Visit www.rsagroup.com for more information. This Annual Report and Accounts contains forward looking statements as defined in the US Private Securities Litigation Reform Act of 1995. For a discussion of factors that could affect future results, reference should be made to the ‘Important disclaimer’ on page 128. Pages 1 to 31 constitute the business review of RSA and are incorporated by reference into the directors’ report set out on pages 37 to 39. The directors’ report has been drawn up and presented in accordance with, and in reliance upon applicable English Company Law and the liabilities of the directors in connection with that report shall be subject to the limitations and restrictions provided by such law.
Combined operating ratio (COR): The ratio of claim costs and expenses (including commission) to premiums
In Ireland, we are focused on the broker channel and are the leading provider of household insurance.
Our Italian business distributes the majority of its products through non tied agents, with a network focused in northern Italy.
UK Emerging Markets We are the UK’s largest Commercial and third largest Personal lines insurer.
Emerging Markets is our fastest growing region, covering 20 markets with high growth potential.
Our Commercial business writes property, motor liability and marine insurance. Property is the largest segment, accounting for over 39% of premiums. The business has a strong reputation for technical excellence. It insures around 80% of FTSE 100 retailers and is one of the leading carriers of professional & financial and marine risks outside Lloyd’s of London.
Latin America accounts for 57% of Emerging Markets’ premiums. Our largest operations are based in Chile, where we are the market leader, Brazil and Mexico. We are also the largest private insurer in Uruguay.
Our Central and Eastern European joint venture owns Link4, the leading direct insurer in Poland. We established a similar operation in the Czech Republic in 2007 and plan to launch in Russia in 2008.
In my Statement last year I referred to our Company as having a quality set of businesses, led by strong and effective management. This made our Company well able in relative terms, to face with confidence world market uncertainties. I also spoke of our plans to both improve and grow profitably our portfolio of businesses and enhance our leadership position in the markets in which we choose to operate. The financial results we have achieved in 2007 have fully lived up to those expectations, and include: Growth in net written premiums of 6% A strong investment result An improvement in operating results A significant increase in post tax profits Growth in shareholders’ funds and balance sheet strength An improvement in credit rating to a full A grade.
Our confidence in our performance has led the Remuneration Committee and Board to increase the target range of expected ROE performance for LTIP awards by two percentage points. We believe this increase is an appropriate target that compares favourably with our peers. It equally importantly provides a strong alignment between management reward and shareholder return.
2007 has been a good year for the Group and in challenging market conditions, we have again delivered a strong performance. The results have been achieved against the backdrop of a competitive rate environment, adverse large losses and weather, including the UK floods, and volatile investment markets. The results clearly demonstrate the benefit of our strong and diversified portfolio and our tight operational and financial management.
Our results clearly demonstrate the strength of the Group. All our regions – International, Emerging Markets and the UK – have achieved profitable growth and strong bottom line results. International and Emerging Markets delivered over 50% of the Group’s premiums and during 2007, we completed the buyout of the Codan minorities and are delighted to have this business under our full ownership.
In 2007 we increased net written premiums by 6% to £5.8bn, with growth across all three regions coming from both organic initiatives and our bolt on acquisitions. International grew ahead of the market, Emerging Markets delivered double digit growth and, in the UK, we targeted profitable growth in Personal and Commercial specialty lines.
The underwriting result was £278m and was after the UK flood losses of £120m, as well as adverse weather and large loss experience across the Group. The combined operating ratio (COR) for the Group was 94.9%, which included 2.1% for the flood losses. The operating result increased by 4% to £814m and benefited from the strong underwriting result and a 13% increase in the investment result to
Profit after tax rose significantly to £628m, benefiting from one of the early actions taken post the Codan minority buyout.
In Other Europe, Ireland continues to perform strongly, driven by EGI, our specialty motor insurer and in Italy premiums were up by 14% as we expanded our agent network.
UK The UK remains our most competitive market but we continue to target profitable growth in Personal and Commercial lines. We continued to take a disciplined approach to risk selection and rating, and premiums were up 3% to £2.7bn. In terms of underwriting, the UK delivered a profit of £65m and a COR of 97.6%, even after the impact of the floods.
In Personal, premiums were up 27% to £1.1bn. MORE TH>N® had another strong year with premiums up 8% and new business up 10%. We have made excellent progress on customer focused initiatives and over 170,000 customers signed up to our new Personal Customer Manager service. We’re delivering on our plans to significantly grow our Affinity business. Premiums were up 18% and we won five new deals in the year worth around £50m.
In 2007, premiums were up 16% (19% on constant exchange) to £615m reflecting strong growth across all markets. The underwriting result increased 64% to £18m and the COR was 2 points better at 95.3%.
The rating environment in 2007 has remained mixed by business class and region. As a Group we benefited from our broad portfolio which gave us a balance of exposure to different markets at different points in the cycle. In the UK, we’ve been consistent in our strategy and actions, putting rate through where required in both Personal and Commercial lines. We expect a similar picture in 2008 with a mixed rating environment by region and class.
The flooding events in the summer meant that the Government’s management and funding of flood defences was pushed right to the top of the political agenda. The Government was criticised by the Association of British Insurers and other industry players for allocating less funding for flood defences in the Pre Budget Review than the industry had asked for. The industry has continued to push for increased spending on flood defences and more responsible planning decisions in response to the Environment, Food and Rural Affairs Select Committee Enquiry on Flooding and the Pitt Review on Lessons Learned from the 2007 floods.
In the EU, the main focus was the appearance of the Commission’s proposal for a Solvency II Directive on capital requirements for insurance companies. The Directive is intended to replace outdated European insurance legislation with a consolidated set of requirements for supervision, capital, risk management and reporting. It should help improve the effectiveness of supervision of insurance groups by helping to transfer best practice and skills between supervisors. The Commission’s proposal will be debated and amended by the European Parliament and Council of Ministers during 2008. RSA is very supportive of the Commission’s proposal and has been lobbying to that effect through the Association of British Insurers and the Treasury and also directly with policymakers in Brussels.
Finally, in Eastern Europe, we are building good momentum through our joint venture. We are the leading direct writer in Poland, have launched in the Czech Republic, and plan to open in Russia in 2008.
While 2007 was a strong year, our goal is to deliver sustainable profitable performance over the long term, and that is what we have achieved over the last four years with combineds in the mid 90’s. This sustained performance reflects our strong and diversified portfolio and is underpinned by our tight operational and financial management.
On rate, we put through increases across the board in Scandinavia. In Canada, we increased rate in Household by 5%, while Personal Motor was flat throughout the year. We received approval for small net increases in Ontario Motor and will be making further rate filings during 2008. Canadian Commercial lines remained competitive and rates overall were down. However, this is against the backdrop of significant increases over the last few years and it remains a profitable market.
In the UK, we have been consistent in our strategy and in our actions and have continued to put rate through the book where required. In Personal, we put rates up by mid single digits as we have done consistently over the last five years. In Commercial, we increased rates in Property by 3% and in Motor by 8%. Liability was down 1% but this compares to a 9% reduction at the same time in 2006.
On expenses, we continue to take action to improve our efficiency and performance. We have met our original £130m expense savings target ahead of schedule and are on track to deliver an additional £70m of savings by the middle of 2008.
In terms of building and expanding our capabilities, we have taken a number of actions
Our underwriting and claims skills are market leading and provide a genuine source of competitive advantage. We launched our Technical Academy in 2006 to develop the next generation of talent and this year we added a global technical graduate programme that aims to attract high calibre new entrants into the industry.
Finally, we have made real progress on employee engagement and our annual global employee survey showed further improvements this year with the overall satisfaction response up 2%. Listening to our employees’ feedback and acting on it is a key part of our culture. That is why the work that has been undertaken on our brand has been shaped by significant input from more than 600 employees from across the Group.
We are confident that each region will continue to deliver strong results and we expect International to again deliver the majority of the Group’s underwriting result in 2008, led by a strong Scandinavian performance.
Our strategy is based on delivering our strategic priorities of: • Strong annual earnings • Targeted profitable growth • Driving operational excellence
We are building for the future through our Technical Academy, Executive Development Programme, Leadership Development Programme and FastTrack, our programme for high potential early career candidates. More recently, we launched the Operational Development Programme to develop expertise and strong careers in operations, with the aim of creating processes and systems that will become another source of competitive advantage.
Strong combined operating ratio delivered in challenging conditions In 2007, the Group delivered another strong profitable performance, demonstrating the resilience of our earnings. This result reflects the strength and diversity of our portfolio, the actions we have taken on rate and expenses, as well as our prudent reinsurance programme and investment policy.
We continue to focus on operational excellence and deliver on our expense savings targets Our technical skills are market leading and a source of real competitive advantage. We will continue to invest in these skills and in the next generation through our Technical Academy and global development programmes We continue to attract top talent from both inside and outside the insurance industry. We have instilled a strong performance culture, with over 90% of our employees having their pay linked to their performance
Opportunities for profitable growth across the portfolio Our overriding focus remains on maintaining underwriting discipline and taking the right action on rate. International will continue to drive profitable above market growth by expanding distribution and using a segmented approach to target profitable niches. In the UK, the focus will remain on maintaining discipline and targeting profitable growth. Emerging Markets will continue to leverage Group best practice to drive strong double digit growth.
We delivered our target of £40m of annualised expense savings one year ahead of schedule, and have committed to delivering a further £20m in savings by mid 2008.
Scandinavia Scandinavia is a significant component of the International portfolio and 24% of the RSA Group. Codan and Trygg-Hansa hold the number three positions in Denmark and Sweden respectively, and we have recently increased our presence in Norway and expanded into Finland. In 2007, Scandinavia delivered above market growth of 8% and improved the COR by 2.3 points to 91.4%.
In 2007, we launched a Global Renewable Energy business, bringing together over 300 engineers and renewable energy underwriters.
Through our global network of offices we service some of the most prominent players in the renewable sector, including technology manufacturers, utility companies, financiers and developers.
Personal delivered a 10% increase in net written premiums, reflecting the strong performance of WLI, our 2006 acquisition as well as continued double digit growth in the bancassurance and car dealership channels. Our car dealership channel gives us access to 30% of the Swedish and Danish car markets, and this year we have increased premiums by over 90%. Our internet channel is a market leading provider in Scandinavia, and increased premiums by 47% during the year.
Personal Broker grew 10% in 2007, with both Travel and Property contributing significantly. During the year we further strengthened the broker distribution channel with the addition of 43 new brokers. Personal Broker also benefits from the agreement with AIR MILES®.
Commercial net written premiums were flat at £183m (4% on constant exchange), reflecting a disciplined approach in increasingly competitive market conditions. The COR improved by 3.7 points to 90.3% and the underwriting result improved by 125%. With a focus on operational excellence, we have driven further efficiencies by investing in our technology platform, with 90% of our SME portfolio now being quoted online.
Other Europe Other Europe comprises our operations in Ireland and Italy and continues to deliver strong above market growth with premiums up 10%. The COR improved by 3.7 points to 89.1% and the underwriting result increased by 43% to £40m. Ireland delivered another strong performance, with growth driven by EGI, the specialty lines insurer acquired in 2006.
Net written premium growth of 8% and a COR of 91.3% Net written premium growth exceeds market growth in both countries Net written premium growth 11% on constant exchange Achieved mid 2007, new target of a further £20m announced Scandinavian expense ratio 15.3% Canadian Intermediated expense ratio 10.5%
The UK has delivered another strong performance in a competitive market. The underwriting result of £65m includes the £120m impact of the UK floods and other adverse weather and demonstrates continued profitability in challenging conditions.
In Commercial, we are focusing on specialist segments and leveraging our technical expertise to develop innovative risk solutions, deliver profitable growth and manage retention in our target markets.
We achieved our target of £70m of annualised expense savings one year ahead of schedule, and have committed to delivering a further £50m of savings by mid 2008. We are targeting a sub 15% expense ratio for the UK business, and sub 20% expense ratio for MORE TH>N®.
We have continued to take action on rate, and retention remains strong at over 80%. The 2007 expense ratio is 17.5%, down from 18.1% in 2006, and MORE TH>N® delivered its target, with an expense ratio of 19.8%.
Commercial In Commercial, net written premiums were down 9% to £1,614m (2006: £1,770m) reflecting our commitment to underwriting discipline and selective capacity withdrawal. The Commercial COR was 95.9%.
RSA experts were quickly on the scene, working alongside SFIL to control the scale of the loss. Our work supported the cashflow of the business, secured the 600 jobs and minimised the business interruption suffered. Production resumed in July, just weeks after the water receded. Our proactive stance in understanding management priorities, our flexible approach and our speed in settling the claim, significantly reduced the scale of the final loss.
MORE TH>N® had another very strong year with an 8% increase in net written premiums to £475m, new business sales up 10% and a 7% increase in average motor premiums.
Affinity continues its good momentum. In 2007, we signed five new deals which will bring an additional £50m in premiums at full run rate. With 23% growth in Affinity since 2005, we are on track to deliver our target of increasing this business by 50% by 2010.
Our technical skills are market leading and a real source of competitive advantage. During 2007 our Underwriting and Geographical Assessment teams were awarded the Insurance Times ‘Training Programme of the Year’ Award for their underwriting excellence and training programme. The programme has also been accredited by the Chartered Insurance Institute.
The UK is the Group’s most competitive market and we anticipate similar conditions in 2008.
