CGNU plc 2000 Results - Pt 2

CGNU PLC 27 February 2001 CGNU plc 2000 Results CGNU plc Preliminary Announcement 2000 PART 2 Summarised consolidated profit and loss account - achieved profit basis For the year to 31 December 2000 Restated 2000 2000 1999 Em £m £m Operating profit Life achieved operating profit 2,572 (excluding change in risk margin) 1,569 1,407 112 Health 68 24 100 Fund management 61 66 676 General insurance 412 459 (41) Non-insurance operations (25) (30) 2 Associated undertakings 1 10 (303) Corporate costs (185) (162) (592) Unallocated interest charges (361) (240) ------- ------- ------- 2,526 1,540 1,534 (218) Wealth management (133) - ------- ------- ------- Operating profit - ongoing business before tax, change in risk margin, amortisation of goodwill and 2,308 exceptional items 1,407 1,534 Businesses discontinued and to be discontinued United States general (902) insurance (to be discontinued) (550) 176 (7) London Market (discontinued) (4) 25 ------- ------- ------- 1,399 853 1,735 - Change in risk margin - 89 (151) Amortisation of goodwill (92) (34) (697) Exceptional items (425) (163) ------- ------- ------- 551 Operating profit before tax 336 1,627 349 Variation from longer-term investment return 213 1,072 (441) Effect of economic assumption changes (269) 358 (44) Change in the equalisation provision (27) (55) Net profit/(loss) arising on the sale 20 of subsidiary undertakings 12 (8) Provision for loss on sale for businesses to be discontinued (1,755) - United States general insurance (1,070) - Loss on withdrawal from London Market (735) operations (448) - (97) Merger transaction costs (59) - ------- ------- ------- (Loss)/profit on ordinary activities before (2,152) tax (1,312) 2,994 Tax on operating profit - ongoing business before change in risk margin, amortisation (716) of goodwill and exceptional items (437) (428) 285 Tax on profit on other ordinary activities 174 (425) ------- ------- ------- (2,583) (Loss)/profit on ordinary activities after tax (1,575) 2,141 (107) Minority interests (65) (85) ------- ------- ------- (2,690) (Loss)/profit for the financial year (1,640) 2,056 (28) Preference dividends (17) (17) (Loss)/profit for the financial year (2,718) attributable to equity shareholders (1,657) 2,039 (1,402) Ordinary dividends (855) (773) ------- ------- ------- (4,120) Retained (loss)/profit for the financial year (2,512) 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 65.1 c in respect of ongoing business 39.7 p 45.4p (Loss)/profit attributable to equity (121.0)c shareholders (73.8)p 91.2p (Loss)/profit attributable to equity (120.9)c shareholders - diluted (73.7)p 90.8p -------------------------------------------------------------------- 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 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 latest draft 'Guidance on accounting in Group accounts for proprietary companies long-term insurance business', circulated by the Association of British Insurers. 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 statutory accounts, can be found on pages 16 to 30. 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. 2000 1999 £m £m New business contribution 392 403 Profit from existing business - expected return 839 634 - experience variances 10 80 - operating assumption changes (7) 8 Development costs (20) (24) Expected return on shareholders' net worth 319 265 ------- ------- 1,533 1,366 Other life and savings activities* 36 41 ------- ------- Life achieved operating profit before tax, change in risk margin and exceptional items 1,569 1,407 Change in risk margin** - 89 ------- ------- Life achieved operating profit before tax and exceptional items 1,569 1,496 ------- ------- Exceptional items *** (106) (12) Investment return variances (43) 851 Effect of economic assumption changes (269) 358 ------- ------- Total life achieved profit before tax 1,151 2,693 Attributed tax (375) (819) ------- ------- Total life achieved profit after tax 776 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. *** Exceptional items in 2000 comprise one-off integration costs. Exceptional items in 1999 comprised one-off costs relating to the integration of the British Life business in Spain. -------------------------------------------------------------------- 