Interim Results 2000 - Part 3

CGNU PLC 2 August 2000 CGNU plc Interim Announcement 2000 Part 3 ------------------------------------------------------------------------------ Page 17 Summarised consolidated profit and loss account - modified statutory basis Restated 6 6 6 months months months Restated to to to full 30 June 30 June 30 June year 2000 2000 1999 1999 Em £m £m £m Premium income after reinsurance and investment sales 11,693 Life premiums 7,130 6,694 13,470 1,325 Investment sales 808 673 1,347 702 Health premiums 428 162 402 ------- ------- ------- ------- 13,720 8,366 7,529 15,219 10,140 General insurance premiums 6,183 5,819 11,227 ------- ------- ------- ------- 23,860 Total 14,549 13,348 26,446 ======= ======= ======= ======= Operating profit 994 Modified statutory life profit 606 564 1,172 34 Health 21 11 24 36 Fund management 22 26 66 536 General insurance 327 370 660 (34) Non-insurance operations (21) (11) (30) 3 Associated undertakings 2 8 10 (159) Corporate costs (97) (65) (162) (274) Unallocated interest charges (167) (107) (240) ------- ------- ------- ------- 1,136 693 796 1,500 (67) Wealth management (41) - - ------- ------- ------- ------- Operating profit before tax, amortisation of goodwill, amortisation of acquired additional value of in-force long-term business and exceptional 1,069 items 652 796 1,500 (30) Amortisation of goodwill (18) (17) (34) Amortisation of acquired additional value of in-force long-term (17) business (10) (2) (22) - Exceptional items - (70) (163) ------- ------- ------- ------- 1,022 Operating profit before tax 624 707 1,281 Short-term fluctuation in investment 202 returns 123 (213) 250 (20) Change in the equalisation provision (12) (35) (55) Net loss arising on the sale - of subsidiary undertakings - (9) (8) (93) Merger transaction costs (57) - - ------- ------- ------- ------- Profit on ordinary activities before 1,111 tax 678 450 1,468 (412) Tax on profit on ordinary activities (251) (153) (382) ------- ------- ------- ------- Profit on ordinary activities after 699 tax 427 297 1,086 (34) Minority interests (21) (28) (66) ------- ------- ------- ------- 665 Profit for the financial period 406 269 1,020 (15) Preference dividends (9) (9) (17) ------- ------- ------- ------- Profit for the financial period 650 attributable to equity shareholders 397 260 1,003 (525) Ordinary dividends (320) (278) (773) ------- ------- ------- ------- Retained profit/(loss) transfer 125 to reserves 77 (18) 230 ======= ======= ======= ======= Earnings per share Operating profit before amortisation of goodwill, amortisation of acquired additional value of in-force long-term business and exceptional items, after taxation, attributable 33.0c to equity shareholders 20.1p 25.8p 48.8p Profit attributable to equity 29.0c shareholders 17.7p 11.6p 44.8p Profit attributable to equity 28.9c shareholders - diluted 17.6p 11.6p 44.7p Dividends per share 23.37c - based on parent company 14.25p 14.25p 38.00p 23.37c - based on weighted average 14.25p 12.34p 34.30p ------------------------------------------------------------------------------ Page 18 Consolidated statement of total recognised gains and losses Restated 6 6 months months Restated to to full 30 June 30 June year 2000 1999 1999 £m £m £m Profit for the financial period 406 269 1,020 Movement in internally-generated additional value of in-force long-term business* 66 328 909 Foreign exchange gains/(losses) 359 (127) (389) ------- ------- ------- Total recognised gains and losses arising in the period 831 470 1,540 ======= ======= ======= * Stated before the effect of foreign exchange movements which are reported within the foreign exchange gains/(losses) line. Reconciliation of movements in consolidated shareholders' funds Restated 6 6 months months Restated to to full 30 June 30 June year 2000 1999 1999 £m £m £m Balance at the beginning of the period As previously reported - CGU plc 9,567 9,039 9,039 - Norwich Union plc 6,039 5,713 5,713 Merger adjustments arising from alignment of accounting practices 67 141 141 ------- ------- ------- Restated shareholders' funds at the beginning of the period 15,673 14,893 14,893 Total recognised gains and losses arising in the period 831 470 1,540 Dividends (329) (287) (790) Increase in capital 21 12 23 Merger reserve arising during the period 5 8 8 Other movements (8) (5) (1) ------- ------- ------- Balance at the end of the period 