‘ We will continue to implement our rate plans and focus on driving growth in profitable segments.’
opportunities for insurers with strong customer propositions and efficient broker servicing models.
The Personal market remains competitive, and is evolving with an increase in aggregator websites. Aggregators are an increasing source of business for us, and require stringent underwriting, high brand recognition and a strict risk appetite. We externally benchmark the quality of our underwriting and are using our PCM’s to build relationships with our aggregator customers to increase retention.
We are committed to maintaining underwriting discipline and rigorous risk selection to deliver sustainable profitable performance. We will continue to implement our rate plans and focus on driving growth in profitable segments.
Emerging Markets has operations in 20 countries across Latin America, Asia and the Middle East, the Baltics and Central and Eastern Europe. We are the number one insurer in Chile and in the Baltics, a leading international insurer in the Middle East, and through our joint venture Link4, the leading direct insurer in Poland.
We are focused on delivering profitable growth through expanding distribution, disciplined underwriting and improving operational performance. Our strategy is to focus on markets where we can establish a meaningful market presence, either in overall market share or in segments where we have a competitive advantage. We are committed to close cooperation across the region to develop customer solutions which can be replicated in our territories cost effectively.
During 2007, we established a platform to accelerate future growth. Significant capability has been added across the region with new CEOs appointed in seven countries. More than 20 senior technical staff have moved from RSA’s established businesses into Emerging Markets to continue our focus on leveraging Group best practice in underwriting discipline and operational excellence.
Centres of underwriting excellence have been established in major markets and provide technical expertise to assist our smaller operations underwrite complex risks. In Asia and the Middle East, we have focused on building expertise in Construction and Engineering (C&E), and have recruited market leading capability in the hubs of Hong Kong, Singapore and the Middle East. This initiative has already delivered 51% growth in C&E gross written premiums across the region this year.
We see personal insurance sold through affinity partners such as mobile phone providers and utilities as a major opportunity to satisfy a need for basic insurance products. We focused development activity in Latin America in 2007 and these propositions will be rolled out in Asia and the Middle East in 2008, building on the region’s competence with established affinity partners.
The 2007 results clearly demonstrate the success of these strategies, with 19% premium growth on constant exchange, a 64% increase in underwriting result to £18m and a 2 point improvement in the COR to 95.3%.
the Baltics The Baltics again performed strongly, delivering premium growth of 35% driven by positive economic conditions. Our Lithuanian business increased its share of the market by 3% to 37% and we launched our operation in Estonia in November. The improvement in the COR from 92.2% to 89.6% demonstrates the results of our operational excellence programmes on automatic renewals, pricing and claims.
asia and the middle east Asia and the Middle East continued to perform strongly with 15% premium growth on constant exchange, driven by strong Motor performance in the UAE, and a COR of 88.8%. We were named ‘Insurer of the Year’ in the UAE and received positive coverage of our response to Cyclone Gonu in Oman. In China, we were the first European insurer to receive a subsidiary licence. This allows us to accelerate our expansion strategy, and subject to regulatory approval, we aim to open 11 branches by 2011, giving us access to 45% of the Chinese insurance market.
Joint ventures Both our major joint ventures made good progress during 2007. India continued to deliver double digit growth and we have appointed a new CEO and continue to focus on accelerating the growth of this business. Our joint venture in Central and Eastern Europe employs a direct model in an intermediated world. It owns Link4, the leading direct writer in Poland, and in May successfully launched a similar operation in the Czech Republic. In 2007, Link4 grew premiums by 38% to £47m, well ahead of the market. We look to build on this experience as we roll out our direct proposition in Russia in 2008.
Strong GDP growth and low insurance penetration continue to present exciting market opportunities, and at the same time, attract new entrants and bring increased competition.
Double size of Emerging Markets by 2010: 15% growth p.a. Latin America COR sub 100% by end 2007
Net written premium growth 19% on constant exchange Latin America COR 98.7%
In challenging market conditions, the Group has again delivered a strong result. In 2007, we delivered profitable growth in each of our regions and achieved a strong bottom line performance. The results have been delivered against the backdrop of a competitive rating environment, adverse large losses and weather, including the UK floods, and volatile investment markets. Our continued delivery of strong results clearly demonstrates the benefit of the strong and diversified portfolio and our tight financial management.
The operating result is £814m (2006: £780m), with an improved investment result offset by the lower underwriting result.
Operating result(2) 814 780 4 Interest, amortisation and reorganisation costs (122) (130) 6 Loss on disposals (22) (1) –
Profit after tax from continuing operations 641 479 34 Loss after tax from discontinued operations (13) (499) 97 Profit/(loss) after tax 628 (20) –
(1) The result is shown on a management basis. The result on a statutory basis is shown on page 58. (2) A reconciliation between operating result on a management basis and results of operating activities on a statutory basis is shown on pages 84 to 85. The key components of the operating result are described on page 84.
As in 2006, the prior year underwriting profit has been particularly strong and totalled £348m in 2007. This reflects a continuation of the trend seen in the first six months of the year with strong positive emergence from our UK specialist claims unit, as well as the cumulative impact of actions taken to reduce claims leakage in Other Europe. This compares with a prior year underwriting profit of £131m in 2006, which as reported, was after £164m of reserve strengthening for Scandinavian PA and UK asbestos reserves. The Group continues to adopt a prudent reserving policy for both current year and overall reserves, and reserves at 31 December 2007 were stronger than at the start of the year, with particular strength in International.
investment result The Group maintains a low risk asset strategy with the portfolio dominated by high quality fixed income and cash assets. During 2007, we undertook a number of actions to enhance the defensive position of the portfolio, including selling a net £220m of equities in the second and fourth quarters, reducing our limited CDO exposure through selective disposals and extending bond duration to improve liability matching and lock in higher yields.
The quality of our portfolio and the benefit of these management actions are clearly demonstrated in the strength of our investment result. The 2007 investment result is up 13% to £629m, and reflects increased investment income as well as a 45% increase in total gains. The increase in total gains has driven the investment result ahead of our 2007 guidance and follows action taken to reduce equity exposure.
Investment income is up 15% to £591m, reflecting an increase in bond and cash yields, with the average underlying yield on the portfolio increasing from 4% to 4.4%. Investment income also includes £26m on the funds withheld account on the Adverse Development Cover provided to Arrowpoint Capital, which is included in the 2007 consolidated accounts for the first time. This is offset by £28m of discount unwind on the related liabilities, which is included in the total unwind of discount of £81m.
Total gains were £119m (2006: £82m). Within this, realised gains total £174m, reflecting gains on equity sales of £185m, offset by losses on bond disposals.
Unrealised losses total £55m and predominantly comprise the mark to market movement in the commercial property portfolio of £42m. This compares with a £42m increase in 2006 and represents a 9.4% fall in the portfolio value, which is broadly in line with the fall in the IPD index of 10%. Unrealised losses also includes charges for vacant investment property costs of £8m, impairments of £3m and other market movements of £5m offset by a £3m gain on exchange.
In 2008, total gains are expected to be in line with the 2006 total of £82m.
Other activities Other activities of £93m are £7m higher than in 2006, which reflects a 19% reduction in central expenses to £60m (2006: £74m), offset by the movement in other operating activities. Other operating activities include net gains on non insurance derivatives which benefited from a £12m gain in 2006, other non insurance activities, share of results of associates, and other costs principally relating to business development in Emerging Markets.
With the completion of the Group’s operational improvement programme in 2006, no reorganisation costs have been charged to the income statement in 2007 (2006: £23m).
Loss on disposals are £22m and include a £13m loss on the disposal of Venezuela and a £6m loss on the disposal of the UK Guildhall legacy book. The loss on Venezuela comprises a £5m loss on the net assets of the Company and £8m of foreign exchange, which is recycled from reserves and does not impact Group net assets. The disposal of Guildhall removes £58m of mostly asbestos and environmental liabilities from our balance sheet. We received £32m consideration for net assets of £30m, and after the unwind of the discount of the reserves of £8m, this resulted in a loss of £6m.
Financial review continued analysis of investment result – management basis 24 | rsa | Annual Report and Accounts 2007
The underlying return on equity remains very strong at 21.3% for the year.
The Group’s operating cashflow was £652m in 2007, a decrease of 23% on 2006 which reflects the impact of the UK floods as well as adverse weather and large loss experience across the Group. The £22m increase in the dividend to minorities to £31m, reflects the minorities’ share of an exceptional dividend paid by the Group’s non-wholly owned UK subsidiary British Aviation Insurance Company. The issued share capital of £304m and £223m net movement in debt both primarily relate to the Codan minority buyout. Corporate activity of £888m includes the buyout of the Codan minorities of £590m, the disposal of the US operation and a number of acquisitions in International and Emerging Markets.
The 2006 cashflow has been reanalysed to show tax paid and issue of share capital separately and to reclassify a £78m investment sale from operating cashflow to sale of other investments.
Our balance sheet and capital position are strong. In 2007, Group shareholders’ funds increased by 20%, to £3.1bn (2006: £2.6bn) primarily reflecting the strong retained profits for the year.
The Group has no holdings in monoline insurers and no exposure to credit insured bonds, US municipal bonds or US subprime Residential Mortgage Backed Securities. The Group’s CDO exposure was £130m at the year end and comprised over £115m of CLOs, which have experienced no downgrades. Since year end, we have disposed of £27m of CDOs.
At the year end, equities (excluding preference shares and Collective Investment Vehicles backed by fixed income and cash assets) comprised 8% of the portfolio compared with 10% in 2006. Although the size of the equity portfolio has been reduced, we have maintained our equity protection strategy, covering up to £800m of our portfolio. These derivatives are a rolling programme of put and call options, with the quantum and strike levels of coverage adjusted quarterly. Since year end, we have taken out an additional £50m of protection on our European equities.
Debt and fixed income securities 9,581 8,568 Cash and cash equivalents 1,509 1,831 Equity securities 1,487 1,620 Investment property 429 454 Other 272 269 total financial assets 13,278 12,742 investment portfolio – management basis
Our tight management of the business, including our relentless action on rate and expenses, conservative reinsurance approach and low risk investment strategy ensured that the Group was well positioned to manage 2007’s competitive rating environment, adverse weather losses, including the UK floods and volatile investment markets.
We remain confident of the Group continuing to deliver sustainable profitable performance, and this is reflected in the 10% increase in the 2007 final dividend and our expectation of delivering a COR of around 95% in 2008.
The Group operates under an enterprise risk management framework that is designed to identify, assess, measure and manage exposure to risk including environmental, social and governance matters. This process is subject to continuous review and development and further work was undertaken in 2007 to enhance the framework.
The Group views risks according to the categories outlined below. Additional information is provided in the risk management section of the financial statements. Details of some of the key current practices, tools and other arrangements for each risk category are set out below.
The Group’s general insurance activities are primarily concerned with the pricing, acceptance and management of risks arising from our contracts with customers. The management of the underwriting and claims risks uses a number of key tools, including the review of the performance and management of all the individual insurance portfolios throughout the Group, and the investigation of potential emerging insurance risks.
The Group’s reinsurance strategy and appetite are set and agreed by the Board 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 reinsurance team monitors and controls reinsurance activity throughout the Group and has responsibility for the purchase of the Group’s worldwide programme of treaties. All major treaty purchases are analysed using various sophisticated modelling tools to ensure that the level of cover purchased is capital efficient and aligned with Group risk appetite and strategy.
2. insurance risks are accepted outside the group’s risk appetite or below technical price The Group has strict underwriting limits in place to ensure that risk selection is within the Group’s risk appetite. The Group’s underwriters are licensed to only write risks within specified limits, based on the experience of each individual underwriter.
Audits of business won and lost ensure that risks accepted are priced to achieve target returns and that underwriting discipline is maintained.
3. adverse loss experience through catastrophic losses arising from an insurance event or series of events, increasing frequency and severity of large losses or deterioration in long tail reserves The Group’s underwriting strategy is set centrally using risk aggregation models and limits to ensure that risks written are well diversified and are within the Group’s risk appetite.
Portfolio reviews monitor underwriting performance, ensuring that risks accepted are within the Group’s risk appetite and priced to achieve target returns. Emerging trends in large losses, frequency and severity are flagged and investigated.
In addition, the Group maintains a conservative reserving policy and claims reserves are set with the aim that, over the longer term, they will be more likely than not to result in positive prior year development.
The investment portfolio is routinely monitored to ensure compliance with counterparty concentration and credit limits and that all exposures are within the Group’s risk appetite.
The prudent nature of the Group’s investment strategy has been evidenced by the resilience of the portfolio during 2007. In spite of market turbulence, the portfolio performed strongly and did not experience any material impairments.
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Our approach to corporate responsibility is based on our Business Principles, which underpin everything we do and outline how we interact with stakeholders, both as a company and as individuals. These principles link to our Group policies and form part of our broader risk and governance framework which, together with our latest Corporate Responsibility Report can be found at www.rsagroup.com.