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 Local 1999 currency at 2000 2000 1999 growth 2000 assumptions 1999 ** £m £m % £m £m £m United Kingdom 979 821 19% 294 250 239 Europe (excluding UK) France 222 189 27% 63 65 63 Ireland 79 52 65% 21 14 16 Netherlands 119 118 9% 19 31 22 Poland - Life 43 58 (25)% 11 38 39 - Pensions 139 319 (56)% 28 69 69 Spain 57 17 256% 22 - 1 Other 165 199 (12)% 19 33 33 International 100 90 8% 6 20 19 ------- ------- ------- ------- ------- ------- Total annualised premiums 1,903 1,863 5% ======= ======= ======= Total new business contribution before effect of solvency margin*** 483 520 501 Effect of solvency margin (91) (93) (98) ------- ------- ------- Total new business contribution including effect of solvency margin 392 427 403 ======= ======= ======= * 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 and rates of exchange. *** New business contribution before effect of solvency margin includes minority interests in 2000 of £29 million (1999: £31 million). This comprises minority interests in France of £4 million (1999: £3 million), Poland £7 million (1999: £15 million), Spain £10 million (1999: £nil) and Other Europe £8 million (1999: £13 million). 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 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. -------------------------------------------------------------------- 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. 2000 1999 £m £m United Kingdom* 903 798 Europe (excluding UK) France 204 131 Ireland 68 53 Netherlands 174 168 Poland - Life 58 72 - Pensions* 36 43 Spain 42 13 Other 19 32 International 29 56 ------- ------- Total life achieved operating profit before tax, change in risk margin and exceptional items** 1,533 1,366 ======= ======= * Excludes other life and savings activities. ** Life achieved operating profit includes minority interests in 2000 of £42 million (1999: £37 million). This comprises minority interests in France of £6 million (1999: £5 million), Poland £15 million (1999: £16 million), Spain £10 million (1999: £nil), Other Europe £12 million (1999: £16 million) and International £(1) million (1999: £nil). Embedded value of life business 2000 1999 £m £m Embedded value at the beginning of the year as previously reported: - CGU plc 5,675 4,868 - Norwich Union plc 4,742 4,415 Merger adjustments arising from alignment of embedded value methodology 101 111 Restated embedded value at the beginning of the year 10,518 9,394 Total life achieved profit after tax* 813 1,845 Exchange rate movements 81 (420) Embedded value from business acquired/(disposed)** 437 89 Amounts injected into life operations 167 164 Amounts released from life operations (782) (554) ------- ------- Embedded value at the end of the year*** 11,234 10,518 ======= ======= * Excluding profits from other life and savings activities after tax. ** 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 with 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 2000 of £208 million (1999: £104 million). This comprises minority interests in France of £34 million (1999: £30 million), Poland £42 million (1999: £24 million), Spain £57 million (1999: £nil) and Other Europe £75 million (1999: £50 million). -------------------------------------------------------------------- Segmental analysis of embedded value of life business Valuation of Net worth* in-force Total at at 31 December at 31 31 December December 2000 1999 2000** 1999 2000 1999 £m £m £m £m £m £m United Kingdom 1,809 1,745 4,450 4,461 6,259 6,206 Europe (excluding UK) France 805 705 397 386 1,202 1,091 Ireland 211 179 274 190 485 369 Netherlands 1,294 1,090 752 716 2,046 1,806 Poland 74 61 210 155 284 216 Spain 59 34 147 45 206 79 Other 183 127 135 109 318 236 International 351 409 83 106 434 515 ------- ------- ------- ------- ------- ------- Embedded value of life businesses 4,786 4,350 6,448 6,168 11,234 10,518 ======= ======= ======= ======= ====== ======= * 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 effect of holding the minimum statutory solvency margin and allowing for projected future releases 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 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, together with the movement in the net assets of the long-term operations held in excess of the minimum statutory solvency margin, 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. 