CGNU plc 2000 Results - Pt 1
CGNU PLC
27 February 2001
CGNU plc 2000 Results
CGNU plc Preliminary Announcement 2000
PART 1
27 February 2001
PRELIMINARY ANNOUNCEMENT - 12 MONTHS ENDED 31 DECEMBER 2000
- Operating profit before tax from ongoing business*, including life
achieved profit, of £1,407 million (1999: £1,534 million) is after a
£133 million investment in developing our e-enabled UK wealth
management service. On a modified statutory basis, operating profit
before tax was £1,028 million (1999: £1,299 million)
- Life achieved operating profit up 14% to £1,569 million
- Worldwide long-term savings new business sales up 24% to £13.5 billion,
21% up in the UK with margins maintained
- General insurance operating profit from ongoing businesses* of £412
million after UK flood and French storm costs of £285 million
- Full year dividend of 38.0 pence net per share
- Rapid and successful merger integration progress
- Major restructuring of business achieved in the year
Bob Scott, Group Chief Executive, commented:
'2000 was a year of considerable achievement. Following the merger of CGU and
Norwich Union in May 2000, we have delivered on every integration milestone to
date and successfully refocused the business.
'At the same time we have maintained our focus on 'business as usual,'
returning a 24% growth in worldwide long-term savings new business sales to
£13.5 billion and have introduced a number of initiatives to enhance growth in
the future. In the UK, our long-term savings business became the leading UK
life company through strong organic growth, delivering outstanding sales
figures, up 21% to £7.5 billion, with margins maintained.
'We enter 2001 with the business reshaped, the integration process on course
and the financial benefits coming through as planned. We intend to use our
broad range of distribution methods to support further expansion in those
markets where we can achieve a leading position. We are well positioned for
future vigorous and profitable growth with increased shareholder returns.'
* Excluding results from US general insurance operations to be
discontinued and discontinued UK London Market operations.
All growth rates quoted are at constant rates of exchange.
Financial Highlights
Local
Restated currency
2000 1999 growth
£m £m %
Total long-term savings new business
- life & pensions premiums 11,023 9,638 17%
- investment sales 2,501 1,578 63%
Total premiums written (after reinsurance)
and investment sales from ongoing business 27,026 23,823 16%
Operating profit before tax from
ongoing business(i) 1,407 1,534 (6%)
(Loss)/profit on ordinary activities
after tax(ii) (1,576) 2,141
Operating earnings from ongoing
business per ordinary share(i) 39.7p 45.4p
Shareholders' funds(iii) 13,633 15,673
Net asset value per ordinary share(iv) 606p 700p
Basis of preparation - the 2000 results have been prepared according to the
principles of merger accounting, using common accounting policies, and have
been taken from the Group's unaudited Annual Report and Accounts 2000. The
1999 results have been restated to this same basis and have been revised to
comply with FRS16 'Current Tax'.
(i) Operating profit before tax and earnings shown above includes life
achieved operating profit and excludes the operating loss of
businesses discontinued and to be discontinued £554 million (1999:
profit of £201 million), the profit arising from the change in risk
margin £nil (1999: £89 million), amortisation of goodwill £92
million (1999: £34 million) and exceptional items £425 million
(1999: £163 million). It does not incorporate the use of the
expected proceeds from businesses sold or sales of businesses to be
completed.
(ii) Loss on ordinary activities after tax, including life achieved
operating profit, is after providing for the loss on the impending
sale of the US general insurance business, the withdrawal
from UK London Market operations and exceptional items.
(iii) Based on equity and non-equity shareholders' funds which have been
reduced by the equalisation provision of £216 million
(1999: £212 million).
(iv) Based on equity shareholders' funds, adding back the equalisation
provision.
Life profits reporting
In reporting the headline operating profit, life profits have been included
using the achieved profit basis. This is used throughout the CGNU Group and by
many in the investment community to assess performance. We have focused on the
achieved profit basis, as we believe life achieved operating profit is a more
realistic measure of the performance of life businesses than the modified
statutory basis. The modified statutory basis is used in our financial
statements and, on this basis, the life operating profit before tax amounted
to £1,190 million. The basis used for reporting achieved profit is consistent
with the draft guidance set out by the Association of British Insurers.
