CGNU PLC Q1 2001 Results-Pt 2
CGNU PLC
3 May 2001
CGNU plc Q1 2001 Results
PART 2 OF 5
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Page 7
Summarised consolidated profit and loss account - achieved profit basis
For the three months ended 31 March 2001
3 3 3 Full
months months months year
2001 2001 2000 2000
Em £m £m £m
Operating profit
705 Life achieved operating profit 444 385 1,569
27 Health 17 16 68
25 Fund management 16 10 61
246 General insurance 155 113 412
(6) Non-insurance operations (4) (4) (24)
(64) Corporate costs (40) (41) (185)
(176) Unallocated interest charges (111) (77) (361)
------- ------- ------- -------
757 477 402 1,540
(51) Wealth management (32) (9) (133)
------- ------- ------- -------
Operating profit - ongoing business
before tax, amortisation of goodwill
706 and exceptional items 445 393 1,407
Businesses discontinued and
to be discontinued
United States general insurance
43 (to be discontinued) 27 79 (550)
- London Market (discontinued) - 7 (4)
------- ------- ------- -------
749 472 479 853
(22) Amortisation of goodwill (14) (9) (92)
- Exceptional items - - (425)
------- ------- ------- -------
727 Operating profit before tax 458 470 336
Variation from longer-term
(1,262) investment return (795) 234 213
- Effect of economic assumption changes - (4) (269)
(21) Change in the equalisation provision (13) (6) (27)
Net profit arising on the sale of
198 subsidiary undertakings 125 - 12
Provision for loss on sale for
businesses to be discontinued
21 - United States general insurance 13 - (1,070)
Loss on withdrawal from London Market
- operations - - (448)
- Merger transaction costs - - (59)
------- ------- ------- -------
(Loss)/profit on ordinary activities
(337) before tax (212) 694 (1,312)
Tax on operating profit
- ongoing business before amortisation
(224) of goodwill and exceptional items (141) (111) (437)
Tax on profit on other ordinary
94 activities 59 (149) 174
------- ------- ------- -------
(Loss)/profit on ordinary activities
(467) after tax (294) 434 (1,575)
(21) Minority interests (13) (11) (65)
------- ------- ------- -------
(488) (Loss)/profit for the financial period (307) 423 (1,640)
(6) Preference dividends (4) (4) (17)
------- ------- ------- -------
(Loss)/profit for the financial period
(494) attributable to equity shareholders (311) 419 (1,657)
- Ordinary dividends - - (855)
------- ------- ------- -------
Retained (loss)/profit for the
(494) financial period (311) 419 (2,512)
======= ======= ======= =======
Earnings per share
Operating profit on an achieved profit
basis before amortisation of goodwill and
exceptional items, after taxation,
attributable to equity shareholders
20.0 c in respect of ongoing business 12.6 p 12.0p 39.7 p
(Loss)/profit attributable to equity
(21.9)c shareholders (13.8)p 18.7p (73.8)p
(Loss)/profit attributable to equity
(21.9)c shareholders - diluted (13.8)p 18.7p (73.7)p
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Page 8
Basis of preparation
The achieved profit statement on page 7 includes the results of the Group's
life operations reported under the achieved profit basis combined with the
modified statutory basis results of the Group's non-life operations set out on
pages 15 to 27. In the directors' opinion the achieved profit basis provides a
more accurate reflection of the performance of the Group's life operations
year on year than results under the modified statutory basis. The achieved
profit methodology used is in accordance with the latest draft 'Guidance on
accounting in Group accounts for proprietary companies long-term insurance
business', circulated by the Association of British Insurers. Further details
on the methodology and assumptions are set out on pages 12 to 14.
The results of the Group's life operations under the modified statutory basis,
which is the basis used in the annual statutory accounts, can be found on
pages 15 to 27.
The contribution from the Group's share of the alliance with The Royal Bank of
Scotland Group plc (RBSG) is incorporated within the total life revenues and
achieved operating profits. Goodwill amortised in the period in respect of
the Group's holding in the associated company, RBS Life Investments Limited,
is included within the 'Amortisation of goodwill' on page 7.
