9 Months Results - To 30th September 1999 Part 1
CGU PLC
10 November 1999
CGU PLC
UNAUDITED RESULTS - 9 MONTHS ENDED 30 SEPTEMBER 1999
* Pre-tax operating profit of £603m (1998 £618m), before merger
integration costs. Operating earnings per share increased by 8%.
* New life and savings business up 30% to £5.4bn with the post-tax
value of new business increasing by 32%.
* Life statutory profits up 12% to £380m. Life achieved operating
profit of £518m.
* Improvement in general insurance underwriting results offset by
lower longer term investment returns.
* Market position in the Netherlands strengthened through the
acquisition of Nuts Ohra.
* Offer to acquire Hibernian Group plc, creating Ireland's leading
composite insurer.
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9 months
9 months 1998
1999 Restated
Unaudited Unaudited
Premiums & investment sales
: life & savings £7,352m £5,564m
: general insurance £6,696m £6,766m
Pre-tax operating profit before
merger integration costs £603m £618m
Operating earnings per ordinary share before
merger integration costs 33.2p 30.8p
Profit/(loss) attributable to
ordinary shareholders* £(155)m £204m
Shareholders' funds £8,833m £9,039m
(31 Dec 1998)
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* Including short-term fluctuations in investment values.
Enquiries:
Bob Scott, Group Chief Executive Telephone: 0171 662 2003
Peter Foster, Group Finance Director Telephone: 0171 662 2007
BOB SCOTT, GROUP CHIEF EXECUTIVE, COMMENTED:
'The rapid and profitable growth of our life & savings business continued in
the first 9 months of 1999 with new business 30% higher. Growth was achieved
by all our major businesses and we captured some 25% of the new pensions
market in Poland. The value of the post-tax new business contribution to
achieved profits increased by 32%. Strong actions continue to be taken to
increase general insurance profitability and improved underwriting results
were achieved for the 9 months, although progress in the third quarter was
held back by a number of large claims and the imposition of a Goods and
Services tax in Australia. Reduced longer term investment returns during the
year resulted in the overall general insurance profit being 5% lower. The
group's operating profit amounted to £603m (1998 £618m) before tax and
integration costs. Using the achieved profits method of reporting life
business, the group's operating profit would have been £741m. Operating
earnings per share increased by 8%, to 33.2p, benefiting from a lower tax
charge, and using the life achieved profit amounted to 39.9p.'
'In the Netherlands, our strong management team will be able to build
substantial value through the merger of Delta Lloyd with Nuts Ohra. This
has created the third largest insurer and second largest direct writer, with
strong positions in the life, pensions and health markets.'
'In Ireland, CGU will become the leading composite insurer through the offer
to acquire the 72.1% of shares in Hibernian Group plc that it does not
own already. The combined businesses will build on their growing share of
the life and savings market and become the second largest general insurer.'
'With integration activities following last year's merger ahead of schedule
and expected to be largely completed by the end of this year, we are well
placed to develop our businesses and improve returns to shareholders.'
GROUP CHIEF EXECUTIVE'S REVIEW:
Life & savings
With strong positions in Europe's life & savings markets, CGU's new business
continued to grow rapidly. Sales of £5.4bn in the first nine months were up
30% over the same period last year. New annual premiums were up 67% and
single premium sales were 25% higher. Sales of ISAs, PEPs, unit trusts and
UCITS increased by 37%. There were good performances in the UK and in France.
In Poland, we have achieved the leading position for pensions business,
capturing some 25% of the recently privatised pensions market; new
annual pension premiums totalled £181m at the end of the third quarter, with
further large volumes of new business expected in the fourth quarter. These
long term and substantial revenue streams are rapidly building a large and
valuable business.
In Romania, we were pleased to receive a licence to begin life operations
next year. Romania offers exciting growth prospects, with a population
of 23 million, a low life assurance spend to GDP of 0.03% (UK 7.87%) and the
prospect of future reform of state pensions. We have signed a statement of
intent with Societe Generale, which will give us exclusive rights to
distribute life and savings products through their Romanian bank BRD Societe
Generale, and we are working with them to identify other bancassurance
opportunities throughout Europe.
The value of the new business contribution to achieved life profits after the
cost of capital, increased by 27% before tax and 32% after tax. In the UK,
product margins were broadly maintained, although the value of new business
was affected by a change in product mix and lower assumed investment returns.
The value of new business more than doubled in Poland following the success
in pensions and was 181% higher in France, mainly reflecting the strong
growth in sales of the AFER product.
