Norwich Union PLC - Interim Results, etc.- Part C
August 03 1999 - 3:35AM
UK Regulatory
RNS No 4095p
NORWICH UNION PLC
3 August 1999
PART C
Page 21
12. Longer-term rates of investment return assumptions
The longer-term rate of investment return is estimated with regard to
historical real rates of return and current inflation expectation adjusted for
consensus economic and investment market forecasts of investment return.
For equity and property investments, the return is calculated by applying the
longer-term rate of return to the monthly weighted average of each group of
assets taking account of new money invested, changes in portfolio mix and the
effect of short-term market movements. The amortised cost basis of accounting
used in the UK to value fixed income securities is regarded as an appropriate
basis for approximating the longer-term rate of return with realised gains and
losses subject to continuing amortisation over the period remaining to the
maturity date. For other fixed income securities a redemption yield basis has
been used to calculate the longer-term rate of return.
The principal rates used in calculating the longer-term investment return for
each significant territory are:
Equities and
property
1999 1998
% %
United Kingdom 7.00 8.75
Ireland 6.75 7.80
The directors are of the opinion that the rates of return selected are prudent
and have been selected with a view to ensuring that returns credited to
operating earnings are not inconsistent with the actual returns which will be
earned over the longer-term.
The actual investment return on investments for the 6 months to 30 June 1999
and 6 months to 30 June 1998 are compared below with the aggregate longer-term
return which has been recognised in operating earnings over the same period.
6 months to 30 June 1999 6 months to 30 June 1998
General General
Long- business Long- business
term and term and
business other Total business other Total
#m #m #m #m #m #m
Actual return on
shareholders' assets
(before allocations)
Reported in non-
technical account:
- Investment income 16 147 163 17 145 162
- Realised and 4 18 22 10 70 80
unrealised gains
20 165 185 27 215 242
Reported in long-term
technical account:
- Total return 37 - 37 63 - 63
57 165 222 90 215 305
Longer-term return credited
to operating earnings
(after allocations):
- Non-technical account 17 46 63 17 79 96
- Technical accounts 40 111 151 52 84 136
57 157 214 69 163 232
Short-term fluctuation - 8 8 21 52 73
in investment return
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Page 22
13. Cash flow statement
(a) Reconciliation of the profit on ordinary activities before tax to net cash
inflow from operating activities:
Restated
6 months 6 months Full
to to year
30.6.99 30.6.98 1998
#m #m #m
Profit on ordinary activities before tax 367 460 777
Adjustments for financing expense,
investing activities and conversion of
revenue to a cash basis:
- Profits attributable to long-term (297) (280) (547)
business
- Cash received from long-term business 191 156 175
- Allocated investment income 3 (11) (21)
- Realised (gains) including profit on - (65) (72)
sale of subsidiary undertakings
- Unrealised (gains) (22) (47) (51)
- Other items 53 40 108
Movements in:
- Debtors, other assets and (120) (184) (291)
prepayments excluding taxation
- General business technical provisions 63 255 365
- Creditors, accruals and deferred income 79 147 30
excluding taxation
Net cash inflow from operating activities 317 471 473
(b) Acquisitions of subsidiary undertakings:
6 months 6 months Full
to to year
30.6.99 30.6.98 1998
#m #m #m
Net cash at bank/(bank overdraft) acquired 1 - (7)
with subsidiary undertakings
Portfolio investments acquired with 3 - 1,008
subsidiary undertakings
Additional value of in-force long-term - - 27
business acquired
Other net liabilities (1) - (893)
3 - 135
Goodwill 4 - 220
Expenses of sale to be paid - - (3)
Net consideration to be (paid)/refunded (2) - 17
Settled by - payment of cash 5 - 369
Acquisitions of subsidiary undertakings
net of cash acquired:
Payment of cash (as above) (5) - (369)
Net cash at bank/(bank overdraft) acquired 1 - (7)
with subsidiary undertakings (as above)
(4) - (376)
(c) Disposals of subsidiary undertakings:
6 months 6 months Full
to to year
30.6.99 30.6.98 1998
#m #m #m
Investments - 97 97
Cash - 5 5
Other net current assets - 99 99
General business technical provisions - (137) (137)
Long-term business assets - 148 148
Long-term business technical provisions - (148) (148)
and liabilities
Net assets disposed of - 64 64
Potential repayment under indemnity clause - 11 13
