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Financial Statements

Notes to the Financial Statements

Notes 19 to 24

Loan capital
Insurance contract liabilities
Insurance and reinsurance liabilities
Borrowings
Current and deferred tax
Provisions

19. Loan capital

	2005 £m	2004 £m
Subordinated guaranteed US$ bonds	285	255
Subordinated guaranteed Euro bonds	341	352
Total dated loan capital	626	607
Subordinated guaranteed perpetual notes	445	-
Total loan capital	1,071	607
Subordinated guaranteed perpetual notes classified as equity	–	444

The subordinated guaranteed US$ bonds ($500m) have a redemption date of 15 October 2029. The rate of interest payable on the US$ bonds is 8.95%.

The subordinated guaranteed Euro bonds (€500m) have a redemption date of 15 October 2019. €200m of the Euro bonds bear interest at a fixed rate of 6.875% until 15 October 2009 and a floating rate thereafter. €300m of the Euro bonds bear interest at a floating rate from the date of issue. The Parent Company has the option to repay the Euro bonds on specific dates from 15 October 2009.

Subordinated guaranteed perpetual notes of £450m (£444m net of discount and fees) were issued on 23 July 2004. The notes pay an annual coupon of 8.50% with an option to call the notes, or if not called for the coupon rate to be reset, on 8 December 2014 and every five years thereafter.

IFRS requires perpetual debt to be classified as equity where the issuer has no contractual obligation to deliver cash (or another financial asset) to another party. Once classified as equity the subsequent interest payments (and related income tax benefits) are recognised directly in equity. Under the original terms of the loan agreement the Company had an option to defer interest payments indefinitely, provided no dividend was declared or distribution paid in respect to any class of share capital since the most recent AGM. Accordingly, the interest payments for the year ended 31 December 2004 of £14m (net of tax £10m) were recognised directly in equity.

During the year ended 31 December 2005, the loan agreement was amended such that the subordinated guaranteed perpetual notes became a financial liability.

The bonds and the notes are contractually subordinated to all other creditors of the Parent Company such that in the event of a winding up or of bankruptcy, they are to be repaid only after the claims of all other creditors have been met.

The fair value of the dated loan capital and subordinated guaranteed perpetual notes at 31 December 2005 was £1,271m (2004: £1,206m).

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20. Insurance contract liabilities

	2005 £m	2004 £m
Provision for unearned premiums	3,001	2,903
Provision for losses and loss adjustment expenses	14,203	14,288
Total gross insurance contract liabilities	17,204	17,191

Provision for unearned premiums

The following changes have occurred in the provision for unearned premiums during the year:

	2005 £m	2004 £m
Provision for unearned premiums at 1 January	2,903	3,863
Premiums written	6,420	6,655
Less: premiums earned	(6,424)	(7,538)
Changes in provision for unearned premiums	(4)	(883)
Gross portfolio transfers and acquisitions	41	(55)
Exchange adjustment	61	(10)
Other movements	–	(12)
Provision for unearned premiums at 31 December	3,001	2,903

Provisions for losses and loss adjustment expenses

	2005 £m	2004 £m
Provision for losses and loss adjustment expenses at 1 January	14,288	14,923
Claim losses and expenses incurred	4,451	5,816
Total claims payments made in the year, net of recoveries	(5,225)	(6,004)
Gross portfolio transfers and acquisitions	(15)	(150)
Exchange adjustment	637	(385)
Other movements	67	88
Provision for losses and loss adjustment expenses at 31 December	14,203	14,288
To be settled within 12 months	7,616	8,202
To be settled after 12 months	6,587	6,086

Assumptions

The total value of outstanding claims provisions less related reinsurance recoveries before discounting amounted to £10,843m (2004: £10,852m).

Claims on certain classes of business have been discounted as follows:

		Discount rate		Average number of years to settlement
	Category	2005 %	2004 %	2005 Years	2004 Years
UK	Asbestos and environmental	5.00	5.00	13	14
Scandinavia	Disability	3.57	3.14	12	11
US	Asbestos and environmental	5.00	5.00	9	9
US	Disability	5.00	5.00	15	15
Canada	Asbestos and environmental	5.00	5.00	6	6

In determining the average number of years to ultimate claims settlement, estimates have been made based on the underlying claims settlement patterns.

Claims development tables

The tables below present changes in the historical general insurance provisions that were established in 2001 and the general insurance provisions arising in each subsequent accident year. The tables are presented at current year cumulative average exchange rates and have been adjusted for operations disposed of.

