9 Months Results - To 30th September 1999 Part 1

CGU PLC 10 November 1999 CGU PLC UNAUDITED RESULTS - 9 MONTHS ENDED 30 SEPTEMBER 1999 * Pre-tax operating profit of £603m (1998 £618m), before merger integration costs. Operating earnings per share increased by 8%. * New life and savings business up 30% to £5.4bn with the post-tax value of new business increasing by 32%. * Life statutory profits up 12% to £380m. Life achieved operating profit of £518m. * Improvement in general insurance underwriting results offset by lower longer term investment returns. * Market position in the Netherlands strengthened through the acquisition of Nuts Ohra. * Offer to acquire Hibernian Group plc, creating Ireland's leading composite insurer. --------------------------------------------------------------------- 9 months 9 months 1998 1999 Restated Unaudited Unaudited Premiums & investment sales : life & savings £7,352m £5,564m : general insurance £6,696m £6,766m Pre-tax operating profit before merger integration costs £603m £618m Operating earnings per ordinary share before merger integration costs 33.2p 30.8p Profit/(loss) attributable to ordinary shareholders* £(155)m £204m Shareholders' funds £8,833m £9,039m (31 Dec 1998) --------------------------------------------------------------------- * Including short-term fluctuations in investment values. Enquiries: Bob Scott, Group Chief Executive Telephone: 0171 662 2003 Peter Foster, Group Finance Director Telephone: 0171 662 2007 BOB SCOTT, GROUP CHIEF EXECUTIVE, COMMENTED: 'The rapid and profitable growth of our life & savings business continued in the first 9 months of 1999 with new business 30% higher. Growth was achieved by all our major businesses and we captured some 25% of the new pensions market in Poland. The value of the post-tax new business contribution to achieved profits increased by 32%. Strong actions continue to be taken to increase general insurance profitability and improved underwriting results were achieved for the 9 months, although progress in the third quarter was held back by a number of large claims and the imposition of a Goods and Services tax in Australia. Reduced longer term investment returns during the year resulted in the overall general insurance profit being 5% lower. The group's operating profit amounted to £603m (1998 £618m) before tax and integration costs. Using the achieved profits method of reporting life business, the group's operating profit would have been £741m. Operating earnings per share increased by 8%, to 33.2p, benefiting from a lower tax charge, and using the life achieved profit amounted to 39.9p.' 'In the Netherlands, our strong management team will be able to build substantial value through the merger of Delta Lloyd with Nuts Ohra. This has created the third largest insurer and second largest direct writer, with strong positions in the life, pensions and health markets.' 'In Ireland, CGU will become the leading composite insurer through the offer to acquire the 72.1% of shares in Hibernian Group plc that it does not own already. The combined businesses will build on their growing share of the life and savings market and become the second largest general insurer.' 'With integration activities following last year's merger ahead of schedule and expected to be largely completed by the end of this year, we are well placed to develop our businesses and improve returns to shareholders.' GROUP CHIEF EXECUTIVE'S REVIEW: Life & savings With strong positions in Europe's life & savings markets, CGU's new business continued to grow rapidly. Sales of £5.4bn in the first nine months were up 30% over the same period last year. New annual premiums were up 67% and single premium sales were 25% higher. Sales of ISAs, PEPs, unit trusts and UCITS increased by 37%. There were good performances in the UK and in France. In Poland, we have achieved the leading position for pensions business, capturing some 25% of the recently privatised pensions market; new annual pension premiums totalled £181m at the end of the third quarter, with further large volumes of new business expected in the fourth quarter. These long term and substantial revenue streams are rapidly building a large and valuable business. In Romania, we were pleased to receive a licence to begin life operations next year. Romania offers exciting growth prospects, with a population of 23 million, a low life assurance spend to GDP of 0.03% (UK 7.87%) and the prospect of future reform of state pensions. We have signed a statement of intent with Societe Generale, which will give us exclusive rights to distribute life and savings products through their Romanian bank BRD Societe Generale, and we are working with them to identify other bancassurance opportunities throughout Europe. The value of the new business contribution to achieved life profits after the cost of capital, increased by 27% before tax and 32% after