Profit on sale - 32 31
Accrued expenses of sale - 2 -
Consideration to be received - - (1)
- 109 107
Satisfied by - cash received - 109 109
- expenses of sale paid - - (2)
- 109 107
Cash divested with sale of subsidiary - (5) (5)
undertakings (as above)
Disposals of subsidiary undertakings net - 104 102
of cash divested
Page 23
13. Cash flow statement (continued)
(d) Analysis of increase/(decrease) in net borrowings:
6 months 6 months Full
to to year
30.6.99 30.6.98 1998
#m #m #m
Change in amounts due to credit (325) (84) 18
institutions due after more than one year
Change in amounts due to credit 232 - (64)
institutions due within one year
Change in finance lease payables (7) 4 6
Total decrease in borrowings (100) (80) (40)
Foreign exchange losses - - (1)
Borrowings at the beginning of the period 481 442 442
Borrowings acquired with Group acquisitions - - 80
Borrowings at the end of the period 381 362 481
(e) Analysis of the change in cash holdings:
6 months 6 months Full
to to year
30.6.99 30.6.98 1998
#m #m #m
Change in cash at bank and in hand (73) 15 49
Change in deposits with credit institutions (11) 110 112
repayable on demand
Change in bank overdrafts 103 4 (49)
Increase in cash holdings 19 129 112
Foreign exchange (losses)/gains (2) (3) 2
Balance of cash holdings at the beginning 191 77 77
of the period
Total cash holdings at the end of the period 208 203 191
(f) Analysis of the balance of cash holdings included in the consolidated
balance sheet:
Change in
the
30.6.99 period 31.12.98
#m #m #m
Cash at bank and in hand 75 (72) 147
Deposits with credit institutions 153 (14) 167
repayable on demand
Bank overdrafts (20) 103 (123)
Total cash holdings 208 17 191
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Page 24
Independent review report to Norwich Union plc
Introduction
We have been instructed by the Company to review the financial information set
out on pages 9 to 23 and we have read the other information contained in the
interim report and considered whether it contains any apparent misstatements
or material inconsistencies with the financial information.
Directors' responsibilities
The interim report, including the financial information contained therein, is
the responsibility of, and has been approved by the directors. The Listing
Rules of the London Stock Exchange require that the accounting policies and
presentation applied to the interim figures should be consistent with those
applied in preparing the preceding annual accounts except where any changes,
and the reasons for them, are disclosed.
Review work performed
We conducted our review in accordance with guidance contained in Bulletin
1999/4 issued by the Auditing Practices Board. A review consists principally
of making enquiries of management and applying analytical procedures to the
financial information and underlying financial data and based thereon,
assessing whether the accounting policies and presentation have been
consistently applied unless otherwise disclosed. A review excludes audit
procedures such as tests of controls and verification of assets, liabilities
and transactions. It is substantially less in scope than an audit performed in
accordance with Auditing Standards and therefore provides a lower level of
assurance than an audit. Accordingly we do not express an audit opinion on the
financial information.
Review conclusion
On the basis of our review we are not aware of any material modifications that
should be made to the financial information as presented for the 6 months to
30 June 1999.
Ernst & Young
London
2 August 1999
NORWICH UNION PLC
Interim Results and New Business Figures for the six months to 30 June 1999
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 period, 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.
Set out in the table below is the embedded value of the long-term business of
the Group:
Analysis of embedded value
30.6.99 31.12.98
#m #m
United Kingdom
Conventional with-profit 578 523
Non-profit, unitised with-profit and unit-linked 3,144 3,014
3,722 3,537
Europe (excluding UK)
France 208 216
Ireland 369 381
Spain 53 54
Other European Union 26 27
656 678
International
Australia 135 117
Other 90 83
225 200
4,603 4,415
Shareholders' net worth 1,807 1,769
Value of in-force business* 2,796 2,646
Embedded value at the end of the period 4,603 4,415
* At 30 June 1999 the deduction for the cost of solvency capital was #186
million (31 December 1998: #189 million).
The embedded values of the overseas businesses have been translated at
exchange rates applying at the date of the valuation.
