2001 Full year results-Part 3
CGNU PLC
27 February 2002
PART 3 OF 6
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Page 8
Summarised consolidated profit and loss account - achieved profit basis
For the year ended 31 December 2001
2001 2001 2000
Em £m £m
Operating profit
2,700 Life achieved operating profit 1,674 1,569
113 Health 70 68
47 Fund management 29 61
1,524 General insurance 945 412
(3) Non-insurance operations (2) (24)
(302) Corporate costs (187) (185)
(687) Unallocated interest charges (426) (361)
------ ------ ------
3,392 2,103 1,540
(160) Wealth management (99) (133)
------ ------ ------
Operating profit - continuing
operations before tax,
amortisation of goodwill
3,232 and exceptional items 2,004 1,407
(34) Discontinued operations (21) (554)
------ ------ ------
3,198 1,983 853
(140) Amortisation of goodwill (87) (92)
Financial Services
(50) Compensation Scheme levy (31) -
(95) Integration costs (59) (425)
------ ------ ------
2,913 Operating profit before tax 1,806 336
Variation from longer-term
(4,169) investment return (2,584) 213
Effect of economic
2 assumption changes 1 (269)
Change in the
(90) equalisation provision (56) (27)
Profit/(loss) on the
disposal of subsidiary
463 undertakings 287 (1,058)
Loss on withdrawal from London
- Market operations - (448)
- Merger transaction costs - (59)
------ ------ ------
Loss on ordinary activities
(881) before tax (546) (1,312)
Tax on operating profit -
continuing operations before
amortisation of goodwill
(1,018) and exceptional items (631) (437)
Tax on profit on other
854 ordinary activities 529 174
------ ------ ------
Loss on ordinary
(1,045) activities after tax (648) (1,575)
(130) Minority interests (80) (65)
------ ------ ------
(1,175) Loss for the financial year (728) (1,640)
(27) Preference dividends (17) (17)
------ ------ ------
Loss for the financial year
attributable to equity
(1,202) shareholders (745) (1,657)
(1,382) Ordinary dividends (857) (855)
------ ------ ------
Retained loss for the
(2,584) financial year (1,602) (2,512)
====== ====== ======
Earnings per share attributable to
equity shareholders
Operating profit on an achieved
profit basis before amortisation
of goodwill and exceptional items,
after tax, in respect
90.5 c of continuing operations 56.1 p 39.7 p
(53.4)c Loss for the financial year (33.1)p (73.8)p
Loss for the financial
(53.4)c year - diluted (33.1)p (73.7)p
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Page 9
Basis of preparation
The achieved profit statement on page 8 includes the results of the Group's
life operations reported under the achieved profit basis combined with the
modified statutory basis results of the Group's non-life operations set out on
pages 17 to 30. In the directors' opinion, the achieved profit basis provides
a more accurate reflection of the performance of the Group's life operations
year on year than results under the modified statutory basis. The achieved
profit methodology used is in accordance with the guidance on 'Supplementary
reporting for long term insurance business (the achieved profits method)'
circulated by the Association of British Insurers in December 2001. Further
details on the methodology and assumptions are set out on pages 13 to 16.
The results of the Group's life operations under the modified statutory basis,
which is the basis used in the annual statutory accounts, can be found on
pages 17 to 30.
The contribution from the Group's share of the alliance with The Royal Bank of
Scotland Group plc (RBSG) is incorporated within the achieved operating
profit. Goodwill amortised in the period in respect of the Group's holding in
the associated company, RBS Life Investments Limited, is included within the
'Amortisation of goodwill' on page 8.
The results for 2001 and 2000 have been audited by the auditors, Ernst & Young
LLP. Their audit report in respect of 2001 is included in the Report &
Accounts on page 98 of that document.
Components of total life achieved profit
Total life achieved profit, including the Group's share from the alliance with
RBSG, comprises the following components, the first four of which in aggregate
are referred to as life achieved operating profit:
- new business contribution written during the year including value added
between the point of sale and end of year;
- the profit from existing business equal to:
- the expected return on the value of the in-force business at the
beginning of the period,
- experience variances caused by the differences between the actual
experience during the period and expected experience based on the
operating assumptions used to calculate the start of year value,
- the impact of changes in operating assumptions including risk
margins;
- development costs incurred in establishing new life businesses;
- the expected investment return on the shareholders' net worth, based
upon assumptions applying at the start of the year;
- investment return variances caused by differences between the actual
return in the period and the expected experience based on economic
assumptions used to calculate the start of year value; and
- the impact of changes in economic assumptions in the period.
