CGNU is the world’s sixth-largest insurance group, the largest insurer in the UK and one of the top five life companies in Europe. Its main activities are long-term savings, fund management and general insurance. It has worldwide premium income and investment sales of £27 billion from ongoing business and £220 billion in assets under management. The Group has 70,000 employees and more than 15 million customers.
Technical account – long-term business 54 Consolidated profit and loss account
Non-technical account 56 Reconciliation of Group operating profit to profit on ordinary activities before taxation 57 Consolidated statement of total recognised gains and losses 57 Reconciliation of movements in consolidated shareholders’ funds 58 Consolidated balance sheet 60 Consolidated cash flow statement 61 Parent company balance sheet 62 Notes to the accounts 98 Four-year review 100 Alternative method of reporting long-term business 107 CGNU Group of companies 108 Shareholder information
Shareholders’ funds >Worldwide long-term savings new business sales up 24%** to £13.5 billion >Increasing distribution strength through alliances with banks in Europe >Actively developing new e-enabled applications; 2001 will see the launch of our UK online wealth management service >Rapid and successful integration progress – on track to achieve our target of £275 million annual cost savings by end 2001 >Agreement for the sale of US general insurance business and exit from UK London Market business at a cost of £1.3 billion after tax *Includes life achieved operating profit, is stated before amortisation of goodwill and exceptional items and excludes operating profit from businesses discontinued (UK London Market) and to be discontinued (US general insurance)
The economic climate during the past 12 months has been largely favourable. We have been able to benefit from this while channelling our energies into the integration process. The results in 2000 showed strong and profitable organic growth in our long-term savings business and we gained market share in the UK, France, the Netherlands and Spain. In general insurance, we improved our margins, although the overall performance was adversely affected by late storm claims from France and floods in the UK.
Our reputation is based on care for the service we provide, quality in the range of products we offer and reliability in ensuring that our financial position at any time can meet our obligations. We believe that this differentiates us in the marketplace, and our commitment to playing a leading role in raising standards across the industry continues.
Richard Harvey will be our Group Chief Executive from 24 April 2001. I am looking forward to working with Richard, who has a wealth of expertise, an open mind and the right drive. Norwich Union has brought a younger generation of managers to the Group; these complement CGU’s more experienced management team, where Tony Wyand and Philip Twyman have very important roles. Mike Biggs will be our Group Finance Director from 31 March 2001 and will be responsible for developing further our financial and capital efficiency. Patrick Snowball will take over full responsibility for UK general insurance, joining the Board from 31 March 2001. Philip Scott continues to head UK long-term savings – the Group’s largest and most profitable business.
Our Board has set new standards for corporate governance to monitor developments in our Company. Apart from Audit, Nominations and Remuneration Committees, we have established an Information Technology Strategy Committee and a Chairman’s Committee, to deal with succession planning and development of talent.
We enter 2001 with the business reshaped, the integration process on course and the financial benefits coming through as planned. We are all determined to use our new leading position to increase shareholder value. We look forward to another year of vigorous and profitable growth.
>£11,023 million of life and savings new business sales >£14,848 million net premiums written >£483 million of new business contribution >To capitalise on the growing market for long-term savings as governments encourage greater private provision for pensions, savings and healthcare products >To capitalise on CGNU’s size and economies of scale to deliver high-quality, low-cost pensions and savings products >To use multiple means of distribution, including intermediaries, tied agents, salaried sales forces, bancassurance and direct sales >To use e-technology to lower costs, improve service and reach more customers >To develop new, e-enabled services such as wealth management 2 – Europe (excluding UK)
>£8,990 million net premiums written >To take a disciplined approach to risks, premium rating, underwriting and claims management >To develop a full range of distribution channels covering intermediaries, partners and direct sales >To use e-technology to lower costs, improve service and reach more customers >To withdraw from large-scale, inherently volatile commercial insurance and to focus on personal lines and small commercial business >To withdraw from lines of business or markets which do not offer the potential for market-leading positions or superior returns
With £220 billion in assets under management around the world, CGNU is one of the top 10 fund managers in Europe and the second-largest UK-based fund manager. The fund management business invests the Group’s funds held for policyholders as well as seeking thirdparty mandates and developing and selling retail investment products. Its main operations are in the UK, France and the Netherlands.
£61m >£2,501 million of new retail investment sales >£220 billion of assets under management >To provide the investment expertise that will safeguard our customers’ wealth over the long term >To share techniques and expertise around the world and to operate increasingly as a global fund manager >To exploit CGNU’s scale to attract the best investment talent and to generate superior returns >To meet the growing demand for equity-related retail products such as mutual funds and unit trusts 1 – UK £897m 2 – Europe (excluding UK)
We have established positions in France, the Netherlands, Ireland and Poland, and a growing presence in Spain and Italy. We also have start-up operations in eastern Europe, where our Polish experience has given us particular expertise, especially in developing a large direct sales force. We are unique among UK financial institutions in having such a significant presence in continental Europe.
Our new balance of strength – leading in the UK, strong and growing in continental Europe – fits the industry pattern whereby most of the European giants are seeking to build from strong domestic positions. In an increasingly competitive market, our scale and efficiency in the UK provide a powerful base for addressing the enormous opportunities in Europe and around the world.
Worldwide business mix from ongoing business* (operating profit) 1 – Life (achieved profit): £1,569m 2 – Fund management: £61m 3 – General insurance: £412m *Excluding US general insurance and UK London Market
The Group’s pre-tax operating profit from ongoing business was £1,407 million (1999: £1,534 million). This is after charging a strategic investment of £133 million in our online wealth management service and £285 million (1999: £69 million) of exceptional weather-related costs arising from late storm claims in France and floods in the UK.
Excluding these items, operating profit would have increased by 17% at constant rates of exchange.
In 2000, we achieved record retail investment sales. We maintained a good investment performance, with particular successes in Cat-standard individual savings accounts (Isas) in the UK and mutual funds in the Netherlands. Operating profit was £61 million (1999: £66 million), after a £21 million investment in the development of our UK retail investment business.
Our integration and cost reduction programme is on track. Annualised savings at the end of the year amounted to £111 million.
We are growing strongly in long-term savings and fund management and taking tough action to improve the quality of our general insurance earnings.
The UK is still principally an intermediary market, and we continue to look to independent financial advisers to provide the majority of our business. But, as we continue to grow the long-term savings business, our bancassurance partnership with Royal Bank of Scotland and NatWest builds significantly on our distribution capability. A further agreement with Tesco will see our products distributed under one of the UK’s best-known brands.
Annual report and accounts 2000 Group Chief Executive’s review 09 CGNU plc
The extended marketing reach that these arrangements offer is likely to accelerate our sales. Combined with our existing routes to market, they make us truly multi-channelled – which has always been our strategy.
To grow our long-term savings business, we need good fund management capabilities. In a sector where size matters, the merger has given us a substantial investment business that can generate superior returns on our own assets and better serve third party investors and the millions of retail customers looking for good investment products. It also provides new opportunities to operate globally and to transfer expertise from one market to another.
A particular success has been equity-linked investments. Although these products have a long history in the UK, continental investors have historically tended to prefer fixed-interest savings. Now, with low interest rates and less certain provision from the state, there is a growing appetite for equity-based products. In 2000, our unit-linked sales in France grew strongly, while equity-backed mutual fund sales in the Netherlands increased to £1 billion, a rise of 381%.
Following industry consolidation, general insurance has the potential to produce better returns than in the past. But to realise that potential we need to focus on the most profitable and stable lines of business that produce higher risk-adjusted returns – personal and small commercial lines – and on those markets where CGNU has the scale and presence to produce real value for shareholders.
All our businesses have been reviewing their portfolios, weeding out the unacceptable risks and adopting a more rigorous approach to underwriting – including, in most cases, putting up premium rates. We have also taken some tough decisions and withdrawn from markets and lines of business that did not fit our strategy.
The biggest disposal, which will be completed during 2001, is the general insurance business in the US. This business ranked 15th in its market and the investment needed to take it into the top five was more than we felt was warranted. The business also presented unknown future risks in terms of environmental claims and litigation relating to asbestos, tobacco and defective construction. Although the exit cost us £1 billion after tax, it gives us a clean break and the chance to concentrate on markets where CGNU has a substantial presence.
All our businesses are developing their use of e-technology. The main thrust is to improve what we already do, using online techniques to reduce costs, improve the exchange of information and offer a better service to intermediaries and customers.
Looking to the future, we see two important trends: the emergence of wealth management as a distinct market sector; and more customers wanting to exploit the power of the internet to manage their financial affairs. To meet these developments, we will have invested £250 million by the end of 2001 in a new online wealth management service in the UK called norwichunion.com. To be launched later in 2001, this unique service will offer a
Annual report and accounts 2000 Group Chief Executive’s review 10 CGNU plc
comprehensive range of financial planning tools and an integrated portfolio of competitive products, including share dealing, a fund supermarket and banking.
Another important part of our e-initiatives is our highly successful Navigator product. Developed in Australia, this allows customers to make their own investment decisions within a package of funds and to monitor performance and adjust their portfolios online. The same techniques are now being transferred to Europe and we are investigating opportunities in Asia.
In the emerging markets of central and eastern Europe, we see large populations with increasing wealth and the demographic pressures that generate demand for long-term savings and investments. Following our success in Poland, we have expanded into the Czech Republic and Romania. Our new long-term savings business in Turkey is performing well and offers real opportunities for growth. Looking further ahead, we continue to explore openings in south-east Asia and China.
France CGNU’s success owes much to its multi-distribution strategy. In France, for example, channels to market comprise tied agents, brokers, the AFER savings association, a salaried sales force and direct operations.
The merger brought together the sixth and 10th-ranked long-term savings businesses in the UK which, during the rest of 2000, grew to become the clear market leader. The combined business was launched under the new Norwich Union brand in October with a 10% market share.
Norwich Union is also strong in with-profit policies, which make up over half our UK savings business. 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 £4 billion and are used to support strong business development that benefits policyholders and shareholders alike. We are committed to ensuring customers fully understand the financial products they buy and are providing more information this year than ever before on investment performance and how we arrive at with-profit bonus rates.
Norwich Union receives more business from independent financial advisers (IFAs) than any other UK provider. It continues to strengthen its IFA links, notably through e-technology, and saw a 25% increase during the year in the amount of new business contributed by IFAs.
With its economies of scale, Norwich Union is set to take the lead in stakeholder pensions when these are introduced in April 2001.
Annual report and accounts 2000 Operating review 14 CGNU plc 1 – The new Norwich Union brand has been heavily advertised in the UK with the message Together we’re stronger.
Some 12 million Britons already access the internet from home, and there is evidence that growing numbers of people are taking control of their finances this way. Our new online wealth management service, norwichunion.com, will attract this audience by helping them to make their money work smarter. This unique service, due to launch later in 2001, will offer a range of financial management tools and an integrated portfolio of competitive customer propositions, including share dealing, a fund supermarket and banking. Customers can pre-register now at www.norwichunion.com.
