To take a focused approach to general insurance with disciplined underwriting and efficient claims handling
To withdraw from lines of business or markets which do not offer the potential for market-leading positions or superior returns 01 Highlights of the year 02 Chairman’s statement 04 Group at a glance 06 Group Chief Executive’s review 11 Operating review 13 Long-term savings 18 General insurance 22 Fund management 25 Environment and community 26 Financial review 32 Board of Directors 34 Directors’ report 37 Corporate governance 40 Remuneration report 44 Directors’ remuneration 49 Directors’ responsibility for the accounts 49 Auditors’ report 50 Accounting policies 53 Consolidated profit and loss account
Technical account – general business 55 Consolidated profit and loss account
CGNU is the UK’s leading insurance company following the merger of CGU and Norwich Union in May 2000, with a top five position in the European market as a whole and a listing in the FTSE life assurance sector.
We propose a final dividend of 23.75 pence, which brings the total for the year to 38 pence. As previously announced, this maintains the level of dividend for former CGU shareholders while increasing that of former Norwich Union shareholders by 30%.
Our share price has increased considerably since the announcement of the merger, thus confirming the rationale of the transaction. The total shareholder return achieved during
Bob Scott, who has been an excellent Group Chief Executive, retires in April. Bob has served the Group with great distinction. He is on top of the issues and is a brilliant, hard-driving manager who has executed our integration flawlessly.
�� Life and savings sales *Includes life achieved operating profit as stated before the change in risk margin, amortisation of goodwill and exceptional items and excludes operating profit from businesses discontinued (UK London Market) and to be discontinued (US general insurance)
Our Group Finance Director, Peter Foster, is also retiring after 37 years with the Company. He has mastered the rapid growth of our Group and has been particularly responsible for developing our reporting system in line with tough new demands. Lyndon Bolton, who leaves in April, has served as a non-executive director for 19 years and we have benefited from his wisdom. Alan Perelman, nonexecutive director, and Peter Ward, executive director, have both left the Board. We have much appreciated their contributions.
Our employees are hard-working and have shown excellent resilience at a time when there was a risk of merger fatigue. We are proud of the calibre of our people. Their quality is a precondition for producing superior results and we thank them for their efforts.
Operating profit before tax from ongoing business, including life achieved profit
The long-term savings business is a focus of the Group and its principal source of growth. It meets the growing need on the part of ageing and increasingly wealthy populations for pensions, savings and healthcare products. As well as leading in its home market, it has strong positions in France, the Netherlands and Ireland, is growing fast in Spain and Italy, and is pioneering new markets in central and eastern Europe, building on a track record of success in Poland.
Annual report and accounts 2000 Group at a glance 05 CGNU plc
The general insurance business focuses on personal lines (typically home and motor cover) and the insurance needs of small businesses. It aims to lead in its chosen markets and to combine value-for-money with excellent customer service. CGNU is the leading general insurer in the UK, Canada, Ireland and New Zealand and is one of the top five in the Netherlands and Australia.
The merger put CGNU in the world premier league. It made us the number one long-term savings and general insurance company in the UK and the second-largest UK-based fund manager. In Europe as a whole, we are among the top five life insurers and top 10 fund managers. With £27 billion in premium income and investment sales from ongoing business, we are now the sixth-largest insurance group in the world.
When the merger took effect last May, we set ourselves an 18-month period in which to complete it. We have met every milestone – including the massive task of launching the combined business in the UK in October – and we remain on track to achieve our targeted cost savings of £275 million a year.
One reason we have been able to move so fast is that in May we were absolutely clear on our post-merger strategy. To become a leading European-based financial services group, we agreed to focus on long-term savings as the engine of growth. We knew we needed to develop a world-class fund management business and to raise the quality of our general insurance earnings by concentrating on the less volatile, more controllable areas of risk. We also agreed that the only way to generate value for our shareholders was to be a market leader in our chosen sectors – and that, where this was not realistic, we should withdraw.
Premium income after reinsurance and investment sales from ongoing business* 1 – Long-term business premiums, health premiums and investment sales: £18,036m 2 – General insurance premiums*: £8,990m *Excluding US general insurance and UK London Market
Annual report and accounts 2000 Group Chief Executive’s review 07 CGNU plc
We are very pleased to report that we are well underway towards delivering our merger objectives. Significant progress has been made and we had already delivered annualised savings of £111 million by the end of 2000. We have undertaken significant corporate activity in expanding our long-term savings distribution capability in the UK and in continental Europe. Additionally, we have repositioned our general insurance business by exiting from US general insurance and London Market business and by selling those businesses which were unlikely to achieve leading positions.
Our long-term savings business achieved record new business sales, up 24% at constant rates of exchange to £13.5 billion. Life achieved operating profit rose 14% at constant rates of exchange to £1,569 million. These figures derive mainly from our success in the UK. It was also an excellent year for our long-term savings business in France.
Operating profit from the general insurance ongoing business was £412 million (1999: £459 million). Although our results showed an underlying improvement, they were adversely affected by exceptional weatherrelated costs in France and the UK. We are continuing to take the necessary steps to improve profitability in our general insurance businesses, towards the Group’s target
Annual report and accounts 2000 Group Chief Executive’s review 08 CGNU plc combined operating ratio of 102% by the end of 2001. Some parts of the business are there already (excluding the effect of the autumn floods, UK personal lines business achieved a combined operating ratio of 100% in the year), so we know this objective is within our grasp.
One prediction that can be made with certainty is that elderly people will make up a growing percentage of the population in the future.
At the end of the 20th century, 17% of the UK population was aged over 65. By 2040, the figure will be 25% and the number of people over 80 will have risen by 81%. At present, in the UK, there are three working people for every pensioner. In 30 years’ time, there will be just two.
The same trend is even more pronounced in other parts of Europe. By 2040, the proportion of pensioners in France, Italy and the Netherlands will double and retired people will make up half the total population.
These demographic changes will create a flourishing market for Europe’s long-term savings companies. That is why CGNU’s main focus is on growing long-term savings and why continental Europe offers excellent prospects for growth. With good products, economies of scale and rapidly developing channels of distribution, CGNU is a leader in meeting the growing need for personal financial provision.
Our life funds are immensely strong, particularly in the UK, where our scale and efficiency make us a natural leader in sectors such as stakeholder pensions. Our worldwide new business sales growth of 24% at constant rates of exchange in 2000 indicates the positive reaction to the merger on the part of our customers and intermediaries, and the strength of many of our businesses.
In other parts of Europe where bancassurance is an important means of distribution, we have new partnerships with Bancaja of Spain and, in Italy, with Banca Popolare di Lodi, Banca delle Marche and UniCredito Italiano.
In South Africa, Germany and Japan, we decided that our general insurance businesses were too small to generate satisfactory returns and sold them. In New Zealand, we had two very strong general insurance businesses following the merger, and decided that the best way to generate value was to sell one of them rather than merge the two.
While this is where the immediate benefits lie, we continue to explore the internet as a means of distribution. Different markets are progressing at different rates. Customers in the UK, for example, can now buy a motor policy or an Isa online. In the Netherlands, 30% of Ohra’s mutual fund sales are via the internet.
We are committed to developing internet and e-commerce applications across our businesses.
Having reshaped the business, we are well positioned for future growth and greater shareholder returns.
CGNU recognises its obligation to behave responsibly in all aspects of its operations around the world. We endeavour to manage our business activities in a manner that contributes to environmental conservation and improvement. We are also actively involved in many aspects of local life in the communities in which we operate. In 2000, we spent a total of nearly £19 million worldwide on sponsorships, community initiatives and charitable giving.
The Group has made significant progress in refocusing the business in line with the objectives set out at the time of the merger, while maintaining positive momentum in its day-to-day operations. We enter 2001 with vigorous growth underway and expect to use a widening range of distribution methods to support further expansion. We are well positioned for future growth and increased shareholder returns.
The following pages look at CGNU’s business operations in more detail and at how the strategy is being applied.
The year also brought new distribution partners to add to the 21 building societies that already sell Norwich Union’s products. We agreed to purchase approximately 50% of the life companies of the Royal Bank of Scotland and NatWest. Combined, the two banks have 10 million personal customers and the largest presence among small and medium-sized businesses in the UK. This represents a significant widening of our reach. Under a similar agreement, our products are now sold under the Tesco brand through the company’s stores and website.
Annual report and accounts 2000 Operating review 15 CGNU plc 2 – October saw the unveiling of more than 50 new products in the UK. Marketed by a retrained sales force, the range is now the largest of any UK life insurer.
An outstanding success in the Netherlands has been in mutual funds, where the business – mainly through Ohra – recorded sales of over £1 billion, about 20% of the market. Ohra also became the first Dutch insurer to use voice recognition to enable customers to call in and place investment instructions automatically.
In Spain, a new bancassurance agreement with Bancaja makes CGNU one of the country’s top 10 long-term savings providers, with access to 2.4 million potential customers.
In Ireland, the relaunch of Hibernian brought together Norwich Union Life, CGU Life and Hibernian Life under a single strong brand that now ranks fourth in its sector.
2 – In the emerging Turkish market, CGNU doubled its annual premium sales in 2000, capturing 8% of the life market, and aims to enter the pensions market as soon as legislation allows.
India represents a significant market for long-term savings business. Subject to regulatory approval, CGNU intends to establish a life business with a local partner in 2001.
The merger made CGNU the clear leader in UK general insurance, operating under the Norwich Union brand and with 20% of the market. While the UK accounts for over half the Group’s general insurance premiums, CGNU also leads the market in Canada, Ireland and New Zealand, and is one of the top five insurers in the Netherlands and Australia.
Our vision is to be a fully integrated, multi-distribution insurance company. Part of our commitment to exceeding customer expectations is to provide our products through a variety of distribution channels, whether via the internet, through a bank or building society, or a high street broker. At the same time we are using our strength, size and skills to deliver economies of scale and a sustained competitive advantage. This will ensure that we continue to enhance the earnings of CGNU.
We have withdrawn from global risks and London Market business to concentrate on leadership in personal lines and the insurance needs of small businesses. Within this more tightly defined business, we are confident of achieving higher risk-adjusted returns by taking a rigorous approach to the risks we 4 – Creditor: £380m 5 – Liability: £221m 6 – Other: £228m 4 – Creditor: £508m 5 – Liability: £223m 6 – Other: £219m
*Excluding US general insurance and UK London Market **Excluding UK London Market
UK Norwich Union is already seeing results from its focus on motor, home and small commercial insurance. These lines are less volatile than large commercial risks and, coupled with our scale, make it easier to generate higher-quality earnings.
Annual report and accounts 2000 Operating review 20 CGNU plc accept, the rates we charge and how we handle claims. The merged business has enabled us to bring together the best products from CGU and Norwich Union, pooling our technology and innovative thinking.
There was a deterioration in our French result, mainly because of late claims from the exceptionally severe storms at the end of 1999 and the fact that final losses in the market were twice those originally estimated. There was also a general deterioration in claims experience.
2 – When floods hit the UK in autumn 2000 – the worst on record since 1766 – our employees and systems met the challenge head on, contacting all policyholders in the areas most significantly affected within days.
In common with the rest of the Dutch general insurance industry, Delta Lloyd Nuts Ohra suffered falling profits in the late 1990s and has set out to reverse the trend during 2000. Improvements in rating and underwriting lifted the motor and domestic results. Our Dutch business has also strengthened its reserves and taken steps to withdraw from larger commercial risks.