2001 2000
£m £m
New business contribution 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 and exceptional items 1,674 1,569
Exceptional items*** (12) (106)
Investment return variances (1,632) (43)
Effect of economic assumption changes 1 (269)
------ ------
Total life achieved profit before tax 31 1,151
Tax on operating profit (514) (485)
Tax on other ordinary activities 499 110
------ -----
Total life achieved profit after tax 16 776
====== ======
* Operating assumption changes include the impact of reducing risk
margins in the Netherlands and the Poland life and pensions operations
in line with the directors' views of the risks associated with these
in-force portfolios. The impact of the change in the Netherlands was
£17 million. The impact was £22 million in the Poland life operation
and £6 million in the Poland pensions operation.
** Profits from other life and savings activities, include the UK service
company, which is deemed to act as a separate business segment to the
long-term business operations, and have been calculated on a statutory
basis.
*** Exceptional items comprise integration costs.
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Page 10
New business contribution
The following table sets out the contribution from new business written by the
long-term business operations. The contribution generated by new business
written during the period is the present value of the projected stream of
after-tax distributable profit from that business. Contribution before tax is
calculated by grossing up the contribution after-tax at the full corporation
tax rate for UK business and at appropriate rates of tax for other countries.
Annual New
premium business
equivalent* contribution
Local 2000
currency at 2001
2001 2000 growth 2001 assumptions** 2000
£m £m % £m £m £m
United Kingdom 1,269 979 30% 327 280 294
Europe
(excluding UK)
France 233 222 3% 79 57 63
Ireland 102 79 26% 29 19 21
Italy 126 58 113% 28 20 20
Netherlands
(including
Belgium and
Luxembourg) 170 131 27% 38 9 16
Poland
- Life 36 43 (27%) 9 11 11
- Pensions 24 139 (85%) 2 28 28
Spain 136 57 136% 63 22 22
Other 91 95 (7%) - 2 2
International 132 100 33% 16 6 6
------ ------ ------ ------ ------ ------
Total
annualised
premiums 2,319 1,903 20%
Total new business
contribution
before effect
of solvency
margin*** 591 454 483
Effect of
solvency margin (112) (91) (91)
------ ------ ------
Total new business
contribution
including effect
of solvency
margin 479 363 392
====== ====== ======
* Annual premium equivalent represents regular premiums plus 10% of
single premiums.
** 2000 new business contribution has been shown using the application
of 2001 economic assumptions.
*** New business contribution before effect of solvency margin includes
minority interests in 2001 of £51 million (2000: £29 million). This
comprises minority interests in France of £4 million (2000: £4 million),
Italy £14 million (2000: £8 million), Poland £1 million
(2000: £7 million) and Spain £32 million (2000: £10 million).
New business contributions have been calculated using the same economic
assumptions as those used to determine the embedded values as at the beginning
of each year and operating assumptions used to determine the embedded values
as at the end of the period. The effect of solvency margin represents the
impact of holding the minimum European Union (EU) solvency margin (or
equivalent for non-EU operations) and discounting to present value the
projected future releases from the solvency margin to shareholders.
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Page 11
Analysis of life achieved operating profit
Life achieved operating profit is calculated on an after-tax basis and then
grossed up at the full rate of corporation tax for UK business and at
appropriate rates of tax for other countries.
2001 2000
£m £m
United Kingdom* 850 903
Europe (excluding UK)
France 227 204
Ireland 79 68
Italy 55 29
Netherlands (including
Belgium and Luxembourg) 221 179
Poland
- Life 65 58
- Pensions* 34 36
Spain 80 42
Other 18 (15)
International 36 29
------ ------
Total life achieved operating profit
before tax and exceptional items** 1,665 1,533
====== ======
* Excludes other life and savings activities.
** Life achieved operating profit includes minority interests in 2001 of
£84 million (2000: £42 million). This comprises minority interests in
France of £8 million (2000: £6 million), Italy £27 million (2000: £12
million), Poland £15 million (2000: £15 million), Spain £34 million
(2000: £10 million) and International £nil (2000: loss of £1 million).
