Interim Results 2000 - Part 2
CGNU PLC
2 August 2000
CGNU plc Interim Announcement 2000
Part 2
Contents Page
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
Principal economic assumptions 14
Other assumptions 14
Alternative assumptions 15
Independent review report 16
Modified statutory basis
Summarised consolidated profit and loss account
- modified statutory basis 17
Consolidated statement of total recognised gains and losses 18
Reconciliation of movements in consolidated shareholders' funds 18
Summarised consolidated balance sheet 19
Consolidated cash flow statement 20
Basis of preparation 21
Basis of accounts 21
Principal exchange rates 21
Change in accounting policy - dividend income 22
Acquisitions in the six months to 30 June 2000 22
Exceptional items 22
Geographical analysis of life and pensions and investment
sales - new business and total income 23
Geographical analysis of modified statutory life profit 24
Geographical analysis of health premiums after reinsurance
and operating result 24
Geographical analysis of general insurance premiums after
reinsurance and operating result 25
Taxation 26
Dividends 26
Earnings per share 27
Longer-term investment return 27
Independent review report 28
Statistical supplement
Segmental analysis of group operating profit
at constant currency 29
Supplementary analyses 30
General insurance - geographical ratio analysis 32
General insurance - class of business analysis 33
Assets under management 35
Shareholder information 36
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Page 9
Summarised consolidated profit and loss account - achieved profit basis
Restated
6 6 6
months months months Restated
to to to full
30 June 30 June 30 June year
2000 2000 1999 1999
Em £m £m £m
Premium income after reinsurance
and investment sales
11,693 Life premiums 7,130 6,694 13,470
1,325 Investment sales 808 673 1,347
702 Health premiums 428 162 402
------- ------- ------- -------
13,720 8,366 7,529 15,219
10,140 General insurance premiums 6,183 5,819 11,227
------- ------- ------- -------
23,860 Total 14,549 13,348 26,446
======= ======= ======= =======
Operating profit
Life achieved operating profit
1,237 (excluding change in risk margin) 754 621 1,407
34 Health 21 11 24
36 Fund management 22 26 66
536 General insurance 327 370 660
(34) Non-insurance operations (21) (11) (30)
3 Associated undertakings 2 8 10
(159) Corporate costs (97) (65) (162)
(274) Unallocated interest charges (167) (107) (240)
------- ------- ------- -------
1,379 841 853 1,735
(67) Wealth management (41) - -
------- ------- ------- -------
Operating profit before tax, change in
risk margin, amortisation of goodwill
1,312 and exceptional items 800 853 1,735
- Change in risk margin - - 89
(30) Amortisation of goodwill (18) (17) (34)
- Exceptional items - (70) (163)
------- ------- ------- -------
1,282 Operating profit before tax 782 766 1,627
Variation from longer-term investment
93 return 57 (24) 1,072
(52) Effect of economic assumption changes (32) 247 358
(20) Change in the equalisation provision (12) (35) (55)
Net loss arising on the sale of
- subsidiary undertakings - (9) (8)
(93) Merger transaction costs (57) - -
------- ------- ------- -------
Profit on ordinary activities
1,210 before tax 738 945 2,994
Tax on operating profit before change
in risk margin, amortisation of
(359) goodwill and exceptional items (219) (204) (415)
Tax on profit on other ordinary
(100) activities (61) (87) (438)
------- ------- ------- -------
751 Profit on ordinary activities after tax 458 654 2,141
(39) Minority interests (24) (31) (85)
------- ------- ------- -------
712 Profit for the financial period 434 623 2,056
(15) Preference dividends (9) (9) (17)
------- ------- ------- -------
Profit for the financial period
697 attributable to equity shareholders 425 614 2,039
(525) Ordinary dividends (320) (278) (773)
------- ------- ------- -------
Retained profit for the financial
172 period 105 336 1,266
======= ======= ======= =======
Earnings per share
Operating profit on an achieved
profit basis before change in risk
margin, amortisation of goodwill and
exceptional items, after taxation,
40.3c attributable to equity shareholders 24.6p 27.4p 55.0p
Profit attributable to equity
31.0c shareholders 18.9p 27.5p 91.2p
Profit attributable to equity
31.0c shareholders - diluted 18.9p 27.4p 90.8p
Dividends per share
23.37c - based on parent company 14.25p 14.25p 38.00p
23.37c - based on weighted average 14.25p 12.34p 34.30p
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Page 10
Basis of preparation
The achieved profit statement on page 9 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 17 to 27. 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 draft 'Guidance on accounting in Group accounts for
proprietary companies long-term insurance business', circulated by the
Association of British Insurers in December 1999. Further details on the
methodology and assumptions are set out on pages 13 to 15.
