level, while linking the amount paid
                                                                    to the overall results of the group. Each LTIP scheme runs
     For the executive directors other than Steven Daniels,
                                                                    for a three year period, with a new scheme commencing
     the Scheme for 2009 could pay a maximum of 80%
                                                                    on 1 January each year.
     of salary (110% in the case of the chief executive).
     The maximum payment would only be achieved in the              Membership of the LTIP is by invitation of the board and
     case of exceptional individual performance and significant     restricted to those few individuals who, by their roles and
     divisional out-performance. ‘On target’ divisional             position within the group, are best placed to influence
     performance and good individual performance would attract      or directly contribute to our longer-term growth. For the
     a bonus of approximately half of the maximum award.            purposes of the LTIP, the Enterprise Value of the group will
                                                                    be assessed with reference to clearly defined valuation
     Steven Daniels’ remuneration was based partly on the total
                                                                    bases. These valuation bases are reviewed every three
     performance of relevant funds compared with benchmark
                                                                    years by independent advisers.
     performance and the contribution made by asset allocation,
     and partly on his performance in achieving specific business   Individuals are granted an amount (‘the award’) at the date
     and personal objectives. Under this arrangement he could       of joining the scheme, which is calculated as a percentage
     have received up to 280% of salary.                            of their salary (up to a maximum of 100% in the case of the
                                                                    group chief executive). The amount received depends on the
     Our annual performance bonus scheme rewards other
                                                                    group’s performance against our Enterprise Value targets
     employees on the basis of group results, divisional results
                                                                    and on target investment performance, with a maximum
     and personal contribution.
                                                                    achievable payout of three times the award.
                                                                    n   The LTIP scheme which started on 1 January 2007
                                                                        required a 7.8% per annum return on the Enterprise
                                                                        Value of the group as at 1 January 2007 to be earned
                                                                        by 31 December 2009. This hurdle was not achieved
                                                                        and therefore no payments will be made to participants
                                                                        under the 2007 LTIP.
                                                                    n   The LTIP scheme which started on 1 January 2008
                                                                        requires a 7.5% per annum return on the Enterprise
                                                                        Value of the group at 1 January 2008 to be earned
                                                                        by 31 December 2010. This scheme is still open.




54
                                                                                     Annual report and accounts 2009




                                                                                                                            01 Business overview
                                                                                                                            02 Performance
n   The LTIP scheme which started on 1 January 2009          Other benefits
    requires a 6.6% per annum return on the Enterprise
    Value of the group at 1 January 2009 to be earned        Other benefits we provide are:
    by 31 December 2011. This scheme is still open.          n   car allowance
n   The new LTIP scheme which started on 1 January 2010      n   medical insurance
    has been significantly redesigned to achieve better
    alignment to member value and staff incentives,          n   income protection cover (executive level only)
    and requires a 9% pa growth in the Enterprise Value      n   group product discounts, which are available to all
    of the Strategic Business Units. For members of the




                                                                                                                            03 Our businesses
                                                                 staff and directors on equal terms.
    board, and those scheme participants engaged primarily
    in investment activity, a proportion of any payment
    is linked to the group’s investment performance.         Directors’ loans
    For this portion to produce any payment, an average
                                                             As at 31 December 2009 and 31 December 2008 there
    outperformance of the relevant benchmark of at least
                                                             were no loans outstanding from directors.
    0.6% per annum must be achieved. This scheme also
    has risk measures embedded in it. Fewer managers
    are enrolled in this LTIP scheme and consequently the    Service contracts
    budget to support it has been reduced.
                                                             Our executive directors are subject to a notice period
Neither the annual bonus nor the LTIP are contractual        of 12 months.




                                                                                                                            04 Group support and CSR
entitlements of those potentially eligible to participate
in them.                                                     The directors approved the Directors’ Report on
                                                             Remuneration on 25 March 2010.
We believe the LTIP scheme strike a good balance
between individual staff incentives and ensuring growth
in member value.

                                                             Stuart Sinclair
Pensions                                                     Chairman of the Remuneration Committee
During 2009 the board reviewed our pension arrangements
                                                                                                                            05 Corporate governance
and took the decision to close the final salary pension
scheme to new members on 31 December 2009.
Existing members continue to accrue benefits in this
scheme. A new defined contribution pension scheme
was introduced for new employees from 1 January 2010
where we contribute twice the amount contributed by each
employee within a range of employee contributions from a
minimum of 3% to a maximum of 7% of salary. The board is
pleased to report that this scheme has received a Pension
Quality Mark along with full accreditation by the National
Association of Pension Funds.
                                                                                                                            06 The numbers




                                                                                                                       55
     Jargon buster




     Association of Financial Mutuals: The trade body that            Free Asset Ratio: A measure used by the FSA and
     represents mutual insurers, Friendly Societies and other         analysts to measure the financial strength of life assurance
     financial mutuals in the UK. It was formed in January 2010       companies. Free assets represent any assets that a
     after a merger of the Association of Friendly Societies and      business holds in excess of the amount required to meet
     the Association of Mutual Insurers.                              its minimum regulatory capital requirements.

     APE: Annual Premium Equivalent: A measure commonly               Friendly Society: Friendly Societies were set up in
     used to calculate and compare the size of a life company.        the 19th century to help and encourage underprivileged
     It is calculated by adding the total annual premiums             people to improve their financial wellbeing. As they are
     received, and 10% of all single premiums received                mutuals, Friendly Societies are owned by members rather
     in the year.                                                     than shareholders.

     Asset shares: Asset shares reflect the amount of money           Funds under management: The value of all investments
     paid into with-profits policies by way of premiums and           managed on behalf of policyholders and other clients.
     investment returns, less the costs of administering
                                                                      Group Operating Profit: Profit before any investment
     those policies.
                                                                      returns that are above or below our long term
     Combined Code on Corporate Governance: The Code                  investment assumptions.
     sets out standards of good practice for listed companies.
                                                                      Heritage business: These products were historically the
     It covers, amongst other things, the board composition
                                                                      first to be offered by LV= as a Friendly Society. It includes
     and its accountability and relations with business owners.
                                                                      our traditional pensions, investment and savings products.
     Mutual organisations such as LV= do not have to adhere
     to the Code, but we choose to as we believe it is good           IFRS: International Financial Reporting Standards are used
     business practice.                                               to ensure a company’s reported accounts are prepared to
                                                                      common standards across the world.
     CRC: The CRC Energy Efficiency Scheme (formerly known
     as the Carbon Reduction Commitment) is the UK’s                  Industrial Branch: Part of our heritage business,
     mandatory climate change and energy saving scheme,               and typically contains small premium whole of life
     due to start in April 2010. It is central to the UK’s strategy   and endowment policies.
     for improving energy efficiency and reducing carbon dioxide
                                                                      KPIs: Key performance indicators used to track and
     emissions, as set out in the Climate Change Act 2008.
                                                                      measure our progress.
     Enterprise Value: As LV= is not quoted on the stockmarket,
                                                                      Multi-distribution: Consumers don’t all like to buy things
     Enterprise Value is our measure of the market value of the
                                                                      in the same way – some buy products in a shop, while
     business. Any rise or fall in Enterprise Value will also tell
                                                                      others buy over the internet or telephone. At LV= we offer
     us if we are growing member value. A complex formula is
                                                                      customers more than one way to buy our products.
     used to calculate our Enterprise Value, and the figure is
     independently verified every three years.                        Mutual: A business that is owned by its members rather
                                                                      than by shareholders.
     FSA: The Financial Services Authority regulates the financial
     services industry in the UK.                                     Ordinary Branch: Part of our heritage business, and
                                                                      typically consists of traditional with-profits endowments,
     FTSE: FTSE is an independent company that provides
                                                                      whole of life policies, annuities and pensions.
     indices to measure how stockmarkets and other financial
     markets perform. In the UK, the FTSE 100 index is widely
     used by the media to report on the valuation of the largest
     100 quoted companies on the UK Stock Exchange.




56
                                                                                     Annual report and accounts 2009




                                                                                                                                    01 Business overview
                                                                                                                                    02 Performance
Pension annuity: An annuity uses the proceeds of a            SSU: Strategic Support Unit. Provides group wide support
pension fund to provide an income for a fixed term or         services that enable the business to operate. SSUs include
the rest of your life.                                        marketing, e-commerce, HR, IT and change and operations.

PPI: Payment Protection Insurance provides money to           Statutory profit/(loss) before tax: Profit or loss as reported
cover a borrower’s monthly loan repayments if they cannot     under the IFRS.
work due to an accident, sickness or unemployment.
                                                              TCF: Treating Customers Fairly is an industry-wide initiative
Quantitative Easing (QE): A form of monetary policy           designed to ensure financial providers meet basic principles
adopted by central banks to stimulate an economy              of product information, suitability and performance.




                                                                                                                                    03 Our businesses
when other traditional means have been exhausted.
                                                              Total capital resources: The amount of capital that we
When interest rates are at or close to zero, central banks
                                                              have to run our business.
buy government or corporate debt with the aim of pumping
money into the economy.                                       Turnbull guidance: The Turnbull report provides guidance to
                                                              directors on how to apply the internal control aspects of the
Risk appetite: The amount of risk that a business
                                                              Combined Code on Corporate Governance.
is prepared to accept or keep when carrying out its
everyday activities.                                          Unallocated divisible surplus (UDS): The amounts
                                                              that have yet to be formerly declared as bonuses for
RDR (Retail Distribution Review): A fundamental review
                                                              participating policyholders together with the free assets
by the FSA designed to help address insufficient trust
                                                              of the group.




                                                                                                                                    04 Group support and CSR
and confidence in financial services products and
services. In particular, it is intended to drive increased    Underlying profit: The operating profit before one-off
professionalism in the tied and independent financial         items such as basis and methodology changes, short term
advice areas, and will change the way that financial          investment fluctuations and amortisation of intangibles.
advice is organised and paid for.
                                                              Walker Review: Originally tasked with reviewing corporate
RNPFN: Formerly the Royal National Pension Fund               governance in UK banks in the light of the experience of
for Nurses.                                                   critical loss and failure throughout the banking system,
                                                              the terms of reference were subsequently extended to
SBU: Strategic Business Unit. LV= is made up
                                                              include other financial institutions. Final recommendations
of five business units (Life, General Insurance,
                                                              were published in November 2009.
Asset Management, Financial Advice, Bank),                                                                                          05 Corporate governance
each of which focuses on profitably delivering                With-profits fund: An investment fund where we combine
a specific part of our overall group business plan.           all of our with-profits investors money and manage it on
                                                              their behalf. The fund normally invests in UK and overseas
SIPP (Self invested personal pensions): Unlike normal
                                                              shares; fixed interest securities including Government
personal pension plans, where the pension company
                                                              stocks and bonds; property; cash; and our own business
limits your choice of investments to those that it manages,
                                                              activities. We regularly monitor where we invest the fund
SIPPs allows investors the opportunity to make their own
                                                              to take account of future liabilities.
investment decisions.

Solvency II: An EU wide project that sets out to provide a
comprehensive new framework for insurance supervision
                                                                                                                                    06 The numbers




and regulation. This aims to strengthen protection for
policyholders by ensuring that companies allocate enough
capital to cover all the risks in their business.




                                                                                                                               57
      We can count on LV= to look
      after what we love in life




                                    We have

                                    3.8m
                                    customers, of which
                                     1.1m are members




The numbers
                                                                                       Annual report and accounts 2009

INDEPENDENT AUDITOR’S REPORT TO THE MEMBERS




                                                                                                                                     01 Business overview
OF LIVERPOOL VICTORIA FRIENDLY SOCIETY LIMITED



We have audited the financial statements of Liverpool          We report to you our opinion as to whether the financial
Victoria Friendly Society Limited for the year ended           statements give a true and fair view and are properly
31 December 2009, which comprise the Statement of              prepared in accordance with the Friendly Societies Act




                                                                                                                                     02 Performance
Comprehensive Income, Statement of Financial Position,         1992 and the Regulations made under it. In addition,
Statement of Cashflows and the related notes for the           we report to you if, in our opinion, the Society and the
Society and the Group. These financial statements have         Group has not kept proper accounting records, or if we
been prepared under the accounting policies set out therein.   have not received all the information, explanations and
We are also required to report on the Directors’ Report for    access to documents that we require for our audit.
the year ended 31 December 2009.
                                                               We also, at the request of the Board of Directors,
                                                               review whether the Corporate Governance Statement
RESPECTIVE RESPONSIBILITIES OF                                 reflects the Society’s compliance with the eight provisions
THE BOARD OF DIRECTORS AND                                     of the Annotated Combined Code on Corporate Governance
AUDITORS                                                       for Mutual Insurers (2008) specified for our review and




                                                                                                                                     03 Our businesses
                                                               we report if it does not. We are not required to consider
The Board of Directors’ responsibilities for preparing
                                                               whether the statements on internal control cover all risks
the Annual Report and accounts in accordance with
                                                               and controls, or form an opinion on the effectiveness of the
applicable law and International Financial Reporting
                                                               Group’s corporate governance procedures or its risk and
Standards (IFRSs) as adopted by the European Union
                                                               control procedures.
are set out in the Statement of the Board of Directors’
Responsibilities. The Society has chosen to comply with        We also report to you our opinion as to whether the Directors’
the Annotated Combined Code on Corporate Governance            Report has been prepared in accordance with the Friendly
for Mutual Insurers (2008) issued by the Association of        Societies Act 1992 and the Regulations made under it,
Financial Mutuals.                                             and as to whether the information given therein is consistent
                                                               with the accounting records and financial statements.




                                                                                                                                     04 Group support and CSR
Our responsibility is to audit the financial statements in
accordance with relevant legal and regulatory requirements     We read the other information contained in the Annual
and International Standards on Auditing (UK and Ireland).      Report and consider whether it is consistent with the
This report, including the opinion, has been prepared for      audited financial statements. This other information
and only for the Society’s members as a body in accordance     comprises only Chairman’s Statement, the Chief Executive’s
with the Friendly Societies Act 1992 and the Regulations       Statement, Business Review (including the reviews of life
made under it and for no other purpose. We do not, in giving   business, general insurance and asset management),
this opinion, accept or assume responsibility for any other    the Corporate Governance Statement, the Directors’ Report
purpose or to any other person to whom this report is shown    and the Directors’ Report on Remuneration. We consider
or into whose hands it may come save where expressly           the implications for our report if we become aware of any
agreed by our prior consent in writing.                        apparent misstatements or material inconsistencies with the           05 Corporate governance
                                                               financial statements. Our responsibilities do not extend to
                                                               any other information.
                                                                                                                                     06 The numbers




                                                                                                                                59
     Annual report and accounts 2009

     AUDITOR’S REPORT




     Basis of audit opinion                                         OPINION
     We conducted our audit in accordance with International        In our opinion
     Standards on Auditing (UK and Ireland) issued by the           n   the financial statements give a true and fair view,
     Auditing Practices Board. An audit includes examination,           in accordance with IFRS as adopted by the European
     on a test basis of evidence relevant to the amounts and            Union, of the state of the Society’s and the Group’s
     disclosures in the financial statements. It also includes          affairs as at 31 December 2009 and of the income,
     an assessment of the significant estimates and judgments           expenditure and cashflows of the Society and the Group
     made by the Board of Directors in the preparation of the           for the year then ended, and have been properly prepared
     financial statements, and of whether the accounting policies       in accordance with the Friendly Societies Act 1992 and
     are appropriate to the Society and Group’s circumstances,          the Regulations made under it.
     consistently applied and adequately disclosed.
                                                                    n   the Directors’ Report has been prepared in accordance
     We planned and performed our audit so as to obtain all             with the Friendly Societies Act 1992 and the Regulations
     the information and explanations which we considered               made under it and the information given therein is
     necessary in order to provide us with sufficient evidence          consistent with the accounting records and the financial
     to give reasonable assurance that the financial statements         statements for the financial year.
     are free from material misstatement, whether caused by
     fraud or other irregularity or error. In forming our opinion
     we also evaluated the overall adequacy of the presentation
                                                                    David Roper
     of information in the financial statements.
                                                                    Senior Statutory Auditor for and on behalf of
                                                                    PricewaterhouseCoopers LLP
                                                                    Chartered Accountants and Statutory Auditors
                                                                    31 Great George Street
                                                                    Bristol BS1 5QD
                                                                    25 March 2010




                                                                    Notes:
                                                                    (a) The maintenance and integrity of the LV.com website
                                                                    is the responsibility of the directors; the work carried out by the
                                                                    auditors does not involve consideration of these matters and,
                                                                    accordingly, the auditors accept no responsibility for any changes
                                                                    that may have occurred to the financial statements since they were
                                                                    initially presented on the website.

                                                                    (b) Legislation in the United Kingdom governing the preparation and
                                                                    dissemination of financial statements may differ from legislation in
                                                                    other jurisdictions.




60
                                                                                                          Annual report and accounts 2009

STATEMENT OF COMPREHENSIVE INCOME




                                                                                                                                                            01 Business overview
year ended 31 December 2009




                                                                                                  Group                              Society
                                                                                           2009             2008                 2009          2008
                                                                              Notes          £m               £m                   £m            £m

Gross earned premiums                                                             4    1,250.7         917.3                   531.0       317.5
Reinsurers’ share of gross earned premiums                                        4      (98.1)         (45.6)                (111.5)     (113.6)
Net earned premiums                                                               4    1,152.6         871.7                   419.5       203.9




                                                                                                                                                            02 Performance
Fee and commission income                                                         6       19.5           37.1                    4.3         5.2
Investment income                                                                 7      230.5         301.4                   183.9       167.7
Net gains/(losses) on investments                                                 8      172.5        (728.0)                  121.8      (503.6)
Other income                                                                              27.1           11.7                    0.5         5.9
Total income                                                                           1,602.2         493.9                   730.0      (120.9)

Gross benefits and claims                                                         9   (1,067.9)    (1,050.8)                  (549.9)     (429.7)
Reinsurers’ share of gross benefits and claims                                    9       76.8         27.5                     92.9        42.1
Net benefits and claims                                                           9     (991.1)    (1,023.3)                  (457.0)     (387.6)

Gross change in insurance and investment contract liabilities                   10      (289.4)           676.6               (292.5)        417.8
Reinsurers’ share of gross change in insurance and




                                                                                                                                                            03 Our businesses
investment contract liabilities                                                 10        22.1             (21.5)               11.0           (1.1)
Net change in insurance and investment contract liabilities                     10      (267.3)           655.1               (281.5)        416.7

Finance costs                                                                   11        (6.5)          (3.4)                  (0.6)          (0.3)
Investment return allocated to external unit holders                                      (7.5)         46.4                       –              –
Other operating and administrative expenses                                     12      (421.2)       (427.0)                 (120.4)        (75.5)
Other expenses                                                                          (435.2)       (384.0)                 (121.0)        (75.8)
Total benefits, claims and expenses                                                   (1,693.6)       (752.2)                 (859.5)        (46.7)


Loss before tax                                                                          (91.4)       (258.3)                 (129.5)     (167.6)
Income tax (expense)/credit                                                     16        (3.3)         57.9                     5.4        38.8




                                                                                                                                                            04 Group support and CSR
Pension scheme actuarial losses, net of tax                                     19       (77.5)         (1.6)                  (74.7)        (7.2)
Transfer from the unallocated divisible surplus                                 32       172.2         202.0                   198.8       136.0
Total comprehensive income for the year                                                       –                –                    –             –

As a Friendly Society, all net earnings are deemed to be for the benefit of participating policyholders and are carried forward within the
unallocated divisible surplus.

The Group and the Society have not presented a statement of changes in equity as:

– all income and expense for the current and preceding financial years are shown in the statements of comprehensive income

– there are no equity holders in either the Group or Society as the Society is a mutual organisation                                                        05 Corporate governance
The pages from 64 to 128 are an integral part of the financial statements.
                                                                                                                                                            06 The numbers




                                                                                                                                                       61
     Annual report and accounts 2009

     STATEMENT OF FINANCIAL POSITION
     as at 31 December 2009




                                                                                                  Group                           Society
                                                                                           2009            2008               2009          2008
                                                                               Notes         £m              £m                 £m            £m

     Assets
     Intangible assets                                                           17      283.4            328.1              13.9       18.5
     Deferred acquisition costs                                                  18      102.9             94.4                 –        0.4
     Pension benefit asset                                                       19          –              4.6                 –        4.6
     Property and equipment                                                      20       19.6             16.6               5.0        2.6
     Investment properties                                                       21      379.4            377.2             324.5      360.2
     Investments in group undertakings                                           22          –                –           1,581.3    1,083.4
     Financial assets
     – Fair value through income                                                 23    5,482.4      4,903.7               4,049.7    3,849.7
     – Derivative financial instruments                                          24      121.3        198.2                 121.3      194.2
     – Loans and other recievables                                               25      203.3        646.6                 258.8      187.5
     Reinsurance assets                                                          26      164.0        136.0                 300.4      289.3
     Insurance receivables                                                       27      151.4        138.1                  21.2       12.3
     Corporation tax asset                                                       28       15.0            –                   9.4          –
     Deferred tax asset                                                          29       41.9         29.2                  16.7          –
     Prepayments and accrued income                                              30       71.6         67.2                  45.6       39.7
     Cash and cash equivalents                                                   31      646.8        749.6                 405.1      238.4
     Total assets                                                                      7,683.0      7,689.5               7,152.9    6,280.8

     Liabilities
     Unallocated divisible surplus                                               32      945.1      1,117.3               1,112.9    1,311.7
     Insurance contract liabilities                                              33    5,738.0      5,432.3               4,557.0    4,317.7
     Investment contract liabilities                                             34      578.4        396.0                 578.4      396.0
     Net asset value attributable to external unit holders                                69.0        132.1                     –          –
     Provisions                                                                  36       45.7        100.7                  36.4       51.6
     Corporation tax liability                                                   37          –         17.3                     –       13.5
     Deferred tax liability                                                      29          –            –                     –        1.9
     Financial liabilities
     – Derivative financial instruments                                          24       11.0         15.3                   6.4        3.5
     – Borrowings                                                                            –        150.6                     –          –
     – Other financial liabilities                                               38       14.9         82.6                     –          –
     Pension benefit obligation                                                  19       97.6          8.8                  84.2          –
     Insurance payables                                                          39       33.3         50.9                  22.6       39.3
     Trade and other payables                                                    40      150.0        185.6                 755.0      145.6
     Total liabilities                                                                 7,683.0      7,689.5               7,152.9    6,280.8

     The accounts were approved by the Board of directors and authorised for issue on 25 March 2010. They were signed on its behalf by:
     P.B. Cassidy
     Secretary




62
                                                                                         Annual report and accounts 2009

STATEMENT OF CASHFLOWS




                                                                                                                                     01 Business overview
as at 31 December 2009




                                                                                 Group                         Society
                                                                         2009             2008              2009         2008
                                                               Notes       £m               £m                £m           £m

Cash and cash equivalents at 1 January                          31     726.6             766.4            225.2     360.7

Cash flows arising from:




                                                                                                                                     02 Performance
Operating activities
Cash (used in)/generated from operating activities              41     (236.6)       (109.2)              524.5      (38.5)
Dividend income received                                                 54.5           97.9               47.0       80.7
Interest income received                                                146.1         170.5               110.6       43.6
Rental income on investment properties                                   22.5           26.8               23.3       24.2
Purchase of investment properties                               21      (69.1)         (39.7)             (31.2)     (36.8)
Proceeds from sale of investment properties                              42.1           36.0               42.1       19.7
Finance cost paid                                               11       (6.5)           (3.4)             (0.6)       (0.3)
Income tax paid                                                 16      (29.4)         (35.9)             (20.2)     (13.1)
Net cash flows (used in)/generated from operating activities            (76.4)        143.0               695.5       79.5

Investing activities




                                                                                                                                     03 Our businesses
Proceeds from sale of property and equipment                    12        2.2              –                  –           –
Intangible assets cost capitalised                                          –        (180.8)                  –           –
Increase in investment in subsidiaries                                      –              –             (523.2)    (213.6)
Redemption of loans to subsidiaries                                         –              –               10.5           –
Purchase of property and equipment                              20       (5.6)          (2.0)              (2.9)       (1.4)
Net cash flows used in investing activities                              (3.4)       (182.8)             (515.6)    (215.0)

Net (decrease)/increase in cash and cash equivalents                    (79.8)           (39.8)           179.9     (135.5)

Cash and cash equivalents at 31 December                        31     646.8             726.6            405.1     225.2




                                                                                                                                     04 Group support and CSR
                                                                                                                                     05 Corporate governance
                                                                                                                                     06 The numbers




                                                                                                                                63
     Annual report and accounts 2009

     NOTES TO THE ACCOUNTS
     31 December 2009




     1. Accounting policies                                                       earlier years and expected loss ratios. The main assumption
                                                                                  underlying these techniques is that past claims development
     Liverpool Victoria Friendly Society Limited (“the Society”) and its
                                                                                  experience can be used to project ultimate claims costs. Allowance
     subsidiaries (together forming “the Group”) have been consolidated
                                                                                  for one off occurrences or changes in legislation, policy conditions
     in preparing the Group accounts.
                                                                                  or portfolio mix, is also made in arriving at the estimated ultimate
                                                                                  cost of claims, in order that it represents the most likely outcome,
     Basis of presentation
                                                                                  taking account of all the uncertainties involved. To the extent that
     The Group accounts consolidate the results of the Society and its            the ultimate cost is different from the estimate, where experience
     subsidiary companies. The Group’s and Society’s accounts conform             is better or worse than that assumed, the surplus or deficit will be
     to International Financial Reporting Standards (“IFRS”). In addition         credited or charged to the Statement of comprehensive income in
     the Society’s accounts comply with the Friendly Societies (Accounts          future years. Majority of claims exposure is due to bodily claims.
     & Related Provisions) Regulations 1994 (“the Regulations”).
                                                                                  The Group establishes reserves for payment of losses and claims
     In accordance with IFRS 4 on Insurance Contracts, the Group has              expenses. These reserves represent the expected ultimate cost
     applied existing accounting practices for insurance contracts and            to settle claims occurring prior to, but still outstanding as of, the
     participating investment contracts modified as appropriate to comply         financial position date. Loss reverses fall into three categories:
     with the IFRS framework and applicable standards. Further details            Outstanding Claims Reserve (OCR), Incurred But Not Reported
     are given in policy b. below.                                                Reserve (IBNR) and Unearned Premium Reserve (UPR).
     The financial statements have been prepared under the historical             The purpose of the OCR is to ensure adequate reserves are in place
     cost convention as modified by the revaluation of land and buildings         for known claims. It is calculated by aggregating the case reserves
     and financial assets and liabilities (including derivatives) at fair value   for all known claims and is calculated as part of the quarterly
     through income.                                                              actuarial reserve review. However, the aggregated case reserves
     The principal accounting policies applied in the preparation of these        may be deemed to be over – or under-stated against the expected
     consolidated financial statements are set out below. These policies          ultimate settlement cost of the known claims and this is allowed for
     have been consistently applied to all years presented, unless                in the IBNR calculation.
     otherwise stated.                                                            The purpose of the IBNR reserve is to reflect the additional claims
                                                                                  cost from claims incurred but not reported before the Statement
     Significant accounting judgements,                                           of financial position date, known as ‘pure IBNR’ and the cost of
     estimates and assumptions                                                    any over or under-statement in the OCR, known as Incurred But Not
     In applying the Group’s accounting policies, Management has made             Enough Reported (IBNER). IBNR and IBNER are calculated as part
     the following significant judgements.                                        of the quarterly actuarial reserve reviews using a combination of
                                                                                  statistical/actuarial techniques.
     Valuation of investment and long-term insurance contract liabilities
     The liability is based on assumptions reflecting the best estimate           These projections are performed on homogeneous groups of claim
     at the time allowing for a margin of risk and adverse deviation.             types. Otherwise, the projections would be prone to error from
     All contracts are subject to a liability adequacy test, which reflects       changes in mix by claim type. The claim types modelled are:-
     Management’s best current estimate of future cash flows.                     n   Accidental Damage
     The assumptions used for mortality, morbidity and longevity are based        n   Fire & Theft
     on standard industry or reinsurers tables, adjusted where appropriate
     to reflect the Group’s own experience. The assumptions used for              n   Windscreen
     investment returns, expenses, lapse and surrender rates, and discount        n   Third Party Property Damage
     rates are based on current market yields product characteristics,
     and relevant claims experience. Due to the long term nature of these         n   Third Party Personal Injury
     obligations, the estimates are subject to significant uncertainty.
                                                                                  The UPR is a provision for the claims and expenses attributable to
     Valuation of general insurance contract liabilities                          the unexpired risk from business written prior to the Statement of
     For general insurance contracts, estimates are made for the                  financial position date. This is a system driven calculation based on
     expected ultimate cost of claims reported as at the Statement of             a daily allocation method.
     financial position date and the cost of claims incurred but not yet
                                                                                  Fair value of financial assets and investment properties
     reported to the Group. It can take a significant period of time
                                                                                  In view of continued market dislocation, the markets for some
     before the ultimate cost of claims can be established with certainty,
                                                                                  assets have become less liquid and therefore the valuations are less
     and the final outcome may be better or worse than that provided.
                                                                                  certain than in previous years. In the absence of an active market,
     Standard actuarial claims projection techniques are used to                  estimation of fair value is achieved by using valuation techniques
     estimate outstanding claims. Such methods extrapolate the                    such as recent arm’s length transactions, discounted cash flow
     development of paid and incurred claims, recoveries from third               analysis and option pricing models. This valuation will also take into
     parties, average cost per claim and ultimate claim numbers for               account the marketability of the assets being valued.
     each accident year, based upon the observed development of




64
                                                                                                         Annual report and accounts 2009

NOTES TO THE ACCOUNTS CONTINUED




                                                                                                                                                          01 Business overview
31 December 2009




Valuation of pension benefit obligations                                   Where the Group invests in specialised investment vehicles
The valuation of the pension benefit obligations for the two               (such as OEIC’s) and owns greater than 50% they are consolidated.
schemes is determined using actuarial valuations. These involve            The interests of other parties in these vehicles will be classified as
making assumptions about discount rates, expected future returns           liabilities and appear as ‘Net asset value attributable to external
on assets, future salary increases, longevity and future pension           unit holders’ because they are puttable instruments. The external
increases. Due to the long term nature of these obligations, the           unit holders’ share of the net investment return on the OEIC’s is




                                                                                                                                                          02 Performance
estimates are subject to significant uncertainty.                          charged or credited to the Statement of comprehensive income as
                                                                           investment return allocated to external unit holders.
Impairment losses on loans and advances
In determining whether an impairment loss should be recorded in            Associates and joint ventures in property holding companies
the statement of total comprehensive income, the Group makes               The Group invests in associate companies and jointly controlled
judgements as to whether there is any observable data indicating           entities that hold investment properties, with holdings ranging
that there is a measurable decrease in the estimated future cash           between 20-98%.
flows from a portfolio of loans before the decrease can be identified
                                                                           Associates are all entities over which the Group has significant
with an individual loan in the portfolio. This evidence may include
                                                                           influence but not control, generally accompanying a shareholding of
observable data indicating that there has been an adverse change in
                                                                           between 20% and 50% of the voting rights.
the payment status of borrowers in a group, or economic conditions
that correlate with defaults on assets in the Group. Management            The investments and the Group’s interests in jointly controlled




                                                                                                                                                          03 Our businesses
uses estimates based on historical loss experience for assets with         entities have not been consolidated under the equity method but are
credit risk characteristics and objective evidence of impairment           designated as investments at fair value through profit or loss under
similar to those in the portfolio when scheduling its future cash          UK unlisted investments. These holdings are recorded at their fair
flows. The methodology and assumptions used for estimating both            value of the holding through profit or loss, with changes in fair value
the amount and timing of future cash flows are reviewed regularly.         recognised in profit or loss in the period of the change in accordance
                                                                           with the exemptions permitted under IAS28 and IAS31 applicable to
Principal accounting policies                                              investment-linked insurance funds.

a. Consolidation                                                           b. Contract classification
Subsidiaries                                                               The Group issues contracts that transfer insurance risk, financial risk
Subsidiaries are all entities, including Open Ended Investment             or both.