Statutory life profits were up 12% at £380m, after a charge of £10m for
setting up costs for Polish pension business. Achieved life operating
profits, which provide a better measure of economic profitability, were
£138m higher than statutory life profits, at £518m.
General insurance
Actions to improve underwriting results and a cautious stance on year
2000 risks saw general insurance premiums 2% lower worldwide at £6.7 billion,
and 11% lower in the United Kingdom. Rate increases are being applied in
most classes of business in the United Kingdom, and wherever possible around
the world, although markets remain competitive. The group is focused on
improving the profitability of general insurance underwriting and on
building deeper positions in more profitable segments.
The third quarter included a number of large claims, the cost of £20m for
hurricane Floyd, and a £12m provision for the effect on outstanding claims
provisions of the introduction of a Goods and Services tax (GST) in
Australia. Underwriting results in the United Kingdom continued to show an
improvement over last year and Canada produced a strong performance with a
combined operating ratio of 100% in the third quarter. The improvement seen
in the United States underwriting result in earlier quarters was constrained
by claims from hurricane Floyd. The general insurance expense ratio
benefited from merger expense savings and the ratio improved to 14.0%
(9 months 1998 14.5%), despite the effect of a lower premium volume.
The longer term investment return was 9% lower at £923m reflecting the
effect of lower interest rates, a reduction in cash flow and the unwinding
of the discount on certain claims provisions. Overall, general insurance
profits for the first nine months were £404m (1998 £420m).
Asset management and other financial services
Profits from asset management were up 45% to £29m reflecting increased funds
under management. There were good performances from Morley Fund Management,
our UK asset management company, and also from Victoire Asset Management in
France. Total assets and additional funds under management increased by
£5bn since the start of the year to £126bn.
Integration progress and cost savings
Strong progress continued to be made with the integration of our businesses,
with some 88% of our targeted staff reductions of 6,000 achieved already.
Annualised cost savings achieved by the end of September amounted to
£279m, with a target of £325m per annum, by June 2000. Total cost savings
of £133m are reflected in the 9 months results of which £74m are included
in general insurance administrative expenses, £39m in claims handling
expenses and £20m in various other expense categories.
Corporate developments
In the Netherlands, our Dutch subsidiary Delta Lloyd, finalised merger terms
with Nuts Ohra, the health, life and general insurer. The new group, Delta
Lloyd Nuts Ohra, will be the 3rd largest Dutch insurer,the second largest
direct writer, combining call centres, direct mail and a direct sales force,
the third largest in life and pensions and, second in private health.
Premium income for Nuts Ohra in 1998 amounted to £763m, and the estimated
value of net assets acquired on a UK basis was £188m. The acquisition
price of £122m is being satisfied by a subordinated loan from Delta Lloyd
with a value of £116m, and preference shares of £6m. Cost savings are
estimated to be some £10m per annum from 2002.
CGU recently announced an agreed offer to purchase the 72.1% of outstanding
ordinary shares in Hibernian Group plc, not already owned by the group. At
an offer price of IR760p per share, this values the outstanding shares
at approximately £240m. Irrevocable commitments to accept the offer have
been received from the holders of approximately 25% of the shares and the
group now owns or has an interest in approximately 53% of the ordinary
share capital. Subject to completion of the acquisition, the combined
Irish business will create the leading composite insurer in Ireland,
with a growing share of the life and savings market, and a strong
position in general insurance.
Hibernian's premium income in 1998 amounted to IR£321m, with published
net assets at 30 June 1999 of IR£235m.
The group is focused on generating shareholder value with leading positions
in selected market segments. An ongoing review of smaller businesses has to
date led to a number of disposals. These included the Swedish general
insurance business and the life reinsurance portfolio of British & European
in the United Kingdom and, the proposed divestiture of our Greek life
business.
Year 2000 ('Y2K') and the euro
The vast majority of our Y2K preparations are now complete and we are
conducting extensive 21st century simulation testing. Total Y2K IT costs
are estimated at £135m (£115m incurred to date), with £30m included in
these results. Our businesses in the euro zone are continuing to work
actively to prepare for the final conversion; costs incurred to date for
the introduction of the euro amounted to £23m, with £5m included in these
results.
The group cannot provide universal cover against the loss or damage caused
by the date change which is a foreseeable risk. Our general insurance
businesses have, therefore, in line with the rest of the industry,
introduced exclusion clauses wherever possible to reduce the impact of
potential claims arising from Y2K failure. This underwriting stance
has led to a reduction in premium volumes of some £40m since the
beginning of the year.
Return on equity
The group's 'normalised' after tax return on equity for the 12 months to
30 September 1999 was 10% (3 year average 12%). The normalised return is
based on the published after tax operating profits before exceptional
items, including achieved life profits, and the opening equity capital.