The results of the Group's life operations under the modified statutory basis,
which is the basis used in the annual audited accounts, can be found on pages
17 to 27.
Components of total life achieved profit
Total life achieved profit 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;
- 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.
6 6
months months
to to Full
30 June 30 June year
2000 1999 1999
£m £m £m
New business contribution 194 159 403
Profit from
existing business - expected return 417 326 634
- experience variances (9) (10) 80
- operating assumption
changes - - 8
Development costs (17) - (24)
Expected return on shareholders' net worth 155 128 265
------- ------- -------
740 603 1,366
Other life and savings activities* 14 18 41
------- ------- -------
Life achieved operating profit before tax,
change in risk margin and exceptional items 754 621 1,407
Change in risk margin** - - 89
------- ------- -------
Life achieved operating profit before tax and
exceptional items 754 621 1,496
Exceptional items - - (12)
Investment return variances (69) 189 851
Effect of economic assumption changes (32) 247 358
------- ------- -------
Total life achieved profit before tax 653 1,057 2,693
Attributed tax (221) (316) (819)
------- ------- -------
Total life achieved profit after tax 432 741 1,874
======= ======= =======
* Profits from other life and savings activities, which include service
companies, have been calculated on a statutory basis.
** Impact of risk margin changes within economic assumptions.
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Page 11
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
6
months
to
6 6 6 30 June 6
months months Local months 1999 months
to to currency to at 2000 to
30 June 30 June growth 30 June assumptions 30 June
2000 1999 2000 ** 1999
£m £m £m £m £m
United Kingdom 479 384 25% 137 111 106
Europe
(excluding UK)
France 118 97 35% 39 29 28
Ireland 45 23 116% 12 5 7
Netherlands 52 55 4% 9 15 9
Poland - Life 23 33 (26)% 5 15 15
- Pensions 109 2 n/a 22 - -
Spain 9 9 6% 1 1 1
Other 60 133 (51)% 6 26 24
International 45 44 2% 5 10 10
------- ------- ------- ------- ------- -------
Total annualised
premiums 940 780 25%
====== ====== ======
Total new business
contribution before
cost of capital 236 212 200
Cost of capital (42) (42) (41)
------- ------- -------
Total new business
contribution
after cost of capital 194 170 159
======= ======= =======
* Annual premium equivalent represents regular premiums plus 10% of
single premiums.
** 1999 new business contribution has been shown using the application of
year 2000 economic assumptions.
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 cost of capital represents the cost of holding solvency capital equal to
the minimum European Union (EU) solvency margin (or equivalent for non-EU
operations).
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Page 12
Analysis of life achieved operating profit
Life achieved operating profit is calculated on an after-tax basis and then
grossed up at the full rate of corporation tax for UK business and at
appropriate rates of tax for other countries.
6 6
months months
to to Full
30 June 30 June year
2000 1999 1999
£m £m £m
United Kingdom 449 362 798
Europe (excluding UK)
France 124 71 131
Ireland 33 25 53
Netherlands 76 68 168
Poland - Life 20 27 72
- Pensions 24 1 43
Spain 7 1 13
Other (8) 20 32
International 15 28 56
------- ------- -------
Total life achieved operating profit before tax,
change in risk margin and exceptional items* 740 603 1,366
======= ======= =======
* Excludes other life and savings activities.
