Aviva 2001 Annual Report Download - page 30

28 CGNU plc Annual report + accounts 2001 Financial review continued
Return on capital employed Rates of return have been depressed
this year by assets supporting the US general insurance operation,
upon which we received no return for the first five months. We
remain focused on achieving our ambitions of a 10% net real return
in the medium term, without sacrificing quality of earnings.
Return on capital employed1
2001 2000
Normalised Opening
after-tax equity Return on Return on
return capital capital capital
At 31 December £m £m % %
Long-term savings 1,160 11,455 10.1 10.3
General insurance and health 640 5,425 11.8 6.4
Other business (70) 272 (25.7) (47.5)
Corporate (59) 2,009 (2.9) (2.0)
1,671 19,161 8.7 6.7
Borrowings (298) (6,701) 4.4 5.1
1,373 12,460 11.0 7.2
Minority interest (93) (584) 15.9 10.3
Preference capital (17) (200) 8.5 8.5
Total continuing operations21,263 11,676 10.8 7.1
1. The normalised after tax return on opening equity capital, based on operating
profit from continuing operations, including life achieved profit, before amortisation
of goodwill and exceptional items.
2. The return on capital employed, including discontinued operations, was 9.4%
(2000: 5.8%).
Capital Structure The group maintains an efficient structure from a
combination of equity shareholders’funds, preference capital,
subordinated debt and borrowings, consistent with the group’s risk
profile and the regulatory and market requirements of our business.
The group’s capital, from all funding sources, has been allocated such
that the capital employed by trading operations is some £5.9 billion
(2000: £6.7 billion) greater than the capital provided by its
shareholders and its subordinated debtholders. As a result, the
group is able to enhance the returns earned on its equity capital.
The return on capital for continuing operations of 10.8% (2000: 7.1%)
considerably exceeds the 8.7% return on the capital employed in our
businesses (2000: 6.7%), enhancing value for our shareholders.
External funding is provided from both the banking and the debt
capital markets. In November 2001, the company issued £1.2 billion
of subordinated debt. This provides cost-effective funding and is
treated as equity for both regulatory and rating agency purposes.
In addition to its external funding sources, the group has a number
of internal debt arrangements in place. These have allowed the
investment of assets supporting technical liabilities into the pool of
central capital for use across the group. They have also enabled the
shareholders to deploy cash from some parts of the business to
others in order to fund growth. Although intra group loans in nature,
they are counted as part of the capital base for the purpose of capital
management. All internal loans have been negotiated at a market
rate and are appropriately serviced.
The group’s principal insurance operating subsidiaries have been
assigned financial strength ratings of AA,“very strong security”,
from Standard & Poor’s.
Borrowings and interest cover The net proceeds of the disposal of
the US general insurance operation in June this year were used to
reduce the group’s borrowings and to finance the acquisitions made
during the year and other operational requirements.
In November the group raised £1.2 billion of subordinated debt to
fund anticipated organic and inorganic growth.This has been treated
as equity for the purposes of calculating the group’s gearing and
interest cover, to reflect the characteristics of this form of capital.
At the end of 2001, the group’s total external borrowings amounted
to £3.8 billion, including the subordinated debt. Around half of these
borrowings are on a fixed rate basis with maturity terms between two
and 34 years, with the balance being represented by commercial
paper and floating rate bank borrowings.
Capital management
Shareholders’funds have declined by 13% to £11,872 million, largely
reflecting an 18% fall in European equity markets. During the year,
we disposed of the US general insurance operation, crystallising the
after tax loss of £1 billion, provided in 2000, and invested £0.8 billion
in new ventures (2000: £1.2 billion).The group raised £1.2 billion of
fresh capital to strengthen further its financial position.
Capital employed Our focused approach to corporate activity,
closely aligned to the business strategy, has resulted in a shift in the
mix of capital away from general insurance and health.The majority
of the assets released from discontinued operations has been applied
to reduce borrowings.The remainder, together with the proceeds of
the subordinated debt issue, is available to shareholders and has been
shown as corporate.
Capital employed by segment
2001 2000
At 31 December £m £m %
Long-term savings 11,321 11,455 (1)
General insurance and health 4,921 5,425 (9)
Other business 310 272 14
Corporate 3,063 2,009 52
Total continuing operations 19,615 19,161 2
Discontinued operations –1,757 na
Total capital employed 19,615 20,918 (6)
Deployment of equity shareholders’ funds
2001 2000
Fixed
income Other Other
Equities securities investments assets Total
At 31 December £m £m £m £m £m £m
Assets 4,947 5,063 2,242 120 12,372 11,552
Goodwill 1,385 1,004
Additional value of in-force long-term business 5,858 6,605
Assets backing capital employed in
continuing operations 19,615 19,161
External debt (2,651) (2,581)
Internal debt (3,284) (4,120)
Subordinated debt (1,157) –
12,523 12,460
Minority interests (651) (584)
Preference capital (200) (200)
Total continuing operations 11,672 11,676
Discontinued operations –1,757
Equity shareholders’funds 11,672 13,433