Richard Harvey, Norwich Union's group chief executive, commented: "Norwich Union had a good year in 1998, its first as a public limited company, with another strong performance from each of our business units and encouraging progress towards our strategic objectives.
| HIGHLIGHTS | 1998 | Restated | % change |
| Pro forma 1997 | |||
| Operating earnings before tax* | Ł716m | Ł644m | 11 |
| Profit before tax | Ł777m | Ł722m | 8 |
| Earnings per share | 27.8p | 25.2p | 10 |
| Final dividend per share | 8.55p | 7.75p | 10 |
| Full year dividend per share | 12.8p | 11.62p** | 10 |
| Shareholders' net assets | Ł5,713m | Ł5,098m | 12 |
* 11 per cent increase in operating earnings before tax
* Funds under management increased by 17 per cent to Ł57.6 billion
* Final dividend up 10 per cent to 8.55p per share
Richard Harvey, Norwich Union's group chief executive, commented: "Norwich Union had a good year in 1998, its first as a public limited company, with another strong performance from each of our business units and encouraging progress towards our strategic objectives.
"We achieved a consistent performance in our UK life and pensions operation and an excellent return from our international operations. Our UK general business has been growing and has added to that growth by acquisition, while completing another good year in its track record of profits and return on capital.
"We remain committed to creating shareholder value and high-quality earnings. This will be achieved through growth of our UK long-term savings business, building strong businesses in attractive long-term markets overseas and continued profitable development of our UK general insurance business.
"Norwich Union is focused on profitable growth in those areas where it is strong. We are operating in attractive markets, using a variety of distribution methods, supported by a powerful brand, efficient technology, a strong management team and skilled staff."
* Operating earnings exclude changes in the claims equalisation provision and are stated before integration costs and amortisation of goodwill.
** Notional dividend representing the dividend that would have been paid had Norwich Union been a public limited company throughout 1997.
Overview of worldwide Group results
New business sales
Our worldwide life, pensions and investment operations achieved new business growth of 6 per cent in local currency terms. This included an 8 per cent growth in the UK and a 9 per cent growth (in local currency) in Europe. In sterling terms, worldwide new business annual premium equivalent increased to Ł421 million, up 3 per cent on the 1997 figure of Ł407 million (excluding premiums purchased with free share proceeds).
Worldwide regular life and pensions premium sales rose by 11 per cent to Ł199 million (1997: Ł179 million), reflecting a good performance in pensions and creditor business in the UK and strong growth in pensions business in Europe.
New life, pensions and investment business single premium sales of Ł2,216 million (1997: Ł2,284 million excluding premiums purchased with free share proceeds) included strong growth in sales of single premium bond business in the UK and Ireland, offset by lower sales in France and Australia.
Modified statutory solvency basis profits
1998 operating earnings before tax, which now exclude the change in the claims equalisation provision and are stated before integration costs and amortisation of goodwill were Ł716 million, up by 11 per cent over the 1997 restated figure of Ł644 million. These include UK Life & Pensions operating earnings of Ł486 million, up from 1997 earnings of Ł453 million. Our UK General Insurance business contributed Ł129 million compared with the restated previous year's figure of Ł127 million. Particularly encouraging was the continued growth in earnings from our International insurance operations, which returned Ł123 million compared to restated 1997 earnings of Ł105 million.
| Operating earnings before tax* | ||
| 1998 Łm | Restated Pro forma 1997 Łm | |
| UK Life & Pensions business | 486 | 453 |
| UK General Insurance business | 129 | 127 |
| International life business | 91 | 73 |
| International general business | 32 | 32 |
| Non-insurance business | 9 | 2 |
| Holding companies | 7 | (5) |
| Corporate costs | (38) | (38) |
| Operating earnings before tax* | 716 | 644 |
* operating earnings now exclude the change in the claims equalisation provision and are stated before integration costs and amortisation of goodwill
The improved profits from our non-insurance business of Ł9 million (1997: Ł2 million) reflects increased profitability of our investment businesses in the UK and Australia and a strong performance from Hill House Hammond, our UK general insurance broker business.
