2001 Full year results-Part 2

CGNU PLC 27 February 2002 PART 2 OF 6 -------------------------------------------------------------------- Contents Page Operating and financial review 1 Achieved profit basis Summarised consolidated profit and loss account - achieved profit basis 8 Basis of preparation 9 Components of total life achieved profit 9 New business contribution 10 Analysis of life achieved operating profit 11 Embedded value of life business 11 Segmental analysis of embedded value of life business 12 Minority interests in life achieved profit 12 Methodology 13 Principal economic assumptions 14 Other assumptions 15 Modified statutory basis Summarised consolidated profit and loss account - modified statutory basis 17 Earnings per share - modified statutory basis 18 Consolidated statement of total recognised gains and losses 18 Reconciliation of movements in consolidated shareholders' funds 18 Summarised consolidated balance sheet 19 Consolidated cash flow statement 20 Basis of preparation 21 Exchange rates 22 Acquisitions 22 Disposals 23 Exceptional items 25 Geographical analysis of life and pensions and investment sales - new business and total income 25 Geographical analysis of modified statutory life profit 26 Geographical analysis of health premiums after reinsurance and operating result 26 Geographical analysis of general insurance premiums after reinsurance and operating result 27 Taxation 28 Dividends 28 Earnings per share 29 Longer-term investment return 30 Statistical supplement Segmental analysis of group operating profit at constant currency - achieved profit basis 31 Supplementary analyses 32 General insurance - geographical ratio analysis 36 General insurance - class of business analyses 37 Assets under management 39 Group capital structure 40 Return on life and pensions new business 47 Shareholder information 48 --------------------------------------------------------------------- Page 1 OPERATING AND FINANCIAL REVIEW Group operating profit before tax The Group's achieved operating profit before tax from continuing operations, including life achieved operating profit, was up 41% to Â£2,004 million (2000: Â£1,407 million). On a modified statutory basis, operating profit before tax from continuing operations was Â£1,533 million (2000: Â£1,028 million). In calculating the Group operating profit from continuing operations, we have excluded the results from our US general insurance business, the sale of which was completed in June 2001, and the UK London Market operations following our withdrawal from this business in 2000. Whilst the sale of the US general insurance business completed in June 2001, this operation had no economic impact on the 2001 results of the Group as explained on page 23 of this announcement. The results of other operations acquired, sold or announced to be sold in the year are included within continuing operations, as their results are not considered to be sufficiently material to merit separate disclosure. 2001 2000 Â£m Â£m Achieved operating profit - continuing operations before tax, amortisation of goodwill and exceptional items 2,004 1,407 Discontinued operations (21) (554) Amortisation of goodwill (87) (92) Change in claims equalisation provision and Financial Services Compensation Scheme levy (87) (27) Integration costs and merger transaction costs (59) (484) Profit/(loss) on sale of subsidiary undertakings 287 (1,058) Loss on withdrawal from London Market operations - (448) Effect of economic assumption changes 1 (269) Short-term fluctuations in investment return - general insurance and shareholder business (952) 256 Variation from longer-term investment return - life business (1,632) (43) ------ ------ Loss on ordinary activities before tax - achieved profit basis (546) (1,312) ====== ====== Profit/ (loss) on ordinary activities before tax - modified statutory basis 514 (1,406) ====== ====== Profit before tax on a modified statutory basis of Â£514 million (2000: loss of Â£1,406 million) was depressed by a Â£1.0 billion shortfall in the actual investment return compared to the Group's longer-term investment return assumptions. This reflects unrealised losses on equities held by the Group's non-life operations, particularly in the UK and Europe where the major markets fell between 16% and 22%. On an achieved profit basis, the loss before tax was Â£546 million (2000: loss of Â£1,312 million) and includes a further adverse investment return shortfall of Â£1.6 billion reflecting the impact of these market falls on the Group's life embedded value. Over Â£1.0 billion of this adverse investment return variance arose in the UK life operations. The loss on ordinary activities before tax in 2000 of Â£1,312 million arose as a result of the withdrawal from the London Market operations, the provision for the loss on sale of the US general insurance business and the accrual for the one-off merger integration costs. The taxation charge of Â£102 million (2000: Â£263 million) on an achieved profit basis, includes Â£631 million (2000: Â£437 million) in respect of operating profit from continuing operations, equivalent to an effective rate of 31.5% (2000: 31.1%). Long-term savings Our worldwide long-term new business sales achieved excellent growth in 2001 of 10% to Â£15 billion underpinned by a strong performance of our bancassurance arrangements in Spain and Italy and strong organic growth in our other businesses. In the fourth quarter we achieved record new business sales up 21% to Â£4.5 billion. Total worldwide life and pensions sales showed strong growth of 21% to Â£13.5 billion. Retail investment sales were down to Â£1.5 billion, reflecting the lack of consumer confidence in equity-backed products, which was particularly pronounced in the Dutch retail investment market. 