Emerging Markets increased the underwriting result by 83% to £11m, driven primarily by Asia and the Middle East which delivered another excellent result improving its COR by 6.4 points to 83.1%.
In Scandinavia, we continued to develop our motor proposition, signing additional agreements with car dealers in Denmark and Sweden. We acquired White Label Holding and Duborgh Skadeforsikring in Norway.
John Napier Chairman 5Royal & SunAlliance Annual Report & Accounts 2006
The after tax loss of £20m reflects the expected £499m writedown of the US operation and US trading loss for the year. On a like-for-like basis, profit after tax from continuing operations increased by 14% reflecting the strength of the ongoing Group.
In International we have improved the combined ratio by nearly a point to 94.0%. The underwriting result is up by 35% to £85m, driven by continued strong performances in Canada, Europe, Asia and the Middle East. Canada has achieved another outstanding result with an 85% increase in the underwriting result to £48m.
The rating environment has remained mixed by business class and region. In Personal lines, we’ve seen rate increases in the low single digits across our core markets. In Commercial, while the environment has remained stable through the year, rates are off around 4%.
• Clear growth targets for each business • Focus on target trades and segments • Building momentum – new business up 26% in 2006 • Strong retention across the Group at 83% • Tailored customer propositions and risk solutions we are using our technical expertise to develop tailored customer propositions and risk solutions. Renewable energy, for example, is a rapidly growing sector and we have quickly built a strong wind turbine proposition in Canada, Scandinavia and Ireland.
Expanding our motor proposition In 2006 in Scandinavia we signed a number of distribution agreements with motor manufacturers and distributors. These agreements include Peugeot and Volkswagen in Sweden and Toyota in Denmark.
Overview of major strategies We are aiming to become number one in the broker market for reputation, capabilities and profitability. In Commercial, we are leveraging our reputation for technical excellence and innovative risk solutions to deliver profitable growth and manage retention in our target markets.
Johnson increased net written premiums by 25%, reflecting both strong organic growth and the successful integration of the Morgex and Shillington acquisitions. New affinity deals were signed during the year and Johnson now has access to sponsorship groups and credit unions representing 2.9 million members. Johnson continues to develop a strong pipeline of bolt-on acquisitions.
We have taken a number of actions designed to improve the performance of our Latin American operations, including the appointment of a new CEO, CFO and Risk Director at the regional level, and a new CEO in Mexico. Following these actions, we expect an improvement in the Latin American underwriting performance in 2007.
Profit on change in pension scheme design – 180 – (Loss)/profit on disposals (1) 126 –
Group investments now total £12.8bn. In line with our investment policy, £8.6bn or 67% of this is invested in high quality short dated bonds. The average duration of the portfolio is approximately 2.6 years, reflecting the short tail nature of the Group’s insurance liabilities. The percentage of the bond portfolio rated AA or better is 83% and less than 1% is held in non investment grade. The average yield of the Group’s portfolio is 4.0%.
The Group agreed its Individual Capital Guidance (based on its ICA submission) with the FSA in late 2005, which at the request of the FSA remains confidential. The ICA is a forward looking, economic assessment of the capital requirements of the Group based on our assessment of the risks that we are exposed to. The models used to determine the ICA have been integrated into the Group’s business processes and are used to enhance the management of the Group.
Credit, market and liquidity risks The primary sources of credit risk within the Group are investment and treasury activities and reinsurance counterparty risk. Within the investment management and treasury activities, a range of bank counterparty concentration and credit quality limits, together with other controls, are in place to ensure that exposure is managed within the Group risk appetite. New reinsurance cover is placed with reinsurers that are authorised as Approved Reinsurance Counterparties recommended by the Group Reinsurance Credit Committee under criteria approved by the Board Risk Committee.
Community We operate an active community engagement programme throughout the Group. While regions focus on the issues that matter locally, there are some common issues such as safety and social exclusion.
