nn ua l r ep or t + a cc ou nt s 20
CGNU plc St Helen’s, 1 Undershaft London EC3P 3DQ Telephone +44 (0)20 7283 2000 www.cgnu-group.com Registered in England Number 2468686
25 million customers worldwide 7th largest insurer worldwide Top 5 in Europe, No 1 in the UK £28 billion premium income and investment sales from continuing operations £209 billion assets under management 64,000 employees worldwide 01 Highlights of the year 02 Chairman’s statement 04 Group at a glance 06 Group Chief Executive’s review 08 Operating review 23 Corporate social responsibility 24 Financial review 30 Board of Directors 33 Directors’ report 35 Corporate governance 37 Remuneration report 39 Directors’ remuneration 43 Statement of directors’ responsibilities 43 Independent auditor’s report 44 Accounting policies 47 Consolidated profit and loss account Technical account – long-term business 48 Consolidated profit and loss account Technical account – general business 49 Consolidated profit and loss account Non-technical account 50 Reconciliation of Group operating profit to profit on ordinary activities before taxation 51 Consolidated statement of total recognised gains and losses 51 Reconciliation of movements in consolidated shareholders’ funds 52 Consolidated Group balance sheet 54 Consolidated cash flow statement 55 Company balance sheet 56 Notes to the accounts 91 Five year review 92 Alternative method of reporting long-term business 99 CGNU Group of companies 100 Shareholder information
Detailed below are various addresses that may prove useful in the event that you have a query in respect of your shareholding. Please quote CGNU plc, as well as the name and address in which your shares are held, in all correspondence.
£15 billion worldwide longterm savings new business sales 38 pence full year dividend £11.9 billion shareholders’ funds £945 million operating profit before tax from general insurance continuing operations 01 CGNU plc *Including life achieved operating profit before amortisation of goodwill and exceptional items.
Our employees worldwide have shown resilience, courage and tenacity, and deserve much of the credit for the encouraging progress that we have made this year.They deserve to have the best possible training and assistance in their personal development. Only through investing in them can we reach our ambitious targets and aspire to being a world-class, customer-driven service company, creating superior shareholder value.
The European Council of Ministers has agreed an action plan to create an open and transparent market, but there is a long way to go. The EFR will help in getting there. For the first time, heads of Europe’s leading banks and insurance companies have agreed to work together to create a transparent, competitive market. We will work with national governments and the European Commission to build the single market in a practical and consumer-friendly way.
We have strengthened our position as a leading European-based financial services group, and continue to grow the business with a clear strategic focus on the long-term savings market.
We have successfully completed the merger of CGU and Norwich Union to create the UK’s leading insurance and financial services group. Annualised cost savings of £317 million have been achieved, which exceeded our target, and we are now together as one company.
In pursuing our strategy, we have withdrawn from markets where we would not create superior shareholder value. We completed the sale of our US general insurance operations in June last year and exited the London Market. Consequently, our exposure to the atrocious attack on America on 11 September was limited.
In France, the Netherlands and Poland we continue to hold leading positions through CGU France, Delta Lloyd and Commercial Union Polska.
We are making progress towards the development of a world-class fund management business, and encourage sustainable development in our investment activities. We believe it is important to invest in companies that uphold sound ethical policies.
As a result, the Board proposes a re-basing of the 2002 full year dividend to 23 pence (2001: 38 pence). Given our outlook for the business, this strikes the appropriate balance between dividend payments and the retention of capital to take advantage of profitable growth opportunities. From this new base, we expect to adopt a progressive policy of growing dividends by approximately 5% per annum, whilst looking to sustain a target cover in a range of 1.5 to 2.0 times operating earnings after tax, measured on a modified statutory solvency basis.
To withdraw from lines of business or markets which do not offer the potential for market-leading positions or superior returns.
G en er al in su ra nc e 04 CGNU plc Annual report + accounts 2001
Other significant operations: Australia, France, Italy 2nd largest UK-based fund manager and one of the top 10 in Europe
Geographical breakdown of worldwide business mix* Long-term savings 2 – Continental Europe 30% 3 – Rest of world 4% General insurance 5 – Continental Europe 7% 6 – Rest of world 6% *With reference to premium income.
Assets under management £209 billion Investment sales £1,475 million Operating profit before tax £29 million
– Building a business capable of sustaining combined operating ratio of 102% through the underwriting cycle
– Repositioned global business by withdrawing from the US and other markets unlikely to produce superior returns
– Continued strengthening of Morley’s position in the UK institutional fund management market
– 70% of Victoire Asset Management’s funds ranked in top quartile for investment performance in France
– Further success for award-winning Navigator fund administration business in Australia, being adapted for the Singaporean market
– Third-party mandates secured in the UK and the Netherlands increased to £3.5 billion
Operating profit before tax from continuing operations £million *Including share of associates’ premiums and health premiums of £841 million.
Our focus is on our three core businesses – long-term savings, fund management and general insurance. Some 70% of our premiums come from long-term savings, with the remaining 30% from general insurance (2000: 67%-33%). Ninety per cent of our total business comes from Europe, which makes CGNU’s presence in Europe the largest of any UK-based insurer (2000: 89%).
Building for the future The group now holds top-five positions in many key markets, a good position from which to build.This growth is being achieved through the organic development of existing businesses and through acquisitions, partnerships and new ventures that extend our distribution capabilities.
A significant achievement last year was the further strengthening of our bancassurance partnerships in Spain, Italy and Singapore, and continuing development in the UK.These distribution arrangements give the group access to more than 20 million potential customers worldwide.
Strategic acquisitions were made, at the right price, to increase shareholder value. For example, our acquisition of Fortis Australia in July consolidated our top-five position in the Australian general insurance market.
We also made a number of smaller acquisitions in strategic and emerging markets. Our Dutch company, Delta Lloyd, bought Bank Nagelmackers, an important step in developing the Delta Lloyd savings and investment business in Belgium.
The acquisition of Mébit, the sixth-largest life insurance business in Hungary, strengthens our position in the long-term savings markets of central and eastern Europe. We continue to develop our operations in these newer, dynamic markets, including Poland and Turkey (where we already hold top-five positions), Romania and Lithuania.
In line with our strategic objective, we have repositioned our global general insurance portfolio into a more focused, efficient and profitable business with leadership positions in key markets. Part of this turnaround has been achieved through disposals.
The total consideration for our significant acquisitions in 2001 was £799 million.Total proceeds from the sale of businesses was £2,619 million (£419 million excluding the sale of our US general insurance operation).
Group results We have been reshaping the business and building a strong base for future profitable growth, despite a slowdown in the world economy and volatility in investment markets.
Creating competitive advantage As the world’s seventh-largest insurance group, and the largest based in the UK, we believe that the actions we have taken have positioned us well to meet the challenge of increased customer demand in low-margin environments. We are developing competitive advantages from economies of scale, the range of our products, services and distribution capabilities, and the quality of our people.
The group is a major force in the long-term savings markets in Europe, through our leadership position in the UK and a growing presence in other key European countries. We have achieved improved results from our general insurance operation, while reshaping the business to improve the quality of future earnings through a focus on personal and small commercial lines business.
Our management team has a record of delivering results and managing change but the backbone of the organisation is our highly professional and dedicated employees around the world. I would like to thank each of them for their outstanding contribution during the past year.Their resilience and dedication in successfully driving the business forward during the integration period has been remarkable.
£15 billion record worldwide new business sales access to over 20 million customers via bancassurance
The Chinese regulator agreed in September 2001 that we can begin the preparatory work for setting up a life and pensions joint venture in China. We have also launched a new joint venture to develop a life business in India with Dabur Group.These markets have large populations and offer excellent long-term potential for the group.
G ro w in g lo ng -t er m s av in gs b us in es s ag gr es si ve ly a nd p ro fit ab ly 09 CGNU plc
No1 UK stakeholder pensions and bonds £1,674 million life achieved operating profit
Ireland recorded excellent pension sales growth of 81% to £174 million (2000: £95 million).Towards the end of the year in Italy, a market with excellent long-term potential, we introduced individual pension products designed to capitalise on new tax incentives for retirement savings.
Savings Savings products such as fixed income, equity-related or with-profit bonds are a major source of revenue for CGNU, particularly for the UK, Ireland, France, Spain and Italy.Total UK single premium bond sales in 2001 were £3,697 million.The strength of this product portfolio means that we can offer alternative forms of savings to our customers when stock market conditions are volatile. In a market that increasingly looks for quality and financial strength, our with-profit record and strong UK life funds are important advantages.The strength of the with-profit funds is underpinned by our UK “orphan”assets, which amount to about £5 billion and are used to support strong business development that benefits policyholders and shareholders alike.The orphan estate is estimated on the basis of realistic assumptions, as distinct from statutory free reserves which are calculated on a more prudent statutory solvency basis. We believe there will continue to be a demand for with-profit products in the current economic climate.
An example of our success was in France, where Abeille vie outperformed a contracting market during 2001, achieving growth in life new business sales and launching a number of new products. One of Abeille vie’s strengths is the sale of AFER savings products.
Sales of the single premium with-profit Celebration Bond in Ireland continued to grow strongly to £255 million (2000: £155 million), reflecting the continued popularity of this form of saving against a background of volatile investment markets and low interest rates.
Retail investment The poor performance of worldwide equity markets resulted in a sharp fall in the group’s retail investment sales. This was particularly evident in the Netherlands, where our record level of sales in 2000 was not repeated as investment sales fell to £85 million (£2000: £1,025 million).
Worldwide retail investment sales at £1,475 million (2000: £2,501 million) reflected the lack of consumer confidence in equity-related products.
Pensions Pensions business continues to provide us with strong growth, contributing 30% of our total new business sales in 2001 as we capitalise on market reforms and increasing awareness across Europe of the need for greater private pension provision.
Total pension sales in the UK grew 39% to £2,469 million (2000: £1,777 million), supported by the strength of the Norwich Union brand and stimulated by the high-profile advertising for our stakeholder products. We established a leading position in the stakeholder pensions market, with a one-third share of the important independent financial adviser (IFA) channel and over 20% of the total market.
�Spain Bancassurance partnerships extend access to 8 million potential customers in Spain, where CGNU has the fourthlargest bank distribution network.
12 CGNU plc Annual report + accounts 2001 Operating review continued
In February 2002 we agreed a second bancassurance partnership with DBS, giving CGNU exclusive access to one million DBS customers in Hong Kong, a market where bancassurance accounts for some 30% of sales.
New business sales from our partnership with The Royal Bank of Scotland Group in the UK began to build momentum during 2001, following the introduction of new products based on the Norwich Union portfolio.Total sales, of which we have a 50% share, were £480 million. Further product development is planned in 2002.
In addition to these major distribution partnerships, we continue to use technology to help customers who choose to deal directly with us.
During 2001 we also launched the world’s first fully transactional insurance and investment service on interactive digital television (iDTV).The new service enables UK customers to buy savings and insurance products via satellite and cable TV. Our presence on Sky Active and Telewest enables us to reach an audience of 19 million people in more than eight million UK households.
Customer service Our UK business has been accredited with the prestigious Raising Standards accolade, the new symbol of quality, clarity and service for the UK life insurance industry. Raising Standards is designed to instill greater consumer confidence in the industry and ensure people have a clearer understanding of the products they are buying, investment performance and charges.
Multi-distribution capability Pursuit of our aggressive growth targets requires that we maximise our use of a range of distribution methods, tailored to suit individual markets.Total sales of new business are 51% through financial advisers, 35% direct and tied agents, and 14% via bancassurance, where our newer partnerships are set to deliver growth in 2002.
