RNS Number:5266G
Norwich Union PLC
2 March 2000
PART D
NORWICH UNION PLC
Preliminary Results for the twelve months ended 31 December 1999
Page 27
Embedded value of worldwide long-term business
An embedded value provides an estimate of the economic worth of a life
company, excluding any value which may be attributed to future new business.
The embedded value is the sum of the shareholders' net worth and the value
of the in-force business.
The shareholders' net worth comprises the market value of the shareholders'
funds and the shareholders' interest in the surplus held in the non-profit
component of the long-term business funds determined on a statutory solvency
basis and adjusted to add back any non-admissible assets.
The value of the in-force business is the present value of the projected
stream of future after-tax distributable profit from the business in force
at the valuation date, adjusted for the cost of holding an appropriate
amount of solvency capital.
The change in embedded value over the year, adjusted for any amounts
released from or invested in the life operations, provides a measure of the
performance of a life insurance operation, referred to as the embedded value
profit.
The embedded value of the long-term business operations and embedded value
profit have been determined in accordance with the achieved profit method of
reporting and are based on the current structure of the Group.
For comparative purposes, the 1998 embedded value operating profit and value
added by new business have been restated to the investment return and
discount rate assumptions applied in 1999. There is no impact on embedded
value profit before tax or embedded value.
Set out in the table below is the embedded value of the long-term business
of the Group:
Analysis of embedded value
1999 1999 1999 1998
Shareholders Value Total Total
net worth of in-
force*
#m #m #m #m
United Kingdom
Conventional with-profit - 626 626 523
Non-profit, unitised with-profit
and unit-linked 1,228 1,944 3,172 3,014
------ ------ ------ ------
1,228 2,570 3,798 3,537
------ ------ ------ ------
Europe (excluding UK)
France 93 104 197 216
Ireland 179 180 359 381
Poland 17 16 33 -
Spain 26 27 53 54
Other European Union 16 11 27 27
------ ------ ------ ------
331 338 669 678
------ ------ ------ ------
International
Australia 172 11 183 117
Other 87 5 92 83
------ ------ ------ ------
259 16 275 200
------ ------ ------ ------
1,818 2,924 4,742 4,415
====== ====== ====== ======
* At 31 December 1999 the deduction for the cost of solvency capital
was #195 million (1998: #189 million).
The value of in-force business has been calculated using economic
assumptions judged appropriate at the date of the valuation. The discount
rate and assumptions for future investment returns reflect prevailing
long-term interest rates. The discount rate includes a risk margin to make
allowance for the risk that experience in future years may differ from that
assumed. Tax is projected on the basis expected to apply. The assumptions
for future mortality, persistency and expenses reflect recent experience.
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Page 28
Embedded value of worldwide long-term business
Analysis of movement in embedded value
1999 1998
#m #m
Embedded value at the beginning of the year 4,415 4,040
Total embedded value profit after tax 530 530
Exchange rate movements (65) 17
Embedded value from business acquired/(disposed of)* 7 24
Amounts injected into life operations 70 -
Amounts released from life operations (215) (196)
------ ------
Embedded value at the end of the year 4,742 4,415
====== ======
* Embedded value from business acquired/disposed of in 1999 is the
acquired embedded value of British Life in Spain. Embedded value
from business acquired/disposed of in 1998 is the acquired
embedded value of London & Edinburgh, #45 million, less the
embedded value of the New Zealand life business, #21 million, which
was sold during the year.
Components of embedded value profit before tax
Embedded value profit comprises the following components, the first three of
which in aggregate are referred to as operating profit:
- value added by new business written during the year including value added
between the point of sale and end of year;
- the profit from existing business equal to:
- the expected return on the value of the in-force business at the
beginning of the year,
- experience variances caused by the differences between the actual
experience during the year and expected experience based on the
operating assumptions used to calculate the start year value,
- the impact of changes in operating assumptions;
- the expected investment return on the shareholders' net worth, based upon
assumptions applying at the start of the year;
- investment variances caused by differences between the actual return in
the year and the expected experience based on economic assumptions used
to calculate the start year value;
- the impact of change in economic assumptions in the year.
