62 LV= Annual Report 2012
Notes to the Financial Statements continued
31 December 2012
2. Capital management (continued)
2012 2011
Regulatory Capital £m £m
Admissible assets 7,865.7 7,185.9
Add back capital requirements of regulated related undertakings 253.9 241.5
Mathematical reserves (after distribution of surplus) (6,686.0) (6,123.1)
Regulatory current liabilities (353.4) (380.6)
Available capital resources 1,080.2 923.7
Capital requirements of regulated related undertakings (253.9) (241.5)
Capital resources of RNPFN fund (179.5) (164.4)
Peak 1 capital requirement (239.6) (218.0)
Peak 1 excess regulatory capital (excluding RNPFN surplus) 407.2 299.8
With-profits insurance capital component (220.8) (64.6)
Peak 2 excess capital resources (excluding RNPFN surplus) 186.4 235.2
The RNPFN fund’s capital is 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.
Available capital - Long-term insurance contracts
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.
i) Participating insurance contracts
For the Group’s participating contract (with-profits) 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 the 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 Statement of Financial Position comprise only amounts relating to policyholders.
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.
The other activities of the Group have total available capital which is significantly higher than the minimum requirements established by the FSA
for each of the regulated entities 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 and new business growth.
All available capital within LVFS is ultimately available to support the Society’s participating contract fund. However the available capital resources
of each regulated entity are generally subject to restrictions as to their availability to meet requirements that may arise elsewhere in the Group.
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.
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 when valuing liabilities. Any adverse change in either
variable may have the effect of reducing available capital as they may also impact corresponding asset valuations.
Assumptions – long-term trend differences in mortality, morbidity, expense or persistency rates will result in the need to change assumptions.
This may 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.
Further disclosure of the impact on the Unallocated divisible surplus from sensitivity analysis is provided in Note 3 Risk management and control.