2001 Full year results-Part 6
CGNU PLC
27 February 2002
Part 6 of 6
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Page 40
Group capital structure
Shareholders' funds have declined by 13% to £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 £1 billion, provided in 2000, and invested £0.8 billion in new
ventures (2000: £1.2 billion). The group raised £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
£m £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
£m £m £m £m £m £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.
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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
£m £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 £5.9 billion (2000: £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 £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.
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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 £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 £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
£m £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.
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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 £m £m £m £m £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 £m £m £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
====== ====== ======
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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 £599
million
3. The net assets of £258 million represents the £244 million of goodwill on
the RBSG joint venture and £14 million net assets of the other life and
savings operations
4. The capital employed in the Group's general insurance operations includes
£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 £107 million
(post-tax £72 million) have been reclassified as Corporate
6. The return before tax of £80 million comprises investment return (£107
million) and corporate costs (£187 million)
7. The external borrowings reported in the summary consolidated balance
sheet of £2,662 million comprises £11 million of general insurance
borrowings (reported within the general insurance and health net assets)
and £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 (£599
million), goodwill arising on acquisitions (£1,141 million) and goodwill
on the RBSG joint venture (£244 million)
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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 £m £m £m £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
====== ====== ====== ======
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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 £221 million represents the £257 million
of goodwill on the RBSG joint venture and £36 million net liabilities of
the other life and savings operations
3. The capital employed in the Group's general insurance operations includes
£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 £99 million
(post-tax £69 million) have been reclassified as Corporate
5. The return before tax of £86 million comprises investment return (£99
million) and corporate costs (£185 million)
6. The external borrowings reported in the summary consolidated balance
sheet of £2,592 million comprises £11 million of general insurance
borrowings (reported within the general insurance and health net assets)
and £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 £14,217
million includes additional acquired and internally generated value of
in-force long-term business (£6,605 million), goodwill arising on
acquisitions (£747 million) and goodwill on the RBSG joint venture
(£257 million)
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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 £bn £bn £bn £bn £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 (£0.3 billion) and
decreases in respect of additional value of in-force long-term business
(£5.9 billion), goodwill on the RBSG joint venture (£0.2 billion) and
technical provisions, deferred acquisition costs and other items (£0.7
billion). For non-life operations, the adjustments represent goodwill.
2. For life assurance, the £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 £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 £800 million.
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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
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