19 Capital review

1.

The conversion of LGPL to an [ISPV] resulted in an increase in embedded value of £112m and an increase in profit before tax of £156m. This reflects the removal of the requirement to hold a solvency margin in the ISPV and the consequent reduction in the modelled cost of solvency capital.

2.

In Society, the SRC and 1996 Sub-fund have either been required to cover the EU solvency margin or regarded as encumbered due to the restrictions over distribution. Following the restructure, these assets are no longer encumbered and are valued at market value less the anticipated tax charge. The Group has previously modelled EEV operating profit assuming the SRC is released into surplus over a period of 20 years. It is assumed that the remainder of the [SRC] is distributed over two years with the exception of the contingent loan balance with LGPL which is assumed to be distributed as it is repaid.

3.

To take account of the more flexible nature of the capital in Society, the assets modelled to cover the required capital now reflect the average investment mix of the total Society Shareholder Capital which, as a result, includes a higher proportion of fixed interest investments.

4.

The transfer from the SRC into the Society Shareholder Capital at the end of 2007 did not give rise to any incremental tax. The tax impact on future distributions of SRC assets has been modelled using marginal tax rates of between 10% and 12%.