9 Months Results 2000-Part 2
CGNU PLC
8 November 2000
PART 2
UNAUDITED RESULTS - 9 MONTHS ENDED 30 SEPTEMBER 2000
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Page 9
Summarised consolidated profit and loss account - achieved profit basis
For the 9 months to 30 September 2000
Restated Restated
9 9 9 full
months months months year
2000 2000 1999 1999
Em £m £m £m
Operating profit
Life achieved operating profit
(excluding change in risk
1,880 margin) 1,147 950 1,407
54 Health 33 20 24
67 Fund management 41 46 66
702 General insurance 428 375 459
(34) Non-insurance operations (21) (14) (30)
5 Associated undertakings 3 11 10
(223) Corporate costs (136) (99) (162)
(430) Unallocated interest charges (262) (169) (240)
------- ------- -------
2,021 1,233 1,120 1,534
(156) Wealth management (95) - -
------- ------- -------
Operating profit - ongoing business
before tax, change in risk margin,
amortisation of goodwill and
1,865 exceptional items 1,138 1,120 1,534
Businesses to be discontinued
United States general
223 insurance 136 139 176
(7) London Market (4) 13 25
------- ------- -------
2,081 1,270 1,272 1,735
- Change in risk margin - - 89
(51) Amortisation of goodwill (31) (25) (34)
(332) Exceptional items (203) (100) (163)
------- ------- -------
1,698 Operating profit before tax 1,036 1,147 1,627
Variation from longer-term
604 investment return 368 (779) 1,072
Effect of economic
23 assumption changes 14 532 358
Change in the equalisation
(20) provision (12) (47) (55)
Net loss arising on the sale
(44) of subsidiary undertakings (27) (9) (8)
Provision for loss on sale for
businesses to be sold
(2,418) United States general insurance (1,475) - -
Provision for withdrawal from
(734) London Market operations (448) - -
(97) Merger transaction costs (59) - -
------- ------- -------
(Loss)/profit on ordinary
(988) activities before tax (603) 844 2,994
Tax on operating profit - ongoing
business before change in risk
margin, amortisation of goodwill
(503) and exceptional items (307) (332) (428)
Tax on profit on other ordinary
(81) activities (49) 23 (425)
------- ------- -------
(Loss)/profit on ordinary
(1,572) activities after tax (959) 535 2,141
(79) Minority interests (48) (53) (85)
------- ------- -------
(Loss)/profit for the financial
(1,651) period (1,007) 482 2,056
(21) Preference dividends (13) (13) (17)
------- ------- -------
(Loss)/profit for the financial
period attributable to equity
(1,672) shareholders (1,020) 469 2,039
(525) Ordinary dividends (320) (278) (773)
------- ------- -------
Retained (loss)/profit for the
(2,197) financial period (1,340) 191 1,266
======= ======= =======
Earnings per share
Operating profit on an achieved profit
basis before change in risk margin,
amortisation of goodwill and exceptional
items, after taxation, attributable to
equity shareholders in respect of
56.6c ongoing business 34.5p 32.9p 45.4p
(74.5)c (Loss)/profit attributable to (45.4)p 21.0p 91.2p
(74.5)c equity shareholders (45.4)p 21.0p 91.2p
(Loss)/profit attributable to equity
(74.3)c shareholders - diluted (45.3)p 20.9p 90.8p
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Page 10
Basis of preparation
The achieved profit statement on page 9 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 16 to 31. 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 draft 'Guidance on accounting in Group accounts for
proprietary companies long-term insurance business', circulated by the
Association of British Insurers in December 1999. Further details on the
methodology and assumptions are set out on pages 13 to 15.
The results of the Group's life operations under the modified statutory basis,
which is the basis used in the annual audited accounts, can be found on pages
16 to 31.
Components of total life achieved profit
Total life achieved profit 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;
- 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;
- the impact of changes in economic assumptions in the period.
9 9 Full
months months year
2000 1999 1999
£m £m £m
New business contribution 287 263 403
Profit from existing business
- expected return 627 486 634
- experience variances (13) (9) 80
- operating assumption changes 11 - 8
Development costs (20) (10) (24)
Expected return on shareholders' net worth 240 198 265
------- ------- -------
1,132 928 1,366
Other life and savings activities* 15 22 41
------- ------- -------
Life achieved operating profit before tax, change
in risk margin and exceptional items 1,147 950 1,407
Change in risk margin** - - 89
------- ------- -------
Life achieved operating profit before tax and
exceptional items 1,147 950 1,496
Exceptional items - - (12)
Investment return variances 160 (110) 851
Effect of economic assumption changes 14 532 358
------- ------- -------
Total life achieved profit before tax 1,321 1,372 2,693
Attributed tax (423) (415) (819)
------- ------- -------
Total life achieved profit after tax 898 957 1,874
======= ======= =======
* Profits from other life and savings activities, which include service
companies, have been calculated on a statutory basis.
