Our Group results for 2000, incorporating operating profit from ongoing business of £1,407 million, have been seriously affected by the loss to be incurred on the sale of our US general insurance operations. This has been a disappointment. However, your Board is convinced that our decision to exit the general insurance market in the US was the correct one.
As part of the focus on personal and small commercial lines, we also withdrew from the London Market with its inherently volatile marine and energy business. This cost the Group £314 million after tax.
To generate maximum value, we are concentrating on markets where we can achieve leadership positions.
We were the first company to apply as a stakeholder pensions provider and one of the first four to be formally registered. We have also announced that charges on our existing personal pensions will not exceed the stakeholder maximum of 1% a year from 6 April 2001.
Our French long-term savings company, Abeille vie, has two particular strengths – the savings products from AFER (the largest savings association in France), and its own unit-linked business. Helped by new products and strong performances from all Abeille vie’s distribution networks, sales of unit-linked policies increased strongly. The extranets linking Abeille vie to its brokers were improved and the Service Plus call centre won a France Telecom award for its friendliness and efficiency. Our direct operation, Norwich Union Direct, unveiled a new internet site.
The French business has reviewed its entire portfolio to focus on its strengths and return to profitability in 2001. It has increased its rates, withdrawn from unprofitable business, and stopped working with brokers whose business generated losses. Abeille assurances is re-engineering its processes so that agents are freed from claims handling and can concentrate more on sales. Abeille assurances and CGU Courtage have both continued to improve their internet links with intermediaries.
Before marketing costs, the direct operation, Eurofil, achieved break-even for the first time and consolidated its number two position in its sector. The launch of Eurofil.com is another step towards hands-free underwriting and administration.
CGNU’s Canadian business is the largest in the country, with more than 10% of the general insurance market. Its strategy is to use its size to keep its costs competitive and to forge stronger relationships with brokers, agents and banks. Following a recent agreement, CGNU’s products are now distributed through the Bank of Montreal and we are looking for other similar bancassurance deals.
Operating (loss)/profit before tax (72) 1,281 *Including life achieved operating profit
The Group’s target for return on capital is a normalised after-tax return on equity capital of 10% plus inflation. The normalised return is based on operating profit from ongoing business including life achieved operating profit, before amortisation of goodwill and exceptional items, as a percentage of the opening equity capital.
In arriving at the Group operating profit from ongoing business, we have excluded the result of both the US general insurance business (the sale of which was announced in September 2000 and is due to complete in the first half of 2001) and the UK London Market discontinued operations.
11 Philip Scott FIA 47 Executive director Appointed to the Board in May 2000. Joined Norwich Union in 1973 and the Board of Norwich Union in 1993. Held a number of senior positions in Norwich Union, becoming Chief Executive UK Life and Long-Term Savings in March 1999. Currently executive director with responsibility for the Group’s UK Life, Long-Term Savings and Wealth Management operations.
Mike Biggs 11 Richard Harvey 13 Sir Michael Partridge 9 George Paul 26
CGNU has significant operations within the European Union and considers that overall success of EMU presents a substantial opportunity for the Group. Costs incurred to date for the introduction of the euro amount to £57 million, of which £17 million has been included in these results (1999: £16 million). The expected total cost of preparing the Group’s systems for the euro is some £74 million, excluding the UK.
The Remuneration Committee comprises the following non-executive directors, appointed by the Board: George Paul (Chairman) Lyndon Bolton Pehr Gyllenhammar Elizabeth Vallance André Villeneuve
The Board itself determines the level of fees paid to the non-executive directors, following consideration of a recommendation from the executive directors.
The Company believes that a proportion of a senior executive’s total remuneration should be attained through an annual incentive bonus arrangement which links rewards directly with performance.
The benefits paid from the pension schemes are subject to Inland Revenue limits. There is in place an unfunded pension top-up scheme to ensure that senior executives, including executive directors, receive the benefits promised by the pension schemes notwithstanding certain Inland Revenue limits relating to an earnings cap which restricts the amount of pension that can be paid from a tax-approved scheme. Where the limit applies, benefits are topped-up from the unfunded scheme. Bob Scott, Philip Twyman, Mike Biggs and Richard Harvey are affected by these limits and therefore will, at retirement, receive some of their pensions benefit from this top-up arrangement.
– Savings related options 1,222 – – 1,222* 797.6 – Bonus Plan options – ** – – Tony Wyand
2. Awards under the Commercial Union Long Term Incentive Plan vested at the end of the relevant performance period with half the shares vesting being transferred to the director immediately and the balance being transferred two years later. In respect of the performance period ended 31 December 1999, 18,476 shares vested in February 2000 (Peter Foster 5,698 shares, Peter Ward 5,764 shares and Tony Wyand 7,014 shares). Half of the shares were transferred to the directors on vesting and the other half will be transferred to them in 2002. All awards, which have not vested under this Plan, have lapsed. Also included in the numbers disclosed above is half of the shares which vested in 1999, which will be transferred to the directors in February 2001.
