HIGHLIGHTS Strong results in challenging market conditions Increased net written premiums by 6% Operating result up 4% to £814m Underlying return on equity 21.3% Completed buyout of Codan minorities Successful US exit Increased dividend 19% to 7.01p
Our strategies are both general and specific. We continue to exercise leadership on risk assessment and rate where and when necessary to ensure we achieve sustainable business performance. Specific strategic actions in our regions have included: Further strengthening of International with the purchase of the Codan minorities and acquisition growth in Canada Strong premium growth in Emerging Markets via organic growth and entry into new markets, particularly China and the Baltics and use of selected JV acquisitions to strengthen our proposition and prospects in Eastern Europe
Management excellence and a performance culture is embedded at all levels in the Company. There is a bonus pay related plan focused on superior performance. Our Executive Development Programme is in its fourth year, from which two-thirds progress to senior management positions. We continue to both promote from within the business and recruit senior talent to strengthen our overall expertise and performance.
We have also further strengthened our capital position, and I am pleased we achieved our goal of regaining our full A credit rating from Standard & Poor’s last December.
In Canada, premiums were up 6% (9% on constant exchange) to £703m, with Johnson delivering 8% growth (11% on constant exchange) and good performances from both our Commercial and Personal Intermediated businesses. We are now the market leader in British Columbia following the acquisition of Canadian Northern Shield, which completed in December 2007.
During 2007, we resolved our last remaining legacy issue and we are now fully focused on continuing to deliver our objective of sustainable profitable performance. With our strong portfolio and the actions we are taking, we are confident that we will continue to deliver the profitable performance that we have seen over the last few years.
£180m annualised expense savings delivered ahead of schedule We have achieved this through a reduction in headcount of around 2,000, IT and procurement savings, lower premises costs and a 27% reduction in central expenses. The 2007 impact of these annualised savings was an in year P&L benefit of £125m, offset by implementation costs of £75m.
International has had another strong year, delivering above market growth, and strong improvements in the underwriting result and the COR.
Customer focus is central to our propositions and we are optimising customer reach through our multi channel distribution strategy, with strong Intermediary, Affinity and Direct propositions.
During the year, we have seen some challenging conditions within our regional markets and the rating environment is showing some signs of increasing competitiveness. Our niche, segmented approach has benefited us in this environment and we are shifting capacity to where we can see the best returns.
UK floods 18 | RSA | Annual Report and Accounts 2007
We are working with broker partners to strengthen relationships and our customer propositions. Retention remains strong and we are using a targeted approach to drive growth in specialist lines that are profitable Strong growth in MORE TH>N®, with 8% increase in NWP Increased 23% from 2005 levels Achieved mid 2007, new target of a further £50m announced MORE TH>N® expense ratio 19.8% UK expense ratio 17.5%, down from 19.4% in 2005
In Commercial, distribution is evolving with increasing consolidation in the broker market and the emergence of specialists. This is creating new
By maintaining discipline and investing in our capabilities, our UK business will remain well positioned to continue delivering sustainable profitable performance.
We anticipate 2008 will be an exciting year for Emerging Markets as we continue to implement our organic growth strategy. In addition, we are building a pipeline of targeted bolt on acquisitions to accelerate delivery of our growth objectives. We are committed to underwriting discipline and continuous operational improvement to drive sustainable profitable performance.
Represented by: (Decrease)/increase in cash and cash equivalents (352) 443 Purchase/(sale) of other investments 196 (492)
The commercial property portfolio represents only 3% of investment assets and comprises high quality commercial properties, generating strong and sustainable rental income and does not include any development properties.
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.
Business partners We work closely with our business partners and intermediaries to grow a successful business at the same time as reducing our social and environmental impact. We demand high standards from them.
We remain committed to clear and open communication with customers, and resolving their complaints promptly. This was reflected by our upper quartile position in all categories in the UK in the 2007 benchmark by the ABI. Throughout our businesses we continue to improve our customer service. This year we rolled out our Personal Customer Manager programme, which was pioneered in our Canadian business, to over 170,000 customers in the UK, assigning people with their own dedicated customer services manager. This demonstrates our focus on improving the customer experience.
The Group is committed to fostering a constructive dialogue with recognised independent trade unions, ensuring a regular and constructive dialogue on business issues and early consultation on changes affecting the workforce. In the UK, Unite 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.
