2007 General Insurance	2007 Long-term business	2007 Total	2006 General Insurance	2006 Long-term business	2006 Total
Gross premiums
Non-participation contracts	412.8	41.5	454.3	471.4	40.0	511.4
Participation contracts	-	492.7	492.7	-	508.4	508.4
Change in unearned premium provision	23.8	-	23.8	49.3	-	49.3
Gross earned insurance premiums	436.6	534.2	970.8	520.7	548.4	1,069.1
Outwards reinsurance premiums
Non-participation contracts	(16.9)	(1,819.1)	(1,836.0)	(29.6)	(29.9)	(59.5)
Change in unearned premium provision	(0.2)	-	(0.2)	(3.3)		(3.3)
Premium ceded to reinsurers	(17.1)	(1,819.1)	(1,836.2)	(32.9)	(29.9)	(62.8)
Net earned premiums	419.5	(1,284.9)	(865.4)	487.8	518.5	1,006.3

 

	2007	2006
Life contracts gross premiums analysis:
Premiums under individual contracts	526.9	539.4
Premiums under group contracts	7.3	9.0
	534.2	548.4
Premiums from life assurance business	383.7	385.4
Premiums from annuity business	-	0.1
Premiums from pensions business	147.7	160.8
Premiums from permanent health business	2.8	2.1
	534.2	548.4
General insurance contracts gross premiums analysis:
Property	149.6	167.9
Motor	256.7	323.4
Other	30.3	29.4
	436.6	520.7
	970.8	1,069.1

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2. Net claims incurred

	2007 Gross	2007 Reinsured	2007 Net	2006 Gross	2006 Reinsured	2006 Net
Long-term insurance contracts	1,537.8	(78.0)	1,459.8	1,530.5	(81.6)	1,448.9
General insurance contracts	287.1	(17.4)	269.7	364.4	(5.4)	359.0
	1,824.9	(95.4)	1,729.5	1,894.9	(87.0)	1,807.9

	2007	2006
Gross claims paid
Long-term insurance contracts:
- death benefits	135.4	140.4
- surrender benefits	594.8	558.6
- maturity claims	622.1	672.2
- annuity and other benefits	185.5	159.3
	1,537.8	1,530.5
General insurance contracts
- current and prior year claims	287.1	364.4
Gross claims paid	1,824.9	1,894.9
Less recovered from reinsurers
Long-term business
- death benefits	(8.9)	(6.5)
- annuity and other benefits	(69.1)	(75.1)
	(78.0)	(81.6)
General Insurance
- current and prior year claims	(17.4)	(5.4)
Amounts recovered from reinsurers	(95.4)	(87.0)
Net claims paid	1,729.5	1,807.9

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3. Operating expenses

	2007	2006
Staff costs	295.3	334.3
Administrative expenses	318.9	353.2
Depreciation and amortisation	40.4	37.3
Loss on sale of property, plant and equipment	7.4	2.5
Non recurring restructuring costs	105.1	25.4
Gains on implementation of PACE	-	(116.8)
	767.1	635.9

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4. Derivative financial instruments

The Group has entered into various derivatives as principal either as a trading activity, which includes proprietary transactions and customer facilitation, or as a hedging activity for the management of interest rate risk and foreign exchange rate risk. Positive and negative fair values have not been netted as the group does not have a legal right of offset.

Derivatives held for trading purposes

The trading transactions include interest rate swaps, swaptions, caps and floors, forward rate agreements, futures and FTSE options. Trading transactions include derivatives where the Bank enters into a transaction to accommodate a customer together with the corresponding hedge transaction.

Non-trading derivatives

Non-trading transactions comprise derivatives held for hedging purposes to manage the asset and liability positions in the Group. Derivatives used to manage interest rate related positions include swaps, caps and floors, forward rate agreements and exchange traded futures. Foreign exchange rate positions are managed using forward currency transactions and swaps.

