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.
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