Although legislative changes will make life products in the Netherlands less tax-efficient from 2001, we expect the demand for pensions and mutual fund policies to remain strong, where we are well placed to benefit. The 1999 merger between Delta Lloyd and Nuts Ohra created a leading long-term savings business in the Netherlands with two strong brands, economies of scale, attractive products and a range of distribution channels. Following the merger, Delta Lloyd Nuts Ohra has top positions in direct and intermediary distribution, ranking second and third in the Dutch market respectively.
3 – Delta Lloyd is the third biggest intermediary writer in the Netherlands, with a 6% share of the long-term savings market.
The Dutch operation as a whole is investing £24 million in e-technology over the next three years. Delta Lloyd’s extranet, or “digital domain”, now extends to 1,200 intermediaries and will soon allow online transactions as well as the exchange of information. Service to intermediaries was further improved by integrating the marketing and sales of the life, general insurance and health businesses.
Other achievements by the Delta Lloyd Nuts Ohra group in the year included securing the Fokker pension fund and taking further steps to replicate the company’s success in Belgium and Germany. Ohra’s direct marketing and investment strengths, for example, will underpin the launch of mutual funds in Germany in 2001.
Renewed distribution links with UniCredito Italiano and the extension of our existing partnerships with Banca Popolare di Lodi and Banca delle Marche add further coverage in Italy, where bancassurance is the main means of distribution. The number of branches distributing CGNU products in Italy will have risen from 500 at the end of 1999 to over 2,000 by the end of 2001.
CU Polska is Poland’s leading private provider of pensions. It has 30% of the market, and in 2000 attracted over 100,000 new customers.
UK A preview of our online wealth management service, to be launched later in 2001, can be found at www.norwichunion.com. This will offer customers financial planning tools and services including share dealing, a fund supermarket and banking.
Annual report and accounts 2000 Operating review 17 CGNU plc 1 – New bancassurance agreements in the UK, Italy, Spain and the US have extended CGNU’s reach into the marketplace.
CU Polska’s life business (number two in the market) maintained a market share of 20% with strong potential for future growth.
Following the merger, the Group had two pensions and two life businesses in Poland, and had to sell one of each to satisfy the regulators. The two Norwich Union operations, which had been set up only two years earlier, were sold in November for £133 million, realising substantial value for shareholders.
Knowledge gained in Poland is being applied in other eastern European markets. During 2000 we launched a new life business in Romania and agreed to buy the ninth-largest pension fund in the Czech Republic.
The Australian financial services market continues to expand, backed by mandatory and rising retirement contributions in spite of new tax legislation. Norwich Union Australia is working to keep its pricing competitive and is capitalising on the success of the Navigator and Super Solutions products.
Our US long-term savings business is well advanced in its use of e-technology and has distribution agreements with several leading banks. A new bancassurance partnership with the country’s sixth-largest bank, Wells Fargo, gives us access to 2,600 branches and offers further opportunity for growth.
We concluded that combining the two small life businesses of CGU and Norwich Union would not meet the objective of achieving a leadership position in Canada. We are in the process of selling these operations.
Similarly in China, where we currently operate two investment funds, we plan to establish a life joint venture with a local partner, provided the government approves our licence application.
General insurance operating profit before tax 2000 1999 – ongoing business* £m £m
Greater size presents opportunities for reducing costs and raising the quality of earnings. The Group’s strategy is therefore to be a leader in selected general insurance markets or to withdraw – and to make the business less volatile by moving away from large commercial risks and focusing on personal and small commercial lines. Other priorities are to further improve the service to customers and to adopt a rigorous approach to underwriting and claims management.
Our claims service illustrates our commitment to exceed customers’ expectations. Over the past five years, we have progressively developed Total Incident Management (TIM). The objective of TIM is to “get the customer back to normal”as quickly as possible. When a customer makes a claim, Norwich Union will take control by arranging the use of preferred suppliers on behalf of the customer. We are able to agree rates and service standards with the suppliers to ensure that the customer gets prompt service and Norwich Union gets value for money. TIM will be extended to the majority of customers during 2001.
By the end of the year, the UK personal lines business had achieved a combined operating ratio of 100% (before the impact of the autumn floods), and the expense ratio continued to fall from 11.8% in 1999 to 10.7% in 2000, making Norwich Union one of the lowest-cost providers in the UK insurance market. Overall, the merger is on course to achieve its targeted cost savings of £97 million.
1 – Total Incident Management ensures a streamlined, rapid response to customer needs.
Given that the US business ranked only 15th in a fragmented market and carried historic long-tail liabilities, CGNU took the decision to sell, and reached agreement with White Mountains in September 2000. The disposal is subject to regulatory approval and is expected to be completed in the first half of this year.
Following the merger, CGNU had two general insurance businesses of similar size in New Zealand, and decided that the best way to generate shareholder value was to sell one of them rather than integrate the two. We therefore disposed of the former Norwich Union company and now operate through NZI, the largest general insurer in the country. In 2000, its 10th successive year of underwriting profits, NZI continued to concentrate on improving its claims management and reducing its operating expenses.
CGNU is one of the top five general insurers in Malaysia, Thailand, Singapore and Hong Kong and intends to develop its business in each of these markets, not least through new bancassurance agreements and affinity schemes. The recent economic recovery in Asia should contribute to growth, as will the trend towards greater deregulation.
As part of rationalising the portfolio, CGNU has sold its small general insurance businesses in Japan and South Africa.
Delta Lloyd Nuts Ohra is one of the best-performing fund managers in the Netherlands. The year brought substantial growth in assets under management (up to £28 billion), with sales of mutual funds leaping 381% to £1 billion. Further success was achieved by the Delta Lloyd Investment Fund, which ranked first in the list of global mutual funds in 2000. Ohra was voted the best asset manager by the country’s investors and gained a further award for performance from the Nyfer business school.
2 – Victoire Asset Management’s investment performance was recognised by a number of awards, including the grand prix de la gestion d’actifs from the top financial magazine, L’AGEFI.
3 – CGNU sponsors the National Trust’s Guardianship programme, which involves children in conservation projects.
We fully recognise that we have a part to play in contributing to environmental improvement and protection, and employees in each of the Group’s business units are working to achieve the objectives of our corporate environmental policy.
As a successful international business, our environmental programme entails behaving responsibly in our various roles as an insurer, investor, employer and consumer.
For example, Morley Fund Management has recruited a leading socially responsible investment (SRI) team to meet the growing demand from customers for funds of this nature.
The Group maintained its active role in the United Nations Environment Programme financial services initiatives. This year, CGNU is leading a group of insurers and banks from around the world in the definition of global guidance on environmental management and reporting.
We remain an active supporter of Business in the Environment (BiE). It was pleasing to note that in this year’s BiE index of corporate environmental engagement, CGNU was placed first in the financial services sector and fourth in the overall FTSE 100 list.
In total during 2000, the Group gave nearly £5 million worldwide to a range of community investment initiatives, such as crime prevention. In addition, about £14 million was donated to other commercial sponsorship projects, notably sport and the arts.
From next year, CGNU is preparing to report on its community activities according to Business in the Community’s benchmarking template, which measures the full extent of corporate involvement in the community according to accepted yardsticks.
Financial performance from ongoing business* – including life achieved profits £m £m
General insurance 412 459 Non-insurance (25) (30) Associated undertakings 1 10 Corporate costs (185) (162) Unallocated interest (361) (240)
Pre-tax operating profit before amortisation of goodwill, amortisation of acquired additional value of in-force long-term business and exceptional items from ongoing business 1,028 1,299
Operating (losses)/profits from businesses discontinued and to be discontinued (554) 201
We have continued to use life achieved profits in commenting on our performance. This method reflects the change in the embedded value of our life operations and, in our view, gives a more accurate reflection of the performance of the Group’s life operations than the modified statutory basis used in the statutory financial statements.
All growth rates in the Financial review are quoted at constant rates of exchange.
The Group’s operating profit before tax from ongoing business was £1,407 million (1999: £1,534 million). This is after a charge for a strategic investment of £133 million in our online wealth management service, which will cost £250 million in total, and £285 million of exceptional weather-related costs (1999: £69 million) arising from late storm claims in France and floods in the UK. Excluding these items, operating profit from ongoing business would have been 17% higher.
On a modified statutory basis, operating profit before tax from ongoing business was £1,028 million (1999: £1,299 million).
New business in our long-term savings operations grew by an excellent 24% to £13.5 billion, with particularly impressive performances in the UK and France.
France The French operation achieved overall sales growth of 33% in a market that grew by 20%. Operating profit increased by 67%, helped by favourable experience variances.
Poland Our business in Poland is the market leader for private pensions and individual life assurance. At £191 million (1999: £389 million), total sales were lower than last year as a result of the unique, one-off privatisation of pensions provision in 1999. Operating profit was £95 million (1999: £117 million).
International The performance of our international business as a whole was held back by investment in a new bancassurance systems platform in the US and the impact of the introduction of new tax legislation in Australia. Operating profit stood at £29 million (1999: £56 million).
Premium income from our health businesses rose by 78% over 1999 and operating profit more than doubled to £68 million (1999: £24 million). The increase mainly reflected the first full-year inclusion of the Nuts Ohra business in the Netherlands.
Assets under management increased by £12 billion to £220 billion, including third-party funds of £27 billion (1999: £25 billion). Operating profit amounted to £61 million.
Major new ventures: Royal Bank of Scotland; Bancaja; Banca Popolare di Lodi; UniCredito Italiano; and Wells Fargo
The worldwide combined operating ratio from ongoing business was 109%, 107% before the exceptional weather-related events, and clear plans are in place to improve this ratio to 102% by the end of 2001. The worldwide expense ratio improved from 13.3% to 12.6% and will continue to benefit from merger savings.
France The poor performance in France is largely attributable to the storms of December 1999 and the late notification from agents and lead co-insurers which led to an additional charge in 2000. The storms were assessed by the industry as a one-in-500-years event and were the second most expensive insured loss to hit Europe. The cost of the French storms charged in the 2000 result was £90 million (1999: £69 million, including £31 million incurred by group reinsurance).
Other Europe Excluding France, our other European general businesses produced an underwriting loss of £125 million (1999: £89 million). While increases in claim costs and competition adversely affected the results of a number of our European operations, actions have been taken to improve results.
International Our ongoing international general businesses saw a sharp improvement in their underwriting and operating result. Underwriting losses improved to £101 million (1999: £140 million), mainly reflecting the strong performance of our Australian and New Zealand businesses, offset by a lower Canadian result in difficult market conditions. In February 2001, we announced that we had reached agreement to sell one of our two operations in New Zealand, as the best way to maximise shareholder value in this market.
The 1999 exceptional costs largely relate to costs of the Commercial Union plc and General Accident plc merger.
The taxation charge of £255 million (1999: £382 million) includes a charge of £326 million (1999: £349 million) on operating profits from ongoing business, equivalent to an effective rate of 31.7% (1999: 26.9%). The increase is mainly due to changes in the mix of business, with life profits being a higher proportion of the total.
A final dividend of 23.75 pence net per share has been proposed, which brings the total for the year to 38 pence net per share.
Shareholders’ funds fell £2.1 billion to £13.6 billion after deducting the equalisation provision of £216 million. The reduction mainly reflects the loss on the disposal of the US general business and our exit from UK London Market operations.