tax. In the UK, product margins were broadly maintained, although the value of new business was affected by a change in product mix and lower assumed investment returns. The value of new business more than doubled in Poland following the success in pensions and was 181% higher in France, mainly reflecting the strong growth in sales of the AFER product. Statutory life profits were up 12% at £380m, after a charge of £10m for setting up costs for Polish pension business. Achieved life operating profits, which provide a better measure of economic profitability, were £138m higher than statutory life profits, at £518m. General insurance Actions to improve underwriting results and a cautious stance on year 2000 risks saw general insurance premiums 2% lower worldwide at £6.7 billion, and 11% lower in the United Kingdom. Rate increases are being applied in most classes of business in the United Kingdom, and wherever possible around the world, although markets remain competitive. The group is focused on improving the profitability of general insurance underwriting and on building deeper positions in more profitable segments. The third quarter included a number of large claims, the cost of £20m for hurricane Floyd, and a £12m provision for the effect on outstanding claims provisions of the introduction of a Goods and Services tax (GST) in Australia. Underwriting results in the United Kingdom continued to show an improvement over last year and Canada produced a strong performance with a combined operating ratio of 100% in the third quarter. The improvement seen in the United States underwriting result in earlier quarters was constrained by claims from hurricane Floyd. The general insurance expense ratio benefited from merger expense savings and the ratio improved to 14.0% (9 months 1998 14.5%), despite the effect of a lower premium volume. The longer term investment return was 9% lower at £923m reflecting the effect of lower interest rates, a reduction in cash flow and the unwinding of the discount on certain claims provisions. Overall, general insurance profits for the first nine months were £404m (1998 £420m). Asset management and other financial services Profits from asset management were up 45% to £29m reflecting increased funds under management. There were good performances from Morley Fund Management, our UK asset management company, and also from Victoire Asset Management in France. Total assets and additional funds under management increased by £5bn since the start of the year to £126bn. Integration progress and cost savings Strong progress continued to be made with the integration of our businesses, with some 88% of our targeted staff reductions of 6,000 achieved already. Annualised cost savings achieved by the end of September amounted to £279m, with a target of £325m per annum, by June 2000. Total cost savings of £133m are reflected in the 9 months results of which £74m are included in general insurance administrative expenses, £39m in claims handling expenses and £20m in various other expense categories. Corporate developments In the Netherlands, our Dutch subsidiary Delta Lloyd, finalised merger terms with Nuts Ohra, the health, life and general insurer. The new group, Delta Lloyd Nuts Ohra, will be the 3rd largest Dutch insurer,the second largest direct writer, combining call centres, direct mail and a direct sales force, the third largest in life and pensions and, second in private health. Premium income for Nuts Ohra in 1998 amounted to £763m, and the estimated value of net assets acquired on a UK basis was £188m. The acquisition price of £122m is being satisfied by a subordinated loan from Delta Lloyd with a value of £116m, and preference shares of £6m. Cost savings are estimated to be some £10m per annum from 2002. CGU recently announced an agreed offer to purchase the 72.1% of outstanding ordinary shares in Hibernian Group plc, not already owned by the group. At an offer price of IR760p per share, this values the outstanding shares at approximately £240m. Irrevocable commitments to accept the offer have been received from the holders of approximately 25% of the shares and the group now owns or has an interest in approximately 53% of the ordinary share capital. Subject to completion of the acquisition, the combined Irish business will create the leading composite insurer in Ireland, with a growing share of the life and savings market, and a strong position in general insurance. Hibernian's premium income in 1998 amounted to IR£321m, with published net assets at 30 June 1999 of IR£235m. The group is focused on generating shareholder value with leading positions in selected market segments. An ongoing review of smaller businesses has to date led to a number of disposals. These included the Swedish general insurance business and the life reinsurance portfolio of British & European in the United Kingdom and, the proposed divestiture