CGNU acquired Hibernian in January 2000, significantly enhancing its market presence. Following the merger, the Group’s Irish operations were relaunched under the Hibernian brand. Hibernian acquired the personal lines business of Friends First Group in June, giving it 26% of the Irish general insurance market and new strength in direct business. The acquisition also brought with it a new call centre for motor insurance.
Our Spanish business is taking action to improve profits in a hard-pressed market, while the Italian operation – which is performing well – is working hard to reduce the cost of motor bodily injury claims. The year also saw the sale of our small general insurance company in Germany.
As the country’s fourth-largest general insurer, CGU Australia operates through a range of distribution channels and continues to grow by focusing on its most profitable lines of business, improving its processes and using e-commerce to reach new markets at lower cost. Improvements in rating and underwriting, coupled with the absence of adverse weather effects, enabled Australia to report an underwriting profit in the second half of 2000.
The merger catapulted CGNU into becoming the second-largest UK-based fund manager and one of the top 10 in Europe, with worldwide assets under management of £220 billion. This position enables us to retain and recruit the highest-quality investment talent, makes it practical to undertake more specialised research and gives CGNU greater influence with the companies in which it invests – all of which potentially contributes to better performance.
In building a world-class fund management business, CGNU aims to attract more third-party mandates, to increase its share of retail funds and to operate increasingly as a truly global fund manager. Third-party funds increased by 5% to £27 billion at the end of 2000. The operating profit was lower than last year, reflecting investment in Norwich Union’s UK retail business.
In the UK, the integration of the CGU and Norwich Union fund management businesses is progressing well and the combined operation has been relaunched under the Morley brand. The institutional fund management business faced an inevitable slowdown in new mandates as consulting actuaries waited to be convinced that the merger would not disturb investment performance. Morley is gradually being restored to their “buy lists”and new funds are being won, most notably a £250 million bond mandate from a UK public authority.
The retail business (operating as Norwich Union Investment Funds) is the UK’s leading provider of low-cost, Cat-standard Isas and corporate bond Isas. Following the launch of an online Isa in March, the business is already the seventh-ranking internet Isa provider in the UK. As part of a wider drive to promote the use of e-commerce, the business now enables IFAs to facilitate the online purchase of Isas by clients.
Fund management 1 – UK: £897m 3 – Other Europe: £284m 1 – UK: £128bn 2 – France: £30bn 3 – Netherlands: £28bn 4 – Other Europe: £14bn 5 – International: £20bn
Netherlands Delta Lloyd Nuts Ohra has one of the best investment performance records in the Netherlands. A particular success in 2000 was in mutual funds, where – mainly through Ohra – we recorded sales in excess of £1 billion which represents 20% of the market.
It was also a good year for Victoire Asset Management in France, particularly in the unit-linked market. More than half its funds ranked in the top quartile of the French index and 83% were in the top half, a performance recognised by the award of best fund management company for 2000 from La Tribune.
CGNU is transferring the Navigator concept to Europe as part of its internet-enabled offshore wealth management service, based in Dublin. The service is available to wealthy individuals in Ireland, the UK, Spain and Italy. Early results are encouraging and Navigator is likely to be offered in other markets in Europe and Asia.
The retail investment fund business in Australia scored successes with Navigator. Developed in Australia, Navigator assists customers in constructing tailored investment portfolios. By offering a wide range of fund managers, Navigator is able to accommodate the preferences of a wide variety of consumers. It offers easy entry to a range of investments backed by simple-to-access financial data and the ability to switch within schemes. Navigator is one of the leading fund administration service providers in Australia. Navigator ranks second in the market with sales of £824 million in 2000, up 36%, and funds under administration of £2.4 billion.
1 – CGNU’s powerful new fund management operation in the UK was relaunched under the Morley brand on 1 November.
CGNU continued to make progress with its environmental programme during 2000.
Norwich Union has linked up with WWF, the global conservation organisation, to take part in the Sustainability Action Network in the UK. This is a forum for business, academia and Government to share environmental issues, innovations and solutions. WWF is also helping to integrate environmental considerations into Norwich Union’s general insurance business.
Examples include £37,000 raised by teams of UK staff in a 12-day charity fundraising challenge before Christmas. In November, Norwich Union Direct call centre employees took £380,000-worth of pledges for Children in Need on behalf of the BBC.
Life premiums 14,848 13,470 Investment sales 2,501 1,578 Health premiums 687 402
Ongoing business 1,407 1,534 Taxation, minorities and preference dividend (516) (518)
Operating profit before change in risk margin, amortisation of goodwill and exceptional items, after tax, attributable to equity shareholders 891 1,016
Per share 39.7p 45.4p *Excluding US general insurance and UK London Market result
Pre-tax operating profit* before change in risk margin, amortisation of goodwill and exceptional items from ongoing business 1,407 1,534
Deduct life achieved profit (1,569) (1,407) Add modified statutory life profit 1,190 1,172
Amortisation of goodwill (92) (34) Amortisation of acquired additional value of in-force long-term business (29) (22)
The merger to form CGNU was completed on 30 May 2000, creating an international group with the scale and financial strength to compete successfully in its chosen markets. We have already made substantial progress in integrating the overlapping businesses of CGU and Norwich Union and are fully on course to meet our cost savings target of £275 million a year by the end of 2001.
In line with Group strategy, during the year we have invested nearly £1.2 billion in new distribution initiatives in the long-term savings business, both in the UK and internationally. We have also pruned our general insurance businesses, with the most notable being the impending exit from the US general insurance business and our withdrawal from London Market operations. While this has been at a substantial cost of £1.3 billion after tax, it has refocused the Group. These actions have increased the proportion of our business in the faster-growing, long-term savings market and will improve the quality of our earnings.
The Group seeks to generate superior returns and increasing value for its shareholders by adopting rigorous performance targets for each business unit. These targets are based on the economic value generated by each unit, after allowing for the capital used to support the business. The same measure forms an important part of our incentive scheme for senior management.
In 2000, we achieved a normalised after-tax return of 6% (1999: 7%) on ongoing business. This reflects strong results from our long-term savings businesses, offset by a strategic investment in our UK online wealth management service and a fall in general insurance profits following exceptional weather-related claims.
In preparing these results, we have adopted merger accounting principles which assume that the combined Group has been in place for all reporting periods. The alignment of accounting policies and embedded value methodology has lead to a restatement of the comparative figures.
Life achieved operating profit was £1,569 million (1999: £1,407 million), an increase of 14% over 1999. New business margins remain under pressure in many of our markets, and the new pension value contribution in the UK was all the more impressive.
UK With strong growth in sales – up 21% to £7.5 billion (1999: £6.2 billion) – the UK business increased its share in a broadly flat market. Total pension sales rose more than 30% to £1.8 billion, placing CGNU in an excellent position for the introduction of stakeholder pensions later in 2001. The UK life achieved operating profit was up 12% to £938 million, reflecting the rising volume of new business and increased profit from existing business reflecting higher opening interest rates and growth of the in-force portfolio.
Spain Our Spanish business increased its sales by over 600%, reflecting a first-time contribution from our new bancassurance partnership with Bancaja and the introduction of unit-linked policies. Operating profit grew 250% to £42 million.
Life operating profit on a modified statutory basis On a modified statutory basis, life operating profit increased to £1,190 million (1999: £1,172 million).
In the UK, investment in the retail business held back the full-year result by £21 million. Now operating under the Norwich Union brand, our retail investment business is the UK’s leading provider of corporate bond and Cat-standard Isa funds and its sales grew dramatically to £517 million. Over half of these sales (£274 million) related to Cat-standard Isa products, bringing funds under management for Cat-standard products to over £2.5 billion.
Sales from Norwich Union’s Navigator product in Australia grew strongly, increasing 36% to £824 million.
In general insurance, the ongoing business returned an operating profit of £412 million (1999: £459 million). The comparison with last year is distorted by £285 million (1999: £69 million) of exceptional weatherrelated costs which masks an underlying improvement in performance.
Key exits initiated in 2000: US general insurance; UK London Market; German general insurance; State Insurance, New Zealand; South African general insurance; Norwich Union Poland life and pensions; Greek life business; Canadian life businesses; Quilter stockbrokers; and Australian fund manager, Paladin
UK Our ongoing business in the UK was held back by the autumn floods, assessed as the wettest autumn since records began, which cost the Group £195 million. Before storm costs, there was an underlying improvement in the underwriting result, with particular progress in motor and household classes following strong premium rating actions. The combined ratio from ongoing business before the exceptional flood costs was 104% (1999: 107%), with personal lines achieving 100% against 103% in 1999.
During the period, we have achieved annualised cost savings of £111 million, with £26 million of savings included in the results for the year. We have provided for the full amount of one-off integration costs of £425 million. This cost is shown as an exceptional item in the profit and loss account.
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 smoothed returns, and the cost of reinsurance protection. To complement the reinsurance protection bought by individual businesses, the Group has an additional cover, in place above £200 million that provides protection from a single natural catastrophe event.
The Group’s net assets and, to a more limited extent its solvency, are exposed to movements in exchange rates. The Group hedges part of this balance sheet translation exposure through local currency borrowings and derivatives.
The Group maintains an efficient capital structure from a combination of equity shareholders’ funds, preference capital and borrowings consistent with the Group’s risk profile and the regulatory and market requirements of our business. The Group’s principal insurance operating subsidiaries have been assigned financial strength ratings of AA (“very strong security”) from Standard and Poor’s (S&P). The Group’s capital has been allocated such that the capital employed by trading operations is some £7 billion greater than the capital provided by our shareholders. As a result, the Group is able to enhance the returns earned on its equity capital.
The Group uses a variety of borrowing instruments as well as its own funds to invest in the business and has substantial committed facilities available to it.
At the end of 2000, the Company’s total external borrowings amounted to £2.6 billion.
General insurance funds are invested in fixed income securities to broadly match our insurance liabilities, with the balance of the portfolio invested largely in equities. Overall, some 61% of general insurance and other nonlife investments are in fixed income securities and some 29% in equities and properties.
Derivative instruments are used only to a limited extent, within guidelines agreed by the Board. Derivatives are used for investment or debt-hedging purposes or to structure specific retail savings products. Speculative activity is prohibited and all derivative transactions are covered fully, either by cash or by corresponding assets and liabilities.
Our asset management philosophy is to identify benchmarks appropriate for the various funds that we manage and then seek to outperform those benchmarks through superior asset allocation and stock selection based on high-quality research and analysis. Last year was challenging for the investment markets. Equity markets and technology stocks in particular performed poorly over the year, although fixed interest markets generated positive returns as the interest rate environment became more favourable.
3 – US dollar: £279m *Excluding US general insurance and UK London Market
Senior non-executive director, Chairman of the Remuneration Committee and member of the Nomination Committee.
4 Richard Harvey FIA 50 Deputy Group Chief Executive Appointed to the Board as Deputy Group Chief Executive in May 2000. Joined Norwich Union in 1992, holding senior positions in New Zealand and the United Kingdom before joining the Norwich Union Board in 1995 and becoming Group Chief Executive in 1998. Richard will succeed Bob Scott as Group Chief Executive on 24 April 2001.
7 Guillermo de la Dehesa 59 Non-executive director Appointed to the Board in May 2000. Joined the Board of Norwich Union as a non-executive director in 1999. Former Chief Executive of Banco Pastor and currently a director. Former General Manager of the Bank of Spain, Secretary General of Commerce and Secretary of State of Finance in Spain 1982-1988. Currently Vice-Chairman of Goldman Sachs Europe and Chairman of the Centre for Economic Policy Research.