                                                                                                                                                          04 Group support and CSR
Companies (“OEICS”), over which the Group (directly or indirectly)
has the power to govern the financial and operating policies generally     Insurance contracts are those contracts that transfer significant
accompanying a shareholding of more than one half of the voting            insurance risk. Such contracts may also transfer financial risk. As a
rights. The existence and effect of potential voting rights that are       general guideline, the Group defines as significant insurance risk the
currently exercisable or convertible are considered when assessing         possibility of having to pay benefits on the occurrence of an insured
whether the Group controls another entity. Subsidiaries are fully          event that are at least 10% more than the benefits payable if the
consolidated from the date on which control is transferred to the          insured event did not occur.
Group. They are excluded from consolidation from the date on which         Investment contracts are those contracts that transfer financial risk
control ceases.                                                            with no significant insurance risk.
The Group uses the purchase method of accounting to account for            All participating contracts have been classified as participating
the acquisition of subsidiaries. Accordingly, the cost of an acquisition   insurance contracts as these contracts entitle the holder to receive,          05 Corporate governance
is measured as the fair value of the cash or other assets given,           as a supplement to guaranteed benefits, additional benefits or bonuses:
equity instruments issued and liabilities incurred or assumed at
the date control passes, plus costs directly attributable to the           n   that are likely to be a significant portion of the total
acquisition. Identifiable assets acquired, liabilities and contingent          contractual benefits;
liabilities assumed in a business combination are measured initially       n   whose amount or timing is contractually at the discretion of the
at their fair values at the acquisition date, irrespective of the extent       Group; and
of any minority interest. The excess of the cost of acquisition over
the fair value of the Group’s share of the identifiable net assets         n   that are contractually based on:
acquired is recorded as goodwill. If the cost of acquisition is less           i) the performance of a specified pool of contracts or a specified
than the fair value of the net assets of the subsidiary acquired, the             type of contract;
difference is recognised directly in the Statement of comprehensive
income for the period.                                                         ii) realised and/or unrealised investment returns on a specified
                                                                                                                                                          06 The numbers




                                                                                   pool of assets held by the fund; or
Intra-group transactions, balances and unrealised gains on
intra-group transactions are eliminated on consolidation.                      iii) the unallocated surplus of the fund that issues
Unrealised losses are also eliminated unless the transaction                        the contract.
provides evidence of an impairment of the asset transferred.




                                                                                                                                                     65
     Annual report and accounts 2009

     NOTES TO THE ACCOUNTS CONTINUED
     31 December 2009




     Insurance contracts are accounted for in accordance with the             General insurance contracts
     Statement of Recommended Practice issued by the Association              Claims incurred comprise claims and related internal and external
     of British Insurers in December 2005, and amended in December            claims handling costs paid in the year and changes in the provisions
     2006. In certain businesses, the accounting policies or accounting       for outstanding claims, including provisions for claims incurred but
     estimates have been changed, to measure designated insurance             not reported and related claims handling costs, together with any
     liabilities using current market interest rates and allowing for other   other adjustments to claims from previous years. Where applicable,
     changes to regulatory reporting practices. In other words, the Group     we recognise an asset for recoveries from third parties.
     measures the liability on insurance and with-profit contracts in
                                                                              The estimated cost of claims includes expenses to be incurred in
     line with the ‘realistic’ reporting regime of the Financial Services
                                                                              settling claims and a deduction for the expected value of recoveries.
     Authority (“FSA”). More detail on the valuation of insurance and
                                                                              However, given the inevitable uncertainty in establishing claims
     investment contracts is given in accounting policies u. and v.
                                                                              provisions, it is likely that the final outcome will prove to be different
                                                                              from the original liability established. Provisions are adjusted at the
     c. Earned premiums
                                                                              Statement of financial position date to represent an estimate of the
     Long-term insurance contracts                                            expected outcome.
     Regular premiums on long-term and life and pensions insurance
     contracts are recognised as income when due for payment.                 Standard actuarial claims projection techniques are used to estimate
     For single premium business, recognition occurs on the date              outstanding claims. Such methods extrapolate the development
     from which the policy is effective. Reinsurance premiums payable         of paid and incurred claims, recoveries from third parties, average
     are accounted for when due for payment.                                  cost per claim and ultimate claim numbers for each accident year,
                                                                              based upon the observed development of earlier years and expected
     General insurance contracts                                              loss ratios. The main assumption underlying these techniques
     General insurance premiums written reflect business coming into          is that previous claims development experience can be used to
     force during the year. Earned premium is written premium adjusted        project ultimate claims costs. Allowance for one-off occurrences or
     for unearned premium. Unearned premium is that proportion of             changes in legislation, policy conditions or portfolio mix, are also
     a premium written in a year that relates to periods of risk after        made in arriving at the estimated ultimate cost of claims, in order
     the Statement of financial position date. Unearned premiums              that it represents the most likely outcome, taking account of all
     are calculated on a time apportionment basis. The proportion             the uncertainties involved. To the extent that the ultimate cost is
     attributable to subsequent periods is deferred as a provision for        different from the estimate, where experience is better or worse than
     unearned premiums.                                                       that assumed, the surplus or deficit will be credited or charged to the
     Investment contracts                                                     Statement of comprehensive income in future years.
     Premiums and claims relating to investment contracts are not
     recognised in the Statement of comprehensive income but are              f. Fee and commission income
     recorded as contributions to and deductions from the investment          Fees from investment contracts for investment management,
     contract provisions recorded in the Statement of financial position.     other policy administration charges and fund management fees are
                                                                              recognised as income when earned. Commission earned from financial
     d. Reinsurance contracts                                                 intermediary services is taken to income when receivable.
     The Group cedes reinsurance risk in the normal course of business
     for its long-term, pensions and general insurance businesses.            g. Investment income
     Reinsurance assets represent balances recoverable from                   Investment income includes dividends, interest on deposits,
     reinsurance companies. Recoverable amounts are estimated                 interest on loan advances to customers and rents. Dividends
     in a manner consistent with the outstanding claims provision.            are included on an ex-dividend basis. Interest receivable on loan
                                                                              advances to customers is calculated on an effective interest rate
     An impairment review is performed at the Statement of financial
                                                                              basis. Interest on deposits, rents and expenses are included on
     position date. Impairment occurs when there is evidence that the
                                                                              an accruals basis. Interest income for financial assets that are
     Group will not recover outstanding amounts under the contract,
                                                                              not classified as ‘fair value through income’ is recognised using
     such losses being recorded immediately in the Statement of
                                                                              the effective interest method. The effective interest rate is the
     comprehensive income.
                                                                              rate that exactly discounts estimated future cash payments or
     All reinsurance contracts are those that mitigate insurance risk.        receipts through the expected life of the financial instrument
                                                                              or, when appropriate, a shorter period to the net carrying amount
     e. Claims                                                                of the financial asset or financial liability.
     Long-term insurance contracts
     Maturity claims and regular annuity payments are accounted for           h. Realised gains or losses
     when due for payment. Surrenders are accounted for on the earlier        Realised gains and losses on investments are calculated as the
     of the date when paid or when the policy ceases to be included           difference between net sales proceeds and original cost.
     within the long term insurance contract liability. Death claims and
     other claims are accounted for when the Group is notified. The value
     of claims on participating insurance contracts includes bonuses
     paid or payable. Claims values include related internal and external
     claims handling costs. Reinsurance recoveries are accounted for in
     the same period as the related claim.

66
                                                                                                        Annual report and accounts 2009

NOTES TO THE ACCOUNTS CONTINUED




                                                                                                                                                             01 Business overview
31 December 2009




i. Fair value gains or losses on investments                               In respect of insurance contracts, acquisition costs comprise
                                                                           of all direct and indirect costs incurred in writing new contracts.
Unrealised gains and losses on investments represent the difference
                                                                           Deferred acquisition costs for insurance contracts are amortised
between the valuation of fair value investments at the Statement of
                                                                           over a period which is consistent with the assessment of the
financial position date and their purchase price or, if they have been
                                                                           expected pattern of receipt of future revenue margins for each
previously revalued, their valuation at the last Statement of financial
                                                                           product type.
position date. An adjustment is made to unrealised gains and losses




                                                                                                                                                             02 Performance
for the prior year’s unrealised element included in the current year’s     For investment contracts, the costs of acquiring investment
realised gains and losses.                                                 contracts, is limited to the direct transaction costs associated
                                                                           with the acquisition of the business. Deferred acquisition costs for
j. Operating lease payments                                                investment contracts are amortised over the expected contract period.
Operating lease payments are accounted for on a straight line basis        All deferred acquisition costs are tested for recoverability at each
over the term of the lease.                                                reporting date. The carrying values are adjusted to recoverable
                                                                           amounts and any resulting impairment losses are charged to the
k. Income taxes                                                            Statement of comprehensive income.
The income tax expense reflects the movement in current and deferred
                                                                           Impairment reviews are carried out annually or more frequently
income tax in respect of income, gains, losses and expenses.
                                                                           if circumstances exist that indicate the likelihood of impairment.




                                                                                                                                                             03 Our businesses
– Current income tax                                                       The carrying values are adjusted to recoverable amounts and
Current income tax liabilities and assets are measured at the              any resulting impairment losses are charged to the statement
amount expected to be paid to or recovered from the taxation               of comprehensive income.
authorities. The tax rates and tax laws used to compute the
                                                                           Goodwill
amount are those that are enacted or substantively enacted
                                                                           Goodwill represents the excess of the cost of an acquisition over
at the Statement of financial position date.
                                                                           the fair value of the Group’s share of the net identifiable assets of
– Deferred income tax                                                      the acquired subsidiary/associate at the acquisition date and is
Deferred income tax is undiscounted and recognised, using the liability    included in intangible assets. Goodwill is reviewed for impairment at
method, on temporary differences arising between the tax bases of          the end of the first full year of acquisition. Thereafter, it is tested at
assets and liabilities and their carrying amounts in the consolidated      each Statement of financial position date for impairment against the
financial statements. However, if the deferred income tax arises from      recoverable amount (either the higher of value in use or fair value




                                                                                                                                                             04 Group support and CSR
initial recognition of an asset or liability in a transaction other than   less cost) of the relevant cash generating unit and carried in the
a business combination that at the time of the transaction affects         Statement of financial position at cost less accumulated impairment
neither accounting nor taxable profit or loss, it is not accounted for.    losses. Gains and losses on the disposal of an entity include the
Deferred income tax is determined using tax rates (and laws) that          carrying amount of goodwill relating to the entity sold.
have been enacted or substantively enacted by the Statement of
                                                                           Goodwill arising on acquisitions prior to 1998 has been eliminated
financial position date and are expected to apply when the related
                                                                           against the unallocated divisible surplus. This goodwill would be
deferred income tax asset is realised or the deferred income tax
                                                                           charged in the Statement of comprehensive income should there
liability is settled. Deferred income tax assets are recognised to the
                                                                           be a subsequent disposal of the business to which it relates.
extent that it is probable that future taxable profit will be available
against which the temporary differences can be utilised.                   Other intangibles
                                                                           Where an acquisition takes place that gives access to existing
l. Foreign currencies
                                                                                                                                                             05 Corporate governance
                                                                           customers, distribution channels or the right to charge for investment
Monetary assets and liabilities denominated in foreign currencies          or policy administration services, the present value of these is
are translated to sterling at rates of exchange ruling at the end of       recognised as an intangible asset.
the year. Purchases and sales of investments denominated in foreign        The carrying value of the asset is amortised over its expected
currencies are translated at the rates prevailing at the dates of the      economic life, and is assessed as and when impairment may
respective transactions. Exchange gains and losses are dealt with          be indicated.
in that part of the Statement of comprehensive income in which the
underlying transaction is reported.                                        The expected economic life of other intangibles carried by the Group
                                                                           is determined by reference to acquired business, considering factors
m. Intangible assets                                                       such as the remaining terms of agreements, the normal lives of
                                                                           related products and the competitive position, and lies within the
Deferred acquisition costs
                                                                           range of 10 to 20 years.
The costs of acquiring new business, other than for participating
                                                                                                                                                             06 The numbers




business, which are incurred during the financial year, but where          Present value of acquired in-force business (PVIF)
the benefit of such costs will be obtained in subsequent accounting        On acquisition of a portfolio of long-term insurance contracts,
periods, are deferred and recognised as an asset to the extent that        the net present value of the Group’s interest in the expected
they are recoverable out of margins in future matching revenues.           cashflows of the in-force business is capitalised in the Statement
                                                                           of financial position as an asset and is amortised over the
                                                                           anticipated lives of the related contracts.




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     Annual report and accounts 2009

     NOTES TO THE ACCOUNTS CONTINUED
     31 December 2009




     The carrying value of the asset is assessed annually using current         Derivative financial instruments
     assumptions in order to determine whether any impairment has               Derivatives are initially recognised at fair value on the date on
     arisen, compared to the amortised acquired value.                          which a derivative contract is entered into and are subsequently
                                                                                re-measured at their fair value. These include forward foreign
     Any amortisation or impairment charge is recorded in the
                                                                                exchange contracts, financial futures, swap options, interest
     Statement of comprehensive income within other operating and
                                                                                rate swap and cap contracts. There are no designated hedging
     administrative expenses.
                                                                                relationships within the Group that qualify for hedge accounting.

     n. Property and equipment                                                  Changes in the fair value of derivative instruments are recognised
     Operational property and equipment are held at accumulated cost            immediately in gains or losses on investments in the statement
     less depreciation. Both are depreciated on a straight line basis over      of comprehensive income for the period. Realised gains or
     their estimated useful lives. The periods used are as follows:             losses are similarly taken to the statement of comprehensive
                                                                                income on occurrence.
     Land*                                  Not depreciated
                                                                                Financial assets and liabilities at fair value through income
     Freehold buildings                                                         All investments of the Group classified as fair value are designated
     including finance lease property*      50 years                            as fair value through income at inception. This is in accordance with
     Leasehold property*                    10 years or lease term if shorter   the Group’s documented investment strategy and consistent with
                                                                                investment risk being assessed on a portfolio basis. Such assets
     Fixtures, fittings and motor vehicles 4 to 10 years                        are valued at market prices, or prices consistent with market ratings
     IT hardware (spend over £1m)           3 years                             should no price be available.

     Provision is made for any impairments in property and equipment.           Financial assets at fair value through income include listed and
                                                                                unlisted investments, units in authorised unit trusts, open ended
     The assets’ residual values and useful lives are reviewed,                 investment companies (OEICs), and other investments.
     and adjusted if appropriate, at each Statement of financial
     position date.                                                             Financial liabilities at fair value through income include derivative
                                                                                financial instruments and investment contract liabilities.
     *These are properties used by the Group for operational purposes
     and are not investment properties which are dealt with below.              In accordance with IFRS 7 Financial Instruments: Disclosures
                                                                                these assets and liabilities are categorised into a “fair value
                                                                                hierarchy” as follows:
     o. Investment properties
     Investment properties are freehold and leasehold land and building         n   Level 1 – where the fair value is determined based on quoted bid
     held for long term rental yields and capital growth. They are held at          prices in an active market for identical assets or liabilities. An
     fair value and changes in fair value are recorded as fair value gains          example would include an actively traded share in the UK FTSE 100
     or losses in the Statement of comprehensive income. Fair value is          n   Level 2 – where fair value is determined based on quoted bid
     determined annually by independent professional valuers based on
                                                                                    prices in an inactive market for identical assets or liabilities
     market conditions.
                                                                                    or where there are available broker quotes. An example would
                                                                                    include a share on the AIM which is not actively traded
     p. Investments in group undertakings
                                                                                n   Level 3 – where fair value is determined using valuation
     The subsidiaries are held in the Society’s Statement of financial
                                                                                    techniques. An example would include an investment in an
     position at cost less any provision for permanent diminution in value.
                                                                                    unquoted company which is valued based on either net asset
     An assessment of the realisable value is made at the year end and,
                                                                                    value or discounted cashflows.
     if the Directors assess that there has been a permanent fall in that
     value below the carrying value, a provision is made to bring the           Further information on financial assets and liabilities can be found in
     carrying value down to the assessed realisable value.                      note 3 ‘Risk Management and Control’ in iv) Fair value estimation.
     In the Group Statement of financial position, the subsidiaries             Loans and receivables
     are fully consolidated so that, in effect, they are included at their      Loans and receivables are measured at amortised cost using
     net asset value to the Group, including intangible assets, at the          the effective interest rate method. Loans and receivables include
     Statement of financial position date.                                      deposits with credit institutions, policy loans, loans and advances to
                                                                                customers, loans and advances to banks, other loans, amounts due
     q. Financial assets                                                        from other group companies and other receivables.
     The Group classifies its investments into the following categories:
                                                                                The loans subject to securitisation include unsecured personal
     – financial assets at fair value through income;                           loans, which are subject to non-recourse finance arrangements.
                                                                                These loans have been purchased by a special purpose
     – derivative financial instruments; and                                    securitisation company, which is itself funded by the issue of loan
     – loans and receivables.                                                   notes. The equity of this vehicle is not owned by the Group, however,
                                                                                in accordance with IFRS guidance the Group has control over the
                                                                                vehicle and it is therefore treated as a subsidiary. Accordingly, the




68
                                                                                                          Annual report and accounts 2009

NOTES TO THE ACCOUNTS CONTINUED




                                                                                                                                                              01 Business overview
31 December 2009




loans subject to securitisation are included in loans and receivables        u. Long-term insurance contract liabilities
with the no-recourse funding disclosed under borrowings, with
                                                                             Participating business
the accompanying income and expense being reflected within the
                                                                             The liability is calculated in accordance with the FSA’s ‘realistic’
Statement of comprehensive income.
                                                                             liability regime. In particular, provision is made for all bonus
The Group assesses at each Statement of financial position date              payments (declared and future, reversionary and terminal)
whether a loan or receivable, or a group of loans or receivables,            estimated, where necessary, in a manner consistent with the




                                                                                                                                                              02 Performance
is impaired. For loans and receivables, the amount of any impairment         relevant fund’s Principles and Practices of Financial Management
loss is measured as the difference between the carrying amount and           (“PPFM”). The liability includes an allowance for the time and
the present value of future cash flows. The carrying amount of the           intrinsic value of options and guarantees granted to policyholders
asset is reduced by any impairment loss and the loss is recorded in          and for possible future management actions.
the Statement of comprehensive income.
                                                                             The realistic liabilities are based on the aggregate value of
Derecognition of financial assets                                            policy asset shares reflecting past premiums, investment return,
A financial asset is derecognised when:                                      expenses and charges applied to each policy. Allowance is also
                                                                             made for policy-related liabilities such as guarantees, options and
– the rights to receive cash flows from the asset have expired; or           future bonuses calculated using a stochastic model simulating
– the Group has transferred its rights to receive cash flows from the        investment returns, asset mix, expense charges and bonuses.




                                                                                                                                                              03 Our businesses
  asset and has:                                                             Since the realistic liabilities include an allowance for future bonuses
   – transferred the risks and rewards of the asset; or                      to participating contract policyholders that will be payable out
                                                                             of returns on non participating business, an amount within the
   – has transferred control of the asset.                                   participating contract fund is recognised representing the value of
                                                                             non participating business. Such an amount is not recognised for
r. No Negative Equity Guarantees                                             business written outside participating contract funds.
The company provides ‘No Negative Equity Guarantee’ contracts to
                                                                             In determining the realistic value of liabilities for participating
customers on Equity Release Mortgages. The contractual terms of
                                                                             contracts, indirect account is taken of the value of future profits on
these guarantees require the company to make payments equivalent
                                                                             non participating business written out of participating contract funds.
to any shortfall between the market value of customers’ property and
                                                                             This is separately identifiable and is all in respect of policyholder
the value of the loan plus accrued interest at the date of redemption
                                                                             liabilities. As such the excess of the value of those future profits has




                                                                                                                                                              04 Group support and CSR
The guarantee is initially recognised at the fair value of the liability     been deducted from the realistic liabilities rather than recognising
on the date the guarantee is given. Subsequent to initial recognition,       the present value of future profits on this business as an asset.
the company’s liabilities under this guarantee are measured at
                                                                             Non participating business
the best estimate of the discounted value of cash flows required
                                                                             The provision is calculated to comply with the reporting requirements
to settle any future financial obligation arising at the Statement of
                                                                             under the FSA’s Integrated Prudential Sourcebook using a gross
financial position date. This measurement is arrived at by applying
                                                                             premium valuation method or a method at least as prudent as the
stochastic scenario models applying assumptions for interest rates,
                                                                             gross premium method. The principal assumptions are given in the
future house price inflation (HPI) and its volatility, mortality rates and
                                                                             notes to the accounts. The Society and relevant subsidiaries have
early loan repayment rates.
                                                                             adopted the modified statutory solvency basis in the valuation of
Movement in the fair value of the liability relating to guarantees           provisions for non participating business.
is taken to the Statement of comprehensive income in gains and                                                                                                05 Corporate governance
losses on loans and receivables.                                             Liabilities for non participating business will be either included within
                                                                             the long-term insurance contract liabilities or the investment contract
s. Insurance receivables and payables                                        liabilities, depending upon the product classification.

Insurance receivables and payables are recognised when due and               v. Investment contract liabilities
include amounts due from or to agents, brokers and insurance
contract holders. Where there is objective evidence that the carrying        Investment contract liabilities are recognised when contracts are
value is impaired then the impairment loss will be recognised in the         entered into and premiums are charged. These liabilities are initially
Statement of comprehensive income.                                           recognised at transaction price excluding any transaction costs
                                                                             directly attributable to the issue of the contract.
t. Cash and cash equivalents                                                 Deposits and withdrawals are recorded directly as an adjustment to
Cash and cash equivalents comprise cash at bank and in hand,                 the contract liability in the Statement of financial position, a method
                                                                                                                                                              06 The numbers




and short term deposits with an original maturity of three months            known as deposit accounting. Fees charged and investment income
or less.                                                                     received are recognised in the Statement of comprehensive income
                                                                             when earned.
For the purpose of the consolidated cash flow statement,
cash and cash equivalents are as defined above but are shown
net of outstanding bank overdrafts.




                                                                                                                                                         69
     Annual report and accounts 2009

     NOTES TO THE ACCOUNTS CONTINUED
     31 December 2009




     Fair value adjustments are measured at each reporting date and           z. Provisions
     are recorded in the Statement of comprehensive income. Fair value
                                                                              General
     is calculated as the number of units allocated to the policyholder
                                                                              Provisions are recognised when the Group has a present legal or
     in each unit-linked fund multiplied by the unit price of those funds
                                                                              constructive obligation as a result of past events, it is more likely
     at the Statement of financial position date. The fund assets and
                                                                              than not that an outflow of resources will be required to settle the
     liabilities are valued on a basis consistent with that used to
                                                                              obligation and the amount has been reliably estimated. Where the
     measure the equivalent assets and liabilities in the statements of
                                                                              Group expects some or all of a provision to be reimbursed it is
     financial position, adjusted for the discounted effect of future tax
                                                                              recognised as a separate asset when the reimbursement is certain.
     arising from any unrealised gains or losses. For a contract that can
     be cancelled by the policyholder, the fair value cannot be less than     Provisions are measured at the present value of the expenditure
     the surrender value.                                                     required to settle the obligation using a pre-tax rate that reflects
                                                                              current market assessments of the time value of money and the
     The liability is derecognised when the contract expires, is discharged
                                                                              risks specific to the obligation.
     or is cancelled.
                                                                              The expense relating to provisions is presented in the statement
     When contracts contain both a financial risk component and a
                                                                              of comprehensive income.
     significant insurance risk component, and the cash flows are
     distinct and can be measured reliably, the underlying amounts are        Onerous contracts
     unbundled. Any premiums relating to the insurance risk component         A provision is made for onerous contracts in which the unavoidable
     are accounted for on the same basis as long-term insurance               costs of meeting the obligation exceed the expected future
     contracts and the remaining element is accounted for as a deposit,       economic benefits.
     as described above.
                                                                              Provision for impairment
     w. Unexpired risks                                                       Provisions for impairment of loans and receivables are based on
                                                                              appraisals of loans and receivables both collectively and individually.
     For general insurance contracts, provision is made, if required,         Provisions are made to reflect the estimated net realisable amount,
     for any anticipated claims and claims handling costs that are            taking into account potential future recoveries and the original
     anticipated to exceed the unearned premiums, net of deferred             effective interest rate. Balances are written off in full when the debt
     acquisition costs. An estimate is made for future investment             is considered irrecoverable.
     income arising from the unearned premiums, and used to reduce
     the unexpired risk provision.                                            Specific provisions have been made in respect of all identified
                                                                              impaired advances. In calculating the required provision an
     Unexpired risk surpluses and deficits are offset where business          appropriate factor is applied based on the present value of expected
     classes are managed together and a provision is made if an               future cash flows, which is subject to periodic review to ensure
     aggregate deficit arises.                                                its continuing applicability based on current experience, to reflect
                                                                              the probability that not all such loans will result in eventual loss.
     x. Unallocated divisible surplus                                         Collective provisions have been made in respect of losses which,
     The unallocated divisible surplus represents the excess of assets        although not yet specifically identified are expected from experience
     over and above the long-term insurance contract liabilities and          to arise.
     other liabilities. It represents amounts that have yet to be formally
     declared as bonuses for the participating contract policyholders         aa. Employee benefits
     together with the free assets of the Society and Group. Any profit or    Pensions
     loss for the year arising through the Statement of comprehensive         For defined benefit schemes, the net surplus or deficit within the
     income (for the Society and for the Group) is transferred to or from     Group’s two schemes are calculated annually with the assets
     the unallocated divisible surplus.                                       measured at the fair value at the Statement of financial position date
     UK regulations, the Group’s PPFM, and the terms and conditions           and the liabilities discounted at the rate of return available on high
     of participating contracts, set out the bases for the determination      quality corporate bonds. The net surplus or deficit is recognised as
     of the amounts on which the participating additional discretionary       a scheme asset or liability in the Statement of financial position.
     contract benefits are based and within which the Group may exercise      The pension cost for the schemes is analysed between current
     its discretion as to the quantum and timing of their payment to          service cost, past service cost and net return on pension scheme
     contract holders.                                                        assets. Current service cost is the actuarially calculated present
                                                                              value of the benefits earned by the active employees in each period.
     y. Borrowings                                                            Past service costs, relating to employee service in prior periods
     Borrowings represent the non-recourse funding received as part           arising in the current period as a result of the introduction of,
     of the securitisation of unsecured personal loans and overdrafts.        or improvement to, retirement benefits, are recognised in
     Borrowings are recognised initially at fair value, net of transaction    administrative expenses on a straight-line basis over the period
     costs incurred. Borrowings are subsequently stated at amortised          in which the increases in benefits vest, or are earned.
     cost; any difference between the proceeds (net of transaction
     costs) and the redemption value is recognised in the Statement of
     comprehensive income over the period of the borrowings using the
     effective interest method.