Restated
1999 1998 1998
#m #m #m
Value added by new business 147 97 103
Profit from existing business
- expected return 294 279 346
- experience variances 37 22 22
- Poland start up costs (14) - -
- operating assumption changes* 1 27 27
Expected return on shareholders' net worth 120 117 156
------ ------ ------
Operating profit 585 542 654
------ ------ ------
Exceptional costs of integrating acquired
undertakings (12) - -
Investment variances** 132 219 180
Economic assumption changes*** 52 19 (54)
------ ------ ------
Total embedded value profit before tax 757 780 780
Attributed tax (227) (250) (250)
------ ------ ------
Total embedded value profit after tax 530 530 530
====== ====== ======
* New industry tables for annuity mortality improvement were published
during 1999 and have been fully incorporated within the mortality
assumptions. The impact has been mitigated by changes to other
assumptions and margins.
** Investment variances for 1998 include an adverse variance of
#17 million as a result of changing expense apportionment
methodology between costs associated with new business and other
costs in Australia.
*** The 1998 economic assumption changes include #35 million pre-tax as
a result of changing expense inflation assumptions.
Embedded value profit is calculated on an after-tax basis and grossed up at
the full corporation tax rate for UK business and at appropriate rates of
tax for other territories. Profits of overseas businesses have been
translated at the average exchange rates applying for the year.
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Page 29
Embedded value of worldwide long-term business
Value added by new business
The following table sets out the value added by new business written by the
long-term business operations. The value added by new business written
during the year is the present value of the projected stream of after-tax
distributable profit from that business and includes value added to the end
of the year. Profit from new long-term business before tax is calculated by
grossing up the value of new long-term business after tax at the full
corporation tax rate for UK business and at appropriate rates of tax for
other territories.
Restated
1999 1998 1998
#m #m #m
United Kingdom
IFA sales 99 75 79
Direct 11 3 3
------ ------ ------
110 78 82
------ ------ ------
Europe (excluding UK)
France 15 14 15
Ireland 15 11 11
Poland 17 - -
Spain 4 5 5
Other European Union 3 2 2
------ ------ ------
54 32 33
------ ------ ------
International
Australia 7 6 7
Other 1 - -
------ ------ ------
8 6 7
------ ------ ------
Worldwide value added by new business before
cost of capital 172 116 122
Cost of capital (25) (19) (19)
------ ------ ------
Worldwide value added by new business before tax 147 97 103
Attributed tax (46) (31) (33)
------ ------ ------
Worldwide value added by new business after tax 101 66 70
====== ====== ======
Value added by new business has been calculated using the same assumptions
as those used to determine the embedded values as at the end of each year,
and allows for the cost of holding solvency capital equal to the minimum EU
solvency margin (or equivalent for non-EU operations).
The result for direct is based on levels of sales allowances paid from
Norwich Union Life & Pensions Limited to Norwich Union Direct Financial
Services (NUDFS), a non-insurance subsidiary. The excess of actual
expenses, including certain exceptional expenses and development costs,
over sales allowance is reflected in the result of NUDFS.
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Page 30
Embedded value of worldwide long-term business
Analysis of embedded value operating profit before tax
Embedded value operating profit is calculated on an after-tax basis and then
grossed up at the full rate of corporation tax for UK business and at
appropriate rates of tax for other territories.
