CGNU Interim Results 2001-Pt3
CGNU PLC
2 August 2001
PART 3 OF 6
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Page 8
Summarised consolidated profit and loss account - achieved profit basis
For the six months ended 30 June 2001
6 6 6 Full
months months months year
2001 2001 2000 2000
Em £m £m £m
Operating profit
1,382 Life achieved operating profit 857 754 1,569
52 Health 32 34 68
39 Fund management 24 22 61
689 General insurance 427 193 412
(11) Non-insurance operations (7) (19) (24)
(131) Corporate costs (81) (97) (185)
(347) Unallocated interest charges (215) (167) (361)
------ ------ ------ ------
1,673 1,037 720 1,540
(97) Wealth management (60) (41) (133)
------ ------ ------ ------
Operating profit - ongoing
business before tax, amortisation
1,576 of goodwill and exceptional items 977 679 1,407
(34) Businesses discontinued (21) 121 (554)
------ ------ ------ ------
1,542 956 800 853
(48) Amortisation of goodwill (30) (18) (92)
Policyholders' Protection Board
(23) levy (14) - -
- Exceptional items - - (425)
------ ------ ------ ------
1,471 Operating profit before tax 912 782 336
Variation from longer-term
(1,893) investment return (1,174) 57 213
Effect of economic assumption
231 changes 143 (32) (269)
Change in the equalisation
(36) provision (22) (12) (27)
Profit/(loss) on sale of
398 subsidiary undertakings 247 - (1,058)
Loss on withdrawal from London
- Market operations - - (448)
- Merger transaction costs - (57) (59)
------ ------ ------ ------
Profit/(loss) on ordinary
171 activities before tax 106 738 (1,312)
Tax on operating profit - ongoing
business before amortisation of
(505) goodwill and exceptional items (313) (183) (437)
Tax on profit on other ordinary
224 activities 139 (97) 174
------ ------ ------ ------
(Loss)/profit on
ordinary activities
(110) after tax (68) 458 (1,575)
(48) Minority interests (30) (24) (65)
------ ------ ------ ------
(Loss)/profit for the financial
(158) period (98) 434 (1,640)
(15) Preference dividends (9) (9) (17)
------ ------ ------ ------
(Loss)/profit for the financial
period attributable to equity
(173) shareholders (107) 425 (1,657)
(517) Ordinary dividends (321) (320) (855)
------ ------ ------ ------
Retained (loss)/profit for
(690) the financial period (428) 105 (2,512)
====== ====== ====== ======
Earnings per share
Operating profit on an achieved
profit basis before amortisation
of goodwill and exceptional items,
after taxation, attributable to
equity shareholders in respect of
44.4 c ongoing business 27.5 p 20.9p 39.7 p
(Loss)/profit attributable to
(7.7)c equity shareholders (4.8)p 18.9p (73.8)p
(Loss)/profit attributable to
(7.6)c equity shareholders - diluted (4.7)p 18.9p (73.7)p
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Page 9
Basis of preparation
The achieved profit statement on page 8 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 29. 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 29.
The contribution from the Group's share of the alliance with The Royal Bank of
Scotland Group plc (RBSG) is incorporated within the achieved operating
profit. Goodwill amortised in the period in respect of the Group's holding in
the associated company, RBS Life Investments Limited, is included within the
'Amortisation of goodwill' on page 8.
The results for the six-month periods 30 June 2001 and 30 June 2000 are
unaudited but have been reviewed by the auditors, Ernst & Young. Their review
report in respect of 30 June 2001 is included in the Interim Report and
Accounts. The interim accounts do not constitute statutory accounts as defined
in section 240 of the Companies Act 1985.
Components of total life achieved profit
Total life achieved profit, including the Group's share from the alliance with
RBSG, 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 including risk
margins;
- 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;and
- the impact of changes in economic assumptions in the period.