70
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                                                                                                                                                        01 Business overview
31 December 2009




All movements other than actuarial gains and losses in respect of         IAS 40 (Amendment), ‘Investment property’ (and consequential
the pension benefit obligation are recognised in other operating and      amendment to IAS 16). The amendment is part of the IASB’s annual
administrative expenses in the Statement of comprehensive income.         improvement project published in May 2008. Property that is under
Actuarial gains and losses (net of tax) are shown in the Statement        construction or development is within scope of IAS 40. Where the
of comprehensive income after (loss)/profit before tax.                   fair value model is applied, such property is measured at fair value.
                                                                          However, where fair value of investment property under construction
For defined contribution schemes, the Group pays contributions to




                                                                                                                                                        02 Performance
                                                                          is not reliably measurable, the property is measured at cost until the
privately administered pension insurance plans. The Group has no
                                                                          earlier of the date of construction is completed or the date at which
further payment obligations once the contributions have been paid.
                                                                          fair value becomes reliably measurable. There has been no impact
The contributions are recognised as employee benefit expenses
                                                                          on the Group’s financial statements in the current year, as there
when they are due.
                                                                          were no properties under construction at the time of adoption of
                                                                          this amendment.
ab. Assets held under leases
Where assets are financed by leasing arrangements and the risks           IFRS 7, ‘Financial instruments – Disclosures’ (Amendment),
and rewards are substantially transferred to the Group, such finance      requires enhanced disclosures about fair value measurement and
leases are treated as if the assets had been purchased outright and       liquidity risk. The Group has adopted the amendment to IFRS 7
the corresponding liability to the lessor is included as an obligation    with effect from 1 January 2009. This requires disclosure of
in trade and other payables. Depreciation on leased assets is             fair value measurement by level of the following fair value




                                                                                                                                                        03 Our businesses
charged to the Statement of comprehensive income on the same              measurement hierarchy:
basis as owned assets. The capital element on finance leases is           n   Level 1 – fair value determined based on quoted prices in active
shown in the property and equipment note.                                     market for identical assets or liabilities;
Lease payments are treated as consisting of capital and interest          n   Level 2 – fair value determined using inputs other than quoted
elements and the interest is charged to the Statement of                      prices included within Level 1 that are observable for the asset
comprehensive income.                                                         or liability, either directly or indirectly; and
All other leases are operating leases and the costs in respect            n   Level 3 – fair value determined using inputs for the asset
of operating leases are charged on a straight line basis over the             or liability that are not based on observable market data.
lease term. The value of any lease incentive received to take on
an operating lease (for example, rent free periods) is recognised         IAS 1 (Revised), ‘Presentation of financial statements’




                                                                                                                                                        04 Group support and CSR
as deferred income and is released over the life of the lease.            (effective from 1 January 2009). The revised standard prohibits the
                                                                          presentation of items of income and expenses (that is, ‘non-owner
Changes in accounting policies                                            changes in equity’) in the statement of changes in equity, requiring
                                                                          ‘non-owner changes in equity’ to be presented separately from
i) Standards, amendment to published standards and
                                                                          owner changes in equity in a Statement of comprehensive income.
interpretations effective in 2009
                                                                          As a result, the Group presents in the statement of changes in
The following amendments to published standards are mandatory for
                                                                          equity all owner changes in equity, whereas all non-owner changes
the Group’s accounting periods beginning on or after 1 January 2009:
                                                                          in equity are presented in the Statement of comprehensive income.
IAS 23 (Amendment), ‘Borrowing costs’. The amendment requires             Comparative information has been represented so that it also
an entity to capitalise borrowing costs directly attributable to the      conforms to the revised standard.
acquisition, construction or production of a qualifying asset (one that
                                                                          Amendments to IAS 39 ‘Financial Instruments: Recognition and
takes a substantial period of time to get ready for use or sale) as                                                                                     05 Corporate governance
                                                                          Measurement’ and IFRIC9 ‘Reassessment of embedded derivatives’.
part of the cost of that asset. The option of immediately expensing
                                                                          This amendment clarifies the consequences if the fair value of
those borrowing costs has been removed. IAS 23 (amendment) does
                                                                          an embedded derivative that would have to be separated from
not have an impact on the Group’s financial statement in the current
                                                                          its host contract cannot be measured reliably. Adoption of these
year, as there were no qualifying assets for the periods reported on.
                                                                          amendments has had no impact on the financial results or position
IAS 39, ‘Reclassification of financial assets’ (Amendment),               of the Group or Society.
permits an entity to reclassify non derivative financial assets
                                                                          Improvements to International Financial Reporting Standards 2008
(other than those designated at fair value through income by the
                                                                          (majority of changes effective for accounting periods beginning on or
entity upon initial recognition) out of the fair value through income
                                                                          after 1 January 2009) – this is the first standard published under the
category in particular circumstances. The amendment also permits
                                                                          IASBs annual improvements process, which is intended to deal with
an entity to transfer from the available for sale category to the loans
                                                                          non-urgent, minor amendments to standards. The standard includes
and receivables (if the financial asset has not been designated as
                                                                                                                                                        06 The numbers




                                                                          35 amendments and is split into two parts:
available for sale), if the entity has the intention or ability to hold
that financial asset for the foreseeable future.                          i) amendments that result in accounting changes for presentation,
                                                                             recognition or measurement purposes; and

                                                                          ii) amendments that are terminology or editorial changes only.

                                                                          Adoption of this standard has had only a minor impact on some of
                                                                          the disclosures given in the Group and Society financial statements.




                                                                                                                                                   71
     Annual report and accounts 2009

     NOTES TO THE ACCOUNTS CONTINUED
     31 December 2009




     ii) Standards, amendments to published standards and                     IAS 27 (revised), ‘Consolidated and separate financial statements’.
     interpretations early adopted by the Group                               This revised standard coincided with the publication by the FASB in
                                                                              the US of equivalent guidance dealing with non-controlling (minority)
     In 2009, the Group did not early adopt any new, revised or
                                                                              interests. IAS 27 (revised) requires the effects of all transactions
     amended standards.
                                                                              with non-controlling interests to be recorded in equity if there is no
     iii) Standards and interpretations effective in 2009 but not relevant    change in control. They will no longer result in goodwill or gains and
     to the Group’s operations                                                losses. The standard also specifies the accounting when control is
                                                                              lost. Any remaining interest in the entity is re-measured to fair value
     IAS 20 ‘Accounting for government grants and disclosure of
                                                                              and a gain or loss is recognised in profit or loss. It is not expected
     government assistance’ (Amendment)
                                                                              to have a material impact on the Group’s financial statements.
     IAS 29 ‘Financial reporting in hyperinflationary economies’
                                                                              IAS 38 (Amendment), ‘Intangible assets’. The amendment is part
     IAS 31 ‘Interests in joint ventures’ (and consequential amendment        of the IASB’s annual improvement project published in April 2009.
     to IAS 32 and IFRS 7)                                                    The Group will apply IAS 38 (amendment) from the date IFRS 3
                                                                              (revised) is adopted. The amendment clarifies guidance in measuring
     IAS 32 and IAS 1 ‘Puttable financial instruments and obligations
                                                                              the fair value of the intangible assets acquired in a business
     arising on liquidation’
                                                                              combination and it permits the grouping of intangible assets as
     IAS 41 ‘Agriculture’                                                     a single asset if each asset has a similar useful economic life.
                                                                              The amendment will not result in a material impact of the Group’s
     IFRS 2 ‘Share based payments’ (amendment)
                                                                              financial statements.
     IFRS 8 ‘Operating segments’ (IFRS 8 replaces IAS 4)
                                                                              IAS 39 (Amendment), ‘Financial instruments: recognition and
     IFRIC 13 ‘Customer loyalty programmes’                                   measurement – Eligible hedged items’. The amendment was
                                                                              issued in July 2008. It provides guidance in two situations: on the
     IFRIC 16 ‘Hedges of a net investment in foreign operations’              designating of one sided risk in a hedged item, IAS 39 concludes
     IFRIC 15 ‘Agreements for the construction of real estates’               that a purchased option designated in its entirety as the hedging
                                                                              instrument as a one-sided risk will not be perfectly effective.
     iv) Standards, amendments and interpretations to existing                The designation of inflation as a hedged risk or portion is not
     standards that are not yet effective and have not been early             permitted unless in a particular situation. It is not expected to
     adopted by the Group                                                     have a material impact on the Group’s financial statements.
     The following standards and amendments to existing standards             IFRS 3 (revised), ‘Business combinations’. This revised standard
     have been published and are mandatory for the Group’s accounting                                                                      ,
                                                                              harmonises business combination accounting with US GAAP as the
     periods beginning on or after 1 January 2010 or later periods,           FASB issued an equivalent standard. The standard continues to
     and the Group has not early adopted them:                                apply the acquisition method to business combinations, with some
     IAS 1 (Amendment), ‘Presentation of financial statements’.               significant changes. For example, all payments to purchase
     The amendment is part of the IASB’s annual improvements project          a business are to be recorded at fair value at the acquisition date,
     published in April 2009. The amendment provides clarification that       with some contingent payments subsequently re-measured at
     the potential settlement of a liability by the issue of equity is not    fair value through income. Goodwill and non-controlling (minority)
     relevant to its classification as current or non-current. By amending    interests may be calculated on a gross or net basis. All transaction
     the definition of current liability, the amendment permits a liability   costs will be expensed. It is not expected to have a material impact
     to be classified as non-current (provided that the entity as an          on the Group’s financial statements.
     unconditional right to defer settlement by transfer of cash or assets    IFRS 9, ‘Financial instruments’. IFRS 9 addresses classification
     for at least 12 months after the accounting period) notwithstanding      and measurement of financial assets and is available for early
     the fact that the entity could be required by the counterparty to        adoption immediately. IFRS 9 replaces the multiple classification
     settle in shares at any time. The Group will apply IAS 1 (amendment)     and measurement models in IAS 39 with a single model that only
     from 1 January 2010. It is not expected to have a material impact on     has two classification categories: amortised cost and fair value.
     the Group’s financial statements.
                                                                              IFRS 9 represents the first milestone in the IASB’s planned
     IAS 24 (Amendment), ‘Related party disclosures’. The amendment           replacement of IAS 39. IFRS 9 is expected to have a significant
     relaxes the disclosures of transactions between government-related       impact on the Group’s financial statements.
     entities and clarifies the related-party definition. The amendment is
     not expected to have an impact on the Group’s financial statements.




72
                                                                                                                       Annual report and accounts 2009

NOTES TO THE ACCOUNTS CONTINUED




                                                                                                                                                                                   01 Business overview
31 December 2009




2. Capital management
The Society retains capital within its Unallocated Divisible Surplus to meet the key objectives:

(i) To     ensure financial stability;
(ii) To    enable the Group’s strategy to be developed;
(iii) To   give confidence to consumers and other stakeholders who have relationships with the Group; and




                                                                                                                                                                                   02 Performance
(iv) To    comply with capital requirements imposed by its UK regulator, FSA.

At least annually, these objectives are reviewed and benchmarks are set by which to judge the adequacy of the Group’s capital. The capital
position is monitored against those benchmarks to ensure that sufficient capital is available to the Group. In the event that sufficient capital
is not available, plans would be developed either to raise additional capital through, for example, subordinated loans, or to reduce the
quantum of risk accepted thereby reducing the capital requirement through, for example, reinsurance or a change in investment strategy.
If it becomes apparent that excess capital is available to the Group above its potential needs, plans would be developed to return such
excess to participating contract policyholders.

The Group complied with all externally imposed capital requirements to which it was subject throughout the reporting period.

Capital statement
The tables below set out the capital resources available to, and technical provisions of, the individual life funds and other activities of the




                                                                                                                                                                                   03 Our businesses
Group. All funds are UK funds.
                                                     Society’s          RNPFN
                                                  participating   participating         RNPFN     Other UK non            Total
                                                      contract        contract             non     participating     long-term         Other    Consolidation
                                                  business (1)    business (3)    participating               (2)    Business      Activities    Adjustments    Group Total
Available capital resources 2009                            £m              £m              £m               £m             £m            £m              £m            £m

Unallocated divisible surplus                       1,112.9                  –               –             –        1,112.9             –          (167.8)         945.1
Shareholder funds                                         –                  –               –         669.9          669.9       1,338.4        (2,008.3)             –
Adjustments onto regulatory basis:
Unallocated divisible surplus adjustment                72.2          167.3                  –              –         239.5              –               –         239.5
Adjustments to assets                                  (30.6)             –                  –          (51.6)         (82.2)        (45.4)              –        (127.6)
Adjustment for subsidiary values                     (536.1)              –                  –              –        (536.1)             –          522.0           (14.1)
Other adjustments                                      (13.7)             –                  –              –          (13.7)            –               –          (13.7)




                                                                                                                                                                                   04 Group support and CSR
Internal Loans                                             –              –                  –           82.3           82.3             –           (82.3)             –
RNPFN Fund not available to the Group                      –         (167.3)                 –              –        (167.3)             –               –        (167.3)
Total Available Capital Resources                     604.7               –                  –         700.6        1,305.3       1,293.0        (1,736.4)         861.9

Participating Contract Liabilities
on a Realistic Basis 2009
Options and guarantees                                417.5            79.8                  –             –          497.3                –               –      497.3
Other policyholder obligations                      2,104.0           669.2                  –         152.8        2,926.0                –               –    2,926.0
Total participating contract liabilities            2,521.5           749.0                  –         152.8        3,423.3                –               –    3,423.3
Investment and long-term linked
insurance contracts                                   445.7                  –        173.3              38.7         657.7                –               –       657.7
                                                                                                                                                                                   05 Corporate governance
Non participating long term contracts                 566.5                  –        330.8              67.6         964.9                –               –       964.9
Technical provision in the
Statement of financial position                     3,533.7           749.0           504.1            259.1        5,045.9                –               –    5,045.9

Available capital resources 2008
Unallocated divisible surplus                       1,311.7                 –                –              –       1,311.7              –         (194.4) 1,117.3
Shareholder funds                                          –                –                –         622.6          622.6       1,032.6        (1,655.2)        –
Unallocated divisible surplus adjustment                 5.4            88.6                 –              –           94.0             –               –     94.0
Adjustments to assets                                  (18.5)            (0.4)               –          (49.3)         (68.2)        (68.0)              –  (136.2)
Adjustment for subsidiary values                     (501.8)                –                –        (102.0)        (603.8)             –          590.1     (13.7)
Other adjustments                                      (25.2)               –                –              –          (25.2)            –               –    (25.2)
Internal Loans                                             –                –                –           82.3           82.3             –           (82.3)       –
                                                                                                                                                                                   06 The numbers




RNPFN Fund not available to the Group                      –           (88.2)                –              –          (88.2)            –               –    (88.2)
Total Available Capital Resources                     771.6                 –                –         553.6        1,325.2         964.6        (1,341.8)   948.0




                                                                                                                                                                              73
     Annual report and accounts 2009

     NOTES TO THE ACCOUNTS CONTINUED
     31 December 2009




     2. Capital management (continued)
                                                         Society’s          RNPFN
                                                      participating   participating         RNPFN     Other UK non           Total
                                                          contract        contract             non     participating     Longterm         Other    Consolidation
                                                      business (1)    business (3)    participating               (2)    Business     Activities    Adjustments    Group Total
                                                                £m              £m              £m               £m            £m            £m              £m            £m

     Participating Contract Liabilities on a Realistic Basis 2008
     Options and guarantees                               572.5           133.8                  –             –          706.3               –               –      706.3
     Other policyholder obligations                     1,896.5           689.9                  –         129.8        2,716.2               –               –    2,716.2
     Total participating contract liabilities           2,469.0           823.7                  –         129.8        3,422.5               –               –    3,422.5
     Investment and long-term linked
     insurance contracts                                  273.5                  –        182.0              43.8         499.3               –               –       499.3
     Non participating long-term contracts                293.9                  –        332.3              99.7         725.9               –               –       725.9
     Technical provision in the
     Statement of financial position                    3,036.4           823.7           514.3            273.3        4,647.7               –               –    4,647.7

     Notes:
     1) Included within the Society’s participating contract fund are the non participating contracts written within this fund.
     2) Included within the Other UK non participating fund is the reinsured business from Society to its subsidiary company Liverpool Victoria Life
     Company Limited.

     3) RNPFN denotes Royal National Pension Fund for Nurses.

     Movements in capital during the year are analysed below.

                                                         Society’s          RNPFN
                                                      participating   participating         RNPFN     Other UK non           Total
                                                          contract        contract             non     participating     Longterm         Other    Consolidation
                                                      business (1)    business (3)    participating              (2)     Business     Activities    Adjustments     Group Total
     Movements in capital 2009                                  £m              £m              £m               £m            £m            £m              £m             £m

     Capital at 1 January 2009                            771.6                –                 –         553.6        1,325.2        964.6        (1,341.8)         948.0
     Effect of investment variations                      156.2                –                 –            5.4         161.6            –               –          161.6
     Effect of changes in market conditions                (60.7)              –                 –              –          (60.7)          –               –           (60.7)
     Effect of changes in assumptions                     106.3                –                 –           (0.6)        105.7            –               –          105.7
     Effect of changes in regulatory requirements            (0.8)           0.4                 –              –            (0.4)      22.6               –            22.2
     New business                                        (121.7)               –                 –           (6.9)       (128.6)           –               –         (128.6)
     Other                                               (313.1)               –                 –         149.1         (164.0)       305.8          (394.6)        (252.8)
     Adjustment from regulatory to realistic peak           66.9            78.7                 –              –         145.6            –               –          145.6
     Removal of RNPFN fund                                      –          (79.1)                –              –          (79.1)          –               –           (79.1)
     Capital at 31 December 2009                          604.7                –                 –         700.6        1,305.3      1,293.0        (1,736.4)         861.9


                                                         Society’s          RNPFN
                                                      participating   participating         RNPFN     Other UK non           Total
                                                          contract        contract             non     participating     Longterm         Other    Consolidation
                                                      business (1)    business (3)    participating              (2)     Business     Activities    Adjustments     Group Total
     Movements in capital 2008                                  £m              £m              £m               £m            £m            £m              £m             £m

     Capital at 1 January 2008                         1,542.8                 –                 –         406.1        1,948.9       720.7         (1,285.1) 1,384.5
     Effect of investment variations                    (573.5)                –                 –             5.3       (568.2)           –                –  (568.2)
     Effect of changes in assumptions                    150.7                 –                 –            (2.5)       148.2            –                –   148.2
     Effect of changes in regulatory requirements        123.7               0.4                 –               –        124.1        (30.2)            43.2   137.1
     New business                                         (75.5)               –                 –          (31.0)       (106.5)           –                –  (106.5)
     Other                                                 (3.6)               –                 –         175.7          172.1       274.1             (99.9)  346.3
     Adjustment from regulatory to realistic peak       (393.0)            (85.2)                –               –       (478.2)           –                –  (478.2)
     Removal of RNPFN fund                                    –             84.8                 –               –         84.8            –                –    84.8
     Capital at 31 December 2008                         771.6                 –                 –         553.6        1,325.2       964.6         (1,341.8)   948.0

     In aggregate the Group has at its disposal total available capital of £861.9m (2008: £948.0m), representing the aggregation of the solvency
     capital of all group businesses. This capital is available to meet risks and regulatory requirements set by reference to regulatory guidance as
     prescribed by the FSA.

     For the Group’s participating contract funds the available capital is determined in accordance with the ‘realistic balance sheet’ regime
     prescribed by the FSA’s regulations under which liabilities to policyholders include both declared bonuses and the constructive obligation for
     future bonuses not yet declared. The available capital resources include an estimate of the value of their respective estates, which is the
     surplus in the fund in excess of any constructive obligations to policyholders. The unallocated capital represents capital resources of the
     individual participating contract fund to which it relates and is available to meet regulatory and other solvency requirements of the fund.
     For these participating contract funds the liabilities included in the balance sheet comprise only amounts relating to policyholders.


74
                                                                                                        Annual report and accounts 2009

NOTES TO THE ACCOUNTS CONTINUED




                                                                                                                                                                01 Business overview
31 December 2009




2. Capital management (continued)
The other activities of the Group have total available capital which is significantly higher than the minimum requirements established by
the FSA for those businesses and, in principle, the excess is available to the Society. In practice, higher levels of capital are held within
each business operation to provide appropriate cover for risk.

All available capital is ultimately available to support the Society participating contract fund, however the available capital resources of




                                                                                                                                                                02 Performance
each regulated entity are generally subject to restrictions as to their availability to meet requirements that may arise elsewhere in the
Group. The principal restrictions are:

a) The RNPFN participating contract and non participating funds available capital is generally available to support the RNPFN participating
contract fund only, it is comfortably in excess of the required capital margin and, therefore, the Society is not required to provide further
capital support to this business.

b) For other non participating funds, the available surplus held in the fund is attributable to Society policyholders and, subject to meeting
the regulatory requirements of these businesses, this capital is available to meet requirements elsewhere in the Group.

Available capital

i) Long-term insurance contracts




                                                                                                                                                                03 Our businesses
For the long-term insurance contract funds the Group is required to hold sufficient capital to meet the FSA capital requirements based on
the risk capital margin (RCM) determined in accordance with the FSA’s regulatory rules under its realistic capital regime together with the
Individual Capital Assessment (ICA) which takes into account certain business risks not reflected in the RCM. The determination of the RCM
depends on various actuarial and other assumptions about potential changes in market prices future operating experience and the actions
management would take in the event of particular adverse changes in market conditions.

Management intends to maintain surplus capital in excess of the RCM and ICA to meet the FSA’s total requirements and to maintain an
appropriate additional margin over this to absorb changes in both capital and capital requirements.

ii) Non participating insurance contracts
For non participating business the relevant capital requirement is the minimum solvency requirement determined in accordance with FSA
regulations. For this business a lower capital surplus is targeted by management since the capital requirement is less subject to fluctuation
and the capital amount is after deducting liabilities that include additional prudential margins.




                                                                                                                                                                04 Group support and CSR
Sensitivity analysis

i) Sensitivity of Society liabilities
The sensitivity of the Society’s participating insurance contract liabilities at 31 December 2009 to a 20% fall in global equity markets or a fall
in fixed interest yields of 17.5% is as follows:
                                                                   2009       Equities Fixed interest                 2008       Equities Fixed interest
                                                                            down 20%     yields down                           down 20%     yields down
                                                                                               17.5%                                              17.5%
                                                                     £m            £m             £m                   £m             £m             £m

Contract liabilities (excluding investment and
insurance linked contracts)                                    2,740.5     2,658.8        2,914.1                2,762.9      2,532.6       2,779.4
                                                                                                                                                                05 Corporate governance
These sensitivities assume a tax charge or credit on market value appreciation or falls.

ii) Sensitivity of long-term insurance contract liabilities
Long-term insurance contract liabilities are sensitive to changes in market conditions and other assumptions which have been factored into
their calculation, such as mortality or persistency rates. In some cases allowance is also made when calculating liabilities for the effect
of management and/or policyholder actions in different economic conditions on future assumptions such as asset mix, bonus rates and
surrender values.

Market conditions – assumptions are made about investment returns and interest rates. Any adverse change in either variable will increase
liabilities with the effect of reducing available capital. However such changes will also impact corresponding asset valuations, changes in
which may offset the impact of liability movements or in certain cases may result in further decreases in available capital.

Assumptions – long-term trend differences in mortality, morbidity or persistency rates will result in the need to change assumptions. This may
                                                                                                                                                                06 The numbers




require a strengthening or release of reserves. Depending on policy type this sensitivity will differ, for example a change in mortality rates will
have a different impact for annuity contract liabilities when compared to term assurance liabilities. In addition to persistency, assumptions
are made about policyholders’ behaviour in relation to guarantees and options. In turn these assumptions are sensitive to both investment
return and interest rates.




                                                                                                                                                           75
     Annual report and accounts 2009

     NOTES TO THE ACCOUNTS CONTINUED
     31 December 2009




     2. Capital management (continued)
     Financial guarantees and options

     a) Participating insurance contracts
     As a normal part of operating activities, various group companies have given guarantees and options, including interest rate guarantees,
     in respect of certain long-term insurance and fund management contracts.

     In the calculation of FSA liabilities for the participating insurance contract funds the Group is required to apply the FSA’s realistic reporting
     regime. Provision is made for such guarantees and options within the FSA realistic liabilities of the Group’s participating insurance contract
     funds. Under the FSA’s rules these 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 time value is evaluated by projecting a large number of possible future outcomes under a wide range of
     economic scenarios, for example possible outcomes for interest rates and equity returns. These realistic liabilities have been included within
     the Statement of financial position.

     The material guarantees and options in the participating insurance contract funds are:

     i) Guaranteed annuity options – the RNPFN participating insurance contract fund has written individual 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 RNPFN fund also has exposure to GAOs and similar options on deferred annuities.

     ii) Maturity value guarantees – many of the Group’s participating insurance contracts have minimum maturity values reflecting the sums
         assured plus declared annual bonus.

     iii) Money-back guarantees – some of the policies written within the Group provide a guarantee or option to pay out all the premiums paid
          in (at a certain point in time).

     iv) While these do not constitute contractual guarantees, the Group has made promises to certain policyholders in relation to mortgage
         endowments that payments on these policies will meet the mortgage value covered.

     b) Non participating contracts

     The Group has also written contracts which include guarantees and options within its non participating insurance contract funds. These funds
     are not subject to the requirements of the FSA’s realistic reporting regime and liabilities are evaluated by reference to statutory reserving
     rules. Provision for guarantees and options in the non participating funds has been included within liabilities.

     The material guarantees and options in the non participating insurance contract funds are:

     i) Guaranteed annuity options – similar options to those written in the participating insurance contract fund have been written in relation
        to non participating contracts. Provision for these guarantees does not materially differ from a provision based on a market consistent
        stochastic model.

     3. Risk management and control
     The LV= Group seeks to create value for its members by maintaining an appropriate balance between the capital available to support risk,
     and the level and type of risk it takes on in order to achieve returns for policyholders. The principal types of risk, which are detailed below,
     have been identified and risk appetite for each of these has been set based on the amount necessary to meet the Financial Services
     Authority’s Individual Capital Assessment (ICA) capital requirements. The Group recognises the critical importance of having efficient and
     effective risk management systems in place and these take the form of:

     – Board and Executive committees with clear terms of reference.

     – Financial and non-Financial committees.

     – A clear organisation structure with documented apportionment of responsibilities.

     – A uniform methodology of risk assessment, which is embedded within all companies in the Group so that they operate within agreed
       tolerances and with appropriate controls in place.

     – Regular reviews of risks by senior managers, where frequency of review is determined by the potential impact of the risk and its likelihood.

     a) Insurance risk
     Insurance risk is the risk that arises from the inherent uncertainties as to the occurrence, amount and timing of insurance liabilities.
     Long-term insurance risk arises from risks in long-term insurance contracts such as mortality, morbidity, persistency and expense
     variances. To mitigate risk in the life business we reinsure. General insurance risk arises from risks in general insurance contracts which
     lead to significant claims in terms of quantity or value. These would include significant weather events, subsidence, substantial medical
     claims and major accidents on a single policy. Systems are in place to measure, monitor and control exposure to all these risks. These are
     documented in policies for underwriting, pricing, claims and reinsurance.



76
                                                                                                        Annual report and accounts 2009

NOTES TO THE ACCOUNTS CONTINUED




                                                                                                                                                                    01 Business overview
31 December 2009




3. Risk management and control (continued)
Long-term insurance contracts
Protection and annuity business is at risk from adverse changes in mortality experience from the time when the policies were underwritten.
In the case of policies that pay out on death, the risk is that mortality experience worsens whereas, for annuities, the risk is that mortality
experience improves. These two types of business therefore to some extent offset each other in a risk sense. On protection business,
the Group uses underwriting procedures, backed up with medical screening if appropriate, designed to price accurately for such risks and




                                                                                                                                                                    02 Performance
reassurance is in place to limit the quantum of risk retained on each policy. The Group’s annuity business is partially reassured.

Income protection and critical illness business is at risk from morbidity rates. Where there is an increased incidence of ill health or an
increase in the duration of such ill health, the Group is exposed to higher claims than expected. The Group has underwriting procedures,
including medical and financial screening if appropriate, to price accurately for such risks and reinsurance is in place to limit the quantum
of risk retained on each policy.

Persistency risk influences the ability to recover acquisition costs from margins within the products. The risk is greater in early years but
reduces significantly as time passes. For long-term insurance contract liabilities there is an allowance built in to allow for future withdrawals.
Exposure in future years occurs where withdrawals are lower than assumed resulting in higher future guaranteed payouts.

Higher than expected expense costs will increase the value of reserves required. The Group is exposed to the risk that the charges it deducts




                                                                                                                                                                    03 Our businesses
from policyholder benefits are not sufficient to cover future expenses.

The table below sets out the concentration of long-term insurance contract liability by type of contract. All business is written in the UK.
                                                                                 2009                                                 2008
                                                                   Gross   Reinsurance        Net                     Gross     Reinsurance            Net
Group                                                                £m            £m         £m                        £m               £m             £m

Whole life                                                     1,329.1          (0.1)    1,329.0                 1,260.2                  –     1,260.2
Endowment                                                        865.5             –       865.5                   933.2                  –       933.2
Term assurance                                                     2.8         (20.2)      (17.4)                   43.5             (23.7)        19.8
Guaranteed annuity pension                                       950.6          (9.6)      941.0                 1,063.1                  –     1,063.1
Pure endowment pensions                                        1,088.4         (12.9)    1,075.5                   665.9                  –       665.9
Critical illness                                                  29.7         (17.2)       12.5                    38.8             (13.2)        25.6
Income protection                                                 36.0          (8.5)       27.5                    57.6               (7.3)       50.3




                                                                                                                                                                    04 Group support and CSR
ISA                                                               67.1             –        67.1                    68.2                  –        68.2
Other                                                             90.3          (2.8)       87.5                    65.0               (2.9)       62.1
                                                               4,459.5         (71.3)    4,388.2                 4,195.5             (47.1)     4,148.4
Unit linked                                                      654.9           2.8       657.7                   498.5                0.8       499.3
                                                               5,114.4         (68.5)    5,045.9                 4,694.0             (46.3)     4,647.7

The table below sets out the impact on long-term insurance contract liabilities, the unallocated divisible surplus and profit before tax for
movements in key assumptions.
                                                                                                                               Impact on the
                                                                                                                   Impact on     unallocated    Impact on
                                                                                                                 loss before        divisible        gross
                                                                                                                         tax         surplus     liabilities
Sensitivity analysis for the change in assumptions used in long-term insurance contract liabilities                      £m               £m             £m
                                                                                                                                                                    05 Corporate governance

Increase in mortality rates by 5%                                                                                     (3.9)            (3.9)        21.9
Increase in morbidity rates by 5%                                                                                      9.0              9.0         26.8
Reduction in persistency by 5%                                                                                         1.5              1.5          3.5
Increase in expenses by 10%                                                                                         (13.8)           (13.8)         31.3
                                                                                                                                                                    06 The numbers




                                                                                                                                                               77
     Annual report and accounts 2009

     NOTES TO THE ACCOUNTS CONTINUED
     31 December 2009




     3. Risk management and control (continued)
     General insurance
     Property business suffers from the risk of significant weather events or subsidence which can result in large claims in a single area.
     The Group has entered into reinsurance contracts to reduce exposure to catastrophe claims.

     Motor business suffers from risks of substantial medical claims and major accidents on a single policy which can result in a large claim
     against one policy. The Group has entered into reinsurance contracts which limits the payout on large claims.

     The table below sets out the concentration of General Insurance claims liabilities by type of contract.
                                                                                          2009                                                         2008
                                                                        Gross       Reinsurance            Net                         Gross     Reinsurance           Net
     Group                                                                   £m             £m              £m                           £m               £m           £m

     Motor                                                             658.6            (82.7)           575.9                      663.2             (79.0)      584.2
     Household                                                          60.6                –             60.6                       69.6               (0.1)      69.5
     Other                                                              20.7             (0.6)            20.1                       30.0               (1.0)      29.0
                                                                       739.9            (83.3)           656.6                      762.8             (80.1)      682.7

     The table below sets out the impact on the General Insurance claims provision, the unallocated divisible surplus and profit before tax for
     movements in key assumptions.
                                                                                                                                                                 Impact on
                                                                                                                                                Impact on the      general
                                                                                                                                    Impact on     unallocated    insurance
                                                                                                                                  loss before        divisible      claims
                                                                                                                                          tax         surplus     provision
     Sensitivity analysis for the change in assumptions used in the General Insurance claims provision                                    £m               £m           £m

     Single storm event (1 in 200 year probability)                                                                                  (35.0)           (25.2)        25.2
     Subsidence event (based on worst year to date)                                                                                  (18.0)           (13.0)        13.0
     Increase in substantial personal injury claims by 10%                                                                           (19.0)           (13.7)        13.7
     Increase in major accidents on a single policy                                                                                    (5.0)            (3.6)        3.6

     Motor business suffers from risks of substantial medical claims and major accidents on a single policy which can result in a large claim
     against one policy. The Group has entered into reinsurance contracts which reduce the its exposure to large claims, the reinsurance retention
     is £5.0m on a single policy.