Restated
1999 1998 1998
#m #m #m
United Kingdom
Conventional with-profit 56 68 84
Non-profit, unitised with-profit and unit-linked 399 368 447
------ ------ ------
455 436 531
------ ------ ------
Europe (excluding UK)
France 33 26 32
Ireland 49 42 48
Poland 2 - -
Spain 9 8 9
Other European Union 5 3 3
------ ------ ------
98 79 92
------ ------ ------
International
Australia 24 18 21
Other 8 9 10
------ ------ ------
32 27 31
------ ------ ------
Total 585 542 654
====== ====== ======
Principal economic assumptions
The principal economic assumptions used in the calculation of the value of
the in-force long-term business and the value added by new business are as
follows:
United France Ireland
Kingdom
1999 1998 1999 1998 1999 1998
% % % % % %
Discount rate 7.70 7.00 9.20 7.75 8.70 7.25
Pre-tax investment returns
- fixed interest 5.20 4.40 5.70 4.00 5.70 4.60
- equities 7.70 7.00 7.75 6.00 7.75 6.75
Future expense inflation 4.00 4.00 3.00 2.00 4.50 4.00
Tax rate used for grossing
up results 30.25 31.00 40.00 41.67 28.00 33.00
Poland Spain Australia
1999 1998 1999 1998 1999 1998
% % % % % %
Discount rate 15.25 - 9.20 7.75 11.70 9.25
Pre-tax investment returns
- fixed interest 9.75 - 5.70 4.00 7.10 5.00
- equities 12.75 - 7.75 6.00 11.10 9.00
Future expense inflation 7.25 - 3.00 2.00 3.50 2.50
Tax rate used for grossing
up results 32.00 - 35.00 35.00 20.90 20.90
----------------------------------------------------------------------------
Page 31
Embedded value of worldwide long-term business
Other assumptions
- Assumptions for overseas businesses have been chosen on bases consistent
with the United Kingdom.
- Projected tax has been allowed for on the basis which applies to the
structure of the Group. Current tax legislation and rates have been
assumed to continue unaltered, except where changes in future tax
rates have been announced.
- Assumed future mortality, morbidity and lapse rates have been derived
from an analysis of Norwich Union's recent operating experience.
- The management expenses of Norwich Union 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.
Expense inflation rates are assumed to apply on a per policy basis.
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.
- Assumed levels of commission to advisers and agents have been based on
Norwich Union's operating experience during the year.
- It has been assumed that there will be no changes to the methods and bases
used to calculate the statutory technical provisions and current surrender
values.
- The value of in-force business does not allow for future premiums under
recurring single premium business or non-contractual increments. The
value arising therefrom is included in the value of new business, when
the premium is received. Department of Social Security (DSS) rebate
premiums have been treated as recurring single premiums and include an
accrual of nil (1998: #49 million) for unreceived DSS monies.
- Long-term businesses are required to maintain capital to support statutory
solvency margins. Such capital is typically held in investments yielding
annual post-tax returns at levels less than the embedded value discount
rate. The annual cost of maintaining statutory solvency capital is the
difference in the year between the amount earned on investments supporting
statutory solvency margins and the amount expected in accordance with the
level of discount rate. The cost of holding an appropriate amount of
solvency capital over the outstanding life of in-force policies, is the
sum of the present value of these annual costs.
- The value of the in-force business has been determined after allowing for
the cost of holding solvency capital equal to the minimum European Union
(EU) solvency requirement (or equivalent for non-EU operations). Solvency
capital relating to with-profit business is assumed to be covered by
the surplus within the with-profit funds and no cost has been attributed
to shareholders.
- Bonus rates on with-profit business have been set at levels consistent
with the economic assumptions and Norwich Union's medium-term bonus plans.
No value has been attributed to any residual assets in excess of those
required to pay the assumed level of future bonuses to current
participating policyholders. The distribution of profit between
policyholders and shareholders within our with-profit funds assumes that
the shareholder interest in conventional with-profit business in the
United Kingdom and Ireland continues at the current rate of one-ninth of
the cost of bonus.
Alternative assumptions
The discount rate appropriate to any investor will depend on the investor's
own requirements, tax position, and perception of the risks associated with
the realisation of the future profits.
The table below shows the embedded values calculated on alternative discount
rates.
1% As 1%
lower published higher
discount on page 27 discount
rate rate
#m #m #m
Embedded value at 31 December 1999 5,014 4,742 4,503
------ ------ ------
It should be noted that in calculating these values all other assumptions
have been left unchanged.
The embedded value is sensitive to expense inflation assumptions. A one per
cent reduction in the assumption for all businesses would increase the
embedded value by around #30 million after tax.
