2001 Full year results-Part 6

CGNU PLC 27 February 2002 Part 6 of 6 --------------------------------------------------------------------- Page 40 Group capital structure Shareholders' funds have declined by 13% to Â£11,872 million, largely reflecting an 18% fall in European equity markets. During the year, we disposed of the US general insurance operation, crystallising the after tax loss of Â£1 billion, provided in 2000, and invested Â£0.8 billion in new ventures (2000: Â£1.2 billion). The group raised Â£1.2 billion of fresh capital to strengthen further its financial position. Capital employed Our focused approach to corporate activity, closely aligned to the business strategy, has resulted in a shift in the mix of capital away from general insurance and health. The majority of the assets released from discontinued operations has been applied to reduce borrowings. The remainder, together with the proceeds of the subordinated debt issue, is available to shareholders and has been shown as corporate. Capital employed by segment 2001 2000 Â£m Â£m Long-term savings 11,321 11,455 General insurance and health 4,921 5,425 Other business 310 272 Corporate 3,063 2,009 ------- ------- Total continuing operations 19,615 19,161 Discontinued operations - 1,757 ------ ------ Total capital employed 19,615 20,918 ------ ------ Deployment of equity shareholders' funds 2001 2000 Fixed income Other Other Equities securities investments assets Total Total Â£m Â£m Â£m Â£m Â£m Â£m Assets 4,947 5,063 2,242 120 12,372 11,552 ------ ------ ------ ------ Goodwill 1,385 1,004 Additional value of in-force long-term business 5,858 6,605 ------ ------ Assets backing continuing operations 19,615 19,161 External debt (2,651) (2,581) Internal debt (3,284) (4,120) Subordinated debt (1,157) - ------ ------ 12,523 12,460 Minority interests (651) (584) Preference capital (200) (200) ------ ------ Total continuing operations 11,672 11,676 Discontinued operations - 1,757 ------ ------ Equity shareholders' funds 11,672 13,433 ====== ====== Return on capital employed Rates of return have been depressed this year by assets supporting the US general insurance operation, upon which we received no return for the first five months. We remain focused on achieving our ambitions of a 10% net real return in the medium term, without sacrificing quality of earnings. -------------------------------------------------------------------- Page 41 Group capital structure (continued) Return on capital employed 2001 2000 Normalised after Opening Return Return tax equity on on return capital capital capital Â£m Â£m % % Long-term savings 1,160 11,455 10.1% 10.3% General insurance and health 640 5,425 11.8% 6.4% Other business (70) 272 (25.7%) (47.5%) Corporate (59) 2,009 (2.9%) (2.0%) ------ ------ ------ ------ 1,671 19,161 8.7% 6.7% Borrowings (298) (6,701) 4.4% 5.1% ------ ------ ------ ------ 1,373 12,460 11.0% 7.2% Minority interests (93) (584) 15.9% 10.3% Preference capital (17) (200) 8.5% 8.5% ------ ------ ------ ------ Total continuing operations 1,263 11,676 10.8% 7.1% Discontinued operations - 1,757 na na ------ ------ ------ ------ Equity shareholders' funds 1,263 13,433 9.4% 5.8% ====== ====== ====== ====== The return on capital is calculated as the after-tax return on opening equity capital, based on operating profit from continuing operations, including life achieved profit, before amortisation of goodwill and exceptional items. Capital Structure The Group maintains an efficient structure from a combination of equity shareholders' funds, preference capital, subordinated debt and borrowings, consistent with the Group's risk profile and the regulatory and market requirements of our business. The Group's capital, from all funding sources, has been allocated such that the capital employed by trading operations is some Â£5.9 billion (2000: Â£6.7 billion) greater than the capital provided by its shareholders and its subordinated debt holders. As a result, the Group is able to enhance the returns earned on its equity capital. The return on capital for continuing operations of 10.8% (2000: 7.1%) considerably exceeds the 8.7% return on the capital employed in our businesses (2000: 6.7%), enhancing value for our shareholders. External funding is provided from both the banking and the debt capital markets. In November 2001, the company issued Â£1.2 billion of subordinated debt. This provides cost-effective funding and is treated as equity for both regulatory and rating agency purposes. In addition to its external funding sources, the Group has a number of internal debt arrangements in place. These have allowed the investment of assets supporting technical liabilities into the pool of central capital for use across the Group. They have also enabled the shareholders to deploy cash from some parts of the business to others in order to