Chairman of the Stationery Office Pension Scheme Trust. Member of the Audit Committee.
13 Philip Twyman FIA FIAA AAII 56 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 an executive director with responsibility for the Group’s international and fund management operations, as well as Group Strategy and Planning.
14 Elizabeth Vallance 55 Non-executive director Appointed to the Board in May 2000. Joined the Board of Norwich Union as a non-executive director in 1995. Chairman of the NHS Advisory Committee on Distinguished Awards. Fellow of Queen Mary and Westfield College, University of London. Non-executive director of Charter European Trust plc and a former non-executive director of HMV Group Limited. Member of the Remuneration and Nomination Committees.
The Company changed its name on 30 May 2000 from CGU plc to CGNU plc, upon completion of the merger with Norwich Union plc.
CGNU plc is the holding company of the CGNU Group of companies, which transacts life assurance (other than industrial life) and long-term savings business, fund management, and all classes of general insurance through its subsidiaries, associates and branches in the United Kingdom, Continental Europe, North America, Asia, Australia and other countries throughout the world. The Group also invests in securities, properties, mortgages and loans and carries on the business of trading in property.
The final dividend for 2000 will be payable on 17 May 2001 to all holders of ordinary shares on the Register of Members at the close of business on 30 March 2001. The Company’s Dividend Reinvestment Plan will be available to shareholders in respect of the payment of the final dividend. Further details of the Plan can be found in the shareholder information contained on page 108.
Bob Scott, the Group Chief Executive and Lyndon Bolton, a non-executive director, will both retire from the Board on 24 April 2001. At the conclusion of the Annual General Meeting, Richard Harvey will succeed Bob Scott as Group Chief Executive.
There were no contracts of significance in existence during or at the end of the year in which a director of the Company was materially interested.
The table below shows the interests held by each person who was a director at the end of the financial year in the ordinary shares of 25 pence each in the Company, as recorded in the register maintained by the Company in accordance with the provisions of section 325 of the Companies Act 1985. Details of any options and awards held through the Company’s share schemes and incentive plans are shown on pages 45 to 47.
The directors marked with an asterisk held shares in Norwich Union plc prior to their appointment to the Board of CGNU plc. These shares were converted to shares in CGNU plc on 30 May 2000, in accordance with the terms of the Scheme of Arrangement, at the rate of 48 CGNU shares for every 100 Norwich Union shares held. In order to show actual movements in shareholdings during the year, these shareholdings are stated as if the conversion had been applied at the start of the year.
The following are changes to directors’ interests during the period 1 January 2001 to 26 February 2001, that have been reported to the Company and are for shares acquired through the reinvestment of dividends in Personal Equity Plans and/or Individual Savings Accounts.
The register maintained by the Company in accordance with the provisions of section 211 of the Companies Act 1985 shows that, as at 26 February 2001, no person had reported a notifiable interest in the ordinary share capital of the Company.
CGNU has continued to support community initiatives and charitable causes worldwide and the total Group commitment during the year was £4.7 million.
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.
Employees are kept informed of the affairs of the Group through circulars, in-house newspapers, intranet, video presentations and face-to-face briefings. This process was enhanced on the announcement of the proposal to merge CGU and Norwich Union and has continued as integration of the businesses progresses. A process of continuing consultation with the staff representative bodies has been essential in the management of change.
The companies in the Group are committed to providing equal opportunities to all employees irrespective of sex, marital status, creed, colour, race, ethnic origin or disability. The commitment extends to recruitment and selection through competency-based comparisons, training, career development, promotion and performance appraisal. In the event of members of staff becoming disabled, every effort is made to ensure that their employment with the Group continues and to provide specialised training where this is appropriate.
The 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 to act with integrity in all business relationships.
Each of the Group’s businesses is required to have, and to monitor the effectiveness of, a code of conduct based on the Group’s policy, adjusted for local laws and customs, where appropriate.
CGNU has continued to make progress with its environmental programme (see page 25). A stronger and redefined environmental structure has been extended across the enlarged Group and each business unit is working to achieve the objectives of the corporate environmental policy. This year, in accordance with the policy, an externally verified environmental audit has been undertaken to provide assurance on the Group’s progress.
The environmental programme is directed centrally to ensure consistency of approach towards the achievement of objectives and targets, to disseminate best practice across the business and to collate Group performance. The Board continues to review progress annually. The Group’s programme aims to integrate environmental considerations into corporate policy, business decision making, product development and purchasing and supply chain management.
Ernst & Young has stated that, subject to the approval of its partners, it is intending to transfer its business to a limited liability partnership during 2001. If this happens, it is the current intention of the directors to use their statutory powers to appoint Ernst & Young LLP in place of Ernst & Young at the appropriate time.
The UK Listing 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.
The Board has nine scheduled meetings each year and meets more frequently as required. It currently comprises nine non-executive directors, including the Chairman, and seven executive directors. Each non-executive director serves for a fixed term of three years, which may be renewed by mutual agreement, and there is no limit to the number of terms a director may serve. The Company’s articles of association require that, following appointment by the Board, directors must submit themselves for election by shareholders at the next Annual General Meeting. The articles also provide that one third of directors must retire by rotation each year, but are eligible to submit themselves for re-election by the shareholders, and that all directors are obliged to retire at least every three years.
The Board has a formal performance review process to assess how well it is performing. To ensure that directors are able to exercise an independence of judgement, the Nomination Committee undertakes a regular review of directors’ interests in which all potential or perceived conflicts and issues of ‘independence’ are considered. Based on the latest review, the Board considers that all of the current non-executive directors are independent of management and free of any relationship that could materially interfere with the exercise of their independent judgement. The directors bring to the Board a wide range of experience and skills and participate fully in decisions on the key issues facing the Group. Directors are encouraged to attend relevant training courses upon joining the Board and at regular intervals on an ongoing basis, where appropriate.
The duties of the Board and its Committees are set out clearly in formal terms of reference, which are reviewed annually, stating the items specifically reserved for decision by the Board. The said terms of reference contain a procedure whereby directors may, in the furtherance of their duties, seek independent professional advice at the Company’s expense if considered appropriate. At the Board meetings, directors receive regular reports from the key areas of the business and on other material issues.
The Board has established a number of committees, including Remuneration, Audit, Nomination and Information Technology Strategy Committees, which operate within defined terms of reference. Minutes of their meetings are circulated to the Board.
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 also exercises discretion on behalf of the Board in relation to the operation of the Group’s various share schemes and incentive plans.
The Audit Committee comprises the following non-executive directors, appointed by the Board: Derek Stevens (Chairman) Guillermo de la Dehesa Wim Dik Sir Michael Partridge
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 oversee the objectivity and effectiveness of the internal and external auditors.
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 31 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.
The Nomination Committee comprises the following directors, appointed by the Board: Pehr Gyllenhammar (Chairman) Guillermo de la Dehesa Richard Harvey George Paul Bob Scott Elizabeth Vallance
The committee advises the Board on the Group’s IT and e-commerce strategies.
The Company places considerable importance on communications with shareholders and responds to them on a wide range of issues. It has an ongoing programme of dialogue and meetings between the executive directors and its major institutional shareholders, where a wide range of relevant issues including strategy, performance, management and governance are discussed. The Company also seeks the views of major investors, particularly on remuneration issues, through consultation with the Association of British Insurers.
The Group’s systems of internal control have a key role in the identification and management of risks that are significant to the achievement of its business objectives. The Board has in place a system of business risk management, which has been integrated throughout the Group into the business planning and monitoring processes. The results are reviewed by a Risk Committee under the chairmanship of the Group Finance Director. The overall risk management process and results are reviewed formally by the Audit Committee and the Board.
The Group has a well-developed system of planning and monitoring, which incorporates Board approval of a rolling three year Group plan. Performance against the plan is subsequently monitored, and reported formally through the quarterly publication of Group results using a prudent basis of financial reporting and accounting policies applied consistently throughout the Group. There is regular liaison between executive directors and operational management and the Board receives regular presentations from the management responsible for each principal business operation.
The Combined Code requires the Remuneration Committee to determine, on the Board’s behalf, the specific remuneration packages for each of the executive directors. It was the Company’s practice to put these packages to all the non-executive directors, for approval. The Company changed its practice to be in line with the Combined Code from June 2000. Four of the current executive directors have rolling two-year service contracts although, as stated in the Remuneration report on page 43, new appointments to the Board made during the year have been on a one year basis.
The Combined Code also introduced a requirement that the Board reviews the effectiveness of the Group’s system of internal control. This extends the existing requirements in respect of internal financial controls to cover all controls, including financial, operational, compliance and risk management. Internal Control: Guidance for Directors on the Combined Code (the Turnbull guidance), was published in September 1999. As from the third quarter, following completion of the merger, the Board confirms that the Company, as required by the London Stock Exchange, has complied with the Combined Code provisions on internal control having implemented the Turnbull guidance and reporting in accordance with the guidance.
The Auditors’ report on page 49 covers their review of the Company’s compliance with the relevant provisions of the Combined Code.
This report sets out the reward policy established by the Remuneration Committee (the Committee) for the Company’s senior executives, including the executive directors, and outlines the various elements of their remuneration. The details given in the report relate to the basis of remuneration following the merger of the Company and Norwich Union on 30 May 2000 (“the Merger”). Prior to that date, the remuneration packages paid by both companies were based on those set out in their respective Report and Accounts for 1999. Copies of these documents are available from the Group Company Secretary.
This report should be read in conjunction with the details of the remuneration paid to the directors in 2000 contained on pages 44 to 48.
Following the Merger, the Committee undertook a detailed review of the Company’s reward policies to ensure that they remain effective to motivate senior management towards achieving the Company’s targets, and to attract and retain management of the highest calibre. In its review, the Committee was assisted by independent consultants who specialise in reward strategies for senior executives of large multinational organisations.
Senior executives, including executive directors, participate in a Short-Term Incentive Plan that provides for the payment of cash bonuses. Seventy per cent of the payments under the Plan are dependent upon the achievement of performance against an internal financial target, with the balance dependent upon the attainment of personal objectives. For executive directors, the on-target bonus is 35% of basic salary, with a maximum payment of 50%.
A fundamental part of the Short-Term Incentive Plan, which is designed partly as a retention incentive, is the requirement for participants to defer a stated proportion of any cash bonuses awarded under the Plan each year. Executive directors are required to defer 50% and may defer up to 100% of their cash bonus. Participants are granted an award of shares of equal value to the amount of cash bonus deferred which is matched on a ‘one for one basis’ with a grant of restricted shares. The awards of shares and restricted shares are held in trust and vest after three years. The vesting of the shares is not subject to any specific performance conditions as the bonuses which are deferred, and upon which the awards are subject, are only made if the demanding performance conditions of the Short-Term Incentive Plan have been met. The Committee believes that imposing additional conditions would discourage participants from deferring the non-compulsory proportion of their bonus and thereby reducing the retention effect. It is the intention to acquire the shares required in connection with this Plan in the market.
The Board believes in the value of share incentives that align the interests of employees directly with those of shareholders.
Awards under this part of the performance conditions will begin to vest if the ROCE over a performance period is 24%, with the full 30% vesting if the ROCE is 30% or higher. If the performance targets are not met over three years, they will be retested just once over five years with the ROCE performance conditions adjusted accordingly i.e. 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. Recognising the Company’s position as an international insurer, the comparator group for the TSR part of the Plan comprises 19 financial services companies, including 12 major European insurers. Shares acquired in the market are held in trust for use in connection with the Plan.