The top triangle of the tables presents the estimated provision for ultimate incurred losses and loss adjustment expenses at the end of each accident year as at each Balance Sheet date.

The lower (paid) triangle of the tables presents the amounts paid against those provisions in each subsequent accounting period.

The estimated provision for ultimate incurred losses changes as more information becomes known about the actual losses for which the initial provisions were set up and as the rate of exchange changes. The 2005 redundancy/(deficiency) presents the claims development of earlier accident years incurred in the current accounting period. The redundancy/(deficiency) is equal to the current estimate of cumulative claims less the cumulative claims paid.

Consolidated claims development table – gross of reinsurance

	2001 and prior £m	2002 £m	2003 £m	2004 £m	2005 £m	Total £m
Estimate of cumulative claims
At end of accident year	14,262	4,209	4,252	2,998	2,742
One year later	15,603	4,099	3,934	2,579
Two years later	16,969	4,306	3,891
Three years later	17,445	4,370
Four years later	17,994
Claims paid
One year later	4,763	1,621	1,458	952
Two years later	2,699	733	581
Three years later	2,085	504
Four years later	1,493
Cumulative claims paid	11,040	2,858	2,039	952
2005 redundancy/(deficiency)
Core Group	(352)	53	84	234		19
US	(197)	(117)	(41)	185		(170)
	(549)	(64)	43	419		(151)
Reconciliation to the Balance Sheet
Current year provision before discounting	6,954	1,512	1,852	1,627	2,742	14,687
Exchange adjustment to closing rates						384
Discounting						(868)
Present value recognised in the Balance Sheet						14,203

Consolidated claims development table – net of reinsurance

	2001 and prior £m	2002 £m	2003 £m	2004 £m	2005 £m	Total £m
Estimate of cumulative claims
At end of accident year	10,056	3,076	2,996	2,422	2,194
One year later	10,666	2,925	2,746	2,090
Two years later	11,308	2,972	2,626
Three years later	11,830	3,118
Four years later	12,034
Claims paid
One year later	3,283	1,198	993	709
Two years later	1,803	450	365
Three years later	1,347	436
Four years later	873
Cumulative claims paid	7,306	2,084	1,358	709
2005 redundancy/(deficiency)
Core Group	(108)	21	85	153		151
US	(96)	(167)	35	179		(49)
	(204)	(146)	120	332		102
Reconciliation to the Balance Sheet
Current year provision before discounting	4,728	1,034	1,268	1,381	2,194	10,605
Exchange adjustment to closing rates						238
Discounting						(748)
Present value recognised in the Balance Sheet						10,095

In 2005 there has been net positive development of £151m for the Group excluding the US reflecting the favourable experience in the 2002 to 2005 accident years, partially offset by some general reserve strengthening in the 2001 and prior accident years.

US reserves show a significant reduction as the Group continues to settle claims proactively. The split between accident years has been distorted by the treatment of general litigation provisions where the provisions held and any settlements made may be reported in different accident years.

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21. Insurance and reinsurance liabilities

	2005 £m	2004 £m
Direct insurance creditors	196	302
Reinsurance creditors	279	476
Total insurance and reinsurance liabilities	475	778
To be settled within 12 months	458	739
To be settled after 12 months	17	39

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22. Borrowings

	2005 £m	2004 £m
Secured debenture loans	10	10
Amounts owed to credit institutions – unsecured:
Under committed credit facilities	233	317
Other	8	22
Total borrowings	251	349

Borrowings at 31 December were repayable as follows:

	2005 £m	2004 £m
One year or less	242	104
After one year and within two years	1	236
After two years and within three years	1	2
After three years and within four years	1	1
After four years and within five years	2	1
After five years	4	5
Total borrowings	251	349

Loans from credit institutions of £233m at 31 December 2005 (2004: £317m) under committed credit facilities have been classified by reference to the earliest date on which repayment may be demanded by the lender. At 31 December 2005 total committed credit facilities available to the Group were £233m (2004: £317m), of which £233m (2004: £84m) expire within one year and £nil (2004: £233m) expire within one to two years. £400m (2004: £400m) was originally committed under a deal comprising a £150m revolving facility and £250m amortising loan which expires in October 2006. This facility currently bears interest at 125 basis points over LIBOR and there is a commitment fee charged at 50% of the applicable margin of any unused portion of the facility. The facility is subject to cross default conditions. A new facility was entered into by the Group on 7 March 2006.