fund growth. Although intra group loans in nature, they are counted as part of the capital base for the purpose of capital management. All internal loans have been negotiated at a market rate and are appropriately serviced. The Group's principal insurance operating subsidiaries have been assigned financial strength ratings of AA, 'very strong security', from Standards and Poor's. -------------------------------------------------------------------- Page 42 Group capital structure (continued) Borrowings and interest cover The net proceeds of the disposal of the US general insurance operation in June this year were used to reduce the Group's borrowings and to finance the acquisitions made during the year and other operational requirements. In November the Group raised Â£1.2 billion of subordinated debt to fund anticipated organic and inorganic growth. This has been treated as equity for the purposes of calculating the Group's gearing and interest cover, to reflect the characteristics of this form of capital. At the end of 2001, the Group's total external borrowings amounted to Â£3.8 billion, including the subordinated debt. Around half of these borrowings are on a fixed rate basis with maturity terms between two and 34 years, with the balance being represented by commercial paper and floating rate bank borrowings. Borrowings 2001 2000 Â£m Â£m External debt 2,651 2,581 Internal debt 3,284 4,120 ------ ------ 5,935 6,701 Subordinated debt 1,157 - ------ ------ Total 7,092 6,701 ====== ====== The ratio of the Group's external debt to shareholders' funds was 19%. Interest cover, which measures the extent to which external interest costs are covered by achieved operating profit, was 12 times. Capital management In managing its capital, the Group aims to: i. match the profile of its assets and liabilities, taking account of the risks inherent in each business. In the case of the Group's life operations, which have long-term liabilities, the majority of capital is held in fixed income securities. A significant proportion of the capital supporting the Group's general insurance and health operations is held in equities, reflecting the relatively low risk profile of these businesses; ii. maintain financial strength to support new business growth and satisfy the requirements of its policyholders, regulators and rating agencies; iii. retain financial flexibility by maintaining strong liquidity, including significant unutilised committed credit lines, and access to a range of capital markets; and iv. allocate capital efficiently to support growth and repatriate excess capital where appropriate. An important aspect of the Group's overall capital management process is the setting of target risk-adjusted rates of return for individual business units, which are aligned to performance objectives and ensure that the Group is focused on the creation of value for shareholders. -------------------------------------------------------------------- Page 43 Group capital structure (continued) Shareholders' funds, including minority interests Closing shareholders'funds Normalised return (note 1) MSSB net Internally assets generated Embedded Before After (note 2) AVIF value tax tax 2001 Note Â£m Â£m Â£m Â£m Â£m Life assurance United Kingdom 2,676 3,354 6,030 850 595 France 889 354 1,243 227 141 Ireland 256 211 467 79 66 Italy 218 60 278 55 31 Netherlands (including Belgium and Luxembourg) 983 883 1,866 221 163 Poland 117 254 371 99 71 Spain 179 130 309 80 52 Other Europe 101 6 107 18 10 International 385 7 392 36 25 ------ ------ ------ ------ ------ 5,804 5,259 11,063 1,665 1,154 Participating interests and other 3 258 - 258 9 6 ------ ------ ------ ------ ------ 6,062 5,259 11,321 1,674 1,160 ------ ------ ------ ------ ------ General insurance and health 4 United Kingdom 5 2,058 2,058 491 325 France 635 635 67 43 Ireland 197 197 48 38 Netherlands 430 430 72 65 Other Europe 278 278 41 29 Australia and New Zealand 352 352 69 54 Canada 569 569 72 48 Other 402 402 48 38 ------ ------ ------ ------ ------ 4,921 - 4,921 908 640 ------ ------ ------ ------ ------ Other business 310 310 (72) (70) Corporate 5,6 3,063 3,063 (80) (59) External debt 7 (2,651) (2,651) (169) (118) Internal debt (3,284) (3,284) (247) (173) Subordinated debt (1,157) (1,157) (10) (7) ------ ------ ------ ------ ------ (3,719) - (3,719) (578) (427) ------ ------ ------ ------ ------ Shareholders' funds, including minority interests 7,264 5,259 12,523 2,004 1,373 ====== ====== ====== ====== ====== Comprising Note Â£m Â£m Â£m Equities 4,947 - 4,947 Debt and fixed income securities 5,063 - 5,063 Property 825 - 825 Deposits and other investments 1,417 - 1,417 Intangible assets 8 1,984 5,259 7,243 Other net assets 120 - 120 Borrowings (7,092) - (7,092) ------ ------ ------ 7,264 5,259 12,523 ====== ====== ====== -------------------------------------------------------------------- Page 