The Group recognises the critical importance of having efficient and effective risk management systems in place. Close attention is paid to asset and liability management. This is particularly important for our life businesses, given the long-term nature of the liabilities involved. For general insurance businesses, a rigorous process for managing underwriting risk is applied. Central to this process is the use of sophisticated management information that is used to measure and price underwriting risk and establish and monitor claims provisions.
An important strength of the Group is the international diversity of its operations. As a result, approximately half of the Group’s premium income arises in currencies other than sterling. At the same time, its net assets are denominated in a variety of currencies of which the largest are the euro (48%) and sterling (37%). During the year, shareholders’ funds benefited by foreign exchange translation gains of £303 million.
In managing our foreign currency exposures, we do not hedge revenues as these are substantially retained locally to support the growth of our business and meet local regulatory and market requirements.
Some 34% of these borrowings have fixed interest rates with maturity terms of between 2 and 26 years, with the balance largely being in commercial paper. The ratio of the Group’s external debt to shareholders’ funds was 19%, maintaining an efficient capital structure consistent with the Group’s risk profile.
In our long-term savings operations, unitlinked policies are backed directly by appropriate investments. Non-linked policies are invested in a mixture of assets, depending upon the nature of the liabilities. Overall, some 47% is invested in equities and properties and some 41% in fixed income securities.
Our overall investment returns attributable to shareholders exceeded our longer-term return assumptions, helped by good performances of a number of large investment holdings.
Board of directors 1 Pehr Gyllenhammar 65 Chairman and non-executive director Appointed to the Board in 1997, becoming Chairman in 1998. Former Executive Chairman of AB Volvo. Currently a Managing Director of Lazards, Chairman of Reuters Founders Share Company Limited and a non-executive director of Lagardère SCA.
Chairman of the Nomination Committee and member of the Remuneration Committee.
2 George Paul DL 61 Deputy Chairman and non-executive director Appointed to the Board in May 2000 as Deputy Chairman. Joined the Norwich Union Board as a non-executive director in 1990, becoming Chairman in 1994. Non-executive Chairman of Agricola Group Limited, non-executive director of Fleming Overseas Investment Trust plc and of Notcutts Limited.
3 Bob Scott AAII 59 Group Chief Executive Appointed to the Board as Group Chief Executive in June 1998. Joined South British Insurance Company, now part of the Group, in 1959 and worked in New Zealand, the United Kingdom and Australia, before moving to the United Kingdom in 1990. Joined the Board of General Accident in 1992, becoming its Group Chief Executive in 1996. Currently Chairman of the Association of British Insurers and a non-executive director of The Royal Bank of Scotland plc. Bob will retire on 24 April 2001. Member of the Nomination Committee.
5 Mike Biggs ACA 48 Executive director Appointed to the Board in May 2000. Joined Norwich Union in 1991 and the Norwich Union Board in 1996. Held a number of executive appointments in Norwich Union, becoming Finance Director in 1997. Currently executive director responsible for the Group’s General Insurance operations in the UK. Mike will become Group Finance Director from 31 March 2001.
6 Lyndon Bolton 64 Non-executive director Appointed to the Board in June 1998, having served as a non-executive director of General Accident since 1982. Former Managing Director of Alliance Trust and a former non-executive director of TSB Group plc. He will retire from the Board on 24 April 2001 at the close of the Annual General Meeting. Member of the Remuneration Committee.
8 Wim Dik 62 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. Member of the Audit Committee.
Annual report and accounts 2000 Board of directors 33 CGNU plc 9 Peter Foster FCCA 54 Executive director Appointed to the Board in 1994. Joined Commercial Union in 1963 and appointed Finance Director in 1994. Currently Group Finance Director. Peter will retire from the Board on 31 March 2001.
10 Sir Michael Partridge KCB 65 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, non-executive director of Methodist Ministers’ Pension Trust Limited and Epworth Management Investment Limited.
12 Derek Stevens 62 Non-executive director Appointed to the Board in 1995. A director and Chief Financial Officer of British Airways Plc. Chairman of the Audit Committee.
15 André Villeneuve 56 Non-executive director Appointed to the Board in 1996. Chairman of Instinet Corporation and a non-executive director of United Technologies Corporation. A former executive director of Reuters plc. Member of the Remuneration Committee.
16 Tony Wyand 57 Executive director Appointed to the Board in 1987. Joined Commercial Union in 1971 and worked for the Group in the UK, the United States and France. Currently responsible for the Group’s operations in continental Europe. A non-executive director of Société Générale, UniCredito Italiano and Grosvenor Estate Holdings.
Patrick Snowball 50 On 24 January 2001, the Company announced that Patrick Snowball is to be appointed an executive director with responsibility for the Group’s General Insurance operations in the United Kingdom and that he will join the Board with effect from 31 March 2001. Patrick was previously a director of Norwich Union, appointed in October 1999, having joined that company in 1989. He is currently Managing Director of the Group’s General Insurance operations in the United Kingdom.
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 2000.
A separate document accompanying the Report and accounts contains an explanation of the business to be conducted at, and the Notice convening, the Annual General Meeting of the Company, to be held on 24 April 2001 at 11.00am at The Barbican Centre, Silk Street, London EC2Y 8DS.
The Group results for the year are shown in the consolidated profit and loss account on pages 53 to 55.
The directors are recommending a final dividend of 23.75 pence (1999: 23.75 pence) per share which, together with the interim dividend of 14.25 pence (1999: 14.25 pence) per share, produces a total dividend for the year of 38.00 pence (1999: 38.00 pence) per share. The total cost of dividends for 2000, including preference dividends, will amount to £872 million (1999: £790 million), leaving £2,585 million to be transferred from reserves (1999: £230 million to reserves).
The names of the present members of the Board and brief biographical notes appear on pages 32 and 33.
Alan Perelman was also appointed a director on 30 May 2000 and subsequently resigned on 14 November 2000.
The directors retiring by rotation in accordance with the articles of association at the Annual General Meeting and, being eligible, offering themselves for reappointment are Pehr Gyllenhammar and Tony Wyand. Bob Scott also retires by rotation, but will not be seeking reappointment. Mike Biggs, Richard Harvey, Philip Scott and Tony Wyand each have a service contract with a Group Company, details of which can be found on page 43.
Patrick Snowball is to be appointed a Group Executive Director with responsibility for the Group’s UK General Insurance operations and will join the Board with effect from 31 March 2001. He will, in accordance with the articles of association, retire at the forthcoming Annual General Meeting and, being eligible, seek reappointment. Upon appointment, he will have a service contract with a Group Company.
Mike Biggs, currently a Group Executive Director, is to be appointed Group Finance Director with effect from 31 March 2001, at which point Peter Foster, currently Group Finance Director, will retire from the Board.
Mike Biggs* 25,940 20,673 Lyndon Bolton 3,541 3,541 Guillermo de la Dehesa* 144 144 Wim Dik – – Peter Foster 29,170 33,753 Pehr Gyllenhammar 8,114 16,114 Richard Harvey* 38,157 21,171 Sir Michael Partridge* 2,226 2,236 George Paul* 20,366 20,397 Bob Scott 40,354 39,635 Philip Scott* 26,772 26,772 Derek Stevens 1,747 1,965 Philip Twyman 12,558 19,751 Elizabeth Vallance* 830 830 André Villeneuve 640 640 Tony Wyand 55,527 17,465
In the United Kingdom, payments of £3 million were made during the year to community support projects, of which £1.1 million (1999: £0.8 million) were charitable donations. The Group’s charitable giving covers a wide range of sectors and organisations, including many aspects of medical research, social welfare, the young, the elderly and the arts. In the United Kingdom, the Group has encouraged its staff to participate in charitable activities by matching funds raised. During the year, staff raised £0.1 million for a wide range of charities which was matched by the Company, on a £ for £ basis.
The Company has no trade creditors. In respect of Group activities in the United Kingdom, the amounts due to trade creditors at 31 December 2000 represented approximately 32 days of average daily purchases through the year (1999: 29 days).
Employees are involved in the Group’s performance by way of participation in profit sharing and save as you earn share option schemes. The Company will be seeking the approval of shareholders at the Annual General Meeting to establish an All Employee Share Ownership Plan which will replace the profit sharing scheme.
An Environment Report has been prepared, setting out the Group’s policy, its progress to date, future programmes and the results of the externally verified audit. A summary copy is available upon request from the Group Company Secretary or the full report can be viewed on the internet: www.cgnuenvironment.com
On 20 June 2000, PricewaterhouseCoopers and Ernst & Young were appointed joint auditors of the Company to replace PricewaterhouseCoopers who resigned as the Company’s sole auditors.
In accordance with section 384 of the Companies Act 1985, a resolution is to be proposed at the forthcoming Annual General Meeting for the appointment of Ernst & Young as sole auditor of the Company. PricewaterhouseCoopers are not seeking reappointment as a joint auditor of the Company.
The Company Secretary is responsible for ensuring that Board procedures are followed and all directors have access to his advice and services.
The remuneration packages and the benefits paid to each director are reviewed carefully by the Committee, which seeks independent professional advice to ensure that they are appropriate to support both the Company’s short-term and long-term business objectives and that performance-based remuneration is measured against challenging criteria.
As a major investor, the Group monitors the governance of the companies in which it invests and has in place a policy of exercising the voting rights attaching to its own shareholdings in the United Kingdom and, where it has been given discretion to do so, those of its clients. Details of how the voting discretion has been used on any particular issue are available to clients upon request. To avoid unnecessary and confusing variations on corporate governance requirements, the Group’s governance and voting policy is based largely on that recommended by the Association of British Insurers.
However, each issue is considered on its merits and, where a company can provide a reasonable justification for any non-compliance, its management will often receive support.
The Board has ultimate responsibility for the systems of internal control maintained by the Group and for reviewing their effectiveness. The systems are intended to provide reasonable assurance, but not an absolute guarantee, against material financial misstatement or loss, and include the safeguarding of assets, the maintenance of proper accounting records, the reliability of financial information, compliance with appropriate legislation, regulation and best practice, and the identification and containment of business risks.
During the year, the Audit Committee, on behalf of the Board, has reviewed the effectiveness of the framework of the Group’s systems of internal control, the principal features of which are as follows.
The key features of the control environment include the terms of reference for the Board and each of its committees; a clear organisational structure, with documented delegation of authority from the Board to executive management; and defined procedures for the approval of major transactions and capital allocation.
The Committee deals with appointments and reappointment to the Board, monitors potential conflicts of interests and makes recommendations to the Board concerning the independence of the non-executive directors.
This committee comprises the following members appointed by the Board: André Villeneuve (Chairman) Wim Dik Pehr Gyllenhammar Richard Harvey Bob Scott Sven Skarendahl* Philip Twyman *Sven Skarendahl, an independent consultant, whilst not a director of the Company, has been appointed by the Board to this committee due to his broad experience in technology and internet-based companies.
At its Annual General Meetings, the Company complies with the Combined Code as it relates to the disclosure of proxy votes, the separation of resolutions and the attendance of committee chairmen. The Notice of the Annual General Meeting is sent out at least 20 working days prior to the Meeting in order to ensure that shareholders have sufficient time in which to consider the items of business.
Following the merger of the Company with Norwich Union, all aspects of corporate governance were reviewed by the Board at its first meeting post-merger, in June 2000. Other than where stated below, the Company has complied fully throughout the accounting period with the provisions set down in section 1 of the Combined Code.
