Le ad er sh ip in fi na nc ia l s er vi ce s A
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”).
There are various internet sites within the Group, most of which interlink with each other to enable quick reference direct to specific sites. The details are listed below: CGNU Group www.cgnu-group.com
General comments/queries Group Company St Helen’s 020 7662 8326 Secretary’s Department 1 Undershaft CGNU plc London EC3P 3DQ
Richard Harvey has a high-calibre executive team, with a combination of wide experience and vigour. Under his management, we have performed to high standards under demanding conditions.
In February last year the European Financial Services Round Table (EFR) was founded, and I have the privilege of being its chairman. Its purpose is to help create a single market for financial services in the European Union (EU). Such an open market exists, of course, for goods, capital and people – all of which has brought benefits for consumers. But customers are not free to buy financial services products wherever they choose in the EU, because the market is closed and fragmented. Pensions are not portable owing to differences in national tax systems. Costs can be high and consumer protection differs.
Looking to the prospects for CGNU, I believe they show great promise. We shall certainly encounter unexpected developments in the world while seeing the continued consolidation of financial services groups. We shall have to be prepared to seize attractive opportunities.
Thus, as we streamline our business, pursue growth and undergo continuous training, we also have to be flexible enough to master step changes in our ambition to build an ever-stronger company.
Our determination to grow faster than the average for the financial services market has met with considerable success. Our targets have been achieved by a combination of strong organic growth, new bancassurance arrangements and balanced acquisitions.
Our joint venture in the UK with the Royal Bank of Scotland has good growth potential. Our new arrangements with DBS put us in a strong position in South East Asia. In Spain we have, in less than two years, become a leading player through agreements with four of the country’s leading savings banks. We have also expanded our bancassurance partnerships in the fast-growing Italian market.
In line with our strategy, we are growing our long-term savings business aggressively. It now accounts for approximately 70% of our annual premiums. Our general insurance operations are managed for balanced growth, sustainable profitability, and good returns which provide cash flow to support our long-term savings growth.
Since the new group was formed, we have seen our life and savings business grow by over 30% in only 18 months.To sustain the scale and pace of profitable growth, our long-term savings operations require continuous investment of both cash and capital.The view of the Board is that it is not possible to maintain the current level of the Group’s dividend whilst pursuing this strategy.
To take a focused approach to general insurance with disciplined underwriting and efficient claims handling.
“We continue to grow the business with a clear strategic focus on the long-term savings market”
’s st at em en t 03 CGNU plc *Including life achieved operating profit before amortisation of goodwill and exceptional items.
CGNU relative to FTSE100 and FTSE Eurotop 300 Life Assurance CGNU relative to FTSE Eurotop 300 Life Assurance CGNU relative to FTSE100
New business sales £13,479 million Net written premiums* £18,431 million Life achieved operating profit before tax £1,674 million
Net written premiums – continuing operations £8,433 million Combined Operating Ratio (COR) 102% Operating profit before tax – continuing operations £945 million
– Number one provider in the UK with increased market share of over 11% and around 75% of this business from the IFA market
– New and extended bancassurance partnerships in Spain, Italy and the UK increase new business sales to £2.1 billion
– New ventures and developments in central and eastern Europe and South East Asia
– Capitalised on pension reforms in Europe and leading provider of stakeholder pensions in the UK, capturing over 20% of the total market
– Focused on personal lines and small to medium business cover, applying rigorous risk selection and strong rating action across the portfolio
– Hibernian now ranked among top five fund managers in Ireland
Overview Introduction During my first year as group chief executive of CGNU we have taken further important steps forward in line with our strategic objectives. Significant progress has been made in repositioning and strengthening the group as one of the world’s major insurers while, at the same time, achieving increased operating profit and record long-term savings new business sales.
Long-term savings business in Europe is a market that we expect to develop strongly as the responsibility for providing financial support for ageing populations increasingly shifts from the state to the private individual. In addition, we believe customers will continue to seek the reassurance of trusted brands providing high-quality products and services.
Effective and flexible methods of distribution, tailored for individual markets, are important because we believe they will help us achieve our ambitious growth targets. For example, while financial advisers generate around 75% of our long-term savings business in the UK, bancassurance accounted for nearly 90% of our combined new business sales in Spain and Italy in 2001.
In addition to our acquisitions and new ventures, we have withdrawn, as planned, from businesses and markets that do not offer the potential for market-leading positions or superior returns.
The sale of our US general insurance business in June 2001, together with our exit from the London Market and global risks business in 2000, were the major elements in this repositioning. Although these exits cost £1.3 billion after tax (accounted for in 2000), we can already see the benefit in transforming the quality of group earnings.
We further realigned our general insurance portfolio by completing the sale of State Insurance, one of our two general insurance businesses in New Zealand, and by announcing the sale of small general insurance operations in Belgium and Brazil. We also announced our intention to sell CGU Courtage, our broker-based general insurance business in France.
In the life sector, we sold our Canadian businesses, where we lacked the scale and platform to achieve our objective of a top-five market position. Other disposals included the stockbroking business Quilter Holdings in the UK, and our small life operation in Greece.
As our life business continues to grow, we need capital to support it. The group’s capital position was enhanced in November 2001 when we raised £1.2 billion of subordinated debt to support future growth opportunities.
Integration I am pleased to report the successful integration of the operations of CGU and Norwich Union by the end of December 2001. We have brought together two major companies and 64,000 people worldwide with great speed and a clear focus.
Integration was an immense and challenging undertaking. For example, during 2001 in the UK we converted about two million general insurance policies to the Norwich Union brand and reduced 300 products to a new set of 70. Our achievement is a credit to the staff involved across the group, notably in the UK, Ireland, France, Spain and Italy.
Operational cost savings have been achieved through conversion to a single core brand and product set in each market, and the integration of our fund management operations. We have restructured our support operations, reduced duplication, increased efficiency and shared knowledge across the group.
As a result of this activity, we have achieved £317 million of annualised cost savings, which exceeded our target of £275 million. This was accomplished within the integration cost budget of £425 million charged against the 2000 results.
Euro conversion All CGNU businesses involved in conversion to the euro single currency made the transition successfully, on time and on budget, by the end of 2001. Our teams in the Netherlands, France, Italy, Spain, Portugal, Ireland, Greece and Luxembourg worked very hard for nearly five years to complete this extremely complex task. The cross-business teamwork and goodwill generated will be of long-term benefit to the group.
In this context, our focus on managing the day-to-day business effectively helped us to achieve pre-tax operating profit from continuing operations, including life achieved operating profit, of £2,004 million, an increase of 41% (2000: £1,407 million). Our long-term savings business grew significantly, with record sales of new business up 10% to £15 billion, and life achieved operating profit increased 5% to £1,674 million. Operating profit from the general insurance business rose 133% to £945 million.
Though the group enjoyed a successful trading period, the fall in worldwide investment markets saw a reduction in shareholders’funds at 31 December 2001 to £11.9 billion (2000: £13.6 billion).
Worldwide business mix continuing operations £billion General insurance Total long-term business and health premiums
�UK Record new business sales as the leading UK life company, with increased market share of over 11%.
Market position The long-term savings business is the focus of CGNU and its principal source of growth, accounting for 70% of the group’s annual premium income.The business grew vigorously in 2001, meeting the increasing demand for pensions, savings and healthcare products as governments encourage individuals to take more responsibility for their own retirement and welfare provision and reduce the pressure of ageing populations on state schemes.
These conditions create significant opportunities in European long-term savings markets, with pension reforms taking place in many countries. We have built a strong operational platform in Europe which, with cost-efficient businesses, a wide range of products and rapidly developing channels of distribution, contributed 93% of our worldwide new business sales in 2001.
In France, our second-largest long-term savings business, we outperformed the market through the strength of our product range and multi-distribution capability. Continued organic growth consolidated our top-five market positions in the Netherlands and Ireland. In the developing savings markets of Spain and Italy, where bancassurance is the principal method of distribution, new agreements have enhanced our market position. In Spain we now have the fourth-largest bank distribution network, and in Italy we are a top-10 long-term savings provider. We also continue to increase our presence in the developing markets of central and eastern Europe.
We have well-established businesses in Australia and the US, and our new bancassurance agreements with DBS in Singapore and Hong Kong have the added benefit of giving us a launching pad into the attractive long-term savings markets of South East Asia.
Life and pensions new business sales grew significantly by 21% to £13.5 billion (2000: £11 billion), including major contributions from the UK, up 10% to £7.3 billion, and continental Europe, up 39% to £5.5 billion.
Another encouraging performance was reported in the Netherlands, where Delta Lloyd is a top-four pensions provider.Total pension sales rose by 49% to £516 million in 2001 (2000: £341 million). Public attitudes to pension planning are changing, and Delta Lloyd’s successful Financieel Vrijheidsplan has been developed to help people provide for a range of retirement options.
Strong individual pension sales of £31 million in Germany contributed to a 19% increase in total new business premiums to £117 million (2000: £97 million).The launch of new funds and use of the Delta Lloyd brand will enable us to benefit from German pension reforms, which are likely to increase demand for mutual funds and equity-linked savings products.
AFER is the largest retirement savings organisation in France, with more than half a million members. Our sales of AFER products rose by 10% to £1,135 million (2000: £1,012 million), reflecting the popularity of the AFER brand and its fixed interest savings account offering.
Total UK new business sales (including investment sales) rose 8% to £8.1 billion. In France, total sales rose to £1,998 million (2000: £1,861 million) in a market that we estimate contracted by 8%. Delta Lloyd reported a 34% increase in sales in the Netherlands to £777 million (2000: £569 million), and Hibernian in Ireland increased total new business premiums by 21% to £523 million (2000: £424 million).
Our bancassurance agreements in Spain and Italy produced strong combined new business sales of £1.7 billion (2000: £0.4 billion), driving total sales in those two countries to £1.9 billion. Spain achieved growth of 155% in total new business premiums to £932 million (2000: £359 million), and Italy recorded excellent total sales growth of 291% to £958 million (2000: £241 million).
Our United States business contributed total new business premiums 62% higher at £371 million (2000: £218 million) as a result of continuing strong fixed annuity sales. In Australia, total life and pension sales were down to £244 million (2000: £255 million).
Life achieved operating profit rose 5% to £1,674 million, benefiting from the growth in long-term savings new business.
�Turkey A number of new developments have strengthened CGNU’s position in the emerging markets of central Eastern Europe.
Our new UK online wealth management service at www.norwichunion.com offers a range of free interactive financial planning tools and impartial guides to help people manage their money. It also offers an online fund supermarket Isa and share dealing service. A range of banking products will be introduced during 2002. Since its launch in May 2001, the service has attracted nearly one million unique site visitors and more than 90,000 customer registrations, of whom about 70% are new to the group. It also earned two online finance awards from Investor’s Week for innovation of the year and online provider of the year. During 2002 we will continue to develop the service as part of the core UK long-term savings business.
Our customer service standards in the UK were put under significant pressure during 2001, partly because of strong sales arising from demand for stakeholder pension products. In Financial Adviser’s annual IFA service awards in November 2001, Norwich Union received a three-star rating for life and pensions business, compared with a five-star rating the previous year. We were disappointed, but have already taken action to restore the high standards that our customers expect.
In the UK, Norwich Union achieved a 3.3% share, up from 2.4% in 2000, and a top-10 ranking in the retail investment market. This increase in our market share reflects brand strength, breadth of distribution and performance in European equities, fixed income and property investment, plus our position as a leading provider of individual savings accounts (Isas). During 2001, we held top-five positions for gross Isa sales, Isa funds under management, corporate bond Isa sales and for Cat-standard Isa business.