2001 Local currency growth Life and Retail Life and Retail pensions investments Total pensions investments Total Â£m Â£m Â£m % % % Long-term savings sales United Kingdom 7,265 816 8,081 10% (9%) 8% Europe (excluding UK) 5,525 312 5,837 39% (77%) 10% International 689 347 1,036 34% 25% 31% ------ ------ ------ ------ ------ ------ 13,479 1,475 14,954 21% (41%) 10% ====== ====== ====== ====== ====== ====== Navigator 930 20% -------------------------------------------------------------------- Page 2 Life achieved operating profit 2001 2000 Â£m Â£m New business contribution (after the effect of solvency margin) 479 392 Profit from existing business - expected return 848 839 - experience variances (18) 10 - operating assumption changes 17 (7) Development costs - (20) Expected return on shareholders' net worth 339 319 ------ ------ 1,665 1,533 Other life and savings activities 9 36 ------ ------ Life achieved operating profit before tax 1,674 1,569 ====== ====== The increase in life achieved operating profit is largely attributable to higher sales volumes. The expected returns on existing businesses and the shareholders' funds net worth were largely unchanged at Â£1,187 million (2000: Â£1,158 million) due to the application of lower start of the year economic assumptions to a higher opening embedded value. Poor investment returns in 2001 have contributed to a reduction in the Group's embedded value over 2001, thus affecting the expected returns that can be achieved from the embedded value in 2002. The 2001 results have been impacted by a number of changes to operating assumptions, the most significant being the adverse impact of the changes to the mortality assumptions in the UK as a result of the increased life expectancy. This has been more than offset by the economic impact of increases in management fees in the Netherlands, the improved attribution of profits to shareholders in Germany and the reduction in risk margins in respect of our operations in Poland and the Netherlands, in line with the Group's views on the risks associated with these businesses. Adverse experience variances include Â£26 million of costs associated with the ongoing development of our off-shore investment management business in Ireland, and our operations in Romania and the US. Annual premium New business New business equivalent* contribution** margin**** 2001 2000 2001 2000*** 2001 2000*** Â£m Â£m Â£m Â£m % % Life and pensions business United Kingdom 1,269 979 327 280 25.8 28.6 Europe (excluding UK) 918 824 248 168 27.0 20.4 International 132 100 16 6 12.1 6.0 ------ ------ ------ ------ ------ ------ 2,319 1,903 591 454 25.5 23.9 ====== ====== ====== ====== ====== ====== * Annual premium equivalent represents regular premiums plus 10% of single premiums. ** Before effect of solvency margin. *** Restated using 2001 economic assumptions. **** New business margin represents the ratio of new business contribution to annual premium equivalent, expressed as a percentage. UK Our business in the UK, which is the leading life insurance company with a market share of over 11%, achieved record sales of Â£8,081 million (2000: Â£7,505 million). These results demonstrate the strength of our brand and the excellent performance of the life business achieved during a period of integration. We are the market leader for investment bonds, and single premium bond sales held up at Â£3,697 million (2000: Â£3,758 million) in a competitive market. Pension sales grew strongly, up by 39% to Â£2,469 million (2000: Â£1,777 million). The launch of our stakeholder pension products in 2001 has been very successful. We achieved total sales of Â£282 million in the year and captured our target market share of 20%, securing about one-third of the important IFA stakeholder segment. Our partnership with The Royal Bank of Scotland Group (RBSG) produced total sales for the full year 2001 of Â£480 million (2000: Â£nil). The momentum in new business sales has been building and further launches of a new protection product and a with-profits bond are scheduled for the first half of 2002. In reporting the Group's numbers, we have included our 50% share of total sales and operating profit from the RBSG partnership. New business contribution increased to Â£327 million (2000: Â£280 million, at 2001 economic assumptions) and represents a new business margin of 25.8% (2000: 28.6%, at 2001 economic assumptions). The decline in the UK new business margin is attributable to a higher proportion, within total new business sales, of lower margin pension sales and ongoing market pressures on bond business. Life achieved operating profit was Â£859 million (2000: Â£938 million). The benefits of the higher new