80 LV= Annual Report 2012
Notes to the Financial Statements continued
31 December 2012
16. Derivative financial instruments (continued)
The Group uses derivatives to hedge the effect of changes in variable rate borrowings on its fixed rate loan portfolio, to reduce exposure
to payouts under guaranteed annuity contracts and to protect against falls in the FTSE 100. In 2012, the general insurance business
entered into gilt hedge contracts for differences, as a result a significant proportion of the general insurance asset portfolio is hedged
against stock market and gilt yield movements.
2012 2011
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
Interest rate swaps 635.0 20.0 – 486.9 64.2 –
Cash flow swaps 79.4 – (51.2) – – –
Swaptions 151.9 17.9 – 196.7 29.6 –
Equity/index derivatives 153.6 30.6 – 1,110.0 50.0 (3.6)
Property index swap – – – 20.0 – (0.2)
1,019.9 68.5 (51.2) 1,813.6 143.8 (3.8)
17. Investment contract liabilities
Accounting for investment contract liabilities
Investment contract liabilities are recognised when contracts are entered into and premiums are charged. These liabilities are initially
recognised at transaction price excluding any transaction costs directly attributable to the issue of the contract.
Deposits and withdrawals are recorded directly as an adjustment to the contract liability in the Statement of Financial Position, a method
known as deposit accounting. Fees charged and investment income received are recognised in the Statement of Comprehensive Income
when earned.
Fair value adjustments are measured at each reporting date and are recorded in the Statement of Comprehensive Income. Fair value
is calculated as the number of units allocated to the policyholder in each unit linked fund multiplied by the unit price of those funds at
the Statement of Financial Position date. The fund assets and liabilities are valued on a basis consistent with that used to measure the
equivalent assets and liabilities in the Statement of Financial Position, adjusted for the discounted effect of future tax arising from any
unrealised gains or losses. For a contract that can be cancelled by the policyholder, the fair value cannot be less than the surrender value.
The liability is derecognised when the contract expires, is discharged or is cancelled.
Group Society
2012 2011 2012 2011
£m £m £m £m
Balance at 1 January 800.9 741.2 800.9 741.2
Deposits received from policyholders 270.0 214.0 270.0 214.0
Payments made to policyholders and fees deducted (192.6) (120.5) (192.6) (120.5)
Change in contract liabilities as shown in the Statement of Comprehensive Income 81.0 (33.8) 81.0 (33.8)
Balance at 31 December 959.3 800.9 959.3 800.9
The change in contract liabilities as shown in the Statement of Comprehensive Income comprises principally the allocation of the net investment
return to policyholders of investment contracts less allowances for taxes. Investment contracts are not reinsured.