Our portfolio of businesses is diverse and provides exposure to markets at different stages of development and at different points in the insurance cycle.
The combined operating ratio improved by 0.8 points to 93.3% and the underlying return on equity was 20.7%.
1 Financial highlights 2 R&SA at a glance 4 Chairman’s statement 6 Group CEO’s business review 10 Market leading capabilities 11 Profitable growth 12 UK business review 14 International business review 16 Emerging Markets business review 18 Financial review 22 Risk framework 24 Corporate responsibility 26 Board of Directors 29 Directors’ report 31 Corporate governance 35 Remuneration report 41 Directors’ emoluments 42 Directors’ interests 45 Independent auditors’ report to the members of Royal & Sun Alliance Insurance Group plc 46 Consolidated income statement 47 Consolidated statement of recognised income and expense 48 Consolidated balance sheet 49 Consolidated cashflow statement 50 Estimation techniques, uncertainties and contingencies 53 Significant accounting policies 60 Notes to the financial statements 106 Independent auditors’ report to the members of Royal & Sun Alliance Insurance Group plc 107 Parent Company balance sheet 108 Statement of changes in equity of the Parent Company 109 Parent Company cashflow statement 110 Notes to the separate financial statements 114 Shareholder information 115 Financial calendar 116 Frequently asked questions
CCoommbbiinneedd ooppeerraattiinngg rraattiioo ((CCOORR)):: The ratio of claim costs and expenses (including commission) to premiums.
A strong portfolio of businesses, balanced between mature markets and emerging markets with higher growth potential 2 Royal & SunAlliance Annual Report & Accounts 2006
In 2006, the UK delivered a COR of 92.3%, almost one point better than last year and a 4% increase in the underwriting result. Commercial delivered a COR of 92.6% and the Personal COR improved 4 points to 91.6%.
In Commercial, our most competitive market, retention remains strong at 84% and we increased new business by 31% to £298m. In November, we acquired Martello Underwriting Limited, a specialist provider of professional indemnity insurance which is expected to generate premiums of around £40m in 2007.
In Personal, MORE TH>N® delivered a 28% increase in new business and is making good progress in achieving a sub 20% expense ratio by the end of 2007. In Intermediated, we signed 11 distribution agreements, including Paymentshield, the largest independent provider of mortgage related products in the UK, which is expected to contribute over £200m in premiums in 2008.
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 in our target markets to deliver profitable growth and manage retention.
We are targeting £70m of annualised cost savings by mid 2008 and an expense ratio of below 15%.
We are the largest Commercial insurer in the UK, with 13% market share, writing property, motor, liability and marine insurance. Property is the largest segment, accounting for over 35% of Commercial net written premiums. The business has a strong reputation for technical excellence, it insures 70% of FTSE 100 retailers and is one of the leading carriers of Professional & Financial and Marine risks outside of Lloyd’s of London.
Ireland produced another good result in a competitive market. The acquisition of EGI Holdings Limited extends our expertise and product offerings in selected liability and motor lines.
Italy outperformed the market in terms of top line growth, and delivered a strong increase in underwriting profits.
We are targeting double digit growth per annum in these exciting markets by expanding distribution, disciplined underwriting and improving operational performance. We will complement organic growth with acquisitions that accelerate the delivery of our strategic objectives.
We are also successfully driving growth by exploiting alternative distribution channels and taking a segmented approach to our target customer base to develop new customer propositions. We will consider supplementing organic growth with acquisitions in existing territories.
Our businesses in Latvia and Lithuania are ranked number one in each of their markets and we are launching a new operation in Estonia in 2007.
We are located in 10 countries across Asia and the Middle East, including India and China. The Asia and the Middle East portfolio accounts for 19% of Emerging Markets’ net written premiums and consistently delivers strong underwriting results.
Scandinavia accounts for 55% of International premiums. In Denmark and Sweden, our businesses are ranked third largest, operating under the Codan brand in Denmark and Trygg-Hansa in Sweden.
Canada comprises our direct business, Johnson Corporation, as well as Personal Intermediated and Commercial.
Our Italian business distributes the majority of its products through non tied agents, with a network focused on Northern Italy.
The detailed achievements of 2006 are covered in the Chief Executive’s and Chief Financial Officer’s reports. On the operating and financial front I would like to note: • A continued strong financial performance,
We announced in October a revised organisation structure and management changes to strengthen growth and development plans in our chosen markets. Bridget McIntyre, following her appointment in 2005, has continued to strengthen our UK market position. Simon Lee has been appointed to head an International division comprising our large overseas units. The smaller companies in Emerging Markets have been focused under Paul Whittaker with a key task of accelerating further profitable growth. There were further senior management changes to our top hundred managers involving both the promotion of internal candidates and external appointments. A new Chief Executive of Scandinavia, Rickard Gustafson, has been appointed following the retirement of Jens Erik Christensen.
• Double digit growth in Canada, the Baltics and Latin America.
The US exit was a significant management achievement. It required very substantial effort and attention from the senior management and the Board.
The range and scale of issues related to delivering an acceptable basis of exit from the US, required the Board in making any final judgement to balance a series of issues, not least including: • Our responsibility to policyholders,
Over the last four years, we have built a portfolio with a good geographic spread and strong market positions. We have also been focused on operational excellence in our underwriting, claims and expense management. The benefits of this work are clearly evident in our financial performance, and in 2006 we’ve delivered another strong result.
The disposal allows us to focus solely on the development of our ongoing businesses and to continue to deliver on our objective of building one of the leading Property and Casualty insurers.
In Denmark, Sweden and Italy we are growing ahead of the market, while in Canada, the Baltics and Latin America we have continued to achieve double digit growth. The UK remains our toughest market with premiums broadly in line with last year, reflecting our disciplined approach.
It has been an important year for the Group during which we have continued to deliver on our strategic and financial objectives
The Latin American combined of 103.7% reflects acquisition integration costs, higher reinsurance costs and the impact of some adverse weather and large losses. We have taken the opportunity to strengthen the leadership team with the appointments of a new regional CEO, CFO and a new Risk Director and with the actions we have taken, we expect to see the result improve during 2007.
Our underwriting and claims skills are market leading and provide a real source of competitive advantage. In 2006 we launched our Technical Academy to ensure we remain best in class in these key areas. The purpose of the Academy is to develop the next generation of talent, utilise our technical skills to support our growth plans and ensure we are driving best practices across the Group.
Delivering strong financial performance also means having the best people on the team. Last year I talked about how we were embedding a performance culture throughout the business. It is about giving people clear accountability and responsibility as well as opportunities to develop their careers.
Part of achieving this culture means having differentiated reward based on performance at all levels. In 2003, only 15% of employees had pay linked to their performance. We set ourselves a target of increasing this to 90% of employees by the end of 2006, and I am pleased to report that we have now met this target.
Group reorganisation Over the last couple of years, we have built a balanced portfolio of high performing businesses with strong market positions. Our objective is to target profitable growth across the Group and in 2006 we reorganised to give us the right structure to deliver on this objective.
International continues to be headed by Simon Lee. It now includes Scandinavia where we’ve appointed Rickard Gustafson as the new CEO, as well as Canada, Ireland and Italy. Our objective is to drive the businesses harder and deliver growth ahead of the market.
Emerging Markets comprises the Group’s operations in Latin America, Asia and the Middle East and the Baltics. It is headed up by Paul Whittaker who has substantial experience in Eastern Europe and Asia. At R&SA, he’s been a key part of the Executive Team throughout the restructuring.
In each of our businesses, we’re driving a real customer focus, whether it’s in new product development or customer service. In Commercial, we’re leveraging our global expertise to develop new customer propositions such as our ‘One Stop Cargo’ offering for 8 Royal & SunAlliance Annual Report & Accounts 2006
the international marine market. In Personal lines, we’re leading the market on new product innovation to meet changing customer demands. During the year we became the first insurer in the UK to offer discounts for drivers of hybrid cars and following the successful launch of the product, we have now rolled it out in Ireland. It’s a good example of where we are able to take successful initiatives from one market to another.
We are committed to providing high levels of customer service and are always looking for ways to improve our offering. In Canada, our Personal lines business, Johnson has been a market leader in terms of its customer service. This year, we took their model of personal account managers for every customer and piloted it in the UK with 60,000 MORE TH>N®
Driving sustainable profitable performance Our overriding commitment is to sustainable profitable performance. We will continue to deliver this through the discipline and focus with which we run the businesses combined with the balance and strength of our portfolio.
In 2007 we’re confident that each region will again deliver a strong result.
We have a clear strategy, a strong portfolio of businesses, market leading underwriting and claims skills, and a team with a real focus on execution. It is a powerful combination and it’s why we’re confident about the long term sustainability of our performance.
Our strong results are driven by a culture of delivery, discipline, technical expertise and continuous operational improvement. Over the last three years we have implemented new claims and policy systems, enhanced the control environment and delivered £270m of cost savings ahead of plan. We have committed to deliver an additional £130m of annualised savings by mid 2008 and in the UK and Scandinavia we are progressing well towards our target sub 15% expense ratio.
In the UK, our technical excellence continues to be recognised by the industry. In 2006, we were awarded the title of ‘British Insurer of the Year’ at the British Insurance Awards, and our marine business received a British Insurance Award for its Aquaculture
• Delivered a 0.8 point improvement in the COR to 93.3% • Targeting £130m of annualised savings by mid 2008 • Industry recognition • Technical Academy promoting and developing expertise • Energised teams driving the business forward insurance solution. We were awarded ‘Claims Initiative of the Year’ with Marishal Thompson for our work on subsidence risks.
We have embedded a performance management culture with clear accountabilities and reward aligned to performance. During the year, we continued to strengthen the top management team. The business is committed to investing in talent to develop its people, including through Executive Development and ‘FastTrack’ programmes. We have a strong, highly motivated, energised team driving the business forward.
Through the combination of our technical expertise, performance management culture and focus on operational excellence, we will continue delivering sustainable profitable performance.
Our reputation for strong technical expertise is an integral part of our customer proposition. In the UK for example, we insure 70% of FTSE 100 retailers and have customer relationships dating back over 200 years. This, together with our leading claims management processes, helps drive our strong retention levels and profitable growth.
Caption heading In 2006 in Scandinavia we signed a number of agreements with motor manufacturers and distributors. These agreements include Peugeot and Volkswagen in Sweden and Toyota in Denmark. Through these agreements we have access to around 27% of the Swedish new car market and around 30% of the Danish car market.
In the UK we have strong relationships with some of the major manufacturers including Toyota, Land Rover and Volvo. We continue to develop these motor proposition and this year we have signed an agreement with Kia.
Our overriding objective is to deliver sustainable earnings – we will only grow where we can do so profitably. We are building strong positions in our target markets using our technical expertise and customer focus to expand distribution and enhance our customer propositions.
Each of our businesses has clear growth targets. In the UK, we are aiming to grow our Affinity business by more than 50%, strengthen our number three retail position and move to number one in Broker by 2010. In Scandinavia, we are aiming to strengthen our number three market position, while in Canada, Ireland and Italy we are targeting 10% annual premium growth. We are targeting 15% growth per annum in Latin America, Asia and the Middle East and the Baltics, in order to double premiums in 2010 from 2005 levels. Over the same period, we intend increasing gross written premiums in India to £200m. All targets are on a local currency basis.
We focus on target trades and segments that provide opportunities for profitable growth. Within these segments,
By expanding distribution, we are finding more ways to profitably access new customers. Our agreement with Paymentshield, the UK’s largest independent supplier of mortgage related insurance, is expected to deliver over £200m of premiums in 2008. In Scandinavia, our motor dealership proposition now provides us with access to around 30% of the new car market in Denmark and 27% in Sweden. In Canada, Johnson signed a number of affinity deals during 2006 giving it access to a potential 400,000 new customers.
Our focus on profitable market and customer segments, combined with our technical expertise, means that the Group is well positioned to continue to deliver profitable growth.
It has been another year of significant achievement for our UK business. We have delivered another strong result, demonstrating our commitment to disciplined technical underwriting and continuous operational improvement. In 2006 we continued to build momentum and our capabilities, creating an excellent platform from which to drive future profitable performance. We were named ‘General Insurer of the Year’ at the 2006 British Insurance Awards.
In Personal, we are aiming to strengthen our number three retail position by enhancing our customer focus. Using increased customer segmentation and pricing sophistication, we are launching increasingly tailored customer propositions and innovative products to attract new customers and build retention. We plan to grow our Affinity business by over 50% by 2010 from 2005 levels.
The UK market remains very competitive, and we will only write business that is profitable. We are supporting our profit led stance on rating by continuing to build our underwriting and claims management capabilities and successfully driving further
Business progress against strategies In 2006, the UK delivered another strong result, with an 0.8 point improvement in the COR to 92.3% and a 4% increase in the underwriting result to £160m. New business increased by 31% to £559m, while net written premiums were in line with last year, demonstrating our commitment to disciplined underwriting and risk selection.
The business continued to make excellent progress towards delivering on our expense targets, reducing the expense ratio by 1.3% to 18.1%. This year we have reduced headcount by over 550 against our target of 1,000 by mid 2008.
Commercial UK Commercial performed well, delivering a COR of 92.6%. This is our most competitive market; net written premiums were down 2% to £1,770m, reflecting our commitment to disciplined underwriting. Retention remains strong at 84%, reflecting the quality of our underwriting and our customer focus.
improved its COR by 0.4 points to 102.5%. Net written premiums increased 2% to £848m and new business was up 31%.
Since 2004, we have transformed our claims capabilities and processes and built a market leading supply chain, which has significantly reduced claim costs. Our supply chain is now used by Lloyds TSB and Co-operative Insurance Services.
Market conditions The UK is the Group’s most competitive market and we anticipate similar conditions in 2007. It has been a challenging year but we have continued to deliver profitable growth.
By continuing to build our capabilities and new business momentum, our UK business will continue to deliver sustainable profitable performance.
■ Property £661m ■ Motor £592m ■ Casualty £330m ■ Other £187m
We are successfully driving growth by exploiting alternative distribution channels, taking a segmented approach to our target customer base and developing new customer propositions. We are sharing best practice and looking for cost synergies across the region. Long term expense management is a key priority and all businesses are delivering on this important element of our strategy.
In Commercial, we have focused our sales teams on specific customer segments and developed tailored customer value propositions. As a result, growth rates have increased significantly, particularly in the Marine and Health Insurance portfolios.
