Markets were seriously disturbed as a consequence of the disaster. Solvency ratios around the world were already deteriorating, and the fall in equity prices, then and since, has significantly reduced shareholders’funds.
– Consolidated 19% market share and number one position in the UK
“We have reshaped the business and built a strong base for profitable growth”
We are confident that the foundations we have laid over the past 18 months will help us continue to build competitive advantage. Having successfully completed the merger process, we now have a new company.This is an exciting prospect as we enter 2002 with new stature in the international business arena and a good deal of confidence. Our clear strategy, financial strength, powerful, trusted brands and expanding distribution channels give us the capability to outperform. And, on behalf of our shareholders, this is our intention.
Performance and products We achieved record worldwide longterm savings new business sales in 2001, up 10% to £15 billion (2000: £13.5 billion). Our businesses delivered this excellent growth despite the challenging economic environment.
Bancassurance is an increasingly important mechanism for profitable growth. Perhaps our most significant move in 2001 was in Spain, where we formed new bancassurance partnerships with Unicaja, Caixa Galicia and Caja España to further enhance our strong market position.The group’s existing arrangement with Bancaja had already helped to make CGNU the fourth-largest bank distribution network in the Spanish market, where bancassurance is the dominant form of distribution, generating over 80% of life new business. These agreements together provide access to eight million potential customers through more than 3,000 branches.
In the Netherlands, where Delta Lloyd and Ohra are among the leading fund managers, 2001 was a difficult year. We launched a new mutual fund product for institutional investors, and our fixed income mutual funds portfolio was also successful.Total assets under management grew during 2001 to £29 billion. We are taking advantage of this expertise by launching mutual funds into Germany and Belgium.
�Australia The acquisition of Fortis Australia will improve our cost ratio and consolidates CGNU’s top five position.
We have established a combined infrastructure for claims management to obtain the greatest overall benefits from our size, and continue to develop a culture around Total Incident Management (TIM). We recognise the stress that often accompanies a claim, and so aim to get things back to normal for the customer as soon as possible. Extending TIM to around six million policyholders who would benefit in the event of a claim has generated greater value for money for Norwich Union.Through agreements with approved suppliers, we settled over half of the claims in 2001 with repairs or appropriate replacement items at lower cost than by issuing a cheque to the customer. Following this advance, our challenge is to export the TIM culture, sharing learning and processes with other parts of our general insurance business worldwide.
Norwich Union Insurance in the UK has strongly supported the UK General Insurance Standards Council (GISC) from the outset, because we believe that it offers good safeguards for customers. We will therefore continue to adhere to GISC rules until the Financial Services Authority assumes responsibility for regulating the sale of UK general insurance products at the beginning of 2004.
Following the World Trade Center tragedy on 11 September 2001, we helped people caught up in those terrible events by overlooking standard exclusions on travel policies. We also provided free travel insurance for relatives and others who needed to travel to the US in the aftermath of the tragedy.
CGNU invested a total of £16 million worldwide in sponsorships in 2001, including over £5 million spent on community activities and charitable causes as measured using the Business in the Community benchmarking template.
Basis of preparation The financial statements have been prepared on the modified statutory solvency basis, with supplementary information using the achieved profits basis.The main difference between the two methods is that the achieved profits basis recognises a prudent element of profit on insurance contracts at the point of sale, whereas the modified statutory solvency basis defers more of the contract profit until later in the policy term.
Operating profit before amortisation of goodwill and exceptional items, after tax, attributable to equity shareholders 1,263 891
Our UK operation has seen a change of mix, towards products with a much tighter pricing structure, most notably in the pensions sector. As a more developed marketplace, we cannot expect returns on capital in the UK to match the growing markets elsewhere in Europe.
Expected return 848 839 Experience variances (18) 10 Operating assumption changes 17 (7)
At the end of 2001, the group’s total external borrowings amounted to £3.8 billion, including the subordinated debt. Around half of these borrowings are on a fixed rate basis with maturity terms between two and 34 years, with the balance being represented by commercial paper and floating rate bank borrowings.
Long-term savings 11,321 11,455 (1) General insurance and health 4,921 5,425 (9)
External debt (2,651) (2,581) Internal debt (3,284) (4,120) Subordinated debt (1,157) –
The group recognises the critical importance of efficient and effective risk management systems. Close attention is paid to asset and liability management.This is particularly important for our life businesses, given the long-term nature of the liabilities involved.
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 exposure through local currency borrowings and derivatives.