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 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, 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. -------------------------------------------------------------------- Minority interests in life achieved profit Minority Shareholders' Group Interest Interest 2000 2000 2000 £m £m £m New business contribution before effect of solvency margin 483 29 454 Effect of solvency margin (91) (9) (82) ------- ------- ------- New business contribution including effect of solvency margin 392 20 372 ======= ======= ======= Life achieved operating profit 1,533 42 1,491 Other life and savings activities 36 - 36 ------- ------- ------- Life achieved operating profit before tax, change in risk margin and exceptional items 1,569 42 1,527 ======= ======= ======= Total life achieved profit before tax 1,151 46 1,105 Attributed tax (375) (17) (358) ------- ------- ------- Total life achieved profit after tax 776 29 747 ======= ======= ======= Closing life embedded value 11,234 208 11,026 ======= ======= ====== Minority Shareholders' Group Interest Interest 1999 1999 1999 £m £m £m New business contribution before effect of solvency margin 501 31 470 Effect of solvency margin (98) (9) (89) ------- ------- ------- New business contribution including effect of solvency margin 403 22 381 ======= ======= ======= Life achieved operating profit 1,366 37 1,329 Other life and savings activities 41 - 41 ------- ------- ------- Life achieved operating profit before tax, change in risk margin and exceptional items 1,407 37 1,370 ======= ======= ======= Total life achieved profit before tax 2,693 43 2,650 Attributed tax (819) (17) (802) ======= ======= ======= Total life achieved profit after tax 1,874 26 1,848 ======= ======= ======= Closing life embedded value 10,518 104 10,414 ======= ======= ======= Principal economic assumptions The principal economic assumptions used are as follows: United Kingdom France 2000 1999 1998 2000 1999 1998 Risk discount rate 7.4% 7.8% 7.2% 8.5% 8.7% 7.7% Pre-tax investment returns: Base government fixed interest 4.7% 5.2% 4.5% 5.0% 5.5% 3.9% Ordinary shares 7.2% 7.7% 7.0% 7.0% 7.5% 5.9% Property 6.2% 6.7% 6.0% 6.5% 7.0% 5.4% Future expense inflation 3.7% 4.1% 3.4% 2.5% 2.5% 2.5% Tax rate 30.0% 30.0% 31.0% 37.8% 40.0% 40.0% Ireland Netherlands 2000 1999 1998 2000 1999 1998 Risk discount rate 9.1% 9.0% 8.1% 8.0% 8.3% 7.2% Pre-tax investment returns: Base government fixed interest 5.3% 5.6% 4.6% 5.0% 5.5% 3.9% Ordinary shares 8.3% 8.6% 7.6% 7.9% 8.4% 6.8% Property 6.8% 7.1% 6.1% 6.5% 7.0% 5.4% Future expense inflation 5.0% 4.0% 4.0% 2.5% 2.5% 2.5% Tax rate 20.0% 28.0% 33.0% 25.0% 25.0% 25.0% Poland - Life Poland - Pensions 2000 1999 1998 2000 1999 1998 Risk discount rate 20.0% 19.8% 20.6% 17.3% 17.1% n/a Pre-tax investment returns: Base government fixed interest 12.5% 12.5% 12.5% 12.5% 12.5% n/a Ordinary shares 12.5% 12.5% 12.5% 12.5% 12.5% n/a Property n/a n/a n/a n/a n/a n/a Future expense inflation 9.2% 9.2% 9.2% 9.2% 9.2% n/a Tax rate 28.0% 33.0% 35.0% 28.0% 33.0% n/a Spain 2000 1999 1998 Risk discount rate 8.4% 9.1% 8.0% Pre-tax investment returns: Base government fixed 5.4% 5.6% 4.0% interest Ordinary shares 8.4% 8.6% 7.0% Property 6.9% 7.1% 5.5% Future expense inflation 4.0% 3.0% 3.0% Tax rate 35.0% 35.0% 35.0% -------------------------------------------------------------------- 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 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 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 20 (40) (400) (400) Europe (excluding UK) France 10 (10) (40) (70) Ireland 2 (2) (5) (15) Netherlands 10 (10) (50) (110) Poland - Life - - - (5) - Pensions - (3) - (5) Spain 2 (2) - (10) Other - (5) - (10) International - (2) (5) (10) ------- ------- ------- ------- 44 (74) (500) (635) ======= ======= ======= ======= 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. The impact of an increase of one percentage point in the discount rate is calculated with all other assumptions remaining unchanged. MORE TO FOLLOW

Companies

Aviva (AV.)
UK 100