Shareholders' funds
Shareholders' funds of £8,833m were £206m lower than at 31 December 1998.
The reduction was mainly due to the short term downward fluctuations in
investment values of £532m pre-tax, which was reflected in the loss
attributable to ordinary shareholders of £155m. Other significant
movements in shareholders' funds included an increase of £397m in the
valuation of in-force life business and a reduction of £277m due to
movements in rates of exchange.
NOTES TO EDITORS
* CGU is Europe's 5th largest insurance group and the largest in the UK
(based on worldwide sales of some £18bn per annum).
* CGU is one of the top 20 fund managers in Europe, with worldwide assets
and additional funds under management of £126 billion at 30 September
1999.
* In the first 9 months of 1999, total life premiums and retail investment
sales accounted for 52% of the group's total business.
* The distribution of total premiums and retail investment sales of
£18.0 billion for the 12 months to 30 September 1999 was as follows:
Life and
savings General Total
% % %
UK 23 15 38
France 13 4 17
Netherlands 4 2 6
Other Europe 10 3 13
United States 1 15 16
Canada - 5 5
Australia & NZ - 3 3
Rest of World - 2 2
* All growth rates are quoted in local currency.
* Overseas currency results are translated at average exchange rates.
* CGU's corporate press releases and results presentations are available
on the Internet: www.cgugroup.com/group
A detailed review of CGU's business performance follows
BUSINESS REVIEW
LIFE & SAVINGS
ACHIEVED LIFE PROFITS
On the achieved profits basis of reporting life profits, the group's life and
savings operating profit amounted to £518m. The major element of profits on
the business in force and net assets is the interest roll-up on the opening
embedded value. The effect of the substantial reductions in interest rate
assumptions amounted to £68m, offset by the increase in the opening embedded
value.
The embedded value, included in the balance sheet, increased primarily due to
favourable investment return fluctuations.
The new business contribution, after charging for the cost of capital, grew
by 27% to £159m and, after taxation the growth was 32%.
Profit on
business in New
Analysis of life and savings force business
profits and net assets contribution Total
9 months 9 months 9 months
1999 1998 1999 1998 1999 1998
£m £m £m £m £m £m
Life operating profit before
taxation
UK 143 147 85 86 228 233
France 65 68 17 6 82 74
Netherlands 92 102 2 - 94 102
Italy 3 7 24 22 27 29
Poland - life 26 25 16 16 42 41
Poland - pensions 4 - 21 - 25 -
Other life businesses 9 11 (6) (3) 3 8
--- --- --- --- --- ---
Life operating profit on
continuing business 342 360 159 127 501 487
Operating profit on
discontinued business (note) - 7 - 1 - 8
Life operating profit --- --- --- --- --- ---
before taxation 342 367 159 128 501 495
--- --- --- ---
Operating profit on other life &
savings activities before taxation 17 19
--- ---
Operating profit before taxation 518 514
Effect of changes in interest rates
and investment return fluctuations 450 (305)
--- ---
Achieved profit before taxation 968 209
Taxation (296) (77)
--- ---
Achieved profit after taxation 672 132
--- ---
Note: Our life operation in South Africa was disposed of at the end of 1998.
New business contribution
New annualised New business
premiums contribution
9 months 9 months
1999 1998 1999 1998
£m £m £m £m
UK 324 286 85 86
France 107 90 17 6
Netherlands 81 76 2 -
Italy 106 96 24 22
Poland - life 45 43 16 16
Poland - pensions 181 - 21 -
Other life businesses 103 61 (6) (3)
--- --- --- ---
Total 947 652 159 127
--- --- --- ---
Note: Annualised premiums are annual premiums plus 10% of single
premiums.
CGU Life in the UK is the 7th largest life office and again made a major
profit and new business contribution. The 1998 new business contribution,
restated using the 1999 basis for interest rates and taxation, was £78m,
which would have given an underlying increase of 9% to £85m in 1999.
Product margins were broadly maintained although there has been a change
in business mix towards single premium bonds and pensions. New life and
savings sales continued to benefit from the widely recognised strength
of the CGU Life Fund and a multi-distribution strategy, selling through
IFAs, bancassurance partners, estate agents and direct.
In France, a good increase in new business contribution through increased
AFER sales and improved profitability on other savings products
maintained the pattern of earlier quarters.
In the Netherlands, the new business value increased by £2m using interest
rate assumptions at the start of the year. At current interest rate
assumptions the value of new business would have been higher. The lower
interest rate assumptions largely caused the £10m reduction in profits on
business in force. The merger of Nuts Ohra and Delta Lloyd will make Delta
Lloyd Nuts Ohra the 3rd largest life insurer in the Netherlands. Nuts Ohra
will be consolidated into the group's results in the fourth quarter of 1999.