Enquiries:
Bob Scott
Group Chief Executive Telephone +44 (0)20 7662 2023
Richard Harvey
Group Chief Executive (designate) Telephone +44 (0)20 7662 2286
Peter Foster
Group Finance Director Telephone +44 (0)20 7662 2955
Analysts:
Steve Riley
Investor Relations Director Telephone +44 (0)20 7662 8115
Media:
Hayley Stimpson
Director of External Affairs Telephone +44 (0)20 7662 7544
Alex Child-Villiers
Financial Dynamics Telephone +44 (0)20 7269 7107
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Contents
Page
Group Chief Executive's statement 1
Operating and financial review 2
Achieved profit basis
Summarised consolidated profit and loss account
- achieved profit basis 9
Basis of preparation 10
Components of total life achieved profit 10
New business contribution 11
Analysis of life achieved operating profit 12
Embedded value of life business 12
Segmental analysis of embedded value of life business 13
Methodology 13
Minority interests in life achieved profit 14
Principal economic assumptions 14
Other assumptions 15
Alternative assumptions 15
Modified statutory basis
Summarised consolidated profit and loss account
- modified statutory basis 16
Earnings per share - modified statutory basis 17
Consolidated statement of total recognised gains and losses 17
Reconciliation of movements in consolidated shareholders' funds 17
Summarised consolidated balance sheet 18
Consolidated cash flow statement 19
Merger of CGU plc and Norwich Union plc 20
Basis of preparation 20
Exchange rates 21
Change in accounting policy - dividend income 21
Acquisitions and disposals 22
Exceptional items 24
Geographical analysis of life and pensions
and investment sales - new business and total income 25
Geographical analysis of modified statutory life profit 26
Geographical analysis of health premiums after
reinsurance and operating result 26
Geographical analysis of general insurance premiums
after reinsurance and operating result 27
Taxation 28
Dividends 28
Earnings per share 29
Longer-term investment return 30
Statistical supplement
Segmental analysis of group operating profit at constant currency 31
Supplementary analyses 32
General insurance - geographical ratio analysis 35
General insurance - class of business analysis 36
Assets under management 38
UK general insurance trading conditions
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Page 1
GROUP CHIEF EXECUTIVE'S STATEMENT
When the merger took effect in May last year, we had a clear strategy; to
become a leading European-based financial services group through focusing on
long-term savings business, building a world class fund management business
and raising the quality of our general insurance earnings. We also recognised
that a clear focus was needed on those markets where CGNU can achieve a
leading position, and this underpins our objective of creating real value for
shareholders. These principles lie behind everything we have done this year.
We are pleased to report that this strategy is already producing results.
While channelling energies into the merger process during 2000, we have also
been actively investing in a number of long-term savings distribution
initiatives, both in the UK and internationally. We have achieved strong
profitable growth on our long-term savings business, gaining market share in
the UK, France, Netherlands and Spain. At the same time we have exited or are
in the process of exiting a number of businesses, the most significant being
the sale of our US general insurance interests and our UK London Market
operations; actions which have not been without significant cost, but have
refocused the Group and will improve the quality of future earnings.
The Group operating profit before tax from ongoing business, including life
achieved profit, was £1,407 million (1999: £1,534 million). This is after the
strategic investment of £133 million for developing our on-line wealth
management service and £285 million (1999: £69 million) of exceptional
weather-related costs arising from late storm claims in France and floods in
the UK. Excluding these items operating profit from ongoing business
increased by 17%. On a modified statutory basis, operating profit before tax
from ongoing business was £1,028 million (1999: £1,299 million).
Continued growth in long-term savings
Our worldwide long-term savings business made strong progress during 2000 with
life, pensions and investment sales increasing by 24% to £13.5 billion, a
remarkable achievement given the integration activity. Life operating profit
on an achieved profit basis increased by 14% to £1,569 million with the
majority of our businesses returning improved profits. We became the leading
UK life company through strong organic growth in the year and our UK
distribution capability has been significantly strengthened by the partnership
with the The Royal Bank of Scotland and NatWest.
In addition to our agreement with Banca Popolare di Lodi, we recently
announced a further bancassurance arrangement with UniCredito Italiano, which
builds on our distribution capability in Italy. We have a close working
relationship with Societe Generale and continue to explore opportunities for
further co-operation between our two Groups. Although we have not been able to
reach an agreement on a life distribution venture in France, we have agreed
smaller projects such as a bancassurance agreement in Romania, and have others
under discussion. During the year we reached a new bancassurance agreement
with Bancaja, Spain's fourth largest savings bank, boosting new business sales
to over 600%.