External review
The results have been reviewed by Tillinghast-Towers Perrin (consulting
actuaries) who have confirmed that the methodology and assumptions used to
determine the embedded value are reasonable and that the embedded value
profit is reasonable in the context of the operating experience during the
year.
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Page 32
Group achieved profit
In the section of the preliminary announcement which sets out the embedded
value of worldwide long-term business, the results of the Group's life
operations have been reported under the achieved profit basis for reporting
performance. This approach recognises profit as it is earned over the life
of a policy and is not directly dependent upon the emergence of statutory
surplus or upon the incidence and amounts of bonus distribution, the two
significant shortcomings of the modified statutory solvency basis of
reporting. While the achieved profit basis of reporting produces results
that are more volatile than those currently reported in the main financial
statements, the results will provide a more accurate reflection of the
success of the Group year on year in areas of sales, investment performance,
operational efficiencies, policy discontinuances and mortality experience.
The following table combines the Group's life results on the achieved profit
basis with those of non-life business on the statutory basis.
Restated
1999 1998 1998
#m #m #m
Life business
Value added by new business 147 97 103
Profit from existing business
- expected return 294 279 346
- experience variances 37 22 22
- Poland start up costs (14) - -
- operating assumption changes 1 27 27
Expected return on shareholders' net worth 120 117 156
------ ------ ------
Operating profit 585 542 654
Non-life business
Total general business 195 150 161
Profit from non-insurance operations 10 9 9
Holding companies (32) 7 7
Corporate costs (41) (38) (38)
------ ------ ------
Group operating profit* 717 670 793
====== ====== ======
Life business
Exceptional costs of integrating acquired
undertakings (12) - -
Investment variances 132 219 180
Economic assumption changes 52 19 (54)
Non-life business
Amortisation of goodwill (15) (3) (3)
Exceptional costs of integrating acquired
undertakings - (35) (35)
Change in the equalisation provision (27) (8) (8)
Exceptional profit on sale of subsidiary
undertakings - 31 31
Short-term fluctuation in investment return 54 63 55
------ ------ ------
Group profit before tax 901 956 959
Taxation - on operating profit (177) (195) (235)
- on non-operating profit (38) (92) (55)
------ ------ ------
Group profit after tax 686 669 669
Minority interest (16) (10) (10)
Dividends (275) (251) (251)
------ ------ ------
Retained profit for the year 395 408 408
====== ====== ======
* Before the change in the equalisation provision, integration costs
and amortisation of goodwill.
Operating profit has been derived from long-term rate of return
assumptions. For UK equities, the assumed return for 1999 is 7.00 per
cent. Fixed interest assumptions are based on either the amortised cost
approach or are consistent with redemption yields.
Reconciliation of movements in consolidated shareholders' funds
1999 1998
#m #m
Balance at the beginning of the year 5,713 5,098
Retained profit 395 408
Foreign exchange (losses)/gains (78) 16
New share capital issued during the year 9 6
Merger reserve arising on reconstruction - 185
------ ------
Balance at the end of the year 6,039 5,713
====== ======
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Page 33
Supplementary information
On 21 February 2000, the Board of Norwich Union plc announced that it had
agreed terms for a proposed merger with CGU plc to create CGNU plc. In
accordance with undertakings given to The Panel on Takeovers and Mergers,
certain information contained in that announcement is reproduced below.