The performance conditions described above differ from the conditions used previously in connection with the Executive share option schemes, which based vesting solely on the TSR performance.
The Company will propose to shareholders at the Annual General Meeting that a new CGNU Executive Share Option Plan be introduced. This plan will not differ to any material extent from the existing schemes, save that it will align the rules and wording with those of the LTIP and current ABI guidelines and will provide flexibility to grant options to employees outside the United Kingdom. No executives will participate in both the LTIP and the Executive Share Option Scheme in the same financial year.
The executive directors are entitled to purchase shares through the Company’s Inland Revenue-approved Savings Related Share Option Scheme on the same basis as other eligible employees. Under this scheme, shares are granted at a discount of up to 20% of the market value. In order to exercise the option, 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.
Senior executives, including the executive directors, have a normal retirement age of 60. Executive directors accrue pensionable service at a rate of one-thirtieth of pensionable salary for each year of service since they became a senior executive. No pension benefits are accrued on bonuses or other benefits. The Schemes provide a death in service benefit of four times the member’s basic salary at the date of death and a spouse’s pension equal to either two-thirds of a member’s actual or prospective pension (CGU Scheme) or one-third of the member’s salary at the date of death (Norwich Union Scheme).
Post-retirement pensions are reviewed annually and increases are guaranteed equivalent to the increase in the Retail Prices Index (up to 5% CGU Scheme and 10% Norwich Union Scheme).
The second part of the CGNU Plan is a restricted share scheme whereby key executives have been allocated shares in the Company to the value of one times their basic salary as at September 2000. The shares will only vest if, at 31 December 2001, the Company has exceeded the annualised merger savings target of £275 million announced by the Company in August 2000, by at least 10%. If this target is not achieved, the awards will lapse and the participants will not benefit from this part of the Plan. If the shares do vest, they will be met by shares purchased in the market.
Both Bob Scott’s and Peter Foster’s contracts will expire when they retire from service in spring 2001.
The emoluments paid to the Chairman and Deputy Chairman take into account their duties and the amounts paid by both competitors and similar sized companies. In addition to fees, the Chairman receives a company car allowance.
In determining the levels 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 (other than the Chairman) receive no benefits other than their fees.
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: Basic salary Bonus (note 2) Benefits (note 3) Total £’000 £’000 £’000 £’000 £’000 £’000 £’000 £’000
Each of the following directors accrued pension benefits during the year under the Group’s pension schemes for UK employees, as follows: Increase in pension (note 4) Transfer value of increase (note 4) Pension accumulated (note 4)
2.‘Bonus’ refers to the amount paid in 2001 under the performance-related Cash Bonus Plan and the value of shares granted in 2000 under Inland Revenue-approved profit sharing schemes.
3.‘Benefits’ are taxable benefits in kind, which relate mainly to the provision of a company car allowance and private medical insurance. In respect of Mike Biggs, £8,000 (1999: £16,000) relates to payments to compensate him for the equivalent of the benefit he would have received had he been a member of the Norwich Union Pension Scheme prior to 1 June 2000, being the date he joined the Scheme.
4. Disclosed for each director is the ‘increase in pension’ 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 employer (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. Prior to 1 June 2000, pensions for Mike Biggs were provided by the Norwich Union Group making contributions into a defined contribution pension plan. The value of this plan, which is being used to offset the cost of his benefits under the Norwich Union Pension Scheme, as at 31 December 2000 was £752,000 and therefore the additional pension cost accrued during 2000 was £93,000.
Annual report and accounts 2000 Directors’ remuneration 5. As a result of the Merger with Norwich Union, Richard Harvey was required to relocate from Norwich to London. He received a cash lump sum relocation allowance on a basis generally equivalent to that provided to members of management required to relocate at the Company’s request. The allowance, which largely takes into account the substantial disparity in housing values between the two locations was £387,000. The figure is not included in the tables on the facing page. In addition, the Company paid appropriate expenses necessarily incurred in relocating such as legal, estate agency and removal costs.
6. In February 2001, the Awards granted in 1999 under the CGU Integration Incentive Plan vested, the performance condition having been met. As a result, the following shares were transferred from the trustees of the Plan to the executive directors.
9. Peter Ward, an executive director of CGU plc, stepped down as a director on 30 May 2000 upon the Merger taking effect and left service on 30 June 2000. He was within 23 months of normal retirement at his date of leaving service and had a two-year service contract. A severance payment of £729,000 based on the above was paid and he will receive a bonus of £41,307 in respect of his service in 2000. In view of Peter Ward’s age and the circumstances, no mitigation was applied in determining the severance payment. In line with normal practice in such circumstances, Peter Ward received an immediate pension on a non-discounted basis. The cost of this augmentation to his pension entitlement was £168,000.
Notes 1. Executive options, which have been granted on various dates from 1991 to 2000, are normally exercisable between the third and tenth anniversaries of the date of grant. Options granted after 1997 are only exercisable if certain performance conditions have been met. Savings related options, granted from 1994 to 2000, are normally exercisable during the six month period following either the third, fifth or seventh anniversary of the relevant savings contract. No options lapsed unexercised during the year. Bonus Plan options granted in 1999 and 2000 are normally exercisable between the third and tenth anniversary of their grant. The exercise of Savings Related and Bonus Plan options is not subject to the attainment of performance conditions.
2. Mike Biggs, Richard Harvey and Philip Scott each held options over Norwich Union shares granted under the Norwich Union Savings Related Share Option Scheme. As a result of the terms of the Scheme of Arrangement, the directors exchanged these for options over the Company’s shares on the basis of 48 CGNU shares for every 100 Norwich Union shares. The table therefore shows the interests as if converted on 1 January 2000.
4. In respect of options granted during the year, those under the CGNU Executive Share Option Scheme were granted on 29 September 2000 at an exercise price of 960 pence per share; those under the Savings Related Share Option Scheme were granted on 19 September 2000 at 895.2 pence per share; and those under the Deferred Bonus Plan were granted on 31 March 2000 at 875 pence per share.
5. The mid-market price of an ordinary share in the Company at 29 December 2000, the last day in 2000 on which shares were traded, was 1082 pence and the mid-market prices during the year ranged from 710 pence to 1138 pence.
In 1999, shareholders approved the establishment of the CGU Deferred Bonus Plan. As a result, awards over shares have been granted to those executive directors who deferred some or all of their cash bonuses as stated below. Certain directors also hold awards granted in 1997 under the Commercial Union Long Term Incentive Plan, which was approved by shareholders in 1997. The Plan has been discontinued and no awards have been made under that Plan since 1997.
Notes 1. The shares under the CGU Deferred Bonus Plan relating to those directors who elected to defer some or all of their bonuses under the performancerelated Cash Bonus Plan will be released on the third anniversary of their grant. In respect of bonuses relating to the 1999 financial year, the deferred bonuses were converted into shares at 875 pence per share being the market value of a share on 31 March 2000, the date the award was granted.
As described in the Remuneration Report on pages 40 to 43, the Group’s remuneration policy was reviewed following the Merger and a number of new incentive plans have been introduced. In respect of the executive directors, all awards made under these Plans are subject to the condition that shareholders approve that they participate. Subject to this, and the performance conditions attaching to the awards, the following awards were granted to the executive directors during the year.
Mike Biggs 37,333 34,453 Peter Foster 39,081 – Richard Harvey 59,393 107,988 Bob Scott 68,495 – Philip Scott 38,052 34,453 Philip Twyman 41,138 – Tony Wyand 44,429 –
Notes 1. The Committee agreed to grant an award under the CGNU Integration Incentive Plan to Bob Scott, notwithstanding that he would retire prior to the end of the performance period. The Committee believed that this was appropriate bearing in mind that he was instrumental in driving through the merger savings programme and would have served for two thirds of the performance period at the date of his retirement. If the performance target is met, Bob Scott will receive the award at the end of the performance period, pro rated to reflect the fact that he would have served for two thirds of that period.
2. Awards granted under the CGNU Integration Incentive Plan which vest in 2002, were granted on 29 September 2000. Awards granted under the Transitional Arrangement part of the CGNU Long Term Incentive Plan were granted on 29 September 2000 and will vest in 2003. In both cases, vesting is subject to the attainment of performance conditions.
Pehr Gyllenhammar 246 216 Lyndon Bolton 44 42 Louise Botting** 13 31 Wim Dik 35 2 Guillermo de la Dehesa* 35 18 Lord Lang of Monkton** 16 37 Sir Tim Lankester** 13 31 Sir Michael Partridge* 35 32 George Paul* 172 169 Alan Perelman* 43 63 Derek Stevens 50 43 Dr Elizabeth Vallance* 35 32 André Villeneuve 35 31
Notes 1. The directors marked * were appointed to the Board of the Company on 30 May 2000 upon the merger with Norwich Union. Those directors marked ** retired from the Board on that date. Alan Perelman resigned from the Board on 14 November 2000. The fees for Lyndon Bolton include an additional amount for serving as the senior non-executive director, Chairman of the Remuneration Committee and member of the Group’s United Kingdom Advisory Board during the year to 30 May 2000. The fee disclosed for Derek Stevens includes an additional amount for acting as Chairman of the Board’s Audit Committee and of the Trustees of the CGU Staff Pension Scheme. 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.
3. The figures disclosed above include remuneration paid to the following directors by Norwich Union prior to 30 May 2000: Guillermo de la Dehesa £13,000; Sir Michael Partridge £13,000, George Paul £72,000 (including the benefit of a company car), Alan Perelman £27,000 and Elizabeth Vallance £13,000.
4. No past directors received any increase in retirement benefits in excess of the amount to which they were entitled on the later of the date when the benefits first became payable and 26 February 2001.
The directors are responsible for maintaining proper accounting records which disclose with reasonable accuracy at any time the financial position of the Company and the Group.
They are also responsible for safeguarding the assets of the Company and the Group and for ensuring that controls are in place for the prevention and detection of fraud and other irregularities.
We conducted our audit in accordance with Auditing Standards issued by the Auditing Practices Board. An audit includes examination, on a test basis, of evidence relevant to the amounts and disclosures in the accounts. It also includes an assessment of the significant estimates and judgements made by the directors in the preparation of the accounts, and of whether the accounting policies are appropriate to the Group’s circumstances, consistently applied and adequately disclosed.
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.
Our evaluation of the presentation of information in the accounts has had regard to the statutory requirement for insurance companies to maintain an equalisation provision. The nature of the equalisation provision, the amount set aside at 31 December 2000, and the effect of the movement in the provision during the year on the balance on the general business technical account and loss on ordinary activities before taxation, are disclosed in accounting policy O and note 38 to the accounts.
The directors are responsible for preparing the Annual report. As described above, this includes responsibility for preparing the accounts in accordance with applicable United Kingdom law and accounting standards. Our responsibilities, as independent auditors, are established in the United Kingdom by statute, the Auditing Practices Board, the Listing Rules of the Financial Services Authority and by our profession’s ethical guidance.
We report to you our opinion as to whether the accounts give a true and fair view and are properly prepared in accordance with the Companies Act 1985. We also report to you if, in our opinion, the directors’ report is not consistent with the accounts, if the Company has not kept proper accounting records, if we have not received all the information and explanations we require for our audit, or if the information specified by law or the Listing Rules regarding directors’ remuneration and transactions with the Company is not disclosed.
