Business review 11 Group strategy 12 Progress against strategic priorities 14 International business review 17 UK business review 20 Emerging Markets business review 23 Financial review 27 Risk framework 30 Corporate responsibility 32 Executive team 34 Board of Directors
Governance 37 Directors’ report 40 Corporate governance 45 Remuneration report 52 Directors’ emoluments and interests
International comprises our businesses in the mature markets of Scandinavia, Canada, Ireland and Italy.
In Canada, we are the sixth largest general insurer. The business comprises Johnson Corporation, one of Canada’s leading direct writers, as well as our Personal and Commercial Broker operations.
A strong and diversified portfolio, balanced between attractive mature markets and emerging markets with higher growth potential 2 | RSA | Annual Report and Accounts 2007
We are the largest general insurer in the Baltics, with market leading positions in Latvia and Lithuania, and in 2007 we expanded into Estonia.
We are located in eight countries across Asia and the Middle East, including India and China.
Continued discipline in the UK with strong growth in Affinity and in MORE TH>N®
Completion of our exit from the U.S.A., following receipt of formal U.S. Regulatory approval by Arrowpoint, the background to which was reported in detail in last year’s report.
The common theme that runs through these results is management excellence in the strategic, operational and financial performance of our businesses. We continue to review and improve
‘ Our capability to meet an emergency is an important measure of performance and a reflection of the social as well as the commercial role of insurance companies in society.’
our control environment whether it be in the assessment of risk and reinsurance, underwriting discipline or the imperative of achieving sustainable profitable growth. We remain conservative in relation to a prudent reserving policy and continue to pursue a high quality, low risk investment strategy.
A further indication of the Board’s confidence in the future of the business was given by the increase in the final dividend of 10%, giving a total dividend increase for the 2007 year of 19%. This follows the 35% increase in the 2006 final dividend and the 42% increase in the 2007 interim dividend made following a review of dividend policy announced last year.
In summary therefore, a strong set of results achieved in difficult and uncertain financial markets. Results which reflect a dedicated and effective Management Team and the efforts of all our colleagues and employees, whom the Board thanks on behalf of shareholders. On outlook we believe, as in previous years, and as set out in the opening sentences of this report, we have the opportunity and ability to continue to develop and deliver a relative increase in profit and profitability and to strategically enhance our market positions where we choose to operate. We believe we also have the experience and control processes to operate effectively in what we expect will continue to be difficult and demanding market environments.
On a final note, there will be a Resolution at the AGM to change the name of the Company from Royal & SunAlliance to RSA. This follows the restructuring process started in 2003 and the subsequent fusion of the Company into a stronger, cohesive and strategically positioned business, combined with the development of a management ethos based on excellence and achievement. Whilst a major transformation to RSA has been achieved, there still remain improvements to make, and opportunities to realise and we are fully focused on continuing to deliver our goal of sustainable profitable performance. We expect to progress further in 2008.
We have continued to deliver on our strategic priorities. The disposal of our US business last March resolved our last remaining legacy issue and we are now solely focused on continuing to deliver our objective of sustainable profitable performance.
£814m Operating result 6 | RSA | Annual Report and Accounts 2007
£629m, which was driven by our high quality portfolio and low risk investment strategy.
International Our objective in International is to drive the businesses harder and deliver growth ahead of the market. We have made good progress in 2007 with some excellent performances from the individual businesses. Premiums were up 8% to £2.5bn, driven by expanded distribution and targeted acquisitions. Underwriting profit increased 38% to £206m, and the COR improved 1.8 points to 91.3%. As expected, International contributed the largest share of the Group’s underwriting result.
In Scandinavia, we successfully completed the Codan minority buyout and in 2007, Codan continued to deliver strong results and above market growth. Premiums were up 8% to £1.4bn, driven by a good performance from White Label, our 2006 acquisition, and continued growth in bancassurance, car dealerships and internet channels. Codan is a very attractive business with excellent prospects and following the minority buyout, and as part of the ongoing financial management of the Group, we have identified and released £103m of deferred tax reserves.