The new business contribution in Italy continues to benefit from year on year
growth in premiums and good profit margins. The new business value in the
final quarter will be lower following the ending of our distribution
agreement with Credito Italiano in June of this year.
In Poland, our market-leading life business has continued to produce good
premium growth with very satisfactory margins, despite some increase in
competition.
Our Polish pensions business has seen the first substantial flow of
contributions redirected from the state scheme and has produced an excellent
new business value. The majority of the remaining initial contributions are
expected in the fourth quarter.
The analysis of embedded value and information on methodology and
assumptions is provided on page 29.
STATUTORY LIFE PROFITS
Statutory life profits of £380m were 12% higher at constant rates of
exchange, after charging £10m for start up costs in our market-leading
Polish pensions business.
Statutory profits
9 months 9 months
1999 1998
£m £m
UK 184 163
France 68 59
Netherlands 100 96
Italy 15 5
Poland life 18 16
Poland pensions (10) -
Other life businesses 5 (3)
Profit on continuing business 380 336
Profit on discontinued
business (note) - 4
--- ---
380 340
--- ---
Note: Our life operation in South Africa was disposed of
at the end of 1998.
LIFE AND SAVINGS NEW BUSINESS
There were record new business sales in the first nine months of 1999,
with worldwide life and savings sales 30% higher in local currency
at £5.4 billion.
New single New annual ISAs/PEPs
premiums premiums unit trusts/ TOTAL
UCITS (ii)
Local Local Local Local
9 mths currency 9 mths currency 9 mths currency currency
1999 growth 1999 growth 1999 growth growth
£m % £m % £m % %
United Kingdom 1,974 29 127 (4) 549 51 30
France 979 18 9 13 18
Netherlands 244 9 57 4 8
Italy 679 17 38 1 16
Poland 9 167 225 487 461
Germany 83 n/a 24 n/a n/a
Other Europe 138 160 8 29 86 (12) 48
Rest of World 150 (3) 33 21 1
----- --- --- --- --- --- ---
TOTAL 4,256 25 521 67 635 37 30
----- --- --- --- --- --- ---
Notes:
(i) Average exchange rates used and premiums are gross of reassurance.
(ii) UCITS are collective investments sold throughout Europe and Asia.
(iii) Growth excludes sales from discontinued business.
UK : CGU Life's total sales of new life, pensions and investment business
rose by 30% to £2.7bn. There was strong growth through our multi-channel
distribution network, with NAPI (new annual premiums plus a tenth of new
single premiums and investment products) sales up 10% through IFAs and 36%
through our other channels.
New single premiums were 29% higher at £1,974m, boosted by a 43% increase to
£1,371m in sales of our main investment product, the Portfolio Bond, and new
single premium pension sales increased by 19% to £559m. New annual premiums
were 4% lower overall with increased individual pensions business offset by
lower mortgage and protection sales. New investments into ISAs, unit trusts
and PEPs were 51% higher at £549m, including £162m of ISA sales.
France : New business levels continued to show good growth, with single
premium sales 18% higher at £979m, well ahead of the market growth of around
10%. AFER bond sales remained buoyant, up 51% at £531m.
Netherlands : New annual premiums were 4% higher at £57m, including a 33%
increase to £13m in sales of Delta Life, our unit-linked universal life
product. Single premiums were up 9% to £244m, following the acquisition of
a new group pension scheme.
Italy : Following strong sales in the first 6 months of the year, new annual
and single premiums remained ahead of 1998 levels at the 9 months stage,
at £38m and £679m respectively.
Poland : CU Polska has a leading position in the Polish pensions market and
generated £181m in new annual premiums at the end of the third quarter.
Life sales have benefited from the cross-selling opportunities provided by
the new pension arrangements, with annual premiums 16% higher at £44m
and single premiums up 167% at £9m.
Germany : New business levels remained strong at Berlinische Leben and we
continue to refocus the business on the profitable unit-linked and group
pensions markets. Sales were well ahead of last year, with annual premiums
increasing to £24m, including £9m in the third quarter, and single premiums
of £83m, reflecting strong pension and annuity sales.
In Ireland, excellent single premium investment bond sales of £55m were
achieved in the third quarter, boosting total new business to £118m in 1999.
Our cross-border business in Luxembourg added £86m in UCITS sales. New annual
premiums more than doubled to £12m in Turkey, reflecting an increase in the
direct salesforce to over 600.