We continue to strengthen our market positions in Personal lines in Scandinavia and have increased net written premiums by 6%. We have expanded our distribution capacity, signing additional agreements with car dealers in both Denmark and Sweden. We now have access to 27% of the Swedish new car market and around 30% of the Danish market and continue to grow our market share. In Denmark, our bancassurance partnerships give us access to over two-thirds of banks in the Local Bank Association.
We continue to build our platform in the Norwegian market. We acquired White Label Holding AS Group and Duborgh Skadeforsikring AS, who are leading specialist providers of Personal and Commercial affinity products in Norway. These 14 Royal & SunAlliance Annual Report & Accounts 2006
Global marine proposition We are a top three marine insurer in Canada and Scandinavia. Building on the marine expertise within International and UK businesses, we have launched ‘One Stop Cargo’ a comprehensive global offering. This product has been developed to provide small and medium sized businesses and general merchandise cargo owners with access to leading expertise, global capabilities and competitive pricing. It has flexible cover options and can be purchased online or through R&SA’s global network. ‘One Stop Cargo’ was initially launched in Ireland, Asia and the Middle East and will be rolled out more widely across the Group during 2007.
In the Personal Intermediated business, we signed 82 new contracts with brokers, taking the number of new broker contracts to 330 since 2004.
Outlook We are experiencing strong competition in all our markets but, for the most part, pricing discipline is holding. We continue to maintain a rigorous approach to improving our sales effectiveness and are starting to see the benefits of this in a robust pipeline of new business. We also remain open to further strengthening our portfolio by acquisition.
We have undertaken a range of initiatives to improve operational efficiency and are exploiting the many sales and operational advantages that the web provides. In addition, we are on track to deliver £40m of cost savings, which represents International’s share of the Group target. As a result of these initiatives and our developing pipeline, we anticipate steady improvements in the expense ratio.
In 2007, we expect International to represent an increased proportion of the Group’s underwriting result and our Scandinavian business to deliver an improved combined operating ratio of 91-93% (2006: 93.9%).
During 2006 we brought together our businesses across Latin America, the Baltics and Asia and the Middle East, to strengthen our strategic focus on these fast growing markets and fully realise the operations’ profitable growth potential. Emerging Markets delivered an excellent 21% increase in net written premiums and a combined operating ratio of 97.3%.
Overview of major strategies Emerging Markets is our fastest growing business. We see significant growth potential in both Commercial and Personal lines. In Commercial, strong Gross Domestic Product (GDP) growth is driving a greater requirement for risk transfer and in Personal, a more affluent population, with more assets at risk is leading to a greater propensity to insure. We are focused on delivering profitable growth through expanding distribution, disciplined underwriting and improving operational performance, and will complement organic growth with acquisitions that accelerate the delivery of our strategic objectives.
Business progress against strategies In 2006 there were floods in Chile, storms in Mexico and increased reinsurance costs in Latin America following hurricanes Emily, Katrina and Wilma. Despite the impact of these events,
we improved the overall underwriting result by 83% to £11m, demonstrating the strength of the Emerging Markets portfolio.
Latin America delivered a 26% increase in premiums, reflecting strong underlying growth and the successful integration of our 2005 acquisition of Cruz del Sur in Chile. We are focused on driving growth in market segments where we have strong positions and a competitive advantage. In Brazil, our marine franchise continued to perform strongly, growing premiums by 50% in 2006 and we are building on this regional expertise with the launch of Carga Royal in Colombia. Expanding distribution was a key driver of growth in Venezuela where we added 420 new agents during the year.
The Baltics continue to deliver strong net written premium growth with premiums up 31% to £114m, driven by strong performances in both Personal and Commercial lines. The COR was 92.2%
compared with 90.1% in 2005. In Latvia, new car sales increased by 53% in 2006 and we now have agreements in place with over 50% of major car dealerships in the country.
Net Promoter Score surveys, which measure customer advocacy, have been successfully piloted in the UAE, Hong Kong and Latin America and will be rolled out more widely across Emerging Markets in 2007. We are committed to ensuring that our customers have positive experiences when dealing with us, and implementing improvements advocated by them should lead to stronger retention and increased cross selling opportunities.
The Emerging Markets region is exciting, with high growth potential. With the strength of the R&SA Group, our businesses are well positioned to deliver on the profitable growth opportunities that this region presents. We are committed to underwriting discipline and continuous operational improvement to continue to drive sustainable profitable performance.
Guide to terms 1. Investment result Comprises investment income, certain realised gains and unrealised gains/(losses), impairments, foreign exchange and the unwind of discount.
2. Other activities The result for other activities comprises: • the operating result from non insurance activities, • the movement in non insurance derivatives, • income from associates, • central Group expenses, • investment expenses and charges.
4. Profit before tax Profit before tax is shown on a management basis. Profit before tax on a statutory basis is shown on page 46.
In March 2007, we completed the sale of our US business to Arrowpoint Capital. In the 2006 results, we have reclassified the business as ‘held for sale’ and it is shown as a discontinued item in the income statement. The writedown of the US operation and the trading loss for the year totals £499m after tax.
Net written premiums Net written premiums increased by 3% to £5.5bn, demonstrating the strength of our portfolio, with a disciplined approach in the UK, above market growth in Scandinavia and double digit growth in International.
Operating result The operating result increased 5% to £780m, comprising an improved underwriting result and lower central expenses, offset by a lower investment result.
The investment result of £556m is marginally lower than 2005 and comprises a 4% increase in investment income, offset by lower realised and unrealised gains. The increase in investment income reflects a £0.2bn increase in the average size of the portfolio, while the average yield remained in line with last year at 4%. I currently expect that the 2007 total investment result will be broadly in line with 2006.
Other activities also include a £12m gain on the expiration of two derivatives contracts.
Loss after tax In 2006, we incurred a loss after tax of £20m, compared with a profit of £605m in 2005. This movement reflects the writedown of the US operations in 2006, and the one off benefits of a number of disposals and the impact of the change in the UK pension scheme design in 2005.
The table below sets out a reconciliation of the operating result to the loss after tax: £m £m %
Change in pension scheme design – 180 – (Loss)/profit on disposals (1) 126 –
Profit after tax 479 635 (25) Loss after tax from discontinued operations (499) (30) –
Amortisation of £15m was charged in respect of software assets and goodwill on acquired claims provisions, compared with £11m in 2005.
Profit after tax on continuing operations is £479m, which represents an underlying return on equity of 20.7%. Profit after tax in 2005 of £635m included £216m from the disposal of our Japanese operation and our investment in Rothschilds, as well as the change to the UK pension schemes. On a like-for-like basis, profit after tax is up 14%.
The after tax impact of our US disposal is £499m. This comprises the writedown of the net assets and the loss for the year, and the impact of the capital movements and associated transaction costs.
With the completion of the disposal, in accordance with IFRS, we will recycle the cumulative US foreign exchange losses of £19m from reserves through the income statement in the 2007 results. This will be shown outside the operating result and will have no impact on net assets.
Dividend policy The directors will recommend at the Annual General Meeting, to be held on 21 May 2007, a final dividend of 4.12p (2005: 3.05p) per share. This, together with the interim dividend of 1.75p paid on 30 November 2006, will make a total distribution for the year of 5.87p (2005: 4.74p).
Financial strength The overall financial strength of the Group continues to improve, with further actions taken during 2006 on the balance sheet, capital position, pension fund deficit and the Group’s credit rating.
During 2006, we implemented a number of initiatives to improve the quality of our balance sheet. The Yankee Bond Exchange and Tender Offer replaced US$426m of sub Tier 2 capital with an innovative Tier 1 perpetual security, significantly improving our regulatory solvency position.
In addition, we further strengthened the quality of our balance sheet by repaying our senior debt facility early and replacing this with a £500m revolving facility on substantially better terms.
The Group’s shareholders’ funds were £2.6bn at 31 December 2006 down from £2.7bn at 31 December 2005. This movement reflects the profits of the continuing operations offset by the writedown of the US operation.
Cashflow The Group’s cashflows remain strong, with operating cashflows increasing 7% over the year to £817m. After interest and dividend costs, net cashflow is up 23% to £639m.
Solvency position We remain fully compliant with both the FSA’s risk based Internal Capital Assessment (ICA) methodology, and Solvency I which is used to calculate our Insurance Group’s Directive (IGD) requirement.
On completion of the disposal of our US operation, the 2006 IGD coverage ratio increases to 2.0 times the requirement, reflecting the injection of US$287.5m of capital into the US operation in accordance with the terms of the sale, and the release of the US IGD capital requirement.
Our balance sheet and capital position is strong, and the Group has sufficient capital to meet its strategic objectives and financing commitments.
Pension fund The table below shows the main movements in the pension funds’ position during 2006: £m UK Other Total
During 2006, AM Best revised their rating upward, from ‘A-’ (negative) to ‘A-’ at the year end. Following a review by Moody’s, the Group’s financial strength rating was upgraded to ‘Baa1’ (positive outlook) from ‘Baa2’ (stable).
In 2007, AM Best and Moody’s upgraded the Group’s financial strength ratings to ‘A-’ (positive) and ‘A3’ (stable) respectively.
We are committed to returning the Group’s rating with all of the major agencies to ‘A’.
Overall risk framework The Group operates under an enterprise risk management framework that is designed to identify, assess, measure and manage exposure to risk. This process is subject to continuous review and development and further work was undertaken in 2006 to enhance the framework.
Group risk appetite The Group has a process for setting risk appetite at both Group and regional level and for monitoring compliance with this. The Group risk appetite sets business volumes for certain higher risk insurance classes, stipulates loss retention limits, reinsurance protection, targets for credit rating and solvency margins, and other appropriate measures.
Risk framework The Group has continued to adopt the ‘3 lines of defence’ governance model. The framework for the oversight and management of risk is as follows: • Management – the first line of defence in setting strategy, performance measurement, establishment and maintenance of internal control and risk management in the business,
• Risk assessment – the second line, operating a formal risk management framework within which the Group policies and minimum standards are set and objective oversight and challenge of risk management across the Group is achieved.
• Independent assurance – the third line of defence, providing independent and objective assurance of the effectiveness of the Group’s systems of internal control established by the first and second lines of defence. This is the Group Audit Committee, supported by Group Internal Audit.
Group risk policy statements Group risk policy statements set out the minimum standards to be maintained by the Group’s operations in order to manage their risks in a way that is consistent with the risk appetite. Business managers are responsible for complying with Group and local risk policies and for managing risk by taking mitigating actions where risks are outside the appetite. The Board Risk Committee’s oversight and challenge role includes consideration of risk mitigation.
The following details some of the key current practices, tools and other arrangements for each risk category.
Further work has been undertaken in 2006 to refine and improve the Portfolio Classification process, designed to provide a more effective method of evaluating portfolio performance. We are continuing to improve oversight, and tools in support of it, in this area to ensure that we remain in control of our insurance business and the risks within it.
Reinsurance risk The Group’s reinsurance strategy and appetite are set and agreed by the Board Risk Committee and published and disseminated via the Group reinsurance policy statement. The Group Reinsurance Credit Committee oversees the implementation of the counterparty credit aspects of this strategy.
The Group uses a suite of risk tools to help manage operational risk using a common categorisation of risk. These tools include Risk and Control Self Assessments, Key Risk Indicators, Scenario Analyses, Incident Management and Loss Data.
A series of forward looking key risk indicators are used to assess potential future trends in operational risks, whilst data collected on actual operational risk incidents and ‘near misses’ captures past experiences. In addition, the use of scenario analyses enables the Group to assess whether certain operational events that have occurred elsewhere could manifest themselves within the Group. When taken together, the tools provide a complementary set of indicators of the Group’s operational risk profile.
Regulatory risk The Group operates in a number of geographical locations with diverse regulatory requirements. Internationally, the regulatory environment has become more complex and demanding. The Group continues to respond to these developments through its arrangements for regulatory compliance and by ensuring that it maintains open and cooperative relationships with its regulators.
Our Business Principles provide detailed, practical guidance on how we interact with our stakeholders, acting responsibly as both a Company and as individuals. These principles link to our Group policies and form part of our broader risk and governance framework and together with our latest corporate responsibility report can be found at: www.royalsunalliance.com.
Customers We are committed to communicating openly with customers and providing strong levels of service, whether it is a new business enquiry, renewal, claim or complaint.
We use clear segmentation to develop products to meet our customer needs. In 2006 we launched a wide range of products with environmental or social benefits: • We were the first UK and Irish insurer to offer discounts for drivers of hybrid cars,
• In the UK, we launched ‘DriveTime’, a product using satellite technology aimed at reducing accident rates and providing more affordable insurance for young drivers.
We are focused on ensuring our communication with customers is clear and easy to understand. During 2006, we completed a full review of our UK policy documentation.
We focus on developing our people and have a number of programmes underway to provide ongoing career development: • We launched our Technical Academy to ensure we remain at the forefront of technical mastery in underwriting and claims, and to provide clear career pathways for our technical people,
• Our Executive Development Programme, aimed at developing senior managers, is now into its third year. It has been highly successful and 70% of graduates from the first two programmes are now in roles of greater responsibility,
In other areas, we have continued to increase the proportion of employees with performance related pay from 15% in 2003 to 90%.
Rapid response to emergencies Extreme weather conditions require an urgent response for customers. When a tornado hit London in December our emergency response unit was ready. As soon as the emergency services declared the area sufficiently safe, the R&SA engineers and loss adjustors were on site making essential repairs and claims assessments.
Corporate responsibility at R&SA is about good business practice. For us, this is about listening to and engaging with all of our stakeholders – our customers, employees, shareholders and the community
As a Group: • We have set challenging targets for 2008 which will result in a positive effect on the environment as well as cost savings,
• We are managing the environmental impact of our buildings, such as moving to our new premises in Canada, built to high standards of environmental construction and design.
• We are investing in award winning technology to predict and assess risk such as, Eurotempest, Tropical Storm Risk and our flood risk assessment tool,
• Through our partnership with the international charity ‘Trees for Cities’ we support sustainable replanting in response to tree removal as a result of subsidence claims.
Responsible investment Our UK assets continue to be managed by F&C Asset Management who apply their responsible engagement overlay across our portfolios to encourage companies to manage social, ethical and environmental risks. We receive regular feedback on the companies that F&C Asset Management have invested in on our behalf.