We have completed the sale of the Norwich Union life and pensions operations
in Poland for a price equivalent to 2.3 times embedded value. We have also
announced the sale of our Canadian life operations, which are expected to
complete later this year.
Strong investment capability
Our retail sales increased to £2,501 million (1999: £1,578 million) while
total assets under management at 31 December 2000 rose to £220 billion
(1999: £208 billion).
Market leading performance during 2000 enabled our Dutch business to record
mutual fund sales in excess of £1.0 billion, up 381%. In the UK we are the
leading provider of corporate bond and Cat-standard Isas and record Isa sales
of £517 million were achieved in 2000. Continuing the trend established in
earlier years, sales from our Navigator product in Australia, which are
excluded from the headline figures,rose by 36% to £824 million and funds under
administration totalled £2.4 billion.
Progress in general insurance
Operating profit from ongoing business of £412 million (1999: £459 million)
was depressed by £285 million exceptional weather-related costs arising from
late storm claims in France and floods in the UK. In the UK, our largest
general insurance business, we continue to be amongst the lowest cost
providers with an improved expense ratio of 10.7%, down from 11.8%. Strong
premium action has improved the quality and rating of the UK personal lines
business which, excluding the effect of the autumn floods, has a combined
operating ratio of 100% (including floods: 104%). We continue to take
the necessary steps to improve profitability in our worldwide general
insurance business towards the Group's target combined operating ratio of
102% by the end of 2001.
Rapid and successful integration progress
Excellent progress has been made in integrating our businesses. Annualised
savings at the end of 2000 totalled £111 million, with £26 million included in
the results, while the full amount of one-off costs of £425 million has been
provided in 2000.
The Group has made significant progress in refocusing the business in line
with the strategy set out at the time of the merger, while maintaining
momentum in its day-to-day operations. We are well placed to use our
leadership position to increase shareholder value and look forward to another
year of vigorous and profitable growth.
Bob Scott, Group Chief Executive
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OPERATING AND FINANCIAL REVIEW
Results
Operating profit
The Group's operating profit before tax from ongoing business, including life
achieved profit, was £1,407 million (1999: £1,534 million). The results have
been held back by exceptional weather-related costs of £285 million
(1999: £69 million) arising from the late storm claims in France and floods in
the UK, and the strategic investment of £133 million in an on-line UK wealth
management proposition. Excluding these items, operating profit from ongoing
business is 17% higher at constant rates of exchange. On a modified statutory
basis operating profit before tax from ongoing business was £1,028 million
(1999: £1,299 million).
Local
Restated currency
2000 1999 growth
£m £m %
Operating profit before tax
- ongoing business*
Life achieved operating profit 1,569 1,407 14%
Health 68 24 209%
Fund management 61 66 (5%)
General insurance 412 459 (10%)
Non-insurance operations (25) (30) 19%
Associated undertakings 1 10 (89%)
Corporate costs (185) (162) (16%)
Unallocated interest charges (361) (240) (52%)
------- ------- -------
1,540 1,534 3%
Wealth management (133) - -
------- ------- -------
Operating profit before tax
- ongoing business* 1,407 1,534 (6%)
======= ======= =======
Businesses discontinued and to
be discontinued
US general insurance result
(to be discontinued) (550) 176
UK London Market result (discontinued) (4) 25
* Operating profit excludes the operating result of businesses
discontinued and to be discontinued, and is stated before the change
in risk margin, amortisation of goodwill and exceptional items.
In arriving at the Group operating profit from ongoing business, we have
excluded US general insurance business, the sale of which was announced in
September 2000, and the UK London Market operations following our withdrawal
from this business. Our US general insurance business returned an operating
loss of £550 million, of which £679 million has arisen since 31 August and has
no economic impact on the Group. This is further explained on page 7 of this
announcement. The operating loss from our UK London Market business was
£4 million (1999: profit of £25 million). The results of these businesses are
shown under businesses discontinued and to be discontinued. Other operations
sold or announced to be sold in the year, are included within the results from
ongoing business as the results of these businesses are not considered to be
material in the context of the Group's results.
Long-term savings
New business
Our worldwide long-term businesses achieved excellent new business growth of
24% to £13.5 billion (1999: £11.2 billion). This is an exceptional achievement
when set in the context of the merger between CGU and NU and the integration
progress that has been made. Worldwide retail investment sales performed
particularly strongly, up 63% to £2.5 billion (1999: £1.6 billion), boosted by
the impressive growth in the Netherlands, up 381% to £1.0 billion
(1999: £0.2 billion).