In the United States, single premium sales of £128m were 5% lower, with good
sales of a new deferred annuity product being offset by reduced demand for
immediate annuities. Annual premiums were 15% lower at £15m, following our
withdrawal from sales of unprofitable group health products. In Canada,
sales of protection and annuity products boosted new annual premiums by 32%
to £6m and single premiums were 9% higher at £21m.
Life premium income is shown below:
9 months 9 months
1999 1998
£m £m
----------------------------------------------------
UK 2,777 2,283
France 1,746 1,100
Netherlands 560 524
Other Europe - Italy 801 678
- Poland 198 117
- Other 401 111
United States 181 183
Canada 45 38
Rest of World 8 68
----- -----
6,717 5,102
----- -----
----------------------------------------------------
Note: Life premiums in France include £646m (1998 £151m) of transfers
from existing contracts.
GENERAL INSURANCE
Underwriting results showed an improvement of £62m over last year.
Improved results were achieved by our largest businesses in the United
Kingdom and the United States, together with a strong performance in Canada.
In the third quarter, progress was held back by a number of large claims
and the effect of the introduction of the GST in Australia.
The longer term investment return ('LTIR'), applicable to general
insurance business, was £923m (1998 £1,001m). The reduction reflected
lower interest rates, reduced cash flow and the unwinding of the discount
on certain claims provisions.
General insurance profits in the nine months amounted to £404m (1998 £420m).
Details of the principal assumptions for calculating the LTIR are outlined
on page 13.
General insurance Underwriting
profit result Premiums Local
9 mths 9 mths 9 mths 9 mths 9 mths 9 mths currency
1999 1998 1999 1998 1999 1998 growth
£m £m £m £m £m £m %
UK 67 94 (206) (242) 1,987 2,245 (11)
France 39 51 (23) (15) 600 555 8
Netherlands 25 42 (17) (7) 287 270 5
Other Europe 12 10 (40) (37) 460 396 16
United States 141 102 (148) (185) 2,003 1,911 2
Canada 71 42 (18) (40) 593 620 (6)
Australia & NZ 4 36 (47) (18) 431 407 2
Rest of World 18 22 (21) (25) 278 308 (5)
Group reinsurance 27 21 1 (12) 57 54 4
--- --- --- --- ----- ----- ---
404 420 (519) (581) 6,696 6,766 (2)
--- --- --- --- ----- ----- ---
UK: Underwriting results continued to respond to actions taken to
improve profitability despite a number of large claims in the third quarter.
Better results were achieved in the motor classes where premium rates have
risen over the last 12 months by 20% in both private and commercial lines.
The homeowners class, which accounts for some 20% of UK business, made a
good underwriting profit. Household rates have been increased by 5% and
employers' liability rates are up 7%. In the London marine market, which
remains competitive, we are prepared to continue to decline business.
Overall premiums were 11% lower, reflecting management actions to improve
underwriting results and to avoid unacceptable year 2000 risks.
France: Good underwriting results were achieved in health and
property classes, although the market remains competitive.
The integration of the direct writer, Tellit Assurance, with Eurofil is
making good progress and the combined business makes CGU the second
largest direct writer in France.
Netherlands: Underwriting profits were achieved in personal accident, where
we implemented a 10% rate increase in January 1999, and in property.
Higher injury claims affected motor results, where rates have increased by
10% and further rate increases are planned.
Other Europe: Conditions for our smaller businesses throughout Europe
remain generally competitive, although motor rates are hardening in
most markets. Premiums were 16% higher following the acquisition of a
small Italian general insurer in 1998, acquired as part of a bancassurance
arrangement for the life operations.
United States: Our business is the 16th largest in the US, with strong
market positions in the North Eastern States and in agri and inland marine
classes. A £37m improvement in the underwriting result for the first nine
months included better results from most classes of business. Claims from
hurricane Floyd amounted to £20m in the third quarter and a worse result was
reported in the discrete third quarter. Results benefited from merger
expense savings of £38m, late retrospective premiums of £9m in workers'
compensation and the absence of a charge for business no longer written.
Extensive pricing and profitability reviews are being carried out in all
classes, with modest rate increases being applied in agri, package and
parts of the auto portfolio.
Canada: Our market leading Canadian business produced a £22m improvement
in underwriting results in the first nine months and a third quarter
combined operating ratio of 100%. Results benefited from a focused and
disciplined underwriting approach and more favourable weather conditions.
Premium volumes were 6% lower, reflecting our firm stance on rating in
competitive conditions and Y2K exclusions.