In Ireland, where we have an 11% retail investment market share, Hibernian launched a new unit-linked product in June 2001, with access to more than 80 funds and 15 international fund management groups.This launch benefited from shared expertise with the group’s Dublin-based offshore investment specialists, Norwich Union International. Hibernian also benefited from £14 million of sales following the introduction of the government’s tax-advantaged special savings investment account (SSIA) in May.
Unit trust sales in Australia were 18% higher at £347 million (2000: £295 million) following strong inflows during the fourth quarter.
A new partnership with UniCredito Italiano, together with increased distribution through Banca Popolare di Lodi and an existing arrangement with Banca delle Marche, extended our bancassurance reach in Italy through more than 2,000 branches. Bancassurance accounts for over 70% of new business sales in Italy.
Market position Growing and protecting people’s personal wealth over the longer term is fundamental to our business. We need a world-class fund management operation to enable us to provide a premier investment service to our customers and generate superior returns.This business will underpin our long-term savings products with excellent investment returns for our own funds, while attracting more funds from institutions and other third parties.
As we develop our global operations, Morley will be established as the key platform for CGNU to build a world-class fund management business. Morley will seek opportunities to enhance our long-term savings business and create value by managing third-party assets in fast-growing and profitable markets.
Performance and products The past year has seen a difficult investment environment, with lower equity markets and volatility caused by uncertainty over economic conditions around the world.
Despite these challenges, Morley continued to build its position in the institutional market, particularly for European equities, fixed income and socially responsible investment (SRI) propositions. It secured £3.0 billion of new mandates during 2001 (2000: £495 million), an increase of 500%, which places Morley in the top three for actively managed UK institutional mandates for external new business.
Along with its business-leading technology, Navigator is being adapted for introduction to the Singapore market during the first quarter of 2002, when significant financial reforms will pave the way for growth through the fledgling financial adviser market. This represents an important move as CGNU broadens its worldwide investment management capabilities.
The longer-term prospects are good because of the growing need for privately funded pension schemes, stable economic policies encouraging a switch away from traditional cash deposits into equity-linked investments, and a demand for higher-performing assets from increasingly sophisticated investors.
We will be focused on those products and markets around the world where we can be most successful.The needs of our clients will be addressed through a clear investment philosophy and a superior range of funds, products and service. We will retain our strong retail focus to support local businesses while continuing to strengthen our institutional business, using one consistent investment process across all our funds. We remain committed to active fund management and achieving robust and repeatable returns for our clients.
Victoire Asset Management returned an excellent level of investment results in France in 2001, with 70% of its funds ranked in the top quartile for investment performance over three years.Victoire was chosen by monthly financial magazine Mieux Vivre Votre Argent as best asset management team in the insurance industry for 2001, an award it had previously won in 1999.
�Netherlands Delta Lloyd and Ohra are among the leading fund managers in the Netherlands and are now expanding into Germany and Belgium.
We have reduced volatility and improved the quality of earnings in our portfolio by moving away from larger commercial risks, and by disposing of general insurance operations in the United States, our London Market and global risks business, and other businesses where we did not expect to achieve a market-leading position or superior returns.
The benefits of strong rating action, disciplined underwriting and lower weather-related claims, were reflected in an improved underlying underwriting loss for 2001 of £224 million (2000: £821 million loss) and an operating profit up 133% to £945 million (2000: £412 million).These results exclude the disposal of US general insurance and London Market operations.
Through continuing rigorous risk selection and premium rating action we achieved our target combined operating ratio of 102% by the end of 2001. We now have a business capable of sustaining this operating ratio through the underwriting cycle.
Fo cu se d ap pr oa ch to g en er al in su ra nc e
combined operating ratio 6 million customers supported by total incident management 19 CGNU plc
�Ireland Hibernian in Ireland gives CGNU the No 1 position in this market.
Efficiency Norwich Union Insurance’s expense ratio – which broadly measures expenses before commission over premiums – was 10.5% at the end of 2001, one of the lowest among the large UK insurers. This is after investment in our market-leading technology and processes on a scale that only companies of our size can achieve, and reflects how integration of the business has driven down costs.
We aim to use new technology for as many processes and transactions as practicable in the interests of improving service levels and reducing operating costs.This has resulted in Norwich Union in the UK becoming the leading user of remote image inspection technology in Europe. Our engineers use digital video cameras to assess damage to vehicles, which enables us to handle motor insurance claims more quickly and accurately without the need to visit locations.
Similar initiatives are under way in our other general insurance operations. For example, Delta Lloyd in the Netherlands is testing a process for assessing motor claims by accepting digital pictures sent by customers via the internet.
Driving innovation is a key part of our long-term strategy. With this in mind, the group is investing in new motor vehicle technology to help change the way motor insurance is bought by our customers in the future. Pay As You Drive insurance uses a black box installed in the vehicle and linked to satellite tracking technology to provide accurate data about vehicle use. We have talked extensively to customers, vehicle manufacturers and technology providers, and intend to begin a long-term study using this in-car technology to provide a more tailored Pay As You Drive premium charge to our policyholders.This research and development project will put us at the forefront of European insurance offers.
France recorded a strong recovery in its general insurance result to £58 million in 2001, through rate increases, improved underwriting and lower weather-related costs. Net premiums written rose by 8%.
Operating profit from our other European businesses improved to £108 million (2000: £37 million) reflecting the benefits of our strategic focus, disciplined underwriting and rating actions.
In the UK, our underwriting strategy is clear – we have strict control on risk selection. We have further developed our underwriting policies and procedures to ensure we provide for the insurance needs of small to medium businesses while moving away from big commercial risks. This approach, coupled with the creation of an underwriting academy in the UK to develop the professional skills of our key people, is realigning our business to deliver consistent performance and sustainable long-term advantage.
The launch of a common pricing platform for our UK motor business in July 2001, using over seven million policyholder records, is helping us to ensure fairer quotes for everyone.This uses Norwich Union’s huge insurance database (40% larger than that of our nearest competitor) to enable more accurate selection and pricing of risk, and is a significant move towards tailored pricing for individual customers. A similar arrangement for household insurance will begin during 2002.
In the Netherlands, Delta Lloyd recovered from a small loss in 2000 to profit in 2001 as a result of underwriting action and pricing adjustments across all business lines, and a more critical approach to larger risks. Motor rates were increased and stricter underwriting criteria introduced, with certain classes of business no longer covered.
Multi-distribution capability We believe that a successful distribution strategy is one that allows the customer to choose which method of doing business they prefer, an approach reflected in our principal general insurance businesses.
In the UK we have a leading position across the broker, corporate partnership and retail direct distribution channels. We worked with our business partners throughout the integration process and retained key corporate and broker accounts. We have also built a growing presence in e-commerce, with quotes via the internet and other digital channels rising 60% to over one million during 2001.
In France, our motor, health and property insurance business is sold through agents of Abeille assurances, brokers and a direct operation, Eurofil. In Ireland, Hibernian uses call centre technology to supplement the traditional agent and broker channel, as well as the growing direct business. Most of Delta Lloyd’s business in the Netherlands is introduced by intermediaries, with direct sales an area for growth under the strong brand name of Ohra.
In Canada, products are distributed primarily through 2,500 independent broker partners, who are able to handle policy administration over the internet via a leading-edge web application. Our Australian business uses a range of distribution methods, with business from brokers, agents and direct sales lines, and an increasing e-commerce capability.
Supporting communities CGNU invested a total of £16 million worldwide in sponsorships in 2001, with over £5 million spent on community activities and charitable causes. Norwich Union extended its commitment to UK Athletics with a new sponsorship worth £20 million over four years, including development schemes for youngsters. The UK staff charity of the year raised over £180,000 for CLIC (Cancer and Leukaemia in Childhood).
CGNU’s environmental programmes continue to be developed and adopted across the group.This progress has won external recognition in a number of ways.
In the Business in the Environment (BiE) index of corporate environmental engagement, CGNU was placed sixth in the financial services sector and 23rd in the index of FTSE 100 companies. These are lower rankings than last year, reflecting the fact that the newly merged group was unable to provide relevant data for the pre-merger companies in order to demonstrate improving performance over a longer period. We are, however, pleased with our continued performance and play an active part in the development of BiE initiatives.
After thorough consultations with various interest groups, both internally and externally, we have developed a corporate social responsibility policy, comprising commitments in each of the areas mentioned above.
CGNU has also been asked to lead a group of UK insurers and banks in the development of initial guidelines on CSR for the financial services industry.These will form part of the UK contribution to the world summit on sustainable development in Johannesburg later this year.
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. One such initiative is the UK staff charity of the year. In 2001, including matching funds from the group, staff raised over £180,000 for CLIC (Cancer and Leukaemia in Childhood).
CGNU has published its first CSR report, which can be found on our internet website at www.cgnu-group.com/csr.
“Our financial disciplines have delivered strong growth and improved the quality of our earnings”
The directors believe that the achieved profits basis provides a more accurate presentation of the activity and results of the Group, and the business is managed accordingly. Supplementary information on this basis is provided on pages 92 to 98.
Operating profit before tax, including life achieved profit, is a primary measure used by the group to assess its financial performance. It is based upon longer-term investment returns and it excludes the amortisation of goodwill and exceptional items.
Operating earnings per share on a modified statutory basis1 43.2p 28.3p 1. After tax and before amortisation of goodwill, amortisation of acquired additional value of in-force long-term business and exceptional items, attributable to equity shareholders.
The decline in equity-related business contributed to a sales slowdown in Ireland and the Netherlands, the latter seeing investment production fall from £1,025 million last year to £85 million in 2001.
In the UK, in spite of a particularly competitive market, an increasing proportion of which comprises products with a 1% charging structure, we have been able to increase our new business contribution as a result of excellent sales growth.
The group’s operating profit before tax from continuing operations, including life achieved profit, increased to £2,004 million (2000: £1,407 million). On a modified statutory basis operating profit before tax from continuing operations was £1,533 million (2000: £1,028 million).
The increase in operating profit was driven by returns on our expanding European life operations and improved underwriting performance from the general insurance business together with lower weather-related claims in 2001.The fund management operations suffered from reduced fee income, especially in the third quarter, as equity markets fell significantly, and as we have continued to invest in growing our retail operations.
Earnings per share based on profit/(loss) for the financial year: – achieved profit basis (33.1)p (73.8)p – modified statutory basis 0.7p (77.0)p
Profit before tax on a modified statutory basis of £514 million was depressed by a £1 billion shortfall in the actual investment return compared to the group’s longer-term assumptions.This reflects unrealised losses on equities held by the group’s non-life operations, particularly in the UK and Europe where the major markets fell between 16% and 22%.
The new business margins in Spain continue to strengthen, as we expand the business and secure incremental economies of scale. This market is likely to continue to prove profitable as we consolidate our position, with continued competitive advantage provided by our efficient administration platform.
Life achieved operating profit 1,674 1,569 1. Excludes retail investment business.
We withdrew from a number of operations during the year, and announced our intention to sell the CGU Courtage operation in October 2001. We are committed to our strategy of taking a focused approach to general insurance operations, and acquired the Australian business of Fortis in the second half of the year. Together with our existing Australian operations, we now have a leading position in key motor dealer and financial institution distribution channels.
Group – ongoing business 102 109 1. Combined Operating Ratio (COR) – expresses the extent to which expenses and claims cover insurance premiums. It is the sum of expenses, including commissions, as a percentage of net written premiums, and claims as a percentage of net earned premiums.
