In the first half of 2009, the bonds backing the non profit annuity liabilities experienced downgrades, mainly as a consequence of the deteriorating outlook for UK and Irish banks. This led to an increase in the long term default provision to 36 basis points (bps) (2008: 30 bps) to reflect continuing economic uncertainty.
The second half of the year saw a significant improvement in sentiment in the credit markets and a narrowing of spreads. There was a limited reversal of the downgrade experience, but despite this the long term default provision was maintained at 36 bps.
Despite challenging financial conditions in 2009, the actual default cost was only £1m after expected recoveries.
Given the markets have not completely normalised, there have been no material releases of the provisions established at the end of 2008. As a consequence of strengthening the long term provision and market movements, the total credit default provision has increased to £1.5bn from £1.2bn at end 2008. This is equivalent to 68 bps (2008: 68 bps) of defaults per annum over the term of the non profit annuity credit portfolio.