6 months 6 months Full year
2001 2000 2000
£m £m £m
New business contribution 227 194 392
Profit from existing business
- expected return 417 417 839
- experience variances (7) (9) 10
- operating assumption changes 50 - (7)
Development costs - (17) (20)
Expected return on shareholders' net worth 162 155 319
------ ------ ------
849 740 1,533
Other life and savings activities* 8 14 36
------ ------ ------
Life achieved operating profit before
tax and exceptional items 857 754 1,569
Exceptional items ** - - (106)
Investment return variances (742) (69) (43)
Effect of economic assumption changes 143 (32) (269)
------ ------ ------
Total life achieved profit before tax 258 653 1,151
Tax on operating profit (264) (234) (485)
Tax on other ordinary activities 183 13 110
------ ------ ------
Total life achieved profit after tax 177 432 776
====== ====== ======
* Profits from other life and savings activities, which include service
companies, have been calculated on a statutory basis.
** Exceptional items in 2000 comprise one-off integration costs.
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Page 10
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 equivalent * New business contribution
6
months
6 6 Local 6 2000 6
months months currency months at 2001 months
2001 2000 growth 2001 assumptions 2000
**
£m £m % £m £m £m
United Kingdom 606 479 27% 164 130 137
Europe (excluding UK)
France 121 118 1% 35 35 39
Ireland 51 45 12% 14 11 12
Italy 55 18 203% 15 6 6
Netherlands
(including
Belgium and
Luxembourg) 75 57 28% 11 5 8
Poland - Life 17 23 (32%) 4 6 5
- Pensions 13 109 (90%) 1 26 22
Spain 50 9 464% 23 1 1
Other 39 37 10% 2 1 1
International 57 45 21% 3 5 5
------ ------ ------ ------ ------ ------
Total annualised
premiums 1,084 940 13%
Total new business
contribution
before effect
of solvency
margin*** 272 226 236
Effect of solvency
margin (45) (42) (42)
------ ------ ------
Total new business
contribution
including effect of
solvency margin 227 184 194
====== ====== ======
* Annual premium equivalent represents regular premiums plus 10% of
single premiums.
** 2000 new business contribution has been shown using the application
of 2001 economic assumptions and exchange rates.
*** New business contribution before effect of solvency margin includes
minority interests in 2001 of £21 million (six months to 30 June
2000: £10 million). This comprises minority interests in France of
£2 million (six months to 30 June 2000: £2 million), Italy £6 million
(six months to 30 June 2000: £2 million), Poland £1 million
(six months to 30 June 2000: £6 million), Spain £12 million
(six months to 30 June 2000: £nil).
New business contributions have been calculated using the same economic
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.
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Page 11
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.
6 months 6 months Full year
2001 2000 2000
£m £m £m
United Kingdom* 465 449 903
Europe (excluding UK)
France 110 124 204
Ireland 37 33 68
Italy 24 11 29
Netherlands (including Belgium and
Luxembourg) 93 75 179
Poland - Life 23 20 58
- Pensions * 21 24 36
Spain 31 7 42
Other 28 (18) (15)
International 17 15 29
------ ------ ------
Total life achieved operating profit before
tax, and exceptional items** 849 740 1,533
====== ====== ======
* Excludes other life and savings activities.
** Life achieved operating profit includes minority interests in 2001 of
£35 million (six months to 30 June 2000: £15 million, full year 2000:
£42 million). This comprises minority interests in France of
£4 million (six months to 30 June 2000: £2 million, full year 2000:
£6 million), Italy £10 million (six months to 30 June 2000: £4 million,
full year 2000: £12 million), Poland £8 million (six months to
30 June 2000: £9 million, full year 2000: £15 million), Spain
£13 million (six months to 30 June 2000: £nil, full year 2000:
£10 million) and International £nil (six months to 30 June 2000:
£nil, full year 2000: loss of £1 million).