of our Greek life business. Year 2000 ('Y2K') and the euro The vast majority of our Y2K preparations are now complete and we are conducting extensive 21st century simulation testing. Total Y2K IT costs are estimated at £135m (£115m incurred to date), with £30m included in these results. Our businesses in the euro zone are continuing to work actively to prepare for the final conversion; costs incurred to date for the introduction of the euro amounted to £23m, with £5m included in these results. The group cannot provide universal cover against the loss or damage caused by the date change which is a foreseeable risk. Our general insurance businesses have, therefore, in line with the rest of the industry, introduced exclusion clauses wherever possible to reduce the impact of potential claims arising from Y2K failure. This underwriting stance has led to a reduction in premium volumes of some £40m since the beginning of the year. Return on equity The group's 'normalised' after tax return on equity for the 12 months to 30 September 1999 was 10% (3 year average 12%). The normalised return is based on the published after tax operating profits before exceptional items, including achieved life profits, and the opening equity capital. Shareholders' funds Shareholders' funds of £8,833m were £206m lower than at 31 December 1998. The reduction was mainly due to the short term downward fluctuations in investment values of £532m pre-tax, which was reflected in the loss attributable to ordinary shareholders of £155m. Other significant movements in shareholders' funds included an increase of £397m in the valuation of in-force life business and a reduction of £277m due to movements in rates of exchange. NOTES TO EDITORS * CGU is Europe's 5th largest insurance group and the largest in the UK (based on worldwide sales of some £18bn per annum). * CGU is one of the top 20 fund managers in Europe, with worldwide assets and additional funds under management of £126 billion at 30 September 1999. * In the first 9 months of 1999, total life premiums and retail investment sales accounted for 52% of the group's total business. * The distribution of total premiums and retail investment sales of £18.0 billion for the 12 months to 30 September 1999 was as follows: Life and savings General Total % % % UK 23 15 38 France 13 4 17 Netherlands 4 2 6 Other Europe 10 3 13 United States 1 15 16 Canada - 5 5 Australia & NZ - 3 3 Rest of World - 2 2 * All growth rates are quoted in local currency. * Overseas currency results are translated at average exchange rates. * CGU's corporate press releases and results presentations are available on the Internet: www.cgugroup.com/group A detailed review of CGU's business performance follows BUSINESS REVIEW LIFE & SAVINGS ACHIEVED LIFE PROFITS On the achieved profits basis of reporting life profits, the group's life and savings operating profit amounted to £518m. The major element of profits on the business in force and net assets is the interest roll-up on the opening embedded value. The effect of the substantial reductions in interest rate assumptions amounted to £68m, offset by the increase in the opening embedded value. The embedded value, included in the balance sheet, increased primarily due to favourable investment return fluctuations. The new business contribution, after charging for the cost of capital, grew by 27% to £159m and, after taxation the growth was 32%. Profit on business in New Analysis of life and savings force business profits and net assets contribution Total 9 months 9 months 9 months 1999 1998 1999 1998 1999 1998 £m £m £m £m £m £m Life operating profit before taxation UK 143 147 85 86 228 233 France 65 68 17 6 82 74 Netherlands 92 102 2 - 94 102 Italy 3 7 24 22 27 29 Poland - life 26 25 16 16 42 41 Poland - pensions 4 - 21 - 25 - Other life businesses 9 11 (6) (3) 3 8 --- --- --- --- --- --- Life operating profit on continuing business 342 360 159 127 501 487 Operating profit on discontinued business (note) - 7 - 1 - 8 Life operating profit --- --- --- --- --- --- before taxation 342 367 159 128 501 495 --- --- --- --- Operating profit on other life & savings activities before taxation 17 19 --- --- Operating profit before taxation 518 514 Effect of changes in interest rates and investment return fluctuations 450 (305) --- --- Achieved profit before taxation 968 209 Taxation (296) (77) --- --- Achieved profit after taxation 672 132 --- --- Note: Our life operation in South Africa was disposed of at the end of 1998. New business contribution New annualised New business premiums contribution 9 months 9 months 1999 1998 1999 1998 £m £m £m £m UK 324 286 85 86 France 107 90 17 6 Netherlands 81 76 2 - Italy 106 96 24 22 Poland - life 45 43 16 16 Poland - pensions 181 - 21 - Other life businesses 103 61 (6) (3) --- --- --- --- Total 947 652 159 127 --- --- --- --- Note: Annualised premiums are annual premiums plus 