Components of total life achieved profit
Total life achieved profit, including the Group's share from the alliance with
RBSG, comprises the following components, the first four of which in aggregate
are referred to as life achieved operating profit:
- new business contribution written during the year including value added
between the point of sale and end of year;
- the profit from existing business equal to:
- the expected return on the value of the in-force business at the
beginning of the period,
- experience variances caused by the differences between the actual
experience during the period and expected experience based on the
operating assumptions used to calculate the start of year value,
- the impact of changes in operating assumptions including risk
margins;
- development costs incurred in establishing new life businesses;
- the expected investment return on the shareholders' net worth, based
upon assumptions applying at the start of the year;
- investment return variances caused by differences between the actual
return in the period and the expected experience based on economic
assumptions used to calculate the start of year value;
- the impact of changes in economic assumptions in the period.
Full
3 months 3 months year
2001 2000 2000
£m £m £m
New business contribution 113 94 392
Profit from existing business
- expected return 212 214 839
- experience variances 2 (1) 10
- operating assumption changes 28 2 (7)
Development costs - (7) (20)
Expected return on shareholders' net worth 84 78 319
------- ------- -------
439 380 1,533
Other life and savings activities* 5 5 36
------- ------- -------
Life achieved operating profit before tax
and exceptional items 444 385 1,569
Exceptional items ** - - (106)
Investment return variances (520) 111 (43)
Effect of economic assumption changes - (4) (269)
------- ------- -------
Total life achieved profit before tax (76) 492 1,151
Attributed tax 19 (158) (375)
------- ------- -------
Total life achieved profit after tax (57) 334 776
======= ======= =======
* Profits from other life and savings activities, which include service
companies, have been calculated on a statutory basis.
** Exceptional items in 2000 comprise one-off integration costs.
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Page 9
New business contribution
The following table sets out the contribution from new business written by the
long-term business operations. The contribution generated by new business
written during the period is the present value of the projected stream of
after-tax distributable profit from that business. Contribution before tax is
calculated by grossing up the contribution after-tax at the full corporation
tax rate for UK business and at appropriate rates of tax for other countries.
Annual premium New business
equivalent * contribution
3 months
3 3 Local 3 2000 3
months months currency months at 2001 months
2001 2000 growth 2001 assumptions** 2000
£m £m % £m £m £m
United Kingdom 294 228 29% 81 59 62
Europe (excluding UK)
France 66 63 1% 19 18 19
Ireland 25 24 2% 6 5 6
Italy 29 7 273% 9 2 2
Netherlands 30 26 12% 6 3 5
Poland
- Life 9 12 (35%) 2 4 4
- Pensions 8 86 (92%) 1 18 16
Spain 24 5 348% 12 - -
Other 23 24 (1%) 1 1 1
International 26 22 20% (1) 1 1
------- ------- ------- ------- ------- -------
Total annualised
premiums 534 497 4%
Total new business
contribution before
effect of solvency
margin*** 136 111 116
Effect of solvency
margin (23) (22) (22)
------- ------- -------
Total new business
contribution
including
effect of solvency
margin 113 89 94
======= ======= =======
* Annual premium equivalent represents regular premiums plus 10% of
single premiums.
** 2000 new business contribution has been shown using the application
of year 2001 economic assumptions and exchange rates.
*** New business contribution before effect of solvency margin includes
minority interests in 2001 of £11 million (three months to 31 March
2000: £6 million). This comprises minority interests in France of £1
million (three months to 31 March 2000: £1 million), Italy £4 million
(three months to 31 March 2000: £1 million), Poland £nil (three
months to 31 March 2000: £4 million), Spain £6 million (three months
to 31 March 2000: £nil).
New business contributions have been calculated using the same assumptions as
those used to determine the embedded values as at the beginning of each year.
The effect of solvency margin represents the impact of holding the minimum
European Union (EU) solvency margin (or equivalent for non-EU operations) and
discounting to present value the projected future releases from the solvency
margin to shareholders.
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Page 10
Analysis of life achieved operating profit
Life achieved operating profit is calculated on an after-tax basis and then
grossed up at the full rate of corporation tax for UK business and at
appropriate rates of tax for other countries.