44 Group capital structure (continued) Shareholders' funds, including minority interests (continued) Notes 1. The normalised return is based upon operating profit from continuing operations, including life achieved profit, before amortisation of goodwill and exceptional items 2. Includes acquired additional value of in-force long-term business of Â£599 million 3. The net assets of Â£258 million represents the Â£244 million of goodwill on the RBSG joint venture and Â£14 million net assets of the other life and savings operations 4. The capital employed in the Group's general insurance operations includes Â£316 million of goodwill 5. Assets available to shareholders are held by the Group's UK general insurance operations and are available to finance future growth of the Group. Accordingly, for the purposes of preparing this note, these assets together with their associated pre-tax investment return of Â£107 million (post-tax Â£72 million) have been reclassified as Corporate 6. The return before tax of Â£80 million comprises investment return (Â£107 million) and corporate costs (Â£187 million) 7. The external borrowings reported in the summary consolidated balance sheet of Â£2,662 million comprises Â£11 million of general insurance borrowings (reported within the general insurance and health net assets) and Â£2,651 million of borrowings by holding companies of the Group not allocated to operating companies (shown as external debt) 8. Comprises acquired additional value of in-force long-term business (Â£599 million), goodwill arising on acquisitions (Â£1,141 million) and goodwill on the RBSG joint venture (Â£244 million) -------------------------------------------------------------------- Page 45 Group capital structure (continued) Shareholders' funds, including minority interests (continued) Normalised return Opening Closing (note 1) Embedded Embedded Before After Value Value tax tax 2000 Note Â£m Â£m Â£m Â£m Life assurance United Kingdom 6,206 6,259 903 632 France 1,091 1,202 204 122 Ireland 369 485 68 54 Italy 130 172 29 17 Netherlands (including Belgium and Luxembourg) 1,842 2,086 179 134 Poland 216 284 94 66 Spain 79 206 42 27 Other Europe 70 106 (15) (12) International 515 434 29 18 ------ ------ ------ ------ 10,518 11,234 1,533 1,058 Participating interests and other 2 32 221 36 25 ------ ------ ------ ------ 10,550 11,455 1,569 1,083 ------ ------ ------ ------ General insurance and health 3 United Kingdom 4 2,021 2,159 203 151 France 552 585 (103) (65) Ireland 46 195 21 17 Netherlands 452 581 46 41 Other Europe 375 430 20 15 Australia and New Zealand 354 473 82 64 Canada 506 614 78 51 Other 434 388 34 27 ------ ------ ------ ------ 4,740 5,425 381 301 ------ ------ ------ ------ Other business 223 272 (96) (106) Corporate 4,5 2,843 2,009 (86) (56) External debt 6 (1,893) (2,581) (151) (105) Internal debt (3,037) (4,120) (210) (147) ------ ------ ------ ------ (1,864) (4,420) (543) (414) ------ ------ ------ ------ Total continuing operations 13,426 12,460 1,407 970 Discontinued operations 2,831 1,757 - - ------ ------ ------ ------ Shareholders' funds, including minority interests 7 16,257 14,217 1,407 970 ====== ====== ====== ====== -------------------------------------------------------------------- Page 46 Group capital structure (continued) Shareholders' funds, including minority interests (continued) Notes 1. The normalised return is based upon operating profit from continuing operations, including life achieved profit, before amortisation of goodwill and exceptional items 2. The closing net asset value of Â£221 million represents the Â£257 million of goodwill on the RBSG joint venture and Â£36 million net liabilities of the other life and savings operations 3. The capital employed in the Group's general insurance operations includes Â£307 million of goodwill 4. Assets available to shareholders are held by the Group's UK general insurance operations and are available to finance future growth of the Group. Accordingly, for the purposes of preparing this note, these assets together with their associated pre-tax investment return of Â£99 million (post-tax Â£69 million) have been reclassified as Corporate 5. The return before tax of Â£86 million comprises investment return (Â£99 million) and corporate costs (Â£185 million) 6. The external borrowings reported in the summary consolidated balance sheet of Â£2,592 million comprises Â£11 million of general insurance borrowings (reported within the general insurance and health net assets) and Â£2,581 million of borrowings by holding companies of the Group not allocated to operating companies (shown as external debt) 7. The end 2000 total shareholders' funds and minority interests of Â£14,217 million includes additional acquired and internally generated value of in-force long-term business (Â£6,605 million), goodwill arising on acquisitions (Â£747 million) and goodwill on the RBSG joint venture (Â£257 million) --------------------------------------------------------------------- Page 47 Group capital structure (continued) Shareholders' capital, excluding shareholders' interest in the UK and Ireland with-profit businesses Solvency Capital Adjustments Adjusted requirement Employed (note 1) Capital (note 2) Balance 2001 Â£bn Â£bn Â£bn Â£bn Â£bn Life assurance 11.3 (6.5) 4.8 (2.2) 2.6 General insurance and health 4.9 (0.3) 4.6 (1.9) 2.7 Other business 0.3 - 0.3 - 0.3 Corporate 3.1 (0.8) 2.3 - 2.3 ------ ------ ------ ------ ------ Capital employed 19.6 (7.6) 12.0 (4.1) 7.9 External debt (2.6) (2.6) (2.6) Internal debt (3.3) (3.3) (3.3) ------ ------ ------ ------ ------ Capital employed, net of debt 13.7 (7.6) 6.1 (4.1) 2.0 ------ ------ ------ ------ ------ Represented by Subordinated debt 1.2 - 1.2 - 1.2 Shareholders' funds and minority interests 12.5 (7.6) 4.9 (4.1) 0.8 ------ ------ ------ ------ ------ 31 December 2001 13.7 (7.6) 6.1 (4.1) 2.0 ------ ------ ------ ------ ------ 31 December 2000 2.8 ------ 31 December 1999 5.2 ------ Notes 1. For life assurance, the adjustment represents the difference between the capital employed and the embedded value net worth, comprising an increase in respect of asset valuation differences (Â£0.3 billion) and decreases in respect of additional value of in-force long-term business (Â£5.9 billion), goodwill on the RBSG joint venture (Â£0.2 billion) and technical provisions, deferred acquisition costs and other items (Â£0.7 billion). For non-life operations, the adjustments represent goodwill. 2. For life assurance, the Â£2.2 billion represents the European Union (EU) solvency requirements (or equivalent for non-EU operations) that are supported by shareholders' capital. For general insurance and health, the Â£1.9 billion is a benchmark solvency requirement, based upon 20% of net written premiums for continuing operations. Post-tax return on life and pensions new business 2001 % United Kingdom 17% France 16% Ireland 27% Italy 16% Netherlands (including Belgium and Luxembourg) 10% Poland 22% Spain 24% Other Europe and International 11% ------ All business 16% ------ The return is the discount rate at which the present value of the post-tax cash flows expected to be earned over the lifetime of the business written is equal to the initial capital required to support the writing of the business. The capital includes the statutory minimum solvency margins and amounts to approximately Â£800 million. -------------------------------------------------------------------- Page 48 Shareholder information Financial calendar 2002 Ex-dividend date (ordinary shares) 27 March 2002 Record date (ordinary shares) 2 April 2002 Annual General Meeting 23 April 2002 Announcement of long-term savings new business for 3 months to 31 March 2002 25 April 2002 Payment date (ordinary shares) 17 May 2002 Announcement of unaudited six months' interim results 1 August 2002 Dividend The recommended final dividend on the ordinary shares for 2001 will be paid in cash on 17 May 2002. Shareholders are offered the opportunity to participate in the Company's Dividend Reinvestment Plan (the 'Plan'), which enables dividends to be reinvested in the Company's shares at reduced dealing costs. Shareholders who have previously elected to join the Plan need take no further action, as their cash dividend will automatically be used to purchase CGNU's shares, on or after the dividend payment date, in accordance with the terms of the Plan. Shareholders who have not already joined the Plan and wish to do so should contact the Company's Registrar, at the address below, in order to obtain full details and a mandate form. Completed mandate forms must be returned to the Registrar by no later than 25 April 2002 in order to participate in the Plan for the 2002 final dividend. Shareholder enquiries Shareholders who have any administrative enquiries about their shareholding in CGNU plc should contact the Company's Registrar: Lloyds TSB Registrars The Causeway Worthing West Sussex BN99 6DA 0870 600 3952 Internet addresses There are various internet sites within the Group, most of which inter-link to enable quick reference direct to specific sites. Principal UK internet sites are as follows: CGNU Group www.cgnu-group.com UK long-term savings and general insurance www.norwichunion.co.uk Fund management www.morleyfm.com Buying a home www.your-move.co.uk and www.assertahome.com CGNU plc Registered in England no: 2468686 Registered Office: St Helen's, 1 Undershaft, London EC3P 3DQ --------------------------------------------------------------------- This information is provided by RNS The company news service from the London Stock Exchange

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