10% of single premiums. CGU Life in the UK is the 7th largest life office and again made a major profit and new business contribution. The 1998 new business contribution, restated using the 1999 basis for interest rates and taxation, was £78m, which would have given an underlying increase of 9% to £85m in 1999. Product margins were broadly maintained although there has been a change in business mix towards single premium bonds and pensions. New life and savings sales continued to benefit from the widely recognised strength of the CGU Life Fund and a multi-distribution strategy, selling through IFAs, bancassurance partners, estate agents and direct. In France, a good increase in new business contribution through increased AFER sales and improved profitability on other savings products maintained the pattern of earlier quarters. In the Netherlands, the new business value increased by £2m using interest rate assumptions at the start of the year. At current interest rate assumptions the value of new business would have been higher. The lower interest rate assumptions largely caused the £10m reduction in profits on business in force. The merger of Nuts Ohra and Delta Lloyd will make Delta Lloyd Nuts Ohra the 3rd largest life insurer in the Netherlands. Nuts Ohra will be consolidated into the group's results in the fourth quarter of 1999. The new business contribution in Italy continues to benefit from year on year growth in premiums and good profit margins. The new business value in the final quarter will be lower following the ending of our distribution agreement with Credito Italiano in June of this year. In Poland, our market-leading life business has continued to produce good premium growth with very satisfactory margins, despite some increase in competition. Our Polish pensions business has seen the first substantial flow of contributions redirected from the state scheme and has produced an excellent new business value. The majority of the remaining initial contributions are expected in the fourth quarter. The analysis of embedded value and information on methodology and assumptions is provided on page 29. STATUTORY LIFE PROFITS Statutory life profits of £380m were 12% higher at constant rates of exchange, after charging £10m for start up costs in our market-leading Polish pensions business. Statutory profits 9 months 9 months 1999 1998 £m £m UK 184 163 France 68 59 Netherlands 100 96 Italy 15 5 Poland life 18 16 Poland pensions (10) - Other life businesses 5 (3) Profit on continuing business 380 336 Profit on discontinued business (note) - 4 --- --- 380 340 --- --- Note: Our life operation in South Africa was disposed of at the end of 1998. LIFE AND SAVINGS NEW BUSINESS There were record new business sales in the first nine months of 1999, with worldwide life and savings sales 30% higher in local currency at £5.4 billion. New single New annual ISAs/PEPs premiums premiums unit trusts/ TOTAL UCITS (ii) Local Local Local Local 9 mths currency 9 mths currency 9 mths currency currency 1999 growth 1999 growth 1999 growth growth £m % £m % £m % % United Kingdom 1,974 29 127 (4) 549 51 30 France 979 18 9 13 18 Netherlands 244 9 57 4 8 Italy 679 17 38 1 16 Poland 9 167 225 487 461 Germany 83 n/a 24 n/a n/a Other Europe 138 160 8 29 86 (12) 48 Rest of World 150 (3) 33 21 1 ----- --- --- --- --- --- --- TOTAL 4,256 25 521 67 635 37 30 ----- --- --- --- --- --- --- Notes: (i) Average exchange rates used and premiums are gross of reassurance. (ii) UCITS are collective investments sold throughout Europe and Asia. (iii) Growth excludes sales from discontinued business. UK : CGU Life's total sales of new life, pensions and investment business rose by 30% to £2.7bn. There was strong growth through our multi-channel distribution network, with NAPI (new annual premiums plus a tenth of new single premiums and investment products) sales up 10% through IFAs and 36% through our other channels. New single premiums were 29% higher at £1,974m, boosted by a 43% increase to £1,371m in sales of our main investment product, the Portfolio Bond, and new single premium pension sales increased by 19% to £559m. New annual premiums were 4% lower overall with increased individual pensions business offset by lower mortgage and protection sales. New investments into ISAs, unit trusts and PEPs were 51% higher at £549m, including £162m of ISA sales. France : New business levels continued to show good growth, with single premium sales 18% higher at £979m, well ahead of the market growth of around 10%. AFER bond sales remained buoyant, up 51% at £531m. Netherlands : New annual premiums were 4% higher at £57m, including a 33% increase to £13m in sales of Delta Life, our unit-linked universal life product. Single premiums were up 9% to £244m, following the acquisition of a new group pension scheme. Italy : Following strong sales in the first 6 months of the year, new annual and