George Culmer E, I Age 44. Chief Financial Officer and director of the Group from May 2004. Previously Head of Capital Management Zurich Financial Services (insurance).
KPIs are monitored in a number of areas including financial, employee, customer and the environment and community. Financial KPIs include combined operating ratio, expense ratio, operating result and net written premium growth. Employee KPIs include the percentage of staff that have performance related pay, the percentage of staff taking part in the employee survey and the increase in overall employee satisfaction as measured by the survey. Customer KPIs include the levels of customer retention and the Group’s position in the annual benchmarking survey on complaints handling by the Association of British Insurers. Environment and community KPIs include the levels of CO2 emissions and in addition the Group discloses the amount of the Group’s charitable donations.
The Group is committed to fostering a constructive dialogue with independent trade unions wherever they are recognised, ensuring a regular and constructive dialogue on business issues, and early consultation on changes affecting the workforce. In the UK, Amicus is formally recognised through a partnership agreement which covers collective consultation and bargaining on behalf of non management employees. The Management Association (TMA) represents managerial employees under a separate consultative agreement. The European Consultative Forum (ECF), is a cross European body created to enable information sharing and consultation on transnational issues with the European workforce. Since 2005, an amended constitution has been in place for the European workforce which enables streamlined consultation arrangements.
Professional development and training On appointment, new directors are subject to a formal induction programme and receive training and guidance on their duties and responsibilities. Continuing professional development is offered to all directors which includes educational and business awareness presentations.
Internal controls The Board has overall responsibility for the Group’s internal control systems and for monitoring effectiveness. Implementation and maintenance of the internal control systems are the responsibility of the executive directors and senior management. The performance of internal control systems is reviewed regularly by the Group Audit Committee and the boards of subsidiary companies.
Internal audit The Group has an internal audit function, whose activities and effectiveness are monitored and reviewed by the Committee. The Committee is responsible for ensuring that adequate access to information and resources is given to the Group Director, Audit, Risk and Compliance (who is responsible for Internal Audit within the Group) and for approving the appointment of and removal of the holder from that position.
Notes 1. In addition to attendance as above, Andy Haste and other executive directors regularly attend, by invitation, meetings of the Group Audit Committee and Remuneration Committee.
The role of the Remuneration Committee The Committee is a formal committee of the Board and is accountable to shareholders through its annual remuneration report which is voted on at the AGM, and remains committed to reflecting the best interests of shareholders and to the pursuit of best practice in remuneration policy. The Committee welcomes ongoing dialogue with shareholders on remuneration policy.
Activities of the Remuneration Committee The continuing focus of the Committee is the maintenance of a strong link between performance and reward. It is the Committee’s view that the interests of shareholders are best served by ensuring a remuneration structure which has a significant element of performance related pay, and reinforces the culture of high performance and accountability that applies at all levels throughout the Group.
This structure will be replicated for other members of the Executive Team.
base salary levels to the median level for equivalent roles in similar companies facing similar levels of complexity and challenge in the UK and internationally. In the UK, the comparator group most frequently used is a sample of financial service companies within the FTSE 100.
• The Executive Share Option Scheme (ESOS). Regular awards under the ESOS were discontinued from 2006, but the ESOS remains available for use in exceptional circumstances, such as executive recruitment.
David Paige elected not to join a Royal & SunAlliance pension plan on appointment and received a taxable cash allowance of 17.5% of base salary.
Directors’ emoluments (audited part) Remuneration for the year ended 31 December was as follows: Base salary Allowances Total Total and fees and benefits Bonuses 2006 2005
Notes: 1. In addition to the interests shown above, the directors indicated, in common with other employees, had a beneficial interest as at 31 December 2006 in 4,938,894 (2005: 4,938,894)
Notes: 1. On 13 September 2006, SAYE options were granted at an exercise price of 106.0p.