Pehr Gyllenhammar (66) Chairman and non-executive director Appointed to the Board in 1997, becoming Chairman in 1998. Former Executive Chairman of AB Volvo. Currently a Managing Director of Lazard Freres & Co. LLC, Chairman of the Trustees of Reuters Founders Share Company Limited and of Swedish Ships Mortgage Bank and a member of the Supervisory Board of Lagardère SCA. Chairman of the Nomination Committee.
Annual General Meeting A separate document accompanying the Report and Accounts contains an explanation of the business to be conducted at, and the Notice convening, the Annual General Meeting of the Company, to be held on 23 April 2002 at 11.00am at The Barbican Centre, Silk Street, London EC2Y 8DS.
The final dividend for 2001 will be paid on 17 May 2002 to all holders of ordinary shares on the Register of Members at the close of business on 2 April 2002. 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 within the shareholder information on page 100.
Directors’ interests 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 40 to 42. All the disclosed interests are beneficial.
The Company is also supportive of employee development. This support includes the building of relevant competencies, encouraging staff to gain appropriate professional qualifications and assistance with wider personal development.
Auditors At the Annual General Meeting on 24 April 2001, Ernst & Young was appointed as sole auditor to the Company. PricewaterhouseCoopers, which had previously been joint auditor, did not seek reappointment.
The Board has a formal performance review process to assess how well it is performing and how it might improve. To ensure that directors are able to exercise an independence of judgement, the Nomination Committee undertakes an annual review of directors’ interests in which all potential or perceived conflicts and issues relevant to their “independence”are considered. Based on the December 2001 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 receive appropriate training when joining the Board and are required to commit to continue their personal development through attendance and participation on courses, seminars, workshops and lectures on issues relevant to the Group’s business.
The Board has established a number of committees, including Remuneration, Audit, Nomination, Chairman’s and Information Technology Strategy Committees. Each operates within defined terms of reference and the minutes of their meetings are circulated to the Board.
Relations with shareholders 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 within the constraints of the information already known to the market. The Company also seeks the views of major investors, particularly on remuneration issues, both directly and through consultation with the Association of British Insurers.
The benefits paid from the Scheme are subject to Inland Revenue limits. There is in place an unfunded pension top-up arrangement to ensure that senior executives receive the benefits promised by the Scheme notwithstanding an Inland Revenue limit relating to their level of earnings, which in some cases cap the amount of pension that can be paid from a tax-approved scheme. Where this limit applies, benefits are topped-up from the unfunded arrangement. Mike Biggs, Richard Harvey and Philip Twyman are affected by this limit and therefore will, at retirement, have some of their pension benefits from the Scheme topped-up from this arrangement.
(4) Peter Foster and Bob Scott left service early as a consequence of the merger of CGU with Norwich Union. Peter Foster was aged 54 at the date he left service and had a 24 months’ service contract. A severance payment based on his contract of £633,333 was paid and in addition he received a bonus of £63,333, being a proportion of his annual cash bonus in respect of his five months’ service in 2001. In accordance with the Company’s redundancy terms, Peter Foster received an immediate pension on a non-discounted basis, the cost of which was £1,087,000. Peter Foster remains, until 31 May 2002, the Chairman of Curepool Limited, the Group’s internal reinsurance company for which he receives a fee of £147,000 pa.
– Savings related options 2,162 2,162 797.6 – Bonus Plan options 4,593 4,593 966.5 *At date of ceasing to be a director.
CGU Integration Incentive Plan Share award – The performance condition attaching to this part of the plan was to exceed the estimated annualised cost savings of £270 million, which was announced to the market in August 1998, by at least 10%. The actual annualised cost savings achieved was £370 million, whilst the additional one-off cost which arose from generating the increased annualised cost savings was deemed to be proportionate to the original target. The performance condition having been met, the shares referred to in the share awards table vested on 27 February 2001. The mid-market value of a share on that date was 1000 pence per share.
The accounting policies (identified alphabetically) on pages 44 to 46 and notes (identified numerically) on pages 56 to 90 are an integral part of these accounts. The auditor’s report is on page 43.
2 Changes in other technical provisions, net of reinsurance 1 (13) (5,080) Net operating expenses (9a) (3,149) (4,015)
am £m £m 1,242 Balance on long-term business technical account 770 679 Tax credit attributable to balance on the long-term business 1,816 Profit from long-term business operations before tax 1,126 1,053 1,463 Balance on general business technical account 907 (312)
Other assets 3,474 Cash at bank and in hand 2,125 1,948
56 CGNU plc Annual report + accounts 2001 1 – Exchange rates
(ii) Long-term business premium income by geographical origin – continuing operations
(a) The total investment return before tax comprises: Long-term business Non-long-term business £m £m £m £m
(i) The longer-term investment return, net of expenses, allocated to the general business technical account and transferred to the long-term business technical account was £1,404 million (2000: £1,817 million) and £36 million (2000: £2 million transferred from) respectively.