| Profits before tax | ||
| 1998 Łm | Restated Pro forma 1997 Łm | |
| Operating earnings* | 716 | 644 |
| Amortisation of goodwill | (3) | - |
| Exceptional costs of integrating acquired undertakings | (35) | - |
| Change in the claims equalisation provision | (8) | (11) |
| Exceptional profits on disposal of subsidiary undertakings | 31 | - |
| Short term fluctuation in investment return | 76 | 89 |
| Profits before tax | 777 | 722 |
* operating earnings now exclude the change in the claims equalisation provision and are stated before integration costs and amortisation of goodwill
The Group's good operating performance boosted profits before tax to Ł777 million (1997: Ł722 million). Favourable investment market conditions generated short term fluctuations in investment values which were Ł76 million higher than the directors' longer term investment return outlook. These excess returns largely arose on UK equities.
In the course of the year we disposed of our life and investment operations in New Zealand to Royal & SunAlliance for Ł53 million, realising an exceptional profit of Ł31 million. We also completed the sale of our Maritime business to CNA Financial Corporation for Ł57 million.
During 1998, the Group made a number of acquisitions, namely the London & Edinburgh Insurance Group in November 1998 and Portfolio Partners Limited (an Australian investment management company) in September 1998, as well as the motor portfolio of St Paul International Insurance Group Limited in March 1998. As required by new accounting standards, the goodwill arising on these acquisitions of Ł220 million has been capitalised and on the most significant acquisitions will be written off over a 20-year period. The goodwill amortisation charge for 1998 amounted to Ł3 million.
Profits before tax were depressed by a provision of Ł35 million in respect of the exceptional costs of integrating the operations of the recently acquired London & Edinburgh Insurance Group with those of our existing UK general insurance business. The integration process is proceeding at a good pace and the acquired operations are on track to deliver enhanced Group profits in 1999.
The effective rate of tax on the 1998 operating earnings before integration costs and amortisation of goodwill was 29 per cent, compared with 31 per cent in 1997. Operating earnings per ordinary share before integration costs and amortisation of goodwill increased by 15 per cent to 25.4 pence per share (restated 1997: 22.1 pence per share).
The directors have proposed a final dividend of 8.55 pence net per share, bringing the total dividend for 1998 to 12.8 pence net per share. This represents an increase of just over 10 per cent compared with the notional full year dividend in 1997 of 11.62 pence net per share. Dividend cover is approximately 2 times operating earnings after tax, before integration costs and amortisation of goodwill.
Achieved profit basis
As the achieved profit basis results are derived using an "active" basis, the year on year comparison of results is distorted by the different economic assumptions which underpin the calculations for each year. The reduction in bond yields experienced in the course of 1998 has resulted in revisions to the economic assumptions employed in the 1998 calculation. In order to provide shareholders with a meaningful comparison, the 1997 achieved profit results have been restated on a comparable basis to 1998.
On an achieved profit basis, the 1998 operating profits before tax, integration costs and amortisation of goodwill amounted to Ł793 million (restated 1997: Ł704 million). Particularly pleasing was the value added by new business before cost of capital, which rose by 15 per cent to Ł122 million (restated 1997: Ł106 million excluding the value of premiums purchased with free share proceeds), an excellent result both in the UK and overseas given the pressures on margins, particularly in the UK, brought about by intense competition.
This strong operating performance and the increase in value arising from favourable investment markets contributed to a 12 per cent increase in shareholders' funds to Ł5,713 million (1997: Ł5,098 million). Contributing to the increase in shareholders' funds was the recognition on the balance sheet of a pension fund surplus of Ł185 million. This amount represents the surplus of Ł225 million (less deferred tax of Ł40 million) which existed within the Group's defined benefit pension plan on the date of the reconstruction of the Group and which, in accordance with accounting standards, needs to be recognised as a prepayment of pension contributions in the accounts.