business contribution were more than offset by the adverse impact of changes to annuitant mortality assumptions. Recent experience investigations have indicated that life expectancy in the UK is increasing. We have strengthened our base mortality assumption to reflect this and have assumed that the rate of improvement in life expectancy has increased. The asset portfolio of this business was realigned to match the expected longer duration of the business. The financial effect of these changes was a Â£78 million charge to operating profits. Merger savings have been offset by ongoing growth of the business and the development of our stakeholder and distribution propositions. --------------------------------------------------------------------- Page 3 In a market that increasingly looks for quality and financial strength, our with-profit record and strong UK life funds are important advantages. The strength of the with-profit funds is underpinned by our UK 'orphan' assets, which amount to about Â£5 billion and are used to support strong business development that benefits policyholders and shareholders alike. The orphan estate is estimated on the basis of realistic assumptions, as distinct from statutory free reserves which are calculated on a more prudent statutory solvency basis. Europe (excluding UK) Our French life business, the second largest in the CGNU Group, continued to outperform the market, with sales up 5% to Â£1,998 million (2000: Â£1,861 million) against an estimated contraction of 8% in the French market. This performance demonstrates the strength of the multi-distribution capability and broad product range of this business. AFER 'French Franc' single premium sales grew by 32% to Â£930 million (2000: Â£690 million), as French investors preferred fixed interest products over equity-linked products. New business contribution was Â£79 million (2000: Â£57 million, at 2001 economic assumptions) with an improved margin of 33.9% (2000: 25.7%, at 2001 economic assumptions) benefiting from operational efficiencies. Life achieved operating profit was higher at Â£227 million (2000: Â£204 million) due to experience profits and the effect of reduced lapse rate assumptions. Hibernian, our top-five life and pensions business in Ireland, increased sales by 21% to Â£523 million (2000: Â£424 million). Sales of the with-profit Celebration bonds have grown strongly by 62% to Â£255 million (2000: Â£155 million) whilst unit-linked bond sales remain depressed in the current equity market conditions. New business contribution increased to Â£29 million (2000: Â£19 million, at 2001 economic assumptions) with margins at 28.5% (2000: 24.0%, at 2001 economic assumptions). Life achieved operating profit was up 14% to Â£79 million (2000: Â£68 million). In Italy, new business sales increased significantly to Â£958 million (2000: Â£241 million) driven by the expansion of our bancassurance partnerships in 2001, in particular with UniCredito Italiano. New business contribution increased to Â£28 million (2000: Â£20 million, at 2001 economic assumptions) and life achieved operating profit increased to Â£55 million (2000: Â£29 million) benefiting from operational efficiencies and increased contribution from sales. New business margins of 22.2% (2000: 34.3%, at 2001 economic assumptions) reflect the return from our bancassurance arrangements. Delta Lloyd NV, our business in the Netherlands, which includes the smaller businesses of Belgium and Luxembourg, reported new life and pension sales up 34% at Â£777 million (2000: Â£569 million). Total pension sales were up 49% at Â£516 million (2000: Â£341 million), driven by an increase in individual pensions to Â£202 million (2000: Â£140 million) as a result of increased public awareness for the need of greater private provision. Investment sales fell to Â£85 million (2000: Â£1,025 million) as investors moved away from equity-backed products during 2001. New business contribution was Â£38 million (2000: Â£9 million, at 2001 economic assumptions) as a result of increased volumes and the inclusion of the Fokker pension scheme, which resulted in improved margins of 22.3% (2000: 6.9%, at 2001 economic assumptions). The increase in life achieved operating profit to Â£221 million (2000: Â£179 million) benefits from changes in management fees charged to policyholders and includes a Â£17 million profit reflecting the impact of reducing the risk margin. In Poland we are the market leader for private pensions and individual life assurance, with total funds under management of Â£2.2 billion. In line with the market, new business sales were lower at Â£77 million (2000: Â£191 million) as sales of pension products are now restricted to new entrants in the Polish employment market. New business contribution at Â£11 million (2000: Â£39 million, at 2001 economic assumptions) followed the lower level of sales. Life achieved operating profit of Â£99 million (2000: Â£95 million) includes a profit of Â£28 million arising from the reduction in the risk margin, partially offset by the effect of strengthening lapse rate assumptions. In Spain, total new business sales have increased significantly by 155% to Â£932 million (2000: Â£359 million). Our partnership with Bancaja has