single premiums remained ahead of 1998 levels at the 9 months stage, at £38m and £679m respectively. Poland : CU Polska has a leading position in the Polish pensions market and generated £181m in new annual premiums at the end of the third quarter. Life sales have benefited from the cross-selling opportunities provided by the new pension arrangements, with annual premiums 16% higher at £44m and single premiums up 167% at £9m. Germany : New business levels remained strong at Berlinische Leben and we continue to refocus the business on the profitable unit-linked and group pensions markets. Sales were well ahead of last year, with annual premiums increasing to £24m, including £9m in the third quarter, and single premiums of £83m, reflecting strong pension and annuity sales. In Ireland, excellent single premium investment bond sales of £55m were achieved in the third quarter, boosting total new business to £118m in 1999. Our cross-border business in Luxembourg added £86m in UCITS sales. New annual premiums more than doubled to £12m in Turkey, reflecting an increase in the direct salesforce to over 600. In the United States, single premium sales of £128m were 5% lower, with good sales of a new deferred annuity product being offset by reduced demand for immediate annuities. Annual premiums were 15% lower at £15m, following our withdrawal from sales of unprofitable group health products. In Canada, sales of protection and annuity products boosted new annual premiums by 32% to £6m and single premiums were 9% higher at £21m. Life premium income is shown below: 9 months 9 months 1999 1998 £m £m ---------------------------------------------------- UK 2,777 2,283 France 1,746 1,100 Netherlands 560 524 Other Europe - Italy 801 678 - Poland 198 117 - Other 401 111 United States 181 183 Canada 45 38 Rest of World 8 68 ----- ----- 6,717 5,102 ----- ----- ---------------------------------------------------- Note: Life premiums in France include £646m (1998 £151m) of transfers from existing contracts. GENERAL INSURANCE Underwriting results showed an improvement of £62m over last year. Improved results were achieved by our largest businesses in the United Kingdom and the United States, together with a strong performance in Canada. In the third quarter, progress was held back by a number of large claims and the effect of the introduction of the GST in Australia. The longer term investment return ('LTIR'), applicable to general insurance business, was £923m (1998 £1,001m). The reduction reflected lower interest rates, reduced cash flow and the unwinding of the discount on certain claims provisions. General insurance profits in the nine months amounted to £404m (1998 £420m). Details of the principal assumptions for calculating the LTIR are outlined on page 13. General insurance Underwriting profit result Premiums Local 9 mths 9 mths 9 mths 9 mths 9 mths 9 mths currency 1999 1998 1999 1998 1999 1998 growth £m £m £m £m £m £m % UK 67 94 (206) (242) 1,987 2,245 (11) France 39 51 (23) (15) 600 555 8 Netherlands 25 42 (17) (7) 287 270 5 Other Europe 12 10 (40) (37) 460 396 16 United States 141 102 (148) (185) 2,003 1,911 2 Canada 71 42 (18) (40) 593 620 (6) Australia & NZ 4 36 (47) (18) 431 407 2 Rest of World 18 22 (21) (25) 278 308 (5) Group reinsurance 27 21 1 (12) 57 54 4 --- --- --- --- ----- ----- --- 404 420 (519) (581) 6,696 6,766 (2) --- --- --- --- ----- ----- --- UK: Underwriting results continued to respond to actions taken to improve profitability despite a number of large claims in the third quarter. Better results were achieved in the motor classes where premium rates have risen over the last 12 months by 20% in both private and commercial lines. The homeowners class, which accounts for some 20% of UK business, made a good underwriting profit. Household rates have been increased by 5% and employers' liability rates are up 7%. In the London marine market, which remains competitive, we are prepared to continue to decline business. Overall premiums were 11% lower, reflecting management actions to improve underwriting results and to avoid unacceptable year 2000 risks. France: Good underwriting results were achieved in health and property classes, although the market remains competitive. The integration of the direct writer, Tellit Assurance, with Eurofil is making good progress and the combined business makes CGU the second largest direct writer in France. Netherlands: Underwriting profits were achieved in personal accident, where we implemented a 10% rate increase in January 1999, and in property. Higher injury claims affected motor results, where rates have increased by 10% and further rate increases are planned. Other Europe: Conditions for our smaller businesses throughout Europe remain generally competitive, although motor rates are hardening in most markets. Premiums were 16% higher following the acquisition of a small Italian general insurer