Customers As an insurer, we play a vital role in helping people recover and getting their lives back on track. This was demonstrated by our response to weather related events during 2007, including Cyclone Gonu in Oman and the summer flooding in the UK. In response to the UK floods, we were one of the first insurers on the ground, providing emergency payments and alternative accommodation, proactively contacting our customers within 48 hours.
responsible investment Our UK assets continue to be managed by F&C Asset Management who apply their responsible engagement overlay across our equity portfolios to encourage companies to manage social, ethical and environmental risks. We receive regular feedback on the companies in which F&C Asset Management have invested in on our behalf.
employees A sustainable business needs to attract, develop and reward talented people, as well as giving people responsibility and making them accountable for their actions. At RSA we are continuing to build and enhance our high performance culture. This year we have continued to focus on the ongoing development of our employees throughout our businesses and at all levels. Some of the major initiatives we focused on in 2007 were: The launch of our Technical Academy global graduate programme in our core disciplines of claims, actuarial and underwriting
Water (m3) Waste (tonnes) Paper (tonnes(1)) Energy (MWh) CO2 (tonnes(2, 3))
Our Executive Development Programme is now in its fourth year, focusing on key strategic projects The FastTrack programme is a two year development programme for high potential early career candidates. We plan to continue the programme in 2008 with another 45 participants.
Scores recorded in our annual global employee survey continued to improve, with overall satisfaction improving by 2%. A key part of this survey is using the feedback we get from employees as a means of generating ideas and actions to make operational improvements in all our businesses. We turn the results into clear action plans. Last year we also started to run ‘World Café’ engagement events across the Group. These events have played a key part in developing the new RSA brand and beliefs and empowering regional businesses to play their role in making major improvements to the business.
environment During 2007 we have been focusing on integrating environmental management and our climate change strategy throughout our business.
as an insurer: We are committed to engaging in the climate change debate and work closely with forums such as the United Nations, FORGE group and ‘We’re in this Together’ initiative We remain vocal in the UK on key environmental issues and continue to lobby on increased funding for flood defences and action on climate change Our technology to assess risk for customers is constantly improving and evolving through applications such as Eurotempest and our Flood Risk Assessment tool We aim to make it more affordable for customers to make environmental choices though products and services such as our commercial energy surveys, discounted insurance for hybrid cars and fuel efficient vehicles.
Community Over the last few years we have been developing a more targeted and proactive community engagement programme. As a Group, we are focusing on three main areas that are relevant to our business and our interaction with local communities. These are safety, social inclusion and the environment.
environmental targets 2008 % reduction energy UK (electricity) 10 Ireland 10 Canada 5 Waste UK 10 Denmark (paper) 5 Ireland (paper) 10 CO2
Group 2.5 UK 5 Ireland (travel) 5 travel (air) UK 5 Sweden 1 Denmark 1 Ireland 10 Canada 10(1) travel (Car) Sweden 5 Denmark 2 Paper Sweden 5 Denmark 5 note All Canadian targets refer to RSA Canada only (1) Canadian air target for international air travel with 5%
targets for 2008 We met 79% of our 2007 environmental targets. For full details of the progress please see the full Corporate Responsibility Report.
The following targets are for completion by the end of 2008, set against a 2006 baseline.
andy haste group Chief executive Andy was appointed Group Chief Executive in April 2003, following previous roles as Chief Executive of AXA Sun Life plc and Director of AXA UK plc (life and pensions). He is the former President and Chief Executive Officer of Global Consumer Finance Europe at GE Capital UK, Western Europe and Eastern Europe (financial services), and is the former President of National Westminster Bank’s US Consumer Credit Business.
mark Chambers general Counsel and group Company secretary Mark was appointed General Counsel and Group Company Secretary in October 2004. He was previously head of the legal team at American Express for EMEA. Before that he worked for GE, holding a number of senior positions with the consumer finance and insurance businesses. Earlier in his career, Mark worked for the international law firm Slaughter and May in London and New York. Mark is a non-executive director of the University of Westminster.
Orlagh hunt group human resources Director Orlagh joined the Group as HR Director for International in September 2003 and was appointed Group Human Resources Director in October 2006. She was previously Head of Human Resources for AXA Sun Life plc and has previously worked at Walkers and Tesco in a variety of HR management roles.
Bridget mcintyre Uk Chief executive Bridget joined as UK CEO at RSA in November 2005. Previously, Bridget worked for Norwich Union for 13 years in roles including Finance Director of the general insurance business, Managing Director of London & Edinburgh, Finance Director of UK Long Term Savings and, most recently, Sales, Marketing & Underwriting Director of Norwich Union’s general insurance business. As a qualified Chartered Management Accountant, in her earlier career Bridget worked at Volvo UK, HarperCollins, Marconi Radar Systems and Willis Faber.
exeCUtive team 32 | rsa | Annual Report and Accounts 2007
andy haste Age 46. 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).
simon Lee Age 47. Director of the Group from January 2007 having been Chief Executive of the International business since April 2003. Former Chief Executive, Natwest Offshore and Head of US Retail Banking at National Westminster Group.
malcolm Le may Age 50. Director of the Group from March 2004 and Chairman of the Investment Committee. President Europe JER Partners Limited (Europe) (property investment). Non-Executive Director of Pendragon plc. Former Deputy Chief Executive Morley Fund Management (Investment Fund Manager). Former Deputy CEO of ING-Barings (finance).
John maxwell Age 63. 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). Director of the Royal Automobile Club Limited. Director of London Finance and Investment Group plc. 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.
Member of the Group Audit Committee Executive director Member of the Investment Committee Member of the Nomination Committee Member of the Remuneration Committee 34 | rsa | Annual Report and Accounts 2007
Financial statements 57 Independent auditors’ report to the members of Royal & Sun Alliance Insurance Group plc 58 Consolidated income statement 59 Consolidated statement of recognised income and expense 60 Consolidated balance sheet 61 Consolidated cashflow statement 62 Significant accounting policies 70 Estimation techniques, uncertainties and contingencies 73 Risk management 84 Notes to the financial statements 118 Independent auditors’ report to the members of Royal & Sun Alliance Insurance Group plc 119 Parent Company balance sheet 120 Statement of changes in equity of the Parent Company 121 Parent Company cashflow statement 122 Notes to the separate financial statements
Other information 125 Shareholder information 127 Financial calendar 36 | RSA | Annual Report and Accounts 2007
Principal activity The Company is the holding company of the RSA group of companies (the ‘Group’) whose principal activity is the transaction of personal and commercial general insurance business. The Group writes business in over 130 countries.
Business review The Company is required by the Companies Act to include a business review in this report. The information that fulfils the requirements of the business review can be found within the Group CEO’s review on pages 6 to 10, the Group strategy on pages 11 to 13 and the regional business reviews on pages 14 to 22 which are incorporated in this report by reference. An overview of the Group’s business performance during the year along with an analysis of its financial position is set out in the financial review on pages 23 to 26. The future developments of the business can be found in the Group CEO’s review on pages 6 to 10 and in the regional business reviews on pages 14 to 22. The principal risks and uncertainties facing the Group are set out in the estimation techniques, uncertainties and contingencies on pages 70 to 72 and in the risk framework on pages 27 to 29.
Dividends The directors recommend a final dividend of 4.53p per ordinary share in respect of the year ended 31 December 2007 to be paid on 6 June 2008 to holders of ordinary shares on the register at the close of business on 7 March 2008, subject to shareholder approval. This, together with the interim dividend of 2.48p per ordinary share, will make a total dividend for the year of 7.01p per ordinary share.
In 2007 the Group entered the Where Women Want To Work Top 50 produced by The Times for the first time. We were one of only three insurers who made it on to the list.
During 2007 a new Graduate Programme was launched. In this first year it focused on technical roles within claims, underwriting and actuarial. The Graduate Programme is aimed at filling the talent pipeline within our technical roles to support the Group’s growth objectives. The programme is run as part of the Technical Academy.
Our fourth annual web based Global Employee Survey was run in 2007. 91% of eligible employees took the opportunity to contribute. Our aim is to consistently seek feedback on the environment we are creating as an employer and to work constructively towards our objective of becoming an employer of choice. Our intention is to continue to conduct an annual survey to ensure we have a current picture of employees’ views and to track year on year movement in particular areas of priority. In this way we measure how the culture of our business is changing. For example, in 2007 72% of staff felt that ‘My job provides the opportunity to learn new skills and develop new talents’, an increase of 2% on 2006. As in previous years, we have used the 2007 results to build a Groupwide action plan which requires every manager to identify and work on areas of particular importance to his or her team.
Our policy is to encourage employee share ownership. Employees from a number of our global businesses are encouraged to participate in Sharesave which is an Employee Sharesave Scheme (HM Revenue and Customs approved). This year 44% of UK based eligible employees participated while overseas the average take up rate was 28%, which was a significant increase on previous years.
Environmental programme Details of our environmental programme can be found on our website at www.rsagroup.com.
Directors’ report continued 38 | RSA | Annual Report and Accounts 2007
Details of the directors’ service contracts and terms of appointment, together with their interests in the Company’s shares are shown in the remuneration report on pages 45 to 56.
Details of directors’ powers are set out in the corporate governance report on page 40 and are incorporated into this report by reference.
Since 12 July 2006, the Company has granted an indemnity to each of the directors pursuant to the power conferred by Article 154. The indemnities granted constitute qualifying third party indemnity provisions (as defined by section 234 of the Companies Act 2006). The Board of Directors (the ‘Board’) believes that it promotes the success of the Company to provide this indemnity to its directors in order to ensure that the Group attracts and retains high calibre directors through competitive terms of employment in line with market standards.
Directors and officers of the Company and its subsidiaries also have the benefit of an insurance policy which provides suitable cover in respect of legal actions brought against the directors.
None of the directors had any interest in any other contract with the Company or any of its subsidiaries during 2007.
Change of name It is proposed that a resolution be put to the shareholders of the Company at the 2008 AGM that the name of the Company be changed to RSA Insurance Group plc.
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.
Going concern The directors have satisfied themselves that the Group has adequate resources to continue in operation for the foreseeable future having given consideration to the uncertainties and contingencies disclosed in the financial statements and have therefore prepared the financial statements on a going concern basis.
The business of the Company is managed by the directors, who may exercise all the power of the Company subject to the Articles of Association (the ‘Articles’), relevant law and any directions as may be given by the Company in general meeting by shareholder resolution. The directors may delegate any of their powers or discretions to committees.
Approval of the Group’s financial results and any significant changes to accounting practices or policies.
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.
Appointments to the Board The directors and the Company (by ordinary resolution) may appoint a person who is willing to be a director either to fill a casual vacancy or as an additional director. A director who is appointed by the directors shall retire at the following AGM and will put himself forward to be elected by the shareholders. In accordance with the Company’s Articles and the Combined Code, the directors submit themselves for reappointment at the first AGM after their appointment and for re-election every three years thereafter. There are no directors retiring by rotation at the 2008 AGM. The Company may (by ordinary resolution of which special notice has been given) remove any director before the expiration of his period of office.
Nomination Committee During the year the Nomination Committee was chaired by John Napier. The other member of the Committee was John Maxwell. Malcolm Le May was appointed to the Committee on 19 December 2007. The attendance record of directors during 2007 is shown in the table above. The Committee met four times during 2007.
The Nomination Committee’s principal duties are to review the structure, size and composition of the Board and to evaluate the directors’ skills, knowledge and experience. 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 Committee has access to external recruitment consultants in order to help fill any vacancies. The Committee considers the leadership needs and succession planning of the Board when making decisions on new appointments. Resolutions to re-appoint directors at the AGM are subject to the approval of the Board, taking into account the recommendations of the Nomination Committee.
Chairman and Chief Executive Officer (CEO) The roles of the Chairman and the Group CEO are separate, with responsibilities clearly divided between them. This separation of responsibilities is formalised in role statements which have been approved by the Board.
The Chairman is responsible for leading the Board, liaising as necessary with the Group CEO on developments between Board meetings and ensuring that both the Group CEO and his executive management team have appropriate objectives and that their performance against those objectives is 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.
Remuneration Details of the directors’ remuneration and the Group’s policies on remuneration are set out in the remuneration report on pages 45 to 56.
In preparing such financial statements the directors are required to: Select suitable accounting policies and apply them on a consistent basis using reasonable and prudent judgement
State whether or not applicable accounting standards have been followed and explain any material departures
State whether the Group financial statements have been prepared in accordance with IFRS
Corporate governance continued 42 | RSA | Annual Report and Accounts 2007
Group Audit Committee The GAC is chaired by Edward Lea who has been Chairman of the Committee since October 2003. The other members of the Committee are Noel Harwerth and John Maxwell. In 2007, the Committee met seven times. The attendance record of directors in 2007 is shown in the table on page 41. The Committee is comprised of independent non-executive directors who have recent and relevant financial experience. The Group CEO, Chief Financial Officer, Group Director, Enterprise Risk Management and the Group Director, Audit, Risk and Compliance are regular attendees. The Chairman and other members of executive management are also invited to attend from time to time. The outcomes of meetings are reported to the Board and the Board receives the minutes of all GAC meetings.
The GAC’s principal duties are as follows: To coordinate and have oversight of the Group’s financial reporting process
To provide assurance on the effectiveness of the Group’s risk management.
The Board has accepted the GAC’s recommendation that a resolution be put to the 2008 AGM for the reappointment of Deloitte & Touche LLP as external auditors.
It is the GAC’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.
Investment Committee The Investment Committee is chaired by Malcolm Le May, meets twice a year and comprises all of the non-executive directors, the Group CEO and the Chief Financial Officer. The Committee assists the Board in setting the Group’s investment strategy and monitors the execution of that strategy and the Group’s investment performance.
Corporate governance framework The Group’s corporate governance framework describes and prescribes how the Group is directed and managed by setting out the matters reserved for the Board, the terms of reference of the Board and management committees, role statements, policies, systems, procedures and controls.