** Impact of risk margin changes within economic assumptions.
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Page 11
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 premium New business
equivalent * contribution
9
9 9 Local 9 months 9
months months currency months at 2000 months
2000 1999 growth 2000 assumptions 1999
**
£m £m % £m £m £m
United Kingdom 726 599 27% 217 172 166
Europe (excluding UK)
France 168 139 31% 52 45 42
Ireland 64 39 78% 16 12 13
Netherlands 77 81 2% 15 21 14
Poland
- Life 32 45 (25)% 9 23 23
- Pensions 125 203 (36)% 26 34 34
Spain 17 11 65% 3 (3) (2)
Other 89 162 (40)% 9 26 25
International 72 71 (1)% 2 13 13
------- ------- ------- ------- ------- -------
Total annualised
premiums 1,370 1,350 5%
======= ======= =======
Total new business
contribution before
cost of capital 349 343 328
Cost of capital (62) (65) (65)
------- ------- -------
Total new business
contribution after cost
of capital 287 278 263
======= ======= =======
* Annual premium equivalent represents regular premiums plus 10% of
single premiums.
** 1999 new business contribution has been shown using the application of
year 2000 economic assumptions.
New business contributions have been calculated using the same assumptions as
those used to determine the embedded values as at the beginning of each year.
The cost of capital represents the cost of holding solvency capital equal to
the minimum European Union (EU) solvency margin (or equivalent for non-EU
operations).
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Page 12
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.
9 months 9 months Full year
2000 1999 1999
£m £m £m
United Kingdom 675 570 798
Europe (excluding UK)
France 161 103 131
Ireland 47 38 53
Netherlands 129 95 168
Poland
- Life 32 42 72
- Pensions 30 22 43
Spain 12 - 13
Other 6 16 32
International 40 42 56
------- ------- -------
Total life achieved operating profit before
tax, change in risk margin and exceptional
items* 1,132 928 1,366
======= ======= =======
* Excludes other life and savings activities.
Embedded value of life business
9 months 9 months Full year
2000 1999 1999
£m £m £m
Embedded value at the beginning of the
period as previously reported:
- CGU plc 5,675 4,868 4,868
- Norwich Union plc 4,742 4,415 4,415
Merger adjustments arising from alignment
of embedded value methodology 101 111 111
------- ------- -------
Restated embedded value at the beginning
of the period 10,518 9,394 9,394
Total life achieved profit after tax* 888 941 1,845
Exchange rate movements (103) (290) (420)
Embedded value from business acquired 153 83 89
Amounts injected into life operations 88 53 164
Amounts released from life operations (223) (274) (554)
------- ------- -------
Embedded value at the end of the period 11,321 9,907 10,518
======= ======= =======
* Excluding profits from other life and savings activities after tax.
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Page 13
Segmental analysis of embedded value of life business
Valuation of
Net worth* in-force** Total
at 30 Sept at 30 Sept at 30 Sept
2000 1999 2000 1999 2000 1999
£m £m £m £m £m £m
United Kingdom 1,992 1,789 4,391 4,017 6,383 5,806
Europe (excluding UK)
France 894 756 381 339 1,275 1,095
Ireland 216 197 246 191 462 388
Netherlands 1,283 971 677 726 1,960 1,697
Poland 96 72 185 104 281 176
Spain 51 43 131 28 182 71
Other 154 117 161 104 315 221
International 361 359 102 94 463 453
------ ------ ------ ------ ------ ------
Embedded value of
life businesses 5,047 4,304 6,274 5,603 11,321 9,907
===== ====== ====== ====== ====== ======
* 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.
** At 30 September 2000, the deduction for the cost of solvency capital
was £700 million.
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 capital.
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, together with the movement in the net
assets of the long-term operations held in excess of the minimum statutory
solvency capital.
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.
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 effective 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 charge for the cost of the solvency capital
supporting the solvency requirements of the business. This cost of capital is
the difference between the nominal value of required solvency capital and the
present value at risk discount rates of the projected release of this capital
and investment earnings on the capital.