(a) Net operating expenses in the technical accounts comprise: Long-term business General business £m £m £m £m
(a) Tax on profit/(loss) on ordinary activities Tax charged in the non-technical account comprises: UK corporation tax 19 (65) Advance corporation tax written back – (46) Overseas tax 87 46 Associated undertakings – 3 Deferred tax (40) (70) Prior year adjustments 2 13 Tax attributable to balance on long-term business technical account 356 374
Unrealised gains on investments 237 187 190 210 Provisions and other timing differences 58 114 34 40
In addition to the goodwill arising on the acquisition of these subsidiary undertakings, the Group acquired 43.7% of the minority interest in Commercial Union Sigorta AS, and made a number of smaller acquisitions in continental Europe. These gave rise to an additional amount of £35 million goodwill. Total positive goodwill arising in the year was £496 million (note 17).
Other movements in 2000 included adjustments to the fair value of acquisitions in 1999.
Additional value of internally-generated in-force long-term business 5,259 6,058 (799) Amount attributable to minority interests (81) (59) (22)
Amounts owed by policyholders 1,892 2,330 Amounts owed by intermediaries 1,581 1,944
The fair value of these shares at 31 December 2001 was £273 million (2000: £234 million).
As permitted by section 230 of the Companies Act 1985, the profit and loss account of the Company has not been included in these accounts.
The interest charge for the year on the above was: 1 13 14 27
(a) The Group operates a large number of pension schemes around the world, whose members receive benefits on either a defined benefit basis or a defined contribution basis. The largest defined benefit schemes are in the United Kingdom, the Netherlands, Canada and Ireland, where the scheme assets comprise some 98% of the total defined benefit scheme assets throughout the Group. Of this total, the United Kingdom comprises some 80%. The assets of the main United Kingdom, Irish and Canadian schemes are held in separate trustee-administered funds and, in the Netherlands, the main scheme is held in a separate foundation which invests in the life funds of the Group. An actuarial report has been submitted for each of the defined benefit schemes within the last three years, using appropriate methods for the respective countries on local funding bases. There are no material deficiencies in any of the main schemes.
Third party funds under management Unit trusts, Oeics, Peps and Isas 4,677 5,295 Segregated funds 15,998 21,302
Profit/(loss) on ordinary activities before tax 514 (1,406) Add back: Integration costs 59 425 Financial Services Compensation Scheme levy 31 – Merger transaction costs – 59
Net movement in opening and closing non-long-term portfolio investments (5,674) (1) Balance at 1 January 23,224 23,225
In the course of conducting insurance business, various companies within the CGNU Group receive general insurance liability claims, and become involved in actual or threatened litigation arising therefrom, including in respect of pollution and other environmental hazards. Amongst these are claims notified in respect of asbestos production and handling in various jurisdictions, including Australia, Canada and South Africa. Given the significant delays that are experienced in the notification of these claims, the potential number of incidents which they cover and the uncertainties associated with establishing liability and the availability of reinsurance, the ultimate cost cannot be determined with certainty. However, the Group’s exposure to such liabilities is not significant and, on the basis of current information and having regard to the level of provisions made for general insurance claims, the directors consider that any costs arising are not likely to have a material impact on the financial position of the Group.
Corporate costs and unallocated interest charges (613) (546) (402) (286) (284) Wealth management (99) (133) – – –
Pence per ordinary share Net asset value (a) 530p 606p 700p 669p 603p Market price (London) (a) 845p 1082p 998p 941p 848p Earnings per share attributable to equity shareholders (b): Operating profit before amortisation of goodwill, amortisation of acquired additional value of in-force long-term business and exceptional items, after tax, attributable to equity shareholders in respect of continuing operations 43.2p 28.3p 39.2p 35.5p 32.0p
The following table sets out the contribution from new business written by the long-term business operations. The contribution generated by new business written during the period is the present value of the projected stream of after-tax distributable profit from that business. Contribution before tax is calculated by grossing up the contribution after-tax at the full corporation tax rate for UK business and at appropriate rates of tax for other countries.
Netherlands (including Belgium and Luxembourg) 170 131 27% 38 9 16
New business contribution including effect of solvency margin 441 38 479 392
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