continued to produce strong growth with sales of Â£858 million (2000: Â£276 million) and the new partnerships with Unicaja and Caixa Galicia, both of which came on line in the fourth quarter, together produced sales of Â£15 million. Our new partnership with Caja Espana, the tenth-largest savings bank in Spain, completed at the end of December. This consolidates our position as the fourth-largest bancassurance network and further extends our distribution capability. In total, our Spanish business now has access to some 8 million potential customers through over 3,000 branches. New business contribution was Â£63 million (2000: Â£22 million, at 2001 economic assumptions) with an increased new business margin of 46.5% (2000: 38.9%, at 2001 economic assumptions) and improved operating profit of Â£80 million (2000: Â£42 million). Life achieved operating profit from our Other European businesses at Â£18 million (2000: loss of Â£15 million) benefited from a Â£28 million operating assumption change in Germany, and a reduced level of investment in our Dublin- based operations. International Total new life and pensions sales increased by 34% to Â£689 million (2000: Â£520 million), including strong sales from our US business of Â£371 million (2000: Â£218 million). Total life achieved operating profit was Â£36 million (2000: Â£29 million) and is after a Â£19 million charge for IT and other business development costs in the US. The acquisition of the Insurance Corporation of Singapore and the completion of the 10-year bancassurance arrangement with DBS, the number one bank in Singapore and one of the largest banks in South East Asia, was completed in late August and total sales were Â£63 million in the four months since acquisition. We have recently announced a new bancassurance partnership with DBS, which will extend our distribution reach in South East Asia into Hong Kong. DBS is the fourth largest bank in Hong Kong and has a 6% share of the local market. --------------------------------------------------------------------- Page 4 Health Premium income from our health business grew by 21% to Â£841 million (2000: Â£687 million) and total operating profit was Â£70 million (2000: Â£68 million). Our business in the Netherlands continued to be the main driver of the total health result with profits at Â£53 million (2000: Â£50 million). Fund management We are the second-largest UK-based fund manager and one of the top ten in Europe. 2001 has been a difficult year for our fund management operations. The volatility in worldwide equity markets reduced customer demand for retail investment products and market falls depressed fees earned by our businesses. Operating profit from our worldwide fund management business fell to Â£29 million (2000: Â£61 million). Our UK businesses reported a loss of Â£4 million (2000: profit Â£16 million), which includes a contribution to profit of Â£3 million (2000: Â£11 million) from the private client investment business, Quilter Holding Limited (Quilters), sold in March 2001. The result from our ongoing operations of Morley Fund Management (Morley) was a loss of Â£7 million (2000: profit of Â£5 million) reflecting the reduction in investment fees, the continued investment made in the retail business of Â£32 million (2000: Â£21 million) and the cost of developing Morley as a world-class fund management business. Together the combined investment in the business and lower fees have masked the emergence of merger savings in this business. UK retail investment sales were Â£808 million, a fall of 8%. This performance compares favourably with industry trends which show a market fall of 22% in the 11 months to December 2001. Morley has continued to develop its institutional capabilities and has secured new investment mandates of Â£3 billion in 2001. Operating profit in Victoire Asset Management in France increased to Â£12 million (2000: Â£9 million) while the Delta Lloyd result declined to Â£8 million (2000: Â£13 million). In Delta Lloyd, institutional sales of mutual funds rose to Â£584 million (2000: Â£62 million) as a result of attracting a large number of mandates which demonstrates the strength of the Delta Lloyd brand in the Dutch market. Navigator, one of the leading multi-manager funds administration businesses in Australia, has seen strong growth in its sales, which are excluded from the Group's headline new business figures, of 20% to Â£930 million in 2001. We are developing infrastructure in Singapore and expect to roll out a Navigator product in the first half of 2002. The operating profit of the Navigator business in Australia is reported within the fund management result on a statutory basis and was held back by ongoing systems development expenditure. While not included in our results, on an achieved profits basis, Navigator's new business contribution was Â£10 million (2000: Â£13 million) and its embedded value grew to Â£40 million (2000: Â£31 million). Assets under management at 31 December 2001 were Â£209 billion (2000: Â£220 billion). The reduction is largely attributable to the disposal of Quilters and the sale of the US general insurance business which together had combined assets of some Â£11 billion. The reduction in investment markets in 2001 