     The tables below reflect the cumulative incurred claims, including both claims notified and IBNR for each successive accident year at each
     balance sheet date, together with cumulative payments to date. The Group aims to maintain strong reserves in order to protect against
     adverse future claims experience and developments. As claims develop and the ultimate cost becomes more certain, adverse claims
     experiences are eliminated which results in a release of reserves from earlier accident years.

     Analysis of claims development –                    2002        2003           2004          2005           2006     2007           2008          2009           Total
                                                           £m          £m             £m            £m             £m       £m             £m            £m            £m
     gross of reinsurance
     Initial estimate of net provision                   273.1     396.9          400.9       521.5         551.0       560.2         539.6         614.8
     One year later                                      278.7     402.8          387.2       523.6         527.5       512.6         532.4
     Two years later                                     259.6     385.4          366.3       494.5         505.1       484.9
     Three years later                                   252.1     356.3          350.0       472.1         490.6
     Four years later                                    240.6     346.4          337.8       459.6
     Five years later                                    241.6     343.6          335.4
     Six years later                                     240.9     343.2
     Seven years later                                   240.9
     Current estimate of cumulative claims               240.9      343.2          335.4      459.6         490.6        484.9        532.4         614.8 3,501.8
     Cumulative payments to date                        (237.8)    (331.3)        (318.0)    (430.9)       (438.3)      (405.2)     (380.1)        (271.1) (2,812.7)
     Liability recognised in the Statement of financial position
     for 2002 to 2009 accident years                        3.1     11.9           17.4           28.7       52.3        79.7         152.3         343.7         689.1
     Liability recognised in the Statement of financial position
     in respect of prior accident years                                                                                                                            24.4
     Claims handling provision                                                                                                                                     26.4
     Provision as at 31 December 2009                                                                                                                             739.9




78
                                                                                                         Annual report and accounts 2009

NOTES TO THE ACCOUNTS CONTINUED




                                                                                                                                                             01 Business overview
31 December 2009




3. Risk management and control (continued)
Analysis of claims development –                    2002        2003       2004        2005       2006       2007       2008       2009         Total
                                                      £m          £m         £m          £m         £m         £m         £m         £m          £m
net of reinsurance
Initial estimate of net provision                   271.0     365.1      361.0       501.5      531.1      521.6      522.4      591.5
One year later                                      272.6     387.5      367.4       508.9      509.7      498.8      505.5
Two years later                                     253.6     376.0      346.5       473.0      502.9      475.2




                                                                                                                                                             02 Performance
Three years later                                   247.9     349.7      335.5       462.9      485.5
Four years later                                    237.3     347.8      320.4       452.0
Five years later                                    235.7     336.7      319.7
Six years later                                     235.6     335.3
Seven years later                                   235.4
Current estimate of cumulative claims               235.4     335.3      319.7       452.0      485.5      475.2       505.5     591.5 3,400.1
Cumulative payments to date                        (232.8)   (329.3)    (308.9)     (430.8)    (436.5)    (404.0)    (373.6)    (264.0) (2,779.9)
Liability recognised in the
Statement of financial position
for 2002 to 2009 accident years                        2.6       6.0       10.8       21.2       49.0       71.2      131.9      327.5       620.2
Liability recognised in the




                                                                                                                                                             03 Our businesses
Statement of financial position
in respect of prior accident years                                                                                                            10.0
Claims handling provision                                                                                                                     26.4
Provision as at 31 December 2009                                                                                                             656.6


b) Financial risk

i) Market risk
Market risk is the risk of adverse impact due to fluctuations in equity prices, interest rates, exchange rates or property prices. It arises due
to fluctuations in liabilities arising from products sold and the value of investments held. The Group has defined policies and procedures in
place to control the major components of market risk. Exposures to individual companies and to equity shares in aggregate are monitored in
order to ensure compliance with the relevant regulatory limits for solvency purposes and with guidelines set for each fund. Investments held




                                                                                                                                                             04 Group support and CSR
are primarily listed and traded on the UK and other recognised stock exchanges.
Limits on the Group’s exposure to equities are defined both in aggregate terms and by geography, industry and counterparty. Tactical asset
allocation meetings are held weekly, and strategic asset allocation meetings quarterly, to discuss investment return and concentration and
to agree any changes required.

Equity price risk
The Group is exposed to equity price risk from daily fluctuations in the market values of the equity portfolio. These assets are used to
support contractual liabilities arising from investment and long-term insurance contracts. For investment and long-term linked insurance
contracts the price movements are matched with corresponding movements in contractual obligations. For participating insurance contracts
the aim is to achieve growth in excess of its obligations.

Property price risk                                                                                                                                          05 Corporate governance
The Group is exposed to property price risk on the commercial properties it holds as investments. Values of properties are determined from the
future value of cash flows and the Group enters into leases following an assessment of the tenant’s ability to pay the rent and service charges.

Interest rate risk
The Group monitors interest rate risk by calculating the mean duration of the investment portfolio and the liabilities issued. The mean
duration is an indicator of the sensitivity of the assets and liabilities to changes in current interest rates. The mean duration of the liabilities
is determined by means of projecting expected cash flows from the contracts using best estimates of mortality and voluntary terminations.
The mean duration of the assets is calculated in a consistent manner.

Asset liability matching
The Group manages its financial positions with an asset liability management (ALM) framework that has been developed to achieve long term
investment returns in excess of its obligations under insurance and investment contracts. The principal technique of the Group’s ALM is to
match assets to the liabilities arising from insurance contracts by reference to the type of benefits payable to contract holders.
                                                                                                                                                             06 The numbers




The Group’s ALM is integrated with the management of the financial risks associated with the Group’s other financial assets and liabilities
not directly associated with insurance and investment liabilities.




                                                                                                                                                        79
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     31 December 2009




     3. Risk management and control (continued)
     Currency risk
     The Group is exposed to foreign exchange risk within the investment portfolios supporting the Group’s operations from purchased
     investments that are denominated or payable in currencies other than sterling. There is no other exposure to currency risk.
     The table below summarises the Group’s exposure after hedging to foreign currency exchange risk in sterling.
                                                                                   2009                                                       2008
                                                                  Euro US Dollar    Yen        Other    Total           Euro US Dollar         Yen     Other      Total
                                                                   £m       £m      £m           £m       £m             £m       £m           £m        £m        £m

     Derivatives                                                (26.9) 48.8         0.4      0.3 22.6               (0.1)  (2.6)   – (0.6) (3.3)
     Equity securities                                           71.3 153.8        77.1    112.9 415.1             161.4 228.9 93.6 133.9 617.8
     Debt securities                                             44.0   3.0         7.6      0.6 55.2               17.8    6.1  8.5   0.8 33.2
     Other investments                                           (9.1) 69.9         –        –    60.8              10.0    2.8  1.6   3.8 18.2
     Cash and cash equivalents                                   14.3   2.3         –        –    16.6               9.9 10.6    0.1   0.8 21.4
                                                                 93.6 277.8        85.1    113.8 570.3             199.0 245.8 103.8 138.7 687.3

     Some foreign debt securities are denominated in sterling so bear no currency risk and have not been included within the above table.
     Derivative risk
     Derivatives are used to reduce exposure to fluctuations in interest rates and exchange rates and for efficient portfolio management
     purposes. The principal derivatives used are interest rate contracts (including interest rate swaps and options), forward foreign exchange
     contracts, and equity derivatives (index futures and options).
     Summary of market risk sensitivities
     The table below sets out the impact on long-term insurance contract liabilities, the unallocated divisible surplus and profit before tax for
     movements in sectors of the market that the Group is invested in.
                                                                                                                                                               Impact
                                                                                                                                                             on gross
                                                                                                                                          Impact on the    long-term
                                                                                                                            Impact on       unallocated    insurance
                                                                                                                          profit before        divisible     contract
                                                                                                                                    tax         surplus     liabilities
     Sensitivity analysis to movements in key market sectors                                                                        £m               £m             £m

     Equity values fall by 20%                                                                                                 (81.6)            (81.6)      111.5
     Equity values increase by 20%                                                                                              73.6              73.6      (124.4)
     Property values fall by 17.5%                                                                                             (26.0)            (26.0)        28.1
     Property values increase by 17.5%                                                                                          31.6              31.6        (54.7)
     15 year Gilt yields fall by 17.5%                                                                                       (170.2)           (170.2)       255.7
     15 year Gilt yields increase by 17.5%                                                                                    133.9             133.9       (168.6)


     ii) Credit risk
     Credit risk is the risk of loss due to counterparties failing to meet all or part of their obligations in a timely fashion.
     The principal credit risks arise from exposure to counterparties through exposure to corporate bonds, reinsurers’ share of insurance
     liabilities, amounts due from reinsurers in respect of claims already paid, amounts due from insurance contract holders, amounts due from
     insurance intermediaries and counterparty risk with respect of derivative transactions.
     Policies are in place to control the major components of credit risk, including counterparty default and concentration risk. The Group places
     limits on its exposure to a single counterparty, or groups of counterparty, and to geographical and industry segments.
     Reinsurance is used to manage insurance risk. This does not, however, discharge the Group’s liability as primary insurer. If a reinsurer fails to
     pay a claim, the Group remains liable for the payment to the policyholder. The creditworthiness of reinsurers is considered by reviewing their
     financial strength prior to finalisation of any contract and on an annual basis.
     The tables below show the credit profile of the Group’s assets. The credit risk profile of the Society is materially consistent with that of the Group.
                                                                                                                                Below
                                                                            AAA           AA               A      BBB            BBB          Not rated         Total
     Credit risk exposure 2009                                               £m           £m              £m       £m             £m                £m            £m

     Debt and other fixed income securities                           1,966.8        256.2             645.3    232.8           10.2            75.3       3,186.6
     Other                                                                  –         90.9                 –        –              –               –          90.9
     Deposits with credit institutions                                      –          3.4              50.0        –              –            38.5          91.9
     Loans secured by mortgages                                             –            –                 –        –              –               –             –
     Loans secured by policies                                              –            –                 –        –              –             1.2           1.2
     Other loans                                                            –            –                 –        –              –            60.0          60.0
                                                                      1,966.8        350.5             695.3    232.8           10.2           175.0       3,430.6
     Reinsurance assets
     – non linked                                                        18.6           7.6            118.6        –              –             9.7         154.5
     – linked                                                               –          (2.8)               –        –              –               –           (2.8)
                                                                      1,985.4        355.3             813.9    232.8           10.2           184.7       3,582.3

80
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                                                                                                                                                                           01 Business overview
31 December 2009




3. Risk management and control (continued)
ii) Credit risk (continued)

                                                                                                                             Below
                                                                    AAA           AA              A             BBB           BBB       Not rated            Total
Credit risk exposure 2008                                           £m           £m              £m              £m            £m             £m              £m




                                                                                                                                                                           02 Performance
Debt and other fixed income securities                        1,930.0        264.6            310.8        84.7               0.2         32.3        2,622.6
Other                                                               –         63.1                –           –                 –            –           63.1
Deposits with credit institutions                                20.0        165.0            133.3        45.8                 –            –          364.1
Loans secured by mortgages                                          –            –                –           –                 –          5.0            5.0
Loans secured by policies                                           –            –                –           –                 –          1.4            1.4
Other loans                                                         –            –                –           –                 –        233.9          233.9
                                                              1,950.0        492.7            444.1       130.5               0.2        272.6        3,290.1
Reinsurance assets
– non linked                                                      2.4         47.2             71.4         1.0                 –          8.8          130.8
– linked                                                            –          (0.8)              –           –                 –            –            (0.8)
                                                              1,952.4        539.1            515.5       131.5               0.2        281.4        3,420.1




                                                                                                                                                                           03 Our businesses
Included within other loans are loans subject to securitisation to banking customers.

The tables below show the age analysis of the Group’s past due and/or impaired assets.

                                                                                                                                       Total
                                                                                                  31      61                        past due    Past
                                                                                       <30     to 60   to 90          >90            but not due and
                                                                                       days     days    days          days   Linked impaired impaired        Total
Age analysis of assets past due/impaired 2009                                           £m       £m      £m            £m      £m        £m          £m        £m

Financial assets – loans and other receivables                                      9.9           –        –            –        –     0.4       9.9        10.3
Insurance receivables                                                               5.6         0.3    (0.4)          2.4        –     7.8       2.2        10.0
                                                                                   15.5         0.3    (0.4)          2.4        –     8.2      12.1        20.3




                                                                                                                                                                           04 Group support and CSR
                                                                                                                                        Total
                                                                                                  31       61                       past due     Past
                                                                                       <30     to 60    to 90         >90             but not due and
                                                                                       days     days     days         days   Linked impaired impaired         Total
Age analysis of assets past due/impaired 2008                                           £m       £m      £m            £m      £m        £m          £m        £m

Financial assets – loans and other receivables                                         1.0        –       –             –        –     1.0      35.6        36.6
Insurance receivables                                                                  8.6      3.0     0.9           4.1        –    16.6       2.2        18.8
                                                                                       9.6      3.0     0.9           4.1        –    17.6      37.8        55.4

The table below summarises the impairment losses on loans and advances to customers.
                                                                                                                                                    Group
                                                                                                                                           2009             2008
                                                                                                                                             £m               £m
                                                                                                                                                                           05 Corporate governance
Amounts written off during the year as uncollectible                                                                                       42.4             21.5
Income received on claims previously written off                                                                                            (7.3)            (2.5)
Utilisation of provision bought forward                                                                                                   (20.1)              7.9
Total impairment losses on loans and advances                                                                                              15.0             26.9

Collateral
For securities lending the amount and type of collateral required depends on an assessment of the credit risk of the type of security lent.
All securities lent are indemnified subject to the conditions of the Stock Lending Authorisation Agreement with HSBC. Guidelines are
implemented regarding the acceptability of types of collateral and the valuation parameters. Collateral is mainly obtained for securities
lending. Credit risk is also mitigated by entering into the collateral agreement. Operations monitor the market value of the collateral,
request additional collateral when needed and perform an impairment valuation when applicable. The collateral can be sold or repledged
by the Group and is repayable if the contract terminates or the contract’s fair value decreases. At 31 December 2009, the collateral held
                                                                                                                                                                           06 The numbers




was £nil (2008: £nil). No collateral received from the counterparty has been sold or repledged (2008: £nil).

For over-the-counter derivative transactions undertaken by the Group, collateral is received from the counterparty. The collateral can be sold or
repledged by the Group and is repayable if the contract terminates or the contract’s fair value decreases. At 31 December 2009, the fair value
of such collateral held was £103.0m (2008: £184.3m). No collateral received from the counterparty has been sold or repledged (2008: £nil).




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     31 December 2009




     3. Risk management and control (continued)
     iii) Liquidity risk

     Liquidity risk is the risk that the Group does not have sufficient available liquid assets to meet its obligations as they fall due.

     Sources of liquidity risk have been identified and systems are in place to measure, monitor and control liquidity exposures. These are
     documented in liquidity policies.

     Liquidity is maintained at a prudent level, with a buffer to cover contingencies including the provision of temporary liquidity to
     subsidiary companies.

     The table below summarises the maturity profile of the financial liabilities of the Group based on remaining undiscounted contractual
     obligations, except for long term insurance participating (commonly referred to as “with-profits”) contracts where maturity profiles are
     determined on the discounted estimated timing of net cash outflows.


                                                                      Within 1         1-3          3-5       Over 5          No
     Group                                                                year       years        years        years        term          Linked      Total
     Maturity profile of financial liabilities 2009                       £m           £m           £m           £m          £m              £m        £m

     Unallocated divisible surplus                                        –            –            –           –        945.1            –          945.1
     Insurance contract liabilities                                   962.8        617.7        437.6     3,643.4            –         76.5        5,738.0
     Investment contract liabilities                                      –            –            –           –            –        578.4          578.4
     Net asset value attributable to unit holders                      69.0            –            –           –            –            –           69.0
     Provisions                                                         6.0         39.3          0.2         0.2            –            –           45.7
     Financial liabilities
     – Derivative financial instruments                                 4.3          3.9            –           –          2.8            –           11.0
     – Other financial liabilities                                      4.2            –            –        10.7            –            –           14.9
     Pension scheme obiligation                                           –            –            –        97.6            –            –           97.6
     Insurance payables                                                33.3            –            –           –            –            –           33.3
     Trade and other payables                                          34.1         29.3            –        86.6            –            –          150.0
                                                                    1,113.7        690.2        437.8     3,838.5        947.9        654.9        7,683.0

                                                                      Within 1         1-3          3-5       Over 5          No
     Group                                                                year       years        years        years        term          Linked      Total
     Maturity profile of financial liabilities 2008                       £m           £m           £m           £m          £m              £m        £m

     Unallocated divisible surplus                                        –            –            –           –      1,117.3            –        1,117.3
     Insurance contract liabilities                                 1,057.6        733.9        497.9     2,996.5            –        146.4        5,432.3
     Investment contract liabilities                                      –            –            –           –            –        396.0          396.0
     Net asset value attributable to unit holders                     132.1            –            –           –            –            –          132.1
     Provisions                                                        23.8         33.0         40.5         3.4          8.8            –          109.5
     Financial liabilities
     – Derivative financial instruments                                15.3            –            –           –            –            –           15.3
     – Borrowings                                                     150.6            –            –           –            –            –          150.6
     – Other financial liabilities                                     68.8          2.4            –        11.4            –            –           82.6
     Insurance payables                                                50.9            –            –           –            –            –           50.9
     Trade and other payables                                         155.9            –            –           –         47.0            –          202.9
                                                                    1,655.0        769.3        538.4     3,011.3      1,173.1        542.4        7,689.5




82
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                                                                                                                                                              01 Business overview
31 December 2009




3. Risk management and control (continued)
iii) Liquidity risk (continued)
For investment and long-term linked insurance contracts (unit-linked) the Group matches all the assets on which the unit prices are based
with assets in the portfolio. Therefore the Group is not exposed to price, currency, credit or interest risk in respect of these contracts.
The Group is responsible for ensuring there is sufficient liquidity within the asset portfolio to enable liabilities to unit linked policyholders
to be met as they fall due.




                                                                                                                                                              02 Performance
                                                                 Within 1         1-3          3-5       Over 5           No
Society                                                              year       years        years        years         term       Linked       Total
Maturity profile of financial liabilities 2009                        £m          £m           £m           £m           £m           £m            £m

Unallocated divisible surplus                                         –           –            –            –      1,112.9            –     1,112.9
Insurance contract liabilities                                    225.4       375.1        340.3      3,539.7            –         76.5     4,557.0
Investment contract liabilities                                       –           –            –            –            –        578.4       578.4
Provisions                                                          2.0        34.0          0.2          0.2            –            –        36.4
Financial liabilities
– Derivative financial instruments                                 2.5          3.9            –            –            –            –         6.4
Pension obiligations                                                 –            –            –         84.2            –            –        84.2
Insurance payables                                                22.6            –            –            –            –            –        22.6




                                                                                                                                                              03 Our businesses
Trade and other payables                                         755.0            –            –            –            –            –       755.0
                                                               1,007.5        413.0        340.5      3,624.1      1,112.9        654.9     7,152.9
                                                                  Within 1        1-3          3-5       Over 5           No
Society                                                               year      years        years        years         term       Linked       Total
Maturity profile of financial liabilities 2008                        £m          £m           £m           £m           £m           £m            £m

Unallocated divisible surplus                                         –            –           –            –      1,311.7            –     1,311.7
Insurance contract liabilities                                    385.6        541.5       383.8      2,904.3            –        102.5     4,317.7
Investment contract liabilities                                       –            –           –            –            –        396.0       396.0
Provisions                                                          0.8         13.5        35.9          1.4            –            –        51.6
Deferred tax liability                                                –          1.9           –            –            –            –         1.9
Financial liabilities
– Derivative financial instruments                                  3.5            –           –            –            –            –         3.5




                                                                                                                                                              04 Group support and CSR
Insurance payables                                                 39.3            –           –            –            –            –        39.3
Trade and other payables                                          159.1            –           –            –            –            –       159.1
                                                                  588.3        556.9       419.7      2,905.7      1,311.7        498.5     6,280.8




                                                                                                                                                              05 Corporate governance
                                                                                                                                                              06 The numbers




                                                                                                                                                         83
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     31 December 2009




     3. Risk management and control (continued)
     iii) Liquidity risk (continued)
     The tables below summarise the expected recovery or settlement of assets:

                                                                                  2009                                     2008
                                                              Within 1 year   Over 1 year      Total   Within 1 year   Over 1 year       Total
     Group                                                              £m            £m         £m              £m            £m         £m

     Intangible assets                                               9.0         274.4       283.4            5.3         322.8       328.1
     Deferred acquisition costs                                     53.6          49.3       102.9           57.0          37.4        94.4
     Pension benefit asset                                             –             –           –              –           4.6         4.6
     Property and equipment                                            –          19.6        19.6              –          16.6        16.6
     Investment properties                                             –         379.4       379.4              –         377.2       377.2
     Financial assets
     – Fair value through income                                2,750.7       2,731.7       5,482.4        394.8       4,508.9       4,903.7
     – Derivative financial instruments                           110.4          10.9         121.3          4.0         194.2         198.2
     – Loans and other receivables                                196.3           7.0         203.3        496.4         150.2         646.6
     Reinsurance assets                                           127.2          36.8         164.0        124.0          12.0         136.0
     Insurance receivables                                        146.4           5.0         151.4        138.1             –         138.1
     Corporation tax asset                                         15.0             –          15.0            –             –             –
     Deferred tax asset                                            19.2          22.7          41.9          4.1          25.1          29.2
     Prepayments and accrued income                                71.3           0.3          71.6         67.2             –          67.2
     Cash and cash equivalents                                    646.8             –         646.8        749.6             –         749.6
     Total assets                                               4,145.9       3,537.1       7,683.0      2,040.5       5,649.0       7,689.5
                                                                                  2009                                     2008
                                                              Within 1 year   Over 1 year      Total   Within 1 year   Over 1 year       Total
     Society                                                            £m            £m         £m              £m            £m         £m

     Intangible assets                                                 –         13.9          13.9               –       18.5          18.5
     Property and equipment                                            –          5.0           5.0               –        2.6           2.6
     Investment properties                                             –        324.5         324.5               –      360.2         360.2
     Investments in group undertakings and participating interests     –      1,581.3       1,581.3               –    1,083.4       1,083.4
     Financial assets
     – Fair value through income                                 2,166.5      1,883.2       4,049.7         61.3       3,788.4       3,849.7
     – Derivative financial instruments                            110.4         10.9         121.3            –         194.2         194.2
     – Loans and other receivables                                 258.8            –         258.8        187.5             –         187.5
     Reinsurance assets                                            300.4            –         300.4        289.3             –         289.3
     Corporation tax asset                                           9.4            –           9.4            –             –             –
     Deferred tax asset                                                –         16.7          16.7            –             –             –
     Pension benefit asset                                             –            –             –            –           4.6           4.6
     Insurance receivables                                          21.2            –          21.2         12.3             –          12.3
     Deferred acquisition costs                                        –            –             –          0.4             –           0.4
     Prepayments and accrued income                                 45.6            –          45.6         39.7             –          39.7
     Cash and cash equivalents                                     405.1            –         405.1        238.4             –         238.4
     Total assets                                               3,317.4       3,835.5       7,152.9        828.9       5,451.9       6,280.8




84
                                                                                                          Annual report and accounts 2009

NOTES TO THE ACCOUNTS CONTINUED




                                                                                                                                                                 01 Business overview
31 December 2009




3. Risk management and control (continued)
iv) Fair value estimation
Effective 1 January 2009, the Group adopted the amendment to IFRS 7. This requires, for financial instruments held at fair value in the
Statement of financial position, disclosure of fair value measurements by level of the following fair value measurement hierarchy:
n   Quoted prices (unadjusted) in active markets for identical assets or liabilities (Level 1)




                                                                                                                                                                 02 Performance
n   Inputs other than quoted prices included within Level 1 that are observable for the asset or liability, either directly (that is, as prices)
    or indirectly (that is, derived from prices) (Level 2).
n   Inputs for the asset or liability that are not based on observable market data (that is, unobservable inputs) (Level 3).

The following table presents the Company’s/Group’s assets and liabilities measured at fair value at 31 December 2009.
                                                                                                           2009                                    2008
                                                                                                                          Total                     Total
                                                                                Level 1      Level 2      Level 3    fair value               fair value
Group                                                                               £m           £m           £m           £m                       £m

Financial assets
Derivative financial instruments




                                                                                                                                                                 03 Our businesses
Interest rate swaps                                                                 –              –      47.7         47.7                   156.2
Swap options                                                                        –              –      72.1         72.1                    20.1
Forward exchange contracts                                                          –            1.3         –          1.3                    20.2
Equity/index derivatives                                                          0.2              –         –          0.2                     1.7
                                                                                  0.2            1.3     119.8        121.3                   198.2
Financial assets held at fair value through income
Shares, other variable yield securities and units in unit trusts
– UK listed                                                                  1,326.3        114.9          0.3      1,441.5                 1,476.9
– UK unlisted                                                                      –            –        116.6        116.6                   150.1
– Overseas listed                                                              480.7         13.0            –        493.7                   427.9
– Overseas unlisted                                                              5.7            –        147.4        153.1                   163.1




                                                                                                                                                                 04 Group support and CSR
Debt and other fixed income securities
– UK listed                                                                  1,538.8        742.1           2.8     2,283.7                 2,325.5
– Overseas listed                                                              148.2        754.7             –       902.9                   297.1

Other                                                                           11.6            –         79.3         90.9                    63.1
                                                                             3,511.3      1,624.7        346.4      5,482.4                 4,903.7
                                                                             3,511.5      1,626.0        466.2      5,603.7                 5,101.9

Financial liabilities
Investment contract liabilities                                                      –      444.8        133.6        578.4                   396.0

Derivative financial instruments
                                                                                                                                                                 05 Corporate governance
Interest rate swaps                                                                 –         2.8            –          2.8                    11.5
Swap options                                                                        –           –          4.8          4.8                     0.3
Forward exchange contracts                                                        1.8         0.2            –          2.0                     3.5
Equity/index derivatives                                                          1.4           –            –          1.4                       –
                                                                                  3.2         3.0          4.8         11.0                    15.3
                                                                                  3.2       447.8        138.4        589.4                   411.3
                                                                                                                                                                 06 The numbers




                                                                                                                                                            85
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     31 December 2009




     3. Risk management and control (continued)
     iv) Fair value estimation (continued)
                                                                                                           2009                                 2008
                                                                                                                          Total                   Total
                                                                                 Level 1     Level 2      Level 3    fair value             fair value
     Society                                                                         £m         £m            £m           £m                     £m

     Financial assets
     Derivative financial instruments
     Interest rate swaps                                                             –           –        47.7         47.7                 153.0
     Swap options                                                                    –           –        72.1         72.1                  19.3
     Forward exchange contracts                                                      –         1.3           –          1.3                  20.2
     Equity/index derivatives                                                      0.2           –           –          0.2                   1.7
                                                                                   0.2         1.3       119.8        121.3                 194.2

     Financial assets held at fair value through income
     Shares, other variable yield securities and units in unit trusts
     – UK listed                                                              1,004.3        497.9         0.2      1,502.4               1,265.3
     – UK unlisted                                                                  –            –       112.8        112.8                 150.1
     – Overseas listed                                                          343.4          2.6           –        346.0                 387.3
     – Overseas unlisted                                                          5.7            –       105.6        111.3                 106.8

     Debt and other fixed income securities
     – UK listed                                                              1,010.0        453.9          2.8     1,466.7               1,681.0
     – Overseas listed                                                           99.5        356.2            –       455.7                 198.0

     Other                                                                       11.5         43.3           –         54.8                  61.2
                                                                              2,474.4      1,353.9       221.4      4,049.7               3,849.7
                                                                              2,474.6      1,355.2       341.2      4,171.0               4,043.9


     Financial liabilities
     Investment contract liabilities                                                  –      444.8       133.6        578.4                 396.0

     Derivative financial instruments
     Swap options                                                                    –           –         4.8          4.8                     –
     Forward exchange contracts                                                      –         0.2           –          0.2                   3.5
     Equity/index derivatives                                                      1.4           –           –          1.4                     –
                                                                                   1.4         0.2         4.8          6.4                   3.5
                                                                                   1.4       445.0       138.4        584.8                 399.5

     The fair value of financial instruments included in the Level 1 category are based on published quoted bid market prices in an active
     market at the year end date. A market is regarded as quoted in an active market if quoted prices are readily and regularly available from an
     exchange, dealer, broker, industry group, pricing service or regulatory agency and those prices represent actual and regularly occurring market
     transactions on an arm’s length basis.

     Level 2 financial instruments are not traded in an active market or their fair value is determined using valuation techniques. These valuation
     techniques maximise the use of data from observable current market transactions (where it is available) using pricing obtained via pricing
     services, even if the market is not active. It also includes financial assets with prices based on broker quotes.




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                                                                                                                                                            01 Business overview
31 December 2009




3. Risk management and control (continued)
iv) Fair value estimation (continued)

Specific valuation techniques used to value financial instruments classified as level 3 include:
n   Quoted market prices or dealer quotes for similar instruments (for unlisted shares).




                                                                                                                                                            02 Performance
n   The fair value of interest rate swaps is calculated as the present value of the estimated future cash flows based on observable yield curves.
n   The fair value of forward exchange contracts is determined using forward exchange rates at the Statement of financial position date,
    with the resulting value discounted back to present value.
n   Other techniques, such as discounted cash flow analysis, are used to determine fair value for the remaining other financial instrument.

If one or more of the significant inputs is not based on observable market data, the instrument is included in level 3.