Rights and obligations attaching to shares The rights attaching to the ordinary shares and preference shares are set out in the Company’s Articles of Association (the ‘Articles’). Details of the rights and obligations attaching to shares as at 31 December 2007 are incorporated into this report by reference and are set out in note 18 on pages 96 to 97.
Annual General Meeting The AGM will be held at the Queen Elizabeth II Conference Centre, Broad Sanctuary, Westminster, London SW1P 3EE on Monday, 19 May 2008 at 11.00 am.
Board balance and independence Details of the directors who served during the year can be found on page 34.
At all times during the year, at least half of the Board, excluding the Chairman, comprised non-executive directors. All non-executive directors have been determined by the Board to be independent. The Chairman meets regularly with the non-executive directors both individually and collectively without the executive directors being present. The Chairman met the independence criteria of the Combined Code on his appointment in 2003 and continues to meet the criteria set out in the Code. There have been no changes to his external commitments since then which might affect his responsibilities to the Group. None of the executive directors serve on the board of another FTSE 100 company.
The Board, through the GAC, receives reports from the Group Director, Audit, Risk and Compliance and his team on the integrity of the control environment and also receives reports from the external auditors based upon their audit work. The GAC also receives reports on the Group’s arrangements for ensuring regulatory compliance. The Board, through the Board Risk Committee (BRC), considers reports from risk specialists (both internal and external) to the Group, and reviews Group level risk management information.
Incentive arrangements are leveraged so that only exceptional performance attracts the highest levels of award
Up to 100% of annual base salary is paid as cash
Share based long term incentive awards Policy: To provide annual share awards to executives to ensure alignment with shareholder interests solely through the LTIP. Except in exceptional circumstances, no other discretionary share plan will be used to make awards.
Non-executive directors Noel Harwerth 10,000 – Edward Lea 416,467 302,003 Malcolm Le May 15,360 – John Maxwell 304,251 261,011 John Napier 314,265 300,945
Options granted following the AGM in May 2003 are potentially exercisable if, at the end of the period of three business years starting with the business year in which the options were granted, the Group has achieved a return on capital (ROC) of at least 6% per annum (after inflation and excluding items of an exceptional nature which in the view of the Committee do not reflect the underlying performance of the business) when averaged over the period. One retest is allowed at the end of the fourth business year, but if the performance criterion has not been met over the full four year period, the options lapse. Options granted between September 1998 and May 2003 are also subject to a performance condition that the Group must achieve a ROC of at least 6% when averaged over a consecutive three year period, but if the measure is not satisfied at the end of the third business year following the date of grant, the test can be repeated on an annual basis over the 10 year life of the option. Options granted between April 1997 and September 1998 were subject to a different performance condition linked to TSR. For options to be eligible for exercise, the Group’s TSR has to be at or above the median of companies in the FTSE 100 Index over a consecutive period of three years, between the year of grant and the completion of the 10 year life of the option. The test is conducted twice per year, at the end of March and September, by independent external specialists. None of the terms or conditions of any of the existing options over shares of the Group were varied during the year. Full details of all directors’ shareholdings and options to subscribe for shares are recorded in the Group’s Register of Directors’ Interests which is open to inspection in accordance with the provisions of the UKLA Listing Rules.
George Culmer 1,3,4 Deferred Share awards 128,938 – – – – 128,938 08.04.08 Matching Share awards 386,814 – – – – 386,814 08.04.08 Andy Haste 1,3,4 Deferred
We have reported separately on the Parent Company financial statements of Royal & Sun Alliance Insurance Group plc for the year ended 31 December 2007.
The Group’s shares of its associates’ post acquisition profits or losses are recognised in the income statement, and its shares of post acquisition movements in reserves is recognised in reserves. The cumulative post acquisition movements are adjusted in the carrying amount of the investment. When the Group’s share of losses in an associate equals or exceeds its interest in the associate, including any other unsecured receivables, the Group does not recognise further losses, unless it has incurred obligations or made payments on behalf of the associate.
Costs incurred by the acquirer in connection with a business combination must be accounted for separately from the business combination. This will result in such costs being expensed and not being included in goodwill
None of the above are anticipated to have a material impact on the Group financial statements.