Embedded value of life business
2001 2000
£m £m
Embedded value at the beginning
of the year 11,234 10,518
Total life achieved profit after tax * 18 813
Exchange rate movements (97) 81
Embedded value of businesses
(disposed)/acquired ** 84 437
Amounts injected into life operations 175 167
Amounts released from life operations (351) (782)
------ ------
Embedded value at the end of the year *** 11,063 11,234
====== ======
* Excluding profits from other life and savings activities after tax.
** Embedded value from businesses disposed of in 2001 comprises NU Vita
(Italy) (£16 million), Greece Life (£3 million) and Canada (£117
million). Embedded value for businesses acquired in 2001 comprises
Risparmio and Eurovita in Italy (£120 million), the life operations of
Unicaja, Caixa Galicia and Caja Espana in Spain (£64 million), Hungary
(£11 million) and The Insurance Corporation of Singapore (£25 million).
Embedded value from businesses acquired in 2000 comprises Hibernian Group
in Ireland (£57 million), Aseval in Spain (£94 million), and the Group's
share of the associated partnership in RBS Life Investments Limited
(£343 million). Embedded value from business disposed of comprises the
Norwich Union Poland life and pensions operations (£57 million).
*** Embedded value at the end of the year includes minority interests in
2001 of £347 million (2000: £208 million). This comprises minority
interests in France of £34 million (2000: £34 million), Italy £149
million (2000: £70 million), Poland £55 million (2000: £42 million),
Spain £107 million (2000: £57 million) and Other Europe £2 million
(2000: £5 million).
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Page 12
Segmental analysis of embedded value of life business
Net Valuation of Embedded
worth in-force value
at 31 Dec* at 31 Dec** at 31 Dec
2001 2000 2001 2000 2001 2000
£m £m £m £m £m £m
United Kingdom 2,032 1,809 3,998 4,450 6,030 6,259
Europe (excluding UK)
France 836 805 407 397 1,243 1,202
Ireland 191 211 276 274 467 485
Italy 163 99 115 73 278 172
Netherlands (including
Belgium and
Luxembourg) 1,032 1,319 834 767 1,866 2,086
Poland 119 74 252 210 371 284
Spain 107 59 202 147 309 206
Other 58 59 49 47 107 106
International 289 351 103 83 392 434
------ ------ ------ ------ ------ ------
4,827 4,786 6,236 6,448 11,063 11,234
====== ====== ====== ====== ====== ======
* The shareholders' net worth comprises the market value of the
shareholders' funds and the shareholders' interest in the surplus
held in the non-profit component of the long-term business funds
determined on a statutory solvency basis and adjusted to add back any
non-admissible assets.
** The net worth includes £2,200 million (31 December 2000: £2,100
million) in respect of minimum statutory solvency margin requirements
that are supported by shareholders' capital. The effect of holding
the minimum statutory solvency margin and allowing for projected
future releases was £700 million (31 December 2000: £700 million).
Minority interest in life achieved profit
2001 2000
Shareholders' Minority
interest interest Group Group
£m £m £m £m
New business contribution
before effect of
solvency margin 540 51 591 483
Effect of solvency margin (99) (13) (112) (91)
------ ------ ------ ------
New business contribution
including effect of
solvency margin 441 38 479 392
====== ====== ====== ======
Life achieved
operating profit 1,581 84 1,665 1,533
Other life and savings
activities 9 - 9 36
------ ------ ------ ------
Life achieved operating
profit before tax and
exceptional items 1,590 84 1,674 1,569
====== ====== ====== ======
Total life achieved
profit before tax (30) 61 31 1,151
Attributed tax 6 (21) (15) (375)
------ ------ ------ ------
Total life achieved
profit after tax (24) 40 16 776
====== ====== ====== ======
Closing life embedded value 10,716 347 11,063 11,234
====== ====== ====== ======
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Page 13
Methodology
(a) Life achieved profit
The achieved profit method of financial reporting is designed to
recognise profit as it is earned over the life of an insurance policy.
The total profit recognised over the lifetime of a policy is the same as
under the modified statutory basis of reporting, but the timing of
recognition is different.
Distributable profits from long-term businesses arise when they are
released to shareholders following actuarial valuations.These are carried
out in accordance with statutory requirements designed to ensure and
demonstrate solvency in long-term business funds.