Asset management The CGNU asset management businesses had a mixed year, with good performance in France tempered by falling market values leading to depressed fund management fees.
In the UK, Morley continued to invest in the developing retail funds business, with some £32 million spent during the year (2000: £21 million). In spite of poor market conditions, and the sale of Quilters, the group finished the year with over £209 billion assets under management (2000: £220 billion).
Integration We have met our challenging objective for completing integration by the end of 2001, and have exceeded our annualised cost savings target of £275 million.
The group-wide annualised cost base has benefited by £317 million, of which £225 million was reflected in the results of the year.
Life Business Management Corporate Total Year ended 31 December £m £m £m £m £m
Some of these savings are being invested in business growth, new IT platforms, UK general insurance claim process improvements and a global finance change programme.
Normalised Opening after-tax equity Return on Return on return capital capital capital
External funding is provided from both the banking and the debt capital markets. In November 2001, the company issued £1.2 billion of subordinated debt.This provides cost-effective funding and is treated as equity for both regulatory and rating agency purposes.
In addition to its external funding sources, the group has a number of internal debt arrangements in place.These have allowed the investment of assets supporting technical liabilities into the pool of central capital for use across the group.They have also enabled the shareholders to deploy cash from some parts of the business to others in order to fund growth. Although intra group loans in nature, they are counted as part of the capital base for the purpose of capital management. All internal loans have been negotiated at a market rate and are appropriately serviced.
Capital employed Our focused approach to corporate activity, closely aligned to the business strategy, has resulted in a shift in the mix of capital away from general insurance and health.The majority of the assets released from discontinued operations has been applied to reduce borrowings.The remainder, together with the proceeds of the subordinated debt issue, is available to shareholders and has been shown as corporate.
Exchange fluctuation As a result of the international diversity of its operations, approximately half of the group’s premium income arises in currencies other than sterling. Similarly, its net assets are denominated in a variety of currencies, of which the largest are the euro (56%) and sterling (32%).
Reinsurance Reinsurance is a key tool in managing our catastrophe exposure. In designing our reinsurance programmes we take account of our risk assessment, the financial strength of reinsurance counterparties, the benefits to shareholders of capital efficiency and reduced volatility, and the cost of reinsurance protection.
From Left Wim Dik George Paul Derek Stevens Sir Michael Partridge
George Paul DL (62) 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 and of Fleming Overseas Investment Trust plc and a non-executive director of Notcutts Limited. A former Chairman and Chief Executive Officer of Harrisons & Crosfield plc. Senior non-executive director. Chairman of the Remuneration Committee and member of the Audit Committee.
Mike Biggs ACA (49) Executive director Appointed Group Finance Director in March 2001 having been previously appointed to the Board in May 2000 as executive director responsible for the Group’s general insurance operations in the UK. 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.
Patrick Snowball (51) Executive director Appointed to the Board in March 2001 as executive director with responsibility for the Group’s general insurance operations in the UK. He was previously a director of Norwich Union, appointed in October 1999, having joined that company in 1989.
Derek Stevens (63) Non-executive director Appointed to the Board in 1995. A former director and Chief Financial Officer of British Airways Plc and a former Finance Director of TSB Group plc. Currently Chairman of the Trustees of British Airways Pension Scheme. Chairman of the Audit Committee and Chairman of the CGNU Staff Pension Scheme.
Philip Twyman FIA (57) Executive director Appointed to the Board in June 1998. Joined the Board of General Accident in 1996 as executive director responsible for finance, life and investment operations. Currently executive director with responsibility for the Group’s international and fund management operations.
Elizabeth Vallance (56) Non-executive director Appointed to the Board in May 2000. Joined the Board of Norwich Union as a non-executive director in 1995. Currently Chairman of the NHS Advisory Committee on Distinction Awards, Fellow of Queen Mary and Westfield College, University of London and Chairman of Council of the Institute of Education, University of London, nonexecutive director of Charter European Trust plc and a former nonexecutive director of HMV Group Limited. Member of the Remuneration and Nomination Committees.
André Villeneuve (57) 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.
Tony Wyand (58) 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 and Ireland. A non-executive director of Société Générale, UniCredito Italiano and Grosvenor Group Holdings Limited.
Fi na nc ia l s ta te m en ts 32 CGNU plc Annual report + accounts 2001 33 Directors’ report 35 Corporate governance 37 Remuneration report 39 Directors’ remuneration 43 Statement of directors’ responsibilities 43 Independent auditor’s report 44 Accounting policies 47 Consolidated profit and loss account
Share capital Details of the share capital and shares under option as at 31 December 2001, and shares issued during the year which ended on that date, are given in note 30 on pages 77 to 79.
Directors The names of the present members of the Board and biographical notes appear on pages 30 and 31.
Peter Foster who was Group Finance Director at the beginning of the year, retired from the Board on 31 March 2001 and was succeeded by Mike Biggs who was already a Group executive director. Patrick Snowball was appointed a Group executive director on 31 March 2001 and, in accordance with the Company’s articles of association, his appointment was approved at last year’s Annual General Meeting.
Lyndon Bolton and Bob Scott, who were directors at the beginning of the year, retired from the Board at the conclusion of the 2001 Annual General Meeting held on 24 April 2001. Richard Harvey succeeded Bob Scott as Group Chief Executive upon his retirement.
Substantial shareholdings As at 26 February 2002, the Company’s register of substantial shareholdings maintained in accordance with the provisions of section 211 of the Companies Act 1985 showed that the only holding exceeding the 3% disclosure threshold was that of Legal & General Investment Management Limited which held 69,418,493 ordinary shares, representing an interest of 3.08% of the issued ordinary share capital of the Company.
United Kingdom employees The Group continues to place emphasis on communication and dialogue with employees. News about the Group is provided through a variety of channels, including the intranet, circulars, in-house magazines, video presentations,“live”Group-wide television broadcasts and face-to-face briefings.
The Group’s operations in the United Kingdom have established employee career and recognition frameworks, which draw together the formal competencies, target setting and review systems and links them to appropriate rewards and benefits.
At the 2001 Annual General Meeting, shareholders approved the establishment of an All Employee Share Ownership Plan as a way for employees to participate further in the Group’s fortunes through share ownership. The Group operates two elements of the plan. The partnership element allows employees to purchase CGNU shares at the prevailing market price from their pre-tax income. The free share element will enable eligible staff to receive free shares, at the Board’s discretion, in April 2002. The Group also operates a savings related share option scheme which provides employees with an opportunity to save over a fixed period and acquire share options at a discount to the prevailing market price.
Charitable and political donations CGNU has continued to support community initiatives and charitable causes worldwide, and the total Group commitment during the year was £5.1 million.
Standards of Business Conduct The Group recognises its responsibilities to all those with whom its business brings it into contact, including customers, employees, shareholders, suppliers and the community. It therefore operates a Standards of Business Conduct Policy which provides guidance for every employee, Group-wide, to act with integrity in all business relationships.
Creditor payment policy and practice It is the Company’s and the Group’s policy to pay creditors when they fall due for payment. Terms of payment are agreed with suppliers when negotiating each transaction and the policy is to abide by those terms, provided that the suppliers also comply with all relevant terms and conditions.
European Monetary Union The total cost, including systems preparation, incurred for the introduction of the euro into CGNU’s European Union operation amount to £65 million, of which £8 million was incurred during 2001 (2000: £17 million). On 1 January 2002, the Group’s businesses in those countries within the European Union introducing the euro successfully applied the currency transition within their businesses.
On 28 June 2001, Ernst & Young transferred its entire business to Ernst & Young LLP, a limited liability partnership incorporated under the Limited Liability Partnerships Act 2000. The Directors consented to treating the appointment of Ernst & Young as extending to Ernst & Young LLP with effect from 28 June 2001.
Application of the Combined Code The Financial Services Authority requires listed companies to disclose, in relation to section 1 of the Combined Code produced by the Committee on Corporate Governance in June 1998 (the Combined Code), how they have applied its principles and whether they have complied with its provisions throughout the accounting year.
Remuneration Committee The Remuneration Committee comprises the following non-executive directors, appointed by the Board: George Paul (Chairman) Wim Dik Elizabeth Vallance André Villeneuve
The Committee has four scheduled meetings each year to consider all aspects of remuneration paid to senior executives, including executive directors, and to make recommendations to the Board on the remuneration policy, strategy and framework for this group of employees. The Committee reports regularly to the Board.
Within the framework of the remuneration policy approved by the Board, the contents of the remuneration package and the level of benefits paid to each executive director are determined 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. The Board itself determines the level of fees paid to the non-executive directors following a recommendation from the executive directors.
The Board’s Remuneration Report is contained on pages 37 and 38.
The Committee meets four times each year to assist the Board in discharging its responsibilities for the Company’s financial announcements, business risk management, internal control issues and regulatory compliance, as well as to oversee the objectivity and effectiveness of the internal and external auditors. The Committee receives reports of significant issues raised to the audit committees which have been established in the Group’s principal businesses. The Committee meets regularly with the external auditors, in the absence of management, and reports regularly to the Board.
Information Technology Strategy Committee This Committee comprises the following members appointed by the Board: André Villeneuve (Chairman) Wim Dik Pehr Gyllenhammar Richard Harvey Sven Skarendahl* Philip Twyman *Sven Skarendahl is an independent consultant. He is not a director of the Company but has been appointed by the Board to this committee due to his broad experience in technology and internet-based companies.
The Committee advises the Board on the Group’s IT and e-commerce strategies.
Both the Company’s Annual report and Annual review are designed to present a balanced and understandable view of the Group’s activities and prospects. The Chairman’s statement, Group Chief Executive’s review and business operating and financial reviews on pages 2 to 29 provide an assessment of the Group’s affairs and position and will be supported by a presentation to be made at the Annual General Meeting.
Institutional investor As a major investor, the Group monitors the governance of the companies in which it invests. Morley Fund Management Limited, the Group’s asset management company, has regular meetings with senior management of companies where it will raise all relevant matters which may affect the future performance of those companies.
Internal controls 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: Control environment 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; a Group policy framework, which establishes a governance structure for the Group that effectively oversees operations world-wide and assists the Group in achieving its ambitions; and defined procedures for the approval of major transactions and capital allocation.
The Group has well-established internal audit, risk management and compliance functions. There are formal procedures in place for both internal and external auditors to report independently conclusions and recommendations to management and to the Audit Committee.
Financial Services Authority The Financial Services Authority became the single, integrated regulator for the financial services industry in the United Kingdom from 1 December 2001. In preparation for the new regulatory regime, the Group completed, ahead of that date, a detailed review of its governance procedures including the roles and accountabilities of those senior executives who were required to be accredited with the Authority as ‘Approved Persons’.
Compliance with the Combined Code The Company has complied fully throughout the accounting period with the provisions set down in section 1 of the Combined Code save that, for the reasons given in the Remuneration Report on page 38, two executive directors have service contracts with notice periods in excess of 12 months.
The Auditor’s report on page 43 covers their review of the Company’s compliance with the relevant provisions of the Combined Code.
This report sets out the remuneration policy for the Company’s senior executives, including the executive directors, and outlines the various elements of their remuneration.
Remuneration Policy The Company’s remuneration policy seeks to provide remuneration packages appropriate 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 policy is aimed at ensuring senior executives, are rewarded fairly for their respective individual contributions to the Company’s performance.