At any general meeting every shareholder present shall have one vote on a show of hands, and on a poll every shareholder present in person or by proxy shall have one vote for each share of which he is the holder. In the case of an equality of votes, whether on a show of hands or on a poll, the chairman of the meeting shall be entitled to a casting vote. All resolutions were put to a poll at the AGM in 2007. Voting at the AGM is conducted electronically, with the results being announced to the London Stock Exchange and on the Company’s website.
Corporate governance continued 44 | RSA | Annual Report and Accounts 2007
The following report by the Remuneration Committee has been approved by the Board for submission to the shareholders at the 2008 AGM.
Deloitte & Touche LLP have audited the following items stipulated in law for their review: The table of directors’ remuneration and associated footnotes on page 52 and the disclosure of the items comprising benefits in kind
The table of disclosure of directors’ share options and share awards on pages 53 to 56 and associated footnotes.
The Committee presents a summary of its principal activities to shareholders through this report, and the Committee Chairman attends the AGM to answer questions from shareholders on the activities of the Committee and its remuneration policies.
Members of the Committee have no personal financial interest, other than as shareholders, in the Committee’s decisions and they have no
Advisors to the Remuneration Committee In developing remuneration strategy during the year, the Committee obtained its principal advice from New Bridge Street Consultants LLP, who were appointed by the Committee and provided no other services to the Company during 2007.
The Group CEO is invited to attend all meetings of the Committee to provide context and advice to the Committee on Group 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 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.
The Committee meets as often as necessary throughout the year to ensure that it is able to fully report to the Board and shareholders on all relevant matters. In 2007, the Committee met five times and the principal business of those meetings included the following activities: The determination of performance conditions, and approval of awards, under the Long Term Incentive Plan (LTIP)
Conducting the annual review of base salaries for executive directors and the Group CEO’s recommendations for his Executive Team, and making appropriate recommendations to the Board
The review of proposed annual objectives and performance goals of executive directors for 2007
The ongoing review of share incentives generally, including the approval of changes of an administrative or regulatory nature
The determination of termination arrangements for those members of the global ‘Top 100’ (the Top 100) who left the Group in 2007
The drafting of the remuneration report for the Annual Report and Accounts 2007.
Remuneration policy principles The Committee’s remuneration policy is consistent with the high performance culture across the Group. The key principles which underpin the remuneration policy are: Total remuneration is set at a level which enables the recruitment, retention and motivation of high quality executive talent
There is a strong and visible link between remuneration and performance
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
Elements of remuneration Remuneration for executive directors in 2008 will consist of the four principal elements described in the table below, of which only base salary is pensionable: •
Benchmarked against a selected group of FTSE 100 financial services companies
Financial targets are measured against combined operating ratio for Group and business areas
TSR performance measured against a peer group of companies, together with an ROE measure
Full details of performance measures and vesting described on page 56
Remuneration report continued 46 | RSA | Annual Report and Accounts 2007
Base salaries for executive directors and members of the Executive Team are set on appointment with reference to market data. To enable the Group to compete for the most talented executives, the Committee relates base salary levels to the median level for equivalent roles in similar companies facing similar levels of complexity and challenge in the UK and internationally. In the UK, the comparator group most frequently used is a selected group of financial services companies within the FTSE 100.
The Committee is alert to market concerns surrounding base pay increases and closely monitors basic pay (and total remuneration) for executive directors in the light of both the market and individual and corporate performance. The Committee is confident that the structures and processes in place for reviewing annual salary increases are robust.
The 2007 salary review process resulted in the following increases, effective from 1 April 2007, for the executive directors (as at 31 December 2007): Position Increase Base salary
Andy Haste Group CEO 6.2% £855,000 George Culmer Chief Financial Officer 8.6% £480,000 Simon Lee International CEO 6.0% £371,000 Bridget McIntyre UK CEO 6.1% £390,000
The following table sets out the base salaries of UK based executives below Board level on a banded basis as at 31 December 2007. No such executive received a base salary in excess of £350,000.
Annual performance bonus Policy: Bonus payments are related to stretching performance targets and are capped at 133% of base salary. For maximum bonuses to be achieved outstanding performance must be demonstrated.
The executive directors and the Executive Team participate in an annual bonus plan. If stretching targets are achieved, participants receive a cash bonus of up to 50% of base salary and Deferred Shares worth up to 16.5% of base salary. For outstanding performance, a cash bonus of up to 100% of base salary and Deferred Shares worth up to 33% of base salary are achievable. Deferred Shares are described in the section headed share based long term incentive awards below.
The targets used for determining the amount of bonus payable are a combination of stretching business performance targets and the results of a structured assessment of each executive’s performance against detailed and specific personal objectives.
The financial targets that apply to the annual performance bonus for Andy Haste and George Culmer are a combination of targets relating to the overall Group COR result and the COR results of the regional operating businesses. The financial targets for Bridget McIntyre’s and Simon Lee’s annual performance bonus are weighted towards the UK and International businesses respectively while also retaining a target for the Group COR result as a whole.
Bonuses paid to executive directors in respect of the performance year 2007 are included in the table of directors’ emoluments on page 52. The Remuneration Committee is satisfied that the bonus payments made in respect of 2007 reflect the consistently strong COR results across the Group throughout 2007, and the contribution made by each executive director.
UK based executives who are members of 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.
The Executive Share Option Scheme (ESOS). Regular awards under the ESOS were discontinued from 2006, but the ESOS remains available for use in exceptional circumstances, such as executive recruitment.
Remuneration report continued 48 | RSA | Annual Report and Accounts 2007
Deferred Shares As described in the annual performance bonus section on page 48, executive directors, members of the Executive Team and the Top 100 may be granted Deferred Shares as part of the annual bonus. These Deferred Shares may not be withdrawn and will normally vest three years from the date of grant subject to continued employment with the Group.
Conditional awards of Matching Shares Executives may receive a conditional award of Matching Shares pro rata to the number of Deferred Shares held. At threshold performance the matching ratio will be 0.625:1. The maximum matching ratio for Matching Shares: Deferred Shares will be 2.5:1, calculated on the gross value of the bonus invested in Deferred Shares. Details of the performance condition used are described below.
Executive directors, members of the Executive Team and the Top 100 will be eligible for awards of Matching Shares.
Performance conditions The Committee will determine the performance condition for each grant of Performance Shares and Matching Shares, with performance measured over a single period of three years with no provision to retest. In 2008 grants of Performance Shares and Matching Shares related to non voluntarily Deferred Shares will be subject to a performance condition consisting of a combination of return on equity (ROE) and total shareholder return (TSR) targets. These are set out below: 50% of the shares comprising the award will vest according to ROE performance. In line with the positive outlook on the future prospects of the Group, the Remuneration Committee has approved an increase in the ROE performance targets for awards made in 2008. If underlying average annual ROE over three years commencing with the financial year of grant is below 12% (10% for awards made in 2006 and 2007), no part of the award subject to the ROE performance condition will vest. If underlying average annual ROE over three years is 12% (10% for awards made in 2006 and 2007), 25% of the award will vest. If underlying average annual ROE over three years is 18% (16% for awards made in 2006 and 2007), 100% of the award will vest. Vesting will be on a straight line basis in between. Underlying ROE will exclude items of an
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.
Share ownership guidelines Strengthened share ownership guidelines were introduced in 2004 for executive directors and members of the Executive Team.
The following table shows the number of shares (including voluntary Deferred Shares held under the LTIP) held by each executive director at 31 December 2007 and the increase in shareholding over the year.
* Assuming share price of 148.2p (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 Group’s 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 (£112,800 for the tax year commencing 6 April 2007). 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 2008 he will be paid an allowance of 28% of base salary for this purpose.
Service contracts The Committee’s policy on service contracts is that they should be subject to a maximum notice period of one year. Generally in the event of termination and in all cases of termination on performance grounds the Committee’s policy would be to seek and apply mitigation. None of the executive directors have current terms in their service contracts which allow them additional rights or payment in the event of a reconstruction or amalgamation of the Group.
Andy Haste 2 April 2003 12 months George Culmer 1 May 2004 12 months Simon Lee* 30 April 2003 12 months Bridget McIntyre 1 November 2005 12 months * Simon Lee was appointed to the Board effective 1 January 2007. His contractual notice period was extended to 12 months on that date, in line with other executive directors.
Remuneration report continued 50 | RSA | Annual Report and Accounts 2007
contracts may all be terminated earlier by the Company, or the individual, on 12 months notice.
Non-executive directors Under the Company’s Articles, the remuneration paid to non-executive directors is determined by the Board, within limits set by shareholders. The fee structure for non-executive directors was last reviewed in 2005, and is shown below: £
Base fee 45,000 Plus: Chairman of Group Audit Committee 20,000 Chairman of Remuneration Committee 12,500 Chairman of Investment Committee 12,500 Additional fee for sitting on more than one committee but not acting as chair of any committee 5,000
The Committee determines the Chairman’s remuneration. The fee payable to John Napier in respect of his appointment as Chairman of the Board is £325,000p.a. until the end of his current term of appointment. The appointment may be terminated by the Chairman on three months’ notice to the Company.
Non-executive directors do not have service contracts but each has a letter of appointment. The letters of appointment all request a period of one month’s notice should the non-executive director wish to resign.
John Napier’s letter of appointment was effective 9 January 2003 and the term of his appointment was initially three years; at the beginning of 2006 it was extended until 31 December 2008.
Historical TSR performance The main graph below is included in the report of the Committee as a requirement of Schedule 7A to the Companies Act 1985.
The inset graph shows the TSR of the Group with reference to the same index over the 36 month period ending 31 December 2007.
Performance over the 36 months to 31 December 2007 31 Dec 31 Dec 31 Dec
Notes 1. 2007 bonuses were calculated as described in the remuneration report on page 48. In 2007 a maximum cash bonus of 100% of salary was achievable. 2. George Culmer received an annual performance bonus of £441,600 in respect of performance year 2007. His allowances include 15% of base salary as a retirement allowance, paid monthly. During 2007 the amount paid was £71,000. He also received car benefits worth £26,000 and medical benefits worth £1,000. 3. Andy Haste received an annual performance bonus of £786,600 in respect of performance year 2007. His allowances include an age related percentage of base salary as a retirement allowance, paid monthly. During 2007 the allowance was 27% and the amount paid was £228,000. He also received car benefits and additional taxable travel benefits worth £45,000 and medical and life assurance benefits worth £10,000.
6. David Paige resigned as an executive director on 31 December 2006. During 2006 he received total emoluments of £714,000.
Pension benefits (audited part) Non-executive directors are not entitled to any pension benefits. The pension benefits earned by the executive directors, as members of Group defined benefit schemes, were as follows: Transfer value Transfer value Difference in Total of total of total transfer Change in accrued accrued accrued values accrued pension at pension at pension at less member pension 31 December 31 December 31 December contribution in year 2007 2007 2006 (note 1) £ £ £ £ £
Notes 1. The difference in transfer values reflects the difference between the two transfer values calculated using relevant information on the respective dates and is not necessarily the actuarial increase of the underlying pension.
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 represents 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.
Shareholdings (non audited part) The interests of directors in ordinary shares of 27.5p each of the Company, as declared and recorded in accordance with the UKLA Listing Rules, are as follows: Shares held at Shares held at 31 December 1 January Notes 2007 2007
Notes 1. In addition to the interests shown above, the directors indicated, in common with the employees, had a beneficial interest as at 31 December 2007 in 4,938,894 (2006: 4,938,894)
ordinary shares of 27.5p each held in the Royal & SunAlliance ESOP Trust No 2. 2. The directors had a beneficial interest as at 31 December 2007 in the voluntary Deferred Shares of 27.5p each held under the Long Term Incentive Plan which are not included in the above table. 3. On 26 February 2008, the directors’ interests remained unchanged.
The official closing middle market price at its highest during the year was 172.1p per share and at its lowest was 128.3p per share; on the last dealing day of the year it was 148.2p per share.
Options held during 2007 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 Exercise Dates Dates 1 January 31 December price exercisable exercisable 2007 2007 (pence) from to
Notes All of the above options were granted for nil consideration.
Bridget McIntyre 1,2,4 Deferred Share awards 150,000 – – – – 150,000 01.11.08 Matching Share awards 450,000 – – – – 450,000 01.11.08
Code, these awards could not be granted until 12 June 2006. The number of shares was calculated with reference to the share price on 1 November 2005. Subject to performance as described below, these awards may vest on the third anniversary of her appointment. In all other respects these awards are subject to the same rules as other awards granted in 2005.
Notes 1. The market price of ordinary shares on 16 April 2007, the date on which long term incentive scheme interests were granted during the year, was 164.66p. 2. Deferred Shares are inclusive of voluntary Deferred Shares and compulsory Deferred Shares. Voluntary Deferred Shares are purchased by Lloyds TSB Offshore Trust Company
5. The above table shows the date by which qualifying conditions for awards made on 16 April 2007 must be fulfilled. For awards made on 12 June 2006, the date by which qualifying conditions must be fulfilled is 12 June 2009.
Our responsibility is to audit the consolidated financial statements in accordance with relevant legal and regulatory requirements and International Standards on Auditing (UK and Ireland).