in 1998, acquired as part of a bancassurance arrangement for the life operations. United States: Our business is the 16th largest in the US, with strong market positions in the North Eastern States and in agri and inland marine classes. A £37m improvement in the underwriting result for the first nine months included better results from most classes of business. Claims from hurricane Floyd amounted to £20m in the third quarter and a worse result was reported in the discrete third quarter. Results benefited from merger expense savings of £38m, late retrospective premiums of £9m in workers' compensation and the absence of a charge for business no longer written. Extensive pricing and profitability reviews are being carried out in all classes, with modest rate increases being applied in agri, package and parts of the auto portfolio. Canada: Our market leading Canadian business produced a £22m improvement in underwriting results in the first nine months and a third quarter combined operating ratio of 100%. Results benefited from a focused and disciplined underwriting approach and more favourable weather conditions. Premium volumes were 6% lower, reflecting our firm stance on rating in competitive conditions and Y2K exclusions. During the third quarter, we reached agreement to acquire GAN Canada which increases our share of the profitable personal lines affinity scheme market. Plans are in place to integrate it quickly into our own branch network. Australia: Underwriting results were impacted by competition, claims from the Sydney hailstorm in April costing £16m, and a charge of £12m for the introduction of the GST. Rate increases averaging 4%-5% are being implemented in private property and motor, with significant increases in workers' compensation. New Zealand continued to perform well, achieving an underwriting profit. Rates are firming in the market and were up 3%-6% across most classes. ASSOCIATES Profits from associates increased to £11m (1998 £10m). This increase included higher profits of £5m from our share of the Hibernian Group, included six months in arrears, and improved results from the British Aviation Insurance Company. ASSET MANAGEMENT AND OTHER FINANCIAL SERVICES CGU managed assets of £126 billion at 30 September 1999, making it one of the top 20 fund managers in Europe. The group's strategy is to grow in the third party fund management market and mandates for new funds and other third party funds of over £800m were received in the first nine months. Profits from asset management and other financial services increased to £29m (1998 £20m), including £18m from Morley Fund Management in the UK, reflecting increased fee income and merger expense savings. Our UK estate agent chain produced a reduced loss of £5m (1998 loss £8m). OTHER FINANCIAL HIGHLIGHTS SHAREHOLDERS' FUNDS Shareholders' funds amounted to £8,833m (31 Dec 1998 £9,039m) after deducting the equalisation provision of £137m (31 Dec 1998 £114m). The loss attributable to ordinary shareholders of £155m (1998 profit £204m) included short term downward fluctuations in investment values of £532m pre-tax (1998 gains of £17m pre-tax). Other movements in shareholders' funds included an increase of £397m in the valuation of in-force life business before the effect of exchange rate changes. Movements in rates of exchange had a negative effect of £277m of which £86m related to the reserve arising on the valuation of in-force life business. Net assets per ordinary share at 30 September 1999 were 658p (31 Dec 1998 675p) after deducting the equalisation provision. Adding back the equalisation provision, they were 668p (31 Dec 1998 684p). At 5 November 1999, net assets per ordinary share were estimated at 691p (701p adding back the equalisation provision). The solvency margin (excluding life) was 47% (31 Dec 1998 51%). UNALLOCATED EXPENSES Unallocated expenses, including corporate expenses and allocations to worldwide staff profit sharing schemes, amounted to £59m (1998 £44m). UNALLOCATED INTEREST CHARGES Unallocated interest charges include interest on intra-group loans with the centre and external borrowings not allocated to territorial operations. These amounted to £147m (1998 £125m) and included external loan interest of £52m (1998 £58m). LONGER TERM INVESTMENT RETURN (LTIR) The longer term investment return applicable to general business results is calculated separately for each principal general insurance business unit. In respect of equities and properties, the return is calculated by multiplying the opening market value of the investments, adjusted for sales and purchases during the year, by the longer term rate of investment return. For other investments, the actual income receivable is included. The principal assumptions underlying the calculation of the LTIR, which are consistent with the assumptions for life embedded value calculations, are: Longer term rates of return Equities Properties 1999 1998 1999 1998 % % % % UK 6.9 8.1 5.4 7.4 France 5.9 6.5 4.9 6.5 Netherlands 6.8 7.1 4.9 6.1 United States 7.7 7.8 5.7 6.8 Canada 7.9 8.0 5.9 7.0 Australia & NZ 8.0 8.0 6.0 7.0 A statistical appendix, analysis of embedded value and achieved profits methodology and assumptions, and unaudited financial statements follow. 