Advice channels remain very important to CGNU, particularly in mature markets where an array of complex choices can face the customer. Some of the key benefits we provide for financial advisers include a broad, high-quality product range, strong brand recognition, financial strength, and effective use of technology. In the UK, where Norwich Union receives around 75% of its business from independent financial advisers, we welcome proposed changes in the regulatory system and support the underlying intention to create greater customer access to financial services. Advisers also produce significant business for Hibernian in Ireland, Delta Lloyd in the Netherlands and Abeille vie in France.
�France Victoire Asset Management was chosen as the best asset management team in the French insurance industry for 2001.
The fund management business invests policyholders’funds, provides investment management for institutional pension fund mandates, and manages a range of retail investment fund products. Clients include CGNU group businesses and strategic partners, third-party organisations, investment professionals, independent financial advisers and private investors.
Our main fund management operations are in the UK, France, the Netherlands and Australia. With some £209 billion of assets under management at 31 December 2001, we are one of the largest UK-based fund managers and among the top 10 in Europe.
During the year we completed the integration of our UK fund management operations, which was achieved on target for costs and ahead of schedule.This was a significant achievement, given that we also remained focused on “business as usual”activities.
Morley Fund Management is now one of the largest fund management businesses in the UK, managing over £100 billion of assets from its offices in London,Tokyo, Singapore and Boston. Clients have access to the full resources of the Morley team, with more than 170 investment professionals, including fund managers, analysts, economists and strategists.
Morley was rated best UK insurance fund manager in the Standard & Poor’s awards in March 2001.Two of our corporate analysts received top ratings, one in the Reuters UK Larger Companies Survey and one in the Reuters UK Smaller Companies Survey. Morley also came seventh overall in the Reuters UK Larger Companies top asset management groups survey, leaving it well placed as a member of the leading group of UK asset managers.
Bu ild in g a w or ld -c la ss fu nd m an ag em en t b us in es s 15 CGNU plc
Hibernian reinforced its position as a leading player in the Irish investment market. Success in attracting third-party mandates, and the launch of a number of new funds backed by the expertise of Morley, saw funds under management rise 10% to £4.3 billion.
Morley Singapore was awarded enhanced fund manager status by the monetary authority of Singapore in November, which will help achieve our goal of establishing Morley as one of the top five fund management brands in the Asia Pacific market.
Fund administration We continue to develop our distribution and service capability for the important and growing mass affluent market by providing customers with a choice of fund managers within a single product.
The Navigator retail fund administration business in Australia continues to be highly successful. It enables customers to build tailored investment portfolios by drawing from a wide range of fund managers, and is supported by pioneering new technology. New business sales increased by 20% to £930 million (2000: £824 million). With £2.8 billion of funds under administration at 31 December 2001, Navigator ranks second in the Australian market based on new funds under administration.
Global strategy Despite the market downturn during 2001, opportunities exist to build our global fund management operations in a way that will not only support the growth of our long-term savings business but also create value by managing third-party assets.
We have undertaken a global operating review of our fund management business and have concluded that there will be a benefit to CGNU in bringing our operations closer together. Plans are currently being developed to put in place this increased level of co-operation.
Morley’s specialist SRI team, one of only a few in this field, undertook a number of initiatives during 2001, including the launch of a range of pooled pension funds.These funds focus on companies that make a direct link between sustainable development and long-term returns.
Morley launched two new retail funds for UK private investors in 2001. It is the first time Morley has created products under its own name for the retail market. Another development was the launch of Morley Absolute Growth Investment Company (Magic), which incorporates a hedge fund element with the objective of delivering high income while maintaining capital value.This was fully subscribed and raised £226 million of new funds.
The launch of these new products adds to the comprehensive range of investment funds offered by Morley to the institutional and retail markets.
Morley also has particular expertise in property. It manages the second-largest property portfolio in the UK, which is valued at about £9 billion and covers commercial and residential markets and property development.
2nd largest in UK Morley property portfolio increase in new UK institutional mandates 16 CGNU plc Annual report + accounts 2001 Operating review continued
�UK Morley Fund Management has a Socially Responsible Investment team, one of only a few in this field, making a direct link between sustainable development and long-term returns.
Market position Our strategy is to create a general insurance business with strong and focused market positions, capable of generating high-quality earnings and a healthy return on capital. Achieving this goal will provide us with a complementary flow of profits to support the more capital-intensive long-term savings business. We are operating in those markets where we have scale, presence and expertise which, along with our rigorous approach to accepting risks, produces more stable and sustainable profits.
CGNU is the leading general insurer in the UK and Ireland, and we have top-five positions in the Netherlands, Canada, Singapore, New Zealand and Australia (reinforced by the acquisition of Fortis Australia). Our strategy in these markets is to concentrate on leadership in personal lines – mainly home and motor cover – and small to medium business cover, using disciplined underwriting and efficient claims handling. Our size enables us to invest in technology and apply appropriate pricing to meet claims inflation.
CGNU’s exposure to life and general insurance claims relating to the terrorist attacks in the United States on 11 September 2001 is no more than £35 million, after taking into account reinsurance arrangements.The sale of our US business earlier in the year and our exit from the London Market helped to limit our exposure.
Performance The general insurance business reported an impressive turnaround in performance during a year of reshaping the type of business we write, restructuring the global portfolio and integration activity.
General insurance net premiums written decreased to £8,433 million (2000: £8,990 million) as we reduced our worldwide portfolio and aimed for profit rather than volume.
More than half (57%) of CGNU’s general insurance business is written in the UK, where operating under the Norwich Union brand, we have a market share of some 19%. Operating profit in 2001 was up 99% to £590 million. UK net written premiums decreased during 2001 as we reduced our portfolio, mainly through the planned withdrawal from large commercial risks.This refocusing of the business has contributed to a change in distribution mix, with reduced sales through intermediaries but an impressive 28% growth in retail direct sales.
�UK More than half of CGNU’s general insurance business is written in the UK, where Norwich Union is the leading insurer and has a market share of 19%.
20 CGNU plc Annual report + accounts 2001 Operating review continued
We have piloted a web-enabled policy administration system and a new website for intermediaries, which are being developed in the UK as part of our partner self-service (PaSS) programme.This programme will connect intermediaries and corporate partners directly into Norwich Union’s systems through web-based technology and will create a market-leading platform for delivering improved service to our business partners.
Our Australian and New Zealand businesses reported lower operating profit of £69 million (2000: £82 million), primarily reflecting the sale of State Insurance in New Zealand, which contributed £10 million to the 2000 result. Canada achieved an operating profit of £72 million (2000: £78 million) after an increase in the level of prior year bodily injury claims. Our other international businesses returned an increase in operating profit at £48 million (2000: £34 million).
Underwriting and pricing In each market the integration process saw us move business written on to single operating platforms for personal and commercial lines business. A restructured and re-rated product portfolio reflected our groupwide focus on personal lines and small to medium business exposure.
In view of the frequency and cost of severe weather across the UK, the issue of flooding remains high on the agenda for Norwich Union. We are taking a market-leading stance with a campaign aimed at placing the onus on government and industry bodies to ensure adequate flood defences, funding and planning controls. Over time, this should mean better protection against flooding and reduced claims for the insurance industry to meet.
We have commissioned the production of detailed relief maps of the UK, indicating land heights above sea level.This data will enable us to develop a flood model for incorporation into our new pricing platform for homeowner and commercial property business.
This unique information will ensure that Norwich Union can price even more accurately for each individual case.
C or po ra te so ci al re sp on si bi lit y 22 CGNU plc Annual report + accounts 2001 Operating review continued
Customer service The scale and pace of integration activity during 2001 created pressure on our customer service standards, although we worked hard to maintain our performance in key areas. For example, about one million claims benefited from our TIM service in the UK during the year. We acknowledge that continuous improvement to deliver high-quality service is the hallmark of a leading insurer, and we further increased our focus on service improvements as integration was completed.
In September 2001 we became the first UK insurer to be included in the Dow Jones Sustainability World Index – the first global investment index to track the performance of the world’s leading sustainability-driven companies. In addition, CGNU is included in the FTSE4Good indices, which promote investment in companies with good records of corporate social responsibility. We have also been included in a variety of specialist funds that seek evidence of environmental and social responsibility.
Over the past year our focus on environmental management and reporting has broadened to include related areas of corporate performance, such as the community, employees, human rights, health and safety, suppliers, customers and standards of business conduct.Together, these areas are commonly termed corporate social responsibility (CSR).
The CSR policy will go a long way towards demonstrating compliance with guidelines issued in October 2001 by the Association of British Insurers in the UK.The scrutiny of our own performance is an established practice at CGNU board and executive level, which will continue to be developed in the future.
Our commitment to playing a leading role in the development of worldwide thinking and practice in this area resulted in our signing the United Nations’Global Compact initiative, launched by UN secretary-general Kofi Annan.
Integration of CSR into our core business activities can be achieved in different ways. A leading example within the CGNU group is Morley Fund Management, which recognises that successful companies need to manage the environmental, social and ethical issues that affect their business.To maximise returns, Morley has adopted a socially responsible investment (SRI) strategy which uses shareholder engagement to ensure it has a good working knowledge of the companies in which it invests. As a responsible shareholder, Morley encourages companies to adopt best practice when managing the social and environmental impacts of their business, and has integrated these requirements into the exercise of its shareholder voting rights at annual general meetings.
CGNU operates under strong corporate governance principles, supported by core disciplines in the areas of performance management and capital management. Performance management focuses upon delivering high quality financial returns for our shareholders. Capital management optimises these returns through the efficient deployment of shareholder funds, while protecting the interests of debtholders and policyholders.
During 2001 the industry has seen significant turmoil, including the terrorist attacks of 11 September and the falls in worldwide equity markets. Our financial disciplines have helped us through these events and delivered strong growth while protecting solvency and improving the quality of our earnings.
Long-term savings On an annual premium equivalent basis (the sum of new regular premiums and one tenth of new single premiums) new business has increased by 12% in 2001 to £2,475 million.This includes substantial contributions from our expanding European bancassurance operations in Spain and Italy together with considerable organic growth in our other businesses. The life and pensions products contributed £2,319 million, a growth of some 20% over last year, while investment business declined to £156 million (2000: £267 million) reflecting reduced consumer appetite for equity-related products.
The UK Life new business has been influenced by our very strong position in the emerging stakeholder pension market, where we have achieved first position in the influential IFA market since the products were launched in April.The alliance with The Royal Bank of Scotland Group plc has provided £228 million of single premium sales for the first time this year.
Other Europe – 2 1. Excludes retail investment sales and is stated before the effect of solvency margin. 2. Stated using 2001 assumptions.
New business contribution was up 30%, at £591 million for the year with strong growth in all of our major businesses.
During the year we have completed the sale of our US general insurance operation, and announced our intention to dispose CGU Courtage, the broker-based French general insurance operation, while expanding significantly in Spain, Italy, Singapore and other overseas life markets.This represents a significant focus on our core operations, and places us in a strong position for 2002.
Profit/(loss) before tax: – achieved profit basis (546) (1,312) – modified statutory basis 514 (1,406)
On an achieved profit basis, the loss before tax of £546 million includes a further investment return shortfall of £1.6 billion, reflecting the impact of these market falls on the group’s life embedded value. Over £1 billion of this shortfall arose in the UK.
The 2000 results were severely depressed by the cost of withdrawal from our London Market and US general insurance operations.