We report to you our opinion as to whether the consolidated financial statements give a true and fair view, whether the consolidated financial statements have been properly prepared in accordance with the Companies Act 1985 and Article 4 of the IAS Regulation and whether the part of the remuneration report described as having been audited has 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 consolidated financial statements. The information given in the directors’ report includes that specific information presented in the Group CEO’s business review, the regional business reviews and the estimation techniques, uncertainties and contingencies that are cross referred from the business review section of the directors’ report.
Opinion In our opinion: The consolidated financial statements give a true and fair view, in accordance with IFRS as adopted by the European Union, of the state of the Group’s affairs as at 31 December 2007 and of its profit for the year then ended
The consolidated financial statements have been properly prepared in accordance with the Companies Act 1985 and Article 4 of the IAS Regulation
The part of the remuneration report described as having been audited has been properly prepared in accordance with the Companies Act 1985 and
The information given in the directors’ report is consistent with the consolidated financial statements.
Continuing operations Income Gross written premiums 6,596 6,264 Less: reinsurance premiums (759) (780) Net written premiums 5,837 5,484
Change in provision for unearned premiums (230) (192) Net earned premiums 5,607 5,292 Net investment return 2 709 600 Other operating income 4 113 121 Total income 6,429 6,013 Expenses
Earnings per share on profit/(loss) attributable to the ordinary shareholders of the Parent Company
Ordinary dividends paid and proposed for the year Interim dividend paid (per share) 7 2.48p 1.75p Final dividend proposed (per share) 7 4.53p 4.12p
Consolidated income statement for the year ended 31 December 2007 58 | RSA | Annual Report and Accounts 2007
Attributable to: Equity holders of the Parent Company 670 (10) Minority interests 15 24 685 14
Investments in associates 11 105 27 Financial assets 12 11,340 10,457
Total investments 11,874 10,938 Reinsurers’ share of insurance contract liabilities 13 1,872 1,927 Insurance and reinsurance debtors 14 2,579 2,225 Deferred acquisition costs 15 542 453 Current tax assets 23 19 17 Deferred tax assets 23 87 29 Other debtors and other assets 16 963 806 1,069 852 Cash and cash equivalents 17 1,509 1,831 20,485 19,163 Non current and disposal group assets held for sale 34 108 3,485 Total assets 20,593 22,648
Current tax liabilities 23 92 56 Deferred tax liabilities 23 224 319 Provisions 24 331 380 Other liabilities 25 1,087 1, 026
Provisions and other liabilities 1,734 1,781 17,384 16,162 Non current and disposal group liabilities held for sale 34 65 3,594 Total liabilities 17,449 19,756 Total equity, reserves and liabilities 20,593 22,648
The financial statements were approved on 26 February 2008 by the Board of Directors and are signed on its behalf by: George Culmer Chief Financial Officer
Purchase or settlement of: Investment contracts (8,878) (7,840) Investment property (8) (17) Property and equipment (28) (37) Intangible assets (66) (127) Investments in subsidiaries (net of cash acquired) 30 (52) (69) Investments in associates (64) –
Comparative information has been provided for each of these disclosures. These changes have no impact on the result or the earnings per share for the period, the comparative period or earlier periods, and the Group’s financial position at the end of each such period.
Selection of accounting policies The Group exercises judgement in selecting each Group accounting policy. The accounting policies of the Group are selected by the directors to present financial statements that they consider provide the most relevant information. For certain accounting policies there are different accounting treatments that could be adopted, each of which would be in compliance with IFRS and would have a significant influence upon the basis on which the financial statements are presented. The bases of selection of the accounting policies for the accounting for financial assets and for the recognition of actuarial gains and losses related to pension obligations are set out below: The Group designates financial assets that are held as investments on the basis on which the investment return is managed and the performance is evaluated internally. Where the investment return is
managed on the basis of the periodic cashflows arising from the investment, a financial asset is designated as an available for sale financial asset with unrealised gains recognised in the statement of recognised income and expense. Where the investment return is managed on the basis of the total return on the investment (including unrealised investment gains), the financial asset is designated as at fair value through the income statement.
Changes in the ownership interests of a subsidiary between shareholders of the Group and minority shareholders are accounted for as transactions between equity holders of the Group. Any difference between the fair value of the consideration given by the transferee and the carrying value of the ownership interest transferred is recognised directly in equity.
Significant accounting policies 62 | RSA | Annual Report and Accounts 2007
The results and financial position of those Group entities whose functional currency is not Sterling are translated into Sterling as follows: Assets and liabilities for each balance sheet presented are translated at the closing exchange rate at the date of that balance sheet
All resulting exchange differences are recognised as a component of equity.
On consolidation, exchange differences arising from the translation of the net investment in foreign entities, and of borrowings and other currency instruments designated as hedges of such investments, are taken to equity. When a foreign entity is sold, the cumulative exchange differences relating to that foreign entity are recognised in the income statement as part of the gain or loss on sale.
Translation differences on non monetary items, such as equities classified as available for sale financial assets, are included in the fair value reserve in equity.
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 classified as available for sale, the cumulative gain or loss previously recognised in equity is recognised in the income statement.
The hedge is assessed on an ongoing basis and determined to have been highly effective.
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
For mortgage loans on real estate and collateral loans, fair values are estimated using discounted cashflow calculations based upon prevailing market rates
For cash, short term investments, commercial paper, other assets, liabilities and accruals, carrying amounts approximate to fair values
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 different, fair value 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
The provisions for claims outstanding, whether reported or not, comprise the estimated cost of claims incurred but not settled at the balance sheet date. It includes related expenses and a deduction for the expected value of salvage and other recoveries. The provision is determined using the best information available of claims settlement patterns, forecast inflation and settlement of claims. The provisions for claims outstanding relating to long
term permanent disability claims in Canada and Scandinavia are also determined using recognised actuarial methods.
Reinsurance ceded Premiums payable in respect of reinsurance ceded, are recognised in the period in which the reinsurance contract is entered into and include estimates where the amounts are not determined at the balance sheet date. Premiums are expensed over the period of the reinsurance contract, calculated principally on a daily pro rata basis.
Significant accounting policies continued 66 | RSA | Annual Report and Accounts 2007
Deferred tax is provided in full using the liability method on temporary differences arising between the tax bases of assets and liabilities and the carrying amounts in the financial statements. However, if the deferred tax arises from initial recognition of an asset or liability in a transaction other than a business combination that at the time of the transaction affects neither accounting, nor taxable profit or loss, it is not accounted for. Deferred tax is determined using tax rates (and laws) that have been enacted or substantially enacted by the balance sheet date and are expected to apply when the related deferred tax asset is realised or the deferred tax liability is settled.
The amounts charged (or credited where relevant) in the income statement relating to post retirement benefits in respect of defined benefit schemes are as follows: The current service cost
The past service costs for additional benefits granted in the current or earlier periods
The present value of defined benefit obligations and the present values of additional benefits accruing during the period are calculated using the Projected Unit Credit Method.
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
Termination benefits Termination benefits are payable when employment is terminated before the normal retirement date, or whenever an employee accepts voluntary redundancy in exchange for these benefits. The Group recognises termination benefits when it is demonstrably committed to either: terminating the employment of current employees according to a detailed formal plan without possibility of withdrawal; or providing termination benefits as a result of an offer made to encourage voluntary redundancy. Benefits falling due more than 12 months after the balance sheet date are discounted to present value.
Recently issued accounting pronouncements Below are listed the developments that are relevant to the Group’s future financial reporting.
On 10 January 2008 the IASB issued a revised version of IFRS 3 ‘Business Combinations’ and an amended version of IAS 27 ‘Consolidated and Separate Financial Statements’. The revisions include the following changes to existing accounting practice: An equity interest in a subsidiary entity that is not held by the reporting and controlling entity is now described as a non controlling interest (currently described as a minority interest)
All consideration (including contingent consideration) transferred in a business combination is measured at fair value at the acquisition date. Changes in the value of contingent consideration are measured in accordance with the relevant accounting treatment under IFRS
The revised standards will come into effect for the annual periods beginning on or after 1 July 2009, but early adoption is permitted. The revised standards have not yet been adopted by the EU. The new standards will be applied prospectively and so will have no impact on the results and the earnings per share of the current period, the comparative period or earlier periods, and on the Group’s financial position at the end of each such period. It is not possible to assess the impact the changes will have on future periods.
On 29 March 2007 the IASB issued an amendment to IAS 23 ‘Borrowing Costs’ that removed the option to recognise specific borrowing costs, that relate to assets that take a substantial period of time to get ready for use or sale, as expenses. The Group does not incur borrowing costs that relate to the specific categories of assets in IAS 23.
On 28 June 2007 the IFRIC published Interpretation IFRIC 13 ‘Customer Loyalty Programmes’. This interpretation clarifies the accounting treatment for customer loyalty award credits granted by an entity when providing goods or services.
On 14 February 2008 the IASB issued Amendments to IAS 32 ‘Financial Instruments: Presentation’ and IAS 1 ‘Presentation of Financial Statements – Puttable Financial Instruments and Obligations Arising on Liquidation’. The amendment requires certain financial instruments with particular features and meeting specific conditions, which previously would be classified as debt instruments, to be classified as equity instruments. The Group does not issue such instruments.
Where possible the Group adopts multiple techniques to estimate the required level of provisions. This assists in giving greater understanding of the trends inherent in the data being projected. The Group’s estimates of losses and loss expenses are reached after a review of several commonly accepted actuarial projection methodologies and a number of different bases to determine these provisions. These include methods based upon the following: The development of previously settled claims, where payments to date are extrapolated for each prior year
The claims provisions are subject to close scrutiny both within the Group’s business units and at Group Corporate Centre. In addition, for major classes where the risks and uncertainties inherent in the provisions are greatest, regular and ad hoc detailed reviews are undertaken by advisers who are able to draw upon their specialist expertise and a broader knowledge of current industry trends in claims development. As an example, the Group’s exposure to asbestos and environmental pollution is examined on this basis. The results of these reviews are considered when establishing the appropriate levels of provisions for outstanding claims and unexpired periods of risk.
Uncertainty as to the extent of policy coverage and limits applicable
Uncertainty as to the amount of insured loss suffered by a policyholder as a result of the event occurring
The tendency for social trends and factors to influence court awards
Acquisitions and disposals The Group makes acquisitions and disposals of businesses as part of its normal operations. All acquisitions are made after due diligence, which will include, amongst other matters, assessment of the adequacy of claims reserves, assessment of the recoverability of reinsurance balances, inquiries with regard to outstanding litigation and inquiries of local regulators and taxation authorities. Consideration is also given to potential costs, risks and issues in relation to the integration of any proposed acquisitions with existing RSA operations. The Group will seek to receive the benefit of appropriate contractual representations and warranties in connection with any acquisition and, where necessary, additional indemnifications in relation to specific risks although there can be no guarantee that such protection will be adequate in all circumstances. The Group may also provide relevant representations, warranties and indemnities to counterparties on any disposal. While such representations, warranties and indemnities are essential components of many contractual relationships, they do not represent the underlying purpose of the transaction. These clauses are customary in such contracts and may from time to time lead to us receiving claims from counterparties.
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’ (stable) from S&P upgraded from ‘A-’ in December 2007, ‘A-’ (positive outlook) from AM Best and ‘A3’ stable from Moodys. Any worsening in the ratings could have an adverse impact on the ability of the Group to write certain types of general insurance business.
Regulatory environment The legal, regulatory and accounting environment is subject to significant change in many of the jurisdictions in which we operate. We continue to monitor the developments and react accordingly.
In particular the Group is continuing to monitor and respond to ongoing consultation following publication of the Solvency II Framework Directive, which is intended, in the medium term, to achieve greater harmonisation of approach across European member states to assessing capital resources and requirements. The directors are confident that the Group will continue to meet all future regulatory capital requirements.
The components of insurance, reinsurance, credit, market and liquidity risk management 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. Disciplined underwriting, encompassing risk assessment, risk management, pricing and exposure control is critical to the Group’s success.
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
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 reserves may prove insufficient to cover actual losses, LAE 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 reserves and incur a charge to earnings. Such insufficiencies could have a material adverse effect on the Group’s future consolidated financial condition, financial results and cashflows.
Reinsurance risk The Group is exposed to multiple insured losses arising out of a single occurrence, whether a natural peril event such as a hurricane, flood or an earthquake, or man made catastrophes such as an explosion or fire at a major industrial facility. Any such catastrophic event could generate insured losses under one or more of its policies.
Risk management continued 74 | RSA | Annual Report and Accounts 2007
The expertise within the Group on catastrophe modelling is shared through the Worldwide Reinsurance Practice Group, which also provides an overview of the Groupwide catastrophe exposures and reinsurance adequacy. A reinsurance programme is considered to be ‘adequate’ only if it covers at least 199 out of 200 possible events by loss size. This is referred to as the ‘1 in 200 year expected maximum loss’. Since 1999, the Group has set its total retention for a single catastrophic event based on geographic location.