Against this broad policy, the Remuneration Committee (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, type and standing, current economic conditions, prevailing operating conditions within both the Group and the financial services industry generally, the earnings of the Group’s employees 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/short-term and fixed/variable rewards.
Short-term incentives Senior executives participate in a discretionary Annual Bonus Plan that provides for the payment of cash bonuses. For executive directors, the bonus for on target performance is 35% of basic salary, with a maximum payment of 50%. Seventy per cent of the potential payment under the plan is dependent upon the achievement of financial targets based on the Group’s and/or Business Unit’s business plan as appropriate for each director. The remaining 30% of the bonus is based upon the attainment of measurable personal objectives.
A fundamental part of the Annual Bonus Plan, which is also designed as a retention and long-term incentive, is the requirement that a stated proportion of any cash bonus awarded under the Plan each year be deferred through the Company’s Deferred Bonus Plan. Executive directors are required to defer 50%, and may request to defer up to 100%, of their cash bonus.
The performance conditions compare the total shareholder return (TSR) produced by the Company against those of a chosen comparator group. Achievement of median performance within this group triggers the vesting of 20% of awards, which rises to 70% if the Company’s performance is in the upper decile of the comparator group. Recognising the Company’s position as the United Kingdom’s largest international insurance group, the comparator group for the TSR part of the plan comprises 19 financial services companies, including 12 major European insurers.
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 the three year performance period. Awards under this performance condition will begin to vest if the ROCE over the performance period is 24%, with the full 30% vesting if the ROCE is 30% or higher.
If the performance conditions are not met over three years, they will be retested on the fifth anniversary of the grant, the ROCE performance condition being adjusted accordingly, ie the ROCE would need to be at least 40% in excess of inflation over the extended performance period for any awards under that part of the plan to vest.
The Savings Related Share Option Scheme allows eligible employees to acquire options over the Company’s shares at a discount of up to 20% to their market value at the date of grant. In order to exercise the options, participants must have saved the consideration through either a three, five or seven year approved savings contract, subject to a maximum savings limit of £250 per month. The AESOP allows participants to invest up to £125 per month out of their gross salary in the Company’s shares.
Pension arrangements The remuneration package for senior executives in the United Kingdom includes Company contributions into the Group’s pension scheme. All executive directors are members on a non-contributory basis of the defined benefit section of the CGNU Staff Pension Scheme (the Scheme) which was created from the merger on 31 December 2001 of the CGU Staff Pension Scheme, the Norwich Union Group Pensions and Life Insurance Non-Contributory Plan (1971) and the London & Edinburgh Retirement and Death Benefits Plan.
Under the Scheme, executive directors have a normal retirement age of 60 and accrue pensionable service at a rate of one-thirtieth of their final pensionable salary for each year of service since they became a senior executive, subject to a maximum pension of two-thirds of their final pensionable salary. No pension benefits are accrued on bonuses or other benefits. The Scheme provides a lump sum death-in-service benefit of four times the member’s basic salary at the date of death and a spouse’s pension equal to two-thirds of a member’s actual and prospective pension. Post-retirement pensions are reviewed annually and increases are guaranteed at a rate equivalent to the annual increase in the Retail Prices Index up to a maximum of 10% per annum.
Other benefits In addition to the benefits described above, senior executives are entitled to the benefit of a company car allowance and private medical insurance.
Service contracts Service contracts agreed with each executive director incorporate their terms and conditions of employment and can be terminated by the Company giving the director 12 months’ written notice. For Philip Twyman and Tony Wyand, who have retained the terms they were granted when they first became directors, the notice period is 24 months. In practice however, the notice period for Tony Wyand is currently 21 months as he is approaching his normal retirement age when the contract will terminate. Philip Twyman is within 25 months of his normal retirement age. The Company does not consider it to be in shareholders’ interests to renegotiate the contracts for these directors.
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 responsibility 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. In determining the level of non-executive directors’ fees, including the Chairman’s and Deputy Chairman’s fees, the recommendation of executive directors is considered, taking into account the time commitment expended in preparing for and attending meetings as well as market practice. Non-executive directors receive no benefits other than their fees and do not have service contracts with the Company.
38 CGNU plc Annual report + accounts 2001 Remuneration report continued
The remuneration report, which includes the Company’s remuneration policy for its senior executives including executive directors, is presented on pages 37 and 38. The remuneration policy sets out the benefits to which the Company’s senior executives are currently entitled. However, as a result of the mergers which have created the Company, there are still a number of options and awards outstanding under legacy arrangements. These are explained in the following tables and notes. The aggregate amount of emoluments, including compensation payments, paid to directors in 2001 was £6.5 million (2000: £5.2 million).
Executive directors The remuneration payable to executive directors who held office for any part of the financial year, including amounts paid to them as directors of subsidiary undertakings, was: Compensation for Basic salary Bonus (note 2) Benefits (note 3) loss of office (note 4) Total £’000 £’000 £’000 £’000 £’000 £’000 £’000 £’000 £’000 £’000
In addition to the above, each of the directors accrued pension benefits under the Group’s pension scheme for UK employees, as follows: Increase in pension Value of increase Pension accumulated (note 5) (note 5) (note 5)
(1) Peter Foster and Bob Scott retired as directors on 31 March 2001 and 24 April 2001 respectively, and both retired from service on 31 May 2001. Patrick Snowball was appointed a director of the Company on 31 March 2001 and the amounts disclosed are those paid since that date.
(5) Disclosed for each director is the “increase in pensions”entitlement over the year (in excess of an allowance for inflation) and the corresponding transfer value of that increase. The “transfer value of increase”represents an obligation on the pension fund (where funded), or the Company (where unfunded). They are not sums paid or due to the director. Also disclosed is the “pension accumulated”, being the amount of pension to which the director would be entitled on leaving service.
Incentive plans 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 or hold or held awards over shares in the Company, pursuant to the Company’s share-based incentive plans, are set out below.
Bob Scott – Executive options 256,510 256,510* 732.4 – Savings related options 3,694 3,694* 466.7 – Bonus Plan options 6,518 6,518* 966.5
Options granted after 1997 are only exercisable if certain performance conditions are met. During the year, the three year performance period attaching to options granted in December 1998, at an exercise price of 853 pence per share, expired. In order for participants to exercise these options, the Company’s Total Shareholder Return (TSR), when compared with the TSR of 15 financial services companies, including seven major European insurers, would need to at least match median performance. At median performance, 40% of the options become exercisable and, at upper quartile performance 100% of the options become exercisable. Between median and upper quartile, the number of options vesting is determined on a straight-line basis. At the end of the performance period, the Company was ranked 5th out of the ten companies remaining in the comparator group and accordingly 50.9% of the options have become exercisable. Under the rules of the scheme, the performance conditions will be retested at each anniversary of the grant in respect of the options which have not vested.
(5) The mid-market price of an ordinary share in the Company on 31 December 2001 was 845 pence, and the mid-market prices during the year ranged from 650 pence to 1112 pence.
Mike Biggs CGNU Integration Incentive Plan 37,333 – – – 37,333 CGNU Long Term Incentive Plan 34,453 43,229 – – 77,682 CGNU Deferred Bonus Plan – 29,492 – – 29,492
Peter Foster CU Long Term Incentive Plan 5,332 – 2,483 – 2,849* CGU Integration Incentive Plan 34,789 – 34,789 – – CGU Deferred Bonus Plan 3,824 – – – 3,824* CGNU Integration Incentive Plan 39,081 – – – 39,081*
Richard Harvey CGNU Integration Incentive Plan 59,393 – – – 59,393 CGNU Long Term Incentive Plan 107,988 69,270 – – 177,258 CGNU Deferred Bonus Plan – 50,530 – – 50,530
Patrick Snowball CGNU Integration Incentive Plan 28,282 – – – 28,282 CGNU Long Term Incentive Plan 24,682 36,458 – – 61,140 CGNU Deferred Bonus Plan – 16,888 – – 16,888 CGNU Restricted Share Plan 13,141 – – – 13,141
Philip Twyman CGU Integration Incentive Plan 34,789 – 34,789 – – CGU Deferred Bonus Plan 8,083 – – – 8,083 CGNU Integration Incentive Plan 41,138 – – – 41,138 CGNU Long Term Incentive Plan – 41,666 – – 41,666 CGNU Deferred Bonus Plan – 21,666 – – 21,666
(1) The CU Long Term Incentive Plan is the Commercial Union plan approved by shareholders in 1997. Awards were granted that year but, as a result of the merger with General Accident in 1998, no further awards were made under the plan. The awards vested at the end of their relevant performance periods (1999 and 2000) and, in accordance with the terms of the plan, half of the vesting shares were transferred to the participants immediately with the balance transferred two years later. The awards referred to in the above table are the remaining half of the awards which vested in 1999 and which were transferred to the participant during the year. Those shown at 31 December 2001 are the balance of the awards vesting in 2000 which will be released to the participants in February 2002. Once the shares have been transferred, the plan will close.
(4) The CGNU Integration Incentive Plan, which relates to the merger of CGU and Norwich Union, was approved by shareholders at last year’s Annual General Meeting. Awards were granted to directors in September 2000, subject to the condition that shareholders’ approval was obtained. As described below, the performance conditions under the plan have been met and the awards will vest in March 2002. The plan will then close.
(ii) Share Awards continued (7) CGNU Restricted Share Plan. Norwich Union had a deferred bonus arrangement in which a small number of senior managers participated. Awards were granted which vest after three years, subject to the attainment of a performance measure based on Total Shareholder Return (TSR). To vest, Norwich Union’s ranking against the TSR of the FTSE 100 companies would have to be better than median, when 25% of the awards would vest, rising to 100% of the awards vesting if the Company ranked 20th or above. This plan lapsed in 2000 upon the merger of CGU and Norwich Union. However, a one-off arrangement based on ‘phantom shares’ was introduced at that time to replicate the plan but only in respect of the three year performance period which commenced in 1999. Based on the TSR over the performance period (subject to appropriate weighted adjustments being made to recognise that the Company, for the purpose of the calculation, was Norwich Union plc up to 30 May 2000), the Company was ranked 43rd against the FTSE 100 and therefore a cash award, based on 42.5% of the number of ‘phantom shares’ awarded and the market value of an ordinary share, will be paid to the five participants in the plan. Mr Snowball is the only executive director to participate in this phantom plan as it was not extended to those former Norwich Union executives who became directors of CGNU at the time of the merger. In respect of these directors, the Remuneration Committee reserved the right to approve a discretionary cash payment and, in this regard, the Committee has agreed to award a cash bonus to these directors based on the number of shares (ranging from 5,584 to 11,170) and the Company’s share price at the end of February 2002. This plan will now close.
Cash bonus – The bonuses attaching to this part of the plan were paid in March 2000.
Pehr Gyllenhammar (note 1) 268 246 Lyndon Bolton (note 2) 11 44 Guillermo de la Dehesa 36 35 Wim Dik 36 35 Sir Michael Partridge 36 35 George Paul (note 1) 160 172 Derek Stevens (note 1) 54 50 Dr Elizabeth Vallance 36 35 André Villeneuve 36 35
(1) The fee disclosed for Pehr Gyllenhammar includes the benefit of a car allowance. The fee for George Paul reflects his duties as Deputy Chairman, which includes chairing the Remuneration Committee and acting as the senior non-executive director. The fee for Derek Stevens includes an additional amount for acting as Chairman of the Board’s Audit Committee and of the CGNU Staff Pension Scheme.
(2) Lyndon Bolton retired as a director on 24 April 2001.