In Commercial, net written premiums were down 9% to £1.6bn as we maintained our commitment to underwriting discipline and the withdrawal of capacity from areas of the market where the rate, terms and conditions do not meet our underwriting criteria. Our focus on specialty lines is paying off. In Marine, premiums were up by 8% and during the year we launched six new trading units, including Property Investors, Construction and Engineering, and Risk Solutions.
Emerging Markets Emerging Markets had a strong first year as a separate region. In 2007, we focused on building capabilities, putting a high quality central team in place and making two new CEO appointments in India and China. Across the region there are exciting opportunities for profitable growth. We already have established positions in Latin America, Asia and the Middle East and the Baltics and we are targeting double digit premium growth.
Premiums were up 11% (15% on constant exchange) in Latin America driven by a strong performance in Chile and good growth in Marine across Brazil and Mexico. During 2007, we also took the opportunity to exit the Venezuelan market, as it was not a market where we wanted to increase our exposure.
In Asia and the Middle East, premiums were up 8% (15% on constant exchange), driven by a strong motor performance in the UAE. We were also the first European insurer to secure approval for a subsidiary licence for our Chinese business and this will enable us to accelerate our
Industry overview 2007 was a challenging year for the industry with a competitive rating environment, adverse weather losses and financial market turmoil. In addition, there were developments on future regulation with the European Commission issuing its proposal for the Solvency II Directive.
There has been much speculation about the impact of the turmoil in the credit markets on the industry. We already had in place a low risk investment strategy and took action during the year to further strengthen the defensive nature of our investment portfolio, which is dominated by high quality bonds and cash. We have no exposure to US subprime mortgage securities and we reported a stronger investment result this year.
Growth was particularly strong in the Baltics, with premiums up 35%. We have strengthened our number one position in Lithuania and expanded into new markets, opening our Estonian operation in November.
Operational management During 2007, we have continued to take the right action on rate and expenses, as well as continuing to build and improve our capabilities.
Across our international markets, RSA is a brand which is more accessible for both our customers and staff, many of whom already refer to us as RSA. We also want to maximise the benefits of an international brand to support our businesses in their local markets and you will start to see brands such as MORE TH>N® and Codan more heavily endorsed by RSA. The new identity is being used for the first time in this Annual Report and Accounts and we will introduce the new style over time as part of a managed roll out process, keeping the cost of the changeover to a minimum.
in 2007. We further strengthened the Executive Team with three significant new appointments: Tim Mitchell was appointed as Group Underwriting and Claims Director, Clare Salmon joined us as Group Strategy, Marketing and Customer Director and David Weymouth joined us as Group Operations and IT Director.
Financial management In terms of financial management, we continue to exercise strong control. This is clearly evident in our approach to reinsurance which protected us against the impact of the UK floods. We also maintain a strong reserving policy and have in place a high quality, low risk investment strategy. Our investment portfolio is dominated by high quality bonds and cash and we have taken further action to strengthen the defensive nature of the portfolio. George covers this in more detail in his Financial review.
We are seeing exciting opportunities for profitable growth across the portfolio with good topline momentum across the Group. We expect to achieve above market growth in International, targeted profitable growth in the UK, while continuing to take the right action on rate, and double digit growth in Emerging Markets.
Our overriding commitment is to sustainable profitable performance and as we announced with our full year results we expect to deliver a combined ratio of around 95% in 2008.
Key to delivering these strategic priorities are our structure, our capabilities and our focus on delivery.
We derive real advantage from being a pure general insurer. Our focus on doing one thing and doing it well is evident in our attention to detail, rigorous control and our actions.
We have strong positions in attractive markets and a balanced portfolio of businesses. The shape of the portfolio is deliberate: Our geographic spread gives us exposure to markets at different points in the insurance cycle and different stages of development It allows us to shift capacity to where we see the best opportunities In each of our markets there are opportunities for targeted profitable growth
Our technical skills are market leading; in both underwriting and claims they are a source of real competitive advantage.
In 2007, we added to these skills with new executive appointments in Underwriting and Claims, Strategy, Marketing and Customer and Operations and IT. These appointments support our focus on driving profitable growth and operational excellence.
Our track record of successful execution is underpinned by our focus on personal accountability and performance management.