	2007 Fair values		2006 Fair values
	Assets	Liabilities	Assets	Liabilities
Derivatives held for trading:
Interest rate swaps	17.9	(7.5)	6.0	(6.9)
Interest rate options	0.5	(0.5)	0.3	(0.3)
Interest rate swaptions	435.0	-	591.9	-
Interest rate futures	-	(6.0)	-	(11.1)
Financial futures contracts	47.5	-	-	(11.5)
FTSE Options	54.4	-	43.3	-
Total derivative assets/(liabilities) held for trading	555.3	(14.0)	641.5	(29.8)
Derivatives held for hedging:
Derivatives designated as cash flow hedges
Interest rate swaps	10.7	(12.4)	2.6	(31.4)
Derivatives held for non-trading purposes for which hedge accounting has not been applied
Interest rate swaps	0.6	(3.9)	1.4	(4.9)
Embedded derivatives - options	66.9	(66.5)	73.4	(73.7)
Forward currency transactions	0.4	(1.5)	0.7	(0.5)
Total derivative assets/(liabilities) held for non trading	78.6	(84.3)	78.1	(110.5)
Total recognised derivative assets/(liabilities)	633.9	(98.3)	719.6	(140.3)

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5. Loans and advances to customers

	2007	2006
Total shareholder	9,014.0	8,147.4
Long-term business	12.7	15.9
	9,026.7	8,163.3
Total shareholder
Gross loans and advances	9,174.7	8,302.7
Less allowance for losses on loans and advances	(160.7)	(155.3)
	9,014.0	8,147.4
Of which:
Variable rate	4,475.9	4,288.6
Fixed rate	4,538.1	3,858.8
	9,014.0	8,147.4
Concentration of exposure The Group's exposure is virtually all within the United Kingdom. The following industry concentrations of gross advances before provisions, effective interest rate adjustments and suspended interest are considered significant.
Analysis of gross loans and advances
Property and construction	1,309.5	1,001.7
Retail, distribution and services	700.5	504.1
Business and other services	1,963.0	1,530.5
Personal	5,201.7	5,266.4
	9,174.7	8,302.7
Long-term business
Secured by mortgages	5.1	6.9
Secured by insurance policies	7.2	9.0
Other loans	0.4	-
	9,174.7	8,302.7
Fair value of loans and receivables is assessed to be the discounted amount of the future cash flows expected to be received. Discount rates used reflect current market rates and produce fair values which are not materially different from those quoted above.

	2007 Individual	2007 Collective	2007 Total	2006 Individual	2006 Collective	2006 Total
Allowance for losses on loans and advances
At the beginning of the year	27.5	127.8	155.3	47.7	108.7	156.4
Charge against profits	13.9	88.1	102.0	6.0	99.3	105.3
Amounts written off	(5.0)	(87.9)	(92.9)	(26.8)	(77.2)	(104.0)
Recoveries	0.1	-	0.1	0.4	-	0.4
Unwind of discount of allowance	(1.4)	(2.9)	(4.3)	(1.5)	(3.0)	(4.5)
Interest charged on impaired loans	0.5	-	0.5	1.7	-	1.7
At the end of the year	35.6	125.1	160.7	27.5	127.8	155.3

Loans and advances to customers include -29.1m (2006: -35.6m) of financial assets at fair value through profit or loss designated at initial recognition to eliminate or significantly reduce a measurement or recognition inconsistency.

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6. Investments

	2007	2006
At fair value through profit or loss
Listed equities	6,227.4	7,162.8
Unlisted equities	102.7	74.1
Listed debt securities	6,631.6	8,910.4
Unlisted debt securities	1,850.9	16.6
	14,812.6	16,163.9
Available-for-sale
Unlisted equities	8.8	1.7
Listed debt securities	1,914.4	1,952.0
Unlisted debt securities	1,588.7	1,965.2
	3,511.9	3,918.9
Deposits with credit institutions	4,160.9	5,862.2
	22,485.4	25,945.0

The above investments are held by Co-operative Insurance Society Limited, CIS General Insurance Limited, CFS Management Services Limited, CFS Services Limited and The Co-operative Bank p.l.c.

