Notes to the Financial Statements

for the year ended 31 December 2004

31 Technical Provisions

SOUTH AFRICA

Valuation methods and assumptions
The valuation was performed using the “Financial Soundness Valuation” method, in keeping with the applicable professional guidance notes issued by the Actuarial Society of South Africa (ASSA). This means that the assumptions used for valuing liabilities are based on realistic expectations of future experience, plus prescribed margins for prudence and further discretionary margins to ensure that profits are released appropriately over the term of each policy. The assets and liabilities have been valued on bases that are consistent with each other.

Where applicable, liabilities include provisions to meet financial options and guarantees.

Certain individual life mortality assumptions were reduced to better reflect ongoing mortality experience. These were largely offset by an increase of £75 million (R819 million) in mortality discretionary margins so that profit continues to emerge over the terms of those policies.

Where applicable, allowance has been made for bonuses already declared, as well as future bonuses still to be declared at rates consistent with the assumed valuation interest rates. These bonuses include both vested bonuses and non-vested (terminal) bonuses.

The valuation is sensitive to the rate of interest used to discount the liabilities for non-participating policies, assumed future mortality experience of policyholders and the level of discretionary margins.

The principal assumptions used at 31 December 2004 and 31 December 2003 for the long term business are set out below:

The gross interest rates were reduced as follows, where applicable:

• to allow for tax;
• to allow for the minimum margin of 0.25 per cent. per annum, as prescribed by the ASSA;
• in the case of smoothed bonus business, by an additional margin equal to the excess over the 0.25 per cent. of the capital charges applicable to the business. This second-tier margin is incorporated to ensure that the value of capital charges emerge as profit over the full duration of the policy; and
• in the case of certain non-profit annuities to allow for imperfect matching of assets and liabilities.

For assurances, the above underlying mortality rates were further increased by the prescribed ASSA margin of 7.5 per cent. For annuities, the mortality rates were reduced by the prescribed ASSA margin of 7.5 per cent.

Renewal expenses
Renewal expense assumptions (including renewal commissions) have been based on recent experience, inflating at 8.0 per cent. per annum (2003: 8.0 per cent.).

In terms of the prescribed ASSA margins, the underlying expense assumption was increased by 10.0 per cent., and the expense inflation assumption was increased to 8.8 per cent. (2003: 8.8 per cent.).

Surrenders/lapses
Where appropriate, allowance has been made for surrenders and lapses at rates consistent with past experience.

The underlying lapse rates were increased by the prescribed ASSA margin of 25 per cent. Surrender rates were increased or decreased by the prescribed ASSA margin of 10 per cent., depending on which alternative gave rise to an increase in liabilities.

UNITED STATES

Valuation methods and assumptions
The valuation was performed using the applicable standards for US GAAP products in keeping with the applicable professional guidance notes issued by the American Academy of Actuaries. This means that the assumptions used for valuing liabilities are based on realistic expectations of future experience to ensure that profits are realised appropriately over the term of each policy.

The valuation is sensitive to the rate of interest used to discount the liabilities, assumed future mortality experience of policyholders and assumed policyholder lapse experience.

The principal assumptions used for long term business are set out below.

The gross interest rates were reduced for investment default assumptions and investment expenses.

Renewal expenses
Renewal expense assumptions (including renewal commissions) have been based on projected costs with assumed inflation rate of 3 per cent.

Surrenders/lapses
Where appropriate, allowance has been made for surrenders and lapses at rates consistent with past experience.

UK AND REST OF WORLD

Valuation methods and assumptions
Technical provisions have been calculated using generally accepted actuarial methods for the territory in question, and using interest rates and actuarial tables appropriate to the territory in question.