The taxation charge of £102 million (2000: £263 million) on an achieved profit basis, includes £631 million (2000: £437 million) in respect of operating profit from continuing operations, equivalent to an effective rate of 31.5% (2000: 31.1%).
Other Europe – 2.1 1. The ratio of long-term savings new business contribution to sales measured on an annual premium equivalent basis. 2. Excludes retail investment sales and is stated before the effects of solvency margin. 3. Stated using 2001 assumptions.
The increase in life achieved operating profit is largely attributable to higher new business volumes, with expected returns on existing business and shareholders net worth broadly unchanged.
The most significant element of the operating assumption change is the £78 million adverse impact of improved life expectancy on our UK annuity portfolio.This has been offset by the favourable effect of higher management fees and profit attribution in the Netherlands and Germany respectively. In addition, reduction in the risk margins in Poland and the Netherlands has contributed a profit of £45 million.
On a modified statutory basis, the profit from long-term business operations before tax was £1,126 million (2000: £1,053 million).
General insurance Worldwide general insurance net premium income, from continuing operations, decreased to £8,433 million (2000: £8,990 million) reflecting a rigorous approach to pricing and the consequent impact on policy volumes.
In the UK we have secured average, annualised rating increases for personal motor and homeowner of 13% and 6% respectively, and for commercial motor and property of 18% and 11% respectively.The total net written premium has remained broadly stable, but the number of policies has declined as we pursue our focused underwriting strategy.
Netherlands (including Belgium and Luxembourg) 104 108 Other Europe 103 108 Australia and New Zealand 99 101
It was our aim to achieve a COR of 102% by the end of this year across our businesses, and it is satisfying to see this delivered. Improvements have been made in all segments, with particular success in France where the ratio has fallen from 133% to 104%, due to the absence of large storm losses in 2001.
A key medium-term objective for our general insurance business is to deliver a COR at this level across the underwriting cycle. Although market conditions are favourable, the achievement of 102% this year is an excellent result.
In the UK, we have sacrificed some volume to achieve the improvement in product ratings, which are contributing significantly to the COR as the increases earn through.The result in Canada, at 107%, was disappointing and, in line with the market, reflects claims deterioration on the older years in the liability account.
The operating profit reflects the improvement in the underwriting performance to £224 million loss from £821 million loss, together with the normalised investment return of £1,169 million (2000: £1,233 million).
Normalised investment returns have declined slightly during 2001, as a result of general insurance disposals over the last two years and changes to the asset mix.
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.
General insurance and health 640 5,425 11.8 6.4 1. The normalised 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. 2. The return on capital employed, including discontinued operations, was 9.4% (2000: 5.8%).
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 debtholders. As a result, the group is able to enhance the returns earned on its equity capital.
The group’s principal insurance operating subsidiaries have been assigned financial strength ratings of AA,“very strong security”, from Standard & Poor’s.
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.
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.
Total continuing operations 19,615 19,161 2 Discontinued operations – 1,757 na
Equities securities investments assets Total At 31 December £m £m £m £m £m £m
£11.7 billion equity shareholders’ funds 530p net asset value per ordinary share (based on equity shareholders' funds, adding back the equalisation provision)
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.
Derivatives Derivative instruments are only used to a limited extent, within guidelines established by the Board. Derivatives are used for efficient portfolio management, debt-hedging purposes, or to structure specific retail savings products. Speculative activity is prohibited and all derivative transactions are covered fully, either by cash or by corresponding assets and liabilities.
To complement the reinsurance protection bought by individual businesses, the group has an additional cover in place above £100 million that provides protection from a single event or an aggregation of events.
Guillermo de la Dehesa (60) Non-executive director Appointed to the Board in May 2000. Joined the Board of Norwich Union as a non-executive director in 1999. Former Chief Executive of Banco Pastor and currently a director. A former Deputy General Manager of the Bank of Spain (1980-1983) and Secretary of State of Commerce (1983-1986) and Finance (1986-1988) in Spain. Currently Chairman of Plus Ultra, non-executive Vice-Chairman of Goldman Sachs Europe and a director of Campofrio, Unión Eléctrica Fenosa and Telepizza. Member of the Audit and Nomination Committees.
Wim Dik (63) Non-executive director Appointed to the Board in 1999, having served as a Chairman of Nuts Ohra, a Dutch insurer acquired by the Group in 1999. A former Chairman of Nederlandse Unilever Bedrijven BV and former Chairman and Chief Executive Officer of KPN, Royal Dutch Telecom. Currently a member of the Supervisory Board of ABN AMRO Bank and TNT Post Group, an advisory member of the Boards of Unilever and a non-executive director of CMG plc. Professor of ICT Management at Delft University. Member of the Remuneration Committee.
Sir Michael Partridge KCB (66) Non-executive director Appointed to the Board in May 2000. Joined the Board of Norwich Union as a non-executive director in 1996. Former Permanent Secretary, Department of Social Security, Chairman of Middlesex University and non-executive director of The Stationery Office.
Currently non-executive director of Methodist Ministers Pension Trust Limited, Epworth Investment Management Limited and Harefield Research Foundation. Member of the Audit Committee.
Philip Scott FIA (48) Executive director Appointed to the Board in May 2000. Joined Norwich Union in 1973 and the Board of Norwich Union in 1993. Held a number of senior positions in Norwich Union, becoming Chief Executive UK life and long-term savings in March 1999. Currently executive director with responsibility for the Group’s UK life and long-term savings operations.
Technical account – long-term business 48 Consolidated profit and loss account
Technical account – general business 49 Consolidated profit and loss account
Non-technical account 50 Reconciliation of Group operating profit to profit on ordinary activities before taxation 51 Consolidated statement of total recognised gains and losses 51 Reconciliation of movements in consolidated shareholders’ funds 52 Consolidated Group balance sheet 54 Consolidated cash flow statement 55 Company balance sheet 56 Notes to the accounts 91 Five year review 92 Alternative method of reporting long-term business 99 CGNU Group of companies 100 Shareholder information
The directors submit their Report and Accounts for CGNU plc, together with the consolidated accounts of the CGNU group of companies, for the year ended 31 December 2001.
Principal activities CGNU plc is the holding company of the CGNU group of companies, which transacts life assurance (other than industrial life) and long-term savings business, fund management, and all classes of general insurance through its subsidiaries, associates and branches in the United Kingdom, continental Europe and Ireland, North America, Asia, Australia and other countries throughout the world. The Group also invests in securities, properties, mortgages and loans and carries on the business of trading in property.
Review of operations, current position and future prospects Details of the Group’s operations for the accounting period, its current position and future prospects are contained in the Chairman’s statement, Group Chief Executive’s review and business operating and financial reviews set out on pages 2 to 29.
Results The Group results for the year are shown in the consolidated profit and loss account on pages 47 to 49.
Dividend The directors are recommending a final dividend of 23.75 pence (2000: 23.75 pence) per share which, together with the interim dividend of 14.25 pence (2000: 14.25 pence) per share, produces a total dividend for the year of 38.00 pence (2000: 38.00 pence) per share. The total cost of dividends for 2001, including preference dividends, will amount to £874 million (2000: £872 million), requiring £841 million to be transferred from reserves (2000: £2,585 million from reserves).
The directors retiring by rotation in accordance with the articles of association at the forthcoming Annual General Meeting and, being eligible, offering themselves for reappointment are Wim Dik, Derek Stevens, Philip Twyman, André Villeneuve and Tony Wyand. Philip Twyman and Tony Wyand each have a service contract with a Group company, details of which can be found on page 38.
Mike Biggs 20,673 20,703 Guillermo de la Dehesa 144 144 Wim Dik – – Pehr Gyllenhammar 16,756 16,756 Richard Harvey 21,171 21,205 Sir Michael Partridge 2,260 2,297 George Paul 20,397 25,464 Philip Scott 26,772 26,772 Patrick Snowball 2,275 290 Derek Stevens 1,965 1,991 Philip Twyman 11,668 17,131 Elizabeth Vallance 830 830 André Villeneuve 640 640 Tony Wyand 13,156 13,964
Mike Biggs 14 Wim Dik 200 Richard Harvey 15 Sir Michael Partridge 12 George Paul 32 Tony Wyand 64
Employees are encouraged to have their say on how they view the Company and their employment through confidential staff opinion surveys. Results are fed back to staff and, where appropriate, action plans are put in place to address key issues. Through their participation, staff can help to shape future employment developments. In addition, regular discussions take place with the staff representative bodies.
Group companies are committed to providing equal opportunities to all employees irrespective of sex, sexual orientation, marital status, creed, colour, race, ethnic origin or disability. The commitment extends to recruitment and selection, training, career development, flexible working arrangements, promotion and performance appraisal. In the event of members of staff becoming disabled, every effort is made to ensure that their employment with the Group continues and to provide specialised training where this is appropriate.
The health and safety of staff is a priority, with both internal reviews and external reports on the health and safety provision being received at regular intervals. Each business unit has an appointed health and safety representative whose role is to bring to the attention of senior management any areas of concern that should be addressed within the health and safety programme. Information on health and safety matters is communicated to staff through the normal communication channels.
During the year, community investment in the United Kingdom totalled £3.3 million, using the Business in the Community’s benchmarking template, of which £1.3 million (2000: £1.1 million) were charitable donations.
No political donations were made in the United Kingdom during the year (2000: £nil). It is not the Company’s policy to make donations to political organisations or for political causes and has no intention of changing this policy. However, the Political Parties, Elections and Referendums Act (PPER) came into effect during 2001 and introduced a very broad definition of EU political expenditure in the European Union, such that some of the activities which the Group has to date considered to be normal business activities could now fall within that definition, for example paid leave for staff taking part in trade union or work council activities. The PPER requires companies to obtain shareholders’ approval for such expenditure and, therefore, at the forthcoming Annual General Meeting the Board will be seeking authority to make political expenditure, as defined by the PPER, up to £100,000 so as to avoid inadvertent infringements of that legislation. Further clarification on this issue can be found in the Notice of Meeting for the Annual General Meeting which accompanies this report.
Corporate Social Responsibility Policy In response to changes both at European and United Kingdom level, CGNU’s environmental programme is now being reported together with progress in related areas of corporate performance such as community and human resources under the heading of Corporate Social Responsibility (CSR). A separate CSR report has been prepared which contains full details of progress achieved within the environmental programme during the year, as well as an explanation of how CGNU proposes to tackle the challenge of management and reporting on CSR. A copy of the printed summary CSR report is available from the Group Company Secretary or the full report may be viewed on www.cgnu-group.com/csr.
The Company has no trade creditors. In respect of Group activities in the United Kingdom, the amounts due to trade creditors at 31 December 2001 represented approximately 27 days of average daily purchases through the year (2000: 32 days).
In accordance with section 384 of the Companies Act 1985, a resolution is to be proposed at the forthcoming Annual General Meeting for the reappointment of Ernst & Young LLP as auditor of the Company.
Registered Office: St. Helen’s 1 Undershaft, London EC3P 3DQ Registered in England No. 2468686 34 CGNU plc Annual report + accounts 2001 Directors’ report continued
The Board of Directors The Board has eight scheduled meetings each year and meets more frequently as required. It currently comprises eight non-executive directors, including the Chairman, and six executive directors. Each non-executive director serves for a fixed term of three years, which may be renewed by mutual agreement, and there is no limit to the number of terms a director may serve. The Company’s articles of association require that, following appointment by the Board, directors must submit themselves for election by shareholders at the following Annual General Meeting. The articles also provide that one-third of directors must retire by rotation each year, but are eligible to submit themselves for re-election by shareholders, and that all directors are obliged to retire at least every three years.