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 26
Embedded value of worldwide long-term business
Analysis of movement in embedded value
6 months 6 months Full
to to year
30.6.99 30.6.98 1998
#m #m #m
Embedded value at the beginning of the year 4,415 4,040 4,040
Total embedded value profit after tax 224 388 530
Exchange rate movements (36) (29) 17
Embedded value from business (disposed of) - (20) 24
/ acquired*
Amounts injected into life operations - - -
Amounts released from life operations - - (196)
Embedded value at the end of the period 4,603 4,379 4,415
* 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 period including value added
between the point of sale and end of period;
* 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 period 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
period and the expected experience based on economic assumptions used to
calculate the start year value;
* the impact of change in economic assumptions in the period.
Restated
6 months 6 months Restated
to to full year
30.6.99 30.6.98* 1998**
#m #m #m
Value added by new business 60 45 103
Profit from existing business
- expected return 149 137 279
- experience variances 4 20 22
- operating assumption changes - - 27
Expected return on shareholders' net worth 56 54 117
Operating profit*,** 269 256 548
Investment variances*** 52 286 219
Economic assumption changes**** - 28 13
Total embedded value profit before tax 321 570 780
Attributed tax (97) (182) (250)
Total embedded value profit after tax 224 388 530
* If the 1999 investment return and discount rate assumptions had been
applied to the 1998 interim results then the operating profit would have been
#256 million, rather than #301 million as published in the interim
announcement 1998.
** If the 1999 investment return and discount rate assumptions had been
applied to the 1998 full year results then the operating profit would have
been #548 million, rather than #654 million as published in the preliminary
announcement 1998.
*** Investment variances for the full year 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 full year 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 period.
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Page 27
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 period is the present value of the projected stream of after-tax
distributable profit from that business. 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
6 months 6 months Full
to to year
30.6.99 30.6.98* 1998**
#m #m #m
United Kingdom
IFA sales 44 36 79
Direct 6 1 3
50 37 82
Europe (excluding UK)
France 6 7 15
Ireland 7 6 11
Spain 2 2 5
Other European Union 2 2 2
17 17 33
International
Australia 3 1 7
Other - 1 -
3 2 7
Worldwide value added by new business before 70 56 122
cost of capital
Cost of capital (10) (11) (19)
Worldwide value added by new business before tax 60 45 103
Attributed tax (18) (15) (33)
Worldwide value added by new business after tax 42 30 70
* If the 1999 investment return and discount rate assumptions had been
applied to the 1998 interim result (#36 million) then the value added by new
business after cost of capital and before tax would have increased by #5
million to #41 million. In addition, if the 1998 interim result had included
value added to end of period, rather than at point of sale, then the value
added would have increased by a further #4 million, to #45 million.
** Full year 1998 value added by new business has not been restated as it has
been calculated on the same method and assumptions as used for the period
ended 30 June 1999.
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 period, 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.
Value added by new business during the period includes value added at point of
sale and value added between point of sale and the end of the year.
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Page 28
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
6 months 6 months Restated
to to full year
30.6.99 30.6.98* 1998**
#m #m #m
United Kingdom
Conventional with-profit 27 37 68
Non-profit, unitised with-profit and unit-linked 184 172 372
211 209 440
Europe (excluding UK)
France 15 13 27
Ireland 23 18 42
Spain 3 3 8
Other European Union 3 3 3
44 37 80
International
Australia 11 7 19
Other 3 3 9
14 10 28
Total 269 256 548
* If the 1999 investment return and discount rate assumptions had been
applied to the 1998 interim results then the total operating profit would have
been #256 million, rather than #301 million as published in the interim
announcement 1998.
** If the 1999 investment return and discount rate assumptions had been
applied to the 1998 full year results then the total operating profit would
have been #548 million, rather than #654 million as published in the
preliminary announcement 1998.
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 Kingdom France Ireland
30.6.99 30.6.99 30.6.99
& 30.6.98 & 30.6.98 & 30.6.98
31.12.98** 31.12.98** 31.12.98**
% % % % % %
Discount rate 7.00 8.75 7.75 9.00 7.25 8.50
Pre-tax investment
returns
- fixed interest 4.40 6.50 4.00 5.30 4.60 5.80
- equities* 7.00 8.75 6.00 7.30 6.75 7.80
Future expense 4.00 5.00 2.00 3.00 4.00 4.00
inflation
Tax rate used for 30.25 31.00 40.00 41.67 28.00 33.00
grossing up results**
Spain Australia
30.6.99 30.6.99
& 30.6.98 & 30.6.98
31.12.98 31.12.98
% % % %
Discount rate 7.75 9.50 9.25 10.00
Pre-tax investment returns - fixed interest 4.00 5.60 5.00 6.25
- equities 6.00 7.60 9.00 10.75
Future expense inflation 2.00 3.00 2.50 2.50
Tax rate used for grossing up results 35.00 35.00 20.90 20.90
* The equity assumption in the UK at 31 December 1998 and 30 June 1999 is
quoted after the removal of tax credits on dividends.