During the third quarter, we reached agreement to acquire GAN Canada which
increases our share of the profitable personal lines affinity scheme
market. Plans are in place to integrate it quickly into our own branch
network.
Australia: Underwriting results were impacted by competition, claims from
the Sydney hailstorm in April costing £16m, and a charge of £12m
for the introduction of the GST. Rate increases averaging 4%-5% are being
implemented in private property and motor, with significant increases
in workers' compensation.
New Zealand continued to perform well, achieving an underwriting profit.
Rates are firming in the market and were up 3%-6% across most classes.
ASSOCIATES
Profits from associates increased to £11m (1998 £10m). This increase
included higher profits of £5m from our share of the Hibernian Group,
included six months in arrears, and improved results from the British
Aviation Insurance Company.
ASSET MANAGEMENT AND OTHER FINANCIAL SERVICES
CGU managed assets of £126 billion at 30 September 1999, making it one of the
top 20 fund managers in Europe. The group's strategy is to grow in the third
party fund management market and mandates for new funds and other third party
funds of over £800m were received in the first nine months.
Profits from asset management and other financial services increased to £29m
(1998 £20m), including £18m from Morley Fund Management in the UK, reflecting
increased fee income and merger expense savings. Our UK estate agent chain
produced a reduced loss of £5m (1998 loss £8m).
OTHER FINANCIAL HIGHLIGHTS
SHAREHOLDERS' FUNDS
Shareholders' funds amounted to £8,833m (31 Dec 1998 £9,039m) after
deducting the equalisation provision of £137m (31 Dec 1998 £114m). The
loss attributable to ordinary shareholders of £155m (1998 profit £204m)
included short term downward fluctuations in investment values of £532m
pre-tax (1998 gains of £17m pre-tax). Other movements in shareholders'
funds included an increase of £397m in the valuation of in-force life
business before the effect of exchange rate changes. Movements in rates
of exchange had a negative effect of £277m of which £86m related to the
reserve arising on the valuation of in-force life business.
Net assets per ordinary share at 30 September 1999 were 658p
(31 Dec 1998 675p) after deducting the equalisation provision. Adding
back the equalisation provision, they were 668p (31 Dec 1998 684p). At
5 November 1999, net assets per ordinary share were estimated at 691p
(701p adding back the equalisation provision).
The solvency margin (excluding life) was 47% (31 Dec 1998 51%).
UNALLOCATED EXPENSES
Unallocated expenses, including corporate expenses and allocations to
worldwide staff profit sharing schemes, amounted to £59m (1998 £44m).
UNALLOCATED INTEREST CHARGES
Unallocated interest charges include interest on intra-group loans with the
centre and external borrowings not allocated to territorial operations.
These amounted to £147m (1998 £125m) and included external loan interest
of £52m (1998 £58m).
LONGER TERM INVESTMENT RETURN (LTIR)
The longer term investment return applicable to general business results is
calculated separately for each principal general insurance business unit. In
respect of equities and properties, the return is calculated by multiplying
the opening market value of the investments, adjusted for sales and purchases
during the year, by the longer term rate of investment return. For other
investments, the actual income receivable is included. The principal
assumptions underlying the calculation of the LTIR, which are consistent
with the assumptions for life embedded value calculations, are:
Longer term rates of return
Equities Properties
1999 1998 1999 1998
% % % %
UK 6.9 8.1 5.4 7.4
France 5.9 6.5 4.9 6.5
Netherlands 6.8 7.1 4.9 6.1
United States 7.7 7.8 5.7 6.8
Canada 7.9 8.0 5.9 7.0
Australia & NZ 8.0 8.0 6.0 7.0
A statistical appendix, analysis of embedded value and achieved profits
methodology and assumptions, and unaudited financial statements follow.