Embedded value of life business
6 months 6 months Full
2001 2000 year
2000
£m £m £m
Embedded value at the beginning of the
period 11,234 10,518 10,518
Total life achieved profit after tax * 172 422 813
Exchange rate movements (46) 98 81
Embedded value of businesses
(disposed)/acquired ** (109) 57 437
Amounts injected into life operations 106 78 167
Amounts released from life operations (220) (205) (782)
------ ------ ------
Embedded value at the end of the
period *** 11,137 10,968 11,234
====== ====== =======
* Excluding profits from other life and savings activities after tax.
** Embedded value from business acquired in 2001 comprises Hungary
(£11 million). Embedded value from businesses disposed of in 2001
comprises Greece Life (£3 million) and Canada (£117 million).
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 in RBS Life
Investments Limited (£343 million). Hibernian Group was acquired in
the first six months of 2000. Embedded value from business disposed
of comprises the Norwich Union Poland life and pensions operations
(£57 million).
*** Embedded value at the end of the period includes minority interests
in 2001 of £224 million (30 June 2000: £137 million, 31 December
2000: £208 million). This comprises minority interests in France of
£35 million (30 June 2000: £33 million, 31 December 2000:
£34 million), Italy £71 million (30 June 2000: £65 million, 31 December
2000: £70 million), Poland £52 million (30 June 2000: £33 million,
31 December 2000: £42 million), Spain £62 million
(30 June 2000: £nil, 31 December 2000: £57 million) and Other Europe
£4 million (30 June 2000: £6 million, 31 December 2000: £5 million).
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Page 12
Segmental analysis of embedded value of life business
Valuation of Embedded
Net worth* in-force value
at 30 June at 30 June at 30 June
2001 2000 2001** 2000 2001 2000
£m £m £m £m £m £m
United Kingdom 1,754 1,887 4,275 4,291 6,029 6,178
Europe
(excluding UK)
France 875 849 409 423 1,284 1,272
Ireland 202 221 277 243 479 464
Italy 98 94 76 68 174 162
Netherlands(including
Belgium and
Luxembourg) 1,371 1,245 748 714 2,119 1,959
Poland 109 87 241 188 350 275
Spain 65 36 151 49 216 85
Other 57 57 67 54 124 111
International 293 383 69 79 362 462
------ ------ ------ ------ ------ ------
4,824 4,859 6,313 6,109 11,137 10,968
====== ====== ====== ====== ====== ======
* 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 £660 million.
Minority interest in life achieved profit
6 Full
6 months 2001 months year
----------------- 2000 2000
Shareholders' Minority
interest interest Group Group Group
£m £m £m £m £m
New business
contribution
before effect of
solvency margin 251 21 272 236 483
Effect of solvency
margin (40) (5) (45) (42) (91)
------ ------ ------ ------ ------
New business
contribution
including effect
of solvency margin 211 16 227 194 392
====== ====== ====== ====== ======
Life achieved operating
profit 814 35 849 740 1,533
Other life and
savings activities 8 - 8 14 36
------ ------ ------ ------ ------
Life achieved operating
profit before tax and
exceptional items 822 35 857 754 1,569
====== ====== ====== ====== ======
Total life achieved
profit before tax 233 25 258 653 1,151
Attributed tax (72) (9) (81) (221) (375)
------ ------ ------ ------ ------
Total life achieved
profit after tax 161 16 177 432 776
====== ====== ====== ====== ======
Closing life
embedded value 10,913 224 11,137 10,968 11,234
====== ====== ====== ====== ======
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Page 13
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 referred to above.
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 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.