Local
currency
2000 1999 growth
£m £m %
Life and pensions sales:
United Kingdom 6,608 5,420 22%
Europe (excluding UK) 3,895 3,719 12%
International 520 499 3%
------- ------- -------
11,023 9,638 17%
Investment sales 2,501 1,578 63%
------- ------- -------
13,524 11,216 24%
======= ======= =======
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Life achieved operating profit
Our long-term savings businesses delivered a strong increase in life
achieved operating profit, up 14% to £1,569 million (1999: £1,407 million).
Our operation in the UK saw growth of 12% to £938 million (1999: £837 million)
and our Continental European businesses grew 25% to £602 million
(1999: £514 million). The result from our International operations reflected
the impact of a strategic investment by our US business in new bancassurance
systems, and difficult trading conditions in our Australian business.
The growth in expected return from existing business and shareholders' net
worth benefited from the application of higher interest rates on a growing
embedded value.
Local
currency
2000 1999 growth
£m £m %
New business contribution
(after the effect of solvency margin) 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* 1,569 1,407 14%
======= ======= =======
Analysed:
United Kingdom 938 837 12%
Europe (excluding UK) 602 514 25%
International 29 56 (47%)
* Life achieved operating profit is stated before the change in risk
margin, amortisation of goodwill and exceptional items.
New business contribution before the effect of solvency margin was £483
million (1999: £501 million), and reflected the distortion caused by the one-
off privatisation of pensions provision in Poland in 1999. Without this
distortion and restating the 1999 comparative to 2000 economic assumptions and
rates of exchange, new business contribution grew 1% compared to a growth in
life and pensions new business sales measured on an annual premium equivalent
basis of 5%.
Annual premium New business
equivalent* contribution**
2000 1999 2000 1999***
£m £m £m £m
Life and pensions business
United Kingdom 979 821 294 250
Europe (excluding UK) 824 952 183 250
International 100 90 6 20
------- ------- ------- -------
1,903 1,863 483 520
======= ======= ======= =======
* Annual premium equivalent represents regular premiums plus 10% of
single premiums.
** Before effect of solvency margin.
*** Restated using 2000 economic assumptions and rates of exchange.
UK
Our UK business delivered outstanding new business figures and became the UK's
leading life company, with total sales of £7.5 billion (1999: £6.2 billion)
and, at the same time, increased market share in a broadly flat market. Total
pension sales were up over 30% to £1.8 billion (1999: £1.4 billion) placing us
in an excellent position for the introduction of stakeholder pensions later in
2001. Single premium bonds and savings sales also saw strong growth, up 28% to
£3.8 billion (1999: £2.9 billion). Growth over 1999 was achieved in each
quarter across the year with record sales in the last quarter of the year.
This was particularly encouraging following the launch of the new Norwich
Union brand in October 2000.
New business contribution grew 18% to £294 million (1999: £250 million on 2000
economic assumptions) in line with the growth in sales on an annual premium
equivalent basis. Strong growth in sales has been achieved whilst maintaining
margins, which is particularly pleasing in light of the competitive market
pressures and flat overall market in the UK. Life achieved operating profit
saw growth of 12% to £938 million (1999: £837 million). The impact of
introducing the 1% maximum-charge promise from April for existing pension
business has been largely offset by recognising an increase in value in other
areas of the UK life business.
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Europe (excluding UK)
In France, growth in new business of 33% was achieved against an anticipated
market growth of 20%. Life achieved operating profit at £204 million grew
67% (1999: £131 million) boosted by favourable experience variances. We have a
close working relationship with Societe Generale and continue to explore
opportunities for further co-operation between our two groups. Although we
have not been able to reach an agreement on a life distribution venture in
France, we have agreed smaller projects such as a bancassurance agreement in
Romania, and have others under discussion.
The Group has also reviewed its 6.8% shareholding in Societe Generale, which
has performed very well. Reflecting the close relationships between CGNU and
two of its bank partners, Societe Generale and UniCredito Italiano, we have
agreed in principle to sell 2% of our shareholding in Societe Generale to the
Foundations of UniCredito Italiano, and in turn purchase 2% of UniCredito
Italiano from the Foundations, helping to cement our relationship with
UniCredito Italiano. The value of these holdings is approximately the same.