9 months 9 months 1998 12 months Profit and loss account 1999 Restated 1998 ----------------------- Unaudited Unaudited Audited Premium income after reinsurance £m £m £m Life premiums 6,717 5,102 6,952 General insurance premiums 6,696 6,766 8,772 ------ ------ ------ Total premiums 13,413 11,868 15,724 ====== ====== ====== Operating profit Life assurance 380 340 498 General insurance 404 420 504 Associated undertakings 11 10 14 Asset management /other financial services 29 20 14 ------ ------ ----- 824 790 1,030 Unallocated expenses, interest charges and goodwill amortisation (221) (172) (262) ------ ------ ----- Operating profit before taxation and exceptional items 603 618 768 Exceptional items (note 2) (100) (105) (610) ------ ------ ----- Operating profit before taxation 503 513 158 Short-term fluctuation in investment returns (532) 17 647 Change in the equalisation provision (29) (27) 55 Net loss arising from sale of subsidiary undertakings (9) - (14) Merger transaction costs - (72) (75) ------ ------ ----- Profit/(loss) on ordinary activities before taxation (67) 431 771 Tax on profit/(loss) on ordinary activities Operating profit/(loss) before exceptional items (121) (172) (192) Other 88 (10) (51) ------ ------ ----- (33) (182) (243) ------ ------ ----- Profit/(loss) on ordinary activities after taxation (100) 249 528 Minority interests (42) (32) (30) ------ ------ ----- Profit/(loss) for the period (142) 217 498 Preference dividends (13) (13) (17) ------ ------ ----- Profit/(loss) attributable to ordinary shareholders (155) 204 481 Ordinary dividends Interim (187) (174) (174) Final - - (287) ------ ------ ----- (187) (174) (461) ------ ------ ----- Transfer to/(from) retained profits (342) 30 20 ====== ====== ===== Earnings per share (note 3) Operating profit after taxation, before exceptional items, attributable to equity shareholders 33.2p 30.8p 40.2p Profit/(loss) attributable to equity shareholders (11.8)p 15.7p 37.1p Profit/(loss) attributable to equity shareholders - diluted (11.8)p 15.7p 36.8p Notes: (1) Profit on ordinary activities includes non-life unrealised gains previously taken to the revaluation reserve. The general insurance result includes an allocation of total gains and income based on the longer term return. 9 months 1998 results have been restated to reflect these changes in accounting for investment returns. (2) Exceptional items in 1999 comprise merger integration costs. (Full year 1998 comprise merger integration costs of £260m and an additional claims provision of £350m.) (3) Earnings per share were calculated using a weighted average of 1310.4m (9 months 1998 average of 1294.1m) ordinary shares in issue. (4) Total ordinary shares in issue at 30 September 1999 were 1311.8m (30 September 1998 1308.3m). (5) Published results have been translated at average rates of exchange, while assets and liabilities have been translated at closing rates of exchange. The principal average rates were: 9 months 1999 9 months 1998 12 months 1998 French franc 9.87 9.93 9.78 Netherlands florin 3.31 3.34 3.29 United States dollar 1.61 1.65 1.66 Canadian dollar 2.40 2.43 2.47 9 months 9months 1998 12 months 1999 Restated 1998 Unaudited Unaudited Audited Operating profit before taxation £m £m £m and exceptional items -------------------------------- UK 273 266 280 France 115 116 167 Netherlands 129 144 196 Other Europe 38 28 46 United States 152 113 156 Canada 73 44 76 Australia & NZ 4 36 56 Rest of World 13 22 29 Group reinsurance 27 21 24 --- --- ----- 824 790 1,030 Unallocated expenses (59) (44) (80) Unallocated interest charges (147) (125) (175) Goodwill amortisation (15) (3) (7) --- --- ----- 603 618 768 === === ===== Summarised reconciliation of movements in consolidated shareholders' funds -------------------------------------------------------------------------- Restatement of profit for the period Profit as previously reported 338 Unrealised investment gains (121) --- Profit/(loss) for the period (142) 217 498 Movement in the valuation of in-force long term business 397 188 611 Foreign exchange rate movements on this valuation (86) 29 49 --- --- --- 311 217 660 Other foreign exchange rate movements (191) (120) 73 --- ---- ----- Total recognised gains and losses arising in the period (22) 314 1,231 Dividends (200) (187) (478) Increase in capital and shares in lieu of dividends 27 242 249 Merger reserve arising in the period - 11 11 Other movements (11) (5) 9 --- ---- ----- Total movements in the period (206) 375 1,022 Balance at 1 January As previously reported - Commercial