Embedded value of life business
6 6
months months
to to Full
30 June 30 June year
2000 1999 1999
£m £m £m
Embedded value at the beginning of the period as
previously reported:
- CGU plc 5,675 4,868 4,868
- Norwich Union plc 4,742 4,415 4,415
Merger adjustments arising from alignment of
embedded value methodology 101 111 111
------- ------- -------
Restated embedded value at the beginning
of the period 10,518 9,394 9,394
Total life achieved profit after tax* 422 729 1,845
Exchange rate movements 99 (229) (420)
Embedded value from business acquired 56 - 89
Amounts injected into life operations 78 11 164
Amounts released from life operations (205) (190) (554)
------- ------- -------
Embedded value at the end of the period 10,968 9,715 10,518
======= ======= =======
* Excluding profits from other life and savings activities after tax.
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Page 13
Segmental analysis of embedded value of life business
Valuation of
Net worth* in-force** Total
30 30 30 30 30 30
June June June June June June
2000 1999 2000 1999 2000 1999
£m £m £m £m £m £m
United Kingdom 1,887 1,675 4,291 4,053 6,178 5,728
Europe (excluding UK)
France 849 751 423 323 1,272 1,074
Ireland 221 192 243 189 464 381
Netherlands 1,222 983 698 682 1,920 1,665
Poland 87 55 188 74 275 129
Spain 36 44 49 27 85 71
Other 174 122 138 87 312 209
International 383 370 79 88 462 458
------- ------- ------- ------- ------- -------
Embedded value of life
businesses 4,859 4,192 6,109 5,523 10,968 9,715
======= ======= ======= ======= ======= =======
* 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.
** At 30 June 2000, the deduction for the cost of solvency capital was
£700 million.
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 capital.
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 capital.
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 effective 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 charge for the cost of the solvency capital
supporting the solvency requirements of the business. This cost of capital is
the difference between the nominal value of required solvency capital and the
present value at risk discount rates of the projected release of this capital
and investment earnings on the capital.
For with-profit funds in the United Kingdom, for the purpose of recognising
the value of the estate, it is assumed that terminal bonuses are increased to
exhaust all of the free assets over the future lifetime of the in-force
with-profit policies.
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Page 14
Principal economic assumptions
The principal economic assumptions used are as follows:
United Kingdom
30 31 30 31
June December June December
2000 1999 1999 1998
Risk discount rate 7.6% 7.8% 7.7% 7.2%
Pre-tax investment returns:
Base government fixed interest 5.0% 5.2% 5.0% 4.5%
Ordinary shares 7.5% 7.7% 7.5% 7.0%
Property 6.5% 6.7% 6.5% 6.0%
Future expense inflation 3.8% 4.1% 4.0% 3.4%
Tax rate 30.0% 30.0% 30.0% 31.0%
France
30 31 30 31
June December June December
2000 1999 1999 1998
Risk discount rate 8.7% 8.7% 8.1% 7.7%
Pre-tax investment returns:
Base government fixed interest 5.5% 5.5% 4.6% 3.9%
Ordinary shares 7.5% 7.5% 6.6% 5.9%
Property 7.0% 7.0% 6.1% 5.4%
Future expense inflation 2.5% 2.5% 2.5% 2.5%
Tax rate 40.0% 40.0% 40.0% 40.0%
Ireland
30 31 30 31
June December June December
2000 1999 1999 1998
Risk discount rate 9.1% 9.0% 8.1% 8.1%
Pre-tax investment returns:
Base government fixed interest 5.5% 5.6% 4.7% 4.6%
Ordinary shares 8.5% 8.6% 7.7% 7.6%
Property 7.0% 7.1% 6.2% 6.1%
Future expense inflation 5.9% 4.0% 4.0% 4.0%
Tax rate 22.0% 28.0% 28.0% 33.0%
Netherlands
30 31 30 31
June December June December
2000 1999 1999 1998
Risk discount rate 8.2% 8.3% 7.7% 7.2%
Pre-tax investment returns:
Base government fixed interest 5.3% 5.5% 4.7% 3.9%
Ordinary shares 8.2% 8.4% 7.6% 6.8%
Property 6.8% 7.0% 6.2% 5.4%
Future expense inflation 2.5% 2.5% 2.5% 2.5%
Tax rate 25.0% 25.0% 25.0% 25.0%
Poland - Life
30 31 30 31
June December June December
2000 1999 1999 1998
Risk discount rate 19.8% 19.8% 20.6% 20.6%
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 30.0% 33.0% 35.0% 35.0%
Poland - Pensions
30 31 30 31
June December June December
2000 1999 1999 1998
Risk discount rate 17.1% 17.1% n/a n/a
Pre-tax investment returns:
Base government fixed interest 12.5% 12.5% n/a n/a
Ordinary shares 12.5% 12.5% n/a n/a
Property n/a n/a n/a n/a
Future expense inflation 9.2% 9.2% n/a n/a
Tax rate 30.0% 33.0% n/a n/a
Spain
30 31 30 31
June December June December
2000 1999 1999 1998
Risk discount rate 9.1% 9.1% 8.6% 8.0%
Pre-tax investment returns:
Base government fixed interest 5.5% 5.6% 4.8% 4.0%
Ordinary shares 8.5% 8.6% 7.8% 7.0%
Property 7.0% 7.1% 6.3% 5.5%
Future expense inflation 3.0% 3.0% 3.0% 3.0%
Tax rate 35.0% 35.0% 35.0% 35.0%
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.