As a result of the review, a new Long-Term Incentive Plan was introduced in which the Group’s most senior executives participate. The executive directors will, subject to shareholders’ consent, participate in this Plan instead of the Company’s Executive Share Option Scheme. In addition, the performance conditions attaching to incentive awards granted during the year were amended. A new Deferred Bonus Plan has been introduced to replace the Company’s current Plan and a new Integration Incentive Plan relating specifically to the Merger has also been established. Again, shareholders will be asked to approve these plans and the executive directors’ participation in them. Full details of all these changes are given below.
The Company’s remuneration policy seeks to provide competitive remuneration packages relevant for each particular market in which the Company operates, which attract and retain high-calibre employees and encourage and reward superior performance in a manner which is consistent with the interests of shareholders. The Group’s remuneration policies are aimed at meeting these objectives and ensuring that senior executives, including executive directors, are rewarded fairly for their respective individual contributions to the Group’s performance.
Against this policy, the Committee has set the content of the senior executives’ total remuneration package by reference to a variety of factors, including market practices for companies of similar size and standing; current economic conditions; prevailing operating conditions within the Group and the financial services industry; the earnings of the Group’s employees generally; and the skills and management capabilities which the Group must secure in order to attain its strategic objectives. Also, in considering the various elements which constitute senior executives’ remuneration, the Committee seeks to produce a balance between long-term, short-term, fixed and variable rewards. The cyclical nature of some aspects of the Group’s operations is, where appropriate, taken into account in determining this balance.
The remuneration package for the Company’s senior executives (including executive directors) comprises a basic salary, pension entitlements and certain benefits in kind, including a company car allowance. In addition, they participate in short-term and long-term incentive plans as well as the Company’s profit sharing and savings-related share option schemes. Full details of the total remuneration paid to the executive directors in 2000 are set out on pages 44 to 47.
This Plan will operate in respect of the financial year 2000, with the first deferment of bonuses taking place in Spring 2001. Currently, executive directors do not participate in this Plan but a proposal that they do so will be put to shareholders at the forthcoming Annual General Meeting. If approved, executive directors will participate in this Plan by deferring at least 50% of their bonuses which become due for the 2000 financial year. The former CGU Deferred Bonus Plan, which was approved by shareholders in 1999, and which matches deferred bonuses with options over shares, was used in respect of bonuses paid in 2000 but will be replaced by the Plan described above for senior executives, including executive directors.
Senior executives in the United Kingdom, including executive directors, are entitled to participate in the Group’s Inland Revenue-approved profit sharing scheme on the same basis as other eligible employees. At the forthcoming Annual General Meeting, shareholders will be requested to grant authority for the Company to establish an All Employee Share Ownership Plan (AESOP) to replace the Company’s current profit sharing scheme. If approved it is proposed that the free share element of the AESOP would operate instead of the profit sharing scheme in respect of the 2001 financial year, based on performance targets set for that year.
A new Long Term Incentive Plan (LTIP) was introduced in September 2000 in which senior executives participate. Under the LTIP, participants receive an award of restricted shares each year up to the value of one times basic salary. The shares vest after three years but only if certain demanding performance conditions have been met.
The performance conditions compare the total shareholder return (TSR) produced by the Company against that of a chosen comparator group. Achievement of median performance within this group triggers the vesting of 20% of awards and this rises to 70% if the Company’s performance is in the upper decile of the comparator group. The other 30% of the awards vest if the Company achieves a given return, in excess of inflation, on the capital employed within the Company (ROCE) over a three year performance period.
The Company currently operates Executive Share Option Schemes, which have the same performance conditions as those described above for the LTIP. Grants of options under the Schemes are awarded to those members of Group-wide management that have been identified as ‘key’ or possessing high potential. The former CGU executive directors participated as normal in the option schemes in 2000.
Senior Norwich Union executives were to have participated in the Norwich Union Executive Share Plan (ESP) which that company proposed to establish in 2000, subject to the approval of its shareholders. Under the Plan, participants would have received an award of shares up to a value of 100% of their basic salaries and the award would have vested subject to performance conditions being met by the company.
As a result of the Merger, the grants under the proposed ESP were not made and, to compensate for this, an award was made in September 2000 under the LTIP described above, to those former Norwich Union employees who would have participated in the ESP. The participation of Mike Biggs, Richard Harvey and Philip Scott, the former Norwich Union directors, in this award is conditional upon the approval of the LTIP by shareholders at the forthcoming Annual General Meeting.
The Company does not operate any other long-term incentive arrangements in which executive directors participate.
The Commercial Union Long-Term Incentive Plan introduced by the Company in 1997 has been discontinued, although some entitlements granted under the Plan remain outstanding. All the Norwich Union incentive plans terminated upon the Merger.
The remuneration of executive directors includes company contributions into the Group’s defined benefits pension scheme. All the executive directors are members of either the CGU Staff Pension Scheme, or the Norwich Union Group Pensions and Life Insurance Non-Contributory Plan (1971), on a non-contributory basis.
As reported last year, an Integration Incentive Plan was introduced in September 1998 in connection with the merger of Commercial Union and General Accident which was approved by shareholders at the Company’s Annual General Meeting in 1999. In connection with that merger, the stretched savings target, which the Plan was set up to achieve, has been exceeded and accordingly the awards granted under the Plan will vest in February 2001. Details are set out on page 45.
In addition to focusing the senior executives on achieving both performance and savings targets, the CGNU Plan is aimed at retaining key executives during the integration period.
In January 2001, it was reported that Patrick Snowball will join the Board on 31 March 2001 as an executive director. He will be granted a contract which includes a 12 month notice period.
The Company’s articles of association provide that the remuneration paid to the non-executive directors shall be determined by the Board within the limits set by shareholders. At last year’s Annual General Meeting, this limit was set at £750,000. Non-executive directors do not have service contracts with the Company.
Non-executive directors receive a basic annual fee in respect of their Board and Board Committee duties, with a further fee being paid to those directors (other than the Chairman and Deputy Chairman) who have the additional responsibilities of chairing the meetings of the Board Committees. These fees are reviewed, but not necessarily increased, annually and are set by the Board to attract individuals with a broad range of skills and experience appropriate for a major international company.
The directors’ remuneration report regarding the Group’s remuneration policy for its directors and senior executives is presented on pages 40 to 43. The aggregate amount of emoluments paid to directors in 2000 was £5.2 million (1999: £4.8 million).
Notes 1. Richard Harvey, Mike Biggs and Philip Scott were appointed directors of the Company on 30 May 2000 and the figures disclosed for these directors include remuneration (salary and benefits) of £232,000, £148,000 and £142,000 respectively paid by Norwich Union prior to that date. Peter Ward retired as a director on 30 May 2000 and from service on 30 June 2000.
Peter Foster 34,789 Bob Scott 59,299 Philip Twyman 34,789 Tony Wyand 41,792
Peter Ward received 37,838 shares upon leaving service, the performance condition having been met at that time.
7.Consequent upon the Scheme of Arrangement which gave effect to the Merger between the Company and Norwich Union, awards made under the Norwich Union Long-Term Incentive Plan vested in full, and awards granted under the Norwich Union Restricted Share Plan (which were subject to the attainment of conditions based on Norwich Union’s performance) vested as to 45% in relation to awards granted in 1998 (but not otherwise). As a result, the former Norwich Union directors received Norwich Union shares (which, under the terms of the said Scheme, were exchanged for shares in the Company at the rate of 48 CGNU shares for every 100 shares in Norwich Union plc) as follows: Number
Mike Biggs 24,280 Richard Harvey 34,303 Philip Scott 25,890 8. The mid-market price of an ordinary share in the Company at 29 December 2000, being the last day in 2000 upon which shares were traded, was 1082 pence.
Details of the directors who held executive office for any part of the financial year, and hold or held options to subscribe for ordinary shares of the Company under the Executive Share Option Scheme, Savings Related Share Option Scheme, Deferred Bonus Plan, or have acquired a contingent interest in shares under the Integration Incentive Plan, Deferred Bonus Plan or Long-Term Incentive Plans are given in the tables overleaf.
At Options Options At Weighted 1 January granted exercised 31 December average 2000 during year during year 2000 exercise price Number Number Number Number p
Mike Biggs – Savings related options 3,185 – – 3,185 541.6
– Bonus Plan options 3,824 – – 3,824 966.5 Richard Harvey – Savings related options 3,185 – – 3,185 541.6 Bob Scott – Executive options 410,386 ** 153,876 256,510 732.4 – Savings related options 3,694 – – 3,694 466.7 – Bonus Plan options 6,518 ** – 6,518 966.5 Philip Scott – Savings related options 3,185 – – 3,185 541.6 Philip Twyman – Executive options 149,324 41,666 – 190,990 810.3 – Savings related options 2,162 – – 2,162 797.6
– Savings related options 2,162 – – 2,162 797.6 – Bonus Plan options 4,593 – – 4,593 966.5 * At date of ceasing to be a director – 30 May 2000. ** Not eligible to participate due to the proximity of retirement dates.
3. During the year, Bob Scott and Peter Foster made gains of £830,062 and £625,945 respectively upon the exercise of options. The gains have been calculated as the difference between the mid-market price of a share on the date of exercise and the price at which the shares were acquired.
At 31 December At 1 January At 31 December At 1 January
Bob Scott 6,518 6,518 – – Philip Twyman 8,083 3,824 – – Peter Ward – – 5,394* 26,566 *At date of ceasing to be a director – 30 May 2000.
The emoluments paid to the non-executive directors during the year were: £’000 £’000
2. No non-executive director accrued benefits under a defined benefit or defined contribution pension scheme during the year.
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 2000 and of the Group’s loss and cash flows for the year then ended and have been properly prepared in accordance with the Companies Act 1985.
We have audited the accounts on pages 50 to 97 which have been prepared on the basis of the accounting policies set out on pages 50 to 52.
We review whether the corporate governance statement on page 39 reflects the Company’s compliance with the seven provisions of the Combined Code specified for our review by the Listing Rules, and we report if it does not. We are not required to consider whether the Board’s statements on internal control cover all risks and controls, or form an opinion on the effectiveness of either the Company’s corporate governance procedures or its risk and control procedures.
The consolidated accounts have been prepared in accordance with section 255A of, and the special provisions relating to insurance companies of Schedule 9A to, the Companies Act 1985 and with the Statement of Recommended Practice issued by the Association of British Insurers (the “ABI SORP”). The accounting policies adopted reflect United Kingdom financial reporting standards and statements of standard accounting practice applicable at 31 December 2000, as considered appropriate for an insurance company. The balance sheet of the Company has been prepared in accordance with section 226 of, and Schedule 4 to, the Companies Act 1985.
The profit and loss account for the year reflects all income, expenditure, and investment gains and losses, except certain items which are taken directly to reserves after taxation. The items taken directly to reserves include movements in the value of internally generated in-force long-term business and exchange gains and losses on the net investment in foreign enterprises (except for certain items dealt with in the fund for future appropriations).
The Group operates defined-benefit pension schemes with contributions made on a going concern basis, as recommended by actuaries which, together with a money purchase plan in the United Kingdom and defined contribution arrangements in France, cover the majority of employees. 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.