UK 5% Denmark 10% Sweden 6% Ireland 5% Lithuania 5% Denmark (Steam) 10% Sweden (Steam) 5%
John Napier N, I Age 64. Director of the Group from January 2003 and Chairman of the Group from March 2003. Chairman of the Nomination Committee from March 2003. Non-executive Chairman of Kelda Group plc (water utility). Former Executive Chairman and Chief Executive of Kelda Group plc. Former Chairman of Booker plc (cash and carry). Former Managing Director of Hays plc (business services) from 1991 to 1998. Former Managing Director of AGB plc (international market research and information services).
Andy Haste E, I Age 45. Director and Group Chief Executive from April 2003. Former Chief Executive of AXA Sun Life plc and Director of AXA UK plc (life and pensions). Former President and Chief Executive Officer of Global Consumer Finance Europe at GE Capital UK, Western Europe and Eastern Europe (financial services). Former President of National Westminster Bank’s US Consumer Credit Business (retail banking).
John Maxwell A, N, R, I Age 62. Director of the Group from July 2003. Chairman of the Remuneration Committee from October 2003. Director of Provident Financial plc (financial services). Director of Homeserve plc (support services). Governor of the Royal Ballet School. Chairman of the Institute of Advanced Motorists. Previously an Executive Director of Prudential Group plc. Former Chairman of DX Services plc (mail). Previously Director General (Chief Executive Officer) of The Automobile Association Limited.
Simon Lee E Age 46. Director of the Group from January 2007 having been Chief Executive of the International Businesses since April 2003. Former Chief Executive, Natwest Offshore and Head of US Retail Banking at National Westminster Group.
E Executive director A Member of Group Audit Committee N Member of Nomination Committee R Member of Remuneration Committee I Member of Investment Committee 26 Royal & SunAlliance Annual Report & Accounts 2006
29 Directors’ report 31 Corporate governance 35 Remuneration report 41 Directors’ emoluments 42 Directors’ interests 45 Independent auditors’ report to the members of Royal & Sun Alliance Insurance Group plc 46 Consolidated income statement 47 Consolidated statement of recognised income and expenses 48 Consolidated balance sheet 49 Consolidated cashflow statement 50 Estimation techniques, uncertainties and contingencies 53 Significant accounting policies 60 Notes to the financial statements 106 Independent auditors’ report to the members of Royal & Sun Alliance Insurance Group plc 107 Parent Company balance sheet 108 Statement of changes in equity of the Parent Company 109 Parent Company cashflow statement 110 Notes to the separate financial statements 114 Shareholder information 115 Financial calendar 116 Frequently asked questions
Principal activity The Company is the holding company of the Royal & SunAlliance Group of companies (the Group) whose principal activity is the transaction of personal and commercial general insurance business. The Group operates in 27 countries.
The Group uses Key Performance Indicators (KPIs) to provide a well balanced and comprehensive review of the Group’s overall performance.
The preferential dividend at the rate of 3.6875% for the period from 1 October 2006 to 31 March 2007, will be paid on 3 April 2007 to holders of preference shares on the register at the close of business on 16 March 2007.
The Group actively encourages employees to become involved in supporting their local communities. Further details are provided in the corporate responsibility section of this report on pages 24 to 25.
Environmental programme Details of our environmental programme can be found on our website at www.royalsunalliance.com.
Supplier payment policy It is the Company’s policy to agree appropriate terms and conditions in advance with its suppliers and to make payment in accordance with those terms and conditions, provided that the supplier has complied with them. In most cases, agreements for the supply of goods or services are made under standard terms of contract that lay down payment terms. In the UK these are available on request from UK Procurement, Leadenhall Court, 1 Leadenhall Street, London EC3V 1PP.
Directors Members of the Board of Directors are listed on page 26. David Paige resigned as a director on 31 December 2006 and Simon Lee was appointed to the Board effective from 1 January 2007.
At the 2007 AGM Simon Lee will be eligible for re-appointment under Article 110. Edward Lea, John Maxwell, Noel Harwerth, Malcolm Le May and George Culmer will retire by rotation under Article 106 and, being eligible, offer themselves for re-election.
Directors’ interests are set out in the remuneration report on pages 42 to 44.
Directors’ indemnity Article 154 of the Company’s Articles of Association provides, among other things, that, insofar as permitted by law, every director shall be indemnified by the Company against all costs, charges, expenses, losses or liabilities incurred in the execution and discharge of the directors’ duties, power or office.
Annual General Meeting The AGM will be held at the Queen Elizabeth II Conference Centre, Broad Sanctuary, Westminster, London SW1P 3EE on Monday, 21 May 2007 at 11.00am.
Auditors So far as each director is aware, there is no relevant audit information (as defined in Section 234ZA(3) of the Companies Act 1985) of which the Company’s auditors are unaware, and each director has taken all steps that he or she ought to have taken as a director in order to make himself or herself aware of, and to establish that the auditors are aware of, any relevant audit information.
Following an extensive review process earlier in the year, the directors will propose at the 2007 AGM that Deloitte & Touche LLP be appointed as auditors of the Company for the year ending 31 December 2007. PricewaterhouseCoopers LLP will stand down to enable Deloitte & Touche LLP to be appointed in their place. PricewaterhouseCoopers LLP have confirmed, as required by Section 394 of the Companies Act 1985, that there are no matters connected with their ceasing to hold office that they consider should be brought to the attention of Royal & SunAlliance’s shareholders or creditors.
By order of the Board Mark R Chambers General Counsel and Group Company Secretary 30 Royal & SunAlliance Annual Report & Accounts 2006
Compliance with the provisions of the Combined Code In respect of 2006, the Group is required to comply with the Principles and Provisions of Section 1 of the Combined Code published in 2003 and to provide an explanation where it has not done so. In June 2006, a revised version of the Combined Code was published. However, the Group was not required to comply with this during 2006. Additional disclosure in respect of how the Group already meets the requirements of the revised Code is provided below.
The Board The Board meets regularly and is responsible for organising and directing the affairs of the Company and the Group in a manner that is in the best interests of the shareholders as a whole and is consistent with good corporate governance practices, and for ensuring that in carrying out its duties the Company and the Group meets legal and regulatory requirements. The Board is also responsible to the Financial Services Authority (FSA) for ensuring compliance with the Group’s UK regulatory obligations.
The Board has a formal schedule of matters specifically reserved to it, which can only be amended by the Board itself and which is reviewed annually. Matters reserved to the Board include: • Approval of the Group’s long term objectives and commercial strategy,
The Chairman is responsible for leading the Board, liaising as necessary with the Group CEO on developments between Board meetings, ensuring that the Group CEO and his executive management team have appropriate objectives, and that their performance against those objectives are reviewed. The Group CEO is responsible to the Board for the executive management of the Group, and for liaising with the Chairman and keeping him informed on all material matters.
In accordance with the Company’s Articles of Association and the Combined Code, the directors submit themselves for re-appointment at the first Annual General Meeting after their appointment and for re-election every three years thereafter. Simon Lee will therefore be proposed for re-appointment at the forthcoming Annual General Meeting and the directors retiring and proposed for re-election are George Culmer, Noel Harwerth, Edward Lea, Malcolm Le May and John Maxwell.
When appointing new directors, regard is given to the size of the Board and the balance of executive and non-executive directors as well as the skills and experience already represented by the existing Board members, and those which would be desirable on the Board going forward. The report of the Nomination Committee, including a description of its duties, is set out on page 33.
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. 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.
Directors have access to the services and advice of the General Counsel and Group Company Secretary and, in addition, may take independent professional advice at the expense of the Company in furtherance of their duties.
Directors’ responsibilities The directors are required to ensure that adequate accounting records are maintained so as to disclose at any time, and with reasonable accuracy, the financial position of the Group. They are also responsible for taking reasonable steps to safeguard the assets of the Group and to prevent and detect fraud and other irregularities.
They must present financial statements for each financial year, in accordance with applicable law, accounting standards and regulations, which give a true and fair view of the state of affairs of the Company and Group and of the profit or loss and cashflows for that period. The directors are required to prepare financial statements for the Group in accordance with International Financial Reporting Standards (IFRS)
The Board reviews annually the effectiveness of the Group’s system of internal controls in order to safeguard the Group’s assets and shareholders’ investment. This system includes governance, financial controls, the risk management framework and operational, regulatory and compliance requirements. The systems are designed to manage, rather than eliminate, the risk of failure to achieve business objectives and can only provide reasonable and not absolute assurance against material financial misstatement or loss. Following the review of the system of internal control, the Board confirms that the actions it considers necessary to rectify any significant failings or weaknesses identified as a result of the review have been, or are being taken.
The Board, through the Group Audit Committee, 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 Group Audit Committee also receives reports on the Group’s arrangements for ensuring regulatory compliance. The Board, through the Board Risk Committee, considers reports from risk specialists both internal and external to the Group, and reviews Group level risk management information.
The Board considers that collectively this reporting framework gives it sufficient information upon which to monitor the systems of internal control and to review their effectiveness as required by the Combined Code. The Board therefore considers that there is an ongoing process for identifying, evaluating and managing the significant risks faced by the Group, that it has been in place for 2006 and up to the date of approval of the Annual Report & Accounts, that it is regularly reviewed by the Board and that it accords with the Turnbull Guidance on the Combined Code.
Financial control framework In 2006, the Company voluntarily delisted from the New York Stock Exchange and terminated its ADR programme. In January 2007, the Company terminated its US SEC registration and its reporting obligations to the SEC also ceased at that time. As a result of the SEC deregistration, the Company is no longer required to be compliant with the US Sarbanes Oxley Act 2002. However, the elements of Sarbanes Oxley compliance which have added value will be carried forward in the Group’s financial control framework.
Committees Specific responsibilities of the Board have been delegated to the Group Audit, Remuneration, Nomination, Investment and Board Risk Committees. The role of the Investment, Board Risk, Group Audit and Nomination Committees are set out below and the role of the Remuneration Committee is set out in the remuneration report on pages 35 to 36. Details of the Chairmen and membership of the Group Audit, Nomination, Remuneration and Investment Committees are shown on page 34 together with details of attendance at meetings.
to policies, control limits and other mechanisms. The Committee’s principal duties include: • Defining the Group’s risk appetite prior to approval by the Board,
• Approval of policy and minimum standards that are consistent with the risk appetite,
Report of the Group Audit Committee Membership The membership of the Committee and the attendance record of directors in 2006 are shown in the table on page 34. The Committee is comprised of independent non-executive directors who have recent and relevant financial experience.
In 2006, the Committee met six times. The Chairman, Group CEO, Chief Financial Officer, Director Regulatory Risk and Compliance and the Group Director, Audit, Risk and Compliance are regular attendees. Other members of executive management are also invited to attend from time to time. The outcome of meetings are reported to the Board and the Board receives the minutes of all Committee meetings.
• To review all matters relating to the legal integrity of the Group,
• To provide assurance on the effectiveness of the Group’s risk management.
External auditors The Committee meets regularly with internal and external auditors without management present. The partner of the Group’s external auditors, who is responsible for the external audit, attends meetings regularly. Each year, the Committee considers the performance of the external auditors prior to a resolution on their re-appointment and remuneration at the AGM.
During the year, PricewaterhouseCoopers LLP were, on a number of occasions, engaged as advisors. In order to maintain their independence, such appointments are only made in accordance with a protocol developed by the Committee. This gives guidance to businesses within the Group on the appropriateness of engaging the Group’s external auditors as advisors and sets down the procedures to be followed to authorise such an engagement. The Committee is satisfied that this protocol has been followed and there are no matters that would compromise the independence of the auditors or affect the performance of their statutory duties. PricewaterhouseCoopers LLP have also considered their position and have confirmed their independence to the Company in writing.
The Company has enjoyed a long standing and constructive relationship with its current auditor PricewaterhouseCoopers LLP. It is, however, our policy to periodically review major contracts. Following an extensive review earlier in the year, the Board has accepted the Committee’s recommendation that PricewaterhouseCoopers LLP stand down as auditors of the Company and that a resolution be put to the 2007 AGM for the appointment of Deloitte & Touche LLP as external auditors in their place.
Whistleblowing It is the Committee’s responsibility to keep the procedures laid out in the Group whistleblowing policy under review. This policy deals with employees who wish to raise serious concerns in good faith, and either do not feel comfortable raising the matter with local management or are not satisfied with the local management response. They can raise their concerns with the Group Director, Audit, Risk and Compliance, who will either investigate or arrange for an investigation of the matter. Employees are offered such safeguards and support as may be necessary to protect their personal integrity and, where possible, identity.
The terms of reference of the Committee, which explains its role and the authority delegated to it by the directors, are available on the Company’s website at www.royalsunalliance.com or on request from the General Counsel and Group Company Secretary.
Board and board committee membership and attendance in 2006 Directors attending Board and board committee meetings during 2006 were: Board Group Audit Investment Nomination Remuneration Notes Board Committee Committee Committee Committee Committee
Annual General Meeting The AGM Notice is despatched to shareholders at least 20 working days before the meeting and contains separate resolutions on each substantive issue, including a resolution to adopt the Annual Report & Accounts. All directors are requested to attend each AGM. The Chairman and the chairmen of the Group Audit, Nomination and Remuneration Committees make themselves available to take questions from shareholders.
The Company has arrangements in place with its Registrars to ensure that all proxy votes received are accurately counted. The results of proxies lodged on each resolution, including votes for, against and withheld, are published on the Group’s website at www.royalsunalliance.com after each AGM. In accordance with best practice, these results are also announced to the London Stock Exchange.
Relations with shareholders The Board attaches considerable importance to its relationships and communication with shareholders. Senior management meet principal institutional shareholders on a regular basis. In addition, investor relations events are held during the year to increase shareholders’ understanding of the business.
The following report by the Remuneration Committee has been approved by the Board for submission to the shareholders at the 2007 AGM.
PricewaterhouseCoopers LLP have audited the following items stipulated in law for their review: • The table of directors’ remuneration and associated footnotes on page 41 and the disclosure of the items comprising benefits in kind,
• The tables of defined benefit and defined contribution pensions on page 41 and associated footnotes,
The Committee’s responsibilities are set out in its terms of reference which are available to shareholders on request and on our website at www.royalsunalliance.com. These include: • Determining the terms and conditions and remuneration of the Chairman of the Board and the executive directors,
• Overseeing the operation of the Company’s share based long term incentive schemes, including approving the value and timing of awards and overseeing the operation of performance conditions,
The Group CEO is invited to attend all meetings of the Committee to provide context and advice to the Committee on company strategy and performance and senior executive pay strategy. The Group Human Resources Director normally attends meetings to provide information on wider remuneration strategy and practice within the Group. The Chairman of the Board is invited to attend meetings as appropriate. The General Counsel and Group Company Secretary acts as secretary to the Committee. None of the non Committee attendees are present as of right, and do not attend when their own remuneration is discussed.