16,193 15,091 15,673 ======= ======= ======= ------------------------------------------------------------------------------ Page 19 Summarised consolidated balance sheet Restated Restated 30 30 31 June June December 2000 1999 1999 £m £m £m Assets Goodwill 544 488 452 ------- ------- ------- Investments Land and buildings 805 822 763 Participating interests 231 329 283 Variable yield securities 7,416 6,166 7,595 Fixed interest securities 13,531 13,174 12,421 Mortgages and loans 1,305 916 1,080 Deposits 1,077 1,135 1,057 Additional value of in-force long-term business 6,554 5,887 6,425 ------- ------- ------- 30,919 28,429 29,624 Reinsurers' share of technical provisions 2,684 2,610 2,638 Assets of the long-term business 144,894 132,967 140,798 Other assets 9,897 8,254 9,672 ------- ------- ------- Total assets 188,938 172,748 183,184 ======= ======= ======= Liabilities Shareholders' funds Equity 15,993 14,889 15,473 Non-equity 200 202 200 Minority interests 588 532 584 ------- ------- ------- Total capital and reserves 16,781 15,623 16,257 Liabilities of the long-term business 140,447 129,124 136,673 General insurance liabilities 23,206 22,187 22,036 Borrowings 2,834 1,704 2,101 Other creditors and provisions 5,670 4,110 6,117 ------- ------- ------- Total liabilities 188,938 172,748 183,184 ======= ======= ======= Approved by the Board on 1 August 2000 ------------------------------------------------------------------------------ Page 20 Consolidated cash flow statement Restated 6 6 months months Restated to to full 30 June 30 June year 2000 1999 1999 £m £m £m Net cash inflow from operating activities excluding exceptional items and merger transaction costs 215 395 827 Exceptional items and merger transaction costs paid (83) (54) (219) Net cash outflow from servicing of finance (119) (88) (156) Corporation tax paid (including advance corporation tax) (92) (96) (138) Net purchases of tangible fixed assets (39) (51) (131) Acquisitions and disposals of subsidiary and associated undertakings (235) (59) (64) Equity dividends paid (496) (451) (731) Net cash inflow from financing activities 691 110 428 ------- ------- ------- Net cash flows (158) (294) (184) ======= ======= ======= Cash flows were invested as follows: Decrease in cash holdings (146) (139) (18) Net portfolio investment Net purchases/(sales) of investments 52 (175) (226) Non-trading cash flow (from)/to long-term business operations (64) 20 60 ------- ------- ------- Net investment of cash flows (158) (294) (184) ======= ======= ======= The cash flows presented in this statement relate to shareholder and general business transactions only. ------------------------------------------------------------------------------ Page 21 1. Basis of preparation On 21 February 2000, CGU plc and Norwich Union plc announced plans to merge their respective businesses to form CGNU plc. The merger was effected by way of an exchange of shares in CGNU plc for the shares held in the CGU plc and Norwich Union plc companies. The merger became effective on 30 May 2000 and on that date 931 million new shares in CGNU, with a total market value of £9,528 million, were issued to Norwich Union plc shareholders in return for Norwich Union plc shares in a ratio of 48 CGNU shares for every 100 Norwich Union plc shares. The merger has been accounted for using the merger accounting principles set out in Financial Reporting Standard 6 'Acquisitions and Mergers'. Accordingly, the financial information for the six months to 30 June 2000, and that for the 1999 interim and full year results, has been presented as if CGU plc and Norwich Union plc had been combined throughout the current and comparative accounting periods. Merger accounting principles have given rise to a merger reserve. Costs of integrating and re-organising the business are included within operating profit. Merger transaction costs of £57 million have been incurred and are disclosed separately after operating profit before taxation. The results of the two interim periods disclosed are unaudited but have been reviewed by the joint auditors, Ernst & Young and PricewaterhouseCoopers. Their review report in respect of the six months to 30 June 2000 is on page 28. The interim accounts do not constitute statutory accounts as defined in section 240 of the Companies Act 1985. The results for the full year 1999 are based on the statutory Group accounts of CGU plc and Norwich Union plc, both of which received unqualified audit opinions and have been filed with the Registrar of Companies. 