9 months
9 months 1998 12 months
Profit and loss account 1999 Restated 1998
----------------------- Unaudited Unaudited Audited
Premium income after reinsurance £m £m £m
Life premiums 6,717 5,102 6,952
General insurance premiums 6,696 6,766 8,772
------ ------ ------
Total premiums 13,413 11,868 15,724
====== ====== ======
Operating profit
Life assurance 380 340 498
General insurance 404 420 504
Associated undertakings 11 10 14
Asset management
/other financial services 29 20 14
------ ------ -----
824 790 1,030
Unallocated expenses, interest charges
and goodwill amortisation (221) (172) (262)
------ ------ -----
Operating profit before taxation and
exceptional items 603 618 768
Exceptional items (note 2) (100) (105) (610)
------ ------ -----
Operating profit before taxation 503 513 158
Short-term fluctuation in
investment returns (532) 17 647
Change in the equalisation provision (29) (27) 55
Net loss arising from sale of
subsidiary undertakings (9) - (14)
Merger transaction costs - (72) (75)
------ ------ -----
Profit/(loss) on ordinary activities
before taxation (67) 431 771
Tax on profit/(loss) on ordinary
activities
Operating profit/(loss) before
exceptional items (121) (172) (192)
Other 88 (10) (51)
------ ------ -----
(33) (182) (243)
------ ------ -----
Profit/(loss) on ordinary activities
after taxation (100) 249 528
Minority interests (42) (32) (30)
------ ------ -----
Profit/(loss) for the period (142) 217 498
Preference dividends (13) (13) (17)
------ ------ -----
Profit/(loss) attributable to ordinary
shareholders (155) 204 481
Ordinary dividends
Interim (187) (174) (174)
Final - - (287)
------ ------ -----
(187) (174) (461)
------ ------ -----
Transfer to/(from) retained profits (342) 30 20
====== ====== =====
Earnings per share (note 3)
Operating profit after taxation,
before exceptional items,
attributable to equity shareholders 33.2p 30.8p 40.2p
Profit/(loss) attributable to equity
shareholders (11.8)p 15.7p 37.1p
Profit/(loss) attributable to equity
shareholders - diluted (11.8)p 15.7p 36.8p
Notes:
(1) Profit on ordinary activities includes non-life unrealised gains
previously taken to the revaluation reserve. The general insurance
result includes an allocation of total gains and income based on the
longer term return. 9 months 1998 results have been restated to reflect
these changes in accounting for investment returns.
(2) Exceptional items in 1999 comprise merger integration costs. (Full
year 1998 comprise merger integration costs of £260m and an additional
claims provision of £350m.)
(3) Earnings per share were calculated using a weighted average of 1310.4m
(9 months 1998 average of 1294.1m) ordinary shares in issue.
(4) Total ordinary shares in issue at 30 September 1999 were 1311.8m
(30 September 1998 1308.3m).
(5) Published results have been translated at average rates of exchange,
while assets and liabilities have been translated at closing rates
of exchange. The principal average rates were:
9 months 1999 9 months 1998 12 months 1998
French franc 9.87 9.93 9.78
Netherlands florin 3.31 3.34 3.29
United States dollar 1.61 1.65 1.66
Canadian dollar 2.40 2.43 2.47
9 months
9months 1998 12 months
1999 Restated 1998
Unaudited Unaudited Audited
Operating profit before taxation £m £m £m
and exceptional items
--------------------------------
UK 273 266 280
France 115 116 167
Netherlands 129 144 196
Other Europe 38 28 46
United States 152 113 156
Canada 73 44 76
Australia & NZ 4 36 56
Rest of World 13 22 29
Group reinsurance 27 21 24
--- --- -----
824 790 1,030
Unallocated expenses (59) (44) (80)
Unallocated interest charges (147) (125) (175)
Goodwill amortisation (15) (3) (7)
--- --- -----
603 618 768
=== === =====
Summarised reconciliation of movements in consolidated shareholders' funds
--------------------------------------------------------------------------
Restatement of profit for the period
Profit as previously reported 338
Unrealised investment gains (121)
---
Profit/(loss) for the period (142) 217 498
Movement in the valuation of
in-force long term business 397 188 611
Foreign exchange rate movements
on this valuation (86) 29 49
--- --- ---
311 217 660
Other foreign exchange rate movements (191) (120) 73
--- ---- -----
Total recognised gains and losses
arising in the period (22) 314 1,231
Dividends (200) (187) (478)
Increase in capital and shares in
lieu of dividends 27 242 249
Merger reserve arising in the period - 11 11
Other movements (11) (5) 9
--- ---- -----
Total movements in the period (206) 375 1,022
Balance at 1 January
As previously reported
- Commercial Union 4,486 4,486
- General Accident 3,781 3,781
Merger adjustment
- GA preference shares (250) (250)
----- ----- -----
Shareholders' funds at 1 January 9,039 8,017 8,017
----- ----- -----