• Conducting the annual review of base salaries for executive directors and the Group CEO’s recommendations for his Executive Team, 35Royal & SunAlliance Annual Report & Accounts 2006
• The consideration and approval of annual bonus payments for 2005,
• There is a strong and visible link between remuneration and performance,
• Executive remuneration and shareholder interests are strongly aligned. This is reflected in the design of the Long Term Incentive Plan, which provides a co-investment opportunity,
• The observation of existing share ownership guidelines to further enhance the alignment of shareholder interests with those of executive directors,
• Incentive arrangements are leveraged so that only exceptional performance attracts the highest levels of award,
• A balance of short and long term performance is used, incorporating measures of financial performance, delivery of shareholder value and a robust assessment of personal contribution,
As an indication of the balance of remuneration, including long term incentives (LTIs), the following charts illustrate the remuneration attributable to the continuing executive directors over the year (excluding allowances and pension provision): Andy Haste
Policy: Base salary is set with reference to the median level for equivalent roles in similar companies.
Andy Haste CEO 4.5% £805,000 George Culmer CFO 5% £442,000 Bridget McIntyre UK CEO 5% £367,500
Executives are also offered the opportunity to voluntarily invest up to 33% of the cash element of their bonus into Deferred Shares. In 2006 (under the Long Term Incentive Plan), an award of Matching Shares was made on a pro rata basis to the Deferred Shares. Matching Shares may vest subject to the performance conditions described on page 38 of this report.
The Committee reserves the right to reduce the permissible investment below this level. However, the Long Term Incentive Plan will continue to operate on the same terms in 2007.
Financial targets are measured against Combined Operating Ratio (COR) targets which are the preferred measures for Royal & SunAlliance businesses. COR is the single indicator which most fully captures the underlying strength and performance of an insurance business.
UK based executives who are members of the global ‘Top 100’ group (the Top 100) participate in a bonus plan which is structured in the same way and measured using the same metrics as the plan described above. For outstanding performance, a cash bonus of up to 65% of base salary and Deferred Shares worth up to 33% of the cash bonus are achievable.
Awards under the Long Term Incentive Plan will be funded through a combination of new issues and shares purchased in the market.
Policy: To provide annual share awards to executives to ensure alignment with shareholder interests, solely through the Long Term Incentive Plan. Except in exceptional circumstances, no other discretionary share plan will be used to make awards.
Conditional awards of Performance Shares Participants may receive a conditional award of shares with the grant level and performance condition determined by the Committee prior to each grant. Executive directors, members of the Executive Team and the Top 100 will be eligible for awards of Performance Shares.
It is intended that, in 2007, awards of Performance Shares to executive directors will be limited to a maximum face value of 100% of base salary, other than in exceptional circumstances. Awards of Performance Shares to members of the Executive Team in 2007 will be limited to a maximum face value of 80% of base salary, other than in exceptional circumstances. Account will be taken of personal performance in determining the scale of the award to each executive. For executives below this level, distribution policy will normally be based on a formula which relates the size of award to performance and potential, as measured through the annual performance appraisal process.
In any year, the face value of Performance Shares granted to any individual will be limited to 150% of base salary in normal circumstances, subject to an overriding cap of 250% of base salary in exceptional circumstances, such as an executive recruitment.
Aegon AGF Alleanza Allianz Aviva Baloise Fortis Generali Legal & General Munich Re QBE Swiss Re Zurich Financial Services
ROE has been selected as the measure of financial performance as it is one of the key measures of overall business performance and is visible externally to shareholders.
The TSR performance condition has been designed to provide alignment between executive remuneration and shareholder interests and to ensure that an element of the package is linked directly to share price performance. The comparator group has been selected to ensure that performance is compared fairly against a group of similar companies operating in a similar competitive environment. The use of ROE and TSR in combination, provides a balanced approach to the measurement of Company performance over the longer term.
*Assuming share price of 152.50p (the closing middle market price on the last dealing day of the year).
Andy Haste is a member of the SAL Pension Scheme (SAL), a contributory defined benefit occupational pension scheme. In common with all other members of the Royal & SunAlliance defined benefit occupational pension schemes, from 1 January 2006 Andy Haste’s future benefits within SAL will accrue on a ‘career average revalued earnings’ basis rather than on a final salary basis. The Group has decided to retain a cap within its defined benefits after ‘A Day’ and, accordingly, Andy Haste’s benefit accrual will continue to be calculated by reference to a ‘capped’ salary (which will be measured each year in line with past practice). In addition to his benefits within SAL, Andy Haste receives an age related taxable cash allowance to enable him to make his own provision for retirement above the cap. In 2007, he will be paid an allowance of 27% of base salary for this purpose.
Policy: Reasonable provision, in line with arrangements made in similar companies, will be made to allow executives to plan effectively for their retirement, but the Committee will not compensate executives affected by new tax limits effective 6 April 2006.
In addition, the executive directors participate in a number of benefits available to other senior managers, including life assurance at the rate of four times base salary together with a spouse/dependant annuity, sickness and ill health early retirement benefits and private medical insurance. They also have a choice between a company car and a monthly cash car allowance. In common with other employees, the executive directors are eligible to participate in the Royal & SunAlliance International Sharesave Plan (SAYE).
Andy Haste’s service contract commenced on 2 April 2003 and he was appointed as a director of the Group on the same date. His contract expires under normal circumstances in January 2024 unless terminated earlier by the Company or by Andy Haste on 12 months’ notice.
External directorships Where appropriate, the Group encourages directors and other senior managers to accept, subject to the approval of the Chairman of the Board and the Group CEO, an invitation to join the Board of another company in a non-executive capacity, recognising the value of such wider experience. In these circumstances, they are permitted to retain the remuneration from the non-executive appointment. For executive directors and other members of the Executive Team, external appointments are limited to one although at present none of the executive directors hold non-executive positions in other companies.
Non-executive directors All non-executive directors of the Company have letters of appointment which set out the terms and conditions of their appointment. Non-executive directors are not entitled to bonus payments or pension arrangements, nor do they participate in the Group’s long term incentive plans.
Under the Company’s Articles of Association, the remuneration paid to non-executive directors is determined by the Board, within limits set by shareholders. The basic fee for a non-executive director is £45,000pa. The additional fee for chairing the Group Audit Committee is £20,000pa and the additional fee for chairing the Remuneration Committee and the Investment Committee is £12,500pa for each committee. Additionally, a fee of £5,000pa is paid to any non-executive director sitting on more than one committee but not acting as chair of any committee. These fee rates will be unchanged for 2007.
The graph shows the TSR of the Group with reference to the FTSE World Europe Insurance Index and the FTSE 100 Index. The FTSE World Europe Insurance Index comprises the range of European insurance businesses which most closely match our competitor group, and the TSR comparator group selected for 2006 awards under the Long Term Incentive Plan. The FTSE 100 Index comprises the 100 most highly capitalised companies, representing approximately 80% of the UK market. TSR performance relative to the indices is shown over the five years from 31 December 2001 to 31 December 2006.
Royal & SunAlliance FTSE World Europe Insurance Index FTSE 100 40 Royal & SunAlliance Annual Report & Accounts 2006
2. The figures set out in the table above provide information as required by the Directors’ Remuneration Report Regulations 2002. The Listing Rules require the change in accrued pension to be shown excluding the effects of inflation and the transfer value of this increase. These figures are shown in the notes below. 3. The accrued pension figures shown are the annual amounts of the member’s pension payable from normal retirement age. Increases to pensions when in payment are applied in accordance with the relevant scheme rules. On the death of the member leaving a surviving spouse and/or children, spouse’s and/or childrens’ pensions are payable in accordance with scheme rules.
7. Transfer values have been calculated in accordance with the guidance note GN11 published by the UK Institute of Actuaries and Faculty of Actuaries. 8. The transfer value of the accrued benefits represent the value of assets that the pension scheme would need to transfer to another pension provider on transferring the scheme’s liability in respect of Andy Haste’s pension benefits. The transfer values do not represent sums payable or due to Andy Haste.
The Company contributions paid in respect of executive directors who are members of Group defined contribution schemes, were as follows: Company Company contributions contributions paid in 2006 paid in 2005
Bridget McIntyre joined the Group in November 2005. Because of changes being made to the Group’s pension arrangements, no contributions were paid into the Royal & SunAlliance UK Pension Scheme 2002 in respect of November and December 2005. These contributions were paid into the Royal & SunAlliance Stakeholder Pension Plan which was set up on 1 January 2006 and totalled £8,750.
David Paige was not a member of any Royal & SunAlliance pension scheme.
ordinary shares of 27.5p each held in the Royal & SunAlliance ESOP Trust No 2.
Options (audited part) Movements in option holdings during 2006 were as follows: Options held at Options held at 1 January Options granted Options exercised Options lapsed 31 December
David Paige (resigned 31 December 2006) ESOS 1,007,796 – – – 1,007,796
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 April1997 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 Companies Act 1985.
Options held during 2006 in respect of the ordinary shares of the Company as a result of executive and SAYE share option schemes are as follows: Number of Number of options at options at Dates Dates 1 January 31 December Exercise price exercisable exercisable
Notes 2006 2006 (pence) from to 12,466 – – – –
Notes: 1. The market price of ordinary shares on 12 June 2006, the date on which the above long term incentive scheme interests were granted, was 123.35p.
3. Matching Shares are capable of vesting in respect of a maximum of 2.5 times the number of Deferred Shares awarded, subject to the achievement of performance conditions over a three year period. One half of the Matching Shares relating to compulsory Deferred Shares (and all of the Matching Shares relating to voluntary Deferred Shares) are subject to TSR performance relative to other companies specified by the Remuneration Committee. For awards granted in 2006 TSR will be measured relative to the following comparator group companies: Aegon, AGF, Alleanza, Allianz, Aviva, Baloise, Fortis, Generali, Legal & General, Munich Re, QBE, Swiss Re, and Zurich Financial Services. Full vesting will only occur at upper quintile performance; at median performance 25% of the Matching Shares will vest. Vesting will be on a straight line basis in between. The remaining half of the Matching Shares relating to compulsory Deferred Shares are subject to a ROE performance condition. If underlying ROE over three years commencing on the year of grant is below 10%, no part of the award subject to ROE performance will vest. If underlying ROE over three years is 10%, 25% of the award will vest. If underlying average annual ROE over three years is 16% or higher, 100% of the award will vest. Vesting will be on a straight line basis in between. For the purpose of establishing the number of Matching Shares relating to voluntary Deferred Shares that may be awarded, the gross value of that part of the annual bonus payment that a participant elects to voluntarily defer is used.
5. No other directors of the Company held long term incentive scheme interests during 2006.
We have reported separately on the Parent Company financial statements of Royal & Sun Alliance Insurance Group plc for the year ended 31 December 2006 and on the information in the remuneration report and the directors’ interests that are described as having been audited.
In addition we report to you if, in our opinion, we have not received all the information and explanations we require for our audit, or if information specified by law regarding director’s remuneration and other transactions is not disclosed.
We review whether the corporate governance statement reflects the Company’s compliance with the nine provisions of the Combined Code (2003) specified for our review by the Listing Rules of the Financial Services Authority, and we report if it does not. We are not required to consider whether the Board’s statements on internal control cover all risks and controls, or form an opinion on the effectiveness of the Group’s corporate governance procedures or its risk and control procedures.
We read other information contained in the Annual Report and consider whether it is consistent with the audited consolidated financial statements. The other information comprises only the highlights, the R&SA at a glance section, the Chairman’s statement, the Group CEO’s business review, the market leading capability section, the profitable growth section, the UK business review, the International business review, the Emerging market business review, the financial review, the risk framework, the corporate responsibility section, the directors’ report, the corporate governance statement, the remuneration report and the unaudited part of directors’ interests. We consider the implications for our report if we become aware of any apparent misstatements or material inconsistencies with the consolidated financial statements. Our responsibilities do not extend to any other information.
Opinion In our opinion: • The consolidated financial statements give a true and fair view, in accordance with IFRSs as adopted by the European Union, of the state of the Group’s affairs as at 31 December 2006 and of its loss and cash flows for the year then ended,
Underwriting and policy acquisition costs (1,626) (1,649) Benefit from change of pension scheme design – 180
Results of operating activities 741 933 Finance costs 4 (92) (107) (Loss)/profit on disposal of subsidiaries (1) 65 Net share of profit after tax of associates 11 1 3
Discontinued operations Loss for the year from discontinued operations 35 (499) (30)
Earnings per share for profit from continuing operations attributable to the equity holders of the Parent Company
Exchange (losses)/gains net of tax (151) 62 Fair value gains/(losses) net of tax 32 (35) Pension fund actuarial gains/(losses) net of tax 153 (53) Tax on reclassification to loan capital – 24
Attributable to: Equity holders of the Parent Company (10) 564 Minority interests 24 39
Consolidated statement of recognised income and expenses for the year ended 31 December 2006
Investment property 10 454 435 Investments in associates 11 27 29 Financial assets 12 10,457 13,533
Total investments 10,938 13,997 Reinsurers’ share of insurance contract liabilities 13 1,927 4,406 Insurance and reinsurance debtors 14 2,225 2,547 Deferred acquisition costs 15 453 465
Cash generated from continuing operations 32 320 376 Income tax paid (118) (64) Interest received 527 636 Interest paid (82) (107) Dividends received 1 2 Cashflows from discontinued operations (531) (812)
Purchase of: Available for sale investments (7,840) (9,373) Investment property (17) (31) Property and equipment (37) (59) Intangible assets (127) (144) Investments in subsidiaries (net of cash acquired) 31 (69) (106)
Proceeds from issue of share capital 6 2 Purchase of treasury shares – (3) Purchase of shares from minorities (121) – Dividends paid to ordinary shareholders (78) (116) Dividends paid to preference shareholders (9) (9) Dividends paid to minority interests (9) (13) Proceeds from issuance of long term borrowings 74 – Net movement in other borrowings (243) (86) Cashflows from discontinued operations (9) –
Net increase/(decrease) in cash and cash equivalents and bank overdrafts 509 (324) Cash and cash equivalents and bank overdrafts at beginning of the year 1,612 1,864 Effect of exchange rate changes on cash and cash equivalents (81) 72
Cash and cash equivalents and bank overdrafts at end of the year 17 2,040 1,612
Estimation techniques Claims and unexpired risks provisions are determined based upon previous claims experience, knowledge of events and the terms and conditions of the relevant policies and on interpretation of circumstances. Particularly relevant is experience with similar cases and historical claims payment trends. The approach also includes the consideration of the development of loss payment trends, the levels of unpaid claims, legislative changes, judicial decisions and economic conditions.