Future distributable profits will depend on experience in a number of
areas such as investment return, discontinuance rates, mortality and
administration costs. Using realistic assumptions of future experience,
we can project releases to shareholders arising in future years from the
business in-force and associated minimum statutory solvency margin.
The life achieved profit reflects current performance by measuring the
movement, from the beginning to the end of the year, in the present value
of projected releases to shareholders from the business in-force and
associated minimum statutory margin, together with the movement in the
net assets of the long-term operations, adjusted for any amounts released
from or invested in life operations.
The present value of the projected releases to shareholders is calculated
by discounting back to the current time using a risk discount rate. The
risk discount rate is a combination of a discount rate to reflect the
time value of money and a risk margin to make prudent allowance for the
risk that experience in future years may differ from the assumptions
referred to above.
The calculations are carried out on an after-tax basis and the profits
are then grossed up for tax at the full rate of corporation tax for the
United Kingdom and at an appropriate rate for each of the other
countries.
(b) Embedded value
The shareholders' interest in the long-term business operations is
represented by the embedded value. The embedded value is the total of
the net assets of the long-term operations and the present value at
risk discount rates (which incorporate a risk margin) of the projected
releases to shareholders arising from the business in-force, less a
deduction for the effect of holding the minimum statutory solvency
margin. This effect of solvency margin is the difference between the
nominal value of the solvency margin and the present value at risk
discount rates of the projected release of the solvency margin and
investment earnings on the assets deemed to back the solvency margin.
For with-profit funds in the United Kingdom and Ireland, for the purpose
of recognising the value of the estate, it is assumed that terminal
bonuses are increased to exhaust all of the free assets over the future
lifetime of the in-force with-profit policies.
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Page 14
Principal economic assumptions
The principal economic assumptions used are as follows:
United Kingdom
2001 2000 1999
Risk discount rate 7.7% 7.4% 7.8%
Pre-tax investment
returns:
Base government
fixed interest 5.0% 4.7% 5.2%
Ordinary shares 7.5% 7.2% 7.7%
Property 6.5% 6.2% 6.7%
Future expense
inflation 3.7% 3.7% 4.1%
Tax rate 30.0% 30.0% 30.0%
France
2001 2000 1999
Risk discount rate 8.6% 8.5% 8.7%
Pre-tax investment
returns:
Base government
fixed interest 5.1% 5.0% 5.5%
Ordinary shares 7.1% 7.0% 7.5%
Property 6.6% 6.5% 7.0%
Future expense
inflation 2.5% 2.5% 2.5%
Tax rate 36.4% 37.8% 40.0%
Ireland
2001 2000 1999
Risk discount rate 9.3% 9.1% 9.0%
Pre-tax investment
returns:
Base government
fixed interest 5.3% 5.3% 5.6%
Ordinary shares 8.3% 8.3% 8.6%
Property 6.8% 6.8% 7.1%
Future expense
inflation 4.0% 5.0% 4.0%
Tax rate 16.0% 20.0% 28.0%
Italy
2001 2000 1999
Risk discount rate 7.6% 7.5% 7.7%
Pre-tax investment
returns:
Base government
fixed interest 5.3% 5.3% 5.6%
Ordinary shares 8.3% 8.3% 8.6%
Property 6.8% 6.8% 7.1%
Future expense
inflation 3.3% 3.3% 2.5%
Tax rate 41.0% 43.0% 43.0%
Netherlands
2001 2000 1999
Risk discount rate 8.0% 8.0% 8.3%
Pre-tax investment
returns:
Base government
fixed interest 5.1% 5.0% 5.5%
Ordinary shares 8.1% 7.9% 8.4%
Property 6.6% 6.5% 7.0%
Future expense
inflation 2.5% 2.5% 2.5%
Tax rate 25.0% 25.0% 25.0%
Poland - Life
2001 2000 1999
Risk discount rate 18.5% 20.0% 19.8%
Pre-tax investment
returns:
Base government
fixed interest 12.5% 12.5% 12.5%
Ordinary shares 12.5% 12.5% 12.5%
Property n/a n/a n/a
Future expense
inflation 9.2% 9.2% 9.2%
Tax rate 28.0% 28.0% 33.0%
Poland - Pensions
2001 2000 1999
Risk discount rate 16.9% 17.3% 17.1%
Pre-tax investment
returns:
Base government
fixed interest 12.5% 12.5% 12.5%
Ordinary shares 12.5% 12.5% 12.5%
Property n/a n/a n/a
Future expense
inflation 9.2% 9.2% 9.2%
Tax rate 28.0% 28.0% 33.0%
Spain
2001 2000 1999
Risk discount rate 8.3% 8.4% 9.1%
Pre-tax investment
returns:
Base government
fixed interest 5.3% 5.4% 5.6%
Ordinary shares 8.3% 8.4% 8.6%
Property 6.8% 6.9% 7.1%
Future expense
inflation 3.2% 4.0% 3.0%
Tax rate 35.0% 35.0% 35.0%
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Page 15
Other assumptions
- Current tax legislation and rates have been assumed to continue
unaltered, except where changes in future tax rates have been announced.