2. Basis of accounts The unaudited interim accounts for the six months to 30 June 2000 have been prepared on the basis of the accounting policies used to prepare the CGU plc and Norwich Union plc 1999 Annual Report and Accounts, as modified to align differences in the accounting policies used by the two companies. The accounting policies aligned were such that: (i) Certain general business fixed income and debt securities held by Norwich Union plc were revalued from an amortised cost basis to a market value basis; (ii) Project costs which had formerly been capitalised by Norwich Union plc have been eliminated; (iii) Embedded value assumptions used by both companies have been brought onto a common basis. The impact of these changes was to increase profit before tax by £16 million (30 June 1999: reduce by £32 million, full year 1999: reduce by £91 million) and increase shareholders' funds by £83 million (30 June 1999: increase by £100 million, full year 1999: increase by £67 million). 3. Principal exchange rates 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: 6 6 months months to to Full 30 June 30 June year 2000 1999 1999 Canada - dollars 2.30 2.41 2.40 France - francs 10.73 9.78 9.99 Netherlands - guilders 3.60 3.29 3.35 United States - dollars 1.57 1.61 1.62 The results have been translated into euros using the average rate for the six months to June 2000 of 1 euro = £0.61. The principal closing rates were: 30 30 31 June June December 2000 1999 1999 Canada - dollars 2.24 2.33 2.34 France - francs 10.36 10.03 10.55 Netherlands - guilders 3.48 3.37 3.54 United States - dollars 1.51 1.58 1.61 ------------------------------------------------------------------------------ Page 22 4. Change in accounting policy - dividend income Financial Reporting Standard 16 'Current Tax' was published by the Accounting Standards Board on 16 December 1999 following recent changes in the United Kingdom tax system. The principal requirement of this standard is that dividends should be recognised at the amount receivable without any attributable tax credit. In presenting the results for the six months to 30 June 2000 the CGNU plc Group has complied with Financial Reporting Standard 16. Norwich Union plc adopted FRS16 in its full year 1999 accounts. Accordingly, dividend income within the comparative results for the six months to 30 June 1999 for both CGU plc and Norwich Union plc, and the full year to 31 December 1999 for CGU plc only, has been restated to a net of tax basis. UITF abstract 14 'Disclosure of Changes in Accounting Policy' requires the effect of changes in accounting policy to be disclosed in relation to both the reported results in 2000 and 1999. The change in accounting policy has a purely presentational effect and does not alter the profit of the Group after taxation. Accordingly, shareholders' reserves at 30 June 2000, 31 December 1999 and 30 June 1999 remain at the same level before and after the change in accounting for dividend income. The impact of the change in accounting policy on operating profit before taxation is a reduction of £3 million (six months to 30 June 1999: £4 million, full year 1999: £13 million). The impact on profit on ordinary activities before tax is a reduction of £6 million (six months to 30 June 1999: £7 million, full year 1999: £17 million). 5. Acquisitions in the six months to 30 June 2000 On 18 January 2000, the Group acquired the remaining 72 percent of the share capital of Hibernian Group plc, formerly an associate of CGU plc, for a cash consideration of £254 million giving rise to goodwill of £107 million. Hibernian Group plc transacts general insurance in the Republic of Ireland and the United Kingdom, life insurance business in the Republic of Ireland and international reinsurance. The transaction was accounted for as an acquisition. Compliance with Financial Reporting Standard 2 'Subsidiary undertakings' requires a departure from the Companies Act 1985 relating to the calculation of goodwill on Hibernian. In the opinion of the directors, in order to give a true and fair view, goodwill has to take account of the share of net assets purchased when Hibernian became an associate. If the provisions of the Companies Act had been followed, goodwill would have been £47 million lower. 