• Estimates based upon a projection of claims numbers and average cost,
• Notified claims development, where notified claims to date for each year are extrapolated based upon observed development of earlier years,
It should be emphasised that the estimation techniques for the determination of insurance liabilities involve obtaining corroborative evidence from as wide a range of sources as possible and combining these to form the overall estimate. This technique means that the estimate is inevitably deterministic rather than stochastic. A stochastic valuation approach, whereby a range of possible outcomes is estimated and probabilities assigned thereto, is only possible in a limited number of situations.
The pension assets and pension and post retirement liabilities are calculated in accordance with International Accounting Standard 19 (IAS 19). The assets, liabilities and income statement charge, calculated in accordance with IAS 19, are sensitive to the assumptions made, including inflation, interest rate, investment return and mortality. IAS 19 compares, at a given date, the current market value of a pensions fund’s assets with its long term liabilities, which are calculated using a discount rate in line with yields on ‘AA’ rated bonds of suitable duration and currency. As such, the financial position of a pension fund on this basis is highly sensitive to changes in bond rates and equity markets.
Uncertainties and contingencies The uncertainty arising under insurance contracts may be characterised under a number of specific headings, such as: • Uncertainty as to whether an event has occurred which would give rise to a policyholder suffering an insured loss,
• Uncertainty as to the amount of insured loss suffered by a policyholder as a result of the event occurring,
• Uncertainty over the timing of a settlement to a policyholder for a loss suffered.
The diversity of the insurance risks results in it not being possible to identify individual judgments and assumptions that are more likely than others to have a material impact on the future development of the insurance liabilities.
• Issues of allocation of responsibility among potentially responsible parties and insurers,
• Developments pertaining to the Group’s ability to recover reinsurance for claims of this nature,
Contracts with third parties The Group enters into joint ventures, outsourcing contracts and distribution arrangements with third parties in the normal course of its business and is reliant upon those third parties performing their obligations in accordance with the terms and conditions of the contracts.
Litigation, mediation and arbitration The Group, in common with the insurance industry in general, is subject to litigation, mediation and arbitration, and regulatory, governmental and other sectoral inquiries in the normal course of its business. In addition the Group is subject to litigation in connection with its former ownership 51Royal & SunAlliance Annual Report & Accounts 2006
Changes in foreign exchange rates may impact our results We publish our consolidated financial statements in pounds sterling. Therefore, fluctuations in exchange rates used to translate other currencies, particularly other European currencies and the US dollar, into pounds sterling will impact our reported consolidated financial condition, results of operations and cashflows from period to period. These fluctuations in exchange rates will also impact the pound sterling value of our investments and the return on our investments.
Investment risk The Group is exposed to credit risk on its invested assets. Credit risk includes the non performance of contractual payment obligations on invested assets and adverse changes in the credit worthiness of invested assets including exposures to issuers or counterparties for bonds, equities, deposits and derivatives. Our insurance investment portfolios are concentrated in listed securities. We use derivative financial instruments to reduce our exposure to adverse fluctuations in interest rates, foreign exchange rates and equity markets. We have strict controls over the use of derivative instruments.
Rating agencies The ability of the Group to write certain types of insurance business is dependent on the maintenance of the appropriate credit ratings from the rating agencies. The Group has the objective of maintaining single ‘A’ ratings. At the present time the ratings are ‘A–’ from S&P and ‘A–’ from AM Best. Any worsening in the ratings would have an adverse impact on the ability of the Group to write certain types of general insurance business.
• The 2005 auditors’ remuneration, disclosed in note 4, is presented on a comparable basis following changes in the legislation regarding auditors’ remuneration disclosures.
• The Group accounting policy is to recognise actuarial gains and losses arising from the recognition and funding of the Group’s pension obligations in the period in which they arise. This policy has been adopted as it provides the most relevant basis of recognition of such gains and losses.
The cost of an acquisition is measured as the fair value of the assets given, equity instruments issued and liabilities incurred or assumed at the date of exchange, including costs directly attributable to the acquisition. Identifiable assets acquired and liabilities and contingent liabilities assumed in a business combination are measured initially at their fair values at the acquisition date, irrespective of the extent of any minority interest. The excess of the cost of acquisition over the fair value of the Group’s share of the identifiable net assets acquired is recognised as goodwill. If the cost of acquisition is less than the fair value of the net assets of the subsidiary acquired, the difference is recognised directly in the income statement.
Associates Associates are entities over which the Group has significant influence but not control, generally accompanying a shareholding of between 20% and 50% of the voting rights. Investments in associates are accounted for by the equity method of accounting and are initially recognised at cost.
Expenditure that increases the future economic benefits arising from computer software in excess of its standard of performance assessed immediately before the expenditure was made, is recognised as an intangible asset and amortised using the straight line method to allocate the cost over their estimated useful lives which is normally estimated to be between three and five years.
The assets’ residual values and useful lives are reviewed, and adjusted if appropriate, at the balance sheet date.
Investment property is recorded at fair value, measured by independent professionally qualified valuers, who hold a recognised and relevant professional qualification and have recent experience in the location and category of the investment property being valued, on an annual basis or more frequently and by internal valuers for interim periods, with reference to current market conditions. Related unrealised gains and unrealised losses or changes thereof are recognised in investment income.
The Group designates, where possible, its financial assets as available for sale financial assets on initial recognition of a financial asset. On subsequent measurement, investments are measured at fair value with changes in fair value recognised in equity. Where the cumulative changes recognised in equity represent an unrealised loss the individual asset or group of assets is reviewed to test whether an indication of impairment exists.
For securities whose fair values are readily determined and where there is objective evidence that such an asset is impaired, including a significant or prolonged decline in the fair value below cost, the unrealised loss charged to equity is reclassified to the income statement.
Investment income is recognised in the income statement. Dividends on equity investments are recognised on the date at which the investment is priced ‘ex dividend’. Interest income is recognised using the effective interest method. Unrealised gains and losses on available for sale investments are recognised directly in equity, except for impairment losses and foreign exchange gains and losses on monetary items (which are recognised in the income statement). On derecognition of an investment, the cumulative gain or loss previously recognised in equity is recognised in the income statement.
• For cashflow hedges, a forecast transaction that is the subject of the hedge must be highly probable and must present an exposure to variations in cashflows that could ultimately affect profit or loss,
Where loan capital is designated as the hedging instrument against the net investment in foreign entities, the effective portion of the hedge is recognised in equity; the gain or loss relating to the ineffective portion is recognised immediately in the income statement. Gains and losses accumulated in equity are included in the income statement when the underlying hedged item is derecognised.
Estimation of the fair value of financial assets and liabilities The methods and assumptions used by the Group in estimating the fair value of financial assets and liabilities are: • For fixed maturity securities, fair values are generally based upon quoted market prices. Where market prices are not readily available, fair values are estimated using either values obtained from quoted market prices of comparable securities or estimated by discounting expected future cashflows using a current market rate applicable to the yield, credit quality and maturity of the investment,
• If the market for a financial asset is not active, the Group establishes fair value by using valuation techniques. These include the use of recent arm’s length transactions, reference to other instruments that are substantially the same, discounted cashflow analysis and option pricing models,
• For notes, bonds, loans payable and loan capital, fair values are determined by reference to quoted market prices or estimated using discounted cashflow calculations based upon prevailing market rates. Loan capital is carried at amortised cost and when this is different from fair value this is shown in the relevant note. For borrowings that carry a variable rate of interest (other than loan capital), carrying values approximate to fair values,
Insurance contracts Product classification Insurance contracts are those contracts that transfer significant insurance risk at the inception of the contract. Insurance risk is transferred when the Group agrees to compensate a policyholder if a specified uncertain future event (other than a change in a financial variable) adversely affects the policyholder. Any contracts not meeting the definition of an insurance contract under IFRS are classified as investment contracts or derivative contracts, as appropriate.
Loan capital Loan capital comprises subordinated bonds which are stated at the consideration received less transaction costs. Subsequently, it is measured at amortised cost using the effective interest rate method.
• The past service costs for additional benefits granted in the current or earlier periods,
• The impact of any curtailments or settlements during the period,
The expected return on scheme assets is calculated using market expectations, at the beginning of the period, of the investment returns on assets over the entire life of the related obligations.
The value recognised in the balance sheet for each individual post retirement scheme is calculated as follows: • The present value of defined benefit obligation of the scheme at the balance sheet date, 57Royal & SunAlliance Annual Report & Accounts 2006
Share based payment The value of the employee share options and other equity settled share based payments is calculated at fair value at the grant date using appropriate and recognised option pricing models. The value of liabilities in respect of cash settled share based payment transactions are based upon the fair value of the awards at the balance sheet date.
Segment reporting A geographical segment (primary segment) is engaged in providing products or services within a particular economic environment that are subject to risks and returns that are different from those of segments operating in other economic environments. A business segment
(secondary segment) is a group of assets and operations engaged in providing products or services that are subject to risks and returns that are different from those of other business segments.
Unless otherwise stated, in the period where an operation is presented for the first time as discontinued, the notes to the financial statements contain amounts attributable to continuing operations only. The comparatives for the notes to the income statement are restated.
The following balances are generally classified as non current: goodwill and other intangible assets; property and equipment; investment property; investment in associates; financial assets; deferred tax assets; loan capital; and deferred tax liabilities.
– Inclusion of a component of an entity that sells primarily or exclusively to other operating segments of the entity in the definition of an operating segment if the entity is managed that way,
– The amount of each operating segment item reported to be the measure reported to the chief operating decision maker for the purposes of allocating resources to the segment and assessing its performance,
– Reconciliations of total reportable segment revenues, total profit or loss, total assets, and other amounts disclosed for reportable segments to corresponding amounts in the entity’s financial statements,
– An entity to report information about the revenues derived from its products or services (or groups of similar products and services), about the countries in which it earns revenues and holds assets, and about major customers, regardless of whether that information is used by management in making operating decisions,
• IFRIC 9, Reassessment of Embedded Derivatives (effective from annual periods beginning on or after 1 June 2006). IFRIC 9 requires an entity to assess whether an embedded derivative is required to be separated from the host contract and accounted for as a derivative when the entity first becomes a party to the contract. Subsequent reassessment is prohibited unless there is a change in the terms of the contract that significantly modifies the cashflows that otherwise would be required under the contract, in which case reassessment is required. IFRIC 9 is not relevant to the Group’s operations because none of the terms of the Group’s contracts has been changed. IFRIC 9 has been adopted by the EU.
Items of segment revenue, segment expense, segment assets and segment liabilities include amounts of such items that are directly attributable to a segment and amounts of such items that can be allocated to a segment on a reasonable basis. Items are allocated consistently, such that an item of segment revenue is allocated to the segment that holds the income generating asset.
Results of operating activities (per income statement) 455 196 177 (87) 741
Other segment items included in the income statement: Other significant non cash expenses include unwind of discount.
Emerging Central functions Continuing UK International Markets and eliminations operations £m £m £m £m £m 60 Royal & SunAlliance Annual Report & Accounts 2006
UK International Scandinavia and eliminations operations £m £m £m £m £m
Results of operating activities (per income statement) 617 201 166 (51) 933
Profit on disposal of subsidiaries – – – 65 65 Share of associates net of tax – 3 – – 3
Other segment items included in the income statement: Other significant non cash expenses include unwind of discount and the benefit from change of pension scheme design.
Capital expenditure: Secondary segment – business Year ended 31 December 2006
Capital expenditure: Year ended 31 December 2005 restated Continuing operations US
Central functions Continuing Personal Commercial and eliminations operations Personal Commercial Total £m £m £m £m £m £m £m
Restated Restated Restated Restated Restated £m £m £m £m £m £m £m £m £m £m
Other investments: Loans secured by mortgages 1 1 – – – – – – 1 1
Net claims and benefits 3,453 3,389 4. Profit before tax The following items have been included in arriving at the profit before tax on continuing operations: Other operating income Restated £m £m
The operating lease payments recognised as an expense during the year were £75m (2005 restated: £59m).
Fees payable to PricewaterhouseCoopers LLP for audit of the Company’s annual accounts 0.9 0.8 Fees payable to PricewaterhouseCoopers LLP and its associates for other services: The audit of the Company’s subsidiaries, pursuant to legislation 5.3 2.5 Other services pursuant to legislation 0.5 2.0 Tax services 0.5 0.5 Services relating to corporate finance activities 0.2 0.3
A pension payment of £24,423 (2005: £22,953) was paid by a subsidiary to a former director in respect of services other than as a director.
Employee information Staff costs for all employees comprise: Restated £m £m
Wages and salaries 590 592 Social security costs 69 46 Pension costs 64 (84) Share based payments to directors and employees 12 8
4. Profit before tax continued The average number of employees of the continuing operations during the year was as follows: Restated
Tax at the UK rate of 30% (2005: 30%) 195% 268% Tax effect of: Income/gains not taxable (35) (27) Expenses not deductible for tax purposes 14 13 Tax losses not recognised 4 – Adjustment for prior year provisions (5) 18 Different tax rates of subsidiaries operating in other jurisdictions (3) (13)
Weighted average number of ordinary shares in issue (thousands) 2,929,453 2,896,059 2,929,453 2,896,059 Basic earnings per share (p) 15.0% 19.9% (2.1)% 18.9%
Profit/(loss) for the calculation of earnings per share 438 576 (61) 546
Weighted average number of ordinary shares for diluted earnings per share (thousands) 2,959,288 2,913,504 2,959,288 2,913,504 Diluted earnings per share (p) 14.8 19.7 (2.1) 18.7 7. Dividends p p £m £m
At the Annual General Meeting (AGM) on 21 May 2007, a dividend in respect of 2006 of 4.12p per share amounting to a total dividend of £123m is to be proposed. The proposed dividend will be paid and accounted for in shareholders’ equity as an appropriation of retained earnings in the year ending 31 December 2007.