The duties of the Board and its committees are set out clearly in formal terms of reference, which are reviewed annually, stating the items specifically reserved for decision by the Board, including the approval of the Group’s strategy and business plans, acquisitions and disposals outside delegated limits, significant financial decisions and approval of key business policies. The said terms of reference contain a procedure whereby directors may, in the furtherance of their duties, seek independent professional advice at the Company’s expense if considered appropriate. Directors are fully briefed in advance of Board meetings on all matters to be discussed and at the Board meetings directors receive regular reports on the Group’s financial position, key areas of the Group’s business operations and other material issues.
The Committee deals with appointments and reappointments to the Board, monitors potential conflicts of interests and reviews annually the independence of the non-executive directors. The Committee makes recommendations to the Board as appropriate.
At its Annual General Meeting, the Company complies with the Combined Code as it relates to the disclosure of proxy voting, the separation of resolutions and the attendance of committee chairmen. The Notice of the Annual General Meeting is sent out at least 20 business days before the meeting, to ensure that shareholders have sufficient time in which to consider the items of business. Details of the proxy voting by shareholders are available on request and on the Company’s website.
Risk identification and assessment The Group’s systems of internal control provide a framework to support the ongoing identification, evaluation and management of risks significant to the achievement of its business objectives. This includes risks arising from the Group’s financial, regulatory and operational activities as well as social, ethical and environmental risks. The Board has in place a system of business risk management, which has been integrated throughout the Group into the business planning and monitoring process. The results are reviewed by a Risk Committee under the chairmanship of the Group Finance Director. The overall risk management process and results are reviewed formally by the Audit Committee and annually by the Board.
Control procedures and monitoring systems The Group has a well-developed system of planning and monitoring, which incorporates Board approval of a rolling three year Group Plan. Performance against the Plan is subsequently monitored and monthly reports are presented to the Board. Performance is also reported formally through the publication of Group results and accounting policies applied consistently throughout the Group. Operational management report frequently to the executive directors and the Board receives regular representations from management responsible for each principal business operation.
36 CGNU plc Annual report + accounts 2001 Corporate governance continued
This report should be read in conjunction with the details of the remuneration paid to the directors in 2001 contained on pages 39 to 42.
The Committee regularly reviews the remuneration package to ensure that it remains appropriate within the market and for the achievement of its objectives. It is assisted by independent consultants who specialise in reward strategies for senior executives of large international organisations.
The remuneration package for the Company’s senior executives comprises a basic salary, performance-related incentives, a non-contributory defined benefit pension entitlement and certain benefits, including a company car allowance and private medical insurance. The Company believes that a proportion of a senior executive’s total remuneration should be ”at risk” and attained through incentive plans which link rewards directly with performance. The performance-related incentives consist of a short-term incentive plan, giving participants the potential to earn an annual cash bonus; and a long-term incentive plan which makes annual grants of shares or options over shares.
Details of the various elements of the remuneration package are as follows: Basic salaries Each year the Committee gathers data from a number of independent sources concerning the level of salaries paid to senior executives performing comparable functions within the financial services sector and industry generally, for similar sized companies. The level of competence of each senior executive is measured, taking into account the executive’s experience, performance and objectives achieved. Those who display superior performance over a substantial period are assessed as being fully competent in their roles and their salaries are targeted towards the upper quartile for comparable positions. Salaries for those who have not yet achieved full competence in their roles are targeted towards an appropriate level for comparable positions.
Participants are granted an award of shares of equal value to the amount of cash bonus deferred and this is matched on a “one for one basis”with a further award of shares. Both awards of shares are held in trust and vest after three years. The vesting of the shares is not subject to any performance conditions as the cash bonuses which are deferred, and upon which the awards of shares are based, are only made if the demanding performance conditions of the Annual Bonus Plan have been met. The Committee believes that imposing additional conditions would discourage participants from requesting deferral of the non-compulsory deferred proportion of their bonus, thereby reducing the retention incentive and the alignment with shareholders’ interests. If a participant leaves service during the vesting period for reasons of ill-health, retirement, redundancy etc, the shares are released in full at the end of the vesting period. In all other cases, the matching shares lapse.
The Deferred Bonus Plan was introduced in respect of the financial year 2000 with the first deferral of bonuses taking place in March 2001. In respect of these awards, the Company acquired shares in the market and it is its intention to do so in respect of awards granted in 2002.
Senior executives in the United Kingdom are entitled to participate in the Free Share element of the Group’s All-Employee Share Ownership Plan (AESOP). Under this plan, eligible employees can receive up to a maximum of £3,000 pa from the profits of the Company, free of tax, subject to a retention period.
Long-term incentives Under the Company’s Long Term Incentive Plan, senior executives are eligible to receive an award of deferred shares each year up to a maximum value of one times basic salary. The shares vest after three years, but only if predetermined performance conditions have been met.
The Company currently operates an Executive Share Option Plan, which is subject to the same performance conditions as the Long Term Incentive Plan. Grants of options under the Executive Share Option Plan are awarded to those members of Group-wide management who have been identified as “key”or possessing high potential. The maximum value of options granted to a participant in any one year is the equivalent of 150% of his/her basic salary, although the average award in 2001 was a little over 50% of basic salary. No senior executives participate in both the Long Term Incentive Plan and the Executive Share Option Plan in the same financial year.
Shares acquired in the market are held in trust for use in connection with these incentive plans.
During the year, the Committee amended the eligibility rules of the Long Term Incentive Plan, Executive Share Option Plan and Deferred Bonus Plan to permit participants who were within two years of their retirement date to be eligible to receive awards under these plans. As performance-related pay constitutes a significant part of a senior executive’s total remuneration, it was considered necessary to amend this provision as, otherwise, the Company would lose the opportunity of being able to incentivise executives approaching retirement who would see a substantial fall in their potential earnings. This point has been recognised by the Association of British Insurers, which recently changed its guidelines to allow the granting of awards to participants within two years of their retirement, subject to certain requirements. The amendments made to the Company’s plans are consistent with the revised Association of British Insurers’ guidelines and, in particular, provide for the prorating of any awards vesting by reference to the period actually served.
Executive directors in the United Kingdom are entitled to purchase shares through Inland Revenue-approved all-employee share schemes on the same basis as other eligible employees.
Non-executive directors The Company’s articles of association provide that the total remuneration paid to directors shall be determined by the Board within the limits set by shareholders – which is presently £750,000 per annum. At the Company’s forthcoming Annual General Meeting, shareholders will be asked to consider increasing this limit to £1 million so as to allow the Board flexibility in making additional non-executive appointments, if thought appropriate, and to keep the fees paid to individual directors competitive. Executive directors receive no fees for acting as directors.
The emoluments paid to the Chairman and Deputy Chairman take into account their duties and the amounts paid by competitors and similar-sized companies. In addition to fees, the Chairman receives a company car allowance.
(2) “Bonus”refers to amounts paid in 2002, but relating to 2001, under the Annual Bonus Plan (including amounts deferred under the Deferred Bonus Plan) and the value of shares granted in 2001 under the Inland Revenue-approved profit sharing scheme.
Bob Scott was 59 when he left service. Upon leaving, he received a severance payment of £444,000 based on the eight months remaining under his service contract and in addition he received a bonus of £110,000, being a proportion of his annual cash bonus in respect of his five months’ service in 2001. In accordance with the Company’s redundancy terms, Bob Scott received an immediate pension on a non-discounted basis, the cost of which was £236,000.
(6) No past directors received any increase in retirement benefits in excess of the amount to which they were entitled on the later of the date when the benefits first became payable and 26 February 2002.
Peter Foster – Executive options 132,966 132,966* 858.2 – Savings related options 1,740 1,740* 790.2 – Bonus Plan options 3,824 3,824* 966.5
Philip Twyman – Executive options 190,990 190,990 810.3 – Savings related options 2,162 2,162 797.6 – Bonus Plan options 8,083 8,083 918.0
(1) “Savings related options” are options granted under the Inland Revenue-approved SAYE Share Option Schemes. Options granted from 1994 to 2001 are normally exercisable during the six months period following either the third, fifth or seventh anniversary of the relevant savings contract.
(2) “Executive options” are those granted to the former CGU directors under the CGU Executive Share Option Scheme, or predecessor schemes. Options, which have been granted on various dates from 1993 to 2000, are normally exercisable between the third and tenth anniversaries of their date of grant. No options have been granted to executive directors under these schemes since 2000.
(3) “Bonus Plan options” are the options granted in 1999 and 2000 under the CGU Deferred Bonus Plan. Participants, who deferred their annual cash bonus and received an award of shares, also received a matching award over an equivalent number of options. These options, which are not subject to performance conditions, are normally exercisable between the third and tenth anniversary of their grant.
40 CGNU plc Annual report + accounts 2001 Directors’ remuneration continued
Details of the performance conditions relating to these awards are set out in the notes below.
Bob Scott CGU Integration Incentive Plan 59,299 – 59,299 – – CGU Deferred Bonus Plan 6,518 – – – 6,518* CGNU Integration Incentive Plan 68,495 – – – 68,495*
Philip Scott CGNU Integration Incentive Plan 38,052 – – – 38,052 CGNU Long Term Incentive Plan 34,453 38,541 – – 72,994 CGNU Deferred Bonus Plan – 35,458 – – 35,458
Tony Wyand CU Long Term Incentive Plan 6,563 – 3,506 – 3,057 CGU Integration Incentive Plan 41,792 – 41,792 – – CGU Deferred Bonus Plan 4,593 – – – 4,593 CGNU Integration Incentive Plan 44,429 – – – 44,429 CGNU Long Term Incentive Plan – 45,000 – – 45,000 CGNU Deferred Bonus Plan – 20,700 – – 20,700 *At date of ceasing to be a director.
(2) The CGU Integration Incentive Plan was approved by shareholders in 1998 in relation to the merger of Commercial Union and General Accident. As described below, the performance condition under the plan has been met and the awards vested in February 2001. This Plan has now closed.
(3) The CGU Deferred Bonus Plan was approved by shareholders in 1999. Awards under this plan were granted to participants in lieu of some or all of the cash bonuses earned under the Company’s Annual Cash Bonus Plan. This plan, which operated in respect of bonuses awarded in 1999 and 2000, was replaced by the CGNU Deferred Bonus Plan referred to in note 6 below. Awards vest on the third anniversary of their grant.
(6) The CGNU Deferred Bonus Plan was approved by shareholders at last year’s Annual General Meeting and replaced the CGU Deferred Bonus Plan referred to in note 3 above. The awards disclosed include those made in lieu of some or all of the cash bonus earned and deferred under the Company’s Annual Bonus Plan in 2001, and also the matching awards granted on a one for one basis. The awards are not subject to performance conditions and vest on the third anniversary of their grant.
(8) Cost of the Plans. During the year, awards over a total of 1.4 million shares were granted to 113 participants in the CGNU Long Term Incentive Plan and 1.16 million shares to 532 participants where some or all of their annual cash bonus was deferred under the CGNU Deferred Bonus Plan. The awards were made on 4 May 2001. It is the Company’s practice to request the trustee of the CGNU Share Trust to acquire sufficient shares in the market to cover the vesting of 100% of awards granted under the Deferred Bonus Plan and to cover the vesting of 40% of the awards granted under the Long Term Incentive Plan, as the vesting of these awards is subject to the attainment of performance conditions.