(2,837) (Loss)/profit for the financial year attributable to equity shareholders (1,730) 1,003
(44) Change in the equalisation provision (27) (55) 20 Net profit/(loss) arising on the sale of subsidiary undertakings (10a) 12 (8)
The merger has been accounted for using the merger accounting principles set out in Financial Reporting Standard 6 ‘Acquisitions and Mergers’. Accordingly, the financial information for the current year has been presented, and that for prior years restated, as if CGU plc and Norwich Union plc had been combined throughout the current and comparative accounting periods. Merger accounting principles have given rise to a merger reserve (see note 33).
The impact of these changes was to increase profit before tax by £7 million (1999: reduce by £91 million) and increase shareholders’ funds by £110 million (1999: increase by £67 million).
Profit/(loss) for the financial year 209 65 (1,987) (1,713) Other recognised gains and losses 456 (2) (78) 376
‘Business to be discontinued’ represents a material discrete operation where sales contracts have been exchanged with a prospective purchaser but all conditions of sale have not been achieved, and sales proceeds have not yet been received by the Group. These disclosures relate solely to the general insurance business in the United States.
In instances where the carrying value of businesses to be disposed of is more than the likely sales proceeds, a provision for loss on sale has been included in the results.
Operating profit before exceptional items 1,161 1,150 Exceptional items (108) (4)
Longer-term return credited to operating results: Long-term insurance business* 428 422 General insurance (including health) 5,351 5,194
In October 2000, the Group disposed of its 51% holding in its South African general insurance business, CGU Holdings Limited, for a cash consideration of £58 million. The net assets disposed of amounted to £57 million and the loss on disposal, after transaction costs and after writing back £8 million of goodwill previously charged to reserves, was £11 million.
Subject to the satisfaction of certain conditions, the total proceeds for the sale of the US general business of US$3,163 million were fixed by reference to the operation’s net assets as at 31 August 2000 and will not be adjusted to reflect the business results in the period from 1 September 2000 to completion, nor will the Group bear any continuing operating risk from 31 August 2000 or provide any guarantees in respect of its claims reserves or balance sheet beyond this date. Consequently, had the transaction been completed on 31 August 2000, the post-tax loss on sale would have been US$2,007 million.
Balance at 31 December Goodwill (21c) 257 – 257 Share of net assets 470 252 722
Net assets of long-term operations 4,286 4,093 Additional value of in-force long-term business 6,948 6,425
As explained in accounting policy R on page 52, goodwill arising on acquisitions since 1 January 1998 is carried on the balance sheet and amortised over its useful economic life. The cumulative amounts of positive and negative goodwill charged or credited to the consolidated profit and loss account, attributable to subsidiary undertakings acquired from 1 January 1968 to 31 December 1997 and not subsequently sold, are £1,279 million and £18 million respectively. Similar information relating to subsidiary undertakings acquired before 1968 is not readily available.
The cumulative amount in the profit and loss account reserve relating to unrealised gains and losses is £2,412 million (1999: £2,655 million).
Pensions business (in deferment) 3 to 5.75 Nil or 50% of AM80/AF80 or AM 80 less 5 years
Exchange rate movements on opening provisions 2 9 3 4 18 Movement during the year
In the Netherlands, the accruing liabilities each year are fully insured. Life assurance contracts are taken out in the Delta Lloyd Life fund and the premiums are calculated individually for each member.
Net cash inflow from operating activities, excluding exceptional items and merger transaction costs 738 857
Increase in cash holdings 119 – Foreign exchange rate movements 3 28
Bank overdrafts: General business and other activities (219) (176) (43) Banking and stockbroking (22) (1) (21)
Operating profit including achieved life profits – ongoing business 1,407 1,534 1,704 2,053 Deduct achieved life profits (1,569) (1,407) (1,440) (1,382) Add modified statutory life profits 1,190 1,172 1,075 943
***New business contribution before effect of solvency margin includes minority interests in 2000 of £29 million (1999: £31 million). This comprises minority interests in France of £4 million (1999: £3 million), Poland £7 million (1999: £15 million), Spain £10 million (1999: £nil) and Other Europe £8 million (1999: £13 million).
Italy Commercial Union Italia SpA and its principal subsidiaries: Commercial Union Assicurazioni SpA Commercial Union Life SpA Commercial Union Previdenza SpA (66.7%) Commercial Union Vita SpA (55.0%) Commercial Union Insurance SpA (66.7%) Norwich Union Vita SpA
Corporate and single company Peps Quilter & Co. Limited St Helen’s 020 7662 6262 1 Undershaft London EC3P 3DQ