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 (2005: £1m).
Exchange adjustment (74) – – – (74) Transfer to discontinued operations (543) – – – (543)
Net book amount at 31 December 2006 – continuing operations 213 24 254 61 552 66 Royal & SunAlliance Annual Report & Accounts 2006
Amortisation expense of £46m (2005: £39m) has been charged to underwriting and policy acquisition costs.
A number of other assumptions and estimates are involved in the application of a cashflow model to forecast operating cashflows, premium volumes, expenses and working capital requirements. Forecasts of future cashflows are based on the best estimates of future premiums, operating expenses using historical trends, general geographical market conditions, industry trends and forecasts and other available information. These assumptions are subject to review by management and the Group Audit Committee of the Board of Directors. The cashflow forecasts are adjusted by an appropriate discount rate. The discount rates used are pre tax and reflect specific risks relating to the relevant segments at the date of evaluation. The weighted average growth rates used are consistent with the forecasts included in industry reports.
9. Property and equipment Group occupied property – land and buildings Equipment Total £m £m £m
Transfer to assets held for sale (16) – (16) Transfer to discontinued operations – (7) (7)
Group occupied property – land and buildings Equipment Total £m £m £m
The carrying amount of Group occupied property that would have been recognised had the assets been carried under the cost model at 31 December 2006 is £218m (2005: £260m).
Movement in the carrying value of investment property is detailed below: £m £m
Investment property at 1 January 435 417 Additions from subsequent expenditure 1 10 Sales and purchases (21) (2) Fair value gains 40 12 Exchange adjustment (1) (2)
Total assets 207 185 Total liabilities 135 121 Total revenue 147 128 Goodwill on acquisition 5 5 Profit for the year after tax 8 6
Equity securities 1,620 1,683 Debt securities 8,568 11,609 Other financial assets 155 146 Short term investments 114 95
Premiums ceded to reinsurers 790 1,020 Reinsurers’ share of premiums earned (885) (1,042)
Reinsurers’ share of provision for unearned premiums at 31 December 189 298
The following changes have occurred in the reinsurers’ share of the provision for loss and loss adjustment expenses during the year: £m £m
Reinsurers’ share of provision for loss and loss adjustment expenses at 31 December 1,738 4,108
Charge to income statement in the year 10 (31) Disposal of assets 1 (3) Other – (1) Transfer to discontinued operations (5) –
To be settled within 12 months 545 461 To be settled after 12 months 261 135 17. Cash and cash equivalents £m £m
18. Equity and reserves Changes in equity Changes in equity for the year ended 31 December 2006
Prior year adjustment (note19) – – – – – – – (57) (57) – – (57)
Depreciation transfer – – – – 10 – – (10) – – – –
During the year, the Group purchased the minority interest of its subsidiaries in Latvia and Lithuania for DKK599m (£55m). Codan A/S purchased DKK736m (£66m) of its own shares on the market, this increased the Group’s ownership of Codan A/S from 71.7% to 74.5%.
Changes in equity for the year ended 31 December 2005 (restated) Subordinated
Ordinary Ordinary Capital Share- guaranteed share share Treasury Preference Revaluation redemption Translation Retained holders’ perpetual Minority Total capital premium shares shares reserve reserve reserve earnings funds notes interest equity £m £m £m £m £m £m £m £m £m £m £m £m
Treasury share purchase – – (3) – – – – – (3) – – (3) Depreciation transfer – – – – (16) – – 16 – – – –
The subordinated guaranteed US$ bonds (Yankee Bonds) have a redemption date of 15 October 2029. The rate of interest payable on the US$ bonds is 8.95%.
On 20 April 2006, the Parent Company announced an offer to exchange any or all of the outstanding $500m Yankee Bonds for subordinated Sterling perpetual guaranteed bonds (New Bonds). Holders of $425,694,000 of the outstanding nominal amount of the Yankee Bonds participated in the offering, which was settled on 12 May 2006. The balance of the Yankee Bonds that remain outstanding following the closing of the transaction was $74,306,000.
A further $419,000 were repurchased and cancelled on 13 November 2006. The outstanding Yankee Bonds at 31 December 2006 have a nominal value of $73,179,000.
The subordinated guaranteed Euro bonds (€500m) have a redemption date of 15 October 2019. €200m of the Euro bonds bear interest at a fixed rate of 6.875% until 15 October 2009 and a floating rate thereafter. €300m of the Euro bonds bear interest at a floating rate from the date of issue of EURIBOR +1.25%. The Parent Company has the option to repay the Euro bonds on specific dates from 15 October 2009.
The New Bonds are step up perpetual guaranteed subordinated capital securities and the rate of interest payable is 6.701% of the nominal value. The Group has the option to repay the bonds on specific dates starting 12 July 2017. If the bonds are not repaid, from that date, the rate of interest payable would be LIBOR + 2.51%.
The aggregate fair value of the dated loan capital, subordinated Sterling perpetual guaranteed bonds, and subordinated guaranteed perpetual notes at 31 December 2006 is £1,291m (2005: £1,271m).
Provision for unearned premiums 2,969 3,001 Provision for losses and loss adjustment expenses 9,821 14,203
Provision for unearned premiums The following changes have occurred in the provision for unearned premiums during the year: £m £m
Provision for losses and loss adjustment expenses at 31 December 9,821 14,203
To be settled within 12 months 2,268 3,193 To be settled after 12 months 7,553 11,010
Claims on certain classes of business have been discounted as follows: Average number
20. Insurance contract liabilities continued Consolidated claims development table net of reinsurance £m £m £m £m £m £m £m
Three years later 1,017 244 192 Four years later 534 159 Five years later 398
Reconciliation to the balance sheet Current year provision before discounting 3,023 546 641 888 1,249 2,132 8,479 Exchange adjustment to closing rates (132) Discounting (572) Annuities 308
Prior year development in 2006 showed continued favourable experience in the 2002 to 2005 accident years, offset by reserve strengthening in the 2001 and prior accident years. The movement in the 2001 and prior years primarily reflects the strengthening of our UK asbestos reserves by £169m, and our long tail Scandinavian reserves by £260m. The positive run off in the years 2002 to 2005 comes from all main businesses and reflects the benefits of recent management actions as well as the release of surplus reserves within our Danish motor business. The total discounting of £572m compares with £462m in 2005, with the increase predominantly reflecting the impact of the increase in UK asbestos reserves.
To be settled within 12 months 356 458 To be settled after 12 months 35 17 77Royal & SunAlliance Annual Report & Accounts 2006
Secured debenture loans – 10 Amounts owed to credit institutions – unsecured: Under committed credit facilities – 233
One year or less 6 242 After one year and within two years 1 1 After two years and within three years 1 1 After three years and within four years – 1 After four years and within five years – 2 After five years – 4
At 31 December 2006 and 2005 the Group had in place a one billion US dollar Euro commercial paper program. There were no amounts outstanding at 31 December 2006 (2005: £nil).
The movement for the year in the Group’s net deferred tax position is as follows: Restated £m £m
Net deferred tax position at1 January (179) 73 Charge to the income statement for the year (29) (277) (Charge)/credit to equity for the year (75) 15 Acquisition of subsidiaries (5) – Exchange adjustment (2) 10
Reclassification benefit temporary of debt obligations differences Total £m £m £m £m
Deferred tax assets at 1 January 2005 – 170 4 174 Charge to the income statement for the year – (91) (76) (167) Credit to equity for the year (restated) 24 24 – 48 Exchange adjustment – – 2 2
Restated deferred tax assets at 31 December 2005 24 103 (70) 57 (Charge)/credit to the income statement for the year – (37) 80 43 (Charge)/credit to equity for the year (2) (74) 5 (71)
Deferred tax assets at 31 December 2006 22 (8) 15 29
Deferred tax liabilities at 1 January 2005 97 85 (81) 101 Charge to the income statement for the year 7 5 98 110 Charge to equity for the year – 28 5 33 Exchange adjustment – – (8) (8)
Deferred tax liabilities at 31 December 2005 104 118 14 236 Charge/(credit) to the income statement for the year 5 (11) 78 72 Charge to equity for the year – 2 2 4
The deferred income tax (charged)/credited to equity is as follows: Restated £m £m
The aggregate current tax relating to items that were charged or credited to equity is £8m (2005: £21m).
Pensions and post retirement obligations 156 473 Reorganisation provisions 27 48 Other provisions 197 172
Other provisions includes £51m (2005: £nil) of provisions relating to the disposal of the discontinued US operation. In addition, there are provisions of £52m (2005: £54m) held relating to vacant property leases, dilapidations and refurbishments, the costs relating to which will be borne across the period over which the leases expire, which is up to 20 years. Other provisions also includes various litigation provisions of £9m (2005: £4m), the payment of which is dependent upon legal processes and Motor Insurance Bureau provision of £33m (2005: £24m).
Movements during the year on reorganisation and other provisions Reorganisation provisions Other provisions £m £m
Deposits received from reinsurers 61 347 Derivative trading liabilities 28 130 Other creditors 560 624 Accruals and deferred income 377 377
To be settled within 12 months 935 994 To be settled after 12 months 91 484 26. Retirement benefit obligations The Group operates defined contribution pension schemes, funded and unfunded defined benefit pension schemes, and has other post retirement obligations. This note has been adjusted for discontinued operations.
In addition to these changes, the 2002 Scheme (which was the scheme to which new UK employees have been admitted since the closure of the defined benefit schemes to new members) has been closed to further accrual from 1 January 2006. It has been replaced by a stakeholder arrangement and members of the 2002 Scheme and future new employees in the UK will accrue future benefits on a defined contribution basis under the stakeholder plan.
For the two main UK defined benefit schemes, the level of contributions in 2006 were 23% and 21% of pensionable salaries (2005: 23% and 21%). Additional contributions totalling £86m (2005: £86m) were made to the schemes, in accordance with the plan to reduce their deficits. Expected contributions to pension and post retirement benefit plans for the year ending 31 December 2007 are approximately £175m, including a further £86m of additional contributions.
The Group also provides post retirement healthcare benefits to certain current and retired US and Canadian employees. The benefits are not pre funded. Life insurance benefits, which provide varying levels of coverage, are provided at no cost to retirees. Healthcare benefits, which also provide varying levels of coverage, require retiree contributions in certain instances. Benefits are generally payable for life. The estimated discounted present values of the unfunded accumulated obligations are calculated in accordance with the advice of independent, qualified actuaries.
Surplus/(deficit) at 31 December 32 (472) Unrecognised past service cost – (1)
Current service cost 3 4 Interest cost 22 23 Expected return on scheme assets (20) (19) Past service benefit – (11) Gains on curtailment (5) (6)
Actual return on scheme assets 229 25 254 26 280 691 Less: expected return on scheme assets (255) (13) (268) (20) (288) (257)
Actual return on assets in (below)/in excess of expected (26) 12 (14) 6 (8) 434 Experience gains/(losses) on liabilities 81 (39) 42 (1) 41 (50)
Actuarial gains/(losses) on pension benefits 263 (37) 226 – 226 (74)
The accumulated actuarial gains since 1 January 2004 are £82m (2005: £144m loss).
Analysed: Defined benefit pension schemes 102 (46) 56 (426) Other post retirement benefits – (24) (24) (47)
The following is a reconciliation of the Group’s pension scheme assets: £m £m
Experience adjustments on plan liabilities 42 (50) 87 Experience adjustments on plan assets (14) 434 145
Assumptions used in calculation of retirement benefit obligation: Annual rate of general inflation 2.7 2.5 2.5 2.0 Annual rate of increase in salaries 4.2 4.0 4.4 4.1 Annual rate of increase in pensions 2.7 2.5 2.5 2.0
Assumptions used in calculation of income statement credit/charge in year: Expected return on: 83Royal & SunAlliance Annual Report & Accounts 2006
The performance conditions in respect of awards under the Executive Share Option Scheme are described in the footnote to the options table (audited part) on page 42. The exercise price of all options is the fair value of the ordinary shares on the date of grant. All options expire 10 years after the date of the grant.
27. Share based compensation continued Additional information with respect to the plans at 31 December is as follows: Shares Price* Shares Price*
The following share options under the Executive Share Option Scheme and Equity Incentive Scheme for US Employees are outstanding or exercisable at 31 December: Options outstanding
Under the schemes, there were no awards during 2006. The weighted average estimated fair value per option granted by the Company during 2005 was 27.42p. The fair value of the share options granted under the plans during 2005 was £8m. The value of the awards is charged in the income statement over the vesting period.
Options exercisable at year end 1,918,062 136.78 1,966,919 153.67 *Price refers to weighted average exercise price in sterling (pence).
Range of exercise prices of shares exercise price* of shares exercise price*
Under the International Sharesave Plan, the weighted average estimated fair value per option granted by the Company during 2006 was 46.66p (2005: 36.62p). The fair value of share options granted under the International Sharesave Plan during 2006 was £4m (2005: £6m). The value of the awards is charged in the income statement over the vesting period.
The performance conditions in respect of awards under the Share Matching Plan are described in the footnote to the options table (audited part) on page 43. Under the plan, Deferred Share awards granted are held in trust for three years and are normally forfeited upon an employee leaving the Group. No further performance conditions apply.
Participants may also receive Matching Share awards up to a maximum of three times the number of Deferred Shares awarded. Matching Share awards are subject to the achievement of total shareholder return targets over a single two year period, with performance measured by comparison against other UK listed companies. Matching Share awards vest with the Deferred Share awards on the third anniversary of the date of grant to the extent that the performance conditions have been met.
Further information on the Share Matching Plan may be found in the footnote to the long term incentive scheme table (audited part) on page 43.
* This award was approved in 2005, but could not be granted until 2006. It is subject to the same criteria as all the other grants made in 2005.
Under the Share Matching Plan, the fair values of each Deferred Share award granted by the Company during 2006 was 114.40p (2005: 71.40p) and the fair value of each potential Matching Share award was 38.10p (2005: 23.80p). The total fair value of the awards granted under the plan during 2006 was £nil (2005: £4m).
Long Term Incentive Plan The 2006 Long Term Incentive Plan for executive directors and other selected executives was adopted following approval obtained at the 2006 AGM. Awards were made during 2006 following shareholder approval.
As set out in the corporate governance report, the Group’s Board defines the risk appetite of the organisation.