Full
3 months 3 months year
2001 2000 2000
£m £m £m
United Kingdom* 236 232 903
Europe (excluding UK)
France 54 49 204
Ireland 17 15 68
Italy 11 5 29
Netherlands 46 46 174
Poland
- Life 16 9 58
- Pensions* 7 15 36
Spain 16 2 42
Other 28 (5) (10)
International 8 12 29
------- ------- -------
Total life achieved operating profit before
tax, and exceptional items** 439 380 1,533
======= ======= =======
* Excludes other life and savings activities.
** Life achieved operating profit includes minority interests in 2001 of
£17 million (three months to 31 March 2000: £8 million, full year
2000: £42 million). This comprises minority interests in France of
£2 million (three months to 31 March 2000: £1 million, full year
2000: £6 million), Italy £5 million (three months to 31 March 2000:
£2 million, full year 2000: £12 million), Poland £3 million (three
months to 31 March 2000: £5 million, full year 2000: £15 million),
Spain £7 million (three months to 31 March 2000: £nil, full year
2000: £10 million) and International £nil (three months to 31 March
2000: £nil, full year 2000: £(1) million).
Embedded value of life business
3 3 Full
months months year
2001 2000 2000
£m £m £m
Embedded value at the beginning of the period 11,234 10,518 10,518
Total life achieved profit after tax* (60) 331 813
Exchange rate movements 1 (136) 81
Embedded value from business
(disposed)/acquired** (3) 57 437
Amounts injected into life operations 10 47 167
Amounts released from life operations (67) (205) (782)
------- ------- -------
Embedded value at the end of the period*** 11,115 10,612 11,234
======= ======= =======
* Excluding profits from other life and savings activities after tax.
** Embedded value from business disposed of in 2001 comprises Other
Europe (Greece Life).
Embedded value from businesses acquired in 2000 comprises Hibernian
Group in Ireland (£57 million), Aseval in Spain (£94 million), and
the Group's share of the associated partnership in RBS Life
Investments Limited (£343 million). Embedded value from business
disposed of comprises the Norwich Union Poland life and pensions
operations (£57 million). Of these, only the Hibernian Group
transaction was concluded in the three months to 31 March 2000.
*** Embedded value at the end of the period includes minority interests
in 2001 of £215 million (31 March 2000: £121 million, 31 December
2000: £208 million). This comprises minority interests in France of
£35 million (31 March 2000: £30 million, 31 December 2000: £34
million), Italy £72 million (31 March 2000: £55 million, 31 December
2000: £70 million), Poland £46 million (31 March 2000: £31 million,
31 December 2000: £42 million), Spain £58 million (31 March 2000:
£nil, 31 December 2000: £57 million) and Other Europe £4 million (31
March 2000: £5 million, 31 December 2000: £5 million).
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Page 11
Segmental analysis of embedded value of life business
Valuation of Embedded
Net worth* in-force value
at 31 March at 31 March at 31 March
2001 2000 2001** 2000 2001 2000
£m £m £m £m £m £m
United Kingdom 1,769 1,796 4,216 4,390 5,985 6,186
Europe (excluding UK)
France 855 755 404 377 1,259 1,132
Ireland 214 191 284 232 498 423
Italy 101 75 74 63 175 138
Netherlands 1,337 1,135 758 681 2,095 1,816
Poland 88 78 225 173 313 251
Spain 62 33 148 44 210 77
Other 74 74 72 66 146 140
International 346 357 88 92 434 449
------- ------- ------- ------- ------- -------
4,846 4,494 6,269 6,118 11,115 10,612
======= ======= ======= ======= ======= =======
* The shareholders' net worth comprises the market value of the
shareholders' funds and the shareholders' interest in the surplus held
in the non-profit component of the long-term business funds determined
on a statutory solvency basis and adjusted to add back any non-
admissible assets.
** The effect of holding the minimum statutory solvency margin and
allowing for projected future releases was £680 million.