We read the other information contained in the Annual Report, including the corporate governance statement, and consider whether it is consistent with the audited accounts. We consider the implications for our report if we become aware of any apparent misstatements or material inconsistencies with the accounts.
General business premiums written reflect business incepted during the year. General business unearned premiums are those proportions of the premiums written in a year that relate to the periods of risk after the balance sheet date. They are computed principally on either the daily or monthly pro rata basis. Long-term business premiums are accounted for when receivable, except for investment-linked premiums, which are accounted for when liabilities are recognised.
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 and marine 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 and 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. 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.
Transfers from the long-term business technical account to the non-technical account 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.
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.
Investments are stated at their current values at the end of the year, with the exception of most non-linked long-term business debt securities and fixed income securities which are shown at amortised cost, as this basis more closely corresponds with the valuation of the relevant long-term liabilities. Current values, for this purpose, are: stock exchange mid-market values for listed securities; average trading prices for unlisted securities where a market exists; and directors’ valuations for other unlisted securities, and for mortgages and loans.
All properties are valued annually by qualified external valuers or members of staff, at market value. No depreciation is provided on properties held for own use since such depreciation is immaterial. No depreciation is provided on investment properties as the directors consider that, as these properties are held for investment, to depreciate them would not give a true and fair view.
The Group uses derivative instruments, including forward foreign exchange contracts, interest rate swaps, futures and options for hedging purposes. Derivative instruments are accounted for as follows: • forward foreign exchange contracts. The interest rate differential is included in investment income, while the effect of the currency movements on these contracts is treated as an exchange difference; • cross-currency swaps related to the Group’s borrowings. 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 present value of in-force business arising on acquisitions is recognised in the balance sheet. It is amortised over the anticipated lives of the related contracts in the portfolio on a systematic basis. The value of purchased in-force long-term business is reviewed annually for any diminution in value and any reductions are charged to the long-term business technical account.
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. 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.
Goodwill arising on the acquisition of subsidiary and associated undertakings is carried on the balance sheet and amortised on a straight line basis over its useful economic life. Goodwill arising on the acquisition of associated undertakings is included within the carrying value of associated undertakings. All other goodwill is included as a separate intangible asset on the balance sheet. The carrying value of all goodwill is reviewed regularly for impairment. On subsequent disposal of the underlying investment, any goodwill not yet amortised will be taken to the profit and loss account when calculating the profit or loss on disposal. Goodwill arising before 1 January 1998 was eliminated against reserves and has not been reinstated. Goodwill previously written off to reserves will be taken to the profit and loss account when calculating the profit or loss on any disposal of the underlying investment.
The taxation charge in the non-technical account is based on the taxable profits for the year. Taxation, including taxation relief for losses if applicable, is allocated over profits on ordinary activities and amounts charged or credited to reserves. In the long-term business technical account, the taxation charge is based on the method of assessing taxation for long-term funds applicable in the relevant country of operation. Any part of the balance on the long-term business technical account that is computed on an after tax basis is grossed up at the effective rate of taxation in the non-technical account. Provision is only made for deferred taxation where it is expected that a liability will crystallise in the foreseeable future. No provision is made for taxation that might arise if profits retained by overseas subsidiary and associated undertakings were remitted to the United Kingdom.
Consolidated profit and loss account Technical account – long-term business For the year ended 31 December 2000
(3,282) Change in technical provision for linked business, net of reinsurance (P) (2,002) (5,922)
(1,002) Tax charge attributable to long-term business (T & 14b) (611) (578) (3) Allocated investment return transferred to the non-technical account (F & 7b) (2) (29)
Long-term business operating profit 1,905 Profit before exceptional items 1,161 1,150 1,728 Shareholders’ pre-tax profit from long-term business 1,053 1,146
Consolidated profit and loss account Technical account – general business For the year ended 31 December 2000
21,131 Net premiums written (B & 5a) 12,890 11,629 Change in the provision for unearned premiums 20,691 Earned premiums, net of reinsurance 12,622 11,631 2,979 Allocated investment return transferred from the non-technical account (F & 7b) 1,817 1,563
Change in the provision for claims (1,346) Gross amount (821) –
Changes in other technical provisions, net of reinsurance, not shown (21) under other headings (13) (15)
(512) Balance on the technical account – general business (312) 514
Consolidated profit and loss account Non-technical account For the year ended 31 December 2000
(798) Investment expenses and charges (7a) (487) (350) Allocated investment return transferred to the general business
(47) Amortisation of acquired additional value of in-force long-term business (24a) (29) (22)
(735) Loss on withdrawal from London Market operations (10a) (448) – (1,755) Provision for loss on sale of United States general business (10a) (1,070) –
Consolidated statement of total recognised gains and losses For the year ended 31 December 2000
(2,809) (Loss)/profit for the financial year (1,713) 1,020 Movement in internally generated additional value 120 of in-force long-term business* (33) 73 909 203 Foreign exchange gains/(losses) (U & 33) 303 (389)
(2,486) Total recognised gains and losses arising in the year (1,337) 1,540 *Stated before the effect of foreign exchange movements which are reported within the foreign exchange gains/(losses) line.
Balance at 1 January 15,431 As previously reported – CGU plc 9,567 9,039 9,740 – Norwich Union plc 6,039 5,713 108 Merger adjustments arising from alignment of accounting policies 67 141 25,279 Restated shareholders’ funds at 1 January 15,673 14,893 (2,486) Total recognised gains and losses arising in the year (1,337) 1,540 89 Increase in capital (31c) 54 23 8 Merger reserve arising in the year (33) 5 8 180 Goodwill written back and other movements (R & 33) 110 (1)
1,575 Investments in Group undertakings and participating interests (21a) 992 434 201,235 Other financial investments (22a) 126,778 123,264 (552) Less: Non-recourse funding (22a) (348) –
10,484 Additional value of in-force long-term business (L & 24a) 6,605 6,425 233 Deposits with ceding undertakings 147 114 43,262 Assets held to cover linked liabilities 27,255 24,626
Reinsurers’ share of technical provisions 295 Provision for unearned premiums (B) 186 307 2,081 Long-term business provision (P) 1,311 952 1,116 Technical provision for linked liabilities (P) 703 1,738
Capital and reserves 894 Ordinary share capital (31c) 563 560 317 Preference share capital (32a) 200 200 1,211 Called up share capital 763 760 1,675 Share premium account (31c) 1,055 1,004 4,392 Profit and loss account (A & 33) 2,767 4,859 517 Minority interests – equity 326 320
Technical provisions 9,648 Provision for unearned premiums (B) 6,078 5,831 154,003 Long-term business provision (P & 36) 97,022 86,947 43 Other technical provisions 27 28 44,378 Technical provision for linked liabilities (P) 27,958 26,364 3,311 Provisions for other risks and charges (39) 2,086 979 973 Deposits received from reinsurers 613 541 Creditors 1,924 Creditors arising out of direct insurance operations 1,212 882 2,514 Creditors arising out of reinsurance operations 1,584 340
Consolidated cash flow statement For the year ended 31 December 2000
Servicing of finance Interest paid (205) (117) Preference dividends paid (17) (13) Dividends paid to minorities (35) (26)
Capital expenditure Purchases of tangible fixed assets (143) (147) Sales of tangible fixed assets 24 20
Total assets less current liabilities 15,173 10,307 Creditors: Amounts falling due after more than one year
Called up share capital 763 528 Share premium account (31c) 1,055 1,004
Notes to the accounts 1 – Merger of CGU plc and Norwich Union plc
Costs of integrating and reorganising the business are included within operating profit. Merger transaction costs of £59 million have been incurred and are shown after operating profit within the profit on ordinary activities before taxation.
(b) The accounts have been prepared on the basis of the accounting policies used to prepare the CGU plc and Norwich Union plc 1999 Annual Report and Accounts, as modified to align differences in the accounting policies used by the two companies. The accounting policies aligned were such that: (i) Certain general business fixed income and debt securities held by Norwich Union plc were revalued from an amortised cost basis to a market value basis; (ii) Project costs which had formerly been capitalised by Norwich Union plc have been eliminated; (iii) Embedded value assumptions used by both companies have been brought onto a common basis.
(c) The results prior and subsequent to the merger, together with net assets at the date of the merger, are shown below. For both CGU plc and Norwich Union plc, the financial year began on 1 January. The post-merger operating profit before tax includes integration costs.
Premium income after reinsurance and investment sales 8,227 3,809 18,203 30,239
Operating profit before tax 385 264 (721) (72) Short-term fluctuation in investment returns (24) (90) 372 258 Change in the equalisation provision (1) (9) (17) (27) Net profit arising on the sale of subsidiary undertakings – – 12 12 Loss on withdrawal from London Market operations – – (448) (448) Provision for loss on sale of United States general business – – (1,070) (1,070)
Profit/(loss) on ordinary activities before taxation 335 140 (1,881) (1,406) Tax and minority interests (126) (75) (106) (307)
The net assets of the Group on the date of the merger were: £m
Net assets at 30 May 2000 16,787 2 – Basis of preparation
(a) ‘Business discontinued’ represents a material discrete operation where the Group has completed the sale of its operations. These disclosures relate solely to the exit from London Market business.
The principal rates of exchange used for translation are: Average rates Closing rates
The 2000 profit and loss account and balance sheet figures have been translated into euros using the average rate of a1/£0.61 (1999: a1/£0.66) and the closing rate of a1/£0.63 (1999: a1/£0.62) respectively.
United Kingdom 8,806 7,514 8,548 7,405 897 807 Europe (excluding UK) 5,686 5,623 5,629 5,418 1,309 360 International 698 662 671 647 295 411
(iii) 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.
(ii) Operating (loss)/profit, before the change in the equalisation provision, in respect of general insurance and health business
United Kingdom (409) (297) 302 290 Europe (excluding UK) (355) (170) (16) 60 International (69) (133) 192 132
Operating (loss)/profit before exceptional items – ongoing business (865) (631) 480 483 Businesses discontinued and to be discontinued
Ongoing business 1,574 1,701 1,028 1,482 Businesses discontinued and to be discontinued (554) 201 (554) 201 Unallocated interest charges (361) (240) (361) (240) Corporate costs (185) (162) (185) (162)
Operating profit before goodwill amortisation, amortisation of acquired additional value of in-force and exceptional items 474 1,500
Group reinsurance retentions consist of certain reinsurance covers which are retained by the Group rather than being placed with third parties.
(b) The analysis of general business premiums written before reinsurance is: General business premiums excluding health 13,185 12,258 Health 687 410
(a) The total investment return before taxation comprises: Long-term business Non-technical account £m £m £m £m
Investment return before unrealised gains 10,461 10,674 1,953 1,625 Unrealised investment (losses)/gains (6,708) 4,988 (240) (71)
Notes to the accounts continued 68 CGNU plc 7 – Analysis of investment return continued
(b) The longer-term investment return, net of expenses, allocated to the general business technical account and transferred from the long-term business technical account was £1,817 million (1999: £1,563 million) and £2 million (1999: £29 million) respectively.
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 interest income receivable for the year.
Actual return attributable to shareholders: Long-term insurance business* 480 498 General insurance (including health) 6,591 7,222
Three year periods have been chosen as comparable information is not available for Norwich Union prior to 1997.