Key to delivery is having the right culture and right people. We are focused on developing talent through creating an environment where responsibilities and accountabilities are clearly defined, people are challenged and performance rewarded. We have embedded a strong performance culture across the Group.
Our strong portfolio allows us to shift capacity to where we see the best returns We are committed to underwriting discipline and taking the right action on rate We have a tightly controlled risk appetite and underwriting process and a conservative reinsurance policy The sustainability of our earnings is further underpinned by our reserving policy, high quality investment portfolio, and our balance sheet strength
2008 combined operating ratio expected to be around 95% We will continue to use the portfolio to shift capacity to where we see the highest returns. We remain committed to underwriting discipline and taking the right action on rate. Given the actions that we are taking, we are confident that we will continue to deliver sustainable profitable performance in 2008 and beyond.
We target profitable growth in our core trades segments which we know well and have competitive advantage, such as Marine, where we are one of the leading carriers outside Lloyd’s of London We are using our strong customer focus to develop targeted propositions and maximise retention Our focus on customer differentiation for our partners and their customers is driving rapid growth in the Affinity segment in the UK Across the Group, we have benefited from expanding distribution as well as targeted acquisitions
6% growth in net written premiums Net written premiums are up 6%, reflecting above market growth in International, strong double digit growth in Emerging Markets and targeted growth in the UK. This result reflects our positive rating action, organic growth in target segments and the benefits of the bolt on acquisitions made in 2006.
Further savings to be delivered by mid 2008 Our operational improvement programme has improved our efficiency and performance. Our objective is to increase our annualised savings from the £180m delivered at the 2007 year end to our targeted £200m by mid 2008, and we are on track to deliver this.
International comprises the Group’s operations in Scandinavia, Canada, Ireland and Italy. These businesses have strong positions in attractive markets and we aim to outperform in terms of both growth and profitability.
We are committed to delivering sustainable profitable performance. We are using three levers to drive the business forward and outperform the competition: Delivering profitable growth ahead of the market, by pursuing a segmented approach, expanding our distribution and through selected acquisitions Leveraging our market leading capabilities in underwriting and claims Applying a rigorous approach to driving continuous operational efficiencies across the business.
The combination of our geographic spread and targeted, segmented approach means that we can choose to expand in specific areas at different points in the insurance cycle. We target growth
in profitable segments where our technical expertise gives us competitive advantage.
International delivered another strong performance in 2007, with 8% premium growth to £2,513m and a 1.8 point improvement in the COR to 91.3%. International contributed the majority of the Group’s underwriting result, at £206m, which was a 38% increase on 2006.
We have over 25 years experience in the renewable energy sector, and our technical capability has made us a market leader in several markets including Scandinavia, Canada, UK and Ireland.
We have increased our presence in the Wind, Hydro, Bio-Energy and Solar Energy sectors and have developed market leading solutions for our customers and brokers. We are well on track to position RSA as the key insurance solutions provider in this important global sector.
In Commercial lines, we have maintained strong momentum across the region. We hold a leading position in Marine Hull and have also benefited from our acquisition of the Pohjola Marine portfolio in Finland, which gives us a 40% share of the Finnish marine market. In Construction and Engineering, premiums are up by 13% across the region, building on our strong position in the Danish market.
Canada Canada has delivered another excellent performance. Net written premiums are up 6% (9% on constant exchange), while the underwriting result of £50m was a 4% improvement on 2006. This reflects our continued focus on underwriting excellence, claims and expense management. The COR was in line with 2006 at 92.4%.
Johnson, our Personal lines direct business, delivered 8% growth (11% on constant exchange), with strong organic growth supplemented by the impact of acquisitions made in 2006, and now represents 36% of the Canadian business. Johnson is one of the leading direct writers in Canada and during the year we signed a national agreement with AIR MILES®, Canada’s leading loyalty rewards programme, which has over nine million members.
We also look to acquire businesses that have a strategic fit. The acquisition of Canadian Northern Shield diversifies our geographic spread and makes us the market leader in British Columbia and the sixth largest general insurer in Canada.