42 CGNU plc Annual report + accounts 2001 Directors’ remuneration continued
Respective responsibilities of directors and auditors The directors’ responsibilities for preparing the Annual report and the accounts in accordance with applicable United Kingdom law and accounting standards are set out in the Statement of directors’ responsibilities above.
We review whether the corporate governance statement 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 the Group’s corporate governance procedures or its risk and control procedures.
We planned and performed our audit so as to obtain all the information and explanations which we considered necessary in order to provide us with sufficient evidence to give reasonable assurance that the accounts are free from material misstatement, whether caused by fraud or other irregularity or error. In forming our opinion, we also evaluated the overall adequacy of the presentation of information in the accounts.
Independent auditor’s report to the members of CGNU plc 43 CGNU plc
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 2001, 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.
In November and December 2000, the Accounting Standards Board issued three new Financial Reporting Standards (“FRS”). These were FRS17 Retirement Benefits, FRS18 Accounting Policies and FRS19 Deferred Tax. The accounting provisions of FRS17 will not be mandatory for the Group until the year ended 31 December 2003. However, the FRS has an extended transitional period, during which certain disclosures are required in the notes to the accounts. The Group is required to make these phased transitional disclosures for the year ended 31 December 2001 and these are shown in note 43(d). FRS18 is effective for the year ended 31 December 2001 and has not had a material impact on the Group. FRS19 will be effective for the year ended 31 December 2002 and the full impact will be reflected in that year’s accounts.
General business claims incurred include all losses occurring during the year, whether reported or not, related handling costs and any adjustments to claims outstanding from previous years. Significant delays are experienced in the notification and settlement of certain general insurance claims, particularly in respect of liability business, including environmental and pollution exposures, the ultimate cost of which cannot be known with certainty at the balance sheet date.
General business outstanding claims provisions are based on the estimated ultimate cost of all claims incurred but not settled at the balance sheet date, whether reported or not, together with related claims handling costs, except for provisions for certain claims which are discounted using rates having regard to the returns generated by the assets supporting the liabilities. Any estimate represents a point within a range of possible outcomes. Further details of estimating techniques are given in note 37(a).
Long-term business claims reflect the cost of all claims arising during the year, as well as policyholder bonuses paid in anticipation of a bonus declaration.
Deferred acquisition costs represent a proportion of commission and other acquisition costs that relate to policies that are in force at the year end. General business deferred acquisition costs are amortised over the period in which the related premiums are earned. Long-term business deferred acquisition costs are amortised over a period no longer than that in which they are expected to be recoverable out of margins in revenues from the related policies.
Provision is made for any overall excess of expected claims and deferred acquisition costs over unearned premiums, after taking account of the investment return expected to arise on assets relating to the relevant general business provisions.
Transfers from the long-term business technical account to the non-technical account in respect of shareholders’ profits are determined as a result of annual actuarial valuations, which are based on local practice, subject to transfers to or from the fund for future appropriations.
These are valued at the year end rates and disclosed as part of borrowings; • interest rate swaps. The interest payable and receivable is included within investment expenses or investment income as appropriate; • futures contracts and purchased options. These are included at market value and shown under the category of investments to which the contracts relate. No adjustment is made to the classification of existing investments to reflect the effect of the future settlement of these transactions.
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 Company balance sheet, subsidiary undertakings are stated at current value which, for this purpose, is net asset value.
The embedded value is carried at the directors’ valuation, and is audited by the Group’s auditors. Further detail of the methodology and assumptions is included as supplementary information on pages 96 to 98. The embedded value is the total of the shareholders’ net worth 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 deduction for the effect of meeting the statutory solvency requirements of the business. The shareholders’ net worth comprises the market value of the shareholders’ funds and the shareholders’ interest in the surplus held in the non-profit component of the long-term business funds determined on a statutory solvency basis and adjusted to add back any non-admissible assets. This effect of solvency requirements 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 long-term business provision is calculated separately for each life operation, mainly using the net premium method, based on local actuarial principles consistent with those applied in the United Kingdom. Each calculation represents a point within a range of possible outcomes, and the assumptions used in the calculations depend on the circumstances prevailing in each life operation. The principal assumptions are given in note 36.
Within the long-term business provision, explicit allowance is made for vested bonuses, including those added following the current valuation, but not generally for future reversionary or terminal bonuses. The provisions held for linked business and unitised with profits business are the unit liabilities together with certain non-unit provisions.
Computer equipment, motor vehicles and other tangible assets are capitalised at cost and depreciation is charged to the profit and loss account, within expenses, over their estimated useful lives of between three and five years. Assets acquired under finance leases are capitalised and charged to the profit and loss account over the shorter of the term of the leases or their estimated useful lives, subject to a maximum of five years. 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 fund for future appropriations is used in conjunction with long-term business where the nature of the policy benefits is such that the division between shareholder reserves and policyholder liabilities is uncertain. Amounts whose allocation either to policyholders or shareholders has not been determined by the end of the financial year are held in the fund for future appropriations. Transfers between the fund for future appropriations and the long-term business technical account represent changes in the unallocated amounts between balance sheet dates.
Provision is made in the Group accounts for the equalisation provisions established, where required, in the accounts of individual insurance companies in the United Kingdom and in a limited number of countries overseas. The provision is required by law even though no actual liability exists at the balance sheet date.
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 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.
Transactions denominated in foreign currencies are translated at the exchange rate at the date of transaction. Foreign currency assets and liabilities held at the year end are translated at year end rates of exchange. The resulting exchange gains or losses are included in the profit and loss account, for the year and through reserves respectively.
am £m £m 28,329 Gross premiums written – continuing operations (6a) 17,564 15,190 (540) Outward reinsurance premiums (335) (342)
27,789 Written and earned premiums, net of reinsurance (C & 6a) 17,229 14,848
(1,172) Change in technical provision for linked business, net of reinsurance (Q) (727) (2,002)
(9,974) Changes in other technical provisions, net of reinsurance (6,184) (10,591)
(3,580) Net operating expenses (9a) (2,220) (1,918) (387) Investment expenses and charges (7a) (240) (182) (79) Other technical charges (22a) (49) (23) 27 Tax attributable to long-term business (J & 13b) 17 (611) 58 Allocated investment return transferred from/(to) the non-technical account (G & 7b) 36 (2)
11,050 Transfers from the fund for future appropriations (T) 6,851 5,011 7,089 Other income/(charges) 4,395 2,275 1,242 Balance on the long-term business technical account – continuing operations (H) 770 679 1,242 Balance on the long-term business technical account 770 679 574 Tax credit attributable to balance on the long-term business technical account 356 374 1,816 Profit from long-term business operations before tax 1,126 1,053
Change in the provision for claims (487) Gross amount (302) (821)
The table below provides a reconciliation between the analysis used in the narrative sections of this Report and the balance on the general business technical account above.
Allocation of Underwriting result longer-term investment return Total £m £m £m £m £m £m
Unwinding of discount on business no longer written (37c) – (24) – 24 – –
Financial Services Compensation Scheme levy (31) – Change in the equalisation provision (56) (27) Integration costs (9b) – (211)
Investment income (G & 7a) 6 Share of result of associated undertakings, net of goodwill amortisation 4 1
(160) Loss on wealth management (99) (133) (10) Loss from other operations (6) (25)
Other charges: 463 Net profit/(loss) arising on the disposal of subsidiary undertakings (16c) 287 (1,058)
Earnings per share attributable to equity shareholders Operating profit before amortisation of goodwill, amortisation of acquired additional value of in-force long-term business and exceptional items, after tax, 70.0c in respect of continuing operations (15a) 43.2p 28.3p 1.0c Profit/(loss) for the financial year (15a) 0.7p (77.0)p 1.0c Profit/(loss) for the financial year – diluted (15b) 0.7p (76.9)p
– Loss on withdrawal from London Market operations – (448) – Merger transaction costs – (59)
Consolidated statement of total recognised gains and losses For the year ended 31 December 2001 am £m £m 53 Profit/(loss)for the financial year 33 (1,713) Movement in internally-generated additional value
(1,225) of in-force long-term business* (32) (761) 73 210 Foreign exchange (losses)/gains (V & 32) (191) 303
Reconciliation of movements in consolidated shareholders’funds For the year ended 31 December 2001 am £m £m
– Merger reserve arising in the year (32) – 5 5 Goodwill written back and other movements (K & 32) 3 110
Prepayments and accrued income 2,341 Accrued interest and rent 1,432 1,424 1,165 Other prepayments and accrued income 713 802
Technical provisions 7,648 Provision for unearned premiums (C) 4,679 6,078 168,282 Long-term business provision (Q & 36) 102,955 97,022 89 Other technical provisions 54 27 47,795 Technical provision for linked liabilities (Q) 29,241 27,958 1,008 Provisions for other risks and charges (39) 617 2,086 1,491 Deposits received from reinsurers 912 613
General business and other borrowings 312 Amounts due to credit institutions (40c) 191 395 14,006 Other creditors including tax and social security (41) 8,567 6,066 28 Loans from associated undertakings 17 28 1,639 Accruals and deferred income (42) 1,003 1,244 285,313 Total other liabilities 174,554 179,101
Consolidated cash flow statement For the year ended 31 December 2001 £m £m
Operating activities Net cash inflow from operating activities, excluding exceptional items and merger transaction costs (45a) 418 738 Exceptional items and merger transaction costs paid (208) (251)
Returns on investments and servicing of finance Interest paid on borrowings (197) (205) Interest paid on subordinated debt (10) – Preference dividends paid (17) (17) Dividends paid to minorities (22) (35) Net cash outflow from servicing of finance (246) (257)
Acquisitions and disposals Net acquisitions of subsidiary and associated undertakings (45b) 853 (277)
Financing activities Issue of share capital (45c) 29 54 Net drawdown of loans 94 439 Proceeds from issue of subordinated debt (34) 1,157 – Net cash inflow from financing activities 1,280 493
The cash flows presented in this statement relate to non-long-term business transactions only.
Fixed assets Shares in subsidiary undertakings (N & 16e) 13,699 13,655
Current assets Amounts owed by subsidiary undertakings 3,467 3,426 Other assets 355 76
Creditors: Amounts falling due within one year Amounts owed to subsidiary undertakings (1,799) (1,434)
The 2001 profit and loss account and balance sheet figures have been translated into euros using the average rate of a1 = £0.62 (2000: a1 = £0.61) and the closing rate of a1 = £0.61 (2000: a1 = £0.63) respectively.
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
Net premiums written – 192 1,103 3,021 Change in the provision for unearned premiums – (16) 102 (14)
Balance on the general business technical account Underwriting result – (59) (173) (967) Longer-term investment return – 55 152 417
Loss on ordinary activities before tax – (14) (30) (529) Tax on loss on ordinary activities – 1 (93) 110
(i) Operating profit in respect of long-term business before amortisation of acquired additional value of in-force long-term business, amortisation of goodwill on associates and exceptional items £m £m
(iv) Operating (loss)/profit in respect of general insurance business excluding health, before exceptional items
United Kingdom 2,763 2,299 2,058 2,159 4,821 4,458 Europe (excluding UK) 2,336 2,123 1,540 1,791 3,876 3,914
External borrowings (2,651) (2,581) Internal borrowings (3,284) (4,120) Subordinated debt (1,157) – Discontinued operations – 1,757 58 CGNU plc Annual report + accounts 2001 Notes to the accounts continued
Merger integration incentive plans (9b) 49 – Merger integration costs (9b) – 50 Costs of integrating acquired undertakings (9b) 10 –
*The figures for associates comprise the Group’s share of the associated partnership in RBS Life Investment Limited.