For with-profit funds in the United Kingdom, 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
30 Sept 31 Dec 30 Sept 31 Dec
2000 1999 1999 1998
Risk discount rate 7.7% 7.8% 7.9% 7.2%
Pre-tax investment
returns:
Base government
fixed interest 5.1% 5.2% 5.4% 4.5%
Ordinary shares 7.6% 7.7% 7.9% 7.0%
Property 6.6% 6.7% 6.9% 6.0%
Future expense
inflation 3.7% 4.1% 4.1% 3.4%
Tax rate 30.0% 30.0% 30.0% 31.0%
France
30 Sept 31 Dec 30 Sept 31 Dec
2000 1999 1999 1998
Risk discount rate 8.7% 8.7% 8.5% 7.7%
Pre-tax investment
returns:
Base government
fixed interest 5.5% 5.5% 5.2% 3.9%
Ordinary shares 7.5% 7.5% 7.2% 5.9%
Property 7.0% 7.0% 6.7% 5.4%
Future expense
inflation 2.5% 2.5% 2.5% 2.5%
Tax rate 40.0% 40.0% 40.0% 40.0%
Ireland
30 Sept 31 Dec 30 Sept 31 Dec
2000 1999 1999 1998
Risk discount rate 9.1% 9.0% 8.6% 8.1%
Pre-tax investment
returns:
Base government
fixed interest 5.5% 5.6% 5.3% 4.6%
Ordinary shares 8.5% 8.6% 8.3% 7.6%
Property 7.0% 7.1% 6.8% 6.1%
Future expense
inflation 6.0% 4.0% 4.0% 4.0%
Tax rate 21.0% 28.0% 28.0% 33.0%
Netherlands
30 Sept 31 Dec 30 Sept 31 Dec
2000 1999 1999 1998
Risk discount rate 8.2% 8.3% 8.2% 7.2%
Pre-tax investment
returns:
Base government
fixed interest 5.4% 5.5% 5.4% 3.9%
Ordinary shares 8.3% 8.4% 8.3% 6.8%
Property 6.9% 7.0% 6.9% 5.4%
Future expense
inflation 2.5% 2.5% 2.5% 2.5%
Tax rate 25.0% 25.0% 25.0% 25.0%
Poland - Life
30 Sept 31 Dec 30 Sept 31 Dec
2000 1999 1999 1998
Risk discount rate 19.8% 19.8% 20.6% 20.6%
Pre-tax investment
returns:
Base government
fixed interest 12.5% 12.5% 12.5% 12.5%
Ordinary shares 12.5% 12.5% 12.5% 12.5%
Property n/a n/a n/a n/a
Future expense
inflation 9.2% 9.2% 9.2% 9.2%
Tax rate 30.0% 33.0% 35.0% 35.0%
Poland - Pensions
30 Sept 31 Dec 30 Sept 31 Dec
2000 1999 1999 1998
Risk discount rate 17.1% 17.1% 17.9% n/a
Pre-tax investment
returns:
Base government
fixed interest 12.5% 12.5% 12.5% n/a
Ordinary shares 12.5% 12.5% 12.5% n/a
Property n/a n/a n/a n/a
Future expense
inflation 9.2% 9.2% 9.2% n/a
Tax rate 30.0% 33.0% 35.0% n/a
Spain
30 Sept 31 Dec 30 Sept 31 Dec
2000 1999 1999 1998
Risk discount rate 9.2% 9.1% 8.9% 8.0%
Pre-tax investment
returns:
Base government
fixed interest 5.6% 5.6% 5.3% 4.0%
Ordinary shares 8.6% 8.6% 8.3% 7.0%
Property 7.1% 7.1% 6.8% 5.5%
Future expense
inflation 3.0% 3.0% 3.0% 3.0%
Tax rate 35.0% 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.
- 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 does not allow for future premiums under
recurring single premium business or non-contractual increments. The
value arising therefrom is included in the value of new business, when
the premium is received. Department of Social Security (DSS) rebate
premiums have been treated as recurring single premiums.
- The value of the in-force business has been determined after allowing
for the cost of holding solvency capital equal to the minimum EU
solvency requirement (or equivalent for non-EU operations). Solvency
capital relating to with-profit business is assumed to be covered by
the surplus within the with-profit funds and no cost 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.
END OF PART 2 OF 4
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