Computer software acquired under a finance lease is capitalised and depreciated over the period of the lease. All tangible assets are tested for impairment where events or changes in circumstances indicate that the carrying amount may not be recoverable. Impairment losses are included within the cumulative depreciation amounts disclosed.
The valuation of long-term business included in the Group’s balance sheet comprises two elements: the net assets of the long-term business operations, stated in accordance with United Kingdom accounting principles; and an additional asset, called the additional value of in-force long-term business, which is shown separately and represents the difference between the total embedded value of the long-term operations and their net assets included in these accounts.
Movements in the additional value of internally-generated inforce long-term business are taken to the revaluation reserve.
The embedded value is carried at the directors’valuation, having regard to advice from consulting actuaries. The embedded value is the total of the assets of the long-term operations and the present value, at risk discount rates, of the projected releases to shareholders arising from the business in force, less a charge for the cost of capital supporting the solvency requirements of the business. This cost of capital is the difference between the nominal value of required solvency capital and the present value, at risk discount rates, of the projected release of this capital and investment earnings on the capital. The assets of shareholders and policyholders that back the long-term business are managed on a unified basis.
The results of all material subsidiary undertakings are consolidated using audited accounts prepared to 31 December, either from 1 January or the effective date of acquisition. A number of overseas subsidiary undertakings, which do not represent a material part of the Group’s income or assets, have not been consolidated but have been treated as investments and included within other participating interests. In the Parent Company balance sheet, subsidiary undertakings are stated at current value which, for this purpose, is net asset value.
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 taxation of associated undertakings is shown separately in the non-technical account, except where associated undertakings are held by the longterm businesses, in which case the profit is included 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 included within other participating interests.
Borrowings issued at a discount are included in the consolidated balance sheet at their proceeds, net of 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 borrowing.
The results of foreign enterprises are translated into sterling at average exchange rates while their assets and liabilities are translated at year end rates. The resulting exchange differences arising within long-term businesses are included within the long-term business technical account and form part of the transfer to the fund for future appropriations, while those arising within other businesses are taken directly to reserves.
Restated am £m £m 24,902 Gross premiums written – continuing operations (6a) 15,190 13,799 (561) Outward reinsurance premiums (342) (329)
24,341 Written and earned premiums, net of reinsurance (B & 5a) 14,848 13,470
(17,362) Changes in other technical provisions, net of reinsurance (10,591) (12,623)
(3,144) Net operating expenses (9a) (1,918) (1,689) (298) Investment expenses and charges (7a) (182) (186) (38) Other technical charges – net of reinsurance (24a) (23) (15)
8,215 Transfers from/(to) the fund for future appropriations (Q) 5,011 (4,964)
Balance on the technical account – long-term business 1,115 continuing operations (G) 679 806 1,115 Balance on the technical account – long-term business 679 806 Taxation credit attributable to balance on the long-term business
Restated am £m £m 17,098 Gross premiums written – ongoing business 10,430 9,442 5,133 – business to be discontinued (2a) 3,131 2,828 22,741 Gross premiums written (6b) 13,872 12,668 (1,610) Outward reinsurance premiums (982) (1,039)
Restated am £m £m 1,115 Balance on long-term business technical account 679 806 Taxation credit attributable to balance on the long-term business 1,728 Pre-tax profit from long-term business (5b) 1,053 1,146
Allocated investment return transferred from the long-term business 3 technical account (F) 2 29
(418) Tax on (loss)/profit on ordinary activities (T & 14a) (255) (382)
Earnings per share Operating profit before amortisation of goodwill, amortisation of acquired additional value of in-force long-term business and exceptional items, after taxation, attributable to equity shareholders in respect 46.4c of ongoing business (16a) 28.3p 39.2p (126.2)c (Loss)/profit attributable to equity shareholders (16a) (77.0)p 44.8p (126.1)c (Loss)/profit attributable to equity shareholders – diluted (16b) (76.9)p 44.7p
Reconciliation of Group operating profit to profit on ordinary activities before taxation For the year ended 31 December 2000
Operating (loss)/profit before tax based on longer-term investment return after amortisation of goodwill, amortisation of acquired additional value
Reconciliation of movements in consolidated shareholders’ funds For the year ended 31 December 2000
Debtors 6,784 Debtors arising out of direct insurance operations (25) 4,274 3,923 1,265 Debtors arising out of reinsurance operations 797 634 51 Loan to associated undertaking 32 –
Other assets 3,092 Cash at bank and in hand 1,948 1,248
Prepayments and accrued income 2,260 Accrued interest and rent 1,424 1,350 4,533 Deferred acquisition costs (D) 2,856 2,698 1,273 Other prepayments and accrued income (29) 802 472
Total capital and reserves: Other liabilities 22,784 Fund for future appropriations (Q) 14,354 19,314
General business and other borrowings 627 Amounts due to credit institutions (40c) 395 558 9,628 Other creditors including taxation and social security (41) 6,066 6,211 44 Loans from associated undertakings 28 11 1,975 Accruals and deferred income (42) 1,244 735 284,286 Total other liabilities 179,101 166,927
The accounting policies (identified alphabetically) on pages 50 to 52 and notes (identified numerically) on pages 62 to 97 are an integral part of these accounts. The auditors’ report is on page 49.
Operating activities Net cash inflow from operating activities, excluding exceptional items and merger transaction costs (44a) 738 857 Exceptional items and merger transaction costs paid (251) (223)
Acquisitions and disposals Net acquisitions of subsidiary and associated undertakings (44b) (277) (64)
Financing activities Issue of share capital (44c) 54 31 Net drawdown of loans (44c) 439 397
Cash flows were invested as follows: Increase in cash holdings (44d) 119 – Net portfolio investment Purchases of investments 12,824 15,758 Sales of investments (14,365) (16,056)
Fixed assets Shares in subsidiary undertakings (M & 18e) 13,655 10,224 Current assets Amounts owed by subsidiary undertakings 3,426 2,118 Other assets 76 46
Creditors: Amounts falling due within one year Amounts owed to subsidiary undertakings (1,434) (1,744) Proposed ordinary dividend (535) (311) Other creditors (25) (30)
Represented by: Capital and reserves Ordinary share capital (31a) 563 328 Preference share capital (32a) 200 200
(a) On 21 February 2000, CGU plc and Norwich Union plc announced plans to merge their respective businesses to form CGNU plc. The merger was effected by way of a scheme of arrangement of Norwich Union plc under section 425 of the Companies Act 1985. Under the terms of the scheme, Norwich Union shareholders had their existing shares replaced by new shares in CGNU plc. CGU shareholders’ rights were unaffected. The merger became effective on 30 May 2000 and on that date 931 million new shares in CGNU plc, with a total market value of £9,528 million, were issued to Norwich Union plc shareholders in return for Norwich Union plc shares in a ratio of 48 CGNU plc shares for every 100 Norwich Union plc shares.
63 CGNU plc 1 – Merger of CGU plc and Norwich Union plc continued
Investment sales 1,001 577 – 1,578 Health premiums 225 177 – 402 General insurance premiums 8,621 2,606 – 11,227
Premium income after reinsurance and investment sales 18,673 8,004 – 26,677
Operating profit before tax 588 712 (19) 1,281 Short-term fluctuation in investment returns 239 83 (72) 250 Change in the equalisation provision (28) (27) – (55) Net loss arising on the sale of subsidiary undertakings (8) – – (8)
The results of all other operations are entitled ‘Ongoing business’. They do not incorporate the use of the expected proceeds from businesses sold or sales of businesses to be completed.
(b) The Group’s consolidated profit and loss account incorporates the following financial information in respect of the UK London Market and US general insurance businesses: Abridged statement of operating and investment gains
Change in the provision for unearned premiums (16) 64 (14) (6)
Earned premiums, net of reinsurance 176 297 3,007 2,615 Allocated investment return transferred from the non-technical account 55 69 417 380 Claims incurred, net of reinsurance (173) (256) (3,025) (1,973)
Amortisation of goodwill – – (3) (3) Exceptional items – – – (32) Short-term fluctuation in investment returns (10) (10) 66 (237)
(Loss)/profit on ordinary activities before tax (14) 15 (529) (141) Tax on (loss)/profit on ordinary activities 1 8 110 34
Financial Reporting Standard 16 ‘Current Tax’ was published by the Accounting Standards Board on 16 December 1999, following changes in the United Kingdom tax system. The principal requirement of this standard is that dividends should be recognised at the amount receivable without any attributable tax credit.
In presenting the results for the year to 31 December 2000, the CGNU plc Group has complied with FRS16. Norwich Union plc adopted FRS16 in its 1999 accounts. Accordingly, dividend income within the comparative results for the year to 31 December 1999 for CGU plc only has been restated to a net of tax basis.
UITF abstract 14 ‘Disclosure of Changes in Accounting Policy’ requires the effect of changes in accounting policy to be disclosed in relation to both the reported results in 2000 and 1999. The change in accounting policy has a purely presentational effect and does not alter the profit of the Group after taxation. Accordingly, shareholders’ reserves at 31 December 2000 and 31 December 1999 remain at the same level before and after the change in accounting for dividend income. The impact on (loss)/profit on ordinary activities before tax is a loss of £32 million (1999: £19 million).
Canadian dollar 2.25 2.40 2.24 2.34 French franc 10.76 9.99 10.44 10.55 Netherlands guilder 3.62 3.35 3.51 3.54 United States dollar 1.51 1.62 1.49 1.61
(i) Long-term business premium income and sales of investment products by geographical origin
Premiums before reinsurance Premiums after reinsurance Sales of investment products £m £m £m £m £m £m
Total premiums written in Europe (excluding UK) include £29 million (1999: £654 million) relating to transfers from existing contracts.
Europe (excluding UK) 2,849 2,211 2,595 2,031 International 2,103 2,083 1,907 1,848 Group reinsurance retentions – – 34 84
United States (to be discontinued) 3,131 2,828 3,021 2,621 London Market (discontinued) 311 398 192 233
United States (to be discontinued) (967) (204) (550) 176 London Market (discontinued) (59) (44) (4) 25
United Kingdom 912 1,094 525 958 Europe (excluding UK) 411 411 312 381 International 249 195 189 142 Group reinsurance retentions 2 1 2 1
Goodwill amortisation (92) (34) Amortisation of acquired additional value of in-force (29) (22) Exceptional items (425) (163)
General business Long-term business and associated undertakings Total £m £m £m £m £m £m
United Kingdom 1,699 1,508 2,282 3,379 3,981 4,887 Europe (excluding UK) 2,123 2,148 2,115 2,222 4,238 4,370 International 428 469 3,939 4,195 4,367 4,664
(a) The analysis of life and savings business premiums written before reinsurance is: New business – single premiums New business – regular premiums Total premiums written £m £m £m £m £m £m
Life: United Kingdom 3,941 3,046 118 109 5,423 4,361 Europe (excluding UK) 2,709 2,723 239 261 4,422 4,698
Profit from associated undertakings – – 1 10 Income from land and buildings 542 491 57 59 Income from other investments 5,277 5,249 1,364 1,319
Expenses and charges, including allocated interest charges (182) (186) (126) (110) Unallocated interest charges: Intra-group – – (210) (143)
The principal assumptions underlying the calculation of the longer-term investment return are: Longer-term rates of return Longer-term rates of return Equities Properties
(c) The actual return on investments, before deducting investment management expenses and charges, is compared below with the aggregate longer-term return over a three year period.