Total of financial assets that are Credit rating relating to financial assets that are neither past due nor impaired neither past due AAA AA A BBB <BBB Not rated nor impaired £m £m £m £m £m £m £m
Debt securities 6,635 1,528 1,010 201 70 134 9,578 Other financial assets 55 3 8 2 1 82 151 Short term investments 7 26 53 2 1 32 121 Reinsurers’ share of insurance contract liabilities 63 702 714 191 115 74 1,859 Insurance and reinsurance debtors (1) 2 75 71 43 8 2,200 2,399 Derivative assets – – 33 – – – 33 Other debtors – – – – 1 288 289 Cash and cash equivalents 334 822 191 – 3 159 1,509
Debt securities 5,723 1,322 1,242 133 91 53 8,564 Other financial assets 49 5 2 3 4 91 154 Short term investments 4 11 57 7 4 31 114 Reinsurers’ share of insurance contract liabilities 91 579 703 276 85 158 1,892 Insurance and reinsurance debtors (1) 2 18 49 38 6 1,840 1,953 Derivative assets – – 13 – – 4 17 Other debtors – – – – – 325 325 Cash and cash equivalents 494 1,006 249 14 7 61 1,831
The Group’s largest reinsurance exposures to active reinsurance groups are Munich Re, Swiss Re and Lloyds of London. At 31 December 2007 the reinsurance asset recoverable from these groups does not exceed 4.5% of the Group’s total financial assets. Stress tests are regularly performed on the Group’s reinsurance assets and the limits are set such that in a catastrophic event, the exposure to a single reinsurer is estimated not to exceed 3% of the Group’s total financial assets. Certain of the Group’s subsidiaries are members of government mandated pools in various parts of the world. As of 31 December 2007 the largest pool (by premium volume) was Pool Re operated by the UK Government to provide terrorism cover.
The following table provides information regarding the carrying value of financial assets that have been impaired and the ageing of financial assets that are past due but not impaired as at 31 December 2007.
Cash and cash equivalents 1,831 – – – – – 1,831 –
At 31 December 2007, the Group had pledged £954m (2006: £651m) of financial assets as collateral for liabilities or contingent liabilities and had accepted £1,536m (2006: £1,025m) collateral that could be sold or pledged. The nature of the assets pledged as collateral comprises primarily government securities. The terms and conditions of the collateral pledged are market standard in relation to letter of credit facilities. The Group is permitted to sell or repledge collateral held in the event of default by the owner, the fair value of which has been noted above at £1,536m. The terms and conditions of the collateral held are market standard. The assets held as collateral are readily convertible into cash.
In 2006 in addition to the above, the Group’s discontinued US operation had pledged £1,356m of financial assets as collateral for liabilities or contingent liabilities and had accepted £948m of collateral that could be sold or pledged.
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
changes to the balance of the Group’s funds between the major asset classes. Importantly the GIC also approves the terms of reference of the Group’s main operational investment committee, the Group Asset Management Committee (GAMC). The BRC issues GAMC with investment risk limits.
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 on page 80.
The Group sets appropriate risk limits to ensure that no significant concentrations to individual companies or sectors arise. The Group takes a long term view in selecting shares and looks to build value over a sustained period of time rather than churning the portfolio looking for short term gains from its equity holdings.
Property price risk The Group’s portfolio of properties is subject to property price risk arising from changes in the market value of properties. Thus if the value of property falls so will the fair value of the portfolio as set out in the sensitivity analysis on page 80.
Foreign currency exchange risk The Group operates in 28 countries. Accordingly, its net assets are subject to foreign currency exchange rate movements. The Group’s primary foreign currency exposures are to the Danish Kroner, Canadian Dollar, Swedish Krona and the Euro. If the value of Sterling strengthens then the value of non Sterling net assets will decline when translated into Sterling and consolidated.
The Group incurs exposure to foreign currency exchange risk in two ways: Operational foreign currency exchange risk – by underwriting liabilities in currencies other than the currency of the primary environment in which the business units operate (non functional currencies)
Structural foreign currency exchange risk – by investing in overseas subsidiaries and operating an international insurance group.
At 31 December 2007, the Group’s total shareholders’ equity, analysed by currency is: Sterling Danish Kroner Canadian $ Swedish Krona Euro Other Total £m £m £m £m £m £m £m
Shareholders’ equity is stated before taking account of the effect of forward foreign exchange contracts. After taking account of the effect of forward foreign exchange contracts, a 10% change in Sterling against Danish Kroner or Canadian Dollar would have the following impact on shareholders’ equity: 10% 10% 10% 10% strengthening in weakening in strengthening weakening Sterling Sterling in Sterling in Sterling against Danish against Danish against against Kroner Kroner Canadian $ Canadian $ £m £m £m £m
Movement in shareholders’ equity at 31 December 2007 (15) 19 (38) 47 Movement in shareholders’ equity at 31 December 2006 (20) 25 (60) 73
Remaining life Fair value Notional principal amounts Less than One to More than one year five years five years 2007 2006 2007 2006 £m £m £m £m £m £m £m
At 31 December 2007 the Group holds forward foreign exchange contracts that are designated as hedging instruments to reduce structural foreign exchange risk. The derivatives are included in the above. Further information on designated hedges can be found in note 28.
The following table provides an indication of some of the single factor changes adopted within the Group: Changes in the income statement and equity: Increase/(decrease) in income statement Decrease in equity 2007 2006 2007 2006 £m £m £m £m
Interest rate markets (note 2): Impact on fixed interest securities of increase in interest rates of 100bps – – (264) (198) Impact on loan capital of increase in interest rates of 100bps (note 3) – – – –
Property markets (note 4): Decrease of property markets of 15% (64) (68) (44) (45)
Liquidity risk Liquidity risk is the risk that cash may not be available to pay obligations when due at a reasonable cost. The Group has no tolerance for liquidity risk and is committed to meeting all liabilities as they fall due. The investment risk limits set by the BRC ensure that the Group’s portfolio is kept in highly liquid marketable securities sufficient to meet its liabilities as they come due based on actuarial assessment. The Group maintains a level of liquid assets consistent with the expectations of the Financial Services Authority (FSA) and the investment community.
As at 31 December 2007 Less than One to Two to Three to Four to Five to Greater than one year two years three years four years five years ten years ten years Total £m £m £m £m £m £m £m £m
Financial assets Debt securities 1,626 2,006 1,478 1,149 1,021 1,439 862 9,581 Other financial assets 94 18 11 15 – 6 7 151 Short term investments 121 – – – – – – 121 Reinsurers’ share of provision for unearned premiums 201 7 3 1 1 2 – 215 Reinsurers’ share of provision for losses and loss adjustment expenses 522 344 236 159 111 172 113 1,657 Insurance and reinsurance debtors 2,565 5 3 2 3 1 – 2,579 Derivative assets 33 – – – – – – 33 Cash and cash equivalents 1,509 – – – – – – 1,509 Total 6,671 2,380 1,731 1,326 1,136 1,620 982 15,846
Less than One to Two to Three to Four to Five to Greater than one year two years three years four years five years ten years ten years Total £m £m £m £m £m £m £m £m
As at 31 December 2006 Less than One to Two to Three to Four to Five to Greater than one year two years three years four years five years ten years ten years Total £m £m £m £m £m £m £m £m
Financial liabilities Subordinated guaranteed US$ bonds – – – – – – 37 37 Subordinated guaranteed Euro bonds – – 335 – – – – 335 Subordinated Sterling perpetual guaranteed bonds – – – – – 301 – 301 Subordinated guaranteed perpetual notes – – – – – 519 – 519 Provision for unearned premiums 2,734 159 52 6 3 6 9 2,969 Provision for losses and loss adjustment expenses 3,206 1,764 1,265 893 608 1,286 799 9,821 Direct insurance creditors 139 1 – – – – – 140 Reinsurance creditors 236 6 9 – – – – 251 Borrowings 6 1 1 – – – – 8 Deposits due to reinsurers 39 12 9 1 – – – 61
Risk management continued 82 | RSA | Annual Report and Accounts 2007
The Group maintains sufficient capital, which comprises shareholders’ equity and subordinated loan capital, to meet its plan and objectives. This represents sufficient surpluses for both regulatory and economic capital, as well as sufficient capital to support the Group’s aim of maintaining single ‘A’ ratings.
The economic capital analysis compares the economic value of the Group’s assets with the total resources required in a range of adverse scenarios, calibrated to a defined risk tolerance consistent with the Group’s ‘A’ rating which is in line with target. The economic capital surplus is the amount by which the economic assets exceed the total resources required. The total resources required is the amount of assets the Group needs today to meet its liabilities under the defined risk tolerance. The Group defines the economic capital required as the difference between the total resource requirement and the accounting value of liabilities. The Group’s capital surplus has increased during the year. At 31 December 2007, the Group’s surplus economic capital is approximately £2.2bn (2006: £2.0bn).
Amounts reported for the prior year have been restated to reflect the revised operating segments.
Total assets of continuing operations 8,716 8,981 1,575 1,213 20,485 Non current and disposal group assets held for sale 108
Emerging Central Total UK International Markets functions Group £m £m £m £m £m
Capital expenditure: Property and equipment 14 13 8 2 37 Goodwill 40 28 2 – 70 Intangible assets 93 33 1 – 127
The net investment return arising on assets categorised as at fair value through the income statement includes the net return arising on derivatives. There are no other material amounts of net investment return arising from financial assets that do not relate to financial assets designated as available for sale financial assets.
Notes to the financial statements continued 86 | RSA | Annual Report and Accounts 2007
Administration and other expenses 83 87 Reorganisation expenses – 23 Investment expenses and charges 21 25 Amortisation of intangible assets 18 15 Foreign exchange (gains)/losses (3) 1
Interest expense on loan capital 90 80 Other loan interest 14 12
Fees payable to the Company’s auditors and its associates for other services: The audit of the Company’s subsidiaries, pursuant to legislation 0.3 5.3 2.6 – 2.9 5.3 Other services pursuant to legislation 0.1 0.5 0.1 – 0.2 0.5 Tax services 0.8 0.5 0.1 – 0.9 0.5 Services relating to corporate finance activities 0.3 0.2 1.1 – 1.4 0.2
Fees in respect to pension scheme: Audit 0.1 0.1 – – 0.1 0.1
Auditors’ remuneration in 2006 included amounts relating to the requirements of section 404 of the Sarbanes Oxley Act.
A pension payment of £25,302 (2006: £24,423) was paid by a subsidiary to a former director in respect of services other than as a director. Details of directors’ remuneration and pension benefits, including that of the highest paid director (Andy Haste), are included in the directors’ emoluments. Details of directors’ interests in the Parent Company are shown in the directors’ emoluments and interests.
Employee information Staff costs for all employees comprise: Wages and salaries 657 590 Social security costs 74 69 Pension costs 43 64 Share based payments to directors and employees 19 12
Staff costs for employees of discontinued operations comprise: Wages and salaries 5 38 Social security costs 1 3 Pension costs 1 3 Share based payments to directors and employees – 1
Tax at the UK rate of 30% (2006: 30%) 201 195 Tax effect of: Income/gains not taxable (26) (35) Expenses not deductible for tax purposes 10 14 Tax losses not recognised – 4 Release of tax held in respect of Security Fund/Safety Reserve (103) – Release of tax provided in respect of prior periods (15) (5) Different tax rates of subsidiaries operating in other jurisdictions (32) (3) Other (6) –
Income tax expense 29 170 6. Earnings per share attributable to the ordinary shareholders of the Parent Company The earnings per ordinary share is calculated by reference to the profit/(loss) attributable to the ordinary shareholders and the weighted average of shares in issue during the year.
Basic Basic earnings per share is calculated by dividing the profit/(loss) attributable to the ordinary shareholders of the Parent Company by the weighted average number of ordinary shares in issue during the period, excluding ordinary shares purchased by the ESOP Trusts and held as treasury shares.
Profit/(loss) for the calculation of earnings per share 600 438 587 (61)
Weighted average number of ordinary shares in issue (thousands) 3,106,017 2,929,453 3,106,017 2,929,453 Basic earnings per share (p) 19.3 15.0 18.9 (2.1)
Weighted average number of ordinary shares in issue (thousands) 3,106,017 2,929,453 3,106,017 2,929,453 Adjustments for share options (thousands) 43,869 29,835 43,869 29,835
Weighted average number of ordinary shares for diluted earnings per share (thousands) 3,149,886 2,959,288 3,149,886 2,959,288 Diluted earnings per share (p) 19.0 14.8 18.6 (2.1)
Earnings per share attributable to discontinued operations The loss for the year from discontinued operations is £13m (2006: £499m). The basic earnings per share from discontinued operations is (0.4)p (2006: (17.1)p) and the diluted earnings per share from discontinued operations is (0.4)p (2006: (16.9)p).
Net book amount at 31 December 2007 263 25 269 106 663
Amortisation expense of £38m (2006: £46m) has been charged to underwriting and policy acquisition costs.
Cost/valuation At 1 January 2007 298 320 618 Additions 7 21 28 Disposal of subsidiaries (4) – (4) Disposals (19) (8) (27) Revaluation adjustments 17 – 17 Exchange adjustment 17 14 31 Transfer to investment property (10) – (10) Transfer to non current and disposal group assets held for sale (13) – (13)
Accumulated impairment At 1 January 2007 – 6 6 Exchange adjustment – (1) (1)
Cost/valuation At 1 January 2006 301 329 630 Additions 7 30 37 Acquisition of subsidiaries 1 2 3 Disposals (4) (21) (25) Revaluation adjustments 16 – 16 Exchange adjustment (7) (13) (20) Transfer to non current and disposal group assets held for sale (16) (7) (23)
Accumulated depreciation At 1 January 2006 – 220 220 Depreciation charge 4 32 36 Depreciation on disposals – (13) (13) Revaluation adjustment (4) – (4) Exchange adjustment – (7) (7) Transfer to non current and disposal group assets held for sale – (5) (5)
Depreciation and impairment expense of £32m (2006: £42m) has been charged to underwriting and policy acquisition costs.