** Tax rates for grossing up in the UK, France and Ireland are as at 30 June
1999. The rates applying at 31 December 1998 were 31.00%, 41.67% and 33.00%
respectively.
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Page 29
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 period.
- 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.
- 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, as
it is not intended to distribute these assets. 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% lower As published 1% higher
discount rate on page 25 discount rate
#m #m #m
Embedded value at 30 June 1999 4,900 4,603 4,380
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.
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Page 30
Group achieved profit
The UK insurance industry is attempting to develop standards for the
calculation and reporting of profit arising from long-term business, known as
achieved profit reporting.
Achieved profit reporting
In the section of the interim 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 methodology and the assumptions underpinning the embedded value
calculations are set out in detail in the embedded value of worldwide long-
term business section of the interim announcement. The components of the
embedded value profit are also defined, indicating the items comprising
operating earnings for life business.
Reporting on investment performance
During 1998, the Association of British Insurers issued proposals which
revised the method on which insurers report investment return. These
proposals enable companies to report operating earnings which reflect the
longer-term rate of investment returns on shareholders' investments and thus
exclude the volatility which arises from short-term fluctuations in investment
values.
In determining the effect of these proposals on the results for the period
ended 30 June 1999, the longer-term rates for UK equities, which represents
the most significant element of the equity content of the relevant
investments, has been taken to be 7.00 per cent per annum (1998: 8.75 per
cent). For fixed income securities the return arrived at using the amortised
cost basis has been taken as an approximation to the longer-term rate of
return.
The presentation of the Group's operating profit, which includes life profit
on an achieved profit basis, and general business profit under the longer-term
rate of return principles is summarised on page 31.
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Page 31
Group achieved profit
Set out in the table below is the profit for the Group under the achieved
profit methodology.
Restated
6 months 6 months Restated
to to full year
30.6.99 30.6.98* 1998**
#m #m #m
Life business
Value added by new business 60 45 103
Profit from existing business - expected return 149 137 279
- experience variances 4 20 22
- operating assumption changes - - 27
Expected return on shareholders' net worth 56 54 117
Operating profit 269 256 548
Non-life business
Total general business 90 71 150
Profit from non-insurance operations 6 3 9
Holding companies (13) 4 7
Corporate costs (18) (20) (38)
Group operating profit*** 334 314 676
Life business
Investment variances 52 286 219
Economic assumption changes - 28 13
Non-life business
Amortisation of goodwill (7) - (3)
Exceptional costs of integrating acquired - - (35)
undertakings
Change in the equalisation provision (12) (6) (8)
Exceptional profit on sale of subsidiary - 32 31
undertakings
Short-term fluctuation in investment return 8 58 66
Group profit before tax 375 712 959
Taxation - on operating profit (90) (86) (197)
- on non-operating profit (14) (114) (93)
Group profit after tax 271 512 669
Minority interest (2) (2) (10)
Dividends (91) (83) (251)
Retained profit for the period 178 427 408
* If the 1999 investment return and discount rate assumptions had been
applied to the 1998 Interim results then the Group operating profit would have
been #314 million, rather than #359 million as published in the interim
announcement 1998.
** If the 1999 investment return and discount rate assumptions had been
applied to the 1998 full year results then the Group operating profit would
have been #676 million, rather than #793 million as published in the
preliminary announcement 1998.
*** Before 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
6 months 6 months
to to Full year
30.6.99 30.6.98 1998
#m #m #m
Balance at the beginning of the period 5,713 5,098 5,098
Retained profit 178 427 408
Foreign exchange (losses) / gains (39) (35) 16
New share capital issued during the period 9 5 6
Merger reserve arising on reconstruction - - 185
Balance at the end of the period 5,861 5,495 5,713
END OF PART C
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