Notes: 1. The market price of ordinary shares on 14 June 2004, 8 June 2005 and 1 November 2005, the dates on which the above long term incentive scheme interests were granted, was 79.25p, 77.62p and 100p respectively.
Change in the gross provision for unearned premiums (108) (40) Less: change in provision for unearned premiums, reinsurers’ share (84) (21)
Expenses Gross claims incurred (3,758) (4,103) Less: claims recoveries from reinsurers 305 714
Profit before tax on continuing operations 649 894 Income tax expense 5 (170) (259)
Factors contributing to this higher degree of uncertainty include: • The long delay in reporting claims from the date of exposure (for example, cases of mesothelioma can have a latent period of 40 or more years). This makes estimating the ultimate number of claims we will receive particularly difficult,
of the US operation. The directors do not believe that any current mediation, arbitration, regulatory, governmental or sectoral inquiries and pending or threatened litigation or dispute will have a material adverse effect on the Group’s financial position, although there can be no assurance that losses resulting from any current mediation, arbitration, regulatory, governmental or sectoral inquiries and pending or threatened litigation or dispute will not materially affect the Group’s financial position or cashflows for any period.
Reinsurance The Group is exposed to disputes on, and defects in, contracts with its reinsurers and the possibility of default by its reinsurers. The Group is also exposed to the credit risk assumed in fronting arrangements. In selecting the reinsurers with whom we do business our strategy is to seek reinsurers with the best combination of credit rating, price and capacity.
Selection of accounting policies The Group exercises judgement in selecting each Group accounting policy. The accounting policies of the Group are selected by the directors to present financial statements that they consider provides the most relevant information. For certain accounting policies there are different accounting treatments that could be adopted, each of which would be in compliance with IFRS and would have a significant influence upon the basis on which the financial statements are presented. The bases of selection of the accounting policies for the accounting for financial assets and for the recognition of actuarial gains and losses related to pension obligations are set out below: • The Group accounting policy is to designate all financial assets that meet the necessary conditions as available for sale financial assets. This designation enables the Group to recognise the investment return earned on such assets in a consistent manner with the internal measures applied to measure the performance of the individual operations,
The results and financial position of those Group entities whose functional currency is not British pounds sterling are translated into British pounds sterling as follows: • Assets and liabilities for each balance sheet presented are translated at the closing exchange rate at the date of that balance sheet,
• For cash, short term investments, commercial paper, other assets, liabilities and accruals, carrying amounts approximate to fair values,
Recently issued accounting pronouncements not yet adopted by the Group Below are listed the developments that are relevant in the future to the Group’s future financial reporting. The Group does not anticipate that any of these developments will have a material impact on the Group’s financial condition, results of its operations or disclosure in its financial statements.
• On 15 December 2005, the IASB issued a limited Amendment to IAS 21, The Effects of Changes in Foreign Exchange Rates. The Amendment clarifies the requirements of IAS 21 regarding an entity’s investment in foreign operations. The limited Amendment to IAS 21 has been adopted by the EU. The Group will adopt limited Amendment to IAS 21 from 1 January 2007,
(c) Interpretations to published standards that are not yet effective and not relevant for the Group’s operations • IFRIC 7, Applying the Restatement Approach under IAS 29, Financial
Basic Basic earnings per share is calculated by dividing the profit/(loss) attributable to equity holders of the Parent Company by the weighted average number of ordinary shares in issue during the period, excluding ordinary shares purchased by the ESOP Trusts and held as treasury shares.
6. Earnings per share attributable to the equity holders of the Parent Company continued The calculation is performed for the share options to determine the number of shares that could have been acquired at fair value (determined as the average annual market share price of the Parent Company’s shares) based on the monetary value of the subscription rights attached to outstanding share options. The number of shares calculated as above is compared with the number of shares that would have been issued assuming the exercise of the share options.