Deployment of the Group's assets
Shareholders' funds at 31 December 1998 comprise MSSB net assets of Ł3,310 million (1997: Ł2,816 million) and internally-generated additional value of in-force long term business of Ł2,403 million (1997: Ł2,282 million).
Shareholders' MSSB net assets invested in our life businesses of Ł2,012 million (1997: Ł1,758 million) continue to account for a significant part of the total at 61 per cent (1997: 62 per cent). These assets are invested in fixed income securities (51 per cent), equities and property (17 per cent), mortgages and deposits (18 per cent) with the remainder representing working capital.
The mix of the general business solvency assets and other shareholder assets of Ł1,298 million (1997: Ł1,058 million) has changed in 1998 with a greater proportion invested in equities compared to 1997. The mix of shareholder investments supporting the general business is set having regard to the solvency requirements of this type of business.
The funds backing life and general business technical provisions and the fund for future appropriations amount to Ł51.5 billion (1997: Ł44.4 billion). Life technical funds are invested with due regard to the nature of the liabilities, guarantees, and the reasonable expectations of policyholders. Interest rate risk is managed by matching liabilities with assets of a similar duration where appropriate and where possible. The general business technical funds are held in relatively short-term fixed income assets, to match the duration of liabilities and to minimise interest rate exposure.
Worldwide funds under management have grown to Ł57.6 billion in the year, up 17 per cent over the 1997 amount of Ł49.2 billion.
UK long-term savings
Gross premiums for 1998 rose to Ł2,771 million, compared with the 1997 figure of Ł2,679 million (excluding Ł282 million of premiums purchased with free share proceeds). New life, pensions and investment business levels were 8 per cent higher in 1998 at Ł283 million (1997: Ł262 million excluding premiums purchased with free share proceeds) on an annual premium equivalent basis.
Sales figures were particularly pleasing in our core life and pensions business. Regular premium new business rose by 18 per cent to Ł126 million (1997: Ł107 million), reflecting a good performance by group personal pensions, executive pensions and creditor life business.
Single premium sales (excluding unit trusts, Peps and Oeics) increased by 2 per cent to Ł1,497 million (1997: Ł1,466 million excluding premiums purchased with free share proceeds). Sales of single premium bonds, including the new FlexiBond, were 6 per cent up on 1997 at Ł392 million (1997: Ł369 million). Annuity sales have also exceeded last year's sales to finish at Ł660 million (1997: Ł644 million).
Against a background of volatile equity markets in the second half of the year and a significant fall in longer term interest rates, the operating earnings before tax of UK Life & Pensions rose to Ł486 million (1997: Ł453 million). This 7 per cent increase is attributable to non-profit business.
| Analysis of operating earnings before tax | ||
| 1998 Łm | Pro forma 1997 Łm | |
| Technical result (gross of tax): | ||
| With-profit business | 102 | 104 |
| Non-profit business | 367 | 337 |
| Insurance result | 469 | 441 |
| Shareholders' net investment return | 17 | 12 |
| 486 | 453 | |
The pre-tax technical result from with-profit business of Ł102 million is marginally lower than the result reported in 1997. The increase in earnings from the with-profit business observed in the first half of 1998 was attributable to the significant volume of maturities early in the year. The first half result was offset in the second half by the effect of the need to set annual bonuses at a reduced level in light of the longer term investment outlook. The reduction in annual bonus rates will allow the freedom to achieve better overall investment returns, which can be passed to policyholders in the form of additional bonuses at maturity.