(iii) Integration incentive plans As referred to in notes 2 and 4 above, shareholders approved an incentive plan in 1999 in relation to the merger of Commercial Union and General Accident (CGU Integration Incentive Plan) and in 2001 in relation to the merger of CGU and Norwich Union (CGNU Integration Incentive Plan). Both plans have two parts – a share award aimed at incentivising management to exceed the estimated annualised cost savings to result from integrating the businesses, and a cash-based award aimed at focusing management on the operating performance of the Group or Business Unit as appropriate during the integration process. The performance conditions relating to both plans have been achieved. Details are as follows
CGNU Integration Incentive Plan Share award – The performance condition attaching to this part of the plan was to exceed the estimated annualised cost savings of £275 million, which was announced to the market in August 2000, by at least 10%. The actual annualised cost savings achieved was £317 million whilst the additional one-off cost which arose from generating the increased annualised cost savings was within the target. As a result of the performance condition being met, the shares referred to in the above table will vest in March 2002.
Cash bonus – Under this part of the plan, executive directors would receive a cash bonus of up to 50% of their basic salary if appropriate performance conditions were met. Half of the bonus would be achieved if either the Group or Business Unit, as appropriate, met their integration savings targets, and the other half would be achieved if the Group or Business Unit met their trading performance targets during 2000 and 2001. The integration targets were met in full but some of the Group and Business Unit trading targets were not fully achieved. As a consequence, the executive directors will become eligible to receive cash bonuses ranging from 32% to 50% of their salaries in March 2002.
In addition to focusing senior executives on the achievement of both trading performance and integration savings, the integration incentive plans achieved the objective of retaining key employees throughout the integration periods.
Non-executive directors The emoluments paid to the non-executive directors during the year were: £’000 £’000
(3) No non-executive director accrued benefits under a defined benefit or defined contribution pension scheme during the year.
We have audited the Group’s accounts for the year ended 31 December 2001 which comprise the Accounting policies, the Consolidated profit and loss account, Reconciliation of Group operating profit to profit on ordinary activities before taxation, Consolidated statement of total recognised gains and losses, Reconciliation of movements in consolidated shareholders’ funds, Consolidated Group balance sheet, Consolidated cash flow statement and Company balance sheet, and the related notes 1 to 47. These accounts have been prepared on the basis of the accounting policies set out therein.
Our responsibility is to audit the accounts in accordance with relevant legal and regulatory requirements, United Kingdom Auditing Standards and the Listing Rules of the Financial Services Authority.
We report to you our opinion as to whether the accounts give a true and fair view and are properly prepared in accordance with the Companies Act 1985. We also report to you if, in our opinion, the directors’ report is not consistent with the accounts, if the Company has not kept proper accounting records, if we have not received all the information and explanations we require for our audit, or if information specified by law or the Listing Rules regarding directors’ remuneration and transactions with the Group is not disclosed.
Basis of audit opinion We conducted our audit in accordance with United Kingdom Auditing Standards issued by the Auditing Practices Board. An audit includes examination, on a test basis, of evidence relevant to the amounts and disclosures in the accounts. It also includes an assessment of the significant estimates and judgements made by the directors in the preparation of the accounts, and of whether the accounting policies are appropriate to the Group’s circumstances, consistently applied and adequately disclosed.
Equalisation provision Our evaluation of the presentation of information in the accounts has had regard to the statutory requirement for insurance companies to maintain an equalisation provision. The nature of the equalisation provision, the amount set aside at 31 December 2001 and the effect of the movement in the provision during the year on the general business technical result and profit on ordinary activities before tax, are disclosed in accounting policy note U and note 38 to the accounts.
Opinion In our opinion, the accounts give a true and fair view of the state of affairs of the Company and of the Group as at 31 December 2001 and of the profit of the Group for the year then ended and have been properly prepared in accordance with the Companies Act 1985.
The general business technical result is determined on an annual basis.
General business premiums written reflect business incepted during the year. General business unearned premiums are those proportions of the premiums written in a year that relate to the periods of risk after the balance sheet date. They are computed principally on either the daily or monthly pro rata basis.
Long-term business premiums are accounted for when receivable, except for investment-linked premiums which are accounted for when liabilities are recognised.
Investment income consists of interest, dividends and rents receivable for the year, together with realised investment gains and losses. Interest includes the interest rate differential on forward foreign exchange contracts. Realised investment gains and losses represent the difference between the net sale proceeds and the cost of acquisition. Unrealised investment gains and losses represent the difference between the carrying value at the year end and the carrying value at the previous year end or purchase value during the year.
The Group operates defined-benefit pension schemes in a number of countries around the world, with contributions made on a going concern basis, as recommended by actuaries. There are also several money purchase pension plans. Where separate pension schemes exist, they are fully funded on a discontinuance actuarial valuation basis. The pension costs, which are included in expenses, are calculated using actuarial valuation methods which give a substantially even charge over the expected service lives of employees. The costs of other material post-retirement benefits, also included in expenses, are charged as they accrue. Information regarding the new accounting standard FRS17 is given in note 43 to the accounts.
The tax charge in the non-technical account is based on the taxable profits for the year, after any adjustments in respect of prior years. Tax, including tax relief for losses if applicable, is allocated over profits on ordinary activities and amounts charged or credited to reserves. In the long-term business technical account, the tax charge is based on the method of assessing tax for long-term funds applicable in the relevant country of operation. Any part of the balance on the long-term business technical account that is computed on an after tax basis is grossed up at the effective rate of tax in the non-technical account.
Provision is only made for deferred tax where it is expected that a liability will crystallise in the foreseeable future. No provision is made for tax that might arise if profits retained by overseas subsidiary and associated undertakings were remitted to the United Kingdom. As explained in accounting policy B, the requirements of FRS19 will be reflected in the Company’s 2002 accounts.
Goodwill arising on the acquisition of subsidiary undertakings is carried on the balance sheet as a separate intangible asset. Goodwill arising on the acquisition of associated undertakings is included within the carrying value of associated undertakings. All goodwill is amortised on a straight-line basis over its useful economic life, and its carrying value is reviewed regularly for impairment. On subsequent disposal of the underlying investment, any goodwill not yet amortised will be taken to the profit and loss account when calculating the profit or loss on disposal.
Goodwill arising before 1 January 1998 was eliminated against reserves and has not been reinstated. Goodwill previously written off to reserves will be taken to the profit and loss account when calculating the profit or loss on any disposal of the underlying investment.
The Group uses derivative instruments, including forward foreign exchange contracts, interest rate swaps, futures and options for hedging purposes. Derivative instruments are accounted for as follows: • forward foreign exchange contracts. The interest rate differential is included in investment income, while the effect of the currency movements on these contracts is treated as an exchange difference; • cross-currency swaps related to the Group’s borrowings.
Participating interests are investments in which the Group has a long-term equity holding of over 20% and not more than 50%. Where the interests are beneficial and significant influence is exercised, such interests are classified as associated undertakings. The appropriate proportion of the profit or loss on ordinary activities before tax of associated undertakings is shown separately in the non-technical account, except where associated undertakings are held by the long-term businesses, in which case the profit is included within investment income in the long-term technical account. The appropriate proportion of the shareholders’ funds of associated undertakings is included in the consolidated balance sheet. A number of associated undertakings, which do not represent a material part of the Group’s income or assets, have been treated as investments and are included within other participating interests.
The additional value of in-force long-term business arising on acquisitions is recognised in the balance sheet, and is amortised over the useful lifetime of the related contracts in the portfolio on a systematic basis. The rate of amortisation is chosen by considering the profile of the in-force business acquired and the expected depletion in its value. The value of purchased in-force long-term business is reviewed annually for any diminution in value and any reductions are charged to the long-term business technical account.
Q – Long-term business provision and technical provision for linked liabilities
Subordinated debt and borrowings issued at a discount are included in the balance sheets at their proceeds, net of other expenses, together with amortised discount to the balance sheet date. The discount, amortised on a compound basis, and expenses are charged to loan interest in the profit and loss account over the term of the instrument.
46 CGNU plc Annual report + accounts 2001 Accounting policies continued
Consolidated profit and loss account Technical account – long-term business For the year ended 31 December 2001
Long-term business operating profit before amortisation of acquired additional value of in-force long-term business, amortisation of goodwill on associated 1,940 undertakings and exceptional items (3a) 1,203 1,190 Amortisation of acquired additional value of in-force long-term business
(103) (included within other technical charges) (22a) (64) (29) (21) Amortisation of goodwill on associated undertakings (13) –
Consolidated profit and loss account Technical account – general business For the year ended 31 December 2001
am £m £m 16,773 Gross premiums written – continuing operations (6a) 10,399 10,430 18,687 Gross premiums written (6a & 6b) 11,586 13,872 (1,950) Outward reinsurance premiums (1,209) (982)
14,958 Net premiums written – continuing operations (6a) 9,274 9,677 16,737 Net premiums written (C) 10,377 12,890 Change in the provision for unearned premiums 16,921 Earned premiums, net of reinsurance 10,491 12,622
Allocated investment return transferred from the 2,265 non-technical account (G & 7b) 1,404 1,817
Operating profit General insurance – continuing operations (224) (821) 1,169 1,233 945 412 Health – continuing operations (13) (20) 83 88 70 68
Consolidated profit and loss account Non-technical account For the year ended 31 December 2001 49 CGNU plc
(1,924) Unrealised losses on investments (7a) (1,193) (240) Allocated investment return transferred (to)/from the long-term business
Allocated investment return transferred to the general business (2,265) technical account (G & 7b) (1,404) (1,817)
Other income/(charges), including value adjustments 47 Profit from fund management (3a) 29 5
(684) Tax on profit/(loss) on ordinary activities (J & 13a) (424) (255)
26 Profit/(loss) for the financial year attributable to equity shareholders 16 (1,730)
Reconciliation of Group operating profit to profit on ordinary activities before taxation For the year ended 31 December 2001 am £m £m
Operating profit before tax based on longer-term investment return before amortisation of goodwill, amortisation of acquired additional value of in-force long-term business and exceptional items: Continuing operations 1,941 Modified statutory life profit (3a) 1,203 1,190
(21) – long-term business (7a & 19c) (13) – (119) – non-long-term business (17) (74) (92)
(104) Amortisation of acquired additional value of in-force long-term business (22a) (64) (29) (50) Financial Services Compensation Scheme levy (31) –
Operating profit/(loss) before tax based on longer-term investment return after amortisation of goodwill, amortisation of acquired additional value 2,050 of in-force long-term business and exceptional items (3b) 1,271 (72) Short-term fluctuation in investment return
(58) – long-term business (7b) (36) 2 (1,536) – non-long-term business (7b) (952) 256
(90) Change in the equalisation provision (38) (56) (27) 463 Net profit/(loss) arising on the disposal of subsidiary undertakings (16c) 287 (1,058)
(962) Total recognised gains and losses arising in the year (919) (1,337)
Balance at 1 January As previously reported – CGU plc 9,567
– Norwich Union plc 6,039 Merger adjustments arising from alignment of accounting policies 67 21,640 Shareholders’ funds at 1 January (2000 restated) 13,633 15,673 (962) Total recognised gains and losses arising in the year (919) (1,337)
1,760 Investments in Group undertakings and participating interests (19a) 1,077 992 197,734 Other financial investments (20a) 120,974 126,778 (1,878) Less: Non-recourse funding (20a) (1,149) (348)
9,575 Additional value of in-force long-term business (P & 22a) 5,858 6,605 340 Deposits with ceding undertakings 208 147 46,917 Assets held to cover linked liabilities (23) 28,704 27,255
Reinsurers’ share of technical provisions 649 Provision for unearned premiums (C) 397 186 2,156 Long-term business provision (Q) 1,319 1,311 878 Technical provision for linked liabilities (Q) 537 703
Debtors 5,677 Debtors arising out of direct insurance operations (24) 3,473 4,274 1,028 Debtors arising out of reinsurance operations 629 797 52 Loan to associated undertaking 32 32
Capital and reserves 922 Ordinary share capital (30c) 564 563 327 Preference share capital (31a) 200 200 1,249 Called up share capital 764 763 1,770 Share premium account (30c) 1,083 1,055 3,060 Profit and loss account (A & 32) 1,872 2,767 640 Minority interests – equity 393 326
Total capital and reserves: Subordinated debt 22,359 Total capital, reserves and subordinated debt 13,680 14,217
Capital expenditure Purchases of tangible fixed assets (131) (143) Sales of tangible fixed assets 17 24 Net purchases of tangible fixed assets (114) (119)
Cash flows were invested as follows: (Decrease)/increase in cash holdings (45d) (69) 119 Net portfolio investment Purchases of investments 16,255 12,824 Sales of investments (15,032) (14,365) Net purchases/(sales) of investments (45f) 1,223 (1,541)
Represented by: Capital and reserves Ordinary share capital (30) 564 563 Preference share capital (31) 200 200
Called up share capital 764 763 Share premium account (30c) 1,083 1,055
“Discontinued operations”disclosures relate to the exit from London Market business in 2000 and the sale of the general insurance business in the Unites States, which completed on 1 June 2001. The results of all other operations are entitled “Continuing operations”.