has been more than offset by the impact of the new business funds in the year. General insurance Our worldwide continuing general insurance operations, excluding the US general insurance business and the London Market operations, contributed an operating profit of Â£945 million (2000: Â£412 million). The improvement follows the lower weather-related claims of Â£285 million and our strategy of focusing on personal lines and small commercial business. The Group's worldwide combined operating ratio from continuing operations was 102% (2000: 109%) even after recording significant prior year losses from our Canadian business. This much improved performance was achieved through risk selection, premium rate increases and reduction in operating costs. The worldwide expense ratio from continuing operations improved to 12.0% from 12.6%. Net written premiums were lower at Â£8,433 million (2000: Â£8,990 million). Underwriting Operating result* profit* 2001 2000 2001 2000 Â£m Â£m Â£m Â£m United Kingdom (81) (387) 590 296 Europe (excluding UK) (79) (333) 166 (78) International (64) (101) 189 194 ------ ------ ------ ------ Continuing operations (224) (821) 945 412 ====== ====== ====== ====== Discontinued operations United States (173) (967) (21) (550) London Market - (59) - (4) * Excludes the change in the equalisation provision of Â£56 million (2000: Â£27 million) and impact of exceptional items UK As the UK's leading insurer, with a market share of 19%, our general insurance business recorded a 99% increase in operating profit to Â£590 million (2000: Â£296 million) including the benefit of lower exceptional weather-related claims of Â£195 million. Throughout 2001, our strategy has been to focus on personal lines and the needs of small businesses. The combination of our disciplined approach to risk selection and premium rating actions has delivered a stronger result across our major classes of business. We have also built the foundations of a business capable of sustaining a combined operating ratio (COR) of 102% through the underwriting cycle. The UK COR for 2001 was 102% and the personal lines COR amounted to 98% (2000: 104%). -------------------------------------------------------------------- Page 5 We have continued to lead the market in rate increases with annualised rating increases for personal motor and homeowners of 13% and 6%, respectively. In 2001, our rating and risk selection was further refined following the launch of the New Pricing Platform for private cars that allows access to seven million motor policies. It is the largest customer database of its kind in the UK utilising combined data from all our legacy companies. In householders' insurance, we have implemented a more personalised service for homeowners, which enables us to refine our rating and new business selection. In the commercial motor and property businesses we have reshaped our portfolio and have achieved rating actions of 18% and 11%, respectively. Our expense ratio has fallen to 10.5% (2000: 10.7%) and continues to be one of the lowest among the major UK insurers. We have developed a combined infrastructure for claims management to obtain the greatest benefits from our scale. The processes include a market-leading claims service, Total Incident Management (TIM), and the Partner Self Service programme, which connects us directly with intermediaries and corporate partners through the deployment of web-based technology. These processes are integral to our business and our ability to sustain a COR of 102% through the underwriting cycle. Following the call from the Financial Services Compensation Scheme, we have made a provision of Â£31 million (2000: Â£nil). The charge is shown separately in the profit and loss account and is excluded from the general insurance business operating profit, underwriting result and combined operating ratios to provide meaningful period-on-period comparisons. We continue to withdraw from those businesses that we believe do not offer us the potential for market-leading positions and recently announced the sale of our non-core general insurance operations in the UK, Sabre Insurance. Europe (excluding UK) In Europe, our general insurance businesses produced total operating profits of Â£166 million (2000: loss of Â£78 million) and saw improvements in performance across all of our major businesses. Our French general insurance business improved its operating profit to Â£58 million (2000: loss of Â£115 million), largely due to lower weather-related costs following storm losses of Â£90 million in 2000, and the impact of more disciplined underwriting and premium rate increases. As a result, the COR improved to 104% (2000: 133%). Following a review of our portfolio in France, we have decided to exit from our broker distribution business, CGU Courtage and, as we announced in October 2001, we are currently seeking a buyer for this business. Operating profit from our other European businesses improved to Â£108 million (2000: Â£37 million) reflecting the benefits of our strategic focus, disciplined underwriting and rating actions. International Our Australian and New Zealand general insurance businesses reported an excellent COR of 99% (2000: 101%). Operating profit was lower at Â£69 