19 Investment contract liabilities.

Under current IFRS requirements, participating investment contract liabilities are measured using local GAAP, as permitted by IFRS 4. In the UK, participating investment contract liabilities are determined in accordance with FRS 27, including a value for guarantees, in the same way as participating insurance contracts.

Non-participating investment contracts are unit linked contracts. Unit linked liabilities are measured at fair value by reference to the value of the underlying net asset values of the Group’s unitised investment funds at the balance sheet date.

Unitised liabilities are recognised when premiums are received and non-unitised liabilities are recognised when premiums are due.

Claims are not included in the income statement but are deducted from investment contract liabilities. The movement in investment contract liabilities consists of claims incurred in the period less the corresponding elimination of the policyholder liability originally recognised in the balance sheet and the investment return credited to policyholders.

(i) Analysis of investment contract liabilities

(XLS:) Investment contract liabilities – analysis

 

Notes

Gross
2012
£m

Reinsurance
2012
£m

Gross
2011
£m

Reinsurance
2011
£m

Participating investment contracts

 

7,403

(2)

7,276

Non-participating investment contracts

19(iii)

264,958

(211)

251,345

(172)

Investment contract liabilities

19(ii)

272,361

(213)

258,621

(172)

Expected to be settled within 12 months (net of reinsurance)

 

38,356

 

29,855

 

Expected to be settled after 12 months (net of reinsurance)

 

233,792

 

228,594

 

(ii) Movement in investment contract liabilities

(XLS:) Investment contract liabilities – movement in investment contract liabilities

 

Gross
2012
£m

Reinsurance
2012
£m

Gross
2011
£m

Reinsurance
2011
£m

As at 1 January

258,621

(172)

260,749

(233)

Reserves in respect of new business

28,347

(2,045)

28,500

(1,431)

Amounts paid on surrenders and maturities during the year

(37,699)

704

(39,419)

744

Investment return and related benefits

23,469

1,300

9,168

748

Management charges

(300)

(315)

Foreign exchange adjustments

(55)

(59)

Other

(22)

(3)

As at 31 December

272,361

(213)

258,621

(172)

Fair value movements of £(16,305)m (2011: £(9,813)m) are included within the income statement arising from movements in investment contract liabilities designated as FVTPL.

(iii) Non-participating investment contract liability fair value hierarchy

(XLS:) Investment contract liabilities – non-participating investment contract liability fair value hierarchy 2012

As at 31 December 2012

Total
£m

Level 1
£m

Level 2
£m

Level 3
£m

Amortised cost
£m

Non-participating investment contracts

264,958

263,491

1,433

34

(XLS:) Investment contract liabilities – non-participating investment contract liability fair value hierarchy 2011

As at 31 December 2011

Total
£m

Level 1
£m

Level 2
£m

Level 3
£m

Amortised cost
£m

Non-participating investment contracts

251,345

250,446

886

13

The fair value of financial liabilities are, in certain circumstances, measured using valuation techniques that incorporate assumptions that are not evidenced by prices from observable current market transactions in the same instrument and are not based on observable market data.

Non-participating unit linked investment contracts include £34m (2011: £13m) valued using significant unobservable inputs and have been classified as level 3. These liabilities have limited transactions and are backed by property investments.

There have been no significant transfers between any of the levels.

(iv) Expected investment contract liability cash flows

(XLS:) Investment contract liabilities – expected investment contract liability cash flows 2012

 

Date of undiscounted cash flow

Total
£m

Carrying value
£m

As at 31 December 2012

0-5 years
£m

5-15
years
£m

15-25
years
£m

Over
25 years
£m

Participating investment contracts

2,941

3,723

1,435

440

8,539

7,403

(XLS:) Investment contract liabilities – expected investment contract liability cash flows 2011

 

Date of undiscounted cash flow

Total
£m

Carrying value
£m

As at 31 December 2011

0-5 years
£m

5-15
years
£m

15-25
years
£m

Over
25 years
£m

Participating investment contracts

2,970

3,699

1,531

520

8,720

7,276

Investment contract undiscounted net cash flows are based on the expected date of settlement.

Amounts under unit linked contracts are generally repayable on demand and the Group is responsible for ensuring there is sufficient liquidity within the asset portfolio to enable liabilities to unit linked policyholders to be met as they fall due. However, the terms of funds investing in less liquid assets permit the deferral of redemptions for predefined periods in circumstances where there are not sufficient liquid assets within the fund to meet the level of requested redemptions. Accordingly unit linked liabilities have been excluded from the reported cash flows.

A maturity analysis based on the earliest contractual repayment date would present investment contract liabilities as due on the earliest period of the table because policyholders can exercise cancellation options at their discretion. In such a scenario, the liability would be reduced due to the application of surrender penalties.