Non-profit business remained the most significant constituent of the result, with a pre-tax technical result of Ł367 million, up 9 per cent relative to the 1997 amount of Ł337 million. A strong performance from unitised business, reflecting growing funds under management, continued underlying growth in equity markets, and increasing expense profits, has been offset by the effects of lighter annuitant mortality than in recent years and a decline in long term interest rates. This decline has also resulted in the need to strengthen reserves in respect of a small amount of guaranteed annuity business contained within the non-profit fund. Deferred acquisition costs increased reflecting the benefits of new reinsurance arrangements and the deferral of costs on new annuity business.
UK Life & Pensions' achieved profit basis operating profits before tax amounted to Ł531 million compared to the restated 1997 figure of Ł449 million (excluding a restated Ł17 million in respect of the value added by premiums purchased with free share proceeds). The result benefited from higher new business added value before cost of capital of Ł82 million, 6 per cent higher than the equivalent restated figure in 1997 of Ł77 million (excluding the value of premiums purchased with free share proceeds). This was an excellent result given the extreme pressures on margins within the UK life sector, illustrating our ability to add shareholder value in difficult market conditions. Total embedded value of the UK life business increased by 10 per cent from Ł3,220 million to Ł3,537 million over the year.
An important consequence of flotation was that the solvency position of Norwich Union Life & Pensions, the Group's main life business, was strengthened significantly. This was reflected in the AA rating received from Standard and Poor's at the time of the flotation. At 31 December 1998, Norwich Union Life & Pensions had a free asset ratio of 13 per cent, a small fall compared with the 1997 figure of 15 per cent.
UK General Insurance
Operating earnings before tax increased to Ł129 million (1997: Ł127 million). This is an extremely commendable result for our UK General Insurance business in light of the very competitive market conditions during the year and the higher than normal incidence of extreme weather events. These events cost the Group's continuing operations Ł20 million in 1998, at the technical result level.
| Operating earnings before tax* | ||
| Class of business analysis | 1998 Łm | Restated Pro forma 1997 Łm |
| Motor | 34 | 26 |
| Household | 2 | 13 |
| Property and packages | 30 | 32 |
| Other | 15 | 12 |
| London & Edinburgh | (3) | - |
| Quota share | (9) | (17) |
| Discontinued operations | 3 | 3 |
| Technical result | 72 | 69 |
| Shareholders' net investment return | 57 | 58 |
| 129 | 127 | |
* excludes the change in the claims equalisation provision
The technical result, including discontinued operations but excluding the change in the claims equalisation provision, rose to Ł72 million (1997: Ł69 million) notwithstanding the impact of the adverse weather claims. This improvement is largely as a result of the strategic initiatives taken in 1997 and early 1998 of focusing on profitable growth in those segments of the market where Norwich Union has critical mass. This action enabled us to protect our profitability from the full impact of price competition in a longer and flatter underwriting cycle.
Our overall ratio of claims to net earned premiums of 77 per cent has increased relative to 1997. The higher incidence of bad weather in the UK contributed to this deterioration, masking the effect of claims savings arising from investment in new technology and processes. The beneficial effect of the rate increases introduced for some classes of business during 1998 will come through in due course.
Operational efficiency remains high on our agenda. Expenses excluding commissions, expressed as a percentage of net earned premiums, have fallen to 12 per cent (1997: 14 per cent). This industry-leading ratio was achieved through continual process improvements which have more than offset the cost of developing our Direct business of Ł13 million (1997: Ł17 million).
The motor account experienced strong growth in 1998, which, together with improvements in claims handling processes, contributed to a significant improvement in the technical account result to Ł34 million (1997: Ł26 million). Net written premiums rose by 28 per cent to Ł807 million (1997: Ł631 million). This is largely attributable to the private car account, where growth was assisted by the premium rating action taken in late 1997 and 1998 and higher levels of retention. Net written premiums have also benefited from the launch of a number of new private car schemes with Peugeot and Ford.
The household account remained very competitive during 1998. In spite of this Norwich Union maintained the size of the portfolio and achieved retention rates in line with 1997. Abnormal weather costs of Ł16 million mask an underlying improvement in this portfolio, which returned a technical account profit of Ł2 million (1997: Ł13 million). Subsidence costs have been constant between years at Ł26 million.