Reversionary and similar policyholder bonuses included in the movement in the long-term business provision 2,585 2,541
(b) Exceptional items 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
Less: Net transfer to fund for future appropriations (32) (3) – – – – (32) (3)
Other integration costs: Charged to other income/(charges) – – – – – 12 – 12
Charged to profit on ordinary activities before taxation 108 4 211 115 106 44 425 163
Merger integration costs comprise the costs of integrating and reorganising the business of the former CGU and Norwich Union operations. For 1999, these relate to the businesses of the former Commercial Union and General Accident operations.
(a) Other income/(charges) comprise: Profit from fund management 5 65 Non-insurance operations (25) (30) Wealth management (133) – Corporate costs (10b) (235) (193) Net profit/(loss) arising on the sale of subsidiary undertakings (18c) 12 (8) Provision for loss on sale of United States general business (18d) (1,070) – Loss on withdrawal from London Market operations (448) –
Staff profit sharing scheme costs 57 34 Sundry corporate expenses 128 128
The analysis of total staff costs was: Wages and salaries 1,816 1,594 Social security costs 195 187 Pension costs 88 77 12 – Directors
Information concerning individual directors’ emoluments, interests and transactions is given on pages 44 to 48.
On 21 June 2000, Ernst & Young and PricewaterhouseCoopers were appointed joint auditors of the Company, having previously been auditors of Norwich Union plc and CGU plc respectively.
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.
Auditing these financial statements 4.9 4.5 Other audit work 1.8 1.6 Other work – United Kingdom 36.8 8.9
The auditors’ remuneration in respect of the parent company was £3,000 (1999: £3,000).
Tax charged in the long-term business technical account comprises: UK corporation tax 500 494 Overseas taxation 144 115 Deferred taxation (30) (43) Prior year adjustments (3) 12
The potential amount of taxation 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 £m £m £m £m
Unrealised gains on investments 1,525 1,891 615 351 Provisions and other timing differences (177) (42) (45) (5)
Irish shareholders who are due to be paid a final dividend denominated in Irish punts will receive a payment based on the exchange rate prevailing on 26 February 2001.
Provision for loss on businesses to be sold (1,070) (989) (44.0) – – – Loss on for withdrawal from
London Market operations (448) (314) (14.0) – – – Merger transaction costs (59) (50) (2.2) – – –
Weighted average Per share Weighted average Per share Total number of shares 2000 Total number of shares 1999 £m m p £m m p
Segmented assets comprise: General business and Long-term business associated undertakings Other Total £m £m £m £m £m £m £m £m
Reinsurers’ share of technical provisions: Provision for unearned premiums – – 186 307 – – 186 307 Long-term business provision 1,311 952 – – – – 1,311 952
Debtors: Debtors arising out of direct insurance operations 713 586 3,561 3,337 – – 4,274 3,923
Loans to associated undertakings – – 32 – – – 32 –
Prepayments and accrued income: Other prepayments and accrued income 151 111 614 114 37 247 802 472
The cost of assets held to cover linked liabilities is £25,812 million (1999: £19,181 million). Assets held to cover linked liabilities include assets with a carrying value of £nil (1999: £106 million) which are held on behalf of others.
Fund for future appropriations 14,354 19,314 – – – – 14,354 19,314 Technical provisions: Provision for unearned premiums – – 6,078 5,831 – – 6,078 5,831 Long-term business provision 97,022 86,947 – – – – 97,022 86,947 Claims outstanding 540 455 17,465 15,965 – – 18,005 16,420 Equalisation provision – – 216 212 – – 216 212 Other technical provisions – – 27 28 – – 27 28
Technical provision for linked liabilities 27,958 26,364 – – – – 27,958 26,364
Provisions for other risks and charges 496 452 1,590 482 – 45 2,086 979
Amounts owed to credit institutions – – 11 201 384 357 395 558
(b) The identifiable assets and liabilities of the entities acquired, at the relevant date of acquisition, were as set out below.
Assets Total investments 1,314 – 1,314 Additional value of in-force long-term business (24a) 102 – 102 Other assets 147 – 147
Liabilities Technical provisions including linked liabilities 1,192 15 1,207 Other creditors and provisions 129 – 129
In addition to the goodwill arising on the acquisition of these subsidiary undertakings, the Group acquired the 25% minority interest in CGU Underwriting Limited and the 10% minority interest in Commercial Union Hayat Sigorta AS, in Turkey, and made a number of smaller acquisitions in the United Kingdom and continental Europe. These gave rise to an additional amount of £49 million goodwill. Total positive goodwill arising in the year was therefore £364 million (note 19).
In December 2000, the Group completed the sale of Marlborough Underwriting Agency Limited, its wholly-owned Lloyd’s managing agency, to the Berkshire Hathaway Group for a consideration of £5 million. Under the terms of the agreement, the Berkshire Hathaway Group has also replaced CGNU as the provider of capacity to the Marlborough-managed syndicates.
During the course of 2000, the Group entered into binding agreements to dispose of its life operations in Canada and stockbroking operations in the United Kingdom. In addition, the Group announced its intention to dispose of its life operations in Greece and part of its general business operations in New Zealand. These disposals were not completed by 31 December 2000.
Financial Reporting Standard 2 ’Accounting for subsidiary undertakings’ requires the results of the US general business to be consolidated with those of the Group’s ongoing operations until the completion of the transaction. However, given that, subject to completion, the Group has retained no economic interest in the operations of this business beyond 31 August 2000, the US general business’s post-tax operating and investment gains incorporated in the Group’s consolidated profit and loss account from 1 September 2000 to completion will be offset by a corresponding change to the loss on sale calculated at 31 August 2000. The loss on sale recorded in these accounts also reflects goodwill previously written off against reserves but which needs to be reinstated and charged in the profit and loss account.
Notes to the accounts continued 78 CGNU plc 18 – Subsidiary undertakings continued
(d) Businesses to be discontinued – United States general insurance continued
The calculation of the loss is summarised below: £m US$m Exchange rate $:£
Pre-tax provision for loss on sale (1,070) (1,598) Tax attributed to loss on sale 81 121
Provision for loss on sale after tax and goodwill write back (989) (1,477)
The final accounting loss on completion will differ from the post-tax loss of £989 million above. This is due to the consolidation profits or losses of this business from 1 January 2001 to the date of completion, despite there being no economic effect on the Group, and fluctuations in the $:£ exchange rate.
(e) Movements in the Company’s shares in subsidiary undertakings are set out below: Net asset value At 1 January 10,224 9,913 Additions 6,832 – Disposals (540) – Movement in net asset value (2,861) 311
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 £4,393 million (1999: £7,254 million) has been credited to the Company’s revaluation reserve (see note 34). 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.
The carrying value of goodwill comprises: Positive Negative Total Total goodwill goodwill 2000 1999 £m £m £m £m
Amortisation: At 1 January 44 (1) 43 10 Charge in the year 94 (2) 92 34 Foreign exchange rate movements (1) – (1) (1)
The valuation of properties has been undertaken by qualified external valuers or prepared or monitored by qualified members of staff reporting to the Head of Property of Morley Properties Limited, who is a Fellow of The Royal Institution of Chartered Surveyors, or by local qualified staff of the Group in overseas operations. All properties are valued at market value.
(a) Investments in participating interests included in the consolidated balance sheet comprise: Carrying value Cost Carrying value Cost £m £m £m £m
Notes to the accounts continued 80 CGNU plc 21 – Investments in Group undertakings and participating interests continued
Profit for the year after taxation – (2) (2) Foreign exchange rate movements 2 2 4 Realised investment gains after taxation – 1 1 Unrealised investment gains after taxation 17 28 45 Dividends received – (5) (5)
All investments in associated undertakings are held by subsidiary undertakings and are included in the accounts using year ended 31 December 2000 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.
The Group’s shareholding in SFL would reduce to 26.4% if all convertible bonds previously issued by SFL are converted to ordinary shares.
On 5 December 2000, the Group acquired 49.99% of the ordinary share capital of RBS Life Investments Limited (‘RBSLI’), the immediate holding company of Royal Scottish Assurance plc (‘RSA’) and National Westminster Life Assurance Limited (‘NWLA’), for a consideration of £600 million, representing assets acquired of £343 million and goodwill of £257 million. The investment is in the form of a £1 million 49.99% equity participation in RBSLI and a £599 million loan to RBS Life Holdings Limited, the company holding the remaining 50.01% of the ordinary shares in RBSLI. The loan is interest-free, would become repayable if RBSLI disposed of its investments in RSA and NWLA and is guaranteed by The Royal Bank of Scotland plc. The National Westminster Life Assurance Limited element of the transaction is subject to ratification by The Royal Bank of Scotland plc shareholders at their Annual General Meeting on 11 April 2001. If ratification of the transaction is not forthcoming, then full ownership of National Westminster Life Assurance Limited will revert back to The Royal Bank of Scotland plc and the attaching element of the consideration, plus interest, will become repayable to CGNU. No ratification is required for the Royal Scottish Assurance plc element of the transaction.
On 25 September 2000, the Group increased its shareholding in Global Aerospace Underwriting Managers Limited (formerly British Aviation Insurance Group Limited) for a cash consideration of £12 million.
On 18 January 2000, the Group purchased the remaining 73.7% holding in Hibernian Group, taking the Group holding to 100% (see note 18(a)). This company has been consolidated with effect from that date.
(c) The carrying value of goodwill on associated undertakings comprises: Long-term Non-long-term Total Total business business 2000 1999 £m £m £m £m
Goodwill will be amortised on a straight line basis over its useful economic life of 20 years, which has been determined to match the period over which the value of the underlying businesses will exceed the value of their identifiable net assets.
(d) In France, the Group holds the majority interest in a number of specialised investment companies. These invest mainly in equities, bonds and properties, and distribute most of their income. The Group’s interests in these companies are included in these accounts in other financial investments or land and buildings as appropriate.
Shares and other variable yield securities and units in unit trusts 44,941 5,868 50,809 47,108 7,595 54,703
Debt securities and other fixed income securities: At current value 11,460 13,813 25,273 12,472 12,421 24,893 At amortised cost 35,095 – 35,095 29,757 – 29,757
Participation in investment pools 101 – 101 33 – 33 Loans secured by mortgages: Own mortgages 7,912 941 8,853 7,500 832 8,332 Securitised mortgages (23) 348 – 348 – – – Less: Non-recourse funding (23) (348) – (348) – – –
All investments above are shown at current value unless otherwise indicated. The cost of financial investments above was £106,707 million (1999: £109,111 million).
(b) Listed investments included in the carrying value above are: Shares and other variable yield securities and units in unit trusts 50,625 50,234 Debt securities and other fixed income securities 58,433 52,178
(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 £488 million greater (1999: £1,042 million greater) than the amortised cost.
(d) In addition to the investments in participating interests detailed in note 21, the Group holds investments exceeding 10% of a class of the equity capital in a number of other companies in the United Kingdom and elsewhere. These investments do not represent a material part of the assets or investment income of the Group. These include the Group’s 9.3% (1999: 10.0%) shareholding in Delta Lloyd Investment Fund NV. As this company invests mainly in equities and all dividends received are passed on to the shareholders, the Group’s interest has been shown in other financial investments in these accounts. The economic benefits of ownership of an additional holding of 12.1% (1999: 10.8%) belong to the Delta Lloyd Pension Fund.
(f) At 31 December 2000, the Group held equity index futures, forwards and options to buy a notional total of £566 million (1999: £247 million) and to sell a notional total of £169 million (1999: £37 million) for long-term business operations. These contracts have a net positive fair value of £1 million (1999: £5 million). No adjustment has been made to the classification of existing investments to reflect the effect of the future settlement of these transactions.