Excess of actual returns over longer-term returns 1,292 2,104 *Figures are given for non-with-profits business only, where a longer-term rate of return is used.
Policyholder bonuses allocated in anticipation of a bonus declaration included in claims paid 977 860
Acquisition costs 1,429 1,311 3,125 3,024 Changes in deferred acquisition costs (96) (66) (82) (8) Administrative expenses
In 2000, long-term business ‘other’ expenses include costs of £11 million (1999: £9 million) and general business ‘other’ expenses include costs of £6 million (1999: £7 million) relating to projects to prepare for the introduction of the euro.
Charged to corporate costs – – – – 50 – 50 –
Integration incentive plans: Charged to corporate costs – – – – – 31 – 31
Other integration costs in 1999 relate to the integration of the long-term business of Norwich Union’s Spanish operation with its acquisition of British Life.
The 1999 figures for integration incentive plans, which related to the integration of the former Commercial Union and General Accident businesses, comprised the costs of incentive plans payable to staff in certain business units and the costs of cash and share awards to senior management of the Group, which were conditional upon the performance of the Group against predefined targets.
Integration incentive plans (9b) – 31 Integration costs (9b) 50 –
The average number of persons employed by the Group during the year was: United Kingdom 35,641 34,076 Europe (excluding UK) 17,671 13,639
Non-audit fees paid to Ernst & Young and its associates during the year were £4.7 million (1999: £2.4 million).
Non-audit fees paid to PricewaterhouseCoopers and its associates during the year were £38.3 million (1999: £9.2 million).
The non-audit fees include consultancy work related to development of the UK wealth management service, and work relating to merger activity and the integration of Norwich Union plc and CGU plc, the majority of which is subject to competitive tender.
Tax charged in the non-technical account comprises: UK corporation tax (65) 22 Advance corporation tax written back (46) (50) Overseas taxation 46 62 Associated undertakings 3 3 Deferred taxation (70) 10 Prior year adjustments 13 (5) Tax attributable to balance on long-term business technical account 374 340
Notes to the accounts continued 72 CGNU plc 14 – Taxation continued
The provision for deferred taxation, included within the provisions for other risks and charges, comprises: Long-term business Non-long-term business
Unrealised gains on investments 187 253 210 223 Provisions and other timing differences 114 103 40 13
Included within other prepayments and accrued income in 1999 of £472 million in the consolidated balance sheet was a deferred tax asset of £31 million. This asset arose mainly from timing differences within the group of companies headed by The GAN Company of Canada Limited, which was acquired by the Group in 1999. For 2000, the balance of this asset has been netted against the larger deferred tax liability of the Canadian group.
Ordinary dividends in the profit and loss account comprise: *Based on the weighted average dividends per share of CGU plc and Norwich Union plc. The 1999 interim and final dividends per share for CGU plc were 14.25 pence and 23.75 pence respectively.
Net of tax, Net of tax, minorities and minorities and preference Per share Before tax preference Per share Before tax dividends 2000 Restated dividends 1999 £m £m p £m £m p
Operating profit – ongoing business before amortisation of goodwill, amortisation of acquired additional value of in-force long-term business and exceptional items 1,028 636 28.3 1,299 877 39.2
Amortisation of acquired additional value of in-force long-term business (29) (22) (1.0) (22) (15) (0.7)
(Loss)/profit attributable to equity shareholders (1,406) (1,730) (77.0) 1,468 1,003 44.8
Earnings per share has been calculated based on the operating profit from ongoing business before amortisation of goodwill, amortisation of acquired additional value of in-force long-term business and exceptional items, after taxation, attributable to equity shareholders, as well as on the (loss)/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 2,247 million (1999: 2,237 million) ordinary shares in issue.
The actual number of shares in issue at 31 December 2000 was 2,251 million (1999: 2,242 million).
(Loss)/profit attributable to equity shareholders (1,730) 2,247 (77.0) 1,003 2,237 44.8
Notes to the accounts continued 74 CGNU plc 17 – Consolidated balance sheet segmentation
Assets held to cover linked liabilities 27,255 24,626 – – – – 27,255 24,626
Technical provision for linked liabilities 703 1,738 – – – – 703 1,738
Debtors arising out of reinsurance operations 100 66 697 568 – – 797 634
Other assets: Cash at bank and in hand 1,208 668 516 576 224 4 1,948 1,248
‘Other’ comprises fund management, stockbroking and banking activities, and unallocated external and intra-group borrowings. The negative figures for other debtors included in this column of £1,537 million (1999: £628 million) reflect balances due to and from different business segments, which are eliminated on consolidation.
Segmented liabilities excluding capital and reserves comprise: General business and Long-term business associated undertakings Other Total £m £m £m £m £m £m £m £m
Total liabilities, excluding capital and reserves 144,301 136,673 29,491 25,513 5,309 4,741 179,101 166,927
Notes to the accounts continued 76 CGNU plc 18 – Subsidiary undertakings
(a) During the year ended 31 December 2000, the Group acquired the following companies: Country of incorporation Percentage acquired Date of acquisition
On 18 January 2000, the Group acquired the remaining 73.7% of the share capital of Hibernian Group plc, formerly an associate of CGU plc, for a cash consideration of £254 million, giving rise to goodwill of £122 million. Hibernian Group plc transacts general insurance in the Republic of Ireland and the United Kingdom, life insurance business in the Republic of Ireland and international reinsurance. The transaction was accounted for as an acquisition. Compliance with Financial Reporting Standard 2 ‘Accounting for subsidiary undertakings’ requires a departure from the Companies Act 1985 relating to the calculation of goodwill on Hibernian. In the opinion of the directors, in order to give a true and fair view, goodwill has to take account of the share of net assets purchased when Hibernian became an associate. If the provisions of the Companies Act had been followed, goodwill would have been £47 million lower.
On 31 July 2000, the Group entered into a bancassurance partnership with Bancaja, a leading savings bank in Spain. As part of this alliance, the Group purchased 50% of the issued share capital of Aseval, Bancaja’s life insurance subsidiary, for a cash consideration of £205 million (including transaction costs), with further amounts payable if Aseval achieves certain performance targets. The Group’s share of Aseval’s embedded value amounted to £47 million, giving rise to goodwill of £193 million after taking into account the estimated value of the deferred consideration. The transaction has been accounted for as an acquisition and, in view of the management control exercised by the Group, the results of Aseval have been consolidated with those of other Group operations from the date of the purchase.
The total consideration comprised: Cash (including contingent cash amounts) 487 Attributable acquisition costs 7
On 31 July 2000, the Group disposed of its wholly-owned German general insurance business, General AccidentVersicherungs AG. The cash consideration for the transaction was £34 million which incorporates adjustments following the completion accounts process. Net assets at the date of the disposal amounted to £27 million. Under the terms of the sale, the Group has retained some exposure to certain types of run-off losses and is currently in the process of securing reinsurance for the residual risk. A loss on disposal of £43 million has been recorded after allowing for transaction costs and the likely cost of reinsurance and after writing back £31 million of goodwill previously written off against reserves.
During July 2000, the Group disposed of its 50.1% holding of First Australian Property Group Holdings Pty Limited (‘Paladin’) for a consideration of £16 million. The net assets disposed of, comprising unamortised goodwill, amounted to £12 million, generating a profit on disposal of £4 million.
On 29 November 2000, the Group disposed of its wholly-owned Polish businesses, PTE Norwich Union S.A. and Norwich Union Towarzystwo Ubezpieczen na Zycie S.A., for a cash consideration of £133 million, subject to any adjustments arising from the completion accounts process. Net assets at disposal amounted to £57 million, resulting in a profit on disposal of £65 million, after allowing for transaction costs.
This agreement brings to an end the Group’s involvement in the London Market. Reinsurance has also been purchased from the Berkshire Hathaway Group to secure protection against any adverse impact of the run-off of claims reserves held by CGNU in respect of business written prior to exit, both in the respect of historic business through the ILU and other London Market operations, and, more recently, Lloyd’s. This provides cover of £1 billion in excess of CGNU’s claims reserves of £1.2 billion. The charge for withdrawal from London Market operations of £448 million includes the cost of the associated reinsurance protection.
On 25 September 2000, the Group announced that it had entered into an agreement to sell its US general insurance operations for US$2,063 million. In addition, an inter-company loan of US$1,100 million will be repaid to the Group. The settlement will comprise cash, the transfer of businesses to be retained and subordinated loan notes of US$260 million. This sale is subject to the satisfaction of certain conditions, including US regulatory approval, and is expected to be completed later in 2001.
The after-tax provision for the loss on the sale, including pre-closing adjustments of US$200 million (£134 million), recorded in the Group’s consolidated profit and loss account at 31 December 2000 is US$1,477 million or £989 million retranslated at the exchange rate prevailing at 31 December 2000.
Less: Net assets to which proceeds apply (3,092) (4,618) Less: Transaction costs (25) (38)
Provision for loss on sale before tax and goodwill write back (1,000) (1,493) Goodwill write back (70) (105)
(f) Principal subsidiary undertakings at 31 December 2000 are listed on page 107.
Other movements include adjustments to the fair value of acquisitions in 1999.
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 R on page 52, goodwill arising in 1997 and prior years was charged directly to reserves.
Freeholds 6,041 5,381 787 720 6,828 6,101 Long leaseholds – over 50 years 1,933 1,684 29 39 1,962 1,723 Short leaseholds – under 50 years 32 19 4 4 36 23
The cost of land and buildings at 31 December 2000 was £7,299 million (1999: £6,346 million). The carrying value of land and buildings occupied by the Group for its own activities was £580 million (1999: £621 million).
Investments in associated undertakings (21b) 979 920 376 295 Other participating interests 13 26 58 54
None of the other participating interests is listed on a recognised investment exchange.
Movements in the Group’s investments in associated undertakings comprise: Long-term Non-long-term business business Total £m £m £m
Movements in investments in associated undertakings 619 (16) 603 Balance at 1 January Goodwill (21c) – – – Share of net assets 108 268 376
Compania de Seguros La Republica SA Ordinary shares – no par value 31.8% Chile Global Aerospace Underwriting Managers Limited Ordinary £1 shares 50% England Norwich Winterthur Holdings Limited Ordinary £1 shares 48.5% England RBS Life Investments Limited Ordinary £1 shares 50% Scotland Société Foncière Lyonnaise Ordinary FF 50 shares 31.5% France The British Aviation Insurance Company Limited Ordinary £1 shares 38.1% England
(a) These financial investments comprise: Long-term Non-long-term Total Long-term Non-long-term Total business business 2000 business business 1999 £m £m £m £m £m £m
– – – – – – Other loans: Loans secured on policies 957 – 957 902 – 902 Other loans 2,209 292 2,501 1,922 248 2,170
Notes to the accounts continued 82 CGNU plc 22 – Other financial investments continued
(e) Included within other financial investments are shareholdings held on a long-term basis in the issued share capital of Société Générale, a banking company incorporated in France, Münchener Rückversicherungs-Gesellschaft, a reinsurance company incorporated in Germany and The Royal Bank of Scotland Group, a banking company incorporated in Scotland. The market values of these holdings at 31 December 2000 were £1,188 million, £1,510 million and £1,391 million respectively (1999: £1,029 million, £1,385 million and £123 million respectively) and represented 6.8%, 3.6% and 3.3% (1999: 6.9%, 5.0% and 1.3%) of the respective issued share capitals of these companies. Of these holdings, the long-term business operations owned £359 million (1999: £110 million) of the Société Générale shares, £255 million (1999: £416 million) of the Münchener Rückversicherungs-Gesellschaft shares and £1,357 million (1999: £117 million) of The Royal Bank of Scotland Group shares.