The table below presents the movements in level 3 financial instruments for the year ended 31 December 2009:
                                                                                       Total gains/
                                                                                            (losses)
                                                                                        recognised                              Transfers
                                                                                At 1       through                           from level 1      At 31
                                                                             January        income     Purchases    Sales     and level 2   December




                                                                                                                                                            03 Our businesses
Group                                                                            £m             £m           £m       £m              £m         £m

Financial assets
Derivative financial instruments
Interest rate swaps                                                          151.7        (104.0)            –         –               –      47.7
Swap options                                                                  58.6           (8.8)        22.3         –               –      72.1
                                                                             210.3        (112.8)         22.3         –               –     119.8
Financial assets held at fair value through income
Shares, other variable yield securities and units in unit trusts
– UK listed                                                                      –               –         0.3          –             –        0.3
– UK unlisted                                                                125.3            (4.7)        3.8       (7.8)            –      116.6
– Overseas unlisted                                                          187.8          (19.6)        18.6     (42.4)           3.0      147.4




                                                                                                                                                            04 Group support and CSR
Debt and other fixed income securities
– UK listed                                                                    2.8               –            –        –               –        2.8

Other                                                                         11.9              –         67.4         –              –       79.3
                                                                             327.8          (24.3)        90.1     (50.2)           3.0      346.4
                                                                             538.1        (137.1)        112.4     (50.2)           3.0      466.2

Financial liabilities
Investment contract liabilities                                              121.7               –        11.9         –               –     133.6

Derivative financial instruments                                                                                                                            05 Corporate governance
Swap options                                                                   0.9            3.9            –         –               –       4.8
                                                                               0.9            3.9            –         –               –       4.8
                                                                             122.6            3.9         11.9         –               –     138.4
                                                                                                                                                            06 The numbers




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     31 December 2009




     3. Risk management and control (continued)
     iv) Fair value estimation (continued)
                                                                                             Total gains/
                                                                                                  (losses)
                                                                                              recognised                              Transfers
                                                                                      At 1       through                           from level 1      At 31
                                                                                   January        income     Purchases    Sales     and level 2   December
     Society                                                                           £m             £m           £m       £m              £m         £m

     Financial assets

     Derivative financial instruments
     Interest rate swaps                                                          151.7         (104.0)            –          –              –      47.7
     Swap options                                                                  58.6            (8.8)        22.3          –              –      72.1
                                                                                  210.3         (112.8)         22.3          –              –     119.8
     Financial assets held at fair value through income
     Shares, other variable yield securities and units in unit trusts
     – UK listed                                                                      –               –           0.2        –               –       0.2
     – UK unlisted                                                                125.2            (4.6)            –     (7.8)              –     112.8
     – Overseas unlisted                                                          105.6               –             –        –               –     105.6

     Debt and other fixed income securities
     – UK listed                                                                     2.8               –            –         –              –        2.8

                                                                                  233.6           (4.6)          0.2      (7.8)              –     221.4
                                                                                  443.9         (117.4)         22.5      (7.8)              –     341.2


     Financial liabilities
     Investment contract liabilities                                              121.7                –        11.9          –              –     133.6

     Derivative financial instruments
     Swap options                                                                   0.9             3.9            –          –              –       4.8
                                                                                    0.9             3.9            –          –              –       4.8
                                                                                  122.6             3.9         11.9          –              –     138.4

     Changing the inputs for the Group and Society level 3 assets and liabilities would not significantly change the fair value.

     v. Other risk types

     Operational risk
     Operational risk is the risk of loss, resulting from inadequate or failed internal processes, people and systems, or from external events,
     including legal and regulatory risk.

     Senior managers are responsible for the identification, assessment, control and monitoring of operational risks and for reporting these to the
     Risk Committee in accordance with the Group’s escalation criteria. Operational risks are assessed in terms of their probability and impact in
     accordance with Group policy.

     Group risk
     Group risk is the risk of contagion that the Society incurs from its membership of a group of firms. The Group Risk Committee oversees the
     management of such risks.

     Strategic risk
     Strategic risk is the risk arising from the implementation of agreed strategy. It includes risks arising from political, economic, sociological and
     technological changes, competitor actions and capital adequacy.

     Executive management identifies strategic risks when drawing up business plans for approval by the Board and monitors these, ensuring that
     excess risk is reported to the Group Audit, Risk & Compliance Committee and Board.




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                                                                                                                                                         01 Business overview
31 December 2009




4. Net earned premiums
                                                                                                 Group                             Society
                                                                                          2009             2008                2009          2008
Gross written premiums                                                                      £m               £m                  £m            £m

Long-term insurance contracts   – participating business
Investments and savings         – single premium                                         28.9             18.6                28.9           18.6
Pensions and annuities          – single premium                                         40.7             15.0                40.7           15.0




                                                                                                                                                         02 Performance
Investments and savings         – regular premium                                        71.7             89.6                71.7           57.9
Pensions and annuities          – regular premium                                        13.9             16.0                13.9            8.9
Life and health protection      – regular premium                                         6.2              1.8                 6.2              –

Long-term insurance contracts   – non participating business
Pensions and annuities          – single premium                                        246.8            228.5               246.8      215.1
Life and health protection      – single premium                                            –              0.2                   –          –
Investments and savings         – regular premium                                         0.3              1.4                 0.3        1.4
Pensions and annuities          – regular premium                                         9.7             10.1                 9.7          –
Life and health protection      – regular premium                                       106.9             89.8               105.9        0.6




                                                                                                                                                         03 Our businesses
Long-term linked insurance contracts
Investments and savings       – regular premium                                            1.6             8.2                  1.6             –
Pensions and annuities        – regular premium                                            5.3             0.5                  5.3             –
Life and health protection    – regular premium                                              –            14.2                    –             –

General insurance contracts
Motor                                                                                   626.7            288.4                   –          –
Property damage                                                                         113.9            113.0                   –          –
Other                                                                                    70.5              43.7                  –          –
Change in unearned premiums provision                                                   (92.4)            (21.7)                 –          –
Gross earned premiums                                                                 1,250.7            917.3               531.0      317.5




                                                                                                                                                         04 Group support and CSR
Reinsurers share of gross premiums
Long term insurance premiums                                                            (76.1)            (32.6)            (111.5)     (113.6)
General insurance business                                                              (24.7)            (12.1)                 –           –
Change in unearned premiums provision                                                     2.7               (0.9)                –           –
                                                                                        (98.1)            (45.6)            (111.5)     (113.6)
Net earned premiums                                                                   1,152.6            871.7               419.5       203.9


Gross written premiums for investment contracts which are deposit
accounted for and not included above                                                    202.2            229.9               202.2      229.9
                                                                                                                                                         05 Corporate governance
All contracts are written in the UK apart from Highway Insurance Company Limited which writes a proportion of its general insurance in Ireland.
                                                                                                                                                         06 The numbers




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     31 December 2009




     5. New business premiums
                                                                                                 Group                           Society
                                                                                          2009            2008                2009         2008
     Gross new business premiums – long-term contracts                                      £m              £m                  £m           £m

     Long-term insurance contracts   – participating business
     Investments and savings         – single premium                                     28.9            18.6               28.9          18.6
     Pensions and annuities          – single premium                                     40.7            15.0               40.7          15.0
     Investments and savings         – regular premium                                     1.6             2.5                1.6           2.5
     Pensions and annuities          – regular premium                                     0.2             0.2                0.2           0.2

     Long-term insurance contracts   – non participating business
     Pensions and annuities          – single premium                                   246.8            228.5              246.8      215.1
     Life and health protection      – single premium                                       –              0.2                  –          –
     Pensions and annuities          – regular premium                                      –                –                  –          –
     Life and health protection      – regular premium                                   13.1             11.6               13.1          –

     Long-term linked insurance contracts
     Pensions and annuities        – regular premium                                       0.7             1.3                0.7           1.3
     Life and health protection    – regular premium                                       4.5             4.0                4.5             –

     Investment contracts
     Pensions and annuities          – single premium                                   202.2            229.9              202.2      229.9
                                                                                        538.7            511.8              538.7      482.6

     All gross new business premiums relate to individual business.

     Recurrent single premium rebates from the Department for Works and Pensions are included as new business single premiums.

     Where periodic premiums are received other than annually, the periodic new business premiums are stated on an annualised basis.
                                                                                                                              2009         2008
     Group gross premiums earned – general business                                                                             £m           £m

     Motor                                                                                                                  578.6      273.4
     Property damage                                                                                                        115.6      113.5
     Other                                                                                                                   24.5       36.5
                                                                                                                            718.7      423.4


     6. Fee and commission income
                                                                                                 Group                           Society
                                                                                          2009            2008                2009         2008
                                                                                            £m              £m                  £m           £m

     Policy administration fees                                                            9.0            10.3                3.5           4.9
     Fund management fees                                                                  1.9             1.4                  –             –
     Accrued mortgage interest                                                             2.6             0.5                  –             –
     Commission income                                                                     5.9            24.8                0.7           0.3
     Reinsurance commission income                                                         0.1             0.1                0.1             –
                                                                                          19.5            37.1                4.3           5.2


     7. Investment income
                                                                                                 Group                           Society
                                                                                          2009            2008                2009         2008
                                                                                            £m              £m                  £m           £m

     Rental income from investment properties                                             23.7            26.5               23.7          23.6
     Income from investments at fair value through income
       Interest income                                                                  141.4            118.3              109.9       50.7
       Dividend income                                                                   57.6             93.5               47.5       77.5
     Interest on loans and receivables                                                    7.8             63.1                2.8       15.9
                                                                                        230.5            301.4              183.9      167.7




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                                                                                                                                                     01 Business overview
31 December 2009




8. Net gains/(losses)on investments
                                                                                                 Group                         Society
                                                                                         2009              2008             2009         2008
                                                                                           £m                £m               £m           £m

Investment properties                                                                   (12.4)       (100.7)              (12.4)     (98.0)
Investments at fair value through income
  Debt securities                                                                        85.9          42.8                68.1       (12.6)




                                                                                                                                                     02 Performance
  Equity securities                                                                     300.4        (838.8)              248.5     (556.8)
  Derivatives at fair value through income                                             (201.4)        168.7              (182.4)     163.8
                                                                                        172.5        (728.0)              121.8     (503.6)

Net gains/(losses) on investments include realised and fair value gains and losses.

9. Net benefits and claims
                                                                                                 Group                         Society
                                                                                         2009              2008             2009         2008
                                                                                           £m                £m               £m           £m

Gross benefits and claims




                                                                                                                                                     03 Our businesses
Long-term insurance contracts
Benefits and claims paid                                                               555.0             712.0            551.7     428.0
Change in the provision for claims                                                      (1.7)                –             (1.8)      1.7

General insurance contracts
Claims paid                                                                             537.5        340.1                    –         –
Change in the provision for claims                                                      (22.9)         (1.3)                  –         –
                                                                                      1,067.9      1,050.8                549.9     429.7

Reinsurers’ share of gross benefits and claims
Long-term insurance contracts
Benefits and claims paid                                                                (67.3)           (25.5)           (92.9)     (42.1)




                                                                                                                                                     04 Group support and CSR
General insurance contracts
Claims paid                                                                             (6.3)           (1.1)                 –          –
Change in the provision for claims                                                      (3.2)           (0.9)                 –          –
                                                                                       (76.8)         (27.5)              (92.9)     (42.1)
                                                                                       991.1       1,023.3                457.0     387.6

Net benefits and claims for investment contracts which are deposit
accounted for and not included above                                                     71.3             49.5             71.3          32.4



10. Net change in contract liabilities
                                                                                                                                                     05 Corporate governance

                                                                                                 Group                         Society
                                                                                         2009              2008             2009         2008
                                                                                           £m                £m               £m           £m

Gross change in contract liabilities
Change in long-term insurance contract liabilities                                     (263.9)           604.7           (267.0)    431.4
Change in long-term linked insurance contract liabilities                                31.1             53.3             26.0          –
Change in investment contract liabilities                                               (56.6)            18.6            (51.5)     (13.6)
                                                                                       (289.4)           676.6           (292.5)    417.8

Reinsurers’ share of gross change in contract liabilities
Change in long-term insurance contract liabilities                                       24.1             (18.2)           18.1      (45.0)
                                                                                                                                                     06 The numbers




Change in long-term linked insurance contract liabilities                                (2.0)              (3.3)          (7.1)      43.9
                                                                                         22.1             (21.5)           11.0        (1.1)
                                                                                       (267.3)           655.1           (281.5)    416.7




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     31 December 2009




     11. Finance costs
                                                                                                      Group                       Society
                                                                                              2009             2008            2009         2008
                                                                                                £m               £m              £m           £m

     Interest expense on banking and other activities                                          5.9              1.1            0.6          0.2
     Interest expense on loans and borrowings                                                  0.6              0.3              –            –
     Foreign exchange loss on loans and borrowings                                               –              1.9              –            –
     Interest expense on deferred consideration                                                  –              0.1              –          0.1
                                                                                               6.5              3.4            0.6          0.3


     12. Other operating and administrative expenses by nature
                                                                                                      Group                       Society
                                                                                              2009             2008            2009         2008
                                                                                                £m               £m              £m           £m

     Acquisition costs                                                                       148.4            144.0           46.3       31.4
     Movement in deferred acquisition costs                                                    8.5             54.1            0.4        1.8
     Amortisation and impairment of intangible assets                                         22.2             14.0            4.6        4.7
     Depreciation on property and equipment – owned                                            1.2              0.7            0.5        0.2
     Depreciation on property and equipment – finance lease                                    1.4              0.5              –          –
     (Profit)/loss on disposal of property and equipment                                      (2.2)             7.9              –          –
     Operating lease rental charges on land and buildings                                      6.1              5.9            5.9        3.2
     Investment management expenses and charges                                                3.4              1.7           14.7        8.6
     Auditors’ remuneration                                                                    1.5              2.1            0.6        0.8
     Employee benefits expense                                                               155.6            124.2          155.6      119.9
     Bad debt expense                                                                         23.5             27.8              –          –
     Management charge allocated to subsidiaries                                                 –                –          (66.2)     (81.0)
     Administrative expenses                                                                  51.6             44.1          (42.0)     (14.1)
                                                                                             421.2            427.0          120.4       75.5


     13. Auditors’ remuneration
                                                                                                                                Pricewaterhouse-
                                                                                                                                  Coopers LLP
                                                                                                                               2009         2008
     Group                                                                                                                       £m           £m

     Fees payable to the Group’s auditors for the audit of the Group’s annual accounts                                         0.7          0.5

     Fees payable to the Group’s auditors and its associates for other services:
     – other services pursuant to legislation                                                                                  0.4          0.3
     – other services                                                                                                          0.4          0.7
                                                                                                                               1.5          1.5


                                                                                                                                Pricewaterhouse-
                                                                                                                                  Coopers LLP
                                                                                                                               2009         2008
     Society                                                                                                                     £m           £m

     Fees payable to the Society’s auditors for the audit of the Society’s annual accounts                                     0.2          0.2

     Fees payable to the Society’s auditors and its associates for other services:
     – other services pursuant to legislation                                                                                  0.1          0.1
     – other services                                                                                                          0.3          0.4
                                                                                                                               0.6          0.7

     During 2008 Ernst & Young LLP resigned as auditors and PricewaterhouseCoopers LLP were appointed. Auditors fees paid to Ernst & Young
     LLP during 2008 amounted to £0.1m.
     Highway Group Plc was acquired during 2008 and during that year KPMG LLP carried on their duties as the Company’s auditors. Fees paid to
     KPMG LLP during 2008 amounted to £0.5m. In 2009 KPMG resigned as auditors and PricewaterhouseCoopers LLP were appointed.
     Of the fees payable to PricewaterhouseCoopers LLP for the Group’s annual accounts, £0.5m relates to the audit of the subsidiary companies.
     There were no other services carried out by the auditors in respect of the Group or the Society.




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                                                                                                                                                             01 Business overview
31 December 2009




14. Employee benefits expense
                                                                                                   Group                             Society
                                                                                           2009             2008                2009           2008
                                                                                             £m               £m                  £m             £m

Wages and salaries                                                                      127.3               97.2               127.3       93.3
Social security costs                                                                    11.2                8.3                11.2        8.0
Defined benefit and defined contribution pension costs                                   17.1               18.7                17.1       18.6




                                                                                                                                                             02 Performance
                                                                                        155.6              124.2               155.6      119.9

The average number of employees during the year, including executive directors, was as follows:
                                                                                                   Group                             Society
                                                                                           2009              2008                2009        2008
                                                                                         Number            Number              Number      Number

Member contact                                                                          2,379              2,578               2,379      1,986
Administration                                                                            969                958                 969        754
                                                                                        3,348              3,536               3,348      2,740


15. Directors’ emoluments




                                                                                                                                                             03 Our businesses
The aggregate amount of directors’ emoluments was as follows:

                                                                                                                                2009           2008
a) Aggregate emoluments                                                                                                           £m             £m

Aggregate emoluments for the Society                                                                                             2.7            2.7
b) There were no contributions to any money purchase pension scheme in 2009 (2008: £nil).

c) Emoluments of individual directors, including emoluments of the Chairman and highest paid director were as follows for the Society:
                                                                                                                      Other      Total          Total
                                                                                          Salary            Bonus   Benefits    2009           2008
                                                                                          £’000             £’000     £’000     £’000          £’000

M.J. Rogers                                                                               474               405       118        997      1,002




                                                                                                                                                             04 Group support and CSR
S.M. Daniels (resigned 30 September 2009)                                                 188               281         8        477        457
R.A. Rowney                                                                               256               180        13        449        436
K.W. Abercromby                                                                           281                85        12        378        433
D. Holt                                                                                   142                 –         –        142        130
G. Nott                                                                                    60                 –         –         60         55
M.E. Austen                                                                                59                 –         –         59         57
S. Sinclair (appointed 24 September 2008)*                                                 56                 –         –         56         15
I. Reynolds (appointed 3 January 2008)*                                                    52                 –         –         52         52
B. Rose (resigned 18 June 2008)                                                             –                 –         –          –         32
                                                                                        1,568               951       151      2,670      2,669
                                                                                                                                                             05 Corporate governance
*2008 was pro rata for the part of the year since becoming a director.

Other benefits include cash allowance in lieu of pension, car allowances, medical, relocation and other benefits in kind or their equivalent
monetary value.

The Society has made no contributions to personal pension arrangements during 2008 or 2009.

d) Pension arrangements

S.M. Daniels, R.A. Rowney and K.W. Abercromby are members of the LV= Employee Pension Scheme, which is a defined benefit scheme.

The Society makes contributions to the LV= Employee Pension Scheme of 20.6% of pensionable salaries (2008: 20.6% of pensionable
salaries less 6.1m) in respect of all permanent staff, including executive directors.

M.J. Rogers is a member of the staff pension scheme for life assurance only.
                                                                                                                                                             06 The numbers




                                                                                                                                2009           2008
Accrued pension at end of period                                                                                                £’000          £’000

S.M. Daniels                                                                                                                      88             85
R.A. Rowney                                                                                                                       13              8
K.W. Abercromby                                                                                                                   13              7




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     31 December 2009




     16. Income tax (expense)/credit
     a) Current year tax charge
                                                                                                       2009      2008
     Group                                                                                               £m        £m

     Current year tax charge:
     Current year                                                                                       1.0      33.5
     Prior year adjustment                                                                             (2.7)      (8.0)
     Total current tax                                                                                 (1.7)     25.5

     Deferred tax
     Excess of depreciation                                                                             0.9        1.4
     Prior year adjustments                                                                            (0.1)      (0.2)
     Temporary differences                                                                             (2.4)    (26.9)
     Tax losses                                                                                         6.6     (57.7)
     Total deferred tax                                                                                 5.0     (83.4)
     Total income tax expense/(credit)                                                                  3.3     (57.9)

                                                                                                       2009      2008
     Society                                                                                             £m        £m
     Current year tax charge:
     Current year                                                                                         –      22.8
     Prior year adjustment                                                                             (2.1)      (8.3)
     Total current tax                                                                                 (2.1)     14.5

     Deferred tax
     Excess of depreciation                                                                               –       1.0
     Temporary differences                                                                             (1.2)        –
     Tax losses                                                                                        (2.1)    (54.3)
     Total deferred tax                                                                                (3.3)    (53.3)
     Total income tax credit                                                                           (5.4)    (38.8)

     All tax is recorded within the income tax (expense)/credit and none relates to equity.

     b) Reconciliation of tax charge
                                                                                                       2009      2008
     Group                                                                                               £m        £m

     Result before tax                                                                                (91.4)   (258.3)
     Tax calculated at the average standard rate of corporation tax in the UK at 28% (2008: 28.5%)    (25.6)     (73.6)
     Permanent differences
     Disallowable expenses                                                                            (2.3)       (2.6)
     Deferred tax on intangibles acquired                                                                –        (0.3)
     Unprovided deferred tax asset                                                                     1.8         1.5
     Transfer pricing                                                                                    –         0.2
     Policyholder tax (including prior year adjustments)                                              32.2       24.9
     Adjustment to tax charge in respect of prior years                                               (2.8)       (8.0)
     Total tax charge/(credit) for the year                                                            3.3      (57.9)
                                                                                                       2009      2008
     Society                                                                                             £m        £m
     Result before tax                                                                               (129.5)   (167.6)
     Tax calculated at the average standard rate of corporation tax in the UK at 28% (2008: 28.5%)    (36.3)     (47.8)
     Permanent differences
     Expenses not deductable for tax purposes                                                          0.1           –
     Unprovided deferred tax asset                                                                     2.7           –
     Policyholder tax (including prior year adjustments)                                              30.2       17.3
     Adjustment to tax charge in respect of prior years                                               (2.1)       (8.3)
     Total tax credit for the year                                                                    (5.4)     (38.8)

     UK corporation tax rate enacted at 31 December 2009 is 28% (2008: 28%).




94
                                      Annual report and accounts 2009

NOTES TO THE ACCOUNTS CONTINUED




                                                                                     01 Business overview
31 December 2009




17. Intangible assets
                                                     Other
                                                intangible
                                     Goodwill       assets    PVIF     Total
Group                                    £m            £m      £m        £m

Cost:
At 1 January 2009                    245.9       103.5       63.4    412.8




                                                                                     02 Performance
Disposals                                 –        (8.4)        –       (8.4)
Reduction of earnout value            (14.8)          –         –     (14.8)
At 31 December 2009                  231.1        95.1       63.4    389.6

Amortisation:
At 1 January 2009                      20.6        36.4      27.7     84.7
Charge for the year                       –        15.1       5.3     20.4
Disposals                                 –         (0.7)       –      (0.7)
Impairment in year                        –            –      1.8       1.8
At 31 December 2009                    20.6        50.8      34.8    106.2

Net book value at 31 December 2009   210.5         44.3      28.6    283.4




                                                                                     03 Our businesses
Cost:
At 1 January 2008                     94.0        74.6       63.4    232.0
Acquisitions                         114.9        28.9          –    143.8
Additions                             37.0           –          –     37.0
At 31 December 2008                  245.9       103.5       63.4    412.8

Amortisation:
At 1 January 2008                      20.6        27.9      22.2     70.7
Charge for the year                       –         8.5       5.5     14.0
At 31 December 2008                    20.6        36.4      27.7     84.7




                                                                                     04 Group support and CSR
Net book value at 31 December 2008   225.3         67.1      35.7    328.1
                                                     Other
                                                intangible
                                     Goodwill       assets    PVIF     Total
Society                                  £m            £m      £m        £m

Cost:
At 1 January 2009                          –       50.9         –     50.9
At 31 December 2009                        –       50.9         –     50.9

Amortisation:
At 1 January 2009                          –       32.4         –     32.4
Charge for the year                        –        4.6         –      4.6           05 Corporate governance
At 31 December 2009                        –       37.0         –     37.0

Net book value at 31 December 2009         –       13.9         –     13.9

Cost:
At 1 January 2008                          –       50.9         –     50.9
At 31 December 2008                        –       50.9         –     50.9

Amortisation:
At 1 January 2008                          –       27.7         –     27.7
Charge for the year                        –        4.7         –      4.7
At 31 December 2008                        –       32.4         –     32.4
                                                                                     06 The numbers




Net book value at 31 December 2008         –       18.5         –     18.5




                                                                                95
     Annual report and accounts 2009

     NOTES TO THE ACCOUNTS CONTINUED
     31 December 2009




     17. Intangible assets (continued)
     PVIF denotes Present Value of acquired In-Force business and is amortised in line with the original expected run off of 20 years, based on the
     market value of the life policies.

     Other intangibles comprise RNPFN, Britannia Road Rescue, Tomorrow/Retirement Solutions and Highway intangibles. The expected economic
     life of other intangibles is determined by reference to acquired business, considering factors such as the remaining terms of agreements,
     the normal lives of related products and the competitive position, and lies within the range of 10 to 20 years.

     Goodwill has been allocated to the individual cash generating units which are based on the key segments of the Group as follows:
                                                                                                                                           Group
                                                                                                                                    2009           2008
                                                                                                                                      £m             £m

     Long-term insurance business                                                                                                  68.7         79.7
     General insurance business                                                                                                   162.4        166.2
                                                                                                                                  231.1        245.9

     For impairment testing of goodwill, we compare the carrying values with the recoverable amount for the general insurance business and the
     long term business. The recoverable amount for each cash generating unit is calculated using a discounted cash flow model of the business.
     The cash flows are based on current strategic 5 year plans, with a terminal value calculated at the end of the planning horizon.

     Amortisation and impairment losses of £22.2m have been assumed and are presented in other operating and administrative expenses in the
     Statement of comprehensive income.

     For the long term insurance business the discount rates used in the calculations differ by product to reflect the risk free rate based on 15
     year gilt yields plus a margin for risk of between 2.5% and 3% to take into account the uncertainties associated with the particular contracts
     being valued. The terminal value of £76.4m has been assumed.

     In the general insurance business we use discounted cash flow results that are calculated using a 12% discount rate. The cash flows are
     further reduced by 15% to reflect the inherent uncertainty in future cash flows on business that has yet to be written. The terminal value of
     £162.1m has been assumed.




96
                                                                                                     Annual report and accounts 2009

NOTES TO THE ACCOUNTS CONTINUED




                                                                                                                                                           01 Business overview
31 December 2009




18. Deferred acquisition costs
                                                                                                   Long-term                    General
                                                                                                   insurance   Investment     insurance
                                                                                                   contracts     contracts    contracts       Total
Group                                                                                                     £m           £m           £m          £m

Cost:
At 1 January 2009                                                                                     49.7              –         44.7       94.4




                                                                                                                                                           02 Performance
Acquisition costs deferred                                                                            14.2              –       113.4       127.6
Amortisation                                                                                         (12.3)             –        (99.7)    (112.0)
Liability adequacy test impairment                                                                       –              –          (7.1)      (7.1)
At 31 December 2009                                                                                   51.6              –         51.3      102.9

Cost:
At 1 January 2008                                                                                   115.3            1.8         14.4      131.5
Acquisition                                                                                             –              –         17.0       17.0
Acquisition costs deferred                                                                           37.7           (1.8)        64.0       99.9
Amortisation                                                                                        (27.0)             –        (50.7)     (77.7)
Write-off following transfer under Part VII of the FSMA                                             (76.3)             –            –      (76.3)
At 31 December 2008                                                                                  49.7              –         44.7       94.4




                                                                                                                                                           03 Our businesses
                                                                                                                Long-term
                                                                                                                insurance    Investment
                                                                                                                contracts      contracts      Total
Society                                                                                                                £m            £m         £m

Cost:
At 1 January 2009                                                                                                    0.4              –       0.4
Amortisation                                                                                                        (0.4)             –      (0.4)
At 31 December 2009                                                                                                    –              –         –

Cost:
At 1 January 2008                                                                                                      –           1.8        1.8




                                                                                                                                                           04 Group support and CSR
Acquisition costs deferred                                                                                             –          (1.8)      (1.8)
Transfer under Part VII of the FSMA                                                                                  0.4             –        0.4
At 31 December 2008                                                                                                  0.4             –        0.4

Acquisition costs are costs of acquiring new business, and include commissions and underwriting and policy issue expenses.

The deferred acquisition costs relating to the business transferred under the Part VII have been written off and replaced by an amount
included in long-term insurance contract liabilities for the present value of future profits on non-participating contracts written in a
participating contract fund. This has been included within Other in note 33.



                                                                                                                                                           05 Corporate governance
                                                                                                                                                           06 The numbers




                                                                                                                                                      97
     Annual report and accounts 2009

     NOTES TO THE ACCOUNTS CONTINUED
     31 December 2009




     19. Pension benefit (obligation)/asset
     i) Summary
                                                                                 2009                                             2008
                                                                  LV Scheme     Ockham         Total               LV Scheme     Ockham           Total
                                                                         £m         £m           £m                       £m         £m            £m

     Asset                                                              –            –           –                      4.6           –        4.6
     Obligation                                                     (84.2)       (13.4)      (97.6)                       –        (8.8)      (8.8)
                                                                    (84.2)       (13.4)      (97.6)                     4.6        (8.8)      (4.2)
                                                                                 2009                                             2008
                                                                  LV Scheme     Ockham         Total               LV Scheme     Ockham           Total
                                                                         £m         £m           £m                       £m         £m            £m

     Actuarial net gain/(loss)                                      (90.0)        (3.7)      (93.7)                    (8.9)        7.8       (1.1)
     Income tax credit/(expense)                                     15.3          0.9        16.2                      1.7        (2.2)      (0.5)
     Total amount charged to total comprehensive income             (74.7)        (2.8)      (77.5)                    (7.2)        5.6       (1.6)

     ii) LV Scheme

     a) Information about the scheme

     The Society is responsible for the LV= Employee Pension Scheme (LV Scheme) a defined benefit pension scheme. The scheme closed to new
     entrants on 31 December 2009.
                                                                                                                                   2009       2008
     b) Disclosed expense                                                                                                            £m         £m

     Current service cost                                                                                                         17.4        18.6
     Interest cost                                                                                                                42.3        41.8
     Expected return on assets                                                                                                   (41.9)      (45.5)
     Past service cost                                                                                                               –         0.5
     Amount charged to income                                                                                                     17.8        15.4
     Actuarial net loss                                                                                                           90.0         8.9
     Total amount charged to total comprehensive income                                                                          107.8        24.3

     Assumptions used to determine current service cost
     Discount rate                                                                                                                6.5%       5.8%
     Long-term rate of return on assets                                                                                           6.3%       6.1%
     Rate of compensation/salary increase                                                                                         4.5%       4.9%
     Pension increases for in-payment benefits
     – price inflation capped at 5% pa, floor of 3% pa                                                                            3.5%       3.7%
     – price inflation capped at 5% pa                                                                                            3.0%       3.4%
     – price inflation capped at 2.5% pa                                                                                          2.3%       2.4%
     Pension increases for deferred benefits
     – pre 6 April 2009 accrual                                                                                                   3.0%       3.4%
     – post 6 April 2009 accrual                                                                                                  2.5%       0.0%
     Price inflation                                                                                                              3.0%       3.4%

     The expected return on assets has been derived as the weighted average of the expected returns from each of the main asset classes
     (i.e. equities and bonds). The expected return for each asset class reflects a combination of historical performance analysis, the forward
     looking views of the financial markets (as suggested by the yields available), and the views of investment organisations.