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 2000, the exposure hedged by these options was £2,551 million (1999: £2,649 million) and the contracts had a fair market value of £122 million (1999: £105 million). These options have varying expiry dates up to 2028.
Other financial investments at 31 December 2000 include financial investments, subject to non-recourse finance arrangements, comprising portfolios of mortgage loans in a Dutch subsidiary (‘DLNO’). These balances are accounted for using a linked presentation in accordance with Financial Reporting Standard 5 ‘Reporting the substance of transactions’.
The principal benefits of these mortgage loans were acquired during 2000 from DLNO by a special purpose securitisation company, Arena 2000-1 B.V. (‘Arena’), which was funded primarily through the issue of fixed rate notes. No gain or loss was recognised on this transfer.
DLNO receives payments from Arena in respect of fees for loan administration purposes, and also under the terms of interest rate swaps written between DLNO and Arena to hedge its respective exposures to movements in interest rates arising from this transaction. In each case, the effect of these interest rate swaps is that Arena swaps all or part of the interest flows receivable from customers in respect of the securitised mortgage loans into fixed interest flows which are designed broadly to match the interest payable to the noteholders. DLNO has no right, nor any obligation, to repurchase the benefit of any of the securitised mortgage loans, other than in certain circumstances where DLNO is in breach of warranty.
No income has yet been earned by DLNO relating to the securitisation of the mortgage loan portfolio.
(a) Movements in the additional value of in-force long-term business comprise: Internally generated Acquired Total £m £m £m
The amortisation charge for the year appears under the heading ‘Other technical charges – net of reinsurance’ in the long-term business technical account on page 53, netted down for attributable tax.
Details of the assumptions and methodology supporting the additional value of in-force long-term business can be found on pages 103 to 105.
Analysis of the geographical split of the embedded value and of the movement in the year are given in the supplementary information on page 103.
Notes to the accounts continued 84 CGNU plc 26 – Other debtors
Net book value at 31 December 1999 59 119 153 331 28 – Own shares
Other prepayments and accrued income 802 472 30 – Banking and stockbroking activities
(b) Banking and stockbroking liabilities, excluding intra-group balances, comprise: Deposits by banks 124 436 Bank customer accounts 1,269 957 Stockbroking clients and counterparties 28 34 Bank overdrafts 22 1 Other banking and stockbroking liabilities 456 584 31 – Ordinary share capital
Notes to the accounts continued 86 CGNU plc 31 – Ordinary share capital continued
Norwich Union Savings Related Option price Number of shares Normally Option price Number of shares Normally Share Option Scheme p exercisable p exercisable
General Accident Savings Related Option price Number of shares Normally Option price Number of shares Normally Share Option Scheme p exercisable p exercisable
General Accident Executive Option price Number of shares Normally Option price Number of shares Normally Share Option Scheme p exercisable p exercisable
As at 31 December 2000, awards over a total of 27,480 ordinary shares were outstanding under the Commercial Union Long Term Incentive Plan. These awards will vest in 2001 and 2002. Shares will be purchased into an employee share trust established to satisfy the vesting of awards.
As at 31 December 2000, awards over a total of 399,375 ordinary shares were outstanding under the CGNU Long Term Incentive Plan. Subject to satisfying performance criteria, these awards will vest in 2003. Shares will be purchased into an employee share trust to satisfy the vesting of awards. Further details of this plan can be found in the Remuneration report on page 41.
(a) The preference share capital of the Company at 31 December 2000 was: Authorised 200,000,000 cumulative irredeemable preference shares of £1 each 200 200
Notes to the accounts continued 88 CGNU plc 33 – Group reserves
Transfer from non-technical account – – (2,585) (2,585) Foreign exchange rate movements 12 – 291 303 Increase in value of in-force long-term business (L) 73 – – 73 Merger reserve arising in the year – 5 – 5 Goodwill on disposals, previously written off – – 115 115 Other movements – (92) 87 (5)
The cumulative amount in the profit and loss account includes non-distributable gains of £5,735 million (1999: £nil).
–’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.
(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 2000.
With-profit 2.25 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
For unitised with-profit business, the provisions are the unit value (reduced by any market value adjustment factor applicable at that date) adjusted as required under UK practice to reflect policyholders’ reasonable expectations.
Up to eight years 3.5 to 4.5 TD 88/90 Eight years and over 2.5 to 3.5 TD 88/90 Annuities 2.5 to 4.5 TPRV (prospective table)
(b) Claims on certain classes of business are discounted as follows: Rate Mean term of liabilities
London Market Business no longer written 4.5% 4.5% 9 years 9 years
An equalisation provision has been established in the Group accounts as explained in accounting policy O on page 52. This had the effect of reducing Group and Company shareholders’ funds by £216 million at the year end (1999: £212 million). The change in the equalisation provision during the year comprised a reduction of £27 million (1999: £55 million) in the balance on the general business technical account and the profit on ordinary activities before taxation, offset by £23 million representing the equalisation provision of a subsidiary company sold during the year.
Additional provisions made in the year 425 1,077 Amounts utilised (241) (12) Amounts released unutilised – (7) Disposals – (4)
The 9.125% US$100 million subordinated debentures 2026 were issued by the Canadian General Insurance Group Limited in 1996. Although these debentures mature in 2026, they are redeemable at the option of that company on or after 31 March 2001 and notice has been given to effect this. Although these bonds were issued in US dollars, this loan has been converted into Canadian dollars through the use of financial instruments.
The 10.75% guaranteed bonds were issued at a discount of £0.8 million and this amount, together with the issue expenses, is being amortised over the full term of the bonds.
The 2.5% subordinated perpetual loan notes were issued by a Dutch subsidiary undertaking to finance the acquisition of NUTS OHRA Beheer BV. These loan notes have a face value of NLG 1,079 million and their fair value is estimated at NLG 380 million (1999: NLG 380 million) which is based on the future cash flows in perpetuity discounted back at a market rate of interest. The rate of interest paid on the notes will be gradually increased over the next nine years to a maximum of 2.76%. The loan notes are convertible into ordinary shares in Delta Lloyd Nuts Ohra NV, should there be a public offering of those shares.
The long-term institutional borrowings arise wholly in the Netherlands and are mainly in respect of segregated funds for external pension schemes. Other institutional borrowings also arise wholly in the Netherlands, their purpose being to provide working capital.
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 French franc liability through the use of financial instruments in a subsidiary undertaking.
Repayable as follows: One year or less 1,043 244 Between one and two years 100 – Between two and five years 199 99 After five years 198 397
The floating rate borrowings comprise commercial paper and bank borrowings bearing interest based on local inter-bank offer rates, which are fixed in advance for the period of the borrowings. Excluding the subordinated perpetual loan notes, the fixed rate borrowings have a weighted average interest rate of 5.88% (1999: 6.23%) for a weighted average term of 5 years (1999: 8 years).
Expiring within one year 1,430 350 Expiring beyond one year 1,170 1,450
41 – Other creditors including taxation and social security £m £m
Deferred reinsurance commissions 29 34 Other accruals and deferred income 1,215 701
(a) In the United Kingdom, France, the Netherlands and the United States, there are pension schemes whose membership comprises some 80% of pension scheme members throughout the Group. Members of the schemes receive benefits on either a defined benefit basis or on a defined contribution basis. The assets of the United Kingdom and the United States schemes are held in separate trustee-administered funds and, in the Netherlands and France, the schemes are written in life funds of the Group. An actuarial report has been submitted for each of the four defined benefit schemes within the last three years, using appropriate methods for the respective countries. There are no material deficiencies in any of the schemes.
In the United Kingdom, the Group operates two main pension schemes. Both schemes are valued on a market value basis with the respective pension costs from each scheme’s valuation being determined using the same financial assumptions, namely a pension increase rate of 2.8%, a salary increase rate of 4.5% and an interest rate of 6%. The CGU scheme is open to new entrants and was valued using the Projected Unit Method. The scheme had an asset value of £3,801 million and a funding level of 129%. The cost of future service benefits was 32% of pensionable salaries. The spreading of the scheme surplus over the average remaining cost of future service life had the effect that the net pension cost at the scheme anniversary was 3.3% of pensionable salaries. The defined benefit section of the Norwich Union Pension Plan was valued using the Attained Age Method, as this section is generally closed to new employees. New entrants join the defined contribution section. The scheme had an overall asset value of £1,447 million and a funding level of 122%. The cost of future service benefits in respect of defined benefit members was 26% of pensionable salaries which, after allowing for the interest on the surplus shown in the balance sheet and the additional surplus since, leads to a net pension cost at the scheme anniversary of 15.6% of pensionable salaries. The pension cost is then increased to allow for the amounts credited to members’ accounts under the defined contribution section. These two United Kingdom pension schemes account for the substantial part of the Group’s United Kingdom pension liabilities.
In France, pension arrangements which supplement other national and insurance industry arrangements are on a defined contribution basis with returns on individual personal pension accounts reflecting the experience of segregated funds within the life funds. At 31 December 2000, the assets of the arrangements at market value amounted to £54 million. The employers’ contribution is 2.15% of salaries. A deficit in the French insurance industry pension fund is being charged to companies over a maximum 10 year period from 1995. The Group’s share of the deficit as at 31 December 1995 of £53 million is being recognised over a 10 year period in accordance with United Kingdom accounting practice.
For the United States scheme, the valuation carried out by independent actuaries as at 31 December 1999, using the projected unit method, assumed a discount rate of 8% and salary increases of 4%. The assets of the fund at market value amounted to £377 million and the level of funding was 166%. There was no contribution due for 2000. The majority of the pension scheme relates to the US general insurance business, which is in the process of being sold. The assets and liabilities that will be retained are immaterial to the Group.
The 2000 pension costs for the Group were £88 million (1999: £77 million). There were no significant contributions outstanding or prepaid as at 31 December 2000.
Adjustments for financing expense and items not involving movements of cash: Depreciation of tangible fixed assets 141 114 Amortisation of goodwill 92 15 Amortisation of acquired additional value of in-force long-term business 29 22 Increase in general business underwriting liabilities and provisions 280 105 Realised and unrealised gains on investments (780) (515) Provision for loss on sale of United States general business 1,070 – Net (profit)/loss arising on the sale of subsidiary undertakings (12) 8 (Increase) in deferred acquisition costs (67) (29) (Increase) in banking and stockbroking assets and liabilities (100) (32) Decrease in other assets/liabilities 1,285 139 Profits retained in associated undertakings – (9) Profits not yet transferred from long-term business funds (467) (702) Loan interest expense 189 97 Taxation on franked investment income – 13
Share capital is represented by: Ordinary share capital 563 560 Preference share capital 200 200 Share premium account 1,055 1,004 Merger reserve in respect of share capital 1,996 1,996
Cash at bank and in hand: General business and other activities 829 630 199 Banking and stockbroking 17 30 (13)
Net sales of investments (1,541) (298) Net investments acquired with subsidiary undertakings 105 780 Changes in market values and foreign exchange rate movements 1,435 501
Net movement in opening and closing non-long-term portfolio investments (1) 983 Balance at 1 January 23,225 22,242
(g) Non-long-term portfolio investments included in the consolidated balance sheet comprised: 2000 1999 Changes in year £m £m £m
Premium income after reinsurance and investment sales Ongoing business Life assurance
Consolidated profit and loss account Life assurance (achieved profit basis) 1,569 1,407 1,440 1,382 Health 68 24 17 9 Fund management and non-insurance operations 36 36 23 19 General insurance 412 459 496 922 Associated undertakings 1 10 14 5 Corporate costs (185) (162) (118) (107) Unallocated interest charges (361) (240) (168) (177)
Amortisation of goodwill (92) (34) (10) – Amortisation of acquired additional value of in-force long-term business (29) (22) – –
Operating profit before tax (72) 1,281 836 1,882 Short-term fluctuation in investment returns (d) 258 250 784 1,070 Change in the equalisation provision (27) (55) 47 (73) Net loss arising from sale of subsidiary undertakings 12 (8) 17 – Provision for loss on sale for businesses to be sold
(Loss)/profit for the financial year (1,713) 1,020 1,087 1,993 Dividends (872) (790) (729) (574)
Notes (a) The above table presents the figures of CGNU Group for the four years 1997 to 2000, being the period since Norwich Union demutualised. Norwich Union figures for 1996 were not prepared on a comparable basis.