Appendix II
Extracts from the Norwich Union unaudited results
for the year ended 31 December 1999
1999 1998
#million #million
Net premiums written
Life
United Kingdom 3,702 2,749
France 272 244
Holland - -
Italy 10 11
Poland 12 -
Ireland 238 160
Other Europe 78 100
International 332 298
------ ------
4,644 3,562
------ ------
General
UK personal
- motor 897 634
- homeowners 615 360
- creditor 292 55
- health 177 154
- other 23 7
UK commercial
- motor 214 182
- property 194 119
- liability - -
- London market - -
- other 22 26
------ ------
2,434 1,537
------ ------
Continental Europe 221 193
International 128 121
------ ------
2,783 1,851
------ ------
Operating earnings before tax (1)
Life modified statutory basis
- United Kingdom 521 486
- Continental Europe 77 67
- International 31 24
------ ------
629 577
------ ------
General
- United Kingdom 173 145
- Continental Europe 6 1
- International 16 15
------ ------
195 161
------ ------
Corporate and other activities (63) (22)
------ ------
761 716
------ ------
Actual dividend per share 14.0p 12.8p
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Page 34
1999 1998
# million # million
Supplementary information (continued)
Value added by life new business(2,3)
- United Kingdom 98 72
- Continental Europe 44 27
- International 5 4
------ ------
147 103
------ ------
Operating earnings before tax on an achieved profits basis(3,4)
Life and General
- United Kingdom 628 676
- Continental Europe 104 93
- International 48 46
Corporate and other activities (63) (22)
------ ------
717 793
------ ------
Embedded value of life business
- United Kingdom 3,798 3,537
- Continental Europe 669 678
- International 275 200
------ ------
4,742 4,415
------ ------
Equity shareholders' funds(5) 6,039 5,713
------ ------
Assets under management 71,904 63,916
------ ------
Notes:
(1) On a modified statutory solvency basis before amortisation of the value
of acquired in-force business, goodwill amortisation and exceptional
items
(2) Value added by life new business is shown after deducting cost of
capital of #25 million (1998: #19 million)
(3) The 1998 value added by life new business post cost of capital and the
operating earnings before tax on an achieved profits basis will be
restated in the 1999 Report and Accounts to reflect investment return
and discount rate assumptions consistent with those used for the 1999
figures. The restated figures for 1998 are value added by new business
#97 million and the operating earnings before tax on an achieved profits
basis #670 million
(4) Incorporates non-life earnings together with life operating earnings on
an achieved profits basis
(5) Equity shareholders' funds including the embedded value of life business
It is intended that the audited 1999 full year results for Norwich Union
will be announced on 2 March 2000.
*****************************************
Appendix III
Pro forma financial information
The pro forma combined financial information set out below has been
prepared, in accordance with the notes below, to illustrate the effect on
the profits and net assets of CGU as if the Merger had occurred on
31 December 1999 (the year end of each of CGU and Norwich Union). Because
of its nature, the pro forma information may not give a true picture of
the financial results and position of the combined group.
Adjustments Combined
Norwich Group
CGU Union Other pro forma
#million #million #million #million
(note 1) (note 2) (note 3) (note 4)
Long-term savings new business(5)
- United Kingdom life premiums 2,826 2,595 - 5,421
- Continental Europe life premiums 3,253 450 - 3,703
- International life premiums 245 270 - 515
- Retail investment sales 770 577 - 1,347
------ ------ ------ ------
7,094 3,892 - 10,986
------ ------ ------ ------
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Page 35
Supplementary information (continued)
Premiums and investment sales
- Life net premiums written 8,826 4,644 - 13,470
- Retail investment sales 770 577 - 1,347
- Health net premiums written 225 177 - 402
- General net premiums written 8,621 2,606 - 11,227
------ ------ ------ ------
18,442 8,004 - 26,446
------ ------ ------ ------
Operating earnings (6)
Life modified statutory basis
- United Kingdom 271 521 - 792
- Continental Europe 262 77 - 339
- International 15 31 - 46
------ ------ ------ ------
548 629 - 1,177
------ ------ ------ ------
General (excluding health)
- United Kingdom 134 173 - 307
- Continental Europe 30 6 - 36
- International 295 16 - 311
------ ------ ------ ------
459 195 - 654
------ ------ ------ ------
Corporate and other activities (236) (82) - (318)
------ ------ ------ ------
Total operating earnings before
tax(6) 771 742 - 1,513
------ ------ ------ ------
Equity shareholders' funds(7) 9,367 6,005 101 15,473
Assets under management 136,426 71,865 101 208,392
Notes:
(1) Based on CGU's preliminary announcement of its unaudited results for the
year ended 31 December 1999 and according to CGU's accounting policies
(2) Based on Norwich Union's unaudited 1999 full year results adjusted to
align its accounting policies with those of CGU, as follows:
(i) revaluation of general business fixed income and debt securities
from an amortised cost to market value basis, which reduces equity
shareholders' funds by #20m; (ii) adjustments to eliminate the
capitalisation of certain fixed assets, which reduces corporate operating
earnings before tax by #19m and equity shareholders' funds by #14m
(3) Adjustments reflect the alignment of embedded value assumptions by both
companies onto a common basis
(4) No account has been taken of the trading results of CGU or of Norwich
Union since 31 December 1999
(5) Total inflow of regular and single life premiums and retail investment
sales
(6) Stated on a modified statutory basis, before amortisation of the value
of acquired in-force business, goodwill amortisation and exceptional items
(7) Equity shareholders' funds including the embedded value of life business.