On 23 September 2000, the Group purchased a foreign currency option to hedge $1 billion of the expected proceeds from the sale of the US general insurance business. The premium cost of this option was £18.9 million. At the year end, the option was showing a profit of £31.7 million and it was closed out on 22 January 2001 at a profit of £13.2 million.
(g) The Group has entered into stocklending arrangements in the United Kingdom and overseas during the year in accordance with established market conventions. In the United Kingdom, investments are lent to locally-domiciled counter-parties and governed by agreements written under English law. Other investments are specifically deposited under local laws in various countries overseas as security to holders of policies issued there.
Included within other financial investments are £191 million (1999: £345 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).
DLNO and its subsidiary undertakings are not obliged to support any losses that may be suffered by the fixed rate noteholders and do not intend to provide such support. Additionally, the notes were issued on the basis that noteholders are only entitled to obtain payment, of both principal and interest, to the extent Arena’s respective available resources, including funds due from customers in respect of the securitised loans, are sufficient and that noteholders have no recourse whatever to DLNO.
Foreign exchange rate movements 14 (8) 6 In-force long-term business acquired in subsidiaries (18b) – 102 102 In-force long-term business acquired in associates (21b) – 343 343 Amortisation charge for the year – (29) (29) Other movements during the year 95 6 101 Movements arising in the year 109 414 523
Balance at 31 December Included in investments in Group undertakings – 343 343
(b) The reserve arising from the additional value of in-force long-term business comprises: Movement 2000 1999 in the year £m £m £m
Additional value of in-force long-term business at 31 December 6,948 6,425 523 Amount attributable to minority interests (111) (43) (68) Pre-acquisition value of in-force long-term business, net of minority interests (838) (468) (370)
(c) The embedded value of the long-term operations comprises: Total assets of the long-term business segment 148,551 140,798 Total liabilities of the long-term business segment (144,301) (136,673)
Less: Net liabilities/(assets) of other life and savings operations 36 (32)
Amounts owed by policyholders 2,330 2,103 Amounts owed by intermediaries 1,944 1,820
Net book value at 31 December 2000 47 128 181 356
Distributed in year (396,265) – – – Charge for the year – – – (18)
These shares are owned by an employee share trust to satisfy awards under Integration Incentive Plans, Deferred Bonus Plans, Executive Share Option Plans and the CGNU Long Term Incentive Plan. A charge to profit has been made in respect of the exercise of options and vesting of awards during the year. Further details of the shares held can be found in note 31b. Further details of the features of the plans can be found in the Remuneration report on pages 40 to 43.
(a) Banking and stockbroking assets, excluding intra-group balances, comprise: Loans and advances to banks 275 749 Loans and advances to customers 1,216 843
Stockbroking clients and counterparties 38 35 Short-term deposits and cash 17 30 Other banking and stockbroking assets 133 163
(a) The authorised share capital of the Company at 31 December 2000 was: 3,000,000,000 (1999: 1,907,000,000) ordinary shares of 25 pence each 750 477
The allotted, called up and fully paid share capital of the Company at 31 December 2000 was: 2,251,102,449 (1999: 1,312,541,748) ordinary shares of 25 pence each 563 328
(b) At 31 December 2000, 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
Hibernian Savings Related Option price Number of shares Normally Option price Number of shares Normally Share Option Scheme Irish p exercisable Irish p exercisable
CGNU Executive Share Option Scheme Option price Number of shares Normally Option price Number of shares Normally (Delta Lloyd) p exercisable p exercisable
Option price Number of shares Normally Option price Number of shares Normally CGU plc Deferred Bonus Plan p exercisable p exercisable
At 31 December 2000, restricted awards over a total of 1,365,123 ordinary shares were outstanding under the CGU Integration Incentive Plan and 1,120,417 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 28. As at 31 December 2000, the trust held 2,413,220 shares with an aggregate nominal value of £603,305 and their market value at the year end was £26 million. The dividends on these shares have not been waived by the trust. Further details of the Plan can be found in the Remuneration report on page 42.
(c) During 2000, a total of 938,560,701 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 to members of Norwich Union plc 930,607,903 232 – Shares issued under the Group’s Employee and Executive Share Option Schemes 7,952,798 3 51
The fair value of these shares at 31 December 2000 was £234 million (1999: £267 million).
At 1 January 2000 As previously reported – CGU plc 3,341 417 4,277 8,035
Merger adjustments arising from alignment of accounting policies 101 1,769 (34) 1,836
Profit for the year attributable to equity shareholders, including dividends paid or proposed by subsidiary undertakings – – 7,494 7,494
Profit for the year – – 6,622 6,622 Foreign exchange rate movements – – 6 6 Unrealised (losses)/gains (2,861) – 13 (2,848)
Annuity in payment (non profit) General annuity 4 to 5.6 IMA80/IFA80 or IMA92/IFA92
Notes to the accounts continued 90 CGNU plc 37 – Provisions for outstanding claims
(a) Claims incurred in the general business technical account include deficits amounting to £737 million arising on claims reported in previous years. These have arisen principally in relation to certain long-tail liability business which is no longer written. The equivalent figure for surpluses and deficits in respect of prior year claims in 1999 was not material.
Netherlands Permanent health and injury 4% 4% 8 years 8 years Belgium Workers’ compensation 4% 4% 19 years 20 years United States Workers’ compensation 7% 7% 7 years 9 years United States and
Net of reinsurers’ share, the outstanding claims provisions before discounting were £14,470 million (1999: £14,227 million). The period of time which will elapse before the liabilities are settled has been estimated by modelling the settlement patterns of the underlying claims and related reinsurance recoveries. The unwinding of the discount in respect of the United States and London Market business no longer written amounted to £24 million (1999: £33 million).
Movements in provisions for other risks and charges were: Pensions and Deferred taxation Provision for similar obligations (note 14c) integration costs Other Total £m £m £m £m £m
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. The provision is expected to be fully utilised by December 2001.‘Other’ provisions comprise the provision for loss on sale of the US operations to be discontinued, as well as many small provisions throughout the Group for such obligations as costs of litigation and staff entitlements.
40 – Debenture loans, amounts due to credit institutions and commercial paper
(b) Debenture loans comprise: Long-term business Other £m £m £m £m 9.125% US$100 million subordinated debentures 2026 – – 61 62 1.5% FF2.8 billion exchangeable bonds 2003 – – 304 264 2.5% subordinated perpetual loans – – 108 107 Institutional borrowings 2000/2003 (average rate 8%) 16 18 – – Institutional borrowings 2000/2001 (average rate 3%) – – 12 21
Repayable as follows: One year or less 1 4 73 10 Between one and two years 6 6 100 73 Between two and five years 9 8 462 363 After five years – – 258 411
The interest charge for the year on the above loans was: 1 2 63 50
Notes to the accounts continued 92 CGNU plc 40 – Debenture loans, amounts due to credit institutions and commercial paper continued
Repayable as follows: One year or less 11 201 201 66 Between one and two years – – – 31 Between two and five years – – 150 213 After five years – – 33 47
The interest charge for the year on the above was: 13 12 27 16
The interest charge for the year on the above borrowings was: 73 34
(g) After taking into account the various interest rate and currency swaps entered into by the Group, the currency and interest rate exposure of the general business and other borrowings of the Group was: Floating rate borrowings Fixed rate borrowings Total £m £m £m £m £m £m
(h) The Group has the following undrawn committed central borrowing facilities available to it, of which £1,000 million (1999: £544 million) is used to support the commercial paper programme: £m £m
(j) The General Accident preference shares, included in minority interests at their par value of £250 million together with an £8 million accrual for dividends, are listed on the London Stock Exchange. Their fair value at 31 December 2000 was £297 million (1999: £330 million), based on their quoted market price.
Banking and stockbroking liabilities (30b) 1,899 2,012 Proposed final ordinary dividend (15) 535 495 United Kingdom and overseas taxation 420 524 Bank overdrafts 500 217
Bank overdrafts arise substantially from unpresented cheques and amount to £281 million (1999: £41 million) in long-term business operations and £219 million (1999: £176 million) in general business and other operations. The ‘other’ totals include the obligation to repay £191 million (1999: £345 million) received under stock repurchase arrangements entered into in the Netherlands.
Notes to the accounts continued 94 CGNU plc 42 – Accruals and deferred income £m £m
Accruals and deferred income 1,244 735 43 – Pension and other post-retirement benefit costs
(b) Post-retirement health care benefits are provided to employees in the United States through a comprehensive medical plan, whereby participants are reimbursed for a proportion of medical expenses. At 31 December 2000, 7,899 (1999: 8,490) current employees and 6,042 (1999: 5,553) retired employees were eligible to receive these benefits.
Since 1 January 1993, the estimated present cost of providing these future benefits has been charged to expenses. The estimated liability at 31 December 1992 of £39 million is being charged over a 20 year period from 1 January 1993 and annual costs incurred after that date are charged as they arise. Tax relief is only available on these costs as payments are made.
(a) The reconciliation of (loss)/profit on ordinary activities to net cash inflow from operating activities is: £m £m £m £m
(Loss)/profit on ordinary activities before taxation (1,406) 1,468 Add back: Exceptional items 425 163
(Loss)/profit on ordinary activities before taxation, excluding exceptional items and merger transaction costs (922) 1,631
Cash consideration for subsidiary undertakings acquired (546) (196) Cash proceeds from disposal of subsidiary undertakings 246 33 Net cash balances acquired with subsidiary undertakings 23 99
Notes to the accounts continued 96 CGNU plc 44 – Cash flow statement continued
Issue of ordinary share capital 54 33 – – Redemption of preference share capital – (2) – – New borrowings drawn down, net of expenses – – 9,673 4,927 Repayment of borrowings – – (9,234) (4,530)
Foreign exchange rate movements – – 49 (86) Loan notes issued to fund acquisition – – – 111 Loans in acquired companies – – 10 71 Amortisation of discounts and other non-cash items – – – (2)
Changes in cash 122 28 Balance at 1 January 483 455
(e) Non-long-term business cash included in the consolidated balance sheet comprised: 2000 1999 Changes in year £m £m £m
Land and buildings 820 763 56 Other participating interests 12 32 (21) Other financial investments 21,788 21,993 (204) Deposits with ceding undertakings 145 110 36 Banking and stockbroking investments and short-term deposits 459 327 132 45 – Contingent liabilities
In the course of conducting insurance business, various companies within the CGNU Group receive general insurance liability claims, and become involved in actual or threatened litigation arising therefrom, including in respect of pollution and other environmental hazards. Amongst these are claims notified in respect of asbestos production and handling in various jurisdictions, including Australia, Canada, South Africa and the United States. Given the significant delays that are experienced in the notification of these claims, the potential number of incidents which they cover and the uncertainties associated with establishing liability and the availability of reinsurance, the ultimate cost cannot be determined with certainty. However, on the basis of current information and having regard to the level of provisions made for general insurance claims, the directors consider that any costs arising are not likely to have a material impact on the financial position of the Group.