- Assumed future mortality, morbidity and lapse rates have been derived
from an analysis of CGNU's recent operating experience.
- The management expenses of CGNU attributable to long-term business
operations have been split between expenses relating to the acquisition
of new business and to the maintenance of business in-force. Certain
expenses of an exceptional nature have been identified separately and the
discounted value of projected exceptional costs has been deducted from
the value of in-force business. A realistic estimate of future fund
management expenses that will be charged to long-term businesses by Group
companies not included in the long-term business covered by the achieved
profits method has been included within the value of in-force business.
- It has been assumed that there will be no changes to the methods and
bases used to calculate the statutory technical provisions and current
surrender values.
- The value of in-force business allows for future premiums under recurring
single premium business where collection of future single premiums is
expected and where the receipt of further single premiums is not regarded
as new business at the point of receipt. It does not allow for future
premiums under non-contractual increments, or for future Department of
Social Security (DSS) rebate premiums, and the value arising therefrom is
included in the value of new business when the premiums are received.
- The value of the in-force business has been determined after allowing
for the effect of holding solvency margins equal to the minimum EU
solvency requirement (or equivalent for non-EU operations). Solvency
margins relating to with-profit business are assumed to be covered by
the surplus within the with-profit funds and no effect has been
attributed to shareholders.
- Bonus rates on with-profit business have been set at levels consistent
with the economic assumptions and CGNU's medium-term bonus plans. The
distribution of profit between policyholders and shareholders within
the with-profit funds assumes that the shareholder interest in
conventional with-profit business in the United Kingdom and Ireland
continues at the current rate of one-ninth of the cost of bonus.
Alternative assumptions
Economic assumptions
The table below shows the sensitivity to a one percentage point increase in
interest rates and in the discount rate for new business contribution and
embedded value.
New
business Embedded
contribution value
Interest Discount Interest Discount
rates rate rates rate
£m £m £m £m
United Kingdom 25 (50) (300) (350)
Europe (excluding UK)
France 10 (10) (50) (70)
Ireland 3 (3) (5) (15)
Italy 1 (2) - (5)
Netherlands (including
Belgium and Luxembourg) 10 (10) (100) (110)
Poland
- Life - (1) - (10)
- Pensions - (1) - (10)
Spain 2 (5) (10) (15)
Other 1 (1) - -
International (2) (3) (10) (10)
------ ------ ------ ------
50 (86) (475) (595)
====== ====== ====== ======
Profits are affected by a change in underlying interest rates. When interest
rates change, expected future investment returns will also change and this in
turn will affect projected cash flows. A change in interest rates will also
result in a change in the discount rate used to calculate the present value
of the projected cash flows. The impact of an increase of one percentage point
in interest rates incorporates all such changes. In addition, the impact on
embedded value includes the impact of the reduction that would occur in the
market value of fixed interest investments if interest rates increased by one
percentage point. Market values of other asset classes are assumed to reduce
in proportion to movements in the market value of fixed interest investments
of an appropriate term.
The impact of an increase of one percentage point in the discount rate is
calculated with all other assumptions remaining unchanged.
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Page 16
Non-economic assumptions
Sensitivity calculations have been performed to identify the non-economic
assumptions to which new business contribution and the value of in-force
business within embedded value are particularly sensitive. The calculations
have been based on similar percentage movements in each assumption from the
base assumption used to calculate the published new business contribution and
value of in-force. Based on this, the Group's new business contribution is
most sensitive to a change in discontinuance rates, whereas the value of in-
force is broadly equally sensitive to changes in discontinuance rates,
mortality rates and future maintenance expense levels.
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