     The expected return for 2009 reflects the change in investment strategy that occurred in October 2009.

     c) Net statement to financial position
                                                                                                                                   2009       2008
     i) Development of net Statement of financial position                                                                           £m         £m

     Defined benefit obligation (DBO)                                                                                           (813.9)    (667.1)
     Fair Value of Assets (FVA)                                                                                                  729.7      671.7
     Defined benefit (obligation)/asset at the end of the year                                                                   (84.2)       4.6




98
                                                                                                 Annual report and accounts 2009

NOTES TO THE ACCOUNTS CONTINUED




                                                                                                                                                         01 Business overview
31 December 2009




19. Pension benefit (obligation)/asset (continued)
ii) LV Scheme (continued)
                                                                                                                             2009          2008
ii) Reconciliation to the Statement of financial position                                                                      £m            £m

Defined benefit asset/(obligation) at the end of prior the year                                                              4.6          19.9
Amount charged to total comprehensive income                                                                              (107.8)        (24.3)




                                                                                                                                                         02 Performance
Employer contributions                                                                                                      19.0          10.1
Gain/(loss) on acquisitions during the year                                                                                    –           (1.1)
Defined benefit (obligation)/asset at the end of the year                                                                  (84.2)           4.6

iii) Assumptions and dates used                                                                                              2009          2008

Discount rate                                                                                                               5.7%          6.5%
Rate of compensation/salary increase                                                                                        4.3%          4.5%
Pension increases for in-payment benefits
– price inflation capped at 5% pa, floor of 3% pa                                                                           3.8%          3.5%
– price inflation capped at 5% pa                                                                                           3.4%          3.0%
– price inflation capped at 2.5% pa                                                                                         2.3%          2.3%




                                                                                                                                                         03 Our businesses
Pension increases for deferred benefits
– pre 6 April 2009 accrual                                                                                                 3.5%     3.0%
– post 6 April 2009 accrual                                                                                                2.5%     2.5%
Scheme member valuation date                                                                                           31 March 31 March
                                                                                                                           2009    2006
Mortality for members is assumed to follow the tables below as at 31 December 2009.

Pre-retirement mortality: Deferred pensioners

– Males                                                                                1NMA x 0.83 table with a medium cohort
                                                                                       improvements to 2009 and beyond

– Females                                                                              1NFA x 0.86 table with a medium cohort




                                                                                                                                                         04 Group support and CSR
                                                                                       improvements to 2009 and beyond

Post-retirement mortality: Non-pensioners, pensioners and dependants in payment

– Males                                                                                1NMA x 0.83 table with a medium cohort
                                                                                       improvements to 2009 and beyond

– Females (former employees)                                                           1NFA x 0.86 table with a medium cohort
                                                                                       improvements to 2009 and beyond

– Females (dependents)                                                                 1NFA x 1.00 table with a medium cohort
                                                                                       improvements to 2009 and beyond
                                                                                                                                                         05 Corporate governance
d) Additional disclosure information                                                                                                         £m

Expected future benefit payments/administration for the year ending 31 December 2010                                                      32.4
Expected contributions for the year ending 31 December 2010
– Employer                                                                                                                                65.0
– Scheme members                                                                                                                             –
Actual return on Scheme assets during the year ended 31 December 2009
– Expected return on assets                                                                                                               41.9
– Asset gain/(loss) during period                                                                                                         30.4
– Actual return on assets                                                                                                                 72.3

                                                                                                                         Allocation    Allocation
                                                                                                              Target    percentage    percentage
Scheme asset information                                                                                  allocation          2009          2008
                                                                                                                                                         06 The numbers




Equities                                                                                                     30%          30.5%        31.7%
Debt securities                                                                                              58%          56.6%        60.8%
Real estate/property                                                                                         10%           5.4%         6.3%
Other                                                                                                         2%           7.5%         1.2%
Total                                                                                                       100%         100.0%       100.0%

Fair value of plan assets (£m)                                                                                             729.7        671.7



                                                                                                                                                    99
      Annual report and accounts 2009

      NOTES TO THE ACCOUNTS CONTINUED
      31 December 2009




      19. Pension benefit (obligation)/asset (continued)
      ii) LV Scheme (continued)

      e) Historical disclosure information                                   2009      2008       2007        2006       2005

      Asset experience
      Asset (gain)/loss during period                                      (30.4)    107.6         7.2       (18.2)      (78.3)
      Asset (gain)/loss expressed as percentage of plan assets              (4.2)%    16.0%        1.0%        (2.5)%    (11.3)%

      Liability experience
      Obligation (gain)/loss during period                                 (15.5)         –        3.0       (10.4)       (0.4)
      Obligation (gain)/loss expressed as percentage of DBO                 (1.9)%        –        0.4%        (1.4)%     (0.1)%

      Liability assumptions
      Obligation (gain)/loss over period                                  135.9       (98.7)     (32.3)      23.8         68.4
      Obligation (gain)/loss expressed as percentage of DBO                16.7%      (14.8)%      (4.4)%     3.2%         9.7%

      Funded status
      Defined benefit obligation (DBO)                                    (813.9)    (667.1)    (725.9)     (735.8)     (706.4)
      Fair value of assets (FVA)                                           729.7      671.7      745.8       732.9       690.9
      Net (obligation)/asset                                               (84.2)       4.6       19.9        (2.9)       (15.5)

                                                                                                                2009        2008
      f) Changes in disclosed assets and liabilities                                                              £m          £m

      Change in Defined Benefit Obligation (DBO)
      DBO at the prior year end                                                                               667.1       725.9
      Current service cost                                                                                     17.4         18.6
      Interest cost                                                                                            42.3         41.8
      Scheme participants’ contributions                                                                          –          0.2
      Loss/(gain) on change of assumptions                                                                    120.4        (98.7)
      Benefits paid from scheme assets and administrative expenses paid                                       (31.3)       (30.3)
      Scheme change                                                                                               –          0.5
      Acquisitions/divestitures                                                                                   –         11.5
      Administrative expense paid                                                                              (2.0)        (2.4)
      DBO at current year ended                                                                               813.9       667.1

      Change in Scheme assets
      Fair value of assets at the prior year end                                                              671.7       745.8
      Actual return on assets                                                                                  72.3        (62.1)
      Employer contributions                                                                                   19.0         10.1
      Scheme participants’ contributions                                                                          –          0.2
      Benefits paid from scheme assets and administrative expenses paid                                       (33.3)       (32.7)
      Acquisitions/divestitures                                                                                   –         10.4
      Fair value of assets at current year ended                                                              729.7       671.7

                                                                                                                            2009
      g) Reconciliation of past service cost and (gains)/losses                                                               £m

      Reconciliation of past service cost
      Original amount                                                                                                       0.5
      Amortisation in year                                                                                                    –

      Reconciliation of (gains)/losses
      Amortisation in year                                                                                                (90.0)
      Experience (gain)/loss                                                                                               90.0




100
                                                                                                      Annual report and accounts 2009

NOTES TO THE ACCOUNTS CONTINUED




                                                                                                                                                                 01 Business overview
31 December 2009




19. Pension benefit (obligation)/asset (continued)
ii) LV Scheme (continued)

                                                                                                                                               Defined
                                                                        Defined                                     Net            Asset        benefit
                                                                         benefit   Fair value   Unrecognised      (gain)/         ceiling       asset/
                                                                      obligation   of assets     past service      loss       restriction   (obligation)
h) Reconciliation with prior year’s disclosure




                                                                                                                                                                 02 Performance
                                                                             £m           £m              £m        £m                £m            £m

At 31 December 2008                                                   (667.1)       671.7                  –         –                 –         4.6
Employer service cost                                                   (17.4)            –                –         –                 –       (17.4)
Interest cost                                                           (42.3)            –                –         –                 –       (42.3)
Expected asset return                                                       –         41.9                 –         –                 –        41.9
Amortisation                                                                –             –                –     (90.0)                –       (90.0)
Experience gain/(loss)                                                   15.5         30.4                 –     (45.9)                –           –
Employer contributions                                                      –         19.0                 –         –                 –        19.0
Benefits paid                                                            31.3        (31.3)                –         –                 –           –
Administrative expenses paid                                              2.0          (2.0)               –         –                 –           –
Assumption changes                                                    (135.9)             –                –    135.9                  –           –
At 31 December 2009                                                   (813.9)       729.7                  –         –                 –       (84.2)




                                                                                                                                                                 03 Our businesses
i) Reconciliation of assets                                                                                                                        £m

Reconciliation of assets
Scheme assets at 31 December 2008                                                                                                             671.7
Investment return                                                                                                                              72.3
Employer contributions                                                                                                                         19.0
Benefit paid/administrative expenses paid                                                                                                     (33.3)
Scheme assets at 31 December 2009                                                                                                             729.7

Rate of Return on Invested Assets
Weighted invested assets                                                                                                                     664.5




                                                                                                                                                                 04 Group support and CSR
Rate of return                                                                                                                               10.9%

j) Summary and comparison of expense

The tables below show the net benefit expense, assumptions, assets and cash flows for 2009 and those expected for 2010.
                                                                                                                                  2010           2009
i) Net benefit expense                                                                                                              £m             £m

Employer service cost                                                                                                            21.0           17.4
Interest cost                                                                                                                    45.5           42.3
Expected return on assets                                                                                                       (46.5)         (41.9)
Recognition of net (gain)/loss                                                                                                      –           90.0
Net benefit before special events                                                                                                20.0         107.8              05 Corporate governance
Net benefit                                                                                                                      20.0         107.8

ii) Assumptions and dates                                                                                                         2010           2009

Discount rate                                                                                                                    5.7%          6.5%
Long-term rate of return on assets                                                                                               6.2%          6.3%
Rate of compensation/salary increase                                                                                             4.3%          4.5%
Pension increases for in-payment benefits
– price inflation capped at 5% pa, floor of 3% pa                                                                               3.8%     3.5%
– price inflation capped at 5% pa                                                                                               3.4%     3.0%
– price inflation capped at 2.5% pa                                                                                             2.3%     2.3%
Scheme participant census date                                                                                              31 March 31 March
                                                                                                                                2009    2009
                                                                                                                                                                 06 The numbers




                                                                                                                                  2010           2009
iii) Assets at beginning of year                                                                                                    £m             £m

Fair market value                                                                                                              729.7          671.7

iv) Cash Flow                                                                                                                  Expected         Actual

Employer contributions                                                                                                           65.0           19.0
Benefits paid from scheme assets                                                                                                 32.4           33.3

                                                                                                                                                           101
      Annual report and accounts 2009

      NOTES TO THE ACCOUNTS CONTINUED
      31 December 2009




      19. Pension benefit (obligation)/asset (continued)
      iii) Ockham Pension Scheme

      a) Information about the schemes

      Following the acquisition of the Highway Group in 2008, the LV= Group is responsible for Ockham Pension Schemes, a defined benefit
      scheme (closed to new entrants) and two defined contribution pension schemes.

                                                                                                                                2009        2008
      b) Disclosed expense                                                                                                        £m          £m

      Current service cost                                                                                                      0.1          0.1
      Interest cost                                                                                                             4.9          0.9
      Expected return on assets                                                                                                (3.5)        (0.7)
      Amount charged to income                                                                                                  1.5          0.3
      Recognition of actuarial net loss/(gain)                                                                                  3.7         (7.8)
      Amount charged to total Statement of comprehensive income                                                                 5.2         (7.5)

      Assumptions used to determine current service cost
      Discount rate                                                                                                         5.7% pa    6.5% pa
      Long-term rate of return on assets                                                                                    6.3% pa    5.3% pa
      Rate of compensation/salary increase                                                                                  4.3% pa    4.5% pa
      Pension increases
      – linked to inflation                                                                                                 3.5% pa    3.0% pa
      – fixed rate                                                                                                          5.0% pa    5.0% pa
      Price inflation                                                                                                       3.5% pa    3.0% pa


      c) Net Statement of financial position
                                                                                                                                2009        2008
      i) Development of net Statement of financial position                                                                       £m          £m

      Defined benefit obligation (DBO)                                                                                        (88.6)       (76.7)
      Fair value of assets (FVA)                                                                                               75.2         67.9
      Defined benefit obligation at the end of the year                                                                       (13.4)        (8.8)

                                                                                                                                2009        2008
      ii) Reconciliation to the Statement of financial position                                                                   £m          £m

      Defined benefit obligation at the end of the prior year                                                                  (8.8)       (16.4)
      Amounts charged to income                                                                                                (1.4)         (0.3)
      Amortisation                                                                                                                –           7.8
      Asset gain                                                                                                                6.2             –
      Liability experience gain                                                                                                 3.7             –
      Assumption changes                                                                                                      (13.6)            –
      Employer contributions                                                                                                    0.5           0.1
      Defined benefit obligation at the end of current year                                                                   (13.4)        (8.8)

      iii) Assumptions and dates used                                                                                           2009        2008

      Discount rate                                                                                                         5.7% pa    6.5% pa
      Long-term rate of return on assets                                                                                    6.3% pa    5.3% pa
      Rate of compensation/salary increase                                                                                  4.3% pa    4.5% pa
      Pension increases
      – linked to inflation                                                                                                 3.5% pa    3.0% pa
      – fixed rate                                                                                                          5.0% pa    5.0% pa
      Price inflation                                                                                                       3.5% pa    3.0% pa




102
                                                                                         Annual report and accounts 2009

NOTES TO THE ACCOUNTS CONTINUED




                                                                                                                                         01 Business overview
31 December 2009




19. Pension benefit (obligation)/asset (continued)
iii) Ockham Pension Scheme (continued)
                                                                                                                          2009
d) Additional disclosure information                                                                                        £m

Expected future benefit payments/administration for the year ending 31 December 2010                                       4.0
Expected contributions for the year ending 31 December 2010




                                                                                                                                         02 Performance
– Employer                                                                                                                    –
– Scheme members                                                                                                              –
Actual return on scheme during the year ended 31 December 2009
– Expected return on assets                                                                                                3.5
– Asset gain/(loss) during period                                                                                          6.2
– Actual return on assets                                                                                                  9.9

                                                                                                          Allocation  Allocation
                                                                                                         percentage percentage
                                                                                                       31 December 31 December
Scheme asset information                                                                                       2009        2008

Equities                                                                                                   64.2%       23.3%




                                                                                                                                         03 Our businesses
Bonds                                                                                                      19.9%       23.4%
Other                                                                                                       7.2%       31.3%
Other (alternatives)                                                                                        8.7%       22.0%
Total                                                                                                     100.0%      100.0%

Fair value of scheme assets (£m)                                                                             75.2         67.9

                                                                                                                          2009
e) Historical disclosure information                                                                                        £m

Asset experience
Asset gain during period                                                                                                 (6.2)
Asset gain expressed as percentage of scheme assets                                                                      (8.3)%




                                                                                                                                         04 Group support and CSR
Liability experience
Obligation gain during period                                                                                             3.7
Obligation gain expressed as percentage of DBO                                                                            4.2%

Liability assumptions
Obligation loss over period                                                                                            (13.6)
Obligation loss expressed as percentage of DBO                                                                         (15.4)%

Net Statement of financial position
Defined benefit obligation (DBO)                                                                                       (88.6)
Fair value of assets (FVA)                                                                                              75.2
                                                                                                                                         05 Corporate governance
Funded status                                                                                                          (13.4)

Historical disclosure information for the period 31 December 2008 to 31 December 2009.
                                                                                                                                         06 The numbers




                                                                                                                                   103
      Annual report and accounts 2009

      NOTES TO THE ACCOUNTS CONTINUED
      31 December 2009




      19. Pension benefit (obligation)/asset (continued)
      iii) Ockham Pension Scheme (continued)
                                                                                                                           2009
      f) Changes in assets and liabilities                                                                                   £m

      Change in Defined Benefit Obligation (DBO)
      DBO at 31 December 2008                                                                                             76.7
      Current service cost                                                                                                 0.1
      Interest cost                                                                                                        4.9
      Scheme participants’ contributions                                                                                     –
      Experience gain                                                                                                     (3.7)
      Loss on change of assumptions                                                                                       13.6
      Benefits paid from scheme assets and administrative expenses paid                                                   (3.0)
      DBO at 31 December 2009                                                                                             88.6

      Change in Scheme Assets
      Fair value of assets at 31 December 2009                                                                            67.9
      Expected return on scheme assets                                                                                     3.5
      Actuarial gain                                                                                                       6.2
      Employer contributions                                                                                               0.5
      Scheme participants’ contributions                                                                                     –
      Benefits paid from the scheme assets and administrative expenses paid                                               (2.9)
      Fair value of assets at the end of current year                                                                     75.2

                                                                                                                           2009
      g) Reconciliation of past service cost and (gains)/losses                                                              £m

      Reconciliation of past service cost                                                                                      –
      Amortisation in year                                                                                                     –

      Reconciliation of (gains)/losses
      Amortisation in year                                                                                                     –
      Experience gain/(loss)                                                                                                   –

                                                                                                                         Defined
                                                                                Defined        Fair                       benefit
                                                                                 benefit   value of   Unrecognised        asset/
                                                                              obligation    assets      (gain)/loss   (obligation)
      h) Reconciliation with prior year’s disclosure                                 £m        £m               £m            £m

      At 31 December 2008                                                       (76.7)      67.9                 –         (8.8)
      Employer service cost                                                       (0.1)         –                –         (0.1)
      Interest cost                                                               (4.9)         –                –         (4.9)
      Expected asset return                                                          –        3.5                –          3.5
      Amortisation                                                                   –          –                –            –
      Experience gain                                                              3.7        6.2                –          9.9
      Employer contributions                                                         –        0.5                –          0.5
      Scheme participants’ contributions                                             –          –                –            –
      Benefits paid                                                                3.0       (2.9)               –          0.1
      Assumption changes                                                        (13.6)          –                –       (13.6)
      At 31 December 2009                                                       (88.6)      75.2                 –       (13.4)




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                                                                                                                                                  01 Business overview
31 December 2009




19. Pension benefit (obligation)/asset (continued)
iii) Ockham Pension Scheme (continued)

i) Development of assets                                                                                                              £m

Reconciliation of assets
Scheme assets at 31 December 2008                                                                                                  67.9




                                                                                                                                                  02 Performance
Investment return                                                                                                                   3.5
Experience gain                                                                                                                     6.2
Employer contributions                                                                                                              0.5
Benefit paid/administrative expenses paid                                                                                          (2.9)
Scheme assets at 31 December 2009                                                                                                  75.2

Rate of Return on Invested Assets
Weighted invested assets                                                                                                           71.5
Rate of return                                                                                                                     6.3%

j) Summary and comparison of expense




                                                                                                                                                  03 Our businesses
The tables below show the net benefit expense, assumptions, assets and cash flows for 2009 and those expected for 2010.
                                                                                                                       Expected    Actual
i) Net benefit expense                                                                                                      £m        £m

Employer service cost                                                                                                      0.1      0.1
Interest cost                                                                                                              4.9      4.9
Expected return on assets                                                                                                 (4.7)    (3.5)
Recognition of net (gain)/loss                                                                                               –      3.7
Net benefit expense before special events                                                                                  0.3      5.2
Net benefit expense                                                                                                          –        –

                                                                                                                          2010      2009
ii) Assets at beginning of year                                                                                             £m        £m




                                                                                                                                                  04 Group support and CSR
Fair market value                                                                                                        75.2      67.9

iii) Cash flow                                                                                                         Expected    Actual

Employer contributions                                                                                                     0.5      0.5
Benefits paid from scheme assets                                                                                          (4.0)    (2.9)

k) Defined contribution pension schemes

New employees have been eligible to join defined contribution scheme. The assets of these schemes are held separately from those of the
Group in an independently administered fund. The Group’s contribution under these schemes amounted to £0.7m and £1.0m in 2009 and
2008 respectively.                                                                                                                                05 Corporate governance
                                                                                                                                                  06 The numbers




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      31 December 2009




      20. Property and equipment
                                                                                        Freehold      Leasehold                    Fixtures,
                                                                                  and leasehold        property          Major       fittings
                                                                                  (finance lease) enhancements        computer    and motor
                                                                                        property          short        systems      vehicles     Total
      Group                                                                                  £m             £m              £m            £m       £m

      Cost:
      At 1 January 2009                                                                  40.6             3.2                –          4.5     48.3
      Additions                                                                           1.1             1.3                –          3.2       5.6
      Disposals                                                                             –               –                –         (1.5)     (1.5)
      At 31 December 2009                                                                41.7             4.5                –          6.2     52.4

      Depreciation:
      At 1 January 2009                                                                  26.5             1.0                –          4.2     31.7
      Provided in the year                                                                2.4             0.2                –            –       2.6
      Disposals                                                                             –               –                –         (1.5)     (1.5)
      At 31 December 2009                                                                28.9             1.2                –          2.7     32.8

      Net book value at 31 December 2009                                                 12.8             3.3                –          3.5     19.6

      Cost:
      At 1 January 2008                                                                  39.9             2.1              7.9          4.3     54.2
      Additions                                                                           0.7             1.1                –          0.2       2.0
      Disposals                                                                             –               –             (7.9)           –      (7.9)
      At 31 December 2008                                                                40.6             3.2                –          4.5     48.3

      Depreciation:
      At 1 January 2008                                                                  25.6             0.9                –          4.0     30.5
      Provided in the year                                                                0.9             0.1                –          0.2      1.2
      At 31 December 2008                                                                26.5             1.0                –          4.2     31.7

      Net book value at 31 December 2008                                                 14.1             2.2                –          0.3     16.6

                                                                                                                      Leasehold    Fixtures,
                                                                                                                       property      fittings
                                                                                                                  enhancements    and motor
                                                                                                                          short     vehicles     Total
      Society                                                                                                               £m            £m       £m

      Cost:
      At 1 January 2009                                                                                                    3.1          4.5      7.6
      Additions                                                                                                            0.2          2.6      2.8
      Disposals                                                                                                              –         (1.5)    (1.5)
      At 31 December 2009                                                                                                  3.3          5.6      8.9

      Depreciation:
      At 1 January 2009                                                                                                    0.9          4.1      5.0
      Provided in the year                                                                                                 0.3          0.1      0.4
      Disposals                                                                                                              –         (1.5)    (1.5)
      At 31 December 2009                                                                                                  1.2          2.7      3.9

      Net book value at 31 December 2009                                                                                   2.1          2.9      5.0

      Cost:
      At 1 January 2008                                                                                                    1.9          4.3      6.2
      Additions                                                                                                            1.2          0.2      1.4
      At 31 December 2008                                                                                                  3.1          4.5      7.6

      Depreciation:
      At 1 January 2008                                                                                                    0.8          4.0      4.8
      Provided in the year                                                                                                 0.1          0.1      0.2
      At 31 December 2008                                                                                                  0.9          4.1      5.0

      Net book value at 31 December 2008                                                                                   2.2          0.4      2.6

      Lease rentals amounting to £224,000 (2008: £223,000) are included in the Statement of comprehensive income.


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                                                                                                                                                          01 Business overview
31 December 2009




21. Investment properties
                                                                                                 Group                             Society
                                                                                          2009            2008                 2009          2008
                                                                                            £m              £m                   £m            £m

Freeholds                                                                               316.0            319.8               261.1      302.8
Long leaseholds                                                                          63.4             57.4                63.4       57.4
                                                                                        379.4            377.2               324.5      360.2




                                                                                                                                                          02 Performance
Owner occupied properties in the Group, not held as investments, are shown in note 20. The Group does not hold any investments that the
Group occupies.

The market value movements in the year on land and buildings were:
                                                                                                 Group                             Society
                                                                                          2009            2008                 2009          2008
                                                                                            £m              £m                   £m            £m

Balance at 1 January                                                                    377.2         474.2                  360.2      452.2
Additions                                                                                69.1           39.6                  31.2        22.6
Disposals                                                                               (52.8)         (31.4)                (52.8)      (31.4)
Net fair value adjustment                                                               (14.1)       (105.2)                 (14.1)      (97.4)




                                                                                                                                                          03 Our businesses
Transfer under Part VII of the FSMA                                                         –              –                     –        14.2
Balance at 31 December                                                                  379.4         377.2                  324.5      360.2

All investment properties are valued annually at fair value. They were valued as at 31 December 2009, by qualified professional valuers
working for the company of BNP Paribas Real Estate & Property Management UK Ltd, acting in the capacity of external valuers. All such
valuers are Chartered Surveyors, being members of The Royal Institution of Chartered Surveyors. All valuations were carried out in
accordance with the RICS Appraisal and Valuation Standards. The valuation reports are dated 31 December 2009.

The net fair value represents the amount at which the assets could be exchanged between a knowledgeable, willing buyer and a
knowledgeable, willing seller in an arm’s length transaction at the date of valuation, in accordance with standards issued by the International
Valuation Standards Committee. Valuations are performed on a quarterly basis and the fair value gains and losses are recorded within the
Statement of comprehensive income.




                                                                                                                                                          04 Group support and CSR
The Group and Society enter into operating leases for all investment properties. All rents are payable in advance and the rental income
arising during the year amounted to £26.2m (2008: £26.5m) for the Group and £26.2m (2008: £23.6m) for Society, which is included in
investment income.

Non recoverable expenses are deducted from rental income for investment properties and amounted to £3.1m (2008: £1.3m) for Group and
£3.1m (2008: £1.3m) for Society.

The future aggregate minimum lease payments expected to be received in respect of these leases are:
                                                                                                 Group                             Society
                                                                                          2009            2008                 2009          2008
                                                                                            £m              £m                   £m            £m

Within one year                                                                          26.7             34.5                26.7       31.5             05 Corporate governance
Between two and five years                                                               92.6            123.9                92.6      112.1
Over five years                                                                         154.7            168.6               154.7      154.7
                                                                                        274.0            327.0               274.0      298.3
                                                                                                                                                          06 The numbers




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      31 December 2009




      22. Investments in group undertakings
                                                                                                                                      2009          2008
      Society                                                                                                                           £m            £m

      Shares in subsidiaries
      Cost less provisions at 1 January                                                                                             790.9      747.0
      Additions                                                                                                                     488.2       43.9
      Reduction in earnout provision                                                                                                (14.8)         –
                                                                                                                                  1,264.3      790.9

      Loan stock in subsidiaries
      Cost at 1 January                                                                                                             292.5   122.8
      Additions                                                                                                                      35.0   169.7
      Redemption                                                                                                                    (10.5)      –
                                                                                                                                    317.0   292.5
      Shares and loan stock in subsidiaries at 31 December                                                                        1,581.3 1,083.4

      The Society has examined the carrying value of its subsidiaries and no provision for impairment was considered necessary.

      During 2009 the complete holding of shares in the following subsidiaries were transferred to Liverpool Victoria Friendly Society, from its
      subsidiary Liverpool Victoria Life Company Limited. The value of the shares transferred are shown above as an addition in shares in subsidiaries.

      The companies transferred were as follows:

      Liverpool Victoria General Insurance Group Limited
      Liverpool Victoria Banking Services Limited
      Liverpool Victoria Portfolio Managers Limited
      Liverpool Victoria Financial Advice Services Limited
      Frizzell Financial Services Limited

      This list does not include the subsidiaries of these companies.

      The Society also made a capital contribution of £3.0m during the year to Liverpool Victoria Asset Management Limited.

      Further details of the Group’s investments are given in notes 47 and 48.

      23. Fair value through income
                                                                                                        Group                             Society
                                                                                                 2009            2008                 2009          2008
      Group                                                                                        £m              £m                   £m            £m

      Fair value through income
      Shares, other variable yield securities and units in unit trusts
      – UK listed                                                                           1,441.5       1,476.9                 1,502.4    1,265.3
      – UK unlisted                                                                           116.6         150.1                   112.8      150.1
      – Overseas listed                                                                       493.7         427.9                   346.0      387.3
      – Overseas unlisted                                                                     153.1         163.1                   111.3      106.8

      Debt and other fixed income securities
      – UK listed                                                                           2,283.7       2,325.5                 1,466.7    1,681.0
      – Overseas listed                                                                       902.9         297.1                   455.7      198.0

      Other                                                                                     90.9             63.1                11.5           61.2

      Mortgages held at fair value                                                                –             –                    43.3          –
                                                                                            5,482.4       4,903.7                 4,049.7    3,849.7

      Assets held to cover linked liabilities included above                                  657.7             466.1               619.0      450.5




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                                                                                                                                                                       01 Business overview
31 December 2009




24. Derivative financial instruments
The Group uses derivatives to hedge the effect of changes in variable rate borrowings on its fixed rate loan portfolio and to reduce exposure to
payouts under guaranteed annuity contracts. Fair values are estimated using current market interest rate data.
                                                                                  2009                                                 2008
                                                                Contract/                                                Contract/
                                                                 notional    Fair value   Fair value                      notional   Fair value   Fair value
                                                                  amount       – asset     – liability                     amount      – asset     – liability




                                                                                                                                                                       02 Performance
Group                                                                 £m            £m            £m                           £m           £m           £m

Interest rate swaps                                              675.4         47.7          (2.8)                         431.6      156.2         (11.5)
Interest rate caps                                                41.1            –             –                          110.6          –              –
Swap options                                                   1,895.7         72.1          (4.8)                         203.5       20.1           (0.3)
Forward exchange contracts                                        87.1          1.3          (2.0)                         830.2       20.2           (3.5)
Equity/index derivatives                                          21.5          0.2          (1.4)                           1.7        1.7              –
                                                               2,720.8        121.3         (11.0)                       1,577.6      198.2         (15.3)
                                                                                  2009                                                 2008
                                                                Contract/                                                Contract/
                                                                 notional    Fair value   Fair value                      notional   Fair value   Fair value
                                                                  amount       – asset     – liability                     amount      – asset     – liability
Society                                                               £m            £m            £m                           £m           £m           £m




                                                                                                                                                                       03 Our businesses
Interest rate swaps                                              615.4         47.7               –                        286.6      153.0                –
Swap options                                                   1,895.7         72.1            (4.8)                       203.0       19.3                –
Forward exchange contracts                                        45.2          1.3            (0.2)                       830.2       20.2             (3.5)
Equity/index derivatives                                          21.5          0.2            (1.4)                         1.7        1.7                –
                                                               2,577.8        121.3            (6.4)                     1,321.5      194.2             (3.5)

Interest rate swaps
Swaps are contractual agreements between two parties to exchange movements in interest or foreign currency rates. Typically, for an interest
rate swap, a floating rate interest stream will be exchanged for a fixed rate or vice versa.
Interest rate caps
Interest rate caps are options contracts which put an upper limit on a floating exchange rate and whereby the purchaser receives payments at




                                                                                                                                                                       04 Group support and CSR
the end of each period in which the interest rate exceeds the agreed strike price.
Options
Options are contractual agreements that convey the right, but not the obligation, for the purchaser either to buy or sell a specific amount of a
financial instrument at a fixed price, either at a fixed future date or at any time within a specific period.
Forward and futures
Forward and futures contracts are contractual agreements to buy or sell a specific financial instrument at a specific price and date in the
future. Forwards are customised contracts transacted in the over-the-counter market. Futures contracts are transacted in standardised
amounts on regulated exchanges and are subject to daily cash margin requirements.
Equity/index derivatives
Equity and index derivatives are a class of derivatives which value is at least partly derived from one or more underlying equity securities or
entire indices. A variety of equity options are part of the portfolio matching insurance liabilities and unit-linked investment liabilities with a                     05 Corporate governance
corresponding asset.