Certain of the Group’s equities and debt securities that are held at fair value are unlisted (2007: £577m; 2006: £686m). These primarily comprise cash instruments which are highly liquid and redeemable at short notice at carrying value. The amount also includes a number of other unlisted investments which are valued either by reference to industry pricing sources or model based calculations.
The Group Investment Committee (GIC), on behalf of the Group Board, is responsible for reviewing and approving the investment strategy for the Group’s investment portfolios. It provides approval for all major changes of the Group’s investment strategy and, in particular, approves any substantive
Other segment items included in the income statement: Investment income 295 190 30 1 516 Interest expense – (7) (6) (12) (25)
The trustees of the Royal & SunAlliance ESOP Trust and the Royal & SunAlliance ESOP Trust No 2 waived their entitlement to dividends which reduced the total dividend paid by £1m (2006: £1m).
Syn Mun Kong Public Limited Company is listed on the Stock Exchange of Thailand. The fair value of the Group’s holding at 31 December was £3m.
Derivative assets 33 17 Other debtors 355 339 Pension scheme surplus 263 188 Accrued interest and rent 150 128 Prepayments 162 134
The subordinated guaranteed US Dollar bonds (‘Yankee Bonds’) have a redemption date of 15 October 2029. The rate of interest payable on the Yankee Bonds is 8.95%.
The estimated provision for ultimate incurred losses changes as more information becomes known about the actual losses for which the initial provisions were set up and as the rate of exchange changes. The 2007 redundancy/(deficiency) represents the claims development of earlier accident years in the current accounting period.
To be settled within 12 months 13 – 15 34 To be settled after 12 months 6 17 77 22
Present value of funded obligations 4,764 248 5,012 4,767 Present value of unfunded obligations 5 69 74 71 Present value of obligations 4,769 317 5,086 4,838 Equities 1,193 121 1,314 2,191 Bonds 3,410 117 3,527 2,260 Cash 154 23 177 171 Property 226 – 226 248 Total assets in the schemes 4,983 261 5,244 4,870
Experience adjustments on schemes liabilities (78) 42 (50) 87 Experience adjustments on schemes assets 89 (14) 434 145
Other share based payments Certain employees of the Group’s former US operation held entitlements under the Equity Incentive Scheme for US Employees prior to the disposal of the operation. On disposal of the US operation the options under the scheme became cash settled and the majority of the options vested. There are also other plans under which awards have been granted to certain employees in the form of cash settled share based awards. Under these plans, if the vesting conditions are satisfied, cash awards are made based upon the underlying performance of the Parent Company’s ordinary shares. Awards were made in 1999 and 2001 under old schemes and during 2004 and 2005 on terms that provide the same potential benefits as the Share Matching Plan. The liability in respect of these plans at 31 December 2007 was £4m (2006: £2m). The intrinsic value of awards that had vested at 31 December 2007 was £4m (2006: £nil).
Bahrain Royal & Sun Alliance Insurance (Middle East) Limited E.C. (50.01%) General insurance
Liabilities Insurance contract liabilities 58 2,834 Insurance and reinsurance liabilities 5 41 Other liabilities 2 719
We read the other information contained in the Annual Report as described in the contents section and consider whether it is consistent with the audited Parent Company financial statements. We consider the implications for our report if we become aware of any apparent misstatements or material inconsistencies with the Parent Company financial statements. Our responsibilities do not extend to any further information outside the Annual Report.
The attached notes form an integral part of these separate financial statements.
The balance at 31 December comprises: Investment in subsidiaries 5,208 5,410 Loans to subsidiaries 379 401
3. Other debtors and other assets – to be settled within 12 months
Financial statem ents 4. Share capital Full details of the share capital of the Company are set out in note 18 to the consolidated financial statements.
Low cost share dealing facilities A telephone and internet dealing service is available through Equiniti which provides a simple way of buying and selling RSA shares. Commission is 1% with a minimum charge of £25 for telephone dealing and 0.5% with a minimum charge of £15 for internet dealing. For telephone sales call +44 (0)845 6037 037 between 8.30am and 4.30pm, Monday to Friday, and for internet sales log on to www.shareview.co.uk/ dealing. You will need your shareholder reference number as shown on your share certificate. Share dealing services are also widely provided by other organisations.
Deadline for the receipt of scrip dividend mandates by Equiniti Limited in relation to the ordinary final dividend for 2007