6. Exceptional items Exceptional items comprise: 6 6 months months to to Full 30 June 30 June year 2000 1999 1999 £m £m £m Merger integration costs - 70 120 Integration incentive plans - - 31 Other integration costs - - 12 ------- ------- ------- Total - 70 163 ======= ======= ======= Merger integration costs for the six months to 30 June 1999 and full year 1999 comprise the costs of integrating and reorganising the businesses of the former Commercial Union and General Accident. Integration incentive plans, which relate to the integration of the former Commercial Union and General Accident businesses, comprise the costs of incentive plans payable to staff in certain business units and the costs of cash and share awards to senior management of the Group, which are conditional upon the performance of the Group against pre-defined targets. Other integration costs relate to the integration of the long-term business of Norwich Union's Spanish operation with its acquisition of British Life in 1999. ------------------------------------------------------------------------------ Page 23 7. Geographical analysis of life and pensions and investment sales - new business and total income New business sales Premium income after reinsurance and investment sales New single New regular premiums premiums 6 6 6 6 6 6 months months months months months months to to to to to to 30 30 30 30 30 30 Full June June June June June June year 2000 1999 2000 1999 2000 1999 1999 £m £m £m £m £m £m £m Life and pensions sales United Kingdom 2,966 2,333 182 151 4,138 3,436 7,405 Europe (excluding UK) France 968 715 21 25 1,100 1,292 2,420 Ireland 198 125 25 10 279 174 375 Netherlands 203 167 32 38 515 422 837 Poland - Life 5 6 22 32 120 101 216 - Pensions - - 109 2 182 2 118 Spain 37 14 5 8 66 41 104 Other 183 693 42 64 396 908 1,348 International 228 223 23 22 334 318 647 ------ ------ ------ ------ ------ ------ ------ Total life and pensions 4,788 4,276 461 352 7,130 6,694 13,470 Investment sales United Kingdom 510 464 11 8 521 472 806 Europe (excluding UK) 121 57 - - 121 57 130 International 166 144 - - 166 144 411 ------ ------ ------ ------ ------ ------ ------ Total long-term business 5,585 4,941 472 360 7,938 7,367 14,817 ====== ====== ====== ====== ====== ====== ====== Single premiums are defined as premiums arising on contracts where there is no expectation of future premiums. Additional single premiums are permitted on most contracts of this type and are also classified as single premiums. All premiums are written by way of direct insurance and the directors consider that premiums written on the destination basis are not materially different from premiums written on an origin basis. New business premiums from Europe and International businesses have been translated at the average exchange rates applying for the period. Restating new business sales for the six months to 30 June 1999 to account for the impact of exchange rate movements in the six months to 30 June 2000 would result in the total regular premiums being restated from £360 million to £345 million and from £4,941 million to £4,791 million for total single premiums. Investment sales include Isas, PEPs, unit trusts and UCITS (collective investments sold throughout Europe). ------------------------------------------------------------------------------ Page 24 8. Geographical analysis of modified statutory life profit 6 6 months months to to Full 30 June 30 June year 2000 1999 1999 £m £m £m United Kingdom With-profit 127 127 244 Non-profit 286 264 556 Europe (excluding UK) France 69 52 103 Ireland 19 18 47 Netherlands 73 63 140 Poland - Life 13 11 31 - Pensions (5) (5) (28) Spain 5 4 11 Other 2 9 22 International 17 21 46 ------ ------ ------ Total modified statutory life profit 606 564 1,172 ====== ====== ====== 9. Geographical analysis of health premiums after reinsurance and operating result (a) Premiums after reinsurance: 6 6 months months to to Full 30 June 30 June year 2000 1999 1999 £m £m £m United Kingdom 103 90 177 France 47 48 97 Netherlands 278 24 128 ------ ------ ------ Total 428 162 402 ====== ====== ====== (b) Operating result: Health operating Underwriting profit result 6 6 6 6 months months months months to to to to 30 30 Full 30 30 Full June June year June June year 2000 1999 1999 2000 1999 1999 £m £m £m £m £m £m United Kingdom 2 - - - (2) (4) France 6 6 13 - 2 2 Netherlands 13 5 11 (10) 1 (3) ------ ------ ------ ------ ------ ------ Total 21 11 24 (10) 1 (5) ====== ====== ====== ====== ====== ====== ------------------------------------------------------------------------------ Page 25 10. Geographical analysis of general insurance premiums after reinsurance and operating result (a) General insurance premiums after reinsurance: 6 6 months months to to Full 30 June 30 June year 2000 1999 1999 £m £m £m United Kingdom 2,650 2,514 4,868 Europe (excluding UK) France 353 381 657 Ireland 184 81 151 Netherlands 226 192 339 Other 329 364 659 International Australia and New Zealand 313 328 674 Canada 454 387 788 United States 1,425 1,332 2,621 Other 249 240 470 ------ ------ ------ Total 6,183 5,819 11,227 ====== ====== ====== (b) Operating result: General insurance Underwriting operating profit* result* 6 6 6 6 months months months months to to to to 30 30 Full 30 30 Full June June year June June year 2000 1999 1999 2000 1999 1999 £m £m £m £m £m £m United Kingdom 202 132 315 (157) (177) (328) Europe (excluding UK) France (120) 20 (8) (167) (21) (80) Ireland 11 3 15 (13) (6) (5) Netherlands 10 16 7 (21) (11) (32) Other 1 5 22 (34) (37) (52) International Australia and New Zealand 33 18 15 (12) (19) (57) Canada 44 38 93 (18) (18) (25) United States 115 102 176 (96) (89) (204) Other 31 36 25 (16) (7) (58) ------ ------ ------ ------ ------ ------ Total 327 370 660 (534) (385) (841) ====== ====== ====== ====== ====== ====== * The general insurance operating profit and underwriting result are stated before the change in the equalisation provision of £12 million (six months to 30 June 1999: £35 million, full year 1999: £55 million). ------------------------------------------------------------------------------ Page 26 11. Taxation The tax charge in the profit and loss account comprises: 6 6 months months to to Full 30 June 30 June year 2000 1999 1999 £m £m £m United Kingdom corporation tax 16 (8) 32 Overseas tax 134 73 62 Other (85) (84) (42) ------ ------ ------ Total taxation charge for the period 65 (19) 52 Tax attributable to the long-term business technical result 186 172 330 ------ ------ ------ Charge to profit and loss account 251 153 382 ====== ====== ====== Tax charge analysed between: Operating profit before tax, amortisation of goodwill, amortisation of acquired additional value of in-force long-term business and exceptional items 176 187 335 Profit on other ordinary activities 75 (34) 47 ------ ------ ------ 251 153 382 ====== ====== ====== 12. Dividends The dividends payable in the profit and loss account comprise: 6 6 months months to to Full 30 June 30 June year 2000 1999 1999 £m £m £m Preference dividends 9 9 17 ====== ====== ====== Ordinary dividends Interim - 14.25 pence (1999: 12.34 pence*) 320 278 278 Final - (1999: 21.96 pence*) - - 495 ------ ------ ------ Total ordinary dividends 320 278 773 ====== ====== ====== * Based on the weighted average dividends per share of CGU plc and Norwich Union plc. The 1999 interim and final dividends per share for CGU plc were 14.25p and 23.75p respectively. The preference dividends are in respect of the cumulative irredeemable preference shares of £1 each in issue, payable on 31 March and 30 June 2000. The directors declare an interim dividend for the period of £320 million, representing 14.25 pence net per share of the Company, payable on 17 November 2000 to members on the register at 29 September 2000. Irish shareholders who are due to be paid a dividend denominated in Irish punts will receive a payment based on the exchange rate prevailing on 1 August 2000. ------------------------------------------------------------------------------ Page 27 13. Earnings per share 30 June 2000 30 June 1999 Net Net of tax, of tax, minorities minorities and and Before preference Per preference Per tax dividend share dividend share £m £m p £m p Operating profit before amortisation of goodwill, amortisation of acquired additional value of in-force long-term business and exceptional items 652 450 20.1 576 25.8 Adjusted for the following items: - Amortisation of goodwill (18) (18) (0.8) (17) (0.8) - Amortisation of acquired additional value of in-force long-term business (10) (9) (0.4) (2) (0.1) - Exceptional items - - - (55) (2.5) - Short-term fluctuation in investment returns 123 32 1.4 (208) (9.3) - Change in the equalisation provision (12) (9) (0.4) (25) (1.1) - Net loss arising on the sale of subsidiary undertakings - - - (9) (0.4) - Merger transaction costs (57) (49) (2.2) - - ------ ------ ------ ------ ------ Profit attributable to equity shareholders 678 397 17.7 260 11.6 ====== ====== ====== ====== ====== 31 December 1999 Net of tax, minorities and preference Per dividend share £m p Operating profit before amortisation of goodwill, amortisation of acquired additional value of in-force long-term business and exceptional items 1,091 48.8 Adjusted for the following items: - Amortisation of goodwill (34) (1.5) - Amortisation of acquired additional value of in-force long-term business (15) (0.7) - Exceptional items (124) (5.5) - Short-term fluctuation in investment returns 133 5.9 - Change in the equalisation provision (40) (1.8) - Net loss arising on the sale of subsidiary undertakings (8) (0.4) - Merger transaction costs - - ------ ------ Profit attributable to equity shareholders 1,003 44.8 ====== ====== Earnings per share has been calculated based on the operating profit before amortisation of goodwill, amortisation of acquired additional value of in-force long-term business and exceptional items, after taxation, attributable to equity shareholders, as well as on the profit attributable to equity shareholders, as the directors believe the former earnings per share figures provide a better indication of operating performance. The calculation of basic earnings per share uses a weighted average of 2,244 million (six months to 30 June 1999: 2,234 million, full year 1999: 2,237 million) ordinary shares in issue. Diluted earnings per share is calculated by adjusting the weighted average number of shares for the effect of share options. The actual number of shares in issue at 30 June 2000 was 2,246 million (30 June 1999: 2,238 million, 31 December 1999: 2,242 million). 14. Longer-term investment return The longer-term investment return is calculated separately for each principal country. 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 longer-term investment return are: Longer-term rates of return Equities Properties 2000 1999 2000 1999 % % % % United Kingdom 8.1 6.9 6.6 5.4 France 7.5 5.9 6.5 4.9 Ireland 8.7 7.0 6.7 5.0 Netherlands 8.4 6.8 6.5 4.9 Australia and New Zealand 10.0 8.0 8.0 6.0 Canada 9.3 7.9 7.3 5.9 United States 9.3 7.7 7.3 5.7 ------------------------------------------------------------------------------ Page 28 Independent review report to CGNU plc We have been instructed by the Company to review the financial information set out on pages 17 to 27 and we have read the other information contained in the interim report for any apparent misstatements or material inconsistencies with the above financial information. This information has been prepared on the modified statutory solvency basis, which is the basis of accounting adopted in the annual audited accounts. Directors' responsibilities The interim report, including the above financial information contained therein, is the responsibility of, and has been approved by, the directors. The Listing Rules of the Financial Services Authority require that the accounting policies and presentation applied to the interim figures should be consistent with those applied in preparing the preceding annual accounts except where any changes, and the reasons for them, are disclosed. Review work performed We conducted our review in accordance with guidance contained in Bulletin 1999/4 issued by the Auditing Practices Board. A review consists principally of making enquiries of group management and applying analytical procedures to the above financial information and underlying financial data and based thereon, assessing whether the accounting policies and presentation have been consistently applied unless otherwise disclosed. A review excludes audit procedures such as tests of controls and verification of assets, liabilities and transactions. It is substantially less in scope than an audit performed in accordance with Auditing Standards and therefore provides a lower level of assurance than an audit. Accordingly we do not express an audit opinion on the financial information. Review conclusion On the basis of our review, we are not aware of any material modifications that should be made to the financial information as presented for the six months ended 30 June 2000. PricewaterhouseCoopers Ernst & Young Chartered Accountants London London MORE TO FOLLOW

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