25. Loans and other receivables
                                                                                                         Group                                Society
                                                                                               2009               2008                   2009           2008
                                                                                                 £m                 £m                     £m             £m

Deposits with credit institutions                                                           91.9                 364.1                 48.5         68.0
Loans secured by mortgages                                                                     –                   5.0                    –            –
Loans secured by policies                                                                    1.2                   1.4                  1.1          1.3
Other loans                                                                                 60.0                 233.9                  0.7          1.1
Amounts owed to Group Undertakings                                                             –                     –                176.7         87.0
Other receivables                                                                           50.2                  42.2                 31.6         30.1
                                                                                                                                                                       06 The numbers




                                                                                           203.3                 646.6                258.8        187.5

The carrying amounts disclosed above reasonably approximate fair value at the Statement of financial position date.




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      31 December 2009




      25. Loans and other receivables (continued)
      As at 31 December 2008 loans and advances to customers included unsecured personal loan balances subject to securitisation. £172m of
      unsecured personal loan receivables were securitised to a special purpose securitisation company, Gresham Receivables (No.2) UK Limited
      (Gresham), in return for non-returnable finance of £nil (2008: £151m). £172m was fully re-purchased in March 2009. £31m balance of
      the consideration had been deferred and was repayable in line with loan customer receipts. The securitisation agreement provided for the
      management of the loans by the Company, which had the facility to offer to replace loan amounts repaid with further personal loans advanced
      meeting the qualifying criteria of Gresham.

      Following the 31 December 2008 the entire outstanding loan balances were re-purchased by the company in March 2009. As a result,
      the balance of loans subject to securitisation at 31 December 2009 is nil.

      For loans and advances to customers at amortised cost the carrying value is a reasonable approximation of fair value.

      The Statement of comprehensive income includes the following amounts, which relate to personal loan balances held by Gresham prior to
      the closure of securitisation:
                                                                                                                                 2009         2008
                                                                                                                                   £m           £m

      Interest receivable and similar income                                                                                     3.2       16.5
      Interest payable                                                                                                          (1.8)     (11.4)
      Impairment losses on loans and advances                                                                                   (2.5)     (11.0)
      These are included within investment income and other operating expenses within the Statement of comprehensive income.

      26. Reinsurance assets
                                                                                                     Group                          Society
                                                                                              2009             2008              2009         2008
                                                                                 Notes          £m               £m                £m           £m

      Reinsurers’ share of provision for unearned premiums                       33 a       12.3                9.6                –         –
      Reinsurers’ share of long-term insurance contract liabilities              33 a       71.2              47.1             264.5     246.3
      Reinsurers’ share of long-term linked insurance contract liabilities       33 a       (2.8)              (0.8)            35.9      43.0
      Reinsurers’ share of claims outstanding                                    33 a       83.3              80.1                 –         –
                                                                                           164.0             136.0             300.4     289.3

      The carrying amounts disclosed above reasonably approximate fair value at the Statement of financial position date.

      27. Insurance receivables
                                                                                                     Group                          Society
                                                                                              2009             2008              2009         2008
                                                                                                £m               £m                £m           £m

      Due from policyholders                                                                83.4              85.6              10.0           0.8
      Due from agents, brokers and intermediaries                                           54.9              36.8               0.2           0.6
      Due from reinsurers                                                                   13.1              15.7              11.0          10.9
                                                                                           151.4             138.1              21.2          12.3

      The carrying amounts disclosed above reasonably approximate fair value at the Statement of financial position date.

      28. Corporation tax asset
                                                                                                     Group                          Society
                                                                                              2009             2008              2009         2008
                                                                                                £m               £m                £m           £m

      Corporation tax                                                                        15.0                 –              9.4             –
                                                                                             15.0                 –              9.4             –

      The carrying amounts disclosed above reasonably approximate fair value at the Statement of financial position date.




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                                                                                                                                                           01 Business overview
31 December 2009




29. Deferred tax asset/(liability)
                                                                                                         Group                          Society
                                                                                                           £m                                 £m

Balance at 1 January 2009                                                                                29.2                                (1.9)
Amounts recorded in the Statement of comprehensive income                                                11.2                               18.6
Disposal                                                                                                  1.5                                   –




                                                                                                                                                           02 Performance
Balance at 31 December 2009                                                                              41.9                               16.7
                                                                                                Group                             Society
                                                                                         2009             2008                 2009         2008
i) Analysis of deferred taxation temporary differences                                     £m               £m                   £m           £m

Excess of depreciation                                                                   0.9               0.6                   –             –
Temporary differences on expenses                                                        1.9              (8.5)                2.1          (1.9)
Temporary differences on unrealised gains                                               (3.5)                –                   –             –
Temporary difference for changes in actuarial base                                      18.4                 –                14.6             –
Tax losses                                                                              24.2             37.1                    –             –
Deferred tax asset/(liability)                                                          41.9             29.2                 16.7          (1.9)

ii) Deferred taxation liability not provided




                                                                                                                                                           03 Our businesses
Chargeable gains deferred by roll-over relief                                               –             0.4                    –             –

iii) Deferred taxation asset not recognised
Excess of capital allowances                                                             3.5              9.7                  0.9           0.8
Temporary differences on expenses                                                       18.7              2.9                 14.9           2.9
Tax losses                                                                              22.1             37.7                 18.7          30.2
                                                                                        44.3             50.3                 34.5          33.9

The carrying amounts disclosed above reasonably approximate fair value at the Statement of financial position date.
The asset at the end of the year is expected to be recovered over the next five years as expected taxable profits emerge.




                                                                                                                                                           04 Group support and CSR
30. Prepayments and accrued income
                                                                                                Group                             Society
                                                                                         2009             2008                 2009         2008
                                                                                           £m               £m                   £m           £m

Accrued dividends                                                                        4.2              1.1                  1.6           1.1
Accrued interest                                                                        54.9             51.8                 34.7          32.6
Other prepayments and accrued income                                                    12.5             14.3                  9.3           6.0
                                                                                        71.6             67.2                 45.6          39.7


31. Cash and cash equivalents
                                                                                                Group                             Society
                                                                                         2009             2008                 2009         2008           05 Corporate governance
                                                                                           £m               £m                   £m           £m

Bank balances                                                                          123.7            196.8                 78.8        9.6
Short term bank deposits                                                               523.1            552.8                326.3     228.8
Cash and cash equivalents per Statement of financial position                          646.8            749.6                405.1     238.4
Bank overdrafts (note 40)                                                                  –             (23.0)                  –      (13.2)
Cash and cash equivalents per cashflow statement                                       646.8            726.6                405.1     225.2

The carrying amounts disclosed above reasonably approximate fair value at the Statement of financial position date.

32. Unallocated divisible surplus
                                                                                                Group                             Society
                                                                                         2009             2008                 2009         2008
                                                                                                                                                           06 The numbers




                                                                                           £m               £m                   £m           £m

Balance at 1 January                                                                 1,117.3      1,319.3                   1,311.7 1,447.7
Transfer to Statement of comprehensive income                                         (172.2)      (202.0)                   (198.8) (136.0)
Balance at 31 December                                                                 945.1      1,117.3                   1,112.9 1,311.7

Cumulative goodwill of £199.8m in the Group (£62.2m in the Society) has been eliminated against the unallocated divisible surplus.




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      31 December 2009




      33. Insurance contract liabilities
      a) Analysis of insurance contract liabilities and reinsurance assets
                                                                                         2009                                 2008
                                                                            Gross    Reinsurance       Net       Gross    Reinsurance      Net
      Group                                                   Notes           £m             £m        £m          £m             £m       £m

      Long-term insurance contract liabilities                33 b      4,459.4          (71.2)    4,388.2    4,195.5         (47.1) 4,148.4
      Long-term linked insurance contract liabilities         33 c         76.5            2.8        79.3      102.5           0.8    103.3
      Long-term claims liabilities                            33 d         48.4              –        48.4       50.1             –     50.1
                                                                        4,584.3          (68.4)    4,515.9    4,348.1         (46.3) 4,301.8

      General insurance unearned premiums                     33 e        413.8         (12.3)       401.5      321.4           (9.6) 311.8
      General insurance claims liabilities                    33 f        739.9         (83.3)       656.6      762.8         (80.1)  682.7
                                                                        1,153.7         (95.6)     1,058.1    1,084.2         (89.7)  994.5
                                                                        5,738.0        (164.0)     5,574.0    5,432.3       (136.0) 5,296.3
                                                                                         2009                                 2008
                                                                            Gross    Reinsurance       Net       Gross    Reinsurance      Net
      Society                                                 Notes           £m             £m        £m          £m             £m       £m

      Long-term insurance contract liabilities                33 b      4,432.3        (264.5)     4,167.8    4,165.2       (246.3) 3,918.9
      Long-term linked insurance contract liabilities         33 c         76.5         (35.9)        40.6      102.5         (43.0)   59.5
      Long-term claims liabilities                            33 d         48.2             –         48.2       50.0             –    50.0
                                                                        4,557.0        (300.4)     4,256.6    4,317.7       (289.3) 4,028.4

      b) Movement in long-term insurance contract liabilities
                                                                                         2009                                 2008
                                                                            Gross    Reinsurance       Net       Gross    Reinsurance      Net
      Group                                                                   £m             £m        £m          £m             £m       £m

      Balance at 1 January                                                4,195.5        (47.1)    4,148.4    4,801.7         (65.3) 4,736.4
      Premiums received                                                     196.1        (13.5)      182.6      138.9         (24.5)   114.4
      Liabilities paid for death maturities, surrenders, benefits & claims (679.3)        92.6      (586.7)    (819.6)         22.4   (797.2)
      New business                                                          285.1        (14.1)      271.0      221.2            0.3   221.5
      Benefits and claims variation                                         262.7        (47.0)      215.7        98.4           8.6   107.0
      Fees deducted                                                         (47.1)        (3.6)      (50.7)      (33.9)            –    (33.9)
      Accretion of investment income or change in unit prices               339.9        (30.1)      309.8       (71.7)         (0.3)   (72.0)
      Mortality/morbidity                                                    (0.1)           –        (0.1)      (43.0)          0.5    (42.5)
      Investment return                                                     (15.9)           –       (15.9)          –             –        –
      Expense                                                                23.4          2.7        26.1        38.7             –     38.7
      Lapse and surrender rates                                              (6.8)           –        (6.8)      (56.6)            –    (56.6)
      Discount rate                                                        (134.6)        (7.9)     (142.5)       41.7          (0.1)    41.6
      Model changes                                                          13.1          1.2        14.3      (77.6)           0.4    (77.2)
      Other                                                                  27.4         (4.4)       23.0      (42.7)         10.9     (31.8)
      Balance at 31 December                                              4,459.4        (71.2)    4,388.2    4,195.5         (47.1) 4,148.4
                                                                                         2009                                 2008
                                                                            Gross    Reinsurance       Net       Gross    Reinsurance      Net
      Society                                                                 £m             £m        £m          £m             £m       £m

      Balance at 1 January                                                4,165.2      (246.3)     3,918.9    3,287.1       (244.7) 3,042.4
      Premiums received                                                     189.3       (26.9)       162.4        66.2        (69.4)      (3.2)
      Liabilities paid for death maturities, surrenders, benefits & claims (676.0)       99.3       (576.7)    (600.0)         95.6   (504.4)
      New business                                                          285.8       (12.8)       273.0      206.4              –   206.4
      Benefits and claims variation                                         257.6       (57.2)       200.4      179.2         (60.4)   118.8
      Fees deducted                                                         (45.3)          –        (45.3)      (16.0)            –    (16.0)
      Accretion of investment income or change in unit prices               339.4       (31.0)       308.4     (181.4)         88.3     (93.1)
      Mortality/morbidity                                                    (0.1)          –         (0.1)      (38.4)            –    (38.4)
      Investment return                                                     (15.9)          –        (15.9)          –             –         –
      Expense                                                                22.0           –         22.0        36.4             –     36.4
      Lapse and surrender rates                                              (6.8)          –         (6.8)        0.8             –       0.8
      Discount rate                                                        (130.6)          –       (130.6)       44.7             –     44.7
      Model changes                                                          19.7        14.3         34.0      (86.9)             –    (86.9)
      Transfer under Part VII of the FSMA                                       –           –            –    1,311.0         (46.7) 1,264.3
      Other                                                                  28.0        (3.9)        24.1      (43.9)          (9.0)   (52.9)
      Balance at 31 December                                              4,432.3      (264.5)     4,167.8    4,165.2       (246.3) 3,918.9


112
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                                                                                                                                                        01 Business overview
31 December 2009




33. Insurance contract liabilities (continued)
c) Movement in long-term linked insurance contract liabilities
                                                                                  2009                                       2008
                                                                     Gross    Reinsurance      Net              Gross    Reinsurance       Net
Group                                                                  £m             £m       £m                 £m             £m        £m

Balance at 1 January                                                102.5            0.8    103.3             156.1            (2.5)   153.6




                                                                                                                                                        02 Performance
Premiums received                                                     18.4          (0.2)    18.2               25.5           (2.2)     23.3
Liabilities paid for death maturities, surrenders, benefits & claims (37.6)          0.1    (37.5)             (45.6)           4.8     (40.8)
New business                                                          (1.2)            –     (1.2)               (0.3)         (0.2)      (0.5)
Benefits and claims variation                                         (4.0)            –     (4.0)               (1.5)          0.2       (1.3)
Fees deducted                                                         (3.8)            –     (3.8)               (3.3)          0.3       (3.0)
Accretion of investment income or change in unit prices                8.3             –      8.3              (14.9)          (0.3)    (15.2)
Mortality/morbidity                                                      –             –        –                (4.2)          0.1       (4.1)
Expense                                                                2.6             –      2.6                 0.3             –        0.3
Lapse and surrender rates                                                –             –        –                 0.2           0.9        1.1
Discount rate                                                          7.5          (0.5)     7.0                 2.5             –        2.5
Model changes                                                        (17.2)          4.8    (12.4)              (9.2)          (0.1)      (9.3)




                                                                                                                                                        03 Our businesses
Other                                                                  1.0          (2.2)    (1.2)              (3.1)          (0.2)      (3.3)
Balance at 31 December                                                76.5           2.8     79.3             102.5             0.8    103.3
                                                                                  2009                                       2008
                                                                     Gross    Reinsurance      Net              Gross    Reinsurance       Net
Society                                                                £m             £m       £m                 £m             £m        £m

Balance at 1 January                                                102.5         (43.0)      59.5                –              –          –
Premiums received                                                     18.4        (12.9)       5.5                –          (43.8)     (43.8)
Liabilities paid for death maturities, surrenders, benefits & claims (37.6)         6.4      (31.2)               –              –          –
New business                                                          (1.2)         1.2          –                –              –          –
Benefits and claims variation                                         (4.0)         3.1       (0.9)               –              –          –
Fees deducted                                                         (3.8)         3.4       (0.4)               –              –          –
Accretion of investment income or change in unit prices                8.3         (0.9)       7.4                –              –          –




                                                                                                                                                        04 Group support and CSR
Expense                                                                2.6         (2.6)         –                –              –          –
Discount rate                                                          7.5         (6.2)       1.3                –              –          –
Model changes                                                        (17.2)        17.2          –                –              –          –
Transfer under Part VII of the FSMA                                      –            –          –            102.5            0.8     103.3
Other                                                                  1.0         (1.6)      (0.6)               –              –          –
Balance at 31 December                                                76.5        (35.9)      40.6            102.5          (43.0)      59.5

d) Movement in long-term claims liabilities
                                                                                  2009                                       2008
                                                                     Gross    Reinsurance      Net              Gross    Reinsurance       Net
Group                                                                  £m             £m       £m                 £m             £m        £m
                                                                                                                                                        05 Corporate governance
Balance at 1 January                                                50.1              –       50.1             50.5              –       50.5
Movement in linked funds claims liabilities                            –              –          –              (0.3)            –        (0.3)
Claims incurred                                                    553.3          (67.3)     486.0            711.9          (25.5)     686.4
Claims paid during the year                                       (555.0)          67.3     (487.7)          (712.0)          25.5     (686.5)
Balance at 31 December                                              48.4              –       48.4             50.1              –       50.1

                                                                                  2009                                       2008
                                                                     Gross    Reinsurance      Net              Gross    Reinsurance       Net
Society                                                                £m             £m       £m                 £m             £m        £m

Balance at 1 January                                                50.0              –       50.0             24.8              –       24.8
Claims incurred                                                    549.9          (92.9)     457.0            429.7          (42.1)     387.6
Claims paid during the year                                       (551.7)          92.9     (458.8)          (428.0)          42.1     (385.9)
                                                                                                                                                        06 The numbers




Transfer under Part VII of the FSMA                                    –              –          –             23.5              –       23.5
Balance at 31 December                                              48.2              –       48.2             50.0              –       50.0




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      31 December 2009




      33. Insurance contract liabilities (continued)
      e) Movement in general insurance unearned premiums
                                                                          2009                                2008
                                                              Gross   Reinsurance       Net      Gross    Reinsurance       Net
      Group                                                     £m            £m        £m         £m             £m        £m

      Balance at 1 January                                   321.4         (9.6)      311.8     183.2           (5.2)    178.0
      Premiums written in the year                           811.1        (24.7)      786.4     445.2         (12.1)     433.1
      Premiums earned during the year                       (718.7)        22.0      (696.7)   (423.5)         13.0     (410.5)
      Acquisitions                                               –            –           –     116.5           (5.3)    111.2
      Balance at 31 December                                 413.8        (12.3)      401.5     321.4           (9.6)    311.8

      f) Movement in general insurance claims liabilities
                                                                          2009                                2008
                                                              Gross   Reinsurance       Net      Gross    Reinsurance       Net
      Group                                                     £m            £m        £m         £m             £m        £m

      Balance at 1 January                                   762.8        (80.1)      682.7     437.1         (14.6)     422.5
      Movement in claims incurred in prior accident years   (140.8)        41.6       (99.2)     (64.9)          6.2      (58.7)
      Claims incurred in the current accident year           640.7        (49.3)      591.4     403.7           (8.2)    395.5
      Claims paid during the year                           (522.8)         4.5      (518.3)   (340.1)           1.1    (339.0)
      Acquisitions                                               –            –           –     327.0         (64.6)     262.4
      Balance at 31 December                                 739.9        (83.3)      656.6     762.8         (80.1)     682.7


      34. Investment contract liabilities
                                                                          2009                                2008
                                                              Gross   Reinsurance       Net      Gross    Reinsurance       Net
      Group                                                     £m            £m        £m         £m             £m        £m

      Balance at 1 January                                  396.0                –   396.0     253.9               –    253.9
      Deposits received from policyholders                  202.2                –   202.2     230.0               –    230.0
      Payments made to policyholders and fees deducted      (71.3)               –   (71.3)     (53.6)             –     (53.6)
      Movement in assets                                        –                –       –        (2.1)            –       (2.1)
      Change in technical provision as shown
      in the Statement of comprehensive income               51.5                –    51.5      (32.2)             –     (32.2)
      Balance at 31 December                                578.4                –   578.4     396.0               –    396.0
                                                                          2009                                2008
                                                              Gross   Reinsurance       Net      Gross    Reinsurance       Net
      Society                                                   £m            £m        £m         £m             £m        £m

      Balance at 1 January                                  396.0                –   396.0       83.2              –      83.2
      Deposits received from policyholders                  202.2                –   202.2     230.0               –    230.0
      Payments made to policyholders and fees deducted      (71.3)               –   (71.3)     (36.5)             –     (36.5)
      Movement in assets                                        –                –       –        (2.1)            –       (2.1)
      Change in technical provision as shown
      in the Statement of comprehensive income               51.5                –    51.5         –               –        –
      Transfer under Part VII of the FSMA                       –                –       –     121.4               –    121.4
      Balance at 31 December                                578.4                –   578.4     396.0               –    396.0




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                                                                                                                                                              01 Business overview
31 December 2009




35. Long-term insurance and investment contract liabilities valuation assumptions
The basis of the calculation of the long-term insurance contract liabilities is described in the accounting policies. The liability is calculated
separately for each life operation. Material judgement is required in calculating the liability. In particular there is discretion over the
assumptions used. For participating business, the liability is calculated in accordance with the FSA’s realistic capital regime, adjusted to
exclude the shareholder’s share of the future bonuses (in subsidiaries) and the associated tax liability. Non participating liabilities are valued
using a gross premium method.




                                                                                                                                                              02 Performance
In calculating the realistic liabilities, account has also been taken of future management actions consistent with those set out in the
Principles and Practices of Financial Management. The most significant of these are changes to bonus assumptions and level of payouts.

The assumptions used to calculate the liability depend on the circumstances prevailing in each of the life operations. The assumptions used
in determining the liability are estimated to give a result within the normal range of outcomes. To the extent that the ultimate cost differs to
the amounts provided, for example where experience is worse than that assumed, the surplus or deficit will be credited or charged to the
Statement of comprehensive income in future years.

When valuing options and guarantees the asset model used was the Barrie and Hibbert Market-Consistent Asset Model. This is a deflator
model based on published financial economic theory that is capable of market-consistent valuations for multiple asset classes in multiple
currencies. For this valuation it was calibrated to market data as at 31 December 2009 representative of the nature and term of the
guarantees inherent in participating insurance contracts within the participating insurance contract funds.




                                                                                                                                                              03 Our businesses
a) Society

i) Participating insurance contracts
For participating insurance contracts, a market consistent valuation is used to calculate the liability. This involves placing a value on liabilities
similar to the market value of assets with similar cash flow patterns. The key assumptions used in this valuation are set out in the tables below.

Interest Rates
The risk free interest rates assumed are:
Year                                                                                            2009                                  2008
5                                                                                              3.12%                                 2.84%
15                                                                                             4.80%                                 4.08%
25                                                                                             4.78%                                 4.04%




                                                                                                                                                              04 Group support and CSR
35                                                                                             4.61%                                 3.82%


Other assumptions
Best estimate assumptions are set for inflation, mortality, expenses and persistency. The future expense inflation assumption is modelled as
RPI plus 1.0% (2008: RPI plus 1.0%), where RPI in both 2009 and 2008 is modelled stochastically.
Asset mix for assets backing asset shares at the valuation date:                       2009                                   2008
Cash                                                                                    3.0%                                   6.0%
Fixed interest                                                                         36.0%                                  19.0%
Equities                                                                               50.0%                                  60.0%
Property                                                                               11.0%                                  15.0%
                                                                                                                                                              05 Corporate governance
Mortality rate tables                                                               2009                                    2008
Conventional Life Business                                                    75% AM80 Females -3                     75% AM80 Females -3
Conventional Pensions Business                                                70% AM80 Females -3                     70% AM80 Females -3
Conventional Industrial Branch Business                                           45.0% ELT14M                            45.0% ELT14M
Non Unitised Accumulating Pensions Business                                         70% AM80                                70% AM80
Unitised Accumulating Life Business                                             80% AM80/AF80                           80% AM80/AF80
Unitised Accumulating Pensions Business                                             80% AM80                                80% AM80
Unitised Accumulating Bond Business                                                 80% AM80                         80% AM80 2 year select
Unitised Accumulating Life ISA Business                                  80% AM80 select/AF80 Select                        80% AM80
Annuities in Payment                                                     RV92 av of med and long cohort          RV92 av of med and long cohort
                                                                                                                                                              06 The numbers




                                                                                                                                                        115
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      31 December 2009




      35. Long-term insurance and investment contract liabilities valuation assumptions (continued)

      Per policy expenses – regular premiums                                                     2009                                 2008
      Conventional Life Business                                                                £21.50                               £22.00
      Conventional Pensions Business                                                            £29.50                               £26.50
      Conventional Industrial Branch Business                                                   £12.20                               £12.60
      Non Unitised Accumulating Pensions Business                                               £18.40                               £16.60
      Unitised Accumulating Life Business                                                       £35.50                               £34.30
      Unitised Accumulating Pensions Business                                                   £29.50                               £44.10
      Unitised Accumulating Bond Business                                                       £34.80                               £34.70
      Unitised Accumulating Life ISA Business                                                   £39.90                               £40.70
      Annuities in Payment                                                                      £38.00                               £39.50


      A percentage of these amounts is used for single premium and paid up policies.

      Persistency – lapses, surrenders and paid up rates
      A review of persistency is carried out annually. Assumptions are adjusted where necessary to reflect more recent experience as evidenced
      in the persistency trend analysis, or to reflect expected future trends as a result of anticipated future events.

      Options and guarantees
      There are no guaranteed annuity or financial options within the LVFS participating contract funds. There is an additional reserve calculated
      on a market consistent basis to cover market value restricter (MVR) free guarantees on with-profits bonds.

      Bonuses
      The cost of bonuses incurred during the year ended 31 December 2009 was £76.3m (2008: £76.5m) of which £45.2m (2008: 9.1m)
      was included in the life and pensions insurance contract liabilities and £31.1m (2008: £67.4m) was included in gross benefits and claims
      paid in the Statement of comprehensive income.

      ii) Non participating insurance contracts
      Interest rate                                                                              2009                                 2008
      Non-profit temporary assurances (original LVFS)                                            2.25%                                4.20%
      Non-profit temporary assurances                                                            3.04%                                2.64%
      Other assurances                                                                           3.04%                                2.64%
      Permanent health insurance:
      a) active lives                                                                            3.80%                                3.30%
      b) claims reserves                                                                         3.60%                                3.10%
      Annuities in payment                                                                       3.60%                                3.10%

      Mortality rate tables                                                                     2009                                  2008
      Non-profit temporary assurances (original LVFS)                                    NS: 95.0% AM80/                           90.0% AM80
                                                                                     AF80 S: 165.0% AM80/AF80                       Females -3
      Non-profit temporary assurances                                               TMN00/TMS00 TFN00/TFS00                        TM92/TF92
      Other assurances                                                                       AM92/AF92                             AM92/AF92
      Permanent health insurance:
      a) active lives                                                                        CMIR12                                 CMIR12
      b) claims reserves                                                                     CMIR12                                 CMIR12
      Annuities in payment                                                            90% RV92av mc/lc c2026                    90% RV92av mc/
                                                                                                                                   lc c2026

      Appropriate adjustments were made to the standard mortality tables to take account of actual experience and publicly available market data.

      Per policy expenses – regular premiums                                                     2009                                 2008
      Non-profit temporary assurances                                                           £24.64                               £24.44
      Other assurances                                                                          £36.23                               £38.72
      Permanent health insurance:
      a) active lives                                                                           £28.72                               £28.52
      b) claims reserves                                                                       £412.50                              £430.10
      Annuities in payment                                                                      £40.74                               £43.42


      Options and guarantees
      There are no significant options and guarantees in the non participating business.



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                                                                                                                                                              01 Business overview
31 December 2009




35. Long-term insurance and investment contract liabilities valuation assumptions (continued)
iii) Investment and long-term linked insurance contracts

The provision for unit linked pensions is equal to the value of the assets to which the contracts are linked. There is one product included
within the linked fund which is classified as an investment product and the liability is included within the long-term linked insurance
contract liabilities.




                                                                                                                                                              02 Performance
The provision for property-linked liabilities is equal to the value of the assets to which the contracts are linked and is included within
investment contract liabilities.

The provisions for index-linked permanent health insurance claims and index-linked temporary assurances have been calculated using the
same mortality and morbidity assumptions as used for the corresponding non-linked liabilities for both 2009 and 2008. They are included
within the life and pension unit linked insurance contract liabilities.
Interest rate                                                                                  2009                                   2008
Unit linked pensions (original LVFS)                                                           1.80%                                  4.40%
Non-profits temporary assurances                                                              (1.14)%                                (0.36)%
Permanent health insurance
a) active lives                                                                               (0.38)%                                0.30%




                                                                                                                                                              03 Our businesses
b) claims reserves                                                                             0.10%                                 1.30%


Mortality rate tables                                                                          2009                                   2008
Unit linked pensions (original LVFS)                                                      80% AX92C20                            80% AX92C20



b) Liverpool Victoria Life Company Limited – Ordinary Long Term Fund

i) Participating insurance contracts
For participating insurance contracts, a market consistent valuation is used to calculate the liability. This involves placing a value on liabilities
similar to the market value of assets with similar cash flow patterns. The key assumptions used in this valuation are set out in the tables below.




                                                                                                                                                              04 Group support and CSR
Interest Rates

The risk free interest rates assumed are:
Year                                                                                           2009                                 2008
5                                                                                              3.12%                                2.84%
15                                                                                             4.80%                                4.08%
25                                                                                             4.78%                                4.04%
35                                                                                             4.61%                                3.82%


Other assumptions
Best estimate assumptions are set for inflation, mortality, expenses and persistency. The future expense inflation assumption is modelled as                  05 Corporate governance
RPI plus 1.0% (2008: RPI plus 1.0%), where RPI is modelled as the nominal yields on cash less 0.8% (2008: cash less 0.8%).


Asset mix for assets backing asset shares at the valuation date:                               2009                                  2008
Equities                                                                                      100.0%                                100.0%


Mortality rate tables                                                                         2009                                2008
Reassurance Accepted Unitised Life Business                                                 80% AM80                       80% AM80 2 year select

Per policy expenses – regular premiums                                                        2009                                   2008
Reassurance Accepted Unitised Life Business                                                  £34.80                                 £34.70
                                                                                                                                                              06 The numbers




Persistency
A review of persistency is carried out annually. Assumptions are adjusted where necessary to reflect more recent experience as evidenced in
the persistency trend analysis, or to reflect expected future trends as a result of anticipated future events.




                                                                                                                                                        117
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      NOTES TO THE ACCOUNTS CONTINUED
      31 December 2009




      35. Long-term insurance and investment contract liabilities valuation assumptions (continued)
      Options and Guarantees
      There are no significant options or guarantees in the Liverpool Victoria Life Company participating contract fund.