The margins in the property and packages account remain very healthy. The technical result of Ł30 million (1997: Ł32 million) was adversely affected by Ł3 million weather-related costs. This small increase in the underlying result reflects our continuing focus on profitable small and medium size commercial business and a reducing exposure to the more onerous liability part of the market.
Profitability in our Healthcare business was maintained in a very difficult market affected by personal tax changes and a competitive corporate market. The contribution in 1998 of the London & Edinburgh Insurance Group was a technical loss of Ł3 million before the change in claims equalisation provision.
Norwich Union Direct has recorded a 48 per cent increase in net written premiums in 1998. We continue to make substantial investments in developing our capability to service customers seeking to deal directly with Norwich Union.
Investment return on shareholders' solvency assets net of investment expenses and charges amounted to Ł57 million (1997: Ł58 million). This represents the longer term investment return on these assets, the majority of which are invested in equities. In 1998 the longer term rate applied to equities was 8.75 per cent, compared with 10 per cent in 1997. The incremental effect on the 1998 operating earnings of incorporating a longer term rate of investment return is Ł32 million (1997: Ł20 million).
Europe & International
Overview
Overall the International division produced an excellent performance. The technical result from insurance operations increased to Ł97 million (restated 1997: Ł70 million) with improvements in both life and general insurance operations. This improved result was achieved notwithstanding the negative currency effect of Ł7 million caused by the strength of sterling.
| Analysis of operating earnings before tax | ||
| 1998 Łm | Restated Pro forma 1997 Łm | |
| Life business technical result (gross of tax): | ||
| - Europe | 60 | 32 |
| - International | 18 | 26 |
| 78 | 58 | |
| General business technical result | 19 | 12 |
| 97 | 70 | |
| Shareholders' net investment return | 26 | 35 |
| Insurance operations | 123 | 105 |
Our European life business achieved an 88 per cent growth in pre-tax technical result at Ł60 million (restated 1997: Ł32 million) boosted by strong earnings growth in Ireland. This strong growth was offset by an Ł8 million decrease in technical earnings from our other International life businesses. The general insurance overseas business posted a creditable Ł19 million (1997: Ł12 million).
These results reflect the benefits of our continuing process improvement projects, which have enabled us to control costs while growing business volumes. Our strategy of building strong businesses with critical mass in attractive markets is delivering shareholder value.
Our European and International operations achieved combined new life, pensions and investment business sales of Ł138 million (on an annual premium equivalent basis) broadly unchanged in local currency terms relative to the 1997 sales. This included new business sales in Europe of Ł86 million (on an annual premium equivalent basis), up 9 per cent in local currency terms, bolstered by strong sales in Ireland and Spain. The higher volume of new business increased the value of new business generated before cost of capital to Ł40 million (restated 1997: Ł29 million).
The strong growth in the new business added value contributed to embedded value operating profits before tax in respect of the overseas life operations of Ł123 million (restated 1997: Ł126 million), a figure depressed by the strength of sterling (Ł10 million).
France
The pre-tax technical result for France rose to Ł20 million (1997: Ł13 million), reflecting the continuing success of direct business and benefits arising from a cost reduction programme. The embedded value of new business remained level at Ł15 million (restated 1997: Ł15 million), reflecting lower sales volumes, down 9 per cent relative to 1997 in annual premium equivalent terms.
Ireland
The pre-tax technical result for the life business in Ireland increased from Ł15 million in 1997 to Ł32 million in 1998. This result excludes Ł7 million (1997: Ł12 million) of investment return on shareholders' assets held within the long term fund, which would have previously been reported within the technical result but is now reported as short-term investment fluctuation and excluded from the operating result.
This result has been achieved through strong growth in new business volumes aided by buoyant economic conditions and a substantial improvement in the profitability of our term assurance portfolio.