The Group is continuing with a review of those past sales of personal pension policies which involved transfers, opt outs and non-joiners from occupational schemes, as required by the Personal Investment Authority and the Financial Services Authority.
The regulators have extended the initial scope of the review so that further sales are to be reviewed within a second phase which began in 1999. A provision of some £225 million (1999: £275 million) has been made to meet the outstanding costs of the extended review, including potential levies payable to the Investors Compensation Scheme. It continues to be the Group’s view that there will be no material effect either on the Group’s ability to meet the expectations of policyholders or on shareholders.
In addition, the Company has guaranteed the overdrafts and borrowings of certain subsidiary and associated undertakings. In the opinion of the directors, no material loss will arise in respect of these guarantees and indemnities.
In carrying on the business of investment, the Group has entered into future commitments, including property development, after 31 December 2000. These amounts are not reflected in the consolidated balance sheet on pages 58 and 59. The Group has in hand a number of property developments which, under contracts already signed, will require expenditure of £51 million (1999: £81 million) for long-term business and £48 million (1999: £8 million) for general business operations.
Operating profit before exceptional items Life assurance (achieved profit basis) United Kingdom 938 837 947 822 Europe (excluding UK) 602 514 444 473 International 29 56 49 87
Life assurance (modified statutory basis) United Kingdom 772 816 726 669 Europe (excluding UK) 382 315 311 226
General insurance United Kingdom (387) (284) (418) (182) Europe (excluding UK) (333) (169) (119) (98) International (69) (109) (99) (31)
Underwriting result before exceptional items (c) (821) (593) (654) (284) Longer-term investment return 1,233 1,052 1,150 1,206
Operating profit on ongoing business before tax, amortisation of goodwill, amortisation of acquired additional value of in-force long-term business and exceptional items 1,028 1,299 1,339 1,614
United States general insurance (1,070) – – – Provision for withdrawal from London Market operations (448) – – – Merger transaction costs (59) – (75) –
(Loss)/profit on ordinary activities before tax (1,406) 1,468 1,609 2,879 Taxation (d) (255) (382) (482) (792) Minorities (52) (66) (40) (94)
Pence per ordinary share Net asset value (e) 597p 690p 662p 595p Market price (London) (e) 1082p 998p 941p 848p Earnings per share (f): Operating profit before amortisation of goodwill, amortisation of acquired additional value of in force long-term business and exceptional items, after taxation, attributable to equity shareholders in respect of ongoing business 28.3p 39.2p 35.5p 32.0p
Summarised consolidated profit and loss account – achieved profit basis For the year to 31 December 2000
Provision for loss on sale for businesses to be discontinued (1,755) – United States general insurance (1,070) –
(735) Loss on withdrawal from London Market operations (448) – (97) Merger transaction costs (59) –
(2,152) (Loss)/profit on ordinary activities before tax (1,312) 2,994 Tax on operating profit – ongoing business before change in risk margin,
(716) amortisation of goodwill and exceptional items (437) (428) 285 Tax on profit on other ordinary activities 174 (425)
Earnings per share Operating profit on an achieved profit basis before change in risk margin, amortisation of goodwill and exceptional items, after taxation, attributable to 65,1c equity shareholders in respect of ongoing business 39.7p 45.4p (121.0)c (Loss)/profit attributable to equity shareholders (73.8)p 91.2p (120.9)c (Loss)/profit attributable to equity shareholders – diluted (73.7)p 90.8p
The results of the Group’s life operations under the modified statutory basis, which is the basis used in the annual statutory accounts, can be found on pages 50 to 97.
Total life achieved profit comprises the following components, the first four of which in aggregate are referred to as life achieved operating profit: • new business contribution written during the year, including value added between the point of sale and end of year; • the profit from existing business equal to: – the expected return on the value of the in-force business at the beginning of the period,
Development costs (20) (24) Expected return on shareholders’ net worth 319 265
Total life achieved profit before tax 1,151 2,693 Attributed tax (375) (819)
New business contributions have been calculated using the same assumptions as those used to determine the embedded values as at the beginning of each year. The effect of solvency margin represents the impact of holding the minimum European Union (EU) solvency margin (or equivalent for non-EU operations) and discounting to present value the projected future releases from the solvency margin to shareholders.
** Life achieved operating profit includes minority interests in 2000 of £42 million (1999: £37 million). This comprises minority interests in France of £6 million (1999: £5 million), Poland £15 million (1999: £16 million), Spain £10 million (1999: £nil), Other Europe £12 million (1999: £16 million) and International £(1) million (1999: £nil).
** 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 with RBS Life Investments Limited (£343 million). Embedded value from business disposed of comprises the Norwich Union Poland life and pensions operations (£57 million).
Future distributable profits will depend on experience in a number of areas such as investment return, discontinuance rates, mortality and administration costs. Using realistic assumptions of future experience, we can project releases to shareholders arising in future years from the business in force and associated minimum statutory solvency margin.
The present value of the projected releases to shareholders is calculated by discounting back to the current time using a risk discount rate. The risk discount rate is a combination of a discount rate to reflect the time value of money and a risk margin to make prudent allowance for the risk that experience in future years may differ from the assumptions.
The calculations are carried out on an after-tax basis and the profits are then grossed up for tax at the full rate of corporation tax for the United Kingdom and at an appropriate effective rate for each of the other countries.
For with-profit funds in the United Kingdom, for the purpose of recognising the value of the estate, it is assumed that terminal bonuses are increased to exhaust all of the free assets over the future lifetime of the in-force with-profit policies.
Other life and savings activities 36 – 36 41 – 41
Total life achieved profit before tax 1,151 46 1,105 2,693 43 2,650
Total life achieved profit after tax 776 29 747 1,874 26 1,848
Principal economic assumptions The principal economic assumptions used are as follows: United Kingdom France
Other assumptions • Current tax legislation and rates have been assumed to continue unaltered, except where changes in future tax rates have been announced.
• Assumed future mortality, morbidity and lapse rates have been derived from an analysis of CGNU’s recent operating experience.
• The value of in-force business does not allow for future premiums under recurring single premium business or non-contractual increments. The value arising therefrom is included in the value of new business, when the premium is received. Department of Social Security (DSS) rebate premiums have been treated as recurring single premiums.
• The value of the in-force business has been determined after allowing for the cost 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 mediumterm 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.
The table below shows the sensitivity to a one percentage point increase in interest rates and in the discount rate for new business contribution and embedded value.
Profits are affected by a change in underlying interest rates. When interest rates change, expected future investment returns will also change and this in turn will affect projected cash flows. A change in interest rates will also result in a change in the discount rate used to calculate the present value of the projected cash flows. The impact of an increase of one percentage point in interest rates incorporates all such changes.
Annual report and accounts 2000 Alternative method of reporting long-term business
Auditors’ report to the directors of CGNU plc on the alternative method of reporting long-term business profits
Our responsibilities, as independent auditors, in relation to the supplementary information are established in the United Kingdom by the Auditing Practices Board and our profession’s ethical guidance. We report to you our opinion as to whether the supplementary information has been properly prepared in accordance with the achieved profits basis. We also report to you if we have not received all the information and explanations we require for our audit of the supplementary information.
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.
We have not audited the comparative figures contained in the supplementary information in respect of the year ended 31 December 1999.
United Kingdom CGNU Life Assurance Limited CGU Bonus Limited CGU Insurance plc CGU International Insurance plc CGU Underwriting Limited Commercial Union Life Assurance Company Limited General Accident plc London & Edinburgh Insurance Group Limited Morley Fund Management Limited Morley Pooled Pensions Limited Morley Properties Limited Northern Assurance Company Limited, The Norwich Union Annuity Limited Norwich Union Healthcare Limited Norwich Union Insurance Limited Norwich Union Investment Management Limited Norwich Union Holdings Limited Norwich Union Life Holdings Limited Norwich Union Life & Pensions Limited Norwich Union Linked Life Assurance Limited Norwich Union Portfolio Services Limited Norwich Union Trust Managers Limited Norwich Union Wealth Management Limited Quilter & Co Ltd (73.7%) (Stockbroking) Sabre Insurance Company Limited Scottish General Insurance Company Limited your-move.co.uk Limited
Australia CGU Insurance Australia Limited and its principal subsidiaries: CGU Insurance Limited Mutual Community General Insurance Pty. Limited (51.0%) NZI Insurance Australia Limited Swann Insurance (Australia) Pty. Limited Norwich Union Life Australia Limited
Malaysia Commercial Union Assurance (Malaysia) Berhad (60.0%) GA Insurance Berhad ( 49.0%)
Turkey Commercial Union Hayat Sigorta AS Commercial Union Sigorta AS (54.9%)
The categories of ordinary shareholders and the ranges and size of shareholding as at 31 December 2000 are set out below: Analysis of shareholders No. of shareholders % No. of shares %
Banks and nominee companies 27,496 2.72 1,689,243,621 75.04 Pension fund managers and insurance companies 160 0.02 76,415,097 3.39
The Government introduced the Individual Savings Account (‘Isa’) on 6 April 1999 to promote long term savings. The Isa replaced the Personal Equity Plan (‘Pep’) and the Tax Exempt Special Savings Account (‘Tessa’).
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 can be obtained from the Company’s Registrar – see contact details below.
Alternative versions of this publication are available on request from the Company’s Registrar. The Company’s Registrar has available a ‘textphone’ (Tel: 0870 600 3950) to enable any shareholders with hearing difficulties to communicate with them.
There are various internet sites within the Group, most of which inter-link with each other to enable quick reference direct to specific sites. The details are listed below: CGNU Group www.cgnu-group.com UK Life, Long-term savings and General insurance www.norwichunion.co.uk Wealth management www.norwichunion.com Estate agency www.your-move.co.uk www.assertahome.com Fund management www.morleyfm.com
Barclays Stockbrokers Tay House 0141 352 3000 Limited 300 Bath Street
Isas Lloyds TSB Registrars The Causeway 0870 2424 244 (Isa Manager) Worthing
General comments/queries Group Company St Helen’s Secretary, CGNU plc 1 Undershaft
*Calls are currently charged at 60 pence per minute at all times. The average time to access the share price is approximately one minute. The share price is also posted on our internet site at www.cgnu-group.com.
Designed and produced by Radley Yeldar using RingMaster©. Editorial assistance by The Company Writers. Feature photography by Mark Grimwade and Board photography by Ben Rice. Printed by CTD Capita Limited. All registered trademarks acknowledged. This document is printed on Skye Satin, containing 25% post-consumer waste, 25% pre-consumer waste and 50% virgin fibre which is totally chlorine-free.
CGNU plc St Helen’s, 1 Undershaft, London EC3P 3DQ Telephone +44 (0)20 7283 2000 www.cgnu-group.com Registered in England No. 2468686