Total long-term business premiums, including share of associates 17,939 15,190 17,590 14,848 Less: Share of associates’ premiums (UK)* (375) – (361) –
Total general insurance business premiums (excluding health) 9,557 9,743 8,433 8,990 60 CGNU plc Annual report + accounts 2001 Notes to the accounts continued
(vi) Premium income by destination does not differ materially from premium income by geographical origin, as most risks are located in the countries where the policies were written.
(b) The analysis of general insurance business premiums written before reinsurance is: General business premiums excluding health – continuing operations 9,557 9,743 Discontinued operations 1,187 3,442
(iii) The longer-term return is calculated separately for each principal general insurance business unit and certain long-term business operations. In respect of equities and properties, the return is calculated by multiplying the opening market value of the investments, adjusted for sales and purchases during the year, by the longer-term rate of investment return. The longer-term rate of investment return is determined using consistent assumptions between operations, having regard to local economic and market forecasts of investment return. The allocated longer-term return for other investments is the actual income receivable for the year.
(iv) 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
The Group intends to retain the same longer-term rates of investment return for the 2002 financial year.
(c) The actual return on investments, before deducting investment management expenses and charges, is compared below with the aggregate longer-term return over a four year period.
Actual return attributable to shareholders: Long-term business* 553 642 Non-long-term business 6,693 9,001
Equities 1% higher/lower Group operating result £49m Properties 1% higher/lower Group operating result £8m 62 CGNU plc Annual report + accounts 2001 Notes to the accounts continued
In 2001, long-term business “other”expenses include costs of £5 million (2000: £11 million) and general business “other”expenses include costs of £3 million (2000: £6 million) relating to projects to prepare for the introduction of the euro.
(b) Integration costs have been charged to the consolidated profit and loss account as follows: Long-term business General business technical account technical account Non-technical account Total £m £m £m £m £m £m £m £m
The average number of persons employed by the Group during the year was: United Kingdom 36,091 35,641 Europe (excluding UK) 18,520 17,671
The analysis of total staff costs was: Wages and salaries 1,794 1,865 Social security costs 208 199 Pension costs 89 88 11 – Directors
On 24 April 2001, Ernst & Young were appointed sole auditors of the Company having previously been joint auditors with PricewaterhouseCoopers. The total remuneration payable by the Group, excluding VAT and any overseas equivalent thereof, in respect of the audit of these accounts is shown below, together with fees paid to the auditors of the parent company and their associated firms in respect of other work.
The auditors’ remuneration in respect of the parent company was £10,000 (2000: £3,000).
Accounting and tax advice 1.7 Assurance services 4.2 Due diligence 0.7 Other 1.3
The 2000 non-audit fees included 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 was subject to competitive tender.
The potential amount of tax not expected to become a liability in the foreseeable future, for which provision has not been made, comprises: Long-term business Non-long-term business
Amortisation of acquired additional value of in-force long-term business (64) (49) (2.2) (29) (22) (1.0) Financial Services Compensation Scheme levy (31) (22) (1.0) – – –
Change in the equalisation provision (56) (39) (1.7) (27) (19) (0.8) Net profit/(loss) arising on the disposal
London Market operations – – – (448) (314) (14.0) Merger transaction costs – – – (59) (50) (2.2)
The actual number of shares in issue at 31 December 2001 was 2,255 million (2000: 2,251 million).
Profit/(loss) attributable to equity shareholders 16 2,250 0.7 (1,730) 2,247 (77.0) Dilutive effect of share awards and options – 4 – – 4 0.1 16 – Subsidiary undertakings
(i) On 28 June 2001, the Group completed the acquisition of ABN AMRO Magyar Elet es Nyugdijbiztosito Reszvenytarsasag (“Mébit”), the sixth-largest life insurance business in Hungary, from ABN AMRO Bank N.V. for a cash consideration of £64 million, including transaction costs. The embedded value amounted to £11 million, giving rise to goodwill of £53 million.
(iv) On 21 August 2001, the Group entered into a bancassurance agreement with DBS Group Holdings Limited (“DBS”), the number one bank in Singapore and one of the largest in South East Asia, and acquired 100% of the issued equity share capital of The Insurance Corporation of Singapore (“ICS”), DBS’s life and general insurance subsidiary, for a cash consideration of £152 million, including transaction costs, with further amounts payable if ICS achieves its performance targets. The net assets on acquisition of ICS were £90 million, giving rise to goodwill of £75 million after taking into account the estimated value of deferred consideration.
(v) In September 2001, the Group entered into a new bancassurance partnership with Unicaja, the eighth largest savings bank in Spain. As part of this transaction, the Group acquired 50% of the issued equity share capital of Unicaja’s life and pensions subsidiaries, Unicorp Vida and Ahorro Andaluz (together known as Unicorp Vida) for an initial consideration of £95 million including transaction costs, in the form of promissory notes redeemable in the period to December 2006, with further amounts payable if Unicorp Vida achieves certain performance targets. The Group’s share of Unicorp Vida’s embedded value amounted to £14 million. In addition, the Group also entered into a new bancassurance partnership with Caixa Galicia, Spain’s fifth largest savings bank. As part of this transaction, the Group acquired 50% of the issued equity share capital of Caixa Galicia’s life and pensions subsidiary, Bia Galicia, for an initial cash consideration of £93 million including transaction costs, with further amounts payable if Bia Galicia achieves certain performance targets. The Group’s share of Bia Galicia’s embedded value amounted to £6 million. In December 2001, the Group completed the bancassurance partnership with Caja España, the tenth largest savings bank in Spain. As part of this transaction, the Group acquired 50% of the issued equity share capital of Caja España’s life and pension subsidiary, Caja España Vida, for an initial cash consideration of £88 million including transaction costs, with further amounts payable if Caja España Vida achieves certain performance targets. The Group’s share of Caja España Vida’s embedded value amounted to £12 million. The aggregate goodwill on these transactions was £244 million.
Liabilities Technical provisions including linked liabilities 2,751 4 2,755 Other creditors and provisions 1,448 – 1,448
The total consideration comprised: Cash (including contingent cash amounts) 789 Attributable acquisition costs 10 67 CGNU plc
(b) Goodwill on acquisitions continued The fair value adjustments arise from revaluations, mainly to incorporate the full embedded values in the long-term business companies acquired.
Long-term savings businesses: Poland – 65 Canada (see (i) below) (5) –
Other businesses: Australia – 4 UK (see (iii) below) 70 –
(i) In the first six months of 2001, the Group completed the disposal of its wholly-owned Canadian subsidiaries, Commercial Union Life Holdings Limited and Norwich Union Holdings (Canada) Limited, for a combined consideration of £120 million. The embedded value of both businesses at disposal amounted to £117 million and the loss on disposal, after transaction costs, was £5 million.
(ii) In February 2001, the Group completed the disposal of its wholly-owned New Zealand subsidiary, State Insurance Limited, for a cash consideration of £125 million. The net assets disposed of amounted to £69 million and the profit on disposal, after transaction costs, was £52 million.
(iii) In March 2001, the Group completed the disposal of its holding in Quilter Holdings Limited for a cash consideration of £102 million. The cash consideration reflected the value of the Group’s 56.7% interest in Quilter Holdings Limited following the exercise of management options immediately before the change of ownership. The Group’s share of the net assets disposed of amounted to £24 million and the profit on disposal, after transaction costs and writing back £6 million of goodwill previously charged to reserves, was £70 million.
(iv) In July 2001, the Group completed the disposal of its principal general insurance business in Belgium, CGU SA, for a cash consideration of £72 million. The Group’s share of net assets disposed of amounted to £24 million and the profit on disposal, after writing back £2 million of goodwill previously charged to reserves, was £46 million.
Financial Reporting Standard 2 “Accounting for subsidiary undertakings”required the results of the US general business to be consolidated with those of the Group’s continuing businesses until completion on 1 June. However, given that the Group retained no economic interest in the operations of this business beyond 31 August 2000, the US general business’ post-tax operating loss and investment gains incorporated in the Group’s consolidated profit and loss account from 1 September 2000 to completion on 1 June 2001 has been offset by a corresponding change to the loss on sale calculated at 31 August 2000. The loss on sale also reflects goodwill previously written off against reserves but which needs to be reinstated and charged to the profit and loss account.
(vi) During the course of 2001, the Group entered into a binding agreement to dispose of its specialist non-comprehensive insurer, Sabre Insurance Company. This disposal was not completed by 31 December 2001.
68 CGNU plc Annual report + accounts 2001 Notes to the accounts continued
Loss on sale after tax and goodwill write back (989) 125 (47) (911)
(ii) An analysis of the sale proceeds is as follows: US$m £m
Proceeds, net of transaction costs, including repayment of inter-company loan 3,123 2,200
Shares in subsidiary undertakings are valued at net asset value computed in accordance with the Company’s accounting policies. The resulting gain over book value of £3,199 million (2000: £4,393 million) has been credited to the Company’s revaluation reserve (see note 33). The directors are satisfied that the aggregate value of all such investments is not less than the aggregate amount at which they are stated in the balance sheet.
(f) Principal subsidiary undertakings at 31 December 2001 are listed on page 99.
Freeholds 6,276 6,041 759 787 7,035 6,828 Long leaseholds – over 50 years 1,877 1,933 22 29 1,899 1,962 Short leaseholds – under 50 years 31 32 76 4 107 36
The cost of land and buildings at 31 December 2001 was £7,211 million (2000: £7,299 million). The carrying value of land and buildings occupied by the Group for its own activities was £554 million (2000: £580 million).
Investments in associated undertakings (19b) 752 257 1,009 727 252 979 Other participating interests 43 25 68 1 12 13
(b) Associated undertakings (i) 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 25 5 30 Balance at 1 January Goodwill (19c) 257 – 257 Share of net assets 470 252 722
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 49.99% Scotland Société Foncière Lyonnaise Ordinary FF 50 shares 31.5% France The British Aviation Insurance Company Limited (31 December 2000) Ordinary £1 shares 38.1% England
All investments in associated undertakings are held by subsidiary undertakings and are included in the accounts using year ended 31 December 2001 figures, except where the relevant accounting date is shown in brackets. Société Foncière Lyonnaise (“SFL”) is listed on a recognised investment exchange; all other associated undertakings are not listed. All associated undertakings transact insurance business, with the exception of SFL which is a property company.
Cost: Amortisation: At 1 January – – – – Charge in the year 13 – 13 –
Debt securities and other fixed income securities: At current value 20,353 9,288 29,641 11,460 13,813 25,273 At amortised cost 34,129 – 34,129 35,095 – 35,095
Participation in investment pools 77 35 112 101 – 101 Loans secured by mortgages: Own mortgages 8,259 1,035 9,294 7,912 941 8,853 Securitised mortgages (21) 930 219 1,149 348 – 348 Less: Non-recourse funding (21) (930) (219) (1,149) (348) – (348)
All investments above are shown at current value unless otherwise indicated. The cost of financial investments above was £109,767 million (2000: £106,707 million).
(b) Listed investments included in the carrying value above are: Shares and other variable yield securities and units in unit trusts 36,462 50,625 Debt securities and other fixed income securities 58,837 58,433
(c) The long-term debt securities and other fixed income securities, which are shown at amortised cost, are analysed below: The redemption value of investments held at the year end was £614 million less (2000: £488 million greater) than the amortised cost.