This, together with other movements, will result in the Group holding a 4.3%
stake in Societe Generale and 3.5% of UniCredito Italiano.
In Ireland new business grew by 32% to £424 million (1999: £344 million) due
to the acquisition of Hibernian in January 2000. New business contribution
rose to £21 million (1999: £14 million on 2000 economic assumptions and rates
of exchange).
Our business in the Netherlands reported total sales up 158% to £1.6 billion
(1999: £0.7 billion). This growth includes the impressive performance in
retail investment sales, particularly in the newly acquired award-winning Ohra
Aandelefonds which lead the fund performance rankings in the Netherlands. Life
achieved operating profit grew 12% to £174 million (1999: £168 million),
although new business contribution was down at £19 million (1999: £31 million
on 2000 economic assumptions and rates of exchange) reflecting a change in new
business mix towards single premiums.
In Poland we are the market leader for private pensions and individual life
assurance. Total sales fell to £191 million (1999: £389 million) principally
reflecting the exceptional concentration of sales in the second half of 1999,
following the one-off privatisation of pensions provision. Reflecting this
fall in sales, life achieved operating profit was £95 million (1999: £117
million).
Our business in Spain reported sales up over 600%, reflecting a first time
contribution from our new bancassurance partnership with Bancaja, the fourth
largest savings bank in Spain. This excellent sales performance saw an
increase in life achieved operating profit to £42 million (1999: £13 million).
During the year we have also enhanced our distribution capability in Italy by
the extension of our agreement with Banca Populare di Lodi, which will
progressively provide exclusive access to over 1,200 branches. We announced in
February 2001 a new arrangement with UniCredito Italiano, providing
distribution capability through 500 branches. The UniCredito Italiano
arrangement takes our total Italian distribution capability through all our
bancassurance agreements to over 2000 branches, providing an excellent
platform for future growth.
International
Our international operations saw life and pensions new business up 3% to
£520 million (1999: £499 million). During the year we entered into a new
bancassurance partnership with Wells Fargo, the sixth largest bank in the
United States, which provides a further growth opportunity in the US life
market. New business contribution from our International operations at
£6 million (1999: £20 million on 2000 economic assumptions and rates of
exchange) was held back by investment in new bancassurance systems in our US
business and the introduction of new tax legislation in Australia. Life
achieved operating profit was £29 million (1999: £56 million).
In December 2000, we entered into agreements for the disposal of our Canadian
life businesses, after concluding that these businesses lacked the scale to
achieve our stated objective of a top-5 market position.
Life operating profit on a modified statutory basis
On a modified statutory basis, life operating profits saw modest growth to
£1,190 million (1999: £1,172 million). This growth is lower compared to life
achieved profit growth, reflecting the large increase in new business sales.
Orphan assets
We have in the UK Orphan Assets of approximately £4 billion, which are used to
support strong business development, benefiting both policyholders and
shareholders.
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Health
Premium income from our health businesses rose by 78% over 1999 and operating
profits more than doubled, helped by a refinement in the allocation of
investment return between general and health business. The operating profit
also benefited from the inclusion of a full year of the Nuts Ohra business in
the Netherlands acquired in October 1999.
Underwriting Operating
result profit
2000 1999 2000 1999
£m £m £m £m
United Kingdom 2 (4) 6 -
Europe (excluding UK) (22) (1) 62 24
------- ------- ------- -------
(20) (5) 68 24
======= ======= ======= =======
Fund management
Assets under management
Assets under management increased by £12 billion to £220 billion (1999: £208
billion), including third party funds of £27 billion (1999: £25 billion). The
group is the second largest UK-based fund manager and among the top 10 in
Europe with strong market positions in the UK, France and the Netherlands, and
developing positions in Ireland and Poland.
Operating
profit
2000 1999
£m £m
United Kingdom 16 37
Europe (excluding UK) 24 11
International 21 18
------- -------
61 66
======= ======
UK
We have made a significant investment for future growth in our UK retail
investment business that has held back the full year result by £21 million.
The retail business now operates under the new Norwich Union brand and is the
leading provider of Cat-standard Isa funds and total sales grew significantly
to £897 million (1999: £807 million). Our institutional fund management
business operates under the Morley Fund Management brand, launched in November
2000.