(b) Save for the life achieved profit results, the figures included in this four year review have been based on the audited accounts of the Company and its subsidiaries. All years have been restated under the principles of merger accounting as if CGU and Norwich Union had always been merged and have been prepared on a consistent basis, using CGNU’s current accounting policies for 1999 and 2000, and CGU and Norwich Union’s accounting policies for 1997 and 1998. (c) Geographical results exclude the effect of certain intra-group reinsurance arrangements with North America. (d) Dividend income for 1999 has been recognised as the amount receivable without any attributable tax credit. 1998 and 1997 are shown on a gross of tax basis. (e) The net asset value and market price (London) are as at 31 December. Market prices for 1999 and 1998 are for CGU plc, while that for 1997 is for Commercial Union plc. (f) Basic earnings per ordinary share are shown only. No figures have been provided for diluted earnings per share. (g) Figures for 1999 and 1998 are based on the weighted average dividends per share of CGU plc and Norwich Union plc. Figures for 1997 are based on the weighted average dividends per share of Commercial Union plc, General Accident plc and Norwich Union plc.
Operating profit 2,572 Life achieved operating profit (excluding change in risk margin) 1,569 1,407
Operating profit – ongoing business before tax, change in risk margin, 2,308 amortisation of goodwill and exceptional items 1,407 1,534
Businesses discontinued and to be discontinued (902) United States general insurance (to be discontinued) (550) 176
551 Operating profit before tax 336 1,627 349 Variation from longer-term investment return 213 1,072
(441) Effect of economic assumption changes (269) 358 (44) Change in the equalisation provision (27) (55) 20 Net profit/(loss) arising on the sale of subsidiary undertakings 12 (8)
(2,718) (Loss)/profit for the financial year attributable to equity shareholders (1,657) 2,039
The achieved profit statement on page 100 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 50 to 97. In the directors’ opinion the achieved profit basis provides a more accurate reflection of the performance of the Group’s life operations year on year than results under the modified statutory basis. The achieved profit methodology used is in accordance with the latest draft ‘Guidance on accounting in Group accounts for proprietary companies long-term insurance business’, circulated by the Association of British Insurers. Further details on the methodology and assumptions are set out on pages 103 to 105.
– the impact of changes in operating assumptions; • development costs incurred in establishing new life businesses; • the expected investment return on the shareholders’ net worth, based upon assumptions applying at the start of the year; • investment return variances caused by differences between the actual return in the period and the expected experience based on economic assumptions used to calculate the start of year value; • the impact of changes in economic assumptions in the period.
New business contribution 392 403 Profit from existing business – expected return 839 634
– experience variances 10 80 – operating assumption changes (7) 8
Life achieved operating profit before tax, change in risk margin and exceptional items 1,569 1,407 Change in risk margin** – 89
Life achieved operating profit before tax and exceptional items 1,569 1,496 Exceptional items*** (106) (12) Investment return variances (43) 851 Effect of economic assumption changes (269) 358
Total life achieved profit after tax 776 1,874 * Profits from other life and savings activities, which include service companies, have been calculated on a statutory basis. ** Impact of risk margin changes within economic assumptions.
*** Exceptional items in 2000 comprise one-off integration costs. Exceptional items in 1999 comprised one-off costs relating to the integration of the British Life business in Spain.
Local currency 1999 at 2000 £m £m % £m £m £m
Total new business contribution before effect of solvency margin*** 483 520 501
Total new business contribution including effect of solvency margin 392 427 403 * Annual premium equivalent represents regular premiums plus 10% of single premiums. ** 1999 new business contribution has been shown using the application of year 2000 economic assumptions and rates of exchange.
Embedded value at the beginning of the year as previously reported: – CGU plc 5,675 4,868 – Norwich Union plc 4,742 4,415
Merger adjustments arising from alignment of embedded value methodology 101 111
Restated embedded value at the beginning of the year 10,518 9,394 Total life achieved profit after tax* 813 1,845 Exchange rate movements 81 (420) Embedded value from business acquired/(disposed)** 437 89 Amounts injected into life operations 167 164 Amounts released from life operations (782) (554)
Embedded value at the end of the year*** 11,234 10,518 * Excluding profits from other life and savings activities after tax.
***Embedded value at the end of the year includes minority interests in 2000 of £208 million (1999: £104 million). This comprises minority interests in France of £34 million (1999: £30 million), Poland £42 million (1999: £24 million), Spain £57 million (1999: £nil) and Other Europe £75 million (1999: £50 million).
Net worth* Valuation of in-force Total at 31 December at 31 December at 31 December £m £m £m £m £m £m
Embedded value of life businesses 4,786 4,350 6,448 6,168 11,234 10,518 * The shareholders’ net worth comprises the market value of the shareholders’ funds and the shareholders’ interest in the surplus held in the non-profit component of the long-term business funds determined on a statutory solvency basis and adjusted to add back any non-admissible assets.
** The effect of holding the minimum statutory solvency margin and allowing for projected future releases was £700 million.
The achieved profit method of financial reporting is designed to recognise profit as it is earned over the life of an insurance policy. The total profit recognised over the lifetime of a policy is the same as under the modified statutory basis of reporting, but the timing of recognition is different.
Distributable profits from long-term businesses arise when they are released to shareholders following actuarial valuations. These are carried out in accordance with statutory requirements designed to ensure and demonstrate solvency in long-term business funds.
The life achieved profit reflects current performance by measuring the movement, from the beginning to the end of the year, in the present value of projected releases to shareholders, together with the movement in the net assets of the long-term operations held in excess of the minimum statutory solvency margin, adjusted for any amounts released from or invested in life operations.
The shareholders’ interest in the long-term business operations is represented by the embedded value. The embedded value is the total of the net assets of the long-term operations and the present value at risk discount rates (which incorporate a risk margin) of the projected releases to shareholders arising from the business in force, less a deduction for the effect of holding the minimum statutory solvency margin. This effect of solvency margin is the difference between the nominal value of the solvency margin and the present value at risk discount rates of the projected release of the solvency margin and investment earnings on the assets deemed to back the solvency margin.
Minority Shareholders’ Minority Shareholders’ Group interest interest Group interest interest £m £m £m £m £m £m
Life achieved operating profit before tax, change in risk margin and exceptional items 1,569 42 1,527 1,407 37 1,370
Risk discount rate 8.4% 9.1% 8.0% Pre-tax investment returns: Base government fixed interest 5.4% 5.6% 4.0%
• The management expenses of CGNU attributable to long-term business operations have been split between expenses relating to the acquisition of new business and to the maintenance of business in force. Certain expenses of an exceptional nature have been identified separately and the discounted value of projected exceptional costs has been deducted from the value of in-force business.
We have audited the supplementary information on pages 100 to 105 in respect of the year ended 31 December 2000, which has been prepared in accordance with the achieved profits basis as set out under Methodology and Assumptions and Definitions on pages 103 to 105. The supplementary information should be read in conjunction with the accounts prepared on the modified statutory solvency basis, which are on pages 50 to 97.
The directors are responsible for preparing the Annual report, including, as described on page 49, 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 49. The directors are also responsible for preparing the supplementary information on the above achieved profits basis.
We conducted our audit in accordance with Auditing Standards issued by the Auditing Practices Board. Our audit included examination, on a test basis, of evidence relevant to the amounts and disclosures in the supplementary information. The evidence included an assessment of the significant estimates and judgements made by the directors in the preparation of the supplementary information, and of whether the accounting policies are appropriate to the Group’s circumstances, consistently applied and adequately disclosed.
In our opinion, the supplementary information for the year ended 31 December 2000 has been properly prepared in accordance with the achieved profits basis set out under Methodology and Assumptions and Definitions on pages 103 to 105.
France CGU Participations SA (99.9%) and its subsidiaries: CGU France SA (99.8%) and its principal subsidiaries: Abeille assurances SA (99.8%) Abeille vie SA (99.8%) CGU Courtage SA (99.8%) Eurofil SA (99.8%)
General Accident Vie SA (99.8%) Société d’Epargne Viagére SA (74.9%) Union Financiere de France Banque (76.2%)
Ireland Hibernian Group plc Hibernian Life & Pensions Limited Norwich Union General Insurance (Ireland) Limited
Netherlands Commercial Union Finance BV Delta Lloyd Nuts Ohra NV and principal subsidiaries: Delta Lloyd Bank NV (Banking) Delta Lloyd Levensverzekering NV Delta Lloyd Schadeverzekering NV NUTS OHRA Beheer BV
New Zealand Belves Investments Limited and its principal operating subsidiaries: General Accident Insurance Asia Limited New Zealand Insurance Limited
Spain Plus Ultra Compania Anonima de Seguros y Reaseguros Plus Ultra Vida Sociedad Anonima de Seguros y Reaseguros
United States CGU Corporation Commercial Union Life Insurance Company of America
Principal associated companies are set out in note 21 on page 80.
Ex-dividend date (ordinary shares) 28 March Record date (ordinary shares) 30 March First dividend payment for 83⁄8% cumulative irredeemable preference shares 31 March Dividend Reinvestment Plan Election Date 19 April Annual General Meeting 24 April Publication of unaudited three months’ results 3 May Payment date (ordinary shares) 17 May First dividend payment for 83⁄4% cumulative irredeemable preference shares 30 June Publication of unaudited six months’ results 2 August Second dividend payment for 83⁄8% cumulative irredeemable preference shares 30 September Publication of unaudited nine months’ results 1 November Second dividend payment for 83⁄4% cumulative irredeemable preference shares 31 December
The recommended final dividend on the ordinary shares for 2000 will be paid in cash on 17 May 2001 and shareholders will again be offered the opportunity to participate in the Company’s Dividend Reinvestment Plan (the ‘Plan’) which enables shareholders to re-invest their dividend in the Company’s shares whilst benefiting from reduced dealing costs. Shareholders who have already joined the Plan need take no further action and the cash dividend will automatically be used to purchase CGNU shares on or after the dividend payment date.
Shareholders who have not joined the Plan and wish to do so, should complete a Plan mandate form and return it to the Company’s Registrar by no later than 19 April 2001 in order to participate for the 2000 year final dividend. A mandate form and further details of the Plan can be obtained from the Company’s Registrar.
Detailed below are various addresses that could prove useful in the event that you have a query in respect of your shareholding. Please quote CGNU plc, as well as the name and address in which your shares are held, in all correspondence.
General shareholding Lloyds TSB Registrars The Causeway 0870 600 3952 administration queries Worthing and West Sussex BN99 6DA CGNU share account queries