(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 2001 were £1,100 million, £1,203 million and £1,546 million respectively (2000: £1,188 million, £1,510 million and £1,391 million respectively) and represented 6.6%, 3.6% and 3.2% (2000: 6.8%, 3.6% and 3.3%) of the respective issued share capitals of these companies. Of these holdings, the long-term business operations owned £453 million (2000: £359 million) of the Société Générale shares, £509 million (2000: £255 million) of the Münchener Rückversicherungs-Gesellschaft shares and £1,510 million (2000: £1,357 million) of The Royal Bank of Scotland Group shares.
Of the holdings in Société Générale at 31 December 2001, shares with a market value of £281 million (2000: £304 million) are held to cover the obligation of a French subsidiary to repay exchangeable bonds. Further details of these bonds are given in note 40(b).
In 1998, the Group purchased several swap options from a European bank to cover a possible future exposure to interest rates related to guaranteed annuities in a subsidiary purchased prior to 1998. At 31 December 2001, the exposure hedged by these options was £2,451 million (2000: £2,551 million) and the contracts had a fair market value of £132 million (2000: £122 million). These options have varying expiry dates up to 2028.
Other financial investments include loans secured by mortgages, subject to non-recourse finance arrangements, in a UK long-term business subsidiary and in a Dutch subsidiary. These balances are accounted for using a linked presentation in accordance with Financial Reporting Standard 5 “Reporting the substance of transactions”. Details of the relevant transactions are as follows: (a) In a United Kingdom long-term business subsidiary (“NUER”), the beneficial interest in a portfolio of equity release mortgages was transferred during 2001 to a special purpose securitisation company, Equity Release Funding (No 1) plc (“ERF1”), in return for initial consideration and, at later dates, deferred consideration. The deferred consideration represents receipts accrued within ERF1 after meeting all its obligations to the noteholders, loan providers and other third parties in the priority of payments. No gain or loss was recognised on this transfer. The purchase of the mortgages was funded by the issue of fixed and floating rate notes by ERF1.
(b) In a Dutch subsidiary (“DL”), the principal benefits of two portfolios of mortgage loans have been transferred to two special purpose securitisation companies, Arena 2000-1 BV and Arena 2001-1 BV (“the Arena companies”), which were funded primarily through the issue of fixed rate notes. No gains or losses were recognised on these transfers.
All the shares in the Arena companies are held by independent trustees, respectively Stichting Security Trustee Arena 2000-1 BV and Stichting Security Trustee Arena 2001-1 BV. DL does not own, directly or indirectly, any of the share capital of the Arena companies or their parent companies.
Included in investment income is £36 million (2000: £nil) relating to the securitisation of these mortgage loan portfolios.
In all of the above transactions, CGNU Group and its subsidiaries are not obliged to support any losses that may be suffered by the 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 that the available resources of the respective special purpose securitisation companies, including funds due from customers in respect of the securitised loans, are sufficient and that noteholders have no recourse whatsoever to other companies in the CGNU Group.
74 CGNU plc Annual report + accounts 2001 Notes to the accounts continued
Foreign exchange rate movements (32) (17) (49) In-force long-term business acquired in subsidiaries (16b) – 118 118 In-force long-term business disposed of (27) – (27) Amortisation charge for the year – (49) (49) Other movements during the year
The amortisation charge for the year appears under the heading “Other technical charges”in the long-term business technical account on page 47. This is grossed up for attributable tax in the reconciliations on pages 47 and 50, and in note 3b on page 58.
Details of the assumptions and methodology supporting the additional value of in-force long-term business can be found on pages 96 to 98.
(a) A reconciliation of assets to linked liabilities is as follows: Assets held to cover linked liabilities 28,704 27,255 Reinsurers’ share of technical provision 537 703
Net book value at 31 December 2001 23 127 157 307
Movements in the residual value of own shares comprise: Number £m Number £m
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 30(b). Further details of the features of the plans can be found in the Remuneration report on pages 37 and 38.
The asset in the consolidated balance sheet comprises: Costs in respect of long-term business 1,595 1,520 Costs in respect of general business 1,008 1,336 29 – Banking and stockbroking activities
Stockbroking clients and counterparties – 38 Short-term deposits and cash 21 17 Other banking and stockbroking assets 64 133
(a) The authorised share capital of the Company at 31 December 2001 was: 3,000,000,000 (2000: 3,000,000,000) ordinary shares of 25 pence each 750 750
Option price Number of shares Normally Option price Number of shares Normally CGU plc Deferred Bonus Plan p exercisable p exercisable 78 CGNU plc Annual report + accounts 2001 Notes to the accounts continued
As at 31 December 2001, awards over a total of 8,754 ordinary shares were outstanding under the Commercial Union Long Term Incentive Plan. These awards will vest in 2002. Shares will be purchased into an employee share trust established to satisfy the vesting of awards.
As at 31 December 2001, awards over a total of 1,766,955 ordinary shares were outstanding under the CGNU Long Term Incentive Plan. Subject to satisfying performance criteria, these awards will vest in 2003 and 2004. Shares will be purchased into an employee share trust to satisfy the vesting of awards. Further details of this plan can be found on pages 37 and 38.
The Company has also established and funded an employee share ownership trust, which has the power to acquire shares in the open market to meet future obligations under the Company’s Savings Related Share Option Schemes. Alternatively, new shares may be issued by the Company to meet such obligations.
Ordinary shares in issue in the Company rank pari passu. All the ordinary shares in issue carry the same right to receive all dividends and other distributions declared, made or paid by the Company.
(a) The preference share capital of the Company at 31 December 2001 was: Authorised 200,000,000 cumulative irredeemable preference shares of £1 each 200 200
Transfer from non-technical account – – (841) (841) Foreign exchange rate movements (33) – (158) (191) Decrease in value of in-force long-term business (P & 22a) (761) – – (761) Goodwill on disposals, previously written off – – 9 9
As explained in accounting policy K on page 45, goodwill arising on acquisitions since 1 January 1998 is carried on the balance sheet and amortised over its useful economic life. The cumulative amounts of positive and negative goodwill charged or credited to the consolidated profit and loss account, attributable to subsidiary undertakings acquired from 1 January 1968 to 31 December 1997 and not subsequently sold, are £1,270 million and £18 million respectively. Similar information relating to subsidiary undertakings acquired before 1968 is not readily available.
Movements in the Company’s reserves comprise: Revaluation Profit and loss reserve Merger reserve account Total £m £m £m £m
Retained loss for the year – – (596) (596) Unrealised losses (1,194) – – (1,194)
The cumulative amount in the profit and loss account includes non-distributable gains of £5,735 million (2000: £5,735 million).
Group and Company £m £m 5.75% a800 million subordinated notes 2021 479 –
The 6.125% Fixed/Fixed Rate Reset Subordinated Notes 2036 and the 5.75% Fixed/Floating Rate Reset Subordinated Notes 2021 were issued by the Company on 14 November 2001. The Notes rank below the senior obligations and ahead of the preference and ordinary share capital issued by the Company. The 2036 Notes are callable at par, at the option of the Company, on 16 November 2026 and 14 November 2031. If the Notes are not called, the interest rate payable will be reset to an amount of 2.85% over the Gross Redemption Yield on the appropriate five-year benchmark gilt on the reset date. The 2021 Notes are callable at par on 14 November 2011 and at three monthly intervals thereafter up to maturity. If the Notes are not called, the interest payable will be reset to an amount of 2.12% above 3 month Euribor.
– “with-profit”funds of CGNU Life, Commercial Union Life, Norwich Union Life & Pensions and the Provident Mutual fund, where the with-profits policyholders are entitled to at least 90% of the distributed profits, the shareholders receiving the balance; – “non-profit”funds of Norwich Union Annuity, Norwich Union Life & Pensions and Norwich Union Linked Life, where shareholders are entitled to 100% of the distributed profits. Shareholder profits on unitised with-profit business written by Norwich Union Life & Pensions are derived from management fees and policy charges, and emerge in the non-profit fund.
(ii) In France, where the majority of policyholders’ benefits are determined by investment performance, subject to certain guarantees, and shareholders’ profits are derived largely from management fees. In addition, a substantial number of policies participate in investment returns, with the balance being attributable to shareholders.
(b) The directors have been advised by the Group’s reporting actuary that the assets of each of the long-term operations were at least sufficient to meet their respective liabilities at 31 December 2001.
The long-term business provision is calculated separately for each life operation, mainly using the net premium method. The provisions for overseas subsidiaries have generally been included on the basis of local regulatory requirements, modified where necessary to reflect United Kingdom statutory requirements. Material judgement is required in calculating the provisions and is exercised particularly through the choice of assumptions where there is discretion over these.
United Kingdom Assurance: With-profit 2.25 to 2.5 AM80/AF80 or A67/70 less 3 years Non-profit 3.25 to 4 70%, 90% or 100% AM80/AF80 adjusted for smoker status Pure endowment and deferred annuity: Pensions business (in deferment) 3 to 5.75 Nil or 50% of AM80/AF80 or AM80 less 5 years
Pensions business (from vesting) 4 to 4.75 PMA80/PFA80 or PMA92/PFA92 Adjusted
Annuity in payment: General annuity 4 to 5.8 IMA80/IFA80 or IMA92/IFA92 or RMV92/RFV92
For unitised with-profit business, the provisions are valued initially by determining the lower of the current non-guaranteed surrender value and the bid value of units. This result is then compared with a prospective valuation and the higher result is taken.
The provisions held in respect of guaranteed annuity options are a prudent assessment of the additional liability incurred under the option on a basis and method consistent with that used to value basic policy liabilities, and includes a prudent assessment of the proportion of policyholders who will choose to exercise the option.
Netherlands Life assurance 3 to 4 GBM 61-65, 76-80, 80-85 and GBM/V 85-90, 90-95 Annuities in deferment and in payment 3 to 4 GBM/V 76-80, 80-85, 85-90, 90-95, Coll 1993 and DIL 98 plus further allowance for future mortality improvement
(b) Claims incurred in the general business technical account in 2000 included deficits amounting to £737 million arising on claims reported in previous years. These arose principally in relation to certain long-tail liability business which is no longer written. There were no material deficits in 2001.
Net of reinsurers’ share, the outstanding claims provisions before discounting were £8,058 million (2000: £14,470 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 was not material (2000: £24 million).
An equalisation provision has been established in the Group accounts as explained in accounting policy U on page 46. This had the effect of reducing Group and Company shareholders’ funds by £272 million at the year end (2000: £216 million). The change in the equalisation provision during the year comprised a reduction of £56 million (2000: £27 million) in the balance on the general business technical account and the profit on ordinary activities before tax. The closing provision in 2000 was reduced by £23 million, representing the equalisation provision of a subsidiary company sold during that year.
82 CGNU plc Annual report + accounts 2001 Notes to the accounts continued
Movements in provisions for other risks and charges were: Pensions and Deferred tax Provision for similar obligations (note 13c) integration costs Other Total £m £m £m £m £m
Exchange rate movements on opening provisions 1 (2) (1) (5) (7) Movement during the year: Additional provisions made in the year 58 30 Amounts utilised (296) (1,084) Amounts released unutilised – (15)
“Other”comprises borrowings by holding companies within the Group which are not allocated to operating companies. The amounts shown above are net of related derivative contracts.
(b) Debenture loans comprise: Long-term business Other £m £m £m £m 9.125% US$100 million subordinated debentures 2026 – – – 61 1.5% FF2.8 billion exchangeable bonds 2003 – – 281 304 2.5% subordinated perpetual loan notes – – 106 108 Institutional borrowings (average rate 5%) 51 16 – – Institutional borrowings 2000/2001 (average rate 3%) – – – 12
The 9.125% US$100 million subordinated debentures 2026 were issued by the Canadian General Insurance Group Limited in 1996, and redeemed at the option of the company on 31 March 2001.