In December 2000, we announced that we had reached agreement to sell our
majority shareholding in Quilter Holdings Limited, a private client investment
management company, for £172 million. The transaction is subject to regulatory
approval and is expected to complete in the first quarter of 2001.
Continental Europe and International
Our principal continental Europe businesses include Victoire Asset Management
in France and Delta Lloyd Nuts Ohra in the Netherlands. Operating profit from
these businesses grew strongly to £22 million (1999: £9 million).
Sales from the Norwich Union Navigator product in Australia, which are not
included in new business sales, increased by 36% to £824 million
(1999: £633 million), giving funds under administration of £2.4 billion. The
new business contribution from Navigator, excluded from the reported Group
life new business contribution of £392 million, was £13 million (1999: £12
million) and is after the impact of development spend on the next generation
of information technology.
General insurance
Worldwide
Our worldwide ongoing general businesses, excluding the US general business
and UK London Market operations, contributed an operating profit of
£412 million (1999: £459 million). The result has been held back by a number
of major weather events, principally the autumn floods in the UK estimated at
£195 million and late storm claims in France of £90 million (1999: £69
million) following the December 1999 storms. Excluding these major events,
operating profit rose 33% including the benefit of higher longer-term
investment returns.
Net written premiums from our ongoing worldwide general insurance operations
increased by 9% to £9.0 billion (1999: £8.4 billion).
The Group's worldwide combined operating ratio from ongoing business was 109%
(1999: 107%). Excluding the impact of the UK flood and French storm
costs, the combined operating ratio would be 106%. The worldwide expense ratio
(excluding commission) from ongoing business improved to 12.6% (1999: 13.3%).
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The further improvement in general insurance results remains a key focus and
the Group is committed to achieving the target combined operating ratio of
102% by the end of 2001, through strict underwriting and reducing costs. To
complement the reinsurance protection bought by individual businesses, the
Group has an additional cover in place above £200 million that protects the
Group from a single natural catastrophe event.
Underwriting Operating
result* profit*
2000 1999 2000 1999
£m £m £m £m
United Kingdom (387) (284) 296 290
Europe (excluding UK) (333) (169) (78) 36
International (101) (140) 194 133
------- ------- ------- -------
Ongoing business (821) (593) 412 459
======= ======= ======= =======
Businesses discontinued and to be discontinued
United States (967) (204) (550) 176
UK London Market (59) (44) (4) 25
* Excludes the change in the equalisation provision of £27 million
(1999: £55 million).
UK
The combined general insurance business began operating on 2 October 2000 just
four months after the merger was completed. We remain on track to complete the
integration and realise the benefits of the merger. Norwich Union is the UK's
largest general insurer and insures one in five UK households, one in five
motor vehicles and 700,000 businesses.
The weather costs from the autumn floods amounted to £195 million. To
appreciate the scale of the incident, the flooding experienced across England
and Wales contributed to the wettest autumn since official records began in
1766. Excluding the impact of the bad weather, the underwriting loss improved
by £92 million to £192 million (1999: £284 million) and the combined operating
ratio in the UK improved to 104% (1999: 107%). The personal lines combined
operating ratio was an excellent 100%, before the impact of exceptional
weather costs.
The underlying result displays an accelerating improvement for both personal
and commercial motor business. This highlights a more rigorous approach to the
risks accepted, the premium increases applied and how claims are handled.
Commercial motor premiums have increased on average by 20% over the same
period last year, whilst personal motor premiums are 15% higher than 1999.
The profitability of the commercial property account has been impacted by
large claims, however there has been a significant improvement over the second
half of the year. We continue to push for what we believe is the correct
pricing level for liability, and are prepared to let business go if this
cannot be achieved.
The UK expense ratio was an excellent 10.7% (1999: 11.8%) making us one of the
lowest cost providers in the UK. Further benefits will accrue from the merger
cost savings that will be achieved in 2001.
At the time of the merger announcement, we stated our strategy of focusing on
personal and small commercial risks. In December 2000, the Group completed the
sale of Marlborough Underwriting Agency Limited, its wholly-owned Lloyd's
managing agency, to the Berkshire Hathaway Group. Under the terms of the
agreement, the Berkshire Hathaway Group has also replaced CGNU as the provider
of capacity to the Marlborough-managed syndicates. This agreement brings to an
end the Group's involvement in the London Market. Reinsurance has also been
purchased from the Berkshire Hathaway Group to secure protection against any
adverse impact of the run-off of claims reserves held by CGNU in respect of
business written prior to exit, both in the respect of historic business
through the ILU and other London Market operations, and, more recently,
Lloyd's. This provides cover of £1 billion in excess of CGNU's claims reserves
of £1.2 billion. The charge for withdrawal from London Market operations of
£448 million includes the cost of the associated reinsurance protection.