Risks arise within the investment portfolio from the possibility of mismatching cash and fixed interest assets against liabilities by duration (eg inflation and reinvestment risk). However, the relatively short duration of a general insurance portfolio, together with the Group’s strategy of broadly matching assets and liabilities by duration, provides mitigation against these risks. The Group reviews the duration of its liabilities and asset portfolios to ensure that they remain broadly matched. Regional investment directives limit permissible duration ranges within the individual portfolios. These directives also include objectives for liquidity, asset sector concentration and credit quality.
28. Management of risks continued The components of risk: insurance, reinsurance, credit, market and liquidity risks are addressed below: Insurance risk The Group’s insurance activities are primarily concerned with the pricing, acceptance and management of risks from its customers. In accepting risk the Group is committing to the payment of claims and therefore these risks must be understood and controlled.
For a portfolio of insurance contracts where the theory of probability is applied to pricing and provisioning, the principal risk that the Group faces under its insurance contracts is that the actual claims and benefit payments exceed the expected amount of the insurance liabilities. This could occur because the frequency or severity of claims and benefits payable are greater than estimated. Insurance events are random and the actual number and amount of claims and benefits will vary from year to year from the estimate established using statistical techniques.
Experience shows that the larger the portfolio of similar insurance contracts, the smaller will be the relative variability about the expected outcome. In addition, a more diversified portfolio is less likely to be affected across the board by a change in any subset of the portfolio. The Group has developed its insurance underwriting strategy to diversify the type of insurance risks accepted and within each of these categories to achieve a sufficiently large population of risks to reduce the variability of the expected outcome.
The Group has an Underwriting and Claims Policy that clearly identifies the approach to be adopted in respect of risk selection and management, pricing adequacy, identification and management of aggregation to exposure and claims handling. These principles are adapted to local market, legal and regulatory environments and further embodied in detailed underwriting procedures. The goal is for the Group’s underwriters to be in a position to: • Understand and assess each risk,
• Improve the predictability of the loss experience and make appropriate use of the Group’s underwriting capacity.
In establishing prices, each of the Group’s businesses has access to extensive customer data from its own records and access to appropriate market data.
28. Management of risks continued • Considers aggregation of risk across regions,
Underwriting limits are in place to enforce appropriate risk selection criteria. For example, the Group has the right not to renew individual policies, it can impose deductibles and it has the right to reject the payment of a fraudulent claim. In certain territories, legislation requires that the maximum loss under each employers’ liability contract is never lower than a prescribed amount. All the Group employers’ liability contracts offer maximum cover in compliance with such minimums.
The Group has specialised claims units dealing with the mitigation of risks surrounding known asbestos claims. These units investigate and adjust all asbestos claims. The asbestos claims are reviewed individually at least semi annually and adjusted to reflect the latest information on the underlying facts, current law, jurisdiction, contractual terms and conditions and other factors. The Group actively manages and pursues early settlements of asbestos claims to reduce its exposure to unpredictable developments.
Reserves – an overview The Group establishes property and casualty loss reserves to account for the anticipated ultimate costs of all losses and related loss adjustment expenses (LAE) on losses that have already occurred. The Group establishes reserves for reported losses and LAE, as well as for incurred but not yet reported (IBNR) losses and LAE. Loss reserve estimates are based on known facts and on interpretation of circumstances including our experience with similar cases and historical claims payment trends. The Group also considers the development of loss payment trends, levels of unpaid claims, judicial decisions and economic conditions.
The Group has a Group Reserving Committee consisting of the Chief Executive Officer, Chief Financial Officer, Group Director Audit, Risk and Compliance and Group Chief Actuary. A similar committee has been established in each of the Group’s major regions. The Group Reserving Committee monitors the decisions and judgments made by the business units as to the level of reserves recommended and makes the final decision on the reserves to be included within the financial statements. In making its judgment, the Group Reserving Committee’s aim is that, over the longer term, reserves should be more likely to run off favourably than adversely. However, there can be no assurance that reserves will not develop adversely and exceed the Best Estimate. In making its judgment of the Best Estimate of Reserves to include in the financial statements the Group Reserving Committee adopts the following approach: 90 Royal & SunAlliance Annual Report & Accounts 2006
28. Management of risks continued • The Group’s actuaries provide an indication of ultimate losses together with an assessment of risks and possible favourable or adverse developments that may not have been fully considered in calculating these indications. At the end of 2006, these risks and developments included: the possibility of future legislative change having retrospective effect on open claims; changes in claims settlement procedures potentially leading to future claims payment patterns differing from historical experience; the possibility of new types of claim, such as disease claims, emerging from business written several years ago; general uncertainty in the claims environment; the emergence from latent exposures such as asbestos; the outcome of litigation on claims received; failure to recover reinsurance; and unanticipated changes in claims inflation,
• Consideration is also made of the views of internal peer reviewers of the reserves and of third parties including actuaries, legal counsel, risk directors, underwriters and claims managers,
• Consideration is made of how previous actuarial indications have developed.
For short tail lines of business, development of paid claims and case reserves is reliable and indicative of ultimate losses. The method used is based on the amount of paid and case estimates for reported claims.
For long tail lines of business, initial development of paid claims and case reserves is less reliable and, accordingly, may not be fully indicative of ultimate losses. For this reason, within these lines, methods which incorporate a development pattern assumption are given less weight in calculating the reserves for the early stages of loss development. The estimation of reserves for these lines of business in the early stages of claims development is therefore largely influenced by prior accident years’ loss ratios and changes to pricing, claims costs, mix of business, ceded reinsurance and other factors that are expected to affect the loss ratio. For later periods of loss emergence, methods which incorporate a development pattern assumption are given more weight in estimating ultimate losses.
Estimation of claims provisions – asbestos reserves The Group has exposure to liabilities for asbestos related losses arising from the sale of commercial liability and multi peril policies prior to 1987. After 1987, policy wordings contained more prescriptive, and in many cases absolute, exclusions for these types of exposure thereby considerably reducing the potential for loss.
The position in the US is particularly problematic, as plaintiffs have expanded their focus to defendants beyond the ‘traditional’ asbestos manufacturers and distributors. This has arisen as a consequence of the increase in the number of insureds seeking bankruptcy protection because of asbestos related litigation and the exhaustion of their policy limits. Plaintiffs, supported by lawyers remunerated on a contingent fee basis, are now seeking to draw in a wide cross section of defendants who previously only had peripheral or secondary involvement in asbestos litigation. This may include companies which have distributed or incorporated asbestos containing parts in their products or operated premises where asbestos was present.
There are also increasing signs of attempts to reopen and reclassify into other insurance coverages previously settled claims, and the filing of claims under the non aggregate premises or operation section of general liability policies. There are also indications that plaintiffs may seek damages by asserting that insurers had a duty to protect the public from the dangers of asbestos.
Emerging and legal risks These are risks that have been identified as potentially affecting the Group but for which the extent of risk has not yet been identified. Existing or potential future risk exposures are investigated in a structured way, using internal and external resources, and appropriate proposals for actions to mitigate, contain or remove these risks are made to the BRC.
In addition, to the extent that legal decisions in any of the jurisdictions in which the Group operates worldwide may increase court awards, and that the impact may be applied prospectively or retrospectively, claims and benefits provisions may prove insufficient to cover actual losses, loss adjustment expenses or future policy benefits. In such an event, or where it has been previously estimated that no liability would apply, the Group would add to its loss provisions and incur a charge to earnings. Such insufficiencies could have a material adverse effect on the Group’s future consolidated financial condition, results of operations and cashflows.
In the ordinary course of its insurance activities, the Group is routinely involved in legal or arbitration proceedings with respect to liabilities which are the subject of policy claims.
As insurance industry practices and legal, judicial, social and other environmental conditions change, unexpected and unintended issues related to claims and coverage may emerge. These issues can have a negative effect on the Group’s business by either extending coverage beyond its underwriting intent or by increasing the number and size of claims.
The ability of the businesses in each territory to assess the aggregation risk of a single event impacting on thousands of policyholders is vital. The Group employs proprietary exposure measurement systems to assess these risks. In some markets, particularly in the UK, the Group has in addition, developed its own expertise in catastrophe modelling that is used in conjunction with outside consultants. The accurate estimation of the potential expected maximum loss for a catastrophe is critical and is the primary factor considered in designing the Group’s catastrophe reinsurance programme.
The Group remains primarily liable as the direct insurer on all risks reinsured, although the reinsurer is liable to the Group to the extent of the reinsurance ceded. To limit the risk that the reinsurer is unable to pay in full, under certain reinsurance agreements the Group holds collateral, including escrow funds and letters of credit. The Group monitors the financial condition of reinsurers on an ongoing basis, and reviews its reinsurance arrangements regularly to ensure that its total counterparty exposure to individual reinsurance groups is within the limits set by the BRC and the Financial Services Authority for insurers domiciled in the UK.
The premiums ceded to Munich Re have reduced by £237m in 2006 primarily due to the cessation of the 100% health quota share arrangements.
The Group’s property and casualty facultative placements, other than those with captive reinsurers of its major retail clients, are mainly with the same reinsurers used on treaty placements. Facultative placements, or risks under facultative treaties, reinsure all or part of a single policy determined on a contract by contract basis.
As of 31 December 2006, total impairment provisions for uncollectable reinsurance was £61m (2005: £141m).
28. Management of risks continued Credit risk The BRC is responsible for ensuring that the Board approved Group credit risk appetite is not exceeded.
In defining its risk appetite, the Group draws a distinction between credit risks incurred as a result of offsetting insurance risks or operating in the insurance market (eg reinsurance credit risks and insurance operations credit risks) for which risk tolerances and target profiles are identified and credit risks incurred for the purposes of generating a return (eg invested assets credit risk) for which strict exposure limits are set.
The Group controls its credit exposures according to a series of Group credit risk policies that reflects the individual considerations of the risk categories. These policies are supported by a series of procedures (eg counterparty assessment processes) and limits (eg investment and bank counterparty limits), which are designed to ensure that the Group’s risk appetite is not exceeded.
The Group’s maximum exposure to credit risk can be set out as follows: Maximum Maximum credit risk credit risk
Analysis of debt securities The credit profile of the Group’s fixed income portfolios reflects the Group’s commitment to matching its liabilities with investment rated liquid instruments for the protection of the policyholder.
Credit profile of Group fixed income portfolio (note 1): Notes: 1. The ratings set out above are assigned by independent rating agencies.
2. Includes UK Government guaranteed fixed income securities that are not rated.
28. Management of risks continued Analysis of equity securities The Group’s equity portfolio is diversified as follows across sectors: By country/region
Maturity periods or contractual repricing The following table summarises the contractual repricing or maturity dates (whichever is earlier) for financial assets and financial liabilities, that are subject to fixed and variable interest rates. Equity instruments are not subject to interest rate risk.
Less than One to Two to Three to Four to Greater than one year two years three years four years five years five years Total £m £m £m £m £m £m £m
Financial assets Cash and cash equivalents 1,831 – – – – – 1,831
Financial assets Cash and cash equivalents 1,617 – – – – – 1,617
Market risk The Group is exposed to the risk of potential losses from adverse movements in market rates and prices as follows: • Interest rate risk,
Interest rate risk The fair value of the Group’s portfolio of fixed income securities is inversely correlated to changes in the market interest rates. Thus if interest rates fall the fair value of the portfolio would tend to rise and vice versa as set out in the sensitivity analysis.
Equity price risk The Group’s portfolio of equity securities is subject to equity risk arising from changes in market price. Thus if the value of equities rise so will the fair value of its portfolio and vice versa as set out in the sensitivity analysis.
A number of the Group’s property holdings are Group occupied and therefore appear as property and equipment within the reported accounts. The Group’s investment in investment property is recorded as such and is invested in as part of an efficient portfolio management strategy.
• Structural foreign currency exchange risk – by investing in overseas subsidiaries and operating an international insurance group.
Structural foreign currency exchange risk is managed at a Group level. In managing structural foreign currency exchange risk net assets maintained by the Group’s subsidiaries in local currencies are taken into account to satisfy local regulatory solvency and internal risk based capital assessment requirements. These assets should prove adequate to support local insurance activities irrespective of foreign currency exchange rate movements. Consequently, this may affect the value of the consolidated shareholders’ equity expressed in pounds sterling.
While these derivative instruments are subject to fluctuations in value, such fluctuations are generally offset by the changes in value of the underlying exposures. Derivatives are generally held until their maturity date.
Sensitivity analysis Change in fair value of investments and borrowings (note 1 and note 5): (Decrease)/increase £m £m
Interest rate markets (note 2): Impact on fixed interest securities of increase in interest rates of 100bps (198) (295) Impact on loan capital of increase in interest rates of 100bps 85 132
Equity markets (note 3): Decrease of equity markets of 15% (243) (252) Impact arising from derivatives 41 18
Property markets (note 3): Decrease of property markets of 15% (68) (65)
Notes: 1. This analysis assumes that there is no correlation between equity price, interest rate, property market and foreign currency exchange rate risks. It also assumes that all other assets and liabilities remain unchanged and that no management action is taken. This analysis does not represent management’s view of future market change.
3. The effect of movements in equity and property markets is reflected as a one time decrease of worldwide equity and property markets on 1 January 2007 and 1 January 2006 which results in a 15% decline in the value of the Group’s assets in these investment categories.
5. This analysis has not considered the impact of the above market changes on the valuation of the Group’s insurance liabilities.
Canada Roins Financial Services Limited Holding company Quebec Assurance Company General insurance The Johnson Corporation Holding company Royal & Sun Alliance Insurance Company of Canada General insurance Western Assurance Company General insurance
Colombia Royal & Sun Alliance Seguros (Colombia) SA (86.5%) General insurance
Notes: 1. 100% direct subsidiary of Royal & Sun Alliance Insurance Group plc.
6. Except where indicated all holdings are of equity shares and represent 100% of the nominal issued capital. In all cases the proportion of voting power held equals the proportion of ownership interest.
7. Some subsidiaries have been omitted from this statement to avoid providing particulars of excessive length but none materially affects the results or assets of the Group.
31. Business combinations Acquisition of subsidiaries On 1 August 2006, the Group acquired 100% of the share capital of EGI Holdings Limited in Ireland. On 12 September 2006, the Group acquired 100% of the share capital of White Label Holding AS Group and Duborgh Skadeforsikring AS in Norway. On 13 November 2006, the Group acquired 100% of the share capital of Martello Underwriting Limited in the UK. The total consideration was £93m and goodwill of £70m arose on the acquisitions.