Amortisation of goodwill – – (1) (3) Short-term fluctuation in investment return – (10) 13 66
Loss for the financial year – (13) (123) (419) Retranslation to closing rate – – (2) (4)
Netherlands (including Belgium and Luxembourg) 214 162 Poland – life and pensions 46 22
(iii) Operating profit in respect of fund management before exceptional items
Unwinding of discount on business no longer written (37c) – (24) – –
Continuing operations 1,905 1,028 Discontinued operations (21) (554) Corporate costs (187) (185) Unallocated interest charges (426) (361)
General insurance Long-term business and health business Total £m £m £m £m £m £m
Other business 310 510 Additional value of in-force long-term business 5,858 6,605 Corporate and other holding company assets 3,063 1,887
Staff profit sharing scheme costs 78 57 Sundry corporate expenses 109 128
The analysis of life and savings business premiums written before reinsurance is: New business – single premiums New business – regular premiums Total £m £m £m £m £m £m
Total Group long-term business premiums 17,564 15,190 17,229 14,848 *The figures for associates comprise the Group’s share of the associated partnership in RBS Life Investments Limited.
(iii) General insurance business premium income by geographical origin – continuing operations
Total general business premiums 11,586 13,872 7 – Analysis of investment return
Share of result of associated undertakings 10 – 4 1 Amortisation of goodwill on associated undertakings (19b) (13) – – –
Income from land and buildings 521 542 45 57 Income from other investments 5,653 5,277 1,113 1,364
Expenses and charges, including allocated interest charges (240) (182) (85) (126) Unallocated interest charges: External – subordinated debt – – (10) – – other borrowings – – (169) (151)
(ii) The longer-term investment return and short-term fluctuation are as follows: Shareholders’ interest in long-term business Non-long-term business £m £m £m £m
Total investment return before tax 76 146 30 1,713 Less: share of result of associated undertakings – – (4) (1) Add: unallocated interest charges – – 426 361
Longer-term investment return 112 144 1,404 1,817 Short-term fluctuation in investment return (36) 2 (952) 256
Excess of actual returns over longer-term returns 302 2,362 *Figures are given for non-with-profits business only, where a longer-term rate of return is used.
Four year periods have been chosen as comparable information is not available for Norwich Union prior to 1997.
(d) The table below shows the sensitivity to changes in the longer-term rates of return: Movement in investment return By Change in By
Policyholder bonuses allocated in anticipation of a bonus declaration included in claims paid 758 977 Reversionary and similar policyholder bonuses included in the movement in the long-term business provision 1,143 2,585
Bonuses included in the long-term business technical account 1,901 3,562 9 – Net operating expenses
Changes in deferred acquisition costs (42) (96) 28 (82) Administrative expenses – integration costs (9b) – 140 – 211
Merger integration costs: Charged to administrative expenses – 140 – 211 – – – 351 Charged to profit from fund management – – – – – 56 – 56 Charged to corporate costs – – – – – 50 – 50
Less: Net transfer to fund for future appropriations – (32) – – – – – (32)
Integration incentive plans: Charged to corporate costs – – – – 49 – 49 –
Costs of integrating acquired undertakings: Charged to corporate costs – – – – 10 – 10 –
Charged to profit on ordinary activities before tax – 108 – 211 59 106 59 425
Integration costs in 2001 include £49 million in respect of integration incentive plans relating to the integration of the former CGU and Norwich Union businesses, which are payable to staff of certain business units and to senior management and are conditional upon the performance of the Group against predefined targets. A charge of £10 million is also included in 2001 relating to the costs of integrating the acquired businesses of Fortis Australia Limited and The Insurance Corporation of Singapore.
The items in 2000 comprise merger integration costs and reflect the costs of integrating and reorganising the businesses of the former CGU and Norwich Union operations.
Information concerning individual directors’ emoluments, interests and transactions is given on pages 39 to 42.
Ernst & Young’s fees for other work in 2001 comprised: £m
64 CGNU plc Annual report + accounts 2001 Notes to the accounts continued
(b) Long-term business Tax (credited)/charged in the long-term business technical account comprises: UK corporation tax 128 500 Overseas tax 91 144 Deferred tax (203) (30) Prior year adjustments (33) (3)
(c) Balance sheet The provision for deferred tax, included within the provisions for other risks and charges, comprises: Long-term business Non-long-term business
Unrealised gains on investments 811 1,525 352 615 Provisions and other timing differences (20) (177) (97) (45)
Ordinary dividends in the profit and loss account comprise: Irish shareholders who are due to be paid a dividend denominated in euros will receive a payment at the exchange rate prevailing on 65 CGNU plc
Profit/(loss) attributable to equity shareholders 514 16 0.7 (1,406) (1,730) (77.0)
Earnings per share has been calculated based on the operating profit from continuing operations before amortisation of goodwill, amortisation of acquired additional value of in-force long-term business and exceptional items, after tax attributable to equity shareholders, as well as on the profit attributable to equity shareholders, as the directors believe the former earnings per share figure provides a better indication of operating performance. The calculation of basic earnings per share uses a weighted average of 2,250 million (2000: 2,247 million) ordinary shares in issue, after deducting shares owned by the employee share trusts as required by FRS14 ‘ Earnings per share’.
(a) Acquisitions During the year ended 31 December 2001, the Group acquired the following companies: Country of incorporation Percentage acquired Date of acquisition
ABN AMRO Magyar Elet es Nyugdijbiztosito Reszvenytarsasag Hungary 100% 28 June 2001
(iii) In June 2001, as part of its bancassurance partnership with Banca Popolare di Lodi (“BPL”), the Group sold 50% of its whollyowned subsidiary, Finoa S.r.l (“Finoa”) to BPL. In July 2001, Finoa acquired 50.96% of the issued share capital of Eurovita Italcasse Assicurazioni S.p.A (“Eurovita”) from BPL for a cash consideration of £33 million. Finoa’s share of Eurovita’s embedded value was £35 million. In December 2001, as part of its bancassurance partnership with UniCredito Italiano, the Group’s 55%-owned subsidiary, Commercial Union Vita S.p.A, acquired all the issued share capital of Risparmio Vita Assicurazioni S.p.A for a cash consideration of £55 million. The embedded value acquired was £48 million. The aggregate goodwill on these transactions was £5 million.
(vi) In November 2001, the Group completed the acquisition of 100% of the share capital of Bank Nagelmackers in Belgium for a total consideration of £82 million, including transaction costs. Total net assets were £46 million, after fair value adjustments, giving rise to goodwill of £36 million.
(c) Disposals The net profit/(loss) on the disposal of subsidiary undertakings comprises: £m £m
General insurance businesses: Germany – (43) South Africa – (11) New Zealand (see (ii) below) 52 – United States (see (v) below) 125 (1,070) Belgium (see (iv) below) 46 –
(v) On 1 June 2001, the Group completed the sale of its US general insurance operations for US$2,023 million (net of transaction costs of US$40 million), and settlement of an inter-company loan of US$1,100 million, in total being US$3,123 million (£2,200 million at 1 June 2001 exchange rates). The settlement comprised cash, the transfer of businesses and subordinated loan notes of US$260 million. The total proceeds for the sale of the US general business were fixed by reference to the operation’s net assets as at 31 August 2000 and were not adjusted to reflect the business’ results in the period from 1 September 2000 to completion. In addition, the Group did not bear any continuing operating risk from 31 August 2000 nor provide any guarantees in respect of its claims reserves or balance sheet beyond that date. Prior to completion, US$200 million (£141 million) was injected into the business as a pre-closing adjustment.
The aggregate pre-tax loss on sale recorded in the Group’s consolidated profit and loss account reserves at 31 December 2001 is £996 million retranslated at the exchange rate prevailing at 1 June 2001, and is further analysed on page 69.
(i) The overall pre-tax loss on sale, after retranslation to the exchange rate prevailing at 1 June 2001, was £996 million. This has been reported in the Group accounts as follows: Reported within statement of total recognised gains Total loss
Net assets to which proceeds apply, including capital injection 3,092 (125) 159 3,126 Goodwill write back 70 – – 70
Pre-tax (loss)/profit on sale (1,070) 125 (51) (996) Tax attributed to loss on sale 81 – 4 85
During 2000 and 2001, the Group hedged its exposure to $1 billion of the sale proceeds through the purchase of foreign currency options and forward contracts. The closure of these reduced the exchange gain from £108 million disclosed above to £84 million.
Comprising: Loan notes 260 183 Value of businesses and investments retained 630 443 Cash proceeds 2,233 1,574
The net cash received on completion by the Group was US$2,033 million (£1,433 million), comprising the cash proceeds identified above less the pre-closing capital injection of US$200 million (£141 million).
(e) The Company’s subsidiary undertakings Movements in the Company’s shares in subsidiary undertakings are set out below: Net asset value At 1 January 13,655 10,224
The carrying value of goodwill comprises: Positive Negative Total Total goodwill goodwill 2001 2000 £m £m £m £m
Cost: Foreign exchange rate movements (10) 10 – 14 Other movements – – – 21
Amortisation: At 1 January 137 (3) 134 43 Charge in the year 76 (2) 74 92 Disposals (8) – (8) – Foreign exchange rate movements (1) – (1) (1)
Goodwill is being amortised on a straight-line basis over its useful economic life. Useful economic lives have been determined in respect of each acquisition to match the period over which the value of the underlying businesses will exceed the value of their identifiable net assets. No useful economic lives are in excess of 20 years. As explained in accounting policy K on page 45, goodwill arising in 1997 and prior years was charged directly to reserves.
70 CGNU plc Annual report + accounts 2001 Notes to the accounts continued
(a) Investments in participating interests included in the consolidated balance sheet comprise: Long-term Non-long-term Total Long-term Non-long-term Total business business 2001 business business 2000 £m £m £m £m £m £m
The cost of the above investments was £902 million and £76 million respectively (2000: £920 million and £26 million respectively).