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Page 14
Principal economic assumptions
The principal economic assumptions used are as follows:
United Kingdom
30 June 31 December 30 June 31 December
2001 2000 2000 1999
Risk discount rate 7.9% 7.4% 7.6% 7.8%
Pre-tax investment
returns:
Base government
fixed interest 5.3% 4.7% 5.0% 5.2%
Ordinary shares 7.8% 7.2% 7.5% 7.7%
Property 6.8% 6.2% 6.5% 6.7%
Future expense
inflation 3.7% 3.7% 3.8% 4.1%
Tax rate 30.0% 30.0% 30.0% 30.0%
France
30 June 31 December 30 June 31 December
2001 2000 2000 1999
Risk discount rate 8.5% 8.5% 8.7% 8.7%
Pre-tax investment
returns:
Base government
fixed interest 5.0% 5.0% 5.5% 5.5%
Ordinary shares 7.0% 7.0% 7.5% 7.5%
Property 6.5% 6.5% 7.0% 7.0%
Future expense
inflation 2.5% 2.5% 2.5% 2.5%
Tax rate 37.8% 37.8% 40.0% 40.0%
Ireland
30 June 31 December 30 June 31 December
2001 2000 2000 1999
Risk discount rate 9.4% 9.1% 9.1% 9.0%
Pre-tax investment
returns:
Base government
fixed interest 5.6% 5.3% 5.5% 5.6%
Ordinary shares 8.6% 8.3% 8.5% 8.6%
Property 7.1% 6.8% 7.0% 7.1%
Future expense
inflation 5.0% 5.0% 5.9% 4.0%
Tax rate 18.0% 20.0% 22.0% 28.0%
Italy
30 June 31 December 30 June 31 December
2001 2000 2000 1999
Risk discount rate 7.5% 7.5% 7.7% 7.7%
Pre-tax investment
returns:
Base government
fixed interest 5.3% 5.3% 5.6% 5.6%
Ordinary shares 8.3% 8.3% 8.6% 8.6%
Property 6.8% 6.8% 7.1% 7.1%
Future expense
inflation 3.3% 3.3% 2.5% 2.5%
Tax rate 43.0% 43.0% 43.0% 43.0%
Netherlands
30 June 31 December 30 June 31 December
2001 2000 2000 1999
Risk discount rate 8.0% 8.0% 8.2% 8.3%
Pre-tax investment
returns:
Base government
fixed interest 5.0% 5.0% 5.3% 5.5%
Ordinary shares 7.9% 7.9% 8.2% 8.4%
Property 6.5% 6.5% 6.8% 7.0%
Future expense
inflation 2.5% 2.5% 2.5% 2.5%
Tax rate 25.0% 25.0% 25.0% 25.0%
Poland - Life
30 June 31 December 30 June 31 December
2001 2000 2000 1999
Risk discount rate 20.0% 20.0% 19.8% 19.8%
Pre-tax investment
returns:
Base government
fixed interest 12.5% 12.5% 12.5% 12.5%
Ordinary shares 12.5% 12.5% 12.5% 12.5%
Property n/a n/a n/a n/a
Future expense
inflation 9.2% 9.2% 9.2% 9.2%
Tax rate 28.0% 28.0% 30.0% 33.0%
Poland - Pensions
30 June 31 December 30 June 31 December
2001 2000 2000 1999
Risk discount rate 17.3% 17.3% 17.1% 17.1%
Pre-tax investment
returns:
Base government
fixed interest 12.5% 12.5% 12.5% 12.5%
Ordinary shares 12.5% 12.5% 12.5% 12.5%
Property n/a n/a n/a n/a
Future expense
inflation 9.2% 9.2% 9.2% 9.2%
Tax rate 28.0% 28.0% 30.0% 33.0%
Spain
30 June 31 December 30 June 31 December
2001 2000 2000 1999
Risk discount rate 8.4% 8.4% 9.1% 9.1%
Pre-tax investment
returns:
Base government
fixed interest 5.4% 5.4% 5.5% 5.6%
Ordinary shares 8.4% 8.4% 8.5% 8.6%
Property 6.9% 6.9% 7.0% 7.1%
Future expense
inflation 4.0% 4.0% 3.0% 3.0%
Tax rate 35.0% 35.0% 35.0% 35.0%
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Page 15
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.
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