Minority interests in life achieved profit
3 Full
3 months 2001 months year
------------------------ 2000 2000
Shareholders' Minority Group Group Group
Interest Interest
£m £m £m £m £m
New business contribution
before effect of solvency
margin 125 11 136 116 483
Effect of solvency margin (21) (2) (23) (22) (91)
------- ------- ------- ------- -------
New business contribution
including effect of
solvency margin 104 9 113 94 392
======= ======= ======= ======= =======
Life achieved operating
profit 422 17 439 380 1,533
Other life and savings
activities 5 - 5 5 36
------- ------- ------- ------- -------
Life achieved operating
profit before tax and
exceptional items 427 17 444 385 1,569
======= ======= ======= ======= =======
Total life achieved profit
before tax (84) 8 (76) 492 1,151
Attributed tax 22 (3) 19 (158) (375)
------- ------- ------- ------- -------
Total life achieved profit
after tax (62) 5 (57) 334 776
======= ======= ======= ======= =======
Closing life embedded
value 10,900 215 11,115 10,612 11,234
======= ======= ======= ======= =======
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Page 12
Methodology
(a) Life achieved profit
The achieved profit method of financial reporting is designed to recognise
profit as it is earned over the life of an insurance policy. The total profit
recognised over the lifetime of a policy is the same as under the modified
statutory basis of reporting, but the timing of recognition is different.
Distributable profits from long-term businesses arise when they are released
to shareholders following actuarial valuations. These are carried out in
accordance with statutory requirements designed to ensure and demonstrate
solvency in long-term business funds.
Future distributable profits will depend on experience in a number of areas
such as investment return, discontinuance rates, mortality and administration
costs. Using realistic assumptions of future experience, we can project
releases to shareholders arising in future years from the business in force
and associated minimum statutory solvency margin.
The life achieved profit reflects current performance by measuring the
movement, from the beginning to the end of the year, in the present value of
projected releases to shareholders, together with the movement in the net
assets of the long-term operations held in excess of the minimum statutory
solvency margin, adjusted for any amounts released from or invested in life
operations.
The present value of the projected releases to shareholders is calculated by
discounting back to the current time using a risk discount rate. The risk
discount rate is a combination of a discount rate to reflect the time value of
money and a risk margin to make prudent allowance for the risk that experience
in future years may differ from the assumptions.
The calculations are carried out on an after-tax basis and the profits are
then grossed up for tax at the full rate of corporation tax for the United
Kingdom and at an appropriate rate for each of the other countries.
(b) Embedded value
The shareholders' interest in the long-term business operations is represented
by the embedded value. The embedded value is the total of the net assets of
the long-term operations and the present value at risk discount rates (which
incorporate a risk margin) of the projected releases to shareholders arising
from the business in force, less a deduction for the effect of holding the
minimum statutory solvency margin. This effect of solvency margin is the
difference between the nominal value of the solvency margin and the present
value at risk discount rates of the projected release of the solvency margin
and investment earnings on the assets deemed to back the solvency margin.
For with-profit funds in the United Kingdom, for the purpose of recognising
the value of the estate, it is assumed that terminal bonuses are increased to
exhaust all of the free assets over the future lifetime of the in-force with-
profit policies.
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Page 13
Principal economic assumptions
The principal economic assumptions used are as follows:
United Kingdom
31 March 31 December 31 March 31 December
2001 2000 2000 1999
Risk discount rate 7.4% 7.4% 7.6% 7.8%
Pre-tax investment
returns:
Base government
fixed interest 4.7% 4.7% 5.0% 5.2%
Ordinary shares 7.2% 7.2% 7.5% 7.7%
Property 6.2% 6.2% 6.5% 6.7%
Future expense
inflation 3.7% 3.7% 3.8% 4.1%