      Bonuses
      The cost of bonuses incurred during the year ended 31 December 2009 was £nil (2008: £nil) which was included in gross benefits and
      claims paid in the Statement of comprehensive income.

      ii) Non participating insurance contracts
      Interest rate                                                                  2009                                    2008
      Non-profit temporary assurances                                                3.04%                                   2.64%
      Other assurances                                                               3.04%                                   2.64%
      Permanent health insurance:
      a) active lives                                                                3.80%                                   3.30%
      b) claims reserves                                                             3.60%                                   3.10%
      Annuities in payment                                                           3.60%                                   3.10%

      Mortality rate tables                                                     2009                                         2008
      Non-profit temporary assurances                                   TMN00/TMS00 TFN00/TFS00                            TM92/TF92
      Other assurances                                                        AM92/AF92                                    AM92/AF92
      Permanent health insurance:
      a) active lives                                                            CMIR12                                    CMIR12
      b) claims reserves                                                         CMIR12                                    CMIR12
      Annuities in payment                                                90% RV92av mc/lc c2026                    90% RV92av mc/lc c2026



      Per policy expenses – regular premiums                                         2009                                    2008
      Non-profit temporary assurances                                               £24.64                                  £24.44
      Other assurances                                                              £36.23                                  £38.72
      Permanent health insurance:
      a) active lives                                                               £28.72                                   £28.52
      b) claims reserves                                                           £412.50                                  £430.10
      Annuities in payment                                                          £40.74                                  £43.42


      Options and guarantees
      There are no significant options and guarantees in the non participating business.

      iii) Long-term linked insurance contracts
      The provisions for index-linked permanent health insurance claims and index-linked temporary assurances have been calculated using the
      same mortality and morbidity assumptions as used for the corresponding non-linked liabilities for both 2009 and 2008. They are included
      within the life and pension unit linked insurance contract liabilities.
      Interest rate                                                                  2009                                    2008
      Non-profits temporary assurances                                              (1.14)%                                 (0.36)%
      Permanent health insurance
      a) active lives                                                               (0.38)%                                  0.30%
      b) claims reserves                                                             0.10%                                   1.30%




118
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                                                                                                                                                           01 Business overview
31 December 2009




35. Long-term insurance and investment contract liabilities valuation assumptions (continued)
c) RNPFN fund

i) Participating business
For participating business, a market consistent valuation is used to calculate the liability. This involves placing a value on liabilities similar
to the market value of assets with similar cash flow patterns. The key assumptions used in this valuation are set out in the tables below.




                                                                                                                                                           02 Performance
Interest Rates

The risk free interest rates assumed are:
Year                                                                              2009                                       2008
5                                                                                 3.12%                                      2.84%
15                                                                                4.80%                                      4.08%
25                                                                                4.78%                                      4.04%
35                                                                                4.61%                                      3.82%


Other assumptions
Best estimate assumptions are set for inflation, mortality, expenses and persistency. The future expense inflation assumption is modelled




                                                                                                                                                           03 Our businesses
as RPI plus 1.0% (2008: RPI plus 1.0%), where RPI in both 2009 and 2008 is modelled stochastically


Asset mix for assets backing asset shares at the valuation date:                  2009                                      2008
Cash                                                                             10.3%                                      9.4%
Fixed interest                                                                   65.8%                                     65.8%
Equities                                                                         20.9%                                     21.8%
Property                                                                          3.0%                                      3.0%

Mortality rate tables                                                             2009                                       2008
Conventional Life Business                                                 100% AM/F92 ult                             100% AM/F92 ult
Life Deferred Annuities                                                    100% AM/F92 ult                             100% AM/F92 ult




                                                                                                                                                           04 Group support and CSR
Pension Deferred annuities                                                 100% AM/F92 ult                             100% AM/F92 ult
Unitised with-profits Business                                              100% A67/70 ult                            100% A67/70 ult
Annuities in payment (Male)                                         72% IML00 with improvements                 72% IML00 with improvements
                                                                  of 120% medium cohort over 2000            of 120% medium cohort over 2000
                                                                  to 2004 and future improvements             to 2004 and future improvements
                                                                        120% medium cohort sbt                     120% medium cohort sbt
                                                                             a floor of 1.5%                            a floor of 1.5%
Annuities in payment (Female)                                        85% IFL00 with improvements                85% IFL00 with improvements
                                                                      of greater of 90% of medium                of greater of 90% of medium
                                                                   cohort and CMIR17 over 2000 to             cohort and CMIR17 over 2000 to
                                                                   2004 and future improvements of            2004 and future improvements of              05 Corporate governance
                                                                  greater of 90% medium cohort and           greater of 90% medium cohort and
                                                                    CMIr17 subject to a 1.5% floor              CMIr17 subject to a 1.5% floor

Per policy expenses – regular premiums                                            2009                                       2008
Conventional Life Business                                                       £14.52                                     £14.45
Pensions Deferred annuities                                                      £27.18                                     £27.05
Life Deferred annuities                                                          £13.97                                     £13.91
Unitised with-profits ISA                                                        £14.19                                     £14.12
Unitised with-profits bond                                                       £14.52                                     £14.45

Persistency – lapses, surrenders and paid up rates
                                                                                                                                                           06 The numbers




A review of persistency is carried out annually. Assumptions are adjusted where necessary to reflect more recent experience as evidenced
in the persistency trend analysis, or to reflect expected future trends as a result of anticipated future events.

Options and guarantees
The provisions held in respect of guaranteed annuity options are determined on a market consistent basis. The total amount provided
in respect of the future costs of the options and guarantees was £55.3m (2008: £79.3m).




                                                                                                                                                     119
      Annual report and accounts 2009

      NOTES TO THE ACCOUNTS CONTINUED
      31 December 2009




      35. Long-term insurance and investment contract liabilities valuation assumptions (continued)
      Bonuses
      The cost of bonuses incurred during the year ended 31 December 2009 was £27.4m (2008: £37.9m) of which £1.0m (2008: £1.7m)
      was included in the life and pensions insurance contract liabilities and £26.4m (2008: £36.3m) was included in gross benefits and claims
      paid in the Statement of comprehensive income.

      ii) Non participating business
      Interest rate                                                                     2009                                       2008
      Non-profits assurances                                                            2.72%                                      2.40%
      Non-profits general deferred annuities                                            2.72%                                      2.40%
      Annuities in Payment (post 31/12/91)                                              2.72%                                      2.40%
      Annuities in Payment (other)                                                      3.40%                                      3.00%
      Pension Deferred Annuities                                                        3.40%                                      3.00%

      Mortality rate tables                                                             2009                                        2008
      Non-profits assurances                                                     115% AM/F92 ult                             120% AM/F92 ult
      Non-profits general deferred annuities                                      85% AM/F92 ult                              80% AM/F92 ult
      Annuities in Payment (Male)                                         61.2% IML00 with improvements               57.6% IML00 with improvements
                                                                        of 120% medium cohort over 2000             of 120% medium cohort over 2000
                                                                         to 2004 and future improvements             to 2004 and future improvements
                                                                              120% medium cohort sbt                      120% medium cohort sbt
                                                                                   a floor of 1.5%                             a floor of 1.5%
      Annuities in Payment (Female)                                       72.3% IFL00 with improvements                68% IFL00 with improvements
                                                                        of greater of 90% of medium cohort          of greater of 90% of medium cohort
                                                                          and CMIR17 over 2000 to 2004                and CMIR17 over 2000 to 2004
                                                                        and future improvements of greater          and future improvements of greater
                                                                        of 90% medium cohort and CMIr17             of 90% medium cohort and CMIr17
                                                                               subject to a 1.5% floor                     subject to a 1.5% floor
      Pension Deferred Annuities                                                 85% AM/F92 ult                               80% AM/F92 ult


      Appropriate adjustments were made to the standard mortality tables to take account of actual experience and publicly available market data.

      The provision for linked and unitised with-profits contracts is equal to the value of the units. A non-unit liability consisting mainly of a sterling
      reserve calculated by carrying out cashflow projections on appropriate bases is included within the liability.

      Options and guarantees
      There are no significant options or guarantees in the non participating business.

      iii) Linked fund
      The provision for unit linked assurances is equal to the value of the assets to which the contracts are linked. There are two products included
      within the linked fund, one is classified as an investment product and the liability is included within the life and pension unit linked insurance
      contract liabilities, the other is classified as an insurance product and the liability is included within the investment contract liabilities.


      Interest rate                                                                     2009                                       2008
      Unit linked assurances                                                            2.72%                                      2.40%

      Mortality rate tables                                                            2009                                       2008
      Unit linked assurances                                                      115% AM/F92 ult                            120% AM/F92 ult




120
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NOTES TO THE ACCOUNTS CONTINUED




                                                                                                                                                          01 Business overview
31 December 2009




36. Provisions
a) Movement during the year on other provisions
                                                                                                 Group                            Society
                                                                                         Other                                Other
                                                                                    provisions             Total         provisions         Total
                                                                                           £m                £m                 £m            £m




                                                                                                                                                          02 Performance
Balance at 1 January 2009                                                             100.7              100.7              51.6         51.6
Credit to the Statement of comprehensive income                                        (27.4)             (27.4)           (14.5)       (14.5)
Utilised during the year                                                               (27.6)             (27.6)             (0.7)        (0.7)
Balance at 31 December 2009                                                             45.7               45.7             36.4         36.4

b) Other provisions

Other provisions relate to:
                                                                                                 Group                            Society
                                                                                        2009               2008              2009           2008
                                                                                          £m                 £m                £m             £m

Losses on uneconomic contracts related to banking and losses on banking products        7.1               46.4               2.2             2.5




                                                                                                                                                          03 Our businesses
Unused premises                                                                         4.0                3.0               1.5             0.6
Outsourcing and decommissioning IT systems                                                –                0.2                 –               –
Compensation payables on customer complaints                                            1.9                2.6                 –               –
Earnout payments                                                                       32.7               48.5              32.7            48.5
                                                                                       45.7              100.7              36.4            51.6

Provisions relating to Banking will be utilised during the period to 2027.

Earnout payments are payable during the period to 2012 and relate to the acquisitions of the Tomorrow Group in 2007 and the ABC
acquisition in 2006.

37. Corporation tax liabilty
                                                                                                 Group                            Society




                                                                                                                                                          04 Group support and CSR
                                                                                        2009               2008              2009           2008
                                                                                          £m                 £m                £m             £m

Corporation tax                                                                             –             17.3                   –          13.5
                                                                                            –             17.3                   –          13.5

The carrying amounts disclosed above reasonably approximate fair value at the Statement of financial position date.

38. Other financial liabilities
                                                                                                 Group                            Society
                                                                                        2009               2008              2009           2008
                                                                                          £m                 £m                £m             £m

Deposits by banks                                                                        0.9               0.4                   –             –          05 Corporate governance
Banking customer accounts                                                                3.4              60.8                   –             –
Bank loan (at 1.47% over libor)                                                            –              10.0                   –             –
Subordinated note (£12m-interest payable at the 3 month Euro
Deposit Rate plus a margin of 3.65%)                                                   10.6               11.4                   –             –
                                                                                       14.9               82.6                   –             –

The carrying amounts disclosed above reasonably approximate fair value at the Statement of financial position date.

39. Insurance payables
                                                                                                 Group                            Society
                                                                                        2009               2008              2009           2008
                                                                                          £m                 £m                £m             £m
                                                                                                                                                          06 The numbers




Arising from direct insurance operations                                               20.5               43.9              20.3            39.2
Arising from reinsurance operations                                                    12.8                7.0               2.3             0.1
                                                                                       33.3               50.9              22.6            39.3

The carrying amounts disclosed above reasonably approximate fair value at the financial position date.




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      NOTES TO THE ACCOUNTS CONTINUED
      31 December 2009




      40. Trade and other payables
                                                                                                      Group                            Society
                                                                                               2009            2008                2009          2008
                                                                                                 £m              £m                  £m            £m

      Bank overdrafts                                                                           –              23.0                  –       13.2
      Trade creditors                                                                         1.6              12.5                  –          –
      Amounts owed to group undertakings                                                        –                 –              671.5       62.7
      Other taxes and social security costs                                                  17.1               6.6                5.9        3.8
      Other creditors                                                                        36.9              38.1               22.7       19.0
      Deferred income                                                                         5.0               6.2                5.8        6.2
      Finance lease liabilities                                                               5.6               5.8                  –          –
      Accruals and deferred income                                                           83.8              93.4               49.1       40.7
                                                                                            150.0             185.6              755.0      145.6

      The carrying amounts disclosed above reasonably approximate fair value at the Statement of financial position date.

      41. Cash generated from operating activities
                                                                                                      Group                            Society
                                                                                               2009            2008                2009          2008
                                                                                                 £m              £m                  £m            £m

      Loss before tax                                                                        (91.4)      (258.3)                (129.5) (167.6)
      Investment income                                                                     (230.5)      (301.4)                (183.9) (167.7)
      (Gains)/losses on investments                                                         (172.5)       728.0                 (121.8)    503.6
      Finance costs                                                                            6.5         (43.0)                  0.6       0.3
      Purchase of investments at fair value through income                                (6,436.4)    (4,684.1)              (5,052.2) (3,756.8)
      Sales of investments at fair value through income                                    5,992.0      4,664.9                4,998.8 2,500.2
      Sales/(purchases) of financial derivatives                                              72.6       (164.5)                  75.8    (178.3)

      Non-cash items
      Expenses deferred during the year                                                       (8.5)            37.1                0.4            1.4
      Amortisation of intangible assets                                                       20.4             14.0                4.6            4.7
      Amortisation disposal of intangible assets                                              (0.7)               –                  –              –
      Depreciation on property and equipment                                                   2.6              1.2                0.5            0.2
      (Gain)/loss on disposal of property and equipment                                       (2.2)             7.9                  –              –
      Impairment losses on intangible assets                                                   1.8                –                  –              –
      Impairment disposals on intangible assets                                                8.4                –                  –              –
      Impairment reduction in earnout provision                                               14.8                –               14.8              –
      Pension scheme actuarial losses                                                        (77.5)            (1.1)             (74.7)          (8.9)
      Group relief surrendered/(received)                                                     26.1                –                  –              –

      Changes in working capital
      Decrease/(increase) in loans and receivables                                           443.2           73.7                (45.7) (115.2)
      Increase in reinsurance assets                                                         (28.0)         (48.4)               (11.1)   (44.6)
      Increase in insurance receivables                                                      (13.3)         (44.6)                (8.9)   (11.8)
      Decrease/(increase) in other prepayments and accrued income                              1.8            5.0                 (3.3)      6.2
      Increase in tax receivables                                                            (27.7)             –                (26.1)        –
      Increase/(decrease) in insurance contract liabilities                                  305.7        (196.3)                239.3 1,005.8
      Increase in investment contract liabilities                                            182.4         142.1                 182.4   312.8
      Increase in provisions, pension obligation and pension asset                            38.4           41.8                 73.6     51.9
      Decrease in borrowings                                                                (150.6)       (235.6)                    –         –
      Decrease in other financial liabilities                                                (67.7)         (22.2)                   –      (9.5)
      Decrease in tax liability                                                              (17.3)             –                (15.4)        –
      (Decrease)/increase in insurance payables                                              (17.6)          27.7                (16.7)    26.9
      (Decrease)/increase in trade and other payables                                        (11.4)        146.9                 623.0       7.9
      Cash (used in)/generated from operating activities                                    (236.6)       (109.2)                524.5   (38.5)

      The Group classifies the cash flows for the acquisition and disposal of financial assets as operating cash flows, as the purchases are funded
      from the cash flows associated with the origination of insurance and investment contracts, net of the cash flows.




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                                                                                                                                                            01 Business overview
31 December 2009




42. Commitments
a) Capital commitments
                                                                                                   Group                             Society
                                                                                           2009             2008                 2009          2008
                                                                                             £m               £m                   £m            £m

Authorised and contracted commitments payable after 31 December




                                                                                                                                                            02 Performance
not provided for in respect of:
– property investments                                                                      3.0             4.7                  3.0            4.7
– other financial investments                                                              53.6            70.0                 53.6           70.0
– tangible assets                                                                           1.3             3.5                  1.3            3.5
                                                                                           57.9            78.2                 57.9           78.2

b) Operating lease commitments

The Group leases various properties under non-cancellable operating lease agreements. The leases have varying terms, escalation clauses
and renewal rights. The future aggregate minimum lease payments net of income under non-cancellable operating leases are as follows:
                                                                                                   Group                             Society
                                                                                           2009             2008                 2009          2008




                                                                                                                                                            03 Our businesses
                                                                                             £m               £m                   £m            £m

Within one year                                                                             6.1             5.9                  4.4            3.2
Between two and five years                                                                 20.5            19.3                 13.9           11.1
Over five years                                                                            10.1             8.0                  6.5            7.3
                                                                                           36.7            33.2                 24.8           21.6

The Group has entered into commercial leases for some of its properties that are unoccupied. These leases have varying terms and
escalation clauses. Where these subleases are insufficient to cover the Group’s operating lease agreements an onerous contract provision
for unused premises is set up. The future aggregate minimum sublease payments expected to be received under operating subleases:
                                                                                                   Group                             Society
                                                                                           2009             2008                 2009          2008
                                                                                             £m               £m                   £m            £m




                                                                                                                                                            04 Group support and CSR
Within one year                                                                             0.9              0.4                  0.4             –
Between two and five years                                                                  2.9              1.7                  0.4           0.1
Over five years                                                                             0.3              0.3                  0.1             –
                                                                                            4.1              2.4                  0.9           0.1

c) Finance lease commitments

It is the Group’s policy to lease certain of its properties under finance leases. The average lease term is 99 years. Interest rates are fixed
at the contract rate. All leases are on a fixed repayment basis and no arrangements have been entered into for contingent payments. The
Group’s obligations under finance leases are secured by the lessor’s charges over the leased assets.
                                                                                                   Group                             Society
                                                                                           2009             2008                 2009          2008         05 Corporate governance
                                                                                             £m               £m                   £m            £m

Gross finance lease liabilities – minimum lease payments
Within one year                                                                             1.1              1.1                 1.1         1.1
Between two and five years                                                                  4.6              4.6                 4.6         4.6
Over five years                                                                            93.0             94.1                93.0        94.1
                                                                                           98.7             99.8                98.7        99.8
Future finance charges on finance leases                                                  (92.9)           (93.8)              (92.9)      (93.8)
Present value of financial lease liabilities                                                5.8              6.0                 5.8         6.0
                                                                                                   Group                             Society
                                                                                           2009             2008                 2009          2008
                                                                                             £m               £m                   £m            £m

The present value of finance lease liabilities is as follows:
                                                                                                                                                            06 The numbers




– in less than 1 year                                                                       0.2              0.2                  0.2           0.2
– in the second to fifth year                                                               0.8              0.8                  0.8           0.8
– over five years                                                                           4.8              5.0                  4.8           5.0
                                                                                            5.8              6.0                  5.8           6.0




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      31 December 2009




      42. Commitments (continued)
      d) Other financial commitments

      The Group has entered into several long-term contracts following service outsourcing. These contracts will end no later than 2012, an option
      to withdraw from these commitments in 2011 is available. The present value of the remaining commitment is estimated at £11.6m (2008:
      £5.3m), of which £11.6m (2008: £5.3m) relates to the Society

      These amounts have not been provided for in the financial statements.

      43. Contingent liabilities
      The Society has granted a contingent loan facility to the RNPFN fund, a closed fund within the Group, up to a maximum of £100.0m, to be
      used in the event of a shortfall in the capital resources of that fund. No drawdown of this facility is anticipated.

      44. Related party transactions
      The Group and Society enter into transactions with key management personnel in the normal course of business. All transactions are carried
      out on an arm’s length basis. Details of significant transactions carried out during the year with related parties are as follows:

      a) The Group has related party transactions with LV= Employee Pension Scheme. The Society provides fund management and administration
         services to the Scheme.

         During the year the following amounts were charged to the Pension Scheme for the following services:
                                                                     Fund
                                                                  Management                          Administration
                                                                   Services                             Services                              Total
                                                           2009          2008                  2009             2008                   2009           2008
                                                             £m            £m                    £m               £m                     £m             £m

      Liverpool Victoria Friendly Society Limited            –              –                   1.6             1.0                    1.6            1.0
      Liverpool Victoria Asset Management Limited          1.0            1.1                     –               –                    1.0            1.1

         As at 31 December 2009 the LV= Employee Pension Scheme owed Liverpool Victoria Friendly Society Limited £0.4m (2008: £0.1m) in respect
         of administration services and owed Liverpool Victoria Asset Management £0.2m (2008: £nil) in respect of fund management services.

      b) The aggregate premiums payable for the year by the Group Executive and Non-Executive Directors in respect of the Group’s products was
         £79,035 (2008: £43,555).

      c) The Group Executive and Non-Executive Directors have had no products in the year or prior year in respect of the Group’s products for
         personal loans and credit cards.

      d) Liverpool Victoria Banking Services Limited, a Group company, has an undrawn committed standby facilities of £nil (2008: £90.0m)
         with Liverpool Victoria Insurance Company Limited and £50.0m (2008: £190.0m) with the Society.

      e) The Society has granted a contingent loan facility to the RNPFN fund, a closed fund within the Group, which is disclosed in
         contingent liabilities.

      f) On 1 September 2006, the Society acquired ABC Insurance Solutions Ltd. and its subsidiaries. As consideration, the Society issued
         debenture loan notes to the five individuals who owned the company. The debenture loan notes attract interest at LIBOR and were
         all redeemed during 2008. Following the acquisition Mr J O’Roarke, an owner of the company, was appointed to the Group Executive
         Committee. At 31 December 2009 the Society had no debenture loan notes owing to J. O’Roarke (2008: £nil). Interest paid in the year
         amounted to £nil (2008: £0.1m).

         The Society has entered into a contract with the shareholders of ABC Insurance Solutions Limited to acquire the remaining interest on
         31 December 2012 at market value. In the absence of the minimum threshold being achieved this will be limited to the paid up value
         of the shares.




124
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NOTES TO THE ACCOUNTS CONTINUED




                                                                                                                                                           01 Business overview
31 December 2009




44. Related party transactions (continued)
g) Key management personnel of the Group include all directors, executive and non-executive, and senior management (the Board and the
   Executive Committee). The summary of the compensation of key management personnel for the year is as follows:
                                                                                                                                     Group
                                                                                                                             2009            2008
                                                                                                                             £’000           £’000




                                                                                                                                                           02 Performance
Salaries                                                                                                                    4,736        4,290
Bonuses                                                                                                                     1,995        2,197
Other short term employment benefits                                                                                          385          172
Compensation for loss of office                                                                                               449          119
Total compensation of key management personnel                                                                              7,565        6,778

The Society makes contributions to the LV= Employee Pension Scheme of 20.6% of pensionable salaries (2008: 20.6% of pensionable
salaries less £6.1m) in respect of all permanent staff, including executive directors.

h) The following transactions have taken place between the Society and other Group companies:
                                                                                                                              2009           2008
                                                                                                                                £m             £m




                                                                                                                                                           03 Our businesses
Management charge by the Society                                                                                             66.2         81.0
Investment management charge to the Society                                                                                  (7.3)         (7.4)
Reinsurance ceded by the Society – claims recoveries                                                                         25.7         42.1
Reinsurance ceded by the Society – premiums paid                                                                            (35.4)      (113.3)
Intra group loans – net interest received by the Society                                                                      6.8           5.6
                                                                                                                             56.0           8.0

Balances outstanding between the Society and other Group companies:
                                                                                                                              2009           2008
                                                                                                                                £m             £m

Payable by the Society                                                                                                     (671.5)        (62.7)
Receivable by the Society                                                                                                   176.8          87.0




                                                                                                                                                           04 Group support and CSR
Reinsurance ceded by the Society                                                                                            232.0        243.1
Loans owed to the Society                                                                                                   317.0        292.5
                                                                                                                             54.3        559.9


45. With-profits Actuary
The following information has been provided in accordance with section 77 of the Friendly Societies Act 1992.

a) The With-profits Actuary of the Society until 30 September 2009 was Dr A Smith, the Group Actuary of Liverpool Victoria Friendly
   Society Limited.

b) The total emoluments of Dr Smith during the year were £370,735 (2008: £150,080) including car allowance and medical benefits.
                                                                                                                                                           05 Corporate governance
c) Dr Smith did not receive, nor will receive, any other pecuniary benefit.

                                                                                                                .
d) The Appointed Actuary of the Society from 1 October 2009 is Mrs T Abbey, a partner in the firm of Deloitte LLP She was not a member of
   the Society or of a subsidiary of the Society at any time in 2009.

e) Mrs Abbey had no pecuniary interest in any transactions with the Society at any time during the year except her interest as partner in the
   firm of Deloitte LLP to whom fees for professional services were paid amounting to £145,541 (2008: £nil).

f) Mrs Abbey did not receive, nor will receive, any other pecuniary benefit.

46. Valuation
The latest published report on the valuation of Assets and Liabilities of the Society (the Annual FSA Insurance Return) was made at
31 December 2008 and is available on request from the Group Company Secretary, County Gates, Bournemouth, BH1 2NF and on LV.com.
                                                                                                                                                           06 The numbers




                                                                                                                                                     125
      Annual report and accounts 2009

      NOTES TO THE ACCOUNTS CONTINUED
      31 December 2009




      47. Subsidiary undertakings
      The principal subsidiary undertakings of the Society and Group at 31 December 2009 are shown below.

      The Group and all undertakings are incorporated and domiciled in England and Wales. All holdings are in relation to ordinary shares.

      The registered office is County Gates, Bournemouth BH1 2NF.
      Name                                                                          Principal Activity                                Percentage Held

      Subsidiaries
      360 Degrees Claims Limited *                                                  Accident referral                                        100.0%
      Ayresbrook Limited*                                                           Holding Company                                          100.0%
      Frizzell Financial Services Limited                                           Property Management                                      100.0%
      Highway Corporate Capital Limited *                                           Corporate Member of Lloyd’s                              100.0%
      Highway Group Services Plc *                                                  Insurance Intermediary                                   100.0%
      Highway Insurance Company Limited *                                           General Insurance                                        100.0%
      Highway Insurance Group Plc *                                                 General Insurance Holding Company                        100.0%
      Highway Insurance Guernsey Limited *                                          General Insurance                                        100.0%
      Liverpool Victoria Asset Management Limited                                   Fund Management                                          100.0%
      Liverpool Victoria Banking Services Limited                                   Banking and Credit Finance                               100.0%
      Liverpool Victoria Financial Advice Services Limited                          Financial Advice Services                                100.0%
      Liverpool Victoria General Insurance Group Limited                            General Insurance Holding Company                        100.0%
      Liverpool Victoria Insurance Company Limited *                                General Insurance                                        100.0%
      Liverpool Victoria Life Company Limited                                       Life Insurance                                           100.0%
      Liverpool Victoria Portfolio Managers Limited *                               Investment Management                                    100.0%
      LV Insurance Services Limited *                                               General Insurance Broker                                 100.0%
      LV Insurance Management Limited *                                             Management Services                                      100.0%
      LV Life Services Limited                                                      Management Services                                      100.0%
      LV Equity Release Limited                                                     Equity Release Lifetime Mortgages                        100.0%
      Membership Services Direct Limited                                            General Insurance Broker                                 100.0%
      Membership Services General Limited                                           Insurance Intermediary                                   100.0%
      N M Pension Trustees Limited                                                  Self Invested Personal Pension (SIPP) Administrator      100.0%
      New London Capital Holdings Limited *                                         Holding Company                                          100.0%
      New London Capital Plc *                                                      Investment company                                       100.0%
      NLC Name No 1 Limited *                                                       Corporate Member of Lloyd’s                              100.0%
      NLC Name No 2 Limited *                                                       Corporate Member of Lloyd’s                              100.0%
      NLC Name No 3 Limited *                                                       Corporate Member of Lloyd’s                              100.0%
      NLC Name No 4 Limited *                                                       Corporate Member of Lloyd’s                              100.0%
      NLC Name No 5 Limited *                                                       Corporate Member of Lloyd’s                              100.0%
      NLC Name No 7 Limited *                                                       Corporate Member of Lloyd’s                              100.0%
      Ockham Corporate Limited *                                                    Non-Trading                                              100.0%
      SLA Holdings Limited *                                                        Holding Company                                          100.0%


      * Owned by a subsidiary undertaking of the Society.

      With effect from the 30 November 2009, the immediate parent undertaking changed from Liverpool Victoria Life Company Limited to
      Liverpool Victoria Friendly Society Limited for the following companies; Frizzell Financial Services Limited, Liverpool Victoria Portfolio
      Managers Limited, Liverpool Banking Services Limited, Liverpool Victoria Financial Advice Services Limited and Liverpool Victoria General
      Insurance Group Limited.

      All the principal subsidiaries have the same year end as the Society and all have been included in the consolidation.




126
                                                                                               Annual report and accounts 2009




48. Associates and joint ventures
The associates and joint ventures of the Society and Group at 31 December 2009 are shown below.

The Group and all undertakings are incorporated and domiciled in England and Wales.


Name                                                                                       Principal Activity      Percentage Held

Associates
Lendlease Chelmsford                                                                       Investment property            25.0%
Joint ventures
Vista Limited Partnership                                                                  Investment property            90.0%
Great Victoria Partnership                                                                 Investment property            50.0%
Harlow Consortium                                                                          Investment property            97.0%

49. Open ended investment companies
The open ended investment companies (OEICs) of the Society and Group at 31 December 2009 are shown below.

All OEICs are incorporated and domiciled in England and Wales.


Name                                       Principal Activity                              Year end                Percentage Held

LV=Investment Funds I ICVC                 Open Ended Investment Company                   31/12/2009                   95.15%
which consists of:
LV=European ex-UK Growth Fund                                                                                           81.67%
LV=Japan Growth Fund                                                                                                   100.00%
LV=Pacific ex-Japan Growth Fund                                                                                        100.00%
LV=UK Equity Income Fund                                                                                                99.94%
LV=UK Growth Fund                                                                                                       95.19%

LV=Investment Funds II ICVC                Open Ended Investment Company                   31/12/2009                   98.97%
which consists of:
LV=UK Corporate Bond Fund                                                                                               97.00%
LV=UK Fixed Interest Fund                                                                                               99.78%
LV=UK Index Linked Fund                                                                                                 99.03%
LV=UK Money Market Fund                                                                                                100.00%
LV=Balanced Managed Fund                                                                                                99.03%
LV=Stockmarket Fund                                                                                                     89.65%

LV=Investment Funds III ICVC               Open Ended Investment Company                   31/03/2009                   93.15%
which consists of:
LV=Diversified Income Fund                                                                                              80.43%
LV=Managed Portfolio 4                                                                                                  95.33%
LV=Managed Portfolio 5                                                                                                  91.08%
LV=Managed Portfolio 6                                                                                                  96.92%
LV=Managed Portfolio 7                                                                                                  93.44%

LV=UK Property Fund                        Open Ended Investment Company                   31/12/2009                   42.21%
which consists of:
LV=UK Property Fund                                                                                                     42.21%
                                                        For more information visit
                                                                            lV.com




                                                      All of the paper stock used in the production
                                                          of this Report contains a minimum of
                                                                50% recycled fibre content.




LV= and Liverpool Victoria are registered trademarks of Liverpool Victoria Friendly Society Limited (LVFS) and LV= and LV= Liverpool Victoria are trading styles of the
Liverpool Victoria group of companies. LVFS is authorised and regulated by the Financial Services Authority, Register No. 110035. LVFS is a member of the ABI,
AFS and ILAG. Registered address for all Liverpool Victoria companies: County Gates, Bournemouth, BH1 2NF. Tel: 01202 292333.
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