Balance at end of period 8,833 8,392 9,039
===== ===== =====
Summarised consolidated balance sheet
-------------------------------------
Group
Group as at Group
as at 30 Sep 98 as at
30 Sep 99 Restated 31 Dec 98
Unaudited Unaudited Audited
Assets £m £m £m
Goodwill 263 200 253
Investments
Land and buildings 712 806 798
Participating interests 303 305 304
Variable yield securities 5,345 4,340 5,221
Fixed interest securities 10,248 10,804 10,999
Mortgages and loans 268 297 267
Deposits 699 858 707
Valuation of in-force long
term business 3,436 2,716 3,141
------ ------ ------
21,011 20,126 21,437
Reinsurers' share of technical
provisions 2,186 2,051 2,141
Assets of the long term business 79,151 69,217 76,196
Other assets 6,389 5,846 5,837
------- ------ -------
Total assets 109,000 97,440 105,864
------- ------ -------
Liabilities
Shareholders' funds 8,833 8,392 9,039
Minority interests 492 526 512
----- ----- -----
Total capital and reserves 9,325 8,918 9,551
Liabilities of the long term
business 77,463 67,474 74,457
General insurance liabilities 17,556 16,992 17,504
Borrowings 1,104 982 950
Other creditors and provisions 3,552 3,074 3,402
------ ------ ------
Total other liabilities 22,212 21,048 21,856
------- ------ -------
Total liabilities 109,000 97,440 105,864
------- ------ -------
Consolidated cash flow statement
--------------------------------
9 months 9 months 12 months
1999 1998 1998
Unaudited Unaudited Audited
£m £m £m
Net cash inflow from operating
activities excluding exceptional
items and merger transaction costs 268 584 511
Exceptional items and merger
transaction costs paid (64) (72) (161)
Net cash outflow from
servicing of finance (89) (100) (114)
Corporation tax paid (including
advance corporation tax) (84) (239) (318)
Net purchases of tangible
fixed assets (40) (45) (65)
Acquisitions and disposals
of subsidiary and associated
undertakings (50) (92) (101)
Equity dividends paid (286) (320) (495)
Net cash inflow/(outflow)
from financing activities 207 (19) (54)
---- ----- -----
Net cash flows (138) (303) (797)
---- ----- -----
Cash flows were invested as follows:
(Decrease)/increase in cash holdings (18) 93 31
Net portfolio investment
Net sales of investments (108) (416) (894)
Non-trading cash flow (from)/to
long term business operations (12) 20 66
---- ----- -----
(138) (303) (797)
==== ===== =====
* * * * * *
ANALYSIS OF EMBEDDED VALUE AND ACHIEVED PROFITS METHODOLOGY AND ASSUMPTIONS
Analysis of embedded value
9 months 9 months 12 months
1999 1998 1998
Restated
£m £m £m
UK 1,959 1,587 1,935
France 887 871 871
Netherlands 1,672 1,487 1,530
Other Europe 360 251 324
Other 228 235 208
----- ----- -----
Total 5,106 4,431 4,868
----- ----- -----
Note: The 9 months 1998 figures have been restated to exclude the effect of
smoothing.
Achieved profits methodology and assumptions
The results have been prepared in accordance with the draft 'Guidance on
Accounting for Long Term Insurance Business in the Group Accounts of
Proprietary Companies (The Achieved Profits Method)' issued by the ABI and
are prepared as a supplement to the statutory basis results contained in
this report.
For the purpose of producing quarterly results, the methodology is based on
the roll forward of the embedded value published at 1998 year-end. In the
achieved life operating profit, changes in new business are reflected each
quarter, whereas non-economic parameters such as persistency and expenses are
normally only adjusted annually in the year end results. Changes in interest
rates and investment returns are reflected quarterly as a separate item after
calculating the achieved operating profit.
Although the Group's life and savings business is predominantly long term it
also includes substantial businesses such as service companies. Accounting
for these businesses continues to be on the traditional method.
The key economic assumptions for 9 months 1999 are listed below
United France Netherlands Poland Poland -
Kingdom - life Pensions
Oper. Oper. Oper. Oper. Oper.
EV profits EV profits EV profits EV profits EV profits
% % % % % % % % % %
Risk
margin 4.0* 4.0* 5.2 5.2 4.5 4.5 11.5 11.5 9.0 9.0
After tax
discount rate
(excluding risk
margin) 4.6 3.3 3.1 2.3 3.5 2.6 8.1 8.1 8.1 8.1
Risk discount
rate 8.8* 7.4* 8.5 7.7 8.2 7.2 20.6 20.6 17.9 17.9
Pre-tax
investment
returns:
Government
fixed
interest
securities 5.9 4.4 5.2 3.9 5.4 3.9 12.5 12.5 12.5 12.5
Ordinary
shares 8.4 6.9 7.2 5.9 8.3 6.8
Property 6.9 5.4 6.2 4.9 6.4 4.9
Future expense
inflation 4.0 3.0 2.5 2.5 2.5 2.5 9.2 9.2 9.2 9.2
Tax rate
for grossing
up profits
and new
business
contribution 30.0 40.0 25.0 35.0 35.0
* For unit linked business, the risk margin is 4.7%
Oper. = Operating
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