million (2000: Â£82 million) primarily reflecting the sale of State Insurance Limited in New Zealand which contributed Â£10 million to the 2000 result. In Australia we have reinforced our top-five position in the general insurance market with the acquisition of Fortis Australia Limited establishing ourselves as the market leader in both the motor dealer and financial institution distribution channels. We have also repositioned our portfolio by withdrawing from the mortgage indemnity market in Australia with the sale of CGU Lenders Mortgage Insurance Limited. Operating profit from our Canadian business was Â£72 million (2000: Â£78 million). The deterioration in the second half of 2001 is as a result of the adverse development of prior year losses primarily in relation to bodily injury claims, which has been a significant issue for the Canadian insurance industry. Our other international businesses recorded increased operating profits at Â£48 million (2000: Â£34 million). On 1 June we announced the successful completion of the sale of our US general insurance business thereby completing our exit from this general insurance market. In accordance with the sale agreement the Group did not bear any continuing operating risk from 31 August 2000, nor provide any guarantees in respect of its claims reserves or balance sheet beyond that date, except for the pre-closing adjustments announced in February 2001 and charged in the year ended 31 December 2000. Despite the Group retaining no economic interest beyond this date, accounting standards require that we consolidate the results up to the date of completion of the transaction. The results of the US business for the period to 1 June include an operating loss of Â£21 million (2000: loss of Â£550 million) and a post-tax loss, including a short-term fluctuation in investment returns, of Â£125 million (2000: loss of Â£423 million). The post-tax loss was offset by a compensating reduction in the final loss on sale of Â£125 million, resulting in no net profit or loss to the Group in 2001. Reinsurance Reinsurance is a key tool in managing our catastrophe exposure. In designing our reinsurance programmes we take account of our risk assessment, the financial strength of reinsurance counterparties, the benefits to shareholders of capital efficiency and reduced volatility, and the cost of reinsurance protection. To complement reinsurance protection bought by individual businesses, the group has an additional cover in place above Â£100 million that provides protection from a single event or an aggregation of events. Non-insurance operations The result of the Group's non-insurance businesses improved to a loss of Â£2 million (2000: loss of Â£24 million) driven by reduced losses in the UK from our estate agency business, Your Move. Intense competition held back profits from Hill House Hammond, our UK broker business. In our European non-insurance businesses operating profit fell to Â£11 million (2000: Â£20 million) largely as a result of lower levels of commission in our banking operations in the Netherlands. We completed the acquisition of Bank Nagelmackers in November 2001, which will expand our asset accumulation business in Belgium. --------------------------------------------------------------------- Page 6 Corporate costs Corporate costs, excluding staff profit share and other incentive plans, are lower at Â£109 million (2000: Â£128 million). These have benefited from the emergence of merger cost savings offset by increased project spend, including costs associated with a global finance improvement programme. Profit share and other incentive plan costs have risen to Â£78 million (2000: Â£57 million) following the introduction of staff incentive schemes linked to the performance of the Group. Unallocated interest charges Unallocated interest charges comprise the cost of intra-group loans, external borrowings and subordinated debt not allocated to local business operations. Total interest costs of Â£426 million (2000: Â£361 million) have arisen as a result of increased internal and external borrowings which financed the corporate activities over 2000 and 2001. Shareholders' funds and borrowings Equity shareholders' funds decreased to Â£11.7 billion (31 December 2000: Â£13.4 billion) primarily as a result of the fall in worldwide equity markets. Net assets per ordinary share, based on equity shareholders' funds, fell to 530 pence per share (31 December 2000: 606 pence per share) after adding back the equalisation provision of Â£272 million (31 December 2000: Â£216 million).The Group's 'normalised' annualised 2001 post-tax return on equity was 9.4%. The normalised return is based on the post-tax operating profit, including life achieved profit, before amortisation of goodwill and exceptional items, expressed as a percentage of the opening equity capital. In November 2001, the Group raised Â£1.2 billion of subordinated debt in two tranches of Â£700 million sterling and euro 800 million. The offer was two times oversubscribed, reflecting strong investor demand. The debt will be used to enhance the Group's capital position and support future growth opportunities. New disclosures on the Group's capital structure, returns on capital employed