(b) continued The 1.5% FF2.8 billion exchangeable bonds were issued by a French subsidiary undertaking. They are repayable in cash in 2003 and hence are included in borrowings falling due within one to two years. The holders may however exchange their bonds at any time up to 8 July 2003 into ordinary shares of Société Générale, which are already owned by the Group, although the issuer has the option to pay a cash equivalent. The carrying value of the bonds is adjusted to reflect the value of the Société Générale shares if this value exceeds the nominal bond exchange value of a58.12 (FF381.25). At 31 December 2001, the value of a Société Générale share was a62.85.
(c) Amounts due to credit institutions comprise: General business Other £m £m £m £m
The commercial paper is all repayable within one year and is issued in a number of different currencies. Part of this has been converted into a sterling liability through the use of financial instruments in a subsidiary undertaking.
Repayable as follows: One year or less 1,741 1,043 Between one and two years – 100 Between two and five years 199 199 After five years 198 198
(f) Loans exclude intra-group borrowings, certain of which are guaranteed by third parties.
40 – Debenture loans, amounts due to credit institutions and commercial paper continued
Bank overdrafts arise substantially from unpresented cheques and amount to £553 million (2000: £281 million) in long-term business operations and £364 million (2000: £219 million) in general business and other operations. The “other”totals include the obligation to repay £336 million (2000: £391 million) received under stock repurchase arrangements entered into in the United Kingdom and the Netherlands.
Deferred reinsurance commissions 51 29 Other accruals and deferred income 952 1,215
(b) The Group has continued to account for pensions in accordance with SSAP 24 and the disclosures given in section (c) below are those required by that accounting standard. FRS17 “Retirement Benefits”was issued in November 2000 and differs from SSAP24 in a number of ways. These are principally in the choice of assumptions, and that the difference between the market value of assets and liabilities is immediately recognised in the balance sheet under FRS17, whereas changes in assets and liabilities are recognised on a smoothed basis under SSAP24. Full compliance with FRS17 will not be mandatory for the Group until the year ended 31 December 2003 but phased transitional disclosures are required from 31 December 2001. These disclosures, to the extent not given in section (c), are set out in section (d) below.
The 2001 pension costs of defined benefit and defined contribution schemes for the Group were £89 million (2000: £88 million). There were no significant contributions outstanding or prepaid as at 31 December 2001.
(iii) The effect on the Group net assets and retained profits at 31 December 2001 of substituting the above FRS17 figures for the corresponding SSAP24 balance sheet entries would be as follows: Profit and loss Net assets account £m £m
Totals excluding pension asset 12,380 1,729 Add: pension asset on FRS17 basis 233 233
The cash flow statement reflects long-term business activities only to the extent that cash is transferred between long-term and non-long-term operations. In the following analyses, long-term business assets and liabilities shown in the consolidated balance sheet have therefore been excluded.
Profit/(loss) on ordinary activities before tax, excluding exceptional items and merger transaction costs 604 (922)
Adjustments for financing expense and items not involving movements of cash: Depreciation of tangible fixed assets 136 141 Amortisation of goodwill 87 92 Amortisation of acquired additional value of in-force long-term business 64 29 (Decrease)/increase in general business underwriting liabilities and provisions (347) 280 Realised and unrealised losses/(gains) on investments 621 (780) Provision for loss on sale of United States general business – 1,070 Net (profit) arising on the disposal of subsidiary undertakings (287) (12) Decrease/(increase) in deferred acquisition costs 28 (67) Movement in banking and stockbroking assets and liabilities (398) (100) Movement in other assets/liabilities 393 1,285 Profits retained in associated undertakings 2 – Profits not yet transferred from long-term business funds (702) (467) Loan interest expense 217 189
Net cash inflow from operating activities, excluding exceptional items and merger transaction costs 418 738
Cash consideration for subsidiary undertakings acquired (603) (546) Cash proceeds from disposal of subsidiary undertakings 1,732 246 Net cash balances (acquired)/divested with subsidiary undertakings (276) 23 88 CGNU plc Annual report + accounts 2001 Notes to the accounts continued
Issue of ordinary share capital 29 54 – – New borrowings drawn down, net of expenses – – 10,290 9,673 Repayment of borrowings – – (9,039) (9,234)
Share capital is represented by: Ordinary share capital 564 563 Preference share capital 200 200 Share premium account 1,083 1,055 Merger reserve in respect of share capital 1,996 1,996
Changes in cash (67) 122 Balance at 1 January 605 483
(e) Non-long-term business cash included in the consolidated balance sheet comprised: 2001 2000 Changes in year £m £m £m
(g) Non-long-term portfolio investments included in the consolidated balance sheet comprised: 2001 2000 Changes in year £m £m £m
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 £96 million (2000: £225 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.
90 CGNU plc Annual report + accounts 2001 Notes to the accounts continued
Operating profit including life achieved profit – continuing operations 2,004 1,407 1,623 1,704 2,053
Amortisation of goodwill and acquired value of long-term business (151) (121) (56) (10) – Financial Services Compensation Scheme levy (31) – – – –
Consolidated shareholders’ funds Equity shareholders’ funds 11,672 13,433 15,473 14,691 13,022
Summarised consolidated profit and loss account – achieved profit basis For the year to 31 December 2001 am £m £m
Operating profit – continuing operations before tax, 3,232 amortisation of goodwill and exceptional items 2,004 1,407
The achieved profit statement on page 92 includes the results of the Group’s life operations reported under the achieved profit basis combined with the modified statutory basis results of the Group’s non-life operations set out on pages 44 to 90. In the directors’ opinion, the achieved profit basis provides a more accurate reflection of the performance of the Group’s life operations year on year than results under the modified statutory basis. The achieved profit methodology used is in accordance with the guidance on “Supplementary reporting for long-term insurance business (the achieved profits method)”circulated by the Association of British Insurers in December 2001. Further details on the methodology and assumptions are set out on pages 96 to 98.
Total life achieved profit, including the Group’s share from the alliance with RBSG, comprises the following components, the first four of which in aggregate are referred to as life achieved operating profit: • new business contribution written during the year including value added between the point of sale and end of year; • the profit from existing business equal to: – the expected return on the value of the in-force business at the beginning of the period,
• the impact of changes in economic assumptions in the period.
– experience variances (18) 10 – operating assumption changes* 17 (7)
Development costs – (20) Expected return on shareholders’ net worth 339 319
Total life achieved profit before tax 31 1,151 Tax on operating profit (514) (485) Tax on other ordinary activities 499 110
Total life achieved profit after tax 16 776 * Operating assumption changes include the impact of reducing risk margins in the Netherlands and the Poland life and pensions operations in line with the directors’ views of the risks associated with these in-force portfolios. The impact of the change in the Netherlands was £17 million. The impact was £22 million in the Poland life operation and £6 million in the Poland pensions operation.
** Profits from other life and savings activities include the UK service company, which is deemed to act as a separate business segment to the long-term business operations, and have been calculated on a statutory basis.
Local currency 2000 at 2001 £m £m % £m £m £m
Total new business contribution including effect of solvency margin 479 363 392 * Annual premium equivalent represents regular premiums plus 10% of single premiums. ** 2000 new business contribution has been shown using the application of 2001 economic assumptions.
Total life achieved operating profit before tax and exceptional items** 1,665 1,533 * Excludes other life and savings activities. ** Life achieved operating profit includes minority interests in 2001 of £84 million (2000: £42 million). This comprises minority interests in France of £8 million
(2000: £6 million), Italy £27 million (2000: £12 million), Poland £15 million (2000: £15 million), Spain £34 million (2000: £10 million), and International £nil (2000: loss of £1 million).
Net worth Valuation of in-force Embedded value at 31 December* at 31 December** at 31 December £m £m £m £m £m £m
Netherlands (including Belgium and Luxembourg) 1,032 1,319 834 767 1,866 2,086 * The shareholders’ net worth comprises the market value of the shareholders’ funds and the shareholders’ interest in the surplus held in the non-profit component of the long-term business funds determined on a statutory solvency basis and adjusted to add back any non-admissible assets.
Life achieved operating profit before tax and exceptional items 1,590 84 1,674 1,569
The life achieved profit reflects current performance by measuring the movement, from the beginning to the end of the year, in the present value of projected releases to shareholders, from the business in-force and associated minimum statutory margin together with the movement in the net assets of the long-term operations, adjusted for any amounts released from or invested in life operations.
The calculations are carried out on an after-tax basis and the profits are then grossed up for tax at the full rate of corporation tax for the United Kingdom and at an appropriate rate for each of the other countries.
Economic assumptions The table below shows the sensitivity to a one percentage point increase in interest rates and in the discount rate for new business contribution and embedded value.
The directors are responsible for preparing the Annual Report, including, as described on page 43, the accounts prepared on the modified statutory solvency basis. Our responsibilities in relation to the Annual Report, including those accounts, are set out on page 43. The directors are also responsible for preparing the supplementary information on the above achieved profits basis.
In our opinion, the supplementary information for the year ended 31 December 2001 has been properly prepared in accordance with the achieved profits basis, using the methodology and assumptions set out on pages 96 to 98.
Australia CGU Insurance Australia Limited and its principal subsidiaries: CGU Insurance Limited Norwich Union Life Australia Limited Norwich Union Navigator Limited Sitrof Australia Limited Swann Insurance (Australia) Pty. Limited
Canada CGU Holdings Canada Limited and its principal operating subsidiaries: CGU Insurance Company of Canada Limited Pilot Insurance Company
France CGU Participations SA and its principal subsidiaries: Abeille assurances SA Abeille vie SA CGU Courtage SA (98.65%) Eurofil SA (99.50%) Norwich Union France SA Société d’Epargne Viagére SA (75.0%) Union Financiere de France Banque (76.4%)
Turkey Commercial Union Hayat Sigorta AS Commercial Union Sigorta AS (98.6%)
Ex-dividend date (ordinary shares) 27 March First dividend payment for 83⁄8% cumulative irredeemable preference shares 2 April Record date (ordinary shares) 2 April Annual General Meeting 23 April Dividend Reinvestment Plan Election Date 25 April Announcement of first quarter long-term savings new business figures 25 April Payment date (ordinary shares) 17 May First dividend payment for 83⁄4% cumulative irredeemable preference shares 1 July Announcement of unaudited six months’ interim results 1 August Second dividend payment for 83⁄8% cumulative irredeemable preference shares 30 September Announcement of third quarter long-term savings new business figures 24 October Second dividend payment for 83⁄4% cumulative irredeemable preference shares 31 December
The recommended final dividend on the ordinary shares for 2001 will be paid in cash on 17 May 2002. Shareholders are offered the opportunity to participate in the Company’s Dividend Reinvestment Plan (the ”Plan”) which enables dividends to be reinvested in the Company’s shares at reduced dealing costs. Shareholders who have previously elected to join the Plan need take no further action as their cash dividend will automatically be used to purchase CGNU’s shares, on or after the dividend payment date, in accordance with the terms of the Plan.
The categories of ordinary shareholders, share account holders and the ranges and size of shareholding as at 31 December 2001 are set out below: Analysis of shareholders No. of shareholders % No. of shares %
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 shareholders with hearing difficulties to communicate with them.
Corporate and single company Peps Barclays Stockbrokers Tay House 0845 777 7400 Limited 300 Bath Street