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7. Insurance contracts liabilities and reinsurance assets

	2007	2006
Gross
Long term insurance contracts:
- insurance contracts	2,326.8	2,010.1
- insurance participation contracts	14,798.1	15,520.0
- investment participation contracts	553.5	559.3
	17,678.4	18,089.4
General insurance contracts:
- claims reported (including claims settlement)	718.9	841.0
- claims incurred but not reported	33.7	37.2
- claims settlement expenses	22.3	28.1
- unearned premiums	200.4	224.2
- provision for unexpired risks	5.7	4.6
	981.0	1,135.1
Total gross insurance liabilities	18,659.4	19,224.5

 

	2007	2006
Recoverable from reinsurers
Long term insurance contracts:
- insurance contracts	(1,879.5)	(1,062.4)
- insurance participating contracts	(1,223.1)	-
	(3,102.6)	(1,062.4)
General insurance contracts:
- claims reported	(27.4)	(2.8)
- claims incurred but not reported	(3.1)	(1.8)
- unearned premiums	(2.7)	(3.0)
	(33.2)	(7.6)
Total reinsurers- share of insurance liabilities	(3,135.8)	(1,070.0)

 

	2007	2006
Net
Long term insurance contracts:
- insurance contracts	447.3	947.7
- insurance participation contracts	13,575.0	15,520.0
- investment participation contracts	553.5	559.3
	14,575.8	17,027.0
General insurance contracts:
- claims reported (including claims settlement)	691.5	838.2
- claims incurred but not reported	30.6	35.4
- claims settlement expenses	22.3	28.1
- unearned premiums	197.7	221.2
- provision for unexpired risks	5.7	4.6
	947.8	1,127.5
Total net insurance liabilities	15,523.6	18,154.5

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8. Equity

	2007	2006
Share capital	64.9	64.9
Retained earnings	1,798.3	1,751.0
Other reserves	3.1	(36.5)
	1,866.3	1,779.4
Share capital
Authorised
64,928,318 ordinary shares of -1 each	64.9	64.9
Allotted, called up and fully paid 64,928,318 ordinary shares of -1 each	64.9	64.9
The shareholders have one vote for every share held

	2007	2006
Retained earnings
Retained earnings at beginning of year	1,751.0	1,644.7
Net profit for year	71.4	173.4
Retirement benefit schemes	(0.3)	(45.7)
Dividends paid	(23.8)	(21.4)
Retained earnings at end of year	1,798.3	1,751.0
Other reserves
Revaluation reserve - available for sale investments	(6.4)	(16.0)
Hedging reserve - cash flow hedges	9.5	(20.5)
	3.1	(36.5)
CFS capital resources
Share capital	64.9	64.9
Retained earnings	1,798.3	1,751.0
	1,863.2	1,815.9
Perpetual non cumulative preference share	60.0	60.0
Subordinated debt	298.1	327.8
Total Capital Resources	2,221.3	2,203.7

 

Capital management

The Group-s policy is to maintain a strong base and to be more prudent than industry norms as it is not able to raise equity externally. The Group still recognises the need to maintain a balance between the potential higher returns that might be achieved with greater gearing and the advantages and security afforded by a sound capital position.

The Co-operative Bank p.l.c., CIS General Insurance Limited and Co-operative Insurance Society Limited are regulated entities.Their submissions to the FSA in the year have shown that these individually regulated operations have complied with all externally imposed solvency requirements throughout the period.

Retained earnings exclude cumulative gains on cash flow hedges of -9.5m (2006: loss of -20.5m) and cumulative losses on available-for-sale assets of -6.4m (2006: loss of -16.0m).

Retained earnings include a General Reserve of -317m which is currently held within Co-operative Insurance Society Limited outside the long term business fund. -200m of the reserve has been hypothecated to support the long term insurance business and the remainder is available to meet the obligations of both the long term and general insurance business as it runs off within this legal entity.

The following are also included in the calculation of total CFS capital resources:

Co-operative Bank preference shares which carry the right to a fixed non cumulative preference dividend at a rate of 9.25%, payable 31 May and 30 November.

Subordinated debt which consists of 2 debt issues by the Co-operative Bank, -150m Step up Callable Subordinated Notes 2019 and -150m Callable Subordinated Notes 2021 fixed rate until 2016, then moving to floating rate. -30m subordinated Perpetual Floating Rate Notes were redeemed on 9 January 2008. The rights of repayment to the holders of subordinated debt are subordinated to the claims of depositors and other creditors of the Bank. Subordinated debt is stated net of issue costs.