Europe (excluding UK)
The disappointing performance from our European general insurance businesses
was largely attributable to our French operation. This was mainly caused by
the late notified storm claims from the December 1999 storms where costs for
the industry have significantly escalated from the original projections, due
to higher average claim costs and late notification from agents and lead
co-insurers. The storms were the second most expensive insured loss to hit
Europe. The cost to the Group of the French storms was £90 million in the year
(1999: £69 million, including £31 million incurred by group reinsurance).
Excluding France, our other European general businesses produced an
underwriting loss of £125 million (1999: £89 million). The deterioration
reflected competitive and difficult market conditions in a number of our
European operations. We have implemented significant corrective action
including premium increases for major lines of business.
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International
Our ongoing international general businesses reported a significantly improved
underwriting and operating result. Underwriting losses improved to £101
million (1999: £140 million) principally reflecting a strong performance from
our Australia and New Zealand businesses, with an improved underwriting loss
of £7 million (1999: £57 million) and combined operating ratio of 101%
(1999: 110%). The Canada result deteriorated in difficult market conditions,
partly offset by improved results in a number of our smaller operations.
Following the merger, CGNU plc had two leading general insurance businesses in
New Zealand, each with around 19% market share. A review of these businesses
concluded that greater shareholder value could be generated from a sale of
State Insurance than from integrating the businesses. In February 2001 we
entered into an agreement to sell State Insurance for NZ$405 million
(£125 million) and the transaction is expected to complete in the first
quarter of 2001. The Group remains committed to the New Zealand market and
will continue to develop its remaining business.
At the time of the merger announcement, we had concluded it was in the best
interests of shareholders to withdraw from the US general insurance market.
This decision reflected the difficult conditions in the US property and
casualty market and the requirement for substantial investment to achieve a
leading market position. In September 2000, we announced agreement for the
sale of the Group's US general insurance operations for a total consideration
of $3,163 million (£2,117 million).
The agreement provided that CGNU would not bear any continuing operating risk
from 31 August 2000 nor provide any guarantees in respect of its claims
reserves or balance sheet beyond that date. Despite the Group retaining no
economic interest beyond this date, accounting standards require that CGNU
consolidate the results up to the date of completion of the transaction. Any
post-tax operating gains and losses after 31 August are offset by a
corresponding change to the loss on sale, resulting in no net profit or loss
to the Group.
At 30 September 2000 the Group reported an aggregate loss of £1,290 million
comprising post-tax operating and investment gains of £103 million and
post-tax loss on sale of £1,393 million.
At 31 December the Group is reporting an aggregate loss of £1,412 million
comprising post-tax operating and investment losses of £423 million and
post-tax loss on sale of £989 million. The increase in the aggregate loss of
£122 million principally reflects $200 million (£134 million) of pre-closing
adjustments announced on 20 February 2001 and foreign exchange movements.
There is no change in the sale price.
The deterioration in operating profit and corresponding reduction in the loss
on sale reflected reserve strengthening of $800 million by the US general
insurance business arising from an analysis of the reserve position as part of
the year-end closing.
Non-insurance operations
Our non-insurance businesses reported a loss of £25 million
(1999: £30 million). The increased loss from our UK non-insurance operations
of £45 million (1999: £36 million) was principally attributable to Your Move,
our estate agency business, which incurred higher advertising spend and
development of the IT infrastructure of £15 million in the first half of the
year. The result from our banking business in the Netherlands grew strongly to
£16 million (1999: £2 million), reflecting higher banking commission, stronger
stockbroking performance and the inclusion of a full year's profit of Ohra
Bank.
Corporate costs and unallocated interest charges
Corporate costs amounted to £185 million (1999: £162 million). This includes
a one-off charge of £12 million relating to the cost of the Norwich Union
long-term incentive scheme which crystallised as a result of the merger and
£12 million for the accrual of Norwich Union staff performance-related
payments.
Unallocated interest charges include interest on intra-group loans with the
centre and external borrowings not allocated to local business operations.
The charge increased to £361 million (1999: £240 million) reflecting corporate
activity over the year.