Financial information in respect of CGU's US property and casualty
business for the year ended 31 December 1999, which is included in the
table above, is as follows: Premiums #2,621 million, operating earnings
before tax #178 million and equity shareholders' funds #2,831 million
(including an inter-company loan of #683 million)
The financial information contained in these Appendices I, II III and IV
does not constitute statutory accounts within the meaning of section 240 of
the Companies Act 1985 (the "Act"). Statutory consolidated accounts of CGU
and of Norwich Union for the financial year ended 31 December 1999 have not
been delivered to the Registrar of Companies in England and Wales pursuant
to section 242 of the Act but will be delivered following the annual general
meeting of each company. The auditors to CGU and Norwich Union have not yet
reported on the respective accounts for that year and have not made a report
for the purposes of section 235(2) of the Act for the financial year ended
31 December 1999.
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Page 36
Supplementary information (continued)
Appendix IV
Combined group financial information on an achieved profits basis
Adjustments
Norwich Combined
CGU Union Other Group
#million #million #million #million
(note 1) (note 2) (note 3) (note 4)
Value added by life new business
- United Kingdom 134 98 6 238
- Continental Europe 115 44 24 183
- International 8 5 - 13
------ ------ ------ ------
257 147 30 434
------ ------ ------ ------
Operating earnings before goodwill amortisation, exceptional items
and tax on an achieved profits basis(5)
Life and General
- United Kingdom 580 628 9 1,217
- Continental Europe 451 104 3 558
- International 319 48 - 367
Corporate and other activities (236) (82) - (318)
------ ------ ------ ------
1,114 698 12 1,824
------ ------ ------ ------
Embedded value of life business
- United Kingdom 2,349 3,798 59 6,206
- Continental Europe 3,086 669 42 3,797
- International 240 275 - 515
------ ------ ------ ------
5,675 4,742 101 10,518
------ ------ ------ ------
Notes:
(1) Based on CGU's preliminary announcement of its unaudited results for
the year ended 31 December 1999
(2) Based on Norwich Union's unaudited 1999 full year results with an
adjustment to eliminate the capitalisation of certain fixed assets,
which reduces corporate operating earnings before tax by #19m
(3) Adjustments reflect (i) the alignment of embedded value and achieved
profits assumptions by both companies onto a common basis, as set out
below, (ii) the restatement of CGU's value added by life new business
using assumptions at the end of the year instead of at the beginning
of the year, (iii) the value of Norwich Union's inherited estate and
(iv) Norwich Union's operating earnings on an achieved profits basis
includes value added by life new business adjusted to start of year
assumptions consistent with CGU's basis
(4) No account has been taken of the trading results of CGU or of Norwich
Union since 31 December 1999
(5) Incorporates non-life earnings together with life operating earnings on
an achieved profits basis
Principal economic assumptions for the combined group (%)
UK France Nether- Poland Poland
1999 1999 lands Life Pensions
1999 1999 1999
Risk discount rate 7.8 8.7 8.3 19.8 17.1
Pre tax investment returns
Base Government fixed
interest 5.2 5.5 5.5 12.5 12.5
Ordinary Shares 7.7 7.5 8.4 12.5 12.5
Property 6.7 7.0 7.0 - -
Expense Inflation 4.1 2.5 2.5 9.2 9.2
The common basis shown is that applicable at 31 December 1999 and has been
used to adjust published embedded values and value added by new business.
END
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