Balance at 31 December Goodwill (19c) 244 – 244 Share of net assets 508 257 765
On 6 June 2001, the Group disposed of its shareholding in its associated undertaking in Chile, Compania de Seguros La Republica SA.
(c) The carrying value of goodwill on associated undertakings comprises: Long-term Non-long-term Total Total business business 2001 2000 £m £m £m £m
(a) These financial investments comprise: Long-term Non-long-term Total Long-term Non-long-term Total business business 2001 business business 2000 £m £m £m £m £m £m
Shares and other variable yield securities and units in unit trusts 37,342 4,133 41,475 44,941 5,868 50,809
– – – – – – Other loans: Loans secured on policies 152 – 152 957 – 957 Other loans 2,880 201 3,081 2,209 292 2,501
72 CGNU plc Annual report + accounts 2001 Notes to the accounts continued
(d) In addition to the investments in participating interests detailed in note 19, the Group holds investments exceeding 10% of a class of the equity capital in a number of other companies in the United Kingdom and elsewhere. These investments do not represent a material part of the assets or investment income of the Group. These include the Group’s 7.8% (2000: 9.3%) shareholding in Delta Lloyd Investment Fund NV. As this company invests mainly in equities and all dividends received are passed on to the shareholders, the Group’s interest has been shown in other financial investments in these accounts. The economic benefits of ownership of an additional holding of 16.6% (2000: 12.1%) belong to the Delta Lloyd Pension Fund.
(f) At 31 December 2001, the Group held equity index futures, forwards and options to buy a notional total of £1,771 million (2000: £566 million) and to sell a notional total of £1,657 million (2000: £169 million) for long-term business operations. These contracts have a net positive fair value of £86 million (2000: £1 million). No adjustment has been made to the classification of existing investments to reflect the effect of the future settlement of these transactions.
Included within other financial investments are £336 million (2000: £391 million) of debt securities and other fixed income securities which have been sold under stock repurchase arrangements. The obligations arising under these arrangements are included in other creditors (note 41).
The ultimate effective holding company of ERF1 is Equity Release Funding Holdings Limited, whose shares are held on trust. NUER does not own, directly or indirectly, any of the share capital of ERF1 or its parent company. NUER has purchased £12.5 million of subordinated fixed rate notes, which are repayable in 2031. These are included in debt securities and other fixed income securities within other financial investments in the consolidated balance sheet.
NUER receives payments from ERF1 in respect of fees for loan administration and cash handling purposes. NUER has no right to repurchase the benefit of any of the securitised mortgage loans, other than in certain circumstances where NUER is in breach of warranty or loans are substituted in order to effect a further advance.
Income of £1 million has been recognised by NUER relating to the securitisation of the mortgage portfolio.
DL has purchased £18 million of the fixed rate notes in Arena 2000-1 BV, which are repayable in 2062, and £21 million of the fixed rate notes in Arena 2001-1 BV, repayable in 2053. These are included in debt securities and other fixed income securities within other financial investments in the consolidated balance sheet at their market value of £41 million.
Transfer to revaluation reserve (32) (761) – (761) Movement in minority interest on internally-generated in-force business (22b) 22 – 22
(b) The reserve arising from the additional value of in-force long-term business comprises: Movement 2001 2000 in the year £m £m £m
(c) The embedded value of the long-term operations comprises: Net assets of the long-term businesses (3c) 5,463 4,850 Less: Goodwill arising on RBSLI joint venture (244) (257) Less: Net (assets)/liabilities of other life and savings operations (14) 36
Net assets of long-term operations 5,205 4,629 Additional value of in-force long-term business 5,858 6,605
Analyses of the geographical split of the embedded value and of the movement in the year are given in the supplementary information on page 95.
(b) The cost of assets held to cover linked liabilities is £27,336 million (2000: £25,812 million).
Debtors arising out of direct insurance operations 3,473 4,274 25 – Other debtors
Distributed in year (1,214,033) – (396,265) – Charge for the year – (18) – –
76 CGNU plc Annual report + accounts 2001 Notes to the accounts continued
(a) Banking and stockbroking assets, excluding intra-group balances, comprise: Loans and advances to banks 402 275 Loans and advances to customers 2,242 1,216
(b) Banking and stockbroking liabilities, excluding intra-group balances, comprise: Deposits by banks 229 124 Bank customer accounts 2,270 1,269 Stockbroking clients and counterparties – 28 Bank overdrafts 41 22 Other banking and stockbroking liabilities 772 456 30 – Ordinary share capital
(b) At 31 December 2001, options to subscribe for ordinary shares of 25 pence each in the Company were outstanding as follows: CGNU Savings Related Option price Number of shares Normally Option price Number of shares Normally Share Option Scheme p exercisable p exercisable
Option price Number of shares Normally Option price Number of shares Normally CGNU Executive Share Option Scheme p exercisable p exercisable
(b) continued At 31 December 2001, restricted awards over a total of 1,207,364 ordinary shares were outstanding under the CGNU Integration Incentive Plan. The awards will be satisfied by means of shares purchased by an employee share trust set up for the purpose of satisfying awards under various executive incentive plans and funded by the Company. Details are given in note 27. As at 31 December 2001, the trust held 3,125,687 shares with an aggregate nominal value of £781,422 and their market value at the year end was £26 million. The trustees have waived their right to dividends on the shares held in trust. Further details of the Plan can be found on page 42.
As at 31 December 2001, awards over a total of 1,140,496 ordinary shares, and options over a total of 20,178 ordinary shares, were outstanding under the CGNU Deferred Bonus Plan. These awards will vest in 2004. Shares will be purchased into an employee share trust to satisfy the vesting awards.
(c) During 2001, a total of 3,825,929 ordinary shares of 25 pence each were allotted and issued by the Company as follows: Share capital Share premium Number of shares £m £m
Shares issued under the Group’s Employee and Executive Share Option Schemes 3,825,929 1 28
Revaluation Profit and loss reserve Merger reserve account Total £m £m £m £m
The cumulative amount in the profit and loss account reserve relating to unrealised gains and losses is £1,104 million (2000: £2,412 million).
Profit for the year attributable to equity shareholders, including dividends paid or proposed by subsidiary undertakings – – 278 278
The fair value of these notes at 31 December 2001 was £1,133 million (2000: £nil).
80 CGNU plc Annual report + accounts 2001 Notes to the accounts continued
The assumptions used to calculate the long-term business provision depend on the circumstances prevailing in each of the life operations. The principal assumptions for life funds in the United Kingdom, France and the Netherlands are: Interest % Mortality tables used
In all countries, local generally accepted interest rates and published standard mortality tables are used for different categories of business as appropriate. The tables are based on relevant experience and show mortality rates, by age, for specific groupings of people.
(a) The ultimate cost of general business outstanding claims is estimated by using a range of standard actuarial claims projection techniques, such as the Chain Ladder and Bornhuetter-Ferguson methods. Such methods extrapolate the development of paid and incurred claims, average costs per claim and ultimate claim numbers for each accident year, based upon the observed development of earlier years and expected loss ratios. The main assumption underlying these techniques is that past claims development experience can be used to project ultimate claims costs. Judgement is used to assess the extent to which past trends may not apply in future, for example to reflect public attitudes to claiming or varying levels of claims inflation. The approach adopted takes into account, inter alia, the nature and materiality of the business and the type of data available. Case estimates are generally set by skilled claims technicians applying their experience and knowledge to the circumstances of individual claims. Additional qualitative input, such as allowance for one-off occurrences or changes in legislation, policy conditions or portfolio mix, is also used in arriving at the estimated ultimate cost of claims, in order that it represents the most likely outcome, from a range of possible outcomes, taking account of all the uncertainties involved.
(c) Claims on certain classes of business are discounted as follows: Rate Mean term of liabilities
Netherlands Permanent health and injury 3.5% 4% 12 years 8 years Belgium Workers’ compensation – 4% – 19 years United States Workers’ compensation – 7% – 7 years United States and London Market Business no longer written – 4.5% – 9 years
The provision for integration costs includes amounts relating to staff reductions, vacant properties and integration of the businesses following the merger of Norwich Union plc and CGU plc.“Other”provisions comprise many small provisions throughout the Group for such obligations as costs of litigation and staff entitlements, while the opening balance also included the provision for loss on sale of the US operations.
(a) The analysis by business segment is: Amounts owed to Debenture loans credit institutions Commercial paper Total £m £m £m £m £m £m £m £m
Repayable as follows: One year or less 1 1 100 73 Between one and two years 6 6 281 100 Between two and five years 44 9 153 462 After five years – – 251 258
The interest charge for the year on the above loans was: 2 1 56 63
The 9.5% and the 8.625% guaranteed bonds were issued at a discount of £1.1 million and £0.2 million respectively. These amounts, together with the issue expenses, are being amortised over the full term of the bonds. Although these bonds were issued in sterling, the loans have been converted into French franc and deutschmark liabilities through the use of financial instruments in a subsidiary undertaking.
The 2.5% subordinated perpetual loan notes were issued by a Dutch subsidiary undertaking to finance the acquisition of NUTS OHRA Beheer BV. These loan notes have a face value of NLG 1,079 million and their fair value is estimated at NLG 379 million (2000: NLG 380 million) which is based on the future cash flows in perpetuity discounted back at a market rate of interest. The rate of interest paid on the notes will be gradually increased over the next nine years to a maximum of 2.76%. The loan notes are convertible into ordinary shares in Delta Lloyd Nuts Ohra NV, should there be a public offering of those shares.
Repayable as follows: One year or less 11 11 156 201 Between one and two years – – – – Between two and five years – – – 150 After five years – – 24 33
The interest charge for the year on the above borrowings was: 83 73
The floating rate borrowings comprise commercial paper and bank borrowings bearing interest based on local inter-bank offer rates, which are fixed in advance for the period of the borrowings. Excluding the subordinated perpetual loan notes, the fixed rate borrowings have a weighted average interest rate of 6.26% (2000: 5.88%) for a weighted average term of 10 years (2000: 10 years).
(h) The Group has the following undrawn committed central borrowing facilities available to it, of which £1,000 million (2000: £1,000 million) is used to support the commercial paper programme: £m £m
Expiring within one year 1,550 1,430 Expiring beyond one year 1,430 1,170
41 – Other creditors including tax and social security £m £m
Accruals and deferred income 1,003 1,244 43 – Pension and other post-retirement benefit costs
(c) In the United Kingdom, the Group operated two main pension schemes until their merger on 31 December 2001. Both schemes were valued on a market value basis with the respective pension costs from each scheme’s valuation being determined using the same financial assumptions, namely a pension increase rate of 2.8%, a salary increase rate of 4.5% and an interest rate of 6.0%. The CGU scheme was valued as at an effective date of 1 April 2000 and, being open to new entrants, was valued using the Projected Unit Method. The scheme had an asset value of £3,801 million and a funding level of 129%. The cost of future service benefits was 30% of pensionable salaries. The spreading of the scheme surplus over the average remaining cost of future service life had the effect that the net pension cost at the scheme anniversary was 2.9% of pensionable salaries. The defined benefit section of the Norwich Union Pension Plan was valued as at an effective date of 1 October 2000 using the Attained Age Method, as this section was generally closed to new employees. The scheme had an overall asset value of £1,447 million and a funding level of 122%. The cost of future service benefits in respect of defined benefit members was 26% of pensionable salaries which, after allowing for the interest on the surplus at the valuation date and the additional surplus since, led to a net pension cost at the scheme anniversary of 14.3% of pensionable salaries. The pension cost was then increased to allow for the amounts credited to members’ accounts under the defined contribution section. These two United Kingdom pension schemes accounted for the substantial part of the Group’s United Kingdom pension liabilities, and were merged with effect from 31 December 2001. New entrants now join the defined contribution section of the scheme as the defined benefit section is generally closed to new employees.