Regular premium new business increased from Ł14 million in 1997 to Ł16 million in 1998, reflecting growth in pensions business. Single premium sales of Ł84 million (1997: Ł68 million) highlight the continuing success of our Celebration Bond business. New business value added before cost of capital amounted to Ł11 million (restated 1997: Ł11 million).
Spain
Our Spanish life business pre-tax technical result of Ł7 million (1997: Ł3 million) benefited from growth in volumes and mortality experience profits. Particularly successful was Norwich Union's offering in the pensions market, which contributed towards an annual premium equivalent increase of 60 per cent in local currency terms.
Tough conditions in the general insurance business market allowed a modest growth in results from Ł2 million in 1997 to Ł3 million in 1998.
Australia
Our life business pre-tax technical result in Australia of Ł15 million (1997: Ł23 million) was adversely affected by the strength of sterling (Ł4 million). In local currency terms the 22 per cent reduction reflects a market shift away from traditional life products towards a focus on investment management products. We have further tightened the cost base of our life operations and made a more realistic allocation of costs between acquisition and administrative activities. These initiatives have resulted in an increase in our new business profitability before cost of capital from Ł1 million in 1997 to Ł7 million in 1998.
Our Australian fund management business has, however, grown appreciably during the year as a result of the success of the Navigator product and the acquisition of Portfolio Partners. The additional contribution to operating earnings from this business was Ł8 million (1997: Ł5 million), an increase of 60 per cent. During the year Navigator funds have grown to A$3.4 billion on sales of A$1.2 billion.
New Zealand
Our general business in New Zealand performed well. Market rate increases and withdrawal from non-profitable lines of business contributed to an improved technical result of Ł11 million (1997: Ł9 million), notwithstanding an adverse currency effect of Ł2 million caused by the strength of sterling.
Annual General Meeting
Directors: At the company's AGM, directors George Paul, Michael Biggs, Sir Michael Partridge and Dr Elizabeth Vallance will retire by rotation and, being eligible, offer themselves for re-election.
Dividends: Shareholders entitled to receive a dividend converted to Irish punts will receive 9.73 Irish pence per share based on the exchange rate prevailing on 1 March 1999. The payment date of the dividend will be 16 June 1999 and the record date will be 23 April 1999.
The Report & Accounts and Summary Financial Statement will be posted on 9 April 1999.
Notes:
There have been a number of developments in reporting standards in recent years which have resulted in many changes to the format of UK insurers' accounts. Most recently, in December 1998, the Association of British Insurers (ABI) published a Statement of Recommended Practice (SORP) on accounting for insurance business. This SORP incorporates detailed recommendations for recognising investment returns in financial statements, an area where historically there has been considerable diversity of treatment. The objective of these proposals is to enable companies to report operating earnings that incorporate an annual investment return which reflects assumed longer term investment performance and thus excludes the volatility arising from short term fluctuations in investment values. The introduction of detailed recommendations on accounting for investment returns should improve the comparability of results across the industry. Profits before tax will, nevertheless, include the total investment return.
The SORP is substantially unchanged from the Guidance issued by the ABI in December 1995, which was previously adopted in preparing the Group's financial statements. The SORP retains the use of the modified statutory solvency basis (MSSB) of accounting for life insurance business, introduced in 1995 in accordance with the European Union Insurance Accounts Directive. In addition, we continue to report in the form of supplementary information the results of the Group on the achieved profit basis. This supplementary information has been prepared using draft proposals issued by the ABI in February 1997 and incorporates the results of our life insurance operations using an embedded value approach, which more realistically reflects the performance of this business.
While the overall effect of the introduction of new accounting standards and the publication of the SORP on the presentation of the Group's results is not significant, these developments have caused some changes to the Group's accounting policies. The 1998 financial statements have been prepared in accordance with these revised accounting policies, and 1997 comparative information has been restated accordingly.