Deferred acquisition costs at 1 January 465 487 Exchange adjustment (18) 13
Estimate of cumulative claims At end of accident year 7,178 2,380 2,171 2,043 2,164 2,132
Three years later 7,902 2,317 1,886 Four years later 7,961 2,241 Five years later 8,398
To be settled within 12 months – – 34 33 To be settled after 12 months 17 40 22 22
Net pension and post retirement surplus/(liability) on balance sheet 32 (473) Deferred tax in respect of net pension and post retirement asset/liability (8) 103
26. Retirement benefit obligations continued Discontinued operations – the amounts recognised are as follows: £m £m
The BRC performs the following functions: • Establishes how much risk the Group is willing to assume,
Estimation of claims provisions – non asbestos reserves Reserves are analysed by line of business within the various regions. A single line of business may be written in one or more of the regions. Case reserves are established on each individual claim and are adjusted as new information becomes known during the course of handling the claim. Lines of business for which claims data (eg paid claims and case reserves) emerge over a long period of time are referred to as long tail lines of business. Lines of business for which claims data emerge more quickly are referred to as short tail lines of business. Within the Group’s operations a typical short tail line of business is property. The longest tail lines of business include personal accident in Scandinavia, workers’ compensation in the US, commercial liability and professional liability.
Reserving for asbestos claims is subject to a range of uncertainties that are generally greater than those presented by other types of claims. These include long reporting delays, unresolved legal issues on policy coverage and the identity of the insureds. As a consequence, traditional loss reserving techniques cannot wholly be relied on and we have employed specialised techniques to determine reserves in a prudent manner using the extensive knowledge of both internal asbestos experts and external legal and professional advisors.
Average claim cost is monitored from claim notifications over time and, from this data, after adjustment for inflation, a view is taken of current average claims cost taking into account evidence of trends etc. The average costs observed will reflect the proportion of claims cost being borne by the Group as a result of current sharing agreements amongst insurers, which in turn reflects the Group’s proportion of claimant exposure periods.
Aggregation of risks The Group is exposed to multiple insured losses arising out of a single occurrence, whether a natural peril event such as a hurricane, flood or an earthquake, or man made catastrophes such as an explosion or fire at a major industrial facility. Any such catastrophic event could generate insured losses under one or more of its policies.
Liquidity risk Liquidity risk is the risk that cash may not be available to pay obligations when due at a reasonable cost. The Group has no appetite for incurring liquidity risk and is committed to meeting all liabilities as they fall due. The investment limits ensure the Group’s portfolio is kept in highly liquid marketable securities sufficient to meet its liabilities as they come due based on actuarial assessment.
In addition, the Group has committed credit facilities available as set out in note 22.
4. During the year, Codan A/S purchased DKK736m (£66m) of its own shares on the market. This increased the Group’s share of the results and shareholders’ equity of Codan A/S and its subsidiaries from 71.7% to 74.5%. The Group legally owns 71.7% of Codan A/S until the shares are cancelled at their AGM.
35. Discontinued operations, non current assets and assets and liabilities of operations held for sale continued Non current assets held for sale and assets and liabilities of discontinued operations IFRS requires that the total assets and total liabilities of discontinued operations are each shown separately and excluded from the individual line items of the balance sheet. The assets and liabilities of the US operation have been shown net of intercompany balances. No representation of prior period is required as the assets and liabilities are included in the individual line items: £m
Changes in equity for the year ended 31 December 2006 Capital Subordinated
Additional loans to subsidiaries of £401m (2005: £323m) as disclosed within note 2 have been made. Of this, £294m (2005: £294m) and £78m (2005: £nil) are subordinated loans on which interest is charged at 8.5% and 6.701% respectively with the remaining loan balance interest free with no specified repayment date.
Registered Office and Group Corporate Centre 9th Floor, 1 Plantation Place, 30 Fenchurch Street, London EC3M 3BD. Telephone: +44 (0)20 7111 7000. Registered in England No. 2339826.
Company website The Annual Report & Accounts, interim results and other useful information about the Company is available on our website www.royalsunalliance.com.