Net assets 23 Cash consideration including acquisition costs 80 Deferred consideration 13
If the acquisitions had occurred on 1 January 2006, Group revenue for the year would have increased by £46m and Group profit after tax for the year would have increased by £4m. The total profit after tax of the acquired entities since the acquisition date included in the Group’s profit or loss for the period was £1m.
Disposal of subsidiaries There were no material disposals during the year.
33. Related party transactions The ultimate Parent Company of the Group is Royal & Sun Alliance Insurance Group plc which is incorporated in Great Britain and registered in England and Wales.
Salaries and other short term employee benefits 4 5 Bonus awards 4 3 Pension benefits 1 1 Share based awards 3 1
Receivables from associates – 1 34. Commitments Capital commitments The Group’s significant capital commitments in respect of investment property, property and equipment, intangible assets and associates are detailed in the table below: £m £m
34. Commitments continued Operating lease commitments where the Group is the lessor The future aggregate minimum lease payments under non cancellable operating leases are as follows: Land and buildings £m £m
One year or less 23 21 Between one and five years 82 77 After five years 149 159 35. Discontinued operations, non current assets and assets and liabilities of operations held for sale Discontinued operations On 28 September, the Group announced the sale of its US operations to Arrowpoint Capital Corp. (Arrowpoint), a company set up by the US management team. The Group is selling its US operation to Arrowpoint for a deferred consideration of £158m ($300m), which will be funded from the future performance of the US operation. The Group will make a £151m ($287.5m) capital contribution into the US regulated entities. Two existing arrangements will remain in place: the Adverse Development Cover (ADC) and the Letter of Credit (LOC) supporting certain third party reinsurance recoverables and agreed pension contributions. The ADC is a reinsurance cover put in place in 2003. It is at its policy limit and only exposed to timing risk. The prudent assumptions supporting the projected payment patterns give additional cover against potential timing risks for payment of claims. For the LOC of £79m a methodology has been agreed to step it down commencing two years after the completion of the transaction conditional on the financial health of the US regulated entities. In the event that the regulated entities are required to draw down on the LOC, a mechanism has been agreed for reimbursement to the Group. Neither the ADC nor the LOC represent new exposures to the Group and the directors believe that they do not represent material risks to the Group given their nature, timing and likelihood. As part of the disposal the Group has given minimal representations and warranties and the transaction represents a clean exit from the US. It is intended that the present value of the deferred consideration will be held as part of the general investment portfolio of the Group. The loss recognised as a result of remeasurement to fair value less costs to sell is £399m.
Loss before tax of discontinued operations (484) (29) Tax on writedown (15) (1)
Liabilities Insurance contract liabilities 2,834 Insurance and reinsurance liabilities 41 Provisions and other liabilities 719
Other statutory disclosures required in relation to discontinued operations The statutory disclosures not included elsewhere in these financial statements are as follows: Profit before tax The following items have been included in arriving at the loss before tax: £m £m
Reorganisation expenses 11 49 Investment expenses and charges 23 22 Amortisation and impairment of intangible assets 5 6
Fees payable to PricewaterhouseCoopers for audit of the Company’s annual accounts – – Fees payable to PricewaterhouseCoopers and its associates for other services: The audit of the Company’s subsidiaries, pursuant to legislation 1.1 0.5 Other services pursuant to legislation – 0.1 Tax services 0.1 0.1 104 Royal & SunAlliance Annual Report & Accounts 2006
Wages and salaries 38 76 Social security costs 3 4 Pension costs 3 (9) Share based payments to directors and employees 1 1
The average number of employees of the US operation during the year was 543 (2005: 1,766).
John Tighe is the CEO of the US operation and his remuneration is included within the key management compensation set out in note 33.
Financial assets At the period end, the US operation had pledged £1,356m of financial assets as collateral for liabilities or contingent liabilities and accepted £948m collateral that could be sold or pledged.
Weighted average number of ordinary shares for diluted earnings per share (thousands) 2,959,288 2,913,504 Diluted earnings per share (p) (16.9)% (1.0)%
Non current assets held for sale and assets and liabilities of discontinued operations At 31 December 2005, a Group occupied property within the UK segment, valued at £36m, was presented as held for sale following the decision to dispose of it and the sale being considered highly probable.
Respective responsibilities of directors and auditors The directors’ responsibilities for preparing the Annual Report, the remuneration report, the directors’ interests and the Parent Company financial statements in accordance with applicable law and International Financial Reporting Standards (IFRSs) as adopted by the European Union are set out in the directors’ report.
We report to you our opinion as to whether the Parent Company financial statements give a true and fair view and whether the Parent Company financial statements and the parts of the remuneration report and the directors’ interests to be audited have been properly prepared in accordance with the Companies Act 1985. We also report to you whether in our opinion the information given in the directors' report is consistent with the Parent Company financial statements. The information given in the directors’ report includes that specific information presented in the financial review, the Group CEO’s business review, in the regional business reviews and in the estimation techniques, uncertainties and contingencies that is cross referred from the business review section of the directors’ report.
In addition we report to you if, in our opinion, the Company has not kept proper accounting records, if we have not received all the information and explanations we require for our audit, or if information specified by law regarding directors’ remuneration and other transactions is not disclosed.
We read other information contained in the Annual Report and consider whether it is consistent with the audited Parent Company financial statements. The other information comprises only the highlights, the R&SA at a glance section, the Chairman’s statement, the Group CEO’s business review, the market leading capability section, the profitable growth section, the UK business review, the International business review, the Emerging Market business review, the financial review, the risk framework, the corporate responsibility section, the directors’ report, the corporate governance statement, the remuneration report and the unaudited part of the directors’ interests. We consider the implications for our report if we become aware of any apparent misstatements or material inconsistencies with the Parent Company financial statements.
We planned and performed our audit so as to obtain all the information and explanations which we considered necessary in order to provide us with sufficient evidence to give reasonable assurance that the Parent Company financial statements and the parts of the remuneration report and the directors’ interests to be audited are free from material misstatement, whether caused by fraud or other irregularity or error. In forming our opinion we also evaluated the overall adequacy of the presentation of information in the Parent Company financial statements and the parts of the remuneration report and the directors’ interests to be audited.
• The Parent Company financial statements and the part of the remuneration report and the directors’ interests to be audited have been properly prepared in accordance with the Companies Act 1985,
Independent auditors’ report to the members of Royal & Sun Alliance Insurance Group plc
Amounts owed by subsidiaries 9 1,212 1,149 Current income tax assets 6 57 27 Deferred tax assets 6 28 26 Other debtors and other assets 3 6 7
Profit for the year – – – – – – 143 143 Dividends – paid (note 7) – – – – – – (149) (149) Issued by scrip 12 49 – – – – – 61 Issued for cash 2 4 – – – – – 6 Share options – – – – – – 13 13 Fair value gains/(losses) net of tax – – – 863 – – – 863
Statement of changes in equity of the Parent Company for the year ended 31 December 2006
Cash generated from operations 8 63 (112) Income tax refunded/(paid) – –
Net decrease in cash and cash equivalents 2 (1) Cash and cash equivalents at beginning of the year – 1
Parent Company cashflow statement for the year ended 31 December 2006
1. Significant accounting policies Royal & Sun Alliance Insurance Group plc, domiciled in the United Kingdom is the ultimate Parent Company (the Company) for the Royal & Sun Alliance Insurance Group. The principal activity of the Company is to hold investments in its subsidiaries and the receipt and payment of dividends.
Except where otherwise stated, all figures included in the separate financial statements are presented in millions of pounds sterling (£m), rounded to the nearest million.
The accounting policies that are used in preparation of these separate financial statements are consistent with the accounting policies used in preparation of the consolidated financial statements of Royal & Sun Alliance Insurance Group as set out in those financial statements.
Investments at 1 January – at valuation 4,870 3,981 Additions/(disposals) during the year 78 (85) Fair value adjustments 863 974
The directors believe that the methodology used supports the inclusion of the investments in subsidiaries on the balance sheet, at the fair values ascribed to them. The market value of the Company’s ordinary shares at 31 December 2006 was 152.5p. A movement of 1% in the share price would have an impact of £46m on the fair value.
Full details of the principal subsidiaries of the Company are set out in note 30 to the consolidated financial statements.
3. Other debtors and other assets – to be settled within 12 months £m £m
To be settled within 12 months 57 27 To be settled after 12 months – –
The movement for the year in the Company’s net deferred tax position was as follows: Restated £m £m
Net deferred tax position at 1 January 26 (14) Credited to income for the year 4 – (Charged)/credited to equity (2) 24 Net liability transferred to a subsidiary company – 16
Deferred tax liabilities at 31 December 2005 – Charge to the income statement for the year –
Deferred tax assets at 31 December 2005 – 24 2 26 Charge to equity for the year – (2) – (2) Credited/(charged) to income for the year 5 – (1) 4
Deferred tax assets at 31 December 2006 5 22 1 28
The following transactions were carried out with related parties: Provision of services and benefits Royal & Sun Alliance Insurance Group plc provides services and benefits to its subsidiary companies operating within the UK and overseas as follows: • Provision of technical support in relation to risk management, information technology and reinsurance services. Services are charged for annually on a cost plus basis, allowing for a margin of 5% (2005: 5%),
• Issue of share options and share awards to employees of subsidiaries. Costs are charged for annually based on the underlying value of the awards granted calculated in accordance with the guidance set out within IFRS 2.
Payable to related parties: Payable to subsidiaries, interest bearing loans 427 369 Payable to subsidiaries, non interest bearing 113 105
10. Share based payments Full details of share based payment plans are provided in note 27 to the consolidated financial statements.
Investor Relations For further information about Royal & SunAlliance, please contact the Investor Relations department at: Royal & Sun Alliance Insurance Group plc, 9th Floor, 1 Plantation Place, 30 Fenchurch Street, London EC3M 3BD. Telephone: +44 (0)20 7111 7136.
Annual General Meeting Ordinary shareholders are invited to attend the Company’s Annual General Meeting (AGM), which will be held in The Queen Elizabeth II Conference Centre, Broad Sanctuary, Westminster, London SW1P 3EE at 11.00am on Monday, 21 May 2007. Ordinary shareholders who are unable to attend the AGM to ask a question in person may write to the Company Secretary’s department at the registered office at the address above.
Share dealing Shares can be bought or sold through a stockbroker, bank or building society. The rates of commission charged for share dealing services will vary depending on the kind of service required. The cheapest way to deal in shares is usually on an ‘execution only’ basis which means that a broker will act on their client’s instructions to buy or sell, but will not give advice on the merits of the transaction.
The Company has established an execution only sharedealing service with Lloyds TSB Registrars for existing shareholders with a UK registered address. Shares can be bought or sold within minutes, between the hours of 8.30am and 4.30pm (UK time), Monday to Friday. To deal, log on to www.shareview.co.uk/dealing or telephone +44 (0)870 850 0852. Shareholders will need to have their share certificate(s) to hand when dealing.
■ Pension funds 25% ■ Life 14% ■ Unit Trusts/Mutual Funds 35% ■ Private/Retail 13% ■ Others 13%
ShareGift The purpose of ShareGift is to make it easy for shareholders to donate any number of shares to charity. The service can be particularly useful for shareholders with a small number of shares, which would be uneconomic to sell. Shares donated through ShareGift are transferred into the name of The Orr Mackintosh Foundation, registered charity number 1052686. ShareGift’s purpose is to realise as much value as possible by collecting shares, selling them and using the proceeds to make donations to a wide range of UK charities. Further details can be obtained from: The Orr Mackintosh Foundation, 46 Grosvenor Street, London W1K 3HN. Telephone: +44 (0)20 7828 1151. The website address is www.sharegift.org.
The Unclaimed Assets Register Royal & SunAlliance supplies unclaimed dividend data to The Unclaimed Assets Register (UAR), which provides investors who have lost track of shareholdings with the opportunity to search the UAR’s database of unclaimed financial assets on payment of a small, fixed fee. The UAR donates part of the search fee to charity. Further details can be obtained from: The Unclaimed Assets Register, Bain House, 16 Connaught Place, London W2 2ES. Telephone: +44 (0)870 241 1713. The website address is www.uar.co.uk.
Registrar Lloyds TSB Registrars, The Causeway, Worthing, West Sussex BN99 6DA. The shareholder helpline telephone number is +44 (0)870 600 3988. Overseas callers should use +44 (0)121 415 7064. Shareholders with a text phone facility should use +44 (0)870 600 3950.
The Company has appointed Lloyds TSB Registrars as its registrar to manage the shareholder register, to ensure that all information held about the Company’s shareholders is kept up to date and to pay dividends.
Announcement of the full year results for 2006, the ordinary final dividend for 2006 and the first preference dividend for 2007
Payment date for the ordinary final dividend for 2006 (subject to shareholder approval at the AGM)
A range of shareholder information is available on line at www.shareview.co.uk, including practical help on transferring shares or updating details. Shareholders can also register for secure access to their portfolio, enabling them to check holdings and register their email address to receive shareholder information and the Annual Report & Accounts electronically. At present, the portfolio service is free.
Q What should I do if I change my name? A To ensure that your shareholding is registered in your new name, please write to Lloyds TSB Registrars. You will need to enclose evidence of the change, for example, a copy of your marriage certificate or change of name deed (please do not send originals), together with your share certificate(s) and any uncashed dividend cheques. New documents will then be issued in the right name.
A You should inform Lloyds TSB Registrars immediately. They will send you a form of indemnity to complete and request payment of an administration fee. The form of indemnity is required to protect the Company from the potential misuse of the missing share certificate, so must be returned before a new share certificate can be issued.
Please remember that your share certificate is a valuable document which should be kept in a safe place.
Q I have lost my dividend tax voucher – how can I get another one?
A To get a replacement, you will need to contact Lloyds TSB Registrars. A small fee will be payable for this service.
Q I have found an out of date dividend cheque – how can I cash it?
A Please send the out of date cheque to Lloyds TSB Registrars, with a request that they issue a replacement cheque. There will be a small administration charge for issuing replacement dividend cheques for larger payments.
A Please register at www.shareview.co.uk and create your own portfolio. You will need your shareholder account number (on your share certificate(s) or dividend tax voucher) to access this service.
Q How can I get my dividends paid directly into my bank or building society account?
Directors photography by Homer Sykes; Getty Images – pages 11 and 16; Sam Robinson – page 12; R&SA – pages 10, 14 and 24.
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