Shareholders' funds
Equity shareholders' funds fell by £2.1 billion to £13.4 billion
(1999: £15.5 billion). The reduction was principally due to the provision for
the sale of the US general business and withdrawal from London Market
operations in the UK. Short-term investment fluctuations before tax were £258
million (1999: £250 million) and we recorded in the year positive foreign
exchange experience of £303 million (1999: exchange loss of £389 million).
The Group's 'normalised' after-tax return on equity for the year, excluding
businesses discontinued and to be discontinued, was 6% (1999: 7%). The
normalised return is based on the after-tax operating profit including life
achieved operating profit, before exceptional items and amortisation of
goodwill, as a percentage of opening equity capital.
Net assets per ordinary share fell to 597 pence per share (31 December 1999:
690 pence per share) after deducting the equalisation provision. Adding back
the equalisation provision, they were 606 pence (31 December 1999: 700 pence).
Integration update
The Group is making rapid integration progress. At the time of the merger
announcement in February 2000 we estimated annualised cost savings and one-off
costs of achieving those savings. Following completion of a more detailed
exercise, we announced in August revised annualised cost savings of £275
million with one-off costs to achieve the savings of £425 million.
--------------------------------------------------------------------
Annualised cost savings of £111 million had been achieved by 31 December 2000
resulting in a £26 million benefit to the profit and loss account.
By the end of the year our integration planning was extremely well advanced,
resulting in us having spent or committed the full one-off integration costs
of £425 million. The costs have therefore been charged in full as an
exceptional item to the 2000 profit and loss account. The 1999 exceptional
costs comprise £120 million integration costs and £31 million integration
incentive plan costs arising in respect of the CU and GA merger and £12
million for the integration of British Life and Plus Ultra, our Spanish
operation. Similar integration incentive plans have been put in place in
respect of the CGU and NU merger in order to motivate management and staff to
achieve the merger savings whilst remaining focused on underlying performance.
These incentives are conditional on the businesses reaching pre-determined
targets and, if payable, the costs will be charged as an exceptional item in
the 2001 accounts.
Integration savings
Actual Annualised Total
cost cost projected
savings savings integration
achieved achieved savings
£m £m £m
Life insurance 7 29 91
General insurance 8 32 116
Other operations 11 50 68
------- ------- -------
26 111 275
======= ======= =======
Online developments and wealth management
CGNU continued to invest in innovative e-commerce initiatives across its
businesses, with both business-to-business and business-to-consumer
applications. In August 2000, we announced our intention to launch an on-line
wealth management service in the UK. norwichunion.com is designed to help
people make better decisions about their money and their assets through a
comprehensive and easy-to-use range of financial planning tools and a
portfolio of competitive customer propositions. Our investment in
norwichunion.com will be substantial, involving an investment of £250 million
to the end of 2002. Implementation will be phased to ensure a high quality of
service, and costs incurred to the end of 2000 amount to £110 million.
In May 2000 we also launched asserta home. Within a year, asserta home has
become the UK's leading on-line property portal, with details of homes for
sale or rent throughout the UK. As well as achieving success as a business in
its own right, it is also an important ingredient in developing relationships
with internet-literate customers. An investment in asserta home of £23 million
has been made in 2000.
Dividends
As previously announced, we have maintained dividends at the same level as CGU
declared in 1999. Accordingly, we propose a final dividend of 23.75 pence net
per share which brings the total for the year to 38.0 pence net per share.
Irish shareholders who are due to be paid a final dividend denominated in
Irish punts will receive a payment based upon the exchange rate prevailing on
26 February 2001.
Notes to editors
- CGU plc and Norwich Union plc merged on 30 May 2000 to create CGNU plc,
the UK's largest insurance group and one of the top-five insurers
in Europe with substantial positions in other markets around the world,
making it the world's sixth largest insurer based on gross worldwide
premiums.
- CGNU's principal business activities are long-term savings, fund
management and general insurance, with worldwide premium income and
retail investment sales from ongoing business of over £27 billion and
assets under management of more than £210 billion.
- From October 2000, the combined life and pensions, general insurance
and retail fund management businesses in the UK operate under the
Norwich Union brand, while the institutional investment business
operates under the Morley Fund Management brand.
- Overseas currency results are translated at average exchange rates.
- All growth rates are quoted in local currency.
- CGNU's corporate press releases and results presentations are
available on the internet: www.cgnu-group.com
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