Tax rate 30.0% 30.0% 30.0% 30.0%
France
31 March 31 December 31 March 31 December
2001 2000 2000 1999
Risk discount rate 8.5% 8.5% 8.6% 8.7%
Pre-tax investment
returns:
Base government
fixed interest 5.0% 5.0% 5.3% 5.5%
Ordinary shares 7.0% 7.0% 7.3% 7.5%
Property 6.5% 6.5% 6.8% 7.0%
Future expense
inflation 2.5% 2.5% 2.5% 2.5%
Tax rate 37.8% 37.8% 40.0% 40.0%
Ireland
31 March 31 December 31 March 31 December
2001 2000 2000 1999
Risk discount rate 9.1% 9.1% 9.1% 9.0%
Pre-tax investment
returns:
Base government
fixed interest 5.3% 5.3% 5.6% 5.6%
Ordinary shares 8.3% 8.3% 8.6% 8.6%
Property 6.8% 6.8% 7.1% 7.1%
Future expense
inflation 5.0% 5.0% 4.0% 4.0%
Tax rate 19.0% 20.0% 23.0% 28.0%
Italy
31 March 31 December 31 March 31 December
2001 2000 2000 1999
Risk discount rate 7.5% 7.5% 7.7% 7.7%
Pre-tax investment
returns:
Base government
fixed interest 5.3% 5.3% 5.6% 5.6%
Ordinary shares 8.3% 8.3% 8.6% 8.6%
Property 6.8% 6.8% 7.1% 7.1%
Future expense
inflation 3.3% 3.3% 2.5% 2.5%
Tax rate 43.0% 43.0% 43.0% 43.0%
Netherlands
31 March 31 December 31 March 31 December
2001 2000 2000 1999
Risk discount rate 8.0% 8.0% 8.3% 8.3%
Pre-tax investment
returns:
Base government
fixed interest 5.0% 5.0% 5.5% 5.5%
Ordinary shares 7.9% 7.9% 8.4% 8.4%
Property 6.5% 6.5% 7.0% 7.0%
Future expense
inflation 2.5% 2.5% 2.5% 2.5%
Tax rate 25.0% 25.0% 25.0% 25.0%
Poland - Life
31 March 31 December 31 March 31 December
2001 2000 2000 1999
Risk discount rate 20.0% 20.0% 19.8% 19.8%
Pre-tax investment
returns:
Base government
fixed interest 12.5% 12.5% 12.5% 12.5%
Ordinary shares 12.5% 12.5% 12.5% 12.5%
Property n/a n/a n/a n/a
Future expense
inflation 9.2% 9.2% 9.2% 9.2%
Tax rate 28.0% 28.0% 30.0% 33.0%
Poland - Pensions
31 March 31 December 31 March 31 December
2001 2000 2000 1999
Risk discount rate 17.3% 17.3% 17.1% 17.1%
Pre-tax investment
returns:
Base government
fixed interest 12.5% 12.5% 12.5% 12.5%
Ordinary shares 12.5% 12.5% 12.5% 12.5%
Property n/a n/a n/a n/a
Future expense
inflation 9.2% 9.2% 9.2% 9.2%
Tax rate 28.0% 28.0% 30.0% 33.0%
Spain
31 March 31 December 31 March 31 December
2001 2000 2000 1999
Risk discount rate 8.4% 8.4% 9.1% 9.1%
Pre-tax investment
returns:
Base government
fixed interest 5.4% 5.4% 5.6% 5.6%
Ordinary shares 8.4% 8.4% 8.6% 8.6%
Property 6.9% 6.9% 7.1% 7.1%
Future expense
inflation 4.0% 4.0% 3.0% 3.0%
Tax rate 35.0% 35.0% 35.0% 35.0%
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Page 14
Other assumptions
- Current tax legislation and rates have been assumed to continue
unaltered, except where changes in future tax rates have been
announced.
- Assumed future mortality, morbidity and lapse rates have been derived
from an analysis of CGNU's recent operating experience.
- The management expenses of CGNU attributable to long-term business
operations have been split between expenses relating to the
acquisition of new business and to the maintenance of business in
force. Certain expenses of an exceptional nature have been identified
separately and the discounted value of projected exceptional costs has
been deducted from the value of in-force business.
- It has been assumed that there will be no changes to the methods and
bases used to calculate the statutory technical provisions and current
surrender values.
- The value of in-force business does not allow for future premiums
under recurring single premium business or non-contractual increments.
The value arising therefrom is included in the value of new business
when the premium is received. Department of Social Security (DSS) rebate
premiums have been treated as recurring single premiums.
- The value of the in-force business has been determined after allowing
for the effect of holding solvency margins equal to the minimum EU
solvency requirement (or equivalent for non-EU operations). Solvency
margins relating to with-profit business are assumed to be covered by
the surplus within the with-profit funds and no effect has been
attributed to shareholders.
- Bonus rates on with-profit business have been set at levels consistent
with the economic assumptions and CGNU's medium-term bonus plans. The
distribution of profit between policyholders and shareholders within
the with-profit funds assumes that the shareholder interest in
conventional with-profit business in the United Kingdom and Ireland
continues at the current rate of one-ninth of the cost of bonus.
END OF PART 2 OF 5
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