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Page 15
Other assumptions - continued
- The value of the in-force business has been determined after allowing
for the cost of holding solvency capital equal to the minimum EU
solvency requirement (or equivalent for non-EU operations). Solvency
capital relating to with-profit business is assumed to be covered by
the surplus within the with-profit funds and no cost 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.
Alternative assumptions
The table below shows the sensitivity to a one percentage point increase in
interest rates and in the discount rate for new business contribution and
embedded value.
New business Embedded
contribution value
Interest Discount Interest Discount
rates rate rates rate
£m £m £m £m
United Kingdom 10 (20) (400) (375)
Europe (excluding UK)
France 5 (5) (40) (70)
Ireland 1 (1) (5) (15)
Netherlands 5 (5) (50) (100)
Poland - Life - - - (5)
- Pensions - (2) - (5)
Spain - - - (2)
Other - (2) - (10)
International - (2) (5) (10)
------- ------- ------- -------
21 (37) (500) (592)
======= ======= ======= =======
Profits are affected by a change in underlying interest rates. When interest
rates change, expected future investment returns will also change and this in
turn will affect projected cash flows. A change in interest rates will also
result in a change in the discount rate used to calculate the present value of
the projected cash flows. The impact of an increase of one percentage point
in interest rates incorporates all such changes.
The impact of an increase of one percentage point in the discount rate is
calculated with all other assumptions remaining unchanged.
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Page 16
Independent review report to CGNU plc on the alternative method of reporting
long-term business
We have been instructed by the Company to review the information on pages 9 to
15 which has been prepared in accordance with the achieved profit basis as set
out under the methodology and principal economic assumptions sections on pages
13 and 14. This information should be read in conjunction with the accounts
prepared on the modified statutory solvency basis, which are on pages 17 to
27.
Directors' responsibilities
The interim report, including, as described on page 28, the accounts prepared
on a modified statutory solvency basis, is the responsibility of, and has been
approved by the directors. The directors are also responsible for preparing
the information on the above achieved profit basis. The Listing Rules of the
Financial Services Authority require that the accounting policies and
presentation applied to the interim figures should be consistent with those
applied in preparing the preceding annual accounts except where any changes,
and the reasons for them, are disclosed.
Review work performed
We conducted our review in accordance with the guidance contained in Bulletin
1999/4 issued by the Auditing Practices Board. A review consists principally
of making enquiries of group management and applying analytical procedures to
the information on the above achieved profit basis and based thereon,
assessing whether the accounting policies and presentation have been
consistently applied unless otherwise disclosed. A review excludes audit
procedures such as tests of controls and verification of assets, liabilities
and transactions. It is substantially less in scope than an audit performed
in accordance with Auditing Standards and therefore provides a lower level of
assurance than an audit. Accordingly, we do not express an audit opinion on
the above achieved profit basis.
Review conclusion
On the basis of our review, we are not aware of any material modifications
that should be made to the financial information above prepared on an achieved
profits basis as presented for the six months ended 30 June 2000.
PricewaterhouseCoopers Ernst & Young
Chartered Accountants London
London
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