Union 4,486 4,486 - General Accident 3,781 3,781 Merger adjustment - GA preference shares (250) (250) ----- ----- ----- Shareholders' funds at 1 January 9,039 8,017 8,017 ----- ----- ----- Balance at end of period 8,833 8,392 9,039 ===== ===== ===== Summarised consolidated balance sheet ------------------------------------- Group Group as at Group as at 30 Sep 98 as at 30 Sep 99 Restated 31 Dec 98 Unaudited Unaudited Audited Assets £m £m £m Goodwill 263 200 253 Investments Land and buildings 712 806 798 Participating interests 303 305 304 Variable yield securities 5,345 4,340 5,221 Fixed interest securities 10,248 10,804 10,999 Mortgages and loans 268 297 267 Deposits 699 858 707 Valuation of in-force long term business 3,436 2,716 3,141 ------ ------ ------ 21,011 20,126 21,437 Reinsurers' share of technical provisions 2,186 2,051 2,141 Assets of the long term business 79,151 69,217 76,196 Other assets 6,389 5,846 5,837 ------- ------ ------- Total assets 109,000 97,440 105,864 ------- ------ ------- Liabilities Shareholders' funds 8,833 8,392 9,039 Minority interests 492 526 512 ----- ----- ----- Total capital and reserves 9,325 8,918 9,551 Liabilities of the long term business 77,463 67,474 74,457 General insurance liabilities 17,556 16,992 17,504 Borrowings 1,104 982 950 Other creditors and provisions 3,552 3,074 3,402 ------ ------ ------ Total other liabilities 22,212 21,048 21,856 ------- ------ ------- Total liabilities 109,000 97,440 105,864 ------- ------ ------- Consolidated cash flow statement -------------------------------- 9 months 9 months 12 months 1999 1998 1998 Unaudited Unaudited Audited £m £m £m Net cash inflow from operating activities excluding exceptional items and merger transaction costs 268 584 511 Exceptional items and merger transaction costs paid (64) (72) (161) Net cash outflow from servicing of finance (89) (100) (114) Corporation tax paid (including advance corporation tax) (84) (239) (318) Net purchases of tangible fixed assets (40) (45) (65) Acquisitions and disposals of subsidiary and associated undertakings (50) (92) (101) Equity dividends paid (286) (320) (495) Net cash inflow/(outflow) from financing activities 207 (19) (54) ---- ----- ----- Net cash flows (138) (303) (797) ---- ----- ----- Cash flows were invested as follows: (Decrease)/increase in cash holdings (18) 93 31 Net portfolio investment Net sales of investments (108) (416) (894) Non-trading cash flow (from)/to long term business operations (12) 20 66 ---- ----- ----- (138) (303) (797) ==== ===== ===== * * * * * * ANALYSIS OF EMBEDDED VALUE AND ACHIEVED PROFITS METHODOLOGY AND ASSUMPTIONS Analysis of embedded value 9 months 9 months 12 months 1999 1998 1998 Restated £m £m £m UK 1,959 1,587 1,935 France 887 871 871 Netherlands 1,672 1,487 1,530 Other Europe 360 251 324 Other 228 235 208 ----- ----- ----- Total 5,106 4,431 4,868 ----- ----- ----- Note: The 9 months 1998 figures have been restated to exclude the effect of smoothing. Achieved profits methodology and assumptions The results have been prepared in accordance with the draft 'Guidance on Accounting for Long Term Insurance Business in the Group Accounts of Proprietary Companies (The Achieved Profits Method)' issued by the ABI and are prepared as a supplement to the statutory basis results contained in this report. For the purpose of producing quarterly results, the methodology is based on the roll forward of the embedded value published at 1998 year-end. In the achieved life operating profit, changes in new business are reflected each quarter, whereas non-economic parameters such as persistency and expenses are normally only adjusted annually in the year end results. Changes in interest rates and investment returns are reflected quarterly as a separate item after calculating the achieved operating profit. Although the Group's life and savings business is predominantly long term it also includes substantial businesses such as service companies. Accounting for these businesses continues to be on the traditional method. The key economic assumptions for 9 months 1999 are listed below United France Netherlands Poland Poland - Kingdom - life Pensions Oper. Oper. Oper. Oper. Oper. EV profits EV profits EV profits EV profits EV profits % % % % % % % % % % Risk margin 4.0* 4.0* 5.2 5.2 4.5 4.5 11.5 11.5 9.0 9.0 After tax discount rate (excluding risk margin) 4.6 3.3 3.1 2.3 3.5 2.6 8.1 8.1 8.1 8.1 Risk discount rate 8.8* 7.4* 8.5 7.7 8.2 7.2 20.6 20.6 17.9 17.9 Pre-tax investment returns: Government fixed interest securities 5.9 4.4 5.2 3.9 5.4 3.9 12.5 12.5 12.5 12.5 Ordinary shares 8.4 6.9 7.2 5.9 8.3 6.8 Property 6.9 5.4 6.2 4.9 6.4 4.9 Future expense inflation 4.0 3.0 2.5 2.5 2.5 2.5 9.2 9.2 9.2 9.2 Tax rate for grossing up profits and new business contribution 30.0 40.0 25.0 35.0 35.0 * For unit linked business, the risk margin is 4.7% Oper. = Operating

Companies

Aviva (AV.)
UK 100