86 CGNU plc Annual report + accounts 2001 Notes to the accounts continued
(i) The valuation used for FRS17 disclosures has been based on the most recent actuarial valuations, updated to take account of the requirements of FRS17 in order to assess the liabilities of the major schemes at 31 December 2001. The updating was made by actuaries in each country, with overall co-ordination by external consultants, Watson Wyatt. Other than the actuary of the CGU Staff Pension Scheme, the actuaries making the calculation were independent of the Group. Scheme assets are stated at their market values at 31 December 2001. The details for the main defined benefit schemes are shown below. Where schemes provide both defined benefit and defined contribution pensions, the assets and liabilities shown exclude those relating to defined contribution pensions.
The main financial assumptions used to calculate scheme liabilities under FRS17 are: (ii) The assets and liabilities of the schemes, attributable to defined benefit members, at 31 December 2001 were: UK Netherlands Canada Ireland Total £m £m £m £m £m
Total market value of assets 4,710 443 165 338 5,656 Present value of scheme liabilities (4,518) (430) (145) (229) (5,322)
Totals included in the Group accounts 12,523 1,872 Less: pension asset on SSAP 24 basis (143) (143)
Total assets under management 208,909 219,915 45 – Cash flow statement
(a) The reconciliation of profit/(loss) on ordinary activities to net cash inflow from operating activities is: £m £m
Foreign exchange rate movements – – (24) 49 Loans in acquired companies – – – 10
Bank overdrafts: General business and other activities (364) (219) (145) Banking and stockbroking (41) (22) (19)
Net purchases/(sales) of investments 1,223 (1,541) Net investments (divested)/acquired with subsidiary undertakings (6,165) 105 Changes in market values and foreign exchange rate movements (732) 1,435
Land and buildings 857 820 37 Other participating interests 25 12 13 Other financial investments 15,886 21,788 (5,902) Deposits with ceding undertakings 152 145 7 Banking and stockbroking investments 630 459 171 46 – Contingent liabilities
Note 36 gives details of the assumptions used in determining the long-term business provision which are designed to allow for prudence and the appropriate emergence of surpluses to pay future bonuses. Note 37 gives details of the estimation techniques used in determining the general business outstanding claims provision. Both are estimated to give a result within the normal range of outcomes. To the extent that the ultimate cost falls outside this range, for example where experience is worse than that assumed for long-term business, or assumptions over general business claims inflation may alter in the future, there is a contingent liability in respect of this uncertainty.
In carrying on the business of investment, the Group has entered into future commitments, including property development, after 31 December 2001. These amounts are not reflected in the consolidated Group balance sheet on pages 52 and 53. The Group has in hand a number of property developments which, under contracts already signed, will require expenditure of £207 million (2000: £51 million) for long-term business and £1 million (2000: £48 million) for general business operations.
Premium income after reinsurance and investment sales Life assurance, investment sales and health premiums, including share of associates 19,906 18,036 15,450 11,619 10,993
Consolidated profit and loss account Life assurance (achieved profit basis) 1,674 1,569 1,496 1,440 1,382
Operating profit on continuing operations before tax, amortisation of goodwill, amortisation of acquired additional value of in-force long-term business and exceptional items 1,533 1,028 1,299 1,339 1,614
Short-term fluctuation in investment return (988) 258 250 784 1,070 Change in the equalisation provision (56) (27) (55) 47 (73) Net profit/(loss) arising on the sale of subsidiary undertakings 287 (1,058) (8) 17 – Loss on withdrawal from London Market operations – (448) – – – Merger transaction costs – (59) – (75) –
(Loss)/profit on ordinary activities before tax 514 (1,406) 1,468 1,609 2,879
Notes (a) The net asset value and market price (London) are as at 31 December. Market prices for 1999 and 1998 are for CGU plc, while that for 1997 is for Commercial Union plc. The net asset value is calculated based on equity shareholders’ funds, adding back the equalisation provision. (b) Basic earnings per ordinary share are shown only. No figures have been provided for diluted earnings per share. (c) Figures for 1999 and 1998 are based on the weighted average dividends per share of CGU plc and Norwich Union plc. Figures for 1997 are based on the weighted average dividends per share of Commercial Union plc, General Accident plc and Norwich Union plc.
2,913 Operating profit before tax 1,806 336 (4,169) Variation from longer-term investment return (2,584) 213 2 Effect of economic assumption changes 1 (269) (90) Change in the equalisation provision (56) (27) 463 Net profit/(loss) arising on the sale of subsidiary undertakings 287 (1,058)
(881) Loss on ordinary activities before tax (546) (1,312) Tax on operating profit – continuing operations before amortisation of
(1,018) goodwill and exceptional items (631) (437) 854 Tax on profit on other ordinary activities 529 174
Earnings per share attributable to equity shareholders Operating profit on an achieved profit basis before amortisation of goodwill 90.5c and exceptional items, after tax, in respect of continuing operations 56.1p 39.7p (53.4)c Loss for the financial year (33.1)p (73.8)p (53.4)c Loss for the financial year – diluted (33.1)p (73.7)p
The contribution from the Group’s share of the alliance with The Royal Bank of Scotland Group plc (RBSG) is incorporated within the achieved operating profit. 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 92.
– 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; and
New business contribution 479 392 Profit from existing business – expected return 848 839
Life achieved operating profit before tax and exceptional items 1,674 1,569 Exceptional items*** (12) (106) Investment return variances (1,632) (43) Effect of economic assumption changes 1 (269)
Total new business contribution before effect of solvency margin*** 591 454 483
***New business contribution before effect of solvency margin includes minority interests in 2001 of £51 million (2000: £29 million). This comprises minority interests in France of £4 million (2000: £4 million), Italy £14 million (2000: £8 million), Poland £1 million (2000: £7 million) and Spain £32 million (2000: £10 million).
Netherlands (including Belgium and Luxembourg) 221 179 Poland – life 65 58
Embedded value at the beginning of the year 11,234 10,518 Total life achieved profit after tax* 18 813 Exchange rate movements (97) 81 Embedded value from business (disposed)/acquired** 84 437 Amounts injected into life operations 175 167 Amounts released from life operations (351) (782)
Embedded value at the end of the year*** 11,063 11,234 * Excluding profits from other life and savings activities after tax.
** Embedded value from businesses disposed of in 2001 comprises NU Vita (Italy) (£16 million), Greece Life (£3 million) and Canada (£117 million). Embedded value for businesses acquired in 2001 comprises Risparmio and Eurovita in Italy (£120 million), Unicaja, Caixa Galicia and Caja España in Spain (£64 million), Hungary (£11 million) and The Insurance Corporation of Singapore (£25 million).
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).
***Embedded value at the end of the year includes minority interests in 2001 of £347 million (2000: £208 million). This comprises minority interests in France of £34 million (2000: £34 million), Italy £149 million (2000: £70 million), Poland £55 million (2000: £42 million), Spain £107 million (2000: £57 million) and Other Europe £2 million (2000: £5 million).
**The net worth includes £2,200 million (31 December 2000: £2,100 million) in respect of minimum statutory solvency margin requirements that are supported by shareholders’ capital. The effect of holding the minimum statutory solvency margin and allowing for projected future releases was £700 million (31 December 2000: £700 million).
New business contribution before effect of solvency margin 540 51 591 483 Effect of solvency margin (99) (13) (112) (91)
Life achieved operating profit 1,581 84 1,665 1,533 Other life and savings activities 9 – 9 36
For with-profit funds in the United Kingdom and Ireland, 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.
The principal economic assumptions used are as follows: United Kingdom France
• 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. A realistic estimate of future fund management expenses that will be charged to long-term businesses by Group companies not included in the long-term business covered by the achieved profits method has been included within the value of in-force business.
• 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.
Netherlands (including Belgium and Luxembourg) 10 (10) (100) (110) Poland – life – (1) – (10)
Non-economic assumptions Sensitivity calculations have been performed to identify the non-economic assumptions to which new business contribution and the value of in-force business within embedded value are particularly sensitive. The calculations have been based on similar percentage movements in each assumption from the base assumption used to calculate the published new business contribution and value of inforce. Based on this, the Group’s new business contribution is most sensitive to a change in discontinuance rates, whereas the value of in-force is broadly equally sensitive to changes in discontinuance rates, mortality rates and future maintenance expense levels.
Auditor’s report to the directors of CGNU plc on the alternative method of reporting long-term business profits
We also read the other information in the Annual Report and consider the implications for our report if we become aware of any apparent misstatements or material inconsistencies with the supplementary information. This other information comprises the Chairman’s statement, Group Chief Executive’s review, Operating review, Financial review, the Directors’ report and Corporate governance statement.
Italy CGNU Holding Italia SpA and its principal subsidiaries: Commercial Union Assicurazioni SpA (50.0%) Commercial Union Insurance SpA (99.0%) Commercial Union Life SpA (50.0%) Commercial Union Previdenza SpA Commercial Union Vita SpA (55.0%) Eurovita Italcasse Assicurazioni SpA (25.5%) Risparmio Vita Assicurazioni SpA (55.0%)
Netherlands Commercial Union Finance BV Delta Lloyd Nuts Ohra NV and its principal subsidiaries: Delta Lloyd Bank NV (Banking) Delta Lloyd Levensverzekering NV Delta Lloyd Schadeverzekering NV NUTS OHRA Beheer BV
New Zealand Belves Investments Limited and its principal operating subsidiary: New Zealand Insurance Limited
Ogolnych SA (95.0%) Commercial Union Polska Towarzystwo Ubezpieczen na Zycie SA (90.0%) Commercial Union Powszechne Towarzystwo Emerytalne
Reaseguros (50.0%) Bia Galicia, Compania de Seguros y Reaseguros, S.A. (50.0%) Caja España Vida, Compania de Seguros y Reaseguros (50.0%) Plus Ultra, Compania Anonima de Seguros y Reaseguros Plus Ultra Vida, Sociedad Anonima de Seguros y Reaseguros Unicorp Vida, Compania de Seguros y Reaseguros (50.0%)
Principal associated companies are set out in note 19 on page 71.
Shareholders who have not already joined the Plan and wish to do so, should contact the Company’s Registrar, at the address opposite, 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 2001 final dividend.
CGNU is pleased to offer all shareholders the opportunity of registering to receive future shareholder communications (e.g. Annual Report, Annual Review, Notice of AGM and forms of Proxy) electronically via the internet rather than in paper form through the post. To register for the service please refer to www.shareview.co.uk
Banks and nominee companies 25,842 2.70 1,731,914,737 76.80 Pension fund managers and insurance companies 132 0.01 48,546,441 2.15
Worldwide business mix by sector 1 – General insurance 2 – Long-term savings**
Worldwide business mix by geography 1 – Rest of world 2 – Europe
Peps taken out prior to 5 April 1999 have been allowed to continue and, in addition, the Company introduced a Corporate Sponsored Isa enabling shareholders to hold CGNU shares in a tax advantageous manner. Details for both can be obtained from the administrators – see contact details below.
General shareholding Lloyds TSB Registrars The Causeway 0870 600 3952 administration queries Worthing and CGNU share account queries West Sussex BN99 6DA
Isas Lloyds TSB Registrars The Causeway 0870 242 4244 (Isa Manager) Worthing
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