The carrying amount of Group occupied property that would have been recognised had the assets been carried under the cost model at 31 December 2007 is £189m (2006: £218m).
The lease agreements are normally drawn up in line with local practice and the Group has no significant exposure to leases that include contingent rents.
Global Direct Insurance Investments BV Netherlands 50.0% Royal Sundaram Alliance Insurance Company Ltd India 26.0% Syn Mun Kong Public Limited Company Thailand 20.0%
Summarised below are the assets, liabilities, revenue and profit and loss of the companies above, subject to the following: • During 2007 the Group disposed of its 45% interest in Royal & Sun Alliance Insurance (Malaysia) Bhd. The comparatives below have not been restated
Equity securities 1,487 1,620 Debt securities 9,581 8,568 Other financial assets 151 155 Short term investments 121 114
The Group’s portfolio of equity securities comprises ordinary shares and unit trusts of £1,132m (2006: £1,309m) and other equity instruments of £355m (2006: £311m). Other equity instruments include preference shares and collective investment vehicles primarily invested in cash and bond assets. The performance of these assets is typically not expected to correlate strongly to the performance of ordinary shareholdings.
The Group does not hold significant financial assets that are valued using a valuation technique.
The following changes have occurred in the reinsurers’ share of the provision for unearned premiums during the year: Reinsurers’ share of provision for unearned premiums at 1 January 189 298 Premiums ceded to reinsurers 759 790 Reinsurers’ share of premiums earned (754) (885) Changes in reinsurance asset 5 (95) Reinsurers’ share of portfolio transfers and acquisitions/(disposals) of subsidiaries 12 1 Exchange adjustment 9 (15)
Reinsurers’ share of provision for unearned premiums at 31 December 215 189
The following changes have occurred in the reinsurers’ share of the provision for losses and loss adjustment expenses during the year: Reinsurers’ share of provision for losses and loss adjustment expenses at 1 January 1,738 4,108 Reinsurers’ share of total claims incurred 387 353 Total reinsurance recoveries received (519) (998) Reinsurers’ share of portfolio transfers and acquisitions/(disposals) of subsidiaries 50 (13) Exchange adjustment 57 (341) Other movements 2 6 Transfer to non current and disposal group assets held for sale (58) (1,377)
Insurance debtors comprise: Due from policyholders 1,086 950 Due from intermediaries 1,254 1,046
Total insurance and reinsurance debtors 2,579 2,225 15. Deferred acquisition costs
Deferred acquisition costs at 1 January 453 465 Exchange adjustment 20 (18)
Acquisition costs deferred during the year 766 771 Amortisation charged during the year (705) (761)
Notes to the financial statements continued 94 | RSA | Annual Report and Accounts 2007
To be settled within 12 months 643 545 To be settled after 12 months 320 261 17. Cash and cash equivalents
The interest bearing financial assets and financial liabilities included in cash and cash equivalents and bank overdrafts had an effective interest rate of 4.85% (2006: 4.45%) and had an average maturity of 23 days (2006: 34 days).
18. Equity and reserves continued Changes in equity for the year ended 31 December 2006
Depreciation transfer – – – – 10 – – (10) – – –
Authorised 3,923,636,364 ordinary shares of 27.5p each (2006: 3,923,636,364 ordinary shares of 27.5p each) 1,079 1,079 300,000,000 preference shares of £1 each (2006: 300,000,000 preference shares of £1 each) 300 300
Issued and fully paid 3,252,957,665 ordinary shares of 27.5p each (2006: 2,987,526,642 ordinary shares of 27.5p each) 895 821 125,000,000 preference shares of £1 each (2006: 125,000,000 preference shares of £1 each) 125 125
The Royal & SunAlliance ESOP Trust holds ordinary shares in the Parent Company, which may subsequently be transferred to employees (other than the executive directors). At 31 December 2007 the Trust held 15,102,896 ordinary shares (2006: 17,751,097) in the Parent Company with a nominal value of £4m (2006: £5m) and a mid market value, based on the market value of the Parent Company’s shares at the close of business on 31 December 2007 as shown in the Official List of the London Stock Exchange, of £22m (2006: £27m).
The Royal & SunAlliance ESOP Trust No 2 holds ordinary shares in the Parent Company, which may subsequently be transferred to employees including executive directors. At 31 December 2007 the Trust held 4,938,894 ordinary shares (2006: 4,938,894) in the Parent Company with a nominal value of £1m (2006: £1m) and a mid market value, based on the market value of the Parent Company’s shares at the close of business on 31 December 2007 as shown in the Official List of the London Stock Exchange, of £7m (2006: £8m).
Preference shareholders shall not have any right to receive notice of, attend, speak or vote at any general meeting of the Parent Company unless: The preferential dividend on such shares for the dividend payment period immediately prior to the issue of the notice is in arrears or if any arrears of deficiency of dividend in respect of any preceding period has not been paid in full
A resolution is proposed varying the rights attached to preference shares, for the winding up of the Parent Company or for a reduction of capital in the Parent Company (in which case preference shareholders may only vote on such resolution)
Notes to the financial statements continued 96 | RSA | Annual Report and Accounts 2007
In priority to any payment of dividend to other shareholders (other than any dividend not exceeding 0.1p per share), holders of preference shares are entitled to a cumulative preferential dividend of 7.375% per annum, payable out of the profits available for distribution and resolved to be distributed in half yearly instalments and the shares are not redeemable. Preference shareholders have no further right to participate in the profits of the Parent Company. In addition, preference shares do not confer: Any right to participate in any offer by way of rights or otherwise to subscribe for additional shares in the Parent Company (except where required by law)
The instrument of transfer is in respect of only one class of share.
Total dated loan capital 376 372 Subordinated Sterling perpetual guaranteed bonds 305 301 Subordinated guaranteed perpetual notes 513 519
On 22 February 2007, the Group repurchased Yankee Bonds with nominal value of $49,500,000 for a total consideration of $68m (including accrued interest of $1.5m). Yankee Bonds with nominal value of $23,679,000 remain.
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. If the bonds are not repaid on that date, the rate of interest payable would be LIBOR plus 2.25%.
Provision for unearned premiums 3,383 2,969 Provision for losses and loss adjustment expenses 10,344 9,821
Changes in provision for unearned premiums 235 79 Gross portfolio transfers and acquisitions 37 10 Exchange adjustment 142 (96) Transfer to non current and disposal group assets held for sale – (25)
Notes to the financial statements continued 98 | RSA | Annual Report and Accounts 2007
Provision for losses and loss adjustment expenses at 1 January 9,821 14,203 Claims losses and expenses incurred 4,044 3,877 Total claims payments made in the year, net of recoveries (4,145) (4,748) Gross portfolio transfers and acquisitions 204 4 Exchange adjustment 421 (773) Other movements 57 67 Transfer to non current and disposal group assets held for sale (58) (2,809)
Assumptions The total value of outstanding claims provisions less related reinsurance recoveries before discounting amounted to £9,288m (2006: £8,655m).
20. Insurance contract liabilities continued Consolidated claims development table gross of reinsurance
Claims paid One year later 2,909 1,197 1,082 835 1,115 941 Two years later 1,464 431 334 279 324 Three years later 1,191 295 229 197 Four years later 738 194 164 Five years later 488 105 Six years later 377
Reconciliation to the balance sheet Current year provision before discounting 3,369 513 707 719 993 1,372 2,591 10,264 Exchange adjustment to closing rates 355 Discounting (646)
Notes to the financial statements continued 100 | RSA | Annual Report and Accounts 2007
Total insurance and reinsurance liabilities 426 391 22. Borrowings The Group’s borrowings of £303m (2006: £8m) relate to loans from credit institutions. In 2007 the Group utilised these funds partly to finance the purchase of the minority interest in Codan A/S.
The movement for the year in the Group’s net deferred tax position is as follows: Net deferred tax position at 1 January (290) (179) Credit/(charge) to the income statement for the year 138 (29) Credit/(charge) to equity for the year 24 (75) Net liability on acquisition/disposal of subsidiaries (13) (5) Exchange adjustment (5) (2) Effect of change in tax rates – income statement 1 – – equity 8 –
23. Current and deferred tax continued The following are the major deferred tax liabilities and assets recognised by the Group and their movements during the year: Net Retirement insurance Revaluation Security Fund/ Other Reclassification benefit contract of Safety temporary of debt obligations liabilities investments Reserve differences Total £m £m £m £m £m £m £m
(Charge)/credit to the income statement for the year – (37) (59) 11 – 56 (29) (Charge)/credit to equity for the year (2) (74) – (2) – 3 (75) Disposals of subsidiaries – – – – – (5) (5)
International Financial Reporting Standards require the Danish Security Fund and Swedish Safety Reserve in Codan A/S to be recognised within shareholders’ equity rather than as liabilities. At 31 December 2006 the Group held £101m of deferred tax liability (adjusted for £2m foreign exchange movement in 2007) in respect of these reserves. During 2007 the Group acquired the minority interest in Codan A/S. In light of this change in circumstance the Group has concluded that no tax base and associated temporary tax difference exists in respect of these reserves. The deferred tax liability held at 31 December 2006 in respect of the Danish Security Fund and Swedish Safety Reserve has therefore been released in the period.
Pensions and post retirement obligations 105 156 Reorganisation provisions 37 27 Other provisions 189 197
Reorganisation provisions comprise costs relating to reorganisations mainly within the UK business. These provisions primarily comprise severance and property costs and are part of an ongoing programme to achieve business improvement and expense savings.
Notes to the financial statements continued 102 | RSA | Annual Report and Accounts 2007
Deposits received from reinsurers 64 61 Derivative trading liabilities 62 28 Other creditors 614 560 Accruals and deferred income 347 377
To be settled within 12 months 1,016 935 To be settled after 12 months 71 91
The liabilities arising under the ADC contract comprise an insurance component and a deposit component. The liability arising under the insurance component of £0.1bn represents the timing risk on the settlement of those liabilities. The financial liability arising under the deposit component is offset by the value of funds held in a trust fund whose trust deed only permits the trust fund assets to be used to settle amounts due under the ADC. The value of the funds held in trust at 31 December 2007 is £0.4bn and the value of the liability of the deposit component is £0.4bn.
Following the signing of the amended and restated contract the accounting treatment has been reviewed; the insurance component is accounted for within insurance liabilities and the deposit component, offset by the value of the funds held in the trust account, is recognised under other liabilities.
Defined contribution pension schemes Costs of £34m (2006: £30m) were recognised in respect of defined contribution schemes by the Group. The Group’s Swedish subsidiaries are part of a multi employer defined benefit scheme along with other financial institutions in Sweden. As it is not possible to determine the assets and liabilities in respect of any one employer under this scheme, it is included in these accounts as a defined contribution scheme. Contributions of £23m were paid to this scheme during 2007 and are included in the costs shown above. The latest information regarding the funding of this scheme is taken from the interim report for the first half of 2007, when the scheme funding rate was 132%. The Group’s Swedish subsidiaries’ share of the total multi employer scheme was less than 15%.
Defined benefit pension schemes and other post retirement benefits The major defined benefit pension schemes are located in the UK. The assets of these schemes are held mainly in separate trustee administered funds.
26. Retirement benefit obligations continued In addition to these changes, the 2002 Scheme (which was the scheme to which new UK employees had been admitted following 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 accrue future benefits on a defined contribution basis under the stakeholder scheme.
The major defined benefit schemes are subject to regular valuation using the projected unit method which is the basis used to determine the pension cost in the consolidated income statement. Independent, qualified actuaries carry out valuations of the major defined benefit schemes for the purposes of assessing pension costs.
The Group also provides post retirement healthcare benefits to certain current and retired Canadian employees. The benefits are not prefunded. 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.
Movement in the surplus/(deficit) during the year: Surplus/(deficit) at 1 January 32 (472) Total pension expense (9) (34) Employer contribution 168 203 Actuarial (losses)/gains (28) 226 Acquisition of subsidiary 1 – Exchange adjustment (6) 18 Transfer to non current and disposal group assets and liabilities held for sale – 91
Pension and post retirement surplus 158 32 Deferred tax in respect of net pension and post retirement asset (42) (8)
The amounts recognised in the income statement are as follows: UK Other Total Total £m £m £m £m
Current service cost 40 12 52 60 Interest cost 229 14 243 255 Expected return on scheme assets (279) (15) (294) (288) Past service cost 9 3 12 15 Gains on curtailment (1) (3) (4) (8)
The accumulated actuarial gains since 1 January 2004 are £62m (2006: £90m, restated to exclude discontinued operations).
Notes to the financial statements continued 104 | RSA | Annual Report and Accounts 2007
Schemes in surplus (note 16) 232 31 263 188 Schemes in deficit (note 24) (18) (87) (105) (156)
The following is a reconciliation of the Group’s pension schemes’ assets: Pension schemes’ assets at 1 January 4,870 4,967 Return on schemes’ assets 383 280 Contributions by the employer 168 203 Contributions by schemes’ participants 2 3 Benefits paid (226) (248) Loss on settlement – (1) Acquisition of subsidiary 14 – Exchange rate adjustment 33 (64) Transfer to non current and disposal group assets and liabilities held for sale – (270)
Sensitivity analysis The discount rate, the assumed inflation rate and the mortality assumptions all have a significant effect on the IAS 19 accounting valuation. A 0.1% increase in the discount rate would reduce the defined benefit obligations in the UK by £79m. A 0.1% increase in the inflation rate assumption would increase the defined benefit obligations in the UK by £69m. An increase of one year in life expectancy would increase the defined benefit obligations by approximately £151m.