and returns on life and pensions new business are disclosed on pages 40 to 47. Integration We have successfully completed the integration programme exceeding our target annualised savings of Â£275 million. Total annualised savings of Â£317 million were achieved, with no additional cost. We have brought together two major groups and approximately 64,000 people worldwide. Operational cost savings have been achieved through conversion to common IT platforms, restructuring support operations, eliminating duplication and increasing efficiency. In addition we have rationalised our UK data centres from four into one. We have continued to grow our business and have launched new projects and initiatives to improve and maintain efficiency. General UK fund Life business management Corporate Total Â£m Â£m Â£m Â£m Â£m Year ended 31 December Annualised - target 91 116 27 41 275 - realised 96 144 31 46 317 Included in the 2001 results 76 76 28 45 225 ------ ------ ------ ------ ------ On-line developments and wealth management Development of our UK wealth management business, norwichunion.com, has continued throughout 2001 commencing with a successful launch of the interactive financial planning tools in May 2001. In December 2001, norwichunion.com launched its new share-dealing service and fund supermarket ISA. Since launch the site has attracted approximately one million unique site visitors and over 90,000 customer registrations. We are developing a range of banking products for launch in 2002 and will be aligning the operations closely with the core UK long-term savings business. Costs incurred in 2001 were Â£81 million (2000: Â£110 million) and we remain on target to complete the strategic initiative within our originally announced investment plan of Â£250 million. Notes to editors - CGU plc and Norwich Union plc merged on 30 May 2000 to create CGNU plc, the UK's largest insurance group and one of the top-five insurers in Europe with substantial positions in other markets around the world, making it the world's seventh-largest insurer based on gross worldwide premiums. - CGNU's principal business activities are long-term savings, fund management and general insurance, with worldwide premium income and retail investment sales from ongoing business of more than Â£28 billion and assets under management of more than Â£200 billion. - Overseas currency results are translated at average exchange rates. - All growth rates are quoted in local currency. - CGNU's corporate press releases and results presentations are available on the internet: www.cgnu-group.com - The 2000 new business contribution quoted in the financial highlights and the operating and financial review has been shown using the application of 2001 economic assumptions and foreign exchange rates. --------------------------------------------------------------------- Page 7 Life profits reporting In reporting the headline operating profit, life profits have been included using the achieved profit basis. This is used throughout the CGNU Group and by many in the investment community to assess performance. We have focused on the achieved profit basis, as we believe life achieved operating profit is a more realistic measure of the performance of life businesses than the modified statutory basis. The modified statutory basis is used in our financial statements and, on this basis, the life operating profit before tax amounted to Â£1,203 million. The basis used for reporting achieved profit is consistent with the guidance set out by the Association of British Insurers. Definitions of Group key performance indicators Achieved operating - excludes the operating result of discontinued profit operations, and is stated before amortisation of goodwill and exceptional items. Achieved operating - operating profit on an achieved profit basis before earnings per share amortisation of goodwill and exceptional items, after taxation, attributable to equity shareholders in respect of continuing operations. Modified statutory - excludes the operating result of discontinued operating profit operations, and is stated before amortisation of goodwill, amortisation of acquired additional value of in-force long-term business and exceptional items. Continuing - total business operations excluding the discontinued operations London Market operations and US general insurance operations. Net asset value - is calculated based on equity shareholders' funds, per ordinary share adding back the equalisation provision of Â£272 million (31 December 2000: Â£216 million). Assets under - represents all assets managed by the Group including management funds held on behalf of third parties. New business - is calculated using the same economic assumptions as contribution those used to determine the embedded values at the beginning of each year and is stated before tax and the effect of the solvency margin. New business - the ratio of new business contribution to sales margin measured on an annual premium equivalent basis. --------------------------------------------------------------------- This information is provided by RNS The company news service from the London Stock Exchange MORE TO FOLLOW FR ZGGZZVVGGZZM

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