At 31 December 2005 and 2004 the Group had in place a one billion US dollar Euro commercial paper program. There were no amounts outstanding at 31 December 2005 (2004: £nil).

The weighted average interest rate on short term borrowings at 31 December 2005 was 5.79% (2004: 6.17%).

At 31 December 2005 interest payable on amounts repayable within five years was £20m (2004: £25m) and after five years £1m (2004: £1m).

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23. Current and deferred tax

Current tax liability

	2005 £m	2004 £m
To be settled within 12 months	33	57
To be settled after 12 months	22	21
	55	78

Deferred tax

	2005 £m	2004 £m
Deferred tax assets	33	174
Deferred tax liabilities	(236)	(101)
Net deferred tax position at 31 December	(203)	73

The movement for the year in the Group’s net deferred tax position was as follows:

	2005 £m	2004 £m
Net deferred tax position at1 January	73	(45)
(Charge)/credit to the Income Statement for the year	(277)	27
(Charge)/credit to equity for the year	(9)	5
Net liability disposed of on disposal of subsidiary	-	86
Exchange adjustment	10	-
Net deferred tax position at 31 December	(203)	73

The following are the major deferred tax liabilities and assets recognised by the Group and their movements during the year:

Deferred tax liabilities

	Claims equalisation reserves £m	Revaluation of investments £m	Other temporary differences £m	Total £m
Deferred tax liabilities at 1 January 2004	85	106	10	201
Charge/(credit) to the Income Statement for the year	12	(16)	33	29
Charge/(credit) to equity for the year	-	(5)	-	(5)
Disposals	-	-	(124)	(124)
Deferred tax liabilities at 31 December 2004	97	85	(81)	101
Charge to the Income Statement for the year	7	5	98	110
Charge to equity for the year	-	28	5	33
Disposals	-	-	-	86
Exchange adjustment	-	-	(8)	(8)
Deferred tax liabilities at 31 December 2005	104	118	14	236

Deferred tax assets

	Retirement benefit obligations £m	Other temporary differences £m	Total £m
Deferred tax assets at 1 January 2004	161	(6)	155
Charge to the Income Statement for the year	9	47	56
Disposals	-	(37)	(37)
Exchange adjustment	-	-	-
Deferred tax assets at 31 December 2004	170	4	174
Charge to the Income Statement for the year	(91)	(76)	(167)
Charge to equity for the year	24	-	24
Exchange adjustment	-	2	2
Deferred tax assets at 31 December 2005	103	(70)	33

The deferred income tax (charged)/credited to equity is as follows:

	2005 £m	2004 £m
Fair value reserves in shareholders’ equity
Available for sale financial assets	(28)	5
Group occupied property	5	-
Retirement benefit obligations	24	-

The aggregate current tax relating to items that were charged or credited to equity is £21m (2004: £nil).

At the Balance Sheet date, the Group had unused tax losses of £1,812m (2004: £1,324m) available for offset against future profits. A deferred tax asset has been recognised in respect of £4m (2004: £14m) of these losses. No deferred tax asset has been recognised in respect of the remaining £1,808m (2004: £1,328m) due to the unpredictability of future profit streams. Included in unrecognised tax losses are losses of £1,086m (2004: £723m) which will expire between 2007 and 2024. Other losses may be carried forward indefinitely.

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24. Provisions

	Reorganisation provisions £m	Pensions and post retirement benefits £m	Other provisions £m	Total £m
Provisions at 1 January 2005	74	714	126	914
Exchange adjustment	5	21	3	29
Credited/(charged)	101	(47)	88	142
Utilised	(138)	(35)	(42)	(215)
Released	(3)	(180)	(2)	(185)
Acquisition/(disposal) of subsidiary undertaking	9	-	(1)	8
Provisions at 31 December 2005	48	473	172	693

Reorganisation provisions comprise costs relating to reorganisations mainly within the US and UK businesses. These provisions primarily comprise severance and property costs and are part of a programme to achieve business improvement and expense savings, to be substantially achieved by year end 2006.

Other provisions include various litigation provisions of £4m (2004: £4m), the payment of which is dependent upon legal processes. In addition, there are provisions of £54m (2004: £66m) held relating to vacant property leases, dilapidations and refurbishments, the costs relating to which will be borne across the period over which the leases expire, which is up to 20 years.

Of the above £468m is due to be settled outside of 12 months (2004: £699m).

See note 26 for further information regarding the pensions and post retirement benefits provision.

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