Notes to the financial statements continued 106 | RSA | Annual Report and Accounts 2007
Accumulated post employment benefit obligation for medical costs 3.9 2.8 3.1 2.3 27. Share based compensation The Group has four types of share based payment plans which are settled in the form of ordinary shares: the Executive Share Option Scheme; the Sharesave Plan; the Share Matching Plan; and the Long Term Incentive Plan. Dilution levels for all schemes are held strictly within Association of British Insurers limits.
The total employment cost recorded in the income statement for all plans was £19m in 2007 (2006: £13m). These costs include the costs associated with plans which are settled in the form of ordinary shares for awards that have been granted after 7 November 2002. The value of equity settled awards granted prior to this date has been excluded in accordance with the transitional provisions contained in IFRS 2 ‘Share Based Payment’.
Options outstanding at 1 January 73,839,962 142.71 80,629,852 148.58 Exercised (3,865,688) 86.09 (2,576,629) 101.56 Forfeited (1,890,835) 139.84 (3,985,252) 276.47 Expired (1,890,782) 287.22 (228,009) 342.46 *Sterling (pence)
Under the scheme, there were no awards during 2006 or 2007. The value of the awards is charged in the income statement over the vesting period. The weighted average share price on the dates the options were exercised in 2007 was 152.06p (2006: 149.14p).
The following share options under the Sharesave Plan are outstanding or exercisable as of 31 December: Options outstanding
Weighted average Weighted average remaining remaining contractual life Weighted average contractual life Weighted average Range of exercise prices Number of shares (years) exercise price* Number of shares (years) exercise price*
Outstanding Deferred Share awards at 1 January 3,433,720 4,075,168 Granted* – 150,000 Exercised (327,775) (310,847)
Total potential share awards outstanding at 31 December 10,318,762 11,664,570 *The award shown in 2006 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.
The fair value of the Deferred Share awards was calculated based upon the ordinary share price at grant date after deducting from it the estimated value of the dividends that will not be received during the vesting period. The fair value of the potential Matching Share awards was estimated by calculating the expected value arising from modelling the awards that would arise under different performance scenarios.
The structure of the plan allows for a number of different types of awards to be made. Voluntary Deferred Shares are purchased by participants from net bonus payable (limited to a maximum value of 33% of net bonus); in addition, for senior executives, the Remuneration Committee may defer a portion of an individual’s bonus (limited to 33% of that bonus) into an award over shares referred to for the purpose of the plan as Compulsory Deferred Shares. Voluntary Deferred Shares are held in trust for three years and Compulsory Deferred Shares are normally forfeited on an employee leaving the Group. No further performance conditions apply. The Remuneration Committee may make a conditional award of shares on a ‘matched’ basis to Voluntary and Compulsory Deferred Shares (‘Matching Shares’) up to a maximum of 2.5:1.
Awards of Performance Shares and Matching Shares related to Compulsory Deferred Shares are subject to a performance condition consisting of a combination of a return on equity target and a total shareholder return target (with performance measured by comparison against other European insurance companies) over a single three year performance period. Matching Shares related to Voluntary Deferred Shares are subject only to the return on equity performance condition. Restricted Shares are not subject to performance conditions. All awards vest on the third anniversary of the date of grant to the extent that the performance conditions have been met.
Further information on the Long Term Incentive Plan may be found outside these financial statements in the remuneration report.
Share awards outstanding at 1 January 4,208,357 667,002 1,622,178 4,829,205 11,326,742
Share awards outstanding at 31 December 8,063,261 1,372,433 3,102,956 9,274,148 21,812,798 Potential Matching Shares awards – 5,932,206 7,757,355 – 13,689,561
Notes to the financial statements continued 110 | RSA | Annual Report and Accounts 2007
Share awards outstanding 31 December 4,208,357 667,002 1,622,178 4,829,205 11,326,742 Potential Matching Shares awards – 2,871,739 4,055,422 – 6,927,161
Fair values of the awards granted under the Long Term Incentive Plan scheme during 2007 are taken to be the share price on the day preceding the grant date, except for the Restricted Shares where the share price is reduced by an estimate of the value of dividends that will not be received. A dividend yield of 4.0% (2006: 3.5%) was assumed. Market related performance criteria were based on an arithmetic mean estimate of performance against a specified group of 13 competitors and it is assumed that all non market related performance criteria would be met such that all awards would be exercisable. An estimate based on past experience is made of the number of forfeitures during the vesting period due to employees leaving the Group.
28. Hedge accounting At 1 January 2005 the Group designated the loan capital denominated in Euros as a hedging instrument against the net investment in designated subsidiaries to reduce the foreign currency exchange risk exposure. The book value of the hedging instrument at 31 December 2007 was £365m (2006: £335m). The fair value of the hedging instrument at 31 December 2007 was £377m (2006: £353m). The hedge ineffectiveness recognised in the income statement during 2007 is £nil (2006: £nil).
During 2007 the Group designated certain forward exchange contracts as hedging instruments against the net investment in designated subsidiaries to reduce further the foreign currency exchange risk exposure. On designation, the interest element is separated from the forward exchange rate and is excluded from the hedge relationship. Effectiveness of the hedge is then measured using the spot rate, which is also the exchange rate used when measuring net investment in the designated subsidiaries. The fair value of the hedging instruments at 31 December 2007 is a liability of £26m (2006: £nil). The hedge ineffectiveness recognised in the income statement during 2007 is £nil (2006: £nil).
Chile Royal & Sun Alliance Seguros (Chile) SA (99.4%) General insurance
Mexico Royal & Sun Alliance Seguros (Mexico) SA de C.V. General insurance
Netherlands Antilles Royal & Sun Alliance Insurance (Antilles) NV (51.0%) General insurance
Norway Duborgh Skadeforsikring AS (note 2) Insurance brokerage White Label Holding AS Group (note 2) Holding company
Notes to the financial statements continued 112 | RSA | Annual Report and Accounts 2007
30. Business combinations Acquisition of subsidiaries On 10 April 2007 the Group acquired an additional 40% of the share capital of Stevenson and Hunt Insurance Brokers Limited to bring its total holding to 58%. On 31 October 2007 the Group acquired 100% of the share capital of Thomson Jemmett Vogelzang. On 31 December 2007 the Group acquired 100% of the share capital of Canadian Northern Shield Insurance Company (‘CNS’). All acquisitions were in Canada. The total consideration was £61m and goodwill of £23m arose on acquisitions.
Intangible assets (excluding goodwill) 45 Investments 60 Reinsurers’ share of insurance contract liabilities 25 Other assets 25 Cash and cash equivalents 9 Insurance contract liabilities (90) Other liabilities (36)
If the acquisitions had occurred on 1 January 2007, Group net written premiums for the year would have increased by £52m and the Group’s profit after tax would have increased by £4m. The total profit after tax of the acquired entities since the acquisition dates included in the Group’s profit for the period is £1m.
Disposal of subsidiaries During the year disposals of subsidiary undertakings and books of business were made for total proceeds of £8m, giving rise to a pre tax loss of £35m. Group disposals during the year comprise: The disposal of its US operation on 4 March 2007. The net cost of the transaction was £nil and generated a pre tax loss of £19m. This represents foreign exchange, which is recycled from shareholders’ funds and does not impact total equity. In 2006 the loss recognised as a result of remeasurement to fair value less costs to sell was £399m.
30. Business combinations continued The carrying value of assets and liabilities disposed of were as follows: £m
Investments 1,729 Reinsurers’ share of insurance contract liabilities 1,409 Other assets 328 Cash and cash equivalents 415 Insurance contract liabilities (2,809) Other liabilities (1,056)
The loss on disposal recognised in the income statement in continuing operations of £22m comprises the disposals above, excluding the US operation, of £16m and £6m in respect of a provision on reclassification of a disposal group, as described in note 34.
Notes to the financial statements continued 114 | RSA | Annual Report and Accounts 2007
Discontinued operations The Group disposed of its US operation to Arrowpoint Capital Corp., a company set up by the Group’s former US management team. This transaction was undertaken on normal commercial terms and conditions.
Financial instrument commitments The Group has a number of guarantees and commitments.
33. Commitments continued Operating lease commitments The Group leases various outlets and offices under non cancellable operating lease agreements. The leases have varying terms, escalation clauses and renewal rights.
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
One year or less 25 23 Between one and five years 83 82 After five years 125 149 34. Discontinued operations and non current and disposal group assets and liabilities held for sale Discontinued operations On 4 March 2007 the Group announced the completion of the disposal of its US operation to Arrowpoint Capital Corp. The losses arising on the writedown of the carrying value of the US operation to fair value less costs to sell were recognised in the 2006 result. The loss recognised on completion in 2007 includes the cumulative amount of the exchange gains and losses deferred in equity relating to the US operation and to the cumulative exchange gains and losses recorded on a US Dollar denominated loan made by a UK subsidiary company to the US operation.
Loss before tax and losses recognised on completion/writedown – (85) Loss recognised on completion/writedown (19) (399)
During 2007 the Group has classified one of its subsidiaries within the UK operating segment, Guildhall Insurance Company Limited, as a disposal group. The sale of the company has been agreed, subject to regulatory approval and the Group expects to complete the sale within one year. A provision for a pre tax loss of £6m has been recognised on reclassification. No gain or loss has been recognised in the income statement since the reclassification.
The analysis of the non current and disposal group assets and liabilities held for sale is as follows: Assets Goodwill and other intangibles – 10 Property and equipment 13 2 Total investments – 1,591 Reinsurers’ share of insurance contract liabilities 58 1,377 Insurance and reinsurance debtors 5 250 Deferred acquisition costs – 5 Other debtors and other assets – 37 Cash and cash equivalents 32 213
Basis of audit opinion We conducted our audit in accordance with International Standards on Auditing (UK and Ireland) issued by the Auditing Practices Board. An audit includes examination, on a test basis, of evidence relevant to the amounts and disclosures in the Parent Company financial statements. It also includes an assessment of the significant estimates and judgments made by the directors in the preparation of the Parent Company financial statements, and of whether the accounting policies are appropriate to the Parent Company’s circumstances, consistently applied and adequately disclosed.
The information given in the directors’ report is consistent with the Parent Company financial statements.
We have audited the Parent Company financial statements of Royal & Sun Alliance Insurance Group plc for the year ended 31 December 2007 which comprise the Parent Company balance sheet, statement of changes in equity of the Parent Company, Parent Company cashflow statement and the related notes 1 to 10. These Parent Company financial statements have been prepared under the accounting policies set out therein.
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 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, 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 Parent 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.
Accruals and other liabilities 70 62 Total liabilities 1,496 1,794 Total equity, reserves and liabilities 6,914 7,118
Statement of changes in equity of the Parent Company for the year ended 31 December 2007
In accordance with section 230 of Companies Act 1985, the Company’s income statement and related notes have not been presented in these separate financial statements.
Other prepayments and accrued income 2 3 Other debtors 2 3 Total other debtors and other assets 4 6
Deferred tax assets 21 28 Deferred tax liabilities – – Net deferred tax position at 31 December 21 28
Deferred tax assets The following are the major deferred tax assets recognised by the Company and movements during the year: Other Accelerated temporary Reclassification capital differences of bonds allowances Total £m £m £m £m
At the balance sheet date, the Company has unused tax losses of £7m (2006: £4m) available for offset against future profits. No deferred tax asset has been recognised in respect of the tax losses of £7m (2006: £4m) due to the unpredictability of future profit streams. The losses may be carried forward indefinitely.
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% (2006: 5%)
There are no employees with employment contracts with the Company. All employees are employed by subsidiary companies.
Interest is charged on interest bearing loans, which are repayable on 24 hours written notice, at three months LIBOR + 0.6%.
Registered Office and Group Corporate Centre 9th Floor, One Plantation Place, 30 Fenchurch Street, London EC3M 3BD. Telephone: +44 (0)20 7111 7000. Registered in England No. 2339826.
Disabled shareholders RSA is committed to providing a quality service to all of its shareholders. An induction loop is installed at the AGM venue. Please contact the Company Secretary’s department at the address above if you require particular assistance.
The Unclaimed Assets Register RSA 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, 6th Floor, Cardinal Place, 80 Victoria Street, London SW1E 5JL. Telephone: +44 (0)870 241 1713. The website address is www.uar.co.uk.
Should you have an enquiry relating to the above please contact the Investor Relations department at Royal & Sun Alliance Insurance Group plc, 9th Floor, One Plantation Place, 30 Fenchurch Street, London EC3M 3BD. Telephone: +44 (0)20 7111 7136.
ShareGift Shareholders with a small number of shares, the value of which makes it uneconomic to sell them, may wish to consider donating them to charity through ShareGift, a registered charity administered by The Orr Mackintosh Foundation, registered charity number 1052686. The relevant share transfer form can be obtained from Equiniti. Further details can be obtained from: ShareGift 17 Carlton House Terrace, London SW1Y 5AH Telephone: +44 (0)20 7930 3737 www.sharegift.org
Announcement of the scrip dividend price for the ordinary final dividend for 2007
We operate in 28 countries and provide general insurance products and services in over 130 countries.
Introduction 1 Highlights 2 At a glance 4 Chairman’s statement 6 Group CEO’s review