Italy continued to outperform the market with 14% premium growth. Focused in northern Italy, we operate through brokers and non tied agents. During 2007 we expanded our distribution network, adding 34 new agencies and 12 new brokers.
We have built a track record of delivering strong top and bottom line performance and we are confident that we have the portfolio, the strategy and the capabilities to continue to outperform in our markets, and deliver sustainable profitable performance.
‘ We have built a track record of delivering strong top and bottom line performance.’
Profitable growth ahead of the market Strengthen number three position in Denmark and Sweden Strong double digit growth in Johnson £40m of annualised savings by mid 2008 Scandinavian expense ratio sub 15% by mid 2008 Canadian Intermediated expense ratio sub 10% by mid 2008
We are the UK’s largest Commercial and third largest Personal lines insurer. We are committed to delivering sustainable profitable performance. We will only write business that is profitable and are driving growth in segments where we can achieve our target returns. We are committed to underwriting discipline and actively withdraw capacity in areas of the market where the rate, terms and conditions do not meet our underwriting criteria.
In Personal, we aim to strengthen our number three position by enhancing our customer focus. Using increased customer segmentation and pricing sophistication, we are launching innovative products to acquire new customers
and build retention. We are creating our own space in the affinity market, and our reputation for delivering quality propositions for our partners and their retail customers is attracting new deals.
In 2007, the UK delivered another strong result. The business continues to grow profitably, with a 3% increase in net written premiums to £2,688m. The COR of 97.6% includes the impact of the summer floods of £120m, as well as other adverse weather through the year. Excluding the floods, the UK COR was 93.0%.
The city of Sheffield was hit particularly hard by the June floods. The River Don rose by 15ft and a 6ft torrent of water swept through the 64 acre site of Sheffield Forgemasters (SFIL), the world’s largest independently owned forgemaster and a major local employer.
The Chief Executive of SFIL, praised our ‘exceptional support’ and said, ‘the final settlement was concluded in a friendly and professional manner and this undoubtedly aided our recovery’. Our response to SFIL’s claim was also recognised by the Association of British Insurers and by The Prince of Wales.
We work in partnership with our customers, combining our expertise with their specific company needs and together we find the best solution to get them back up and running again as soon as possible.
We continue to focus on implementing our rate plans, maximising retention and driving growth in profitable specialty lines. Marine premiums increased by 8%, and during the year we launched six specialist trading units, including Property Investors, Construction and Engineering, and Risk Solutions. We are successfully using these trading units to increase our levels of specialisation within our target segments, and their niche expertise to improve our customer propositions, and opportunities for cross sales.
Personal Net written premiums increased by 27% to £1,074m driven by organic growth and recent Affinity deals including Paymentshield. The COR was 100.6%, which includes 6% in respect of the floods. Motor performed strongly, delivering a COR of 98.7%, a 3.8 point improvement over 2006.
We have strengthened our MORE TH>N® brand through the ‘More Is’ proposition focusing on key customer segments, new products that reward customer loyalty and high levels of service. Over 170,000 customers have signed up to our Personal Customer Manager (PCM) initiative which has had a positive impact on retention levels. Our enhanced
Move to number one in the broker market by choice, reputation, capability and profitability by 2010
Strengthen number three position in Personal lines Grow Affinity business by more than 50% by 2010 from 2005 levels £70m of annualised savings by mid 2008 MORE TH>N® expense ratio sub 20% by end 2007 UK expense ratio sub 15%
web capability saw web sales grow by 160% on Household and 30% on Motor since 2005. We continue to focus on driving down cost per sale by implementing initiatives to increase cross sales and marketing efficiency. In 2007, we won Precision Marketing’s ‘Direct Brand of the Year’ Award.
In Commercial, we will continue to focus on our target trades and segments and use our industry recognised technical skills to maintain strong retention. We will continue to innovate our product offerings and pricing to realise the growth potential of MORE TH>N®. In Affinity, we will continue to target new opportunities and deliver profitable growth from our existing deals.
In its first year, Emerging Markets delivered strong double digit growth in net written premiums, with a 2 point improvement in the COR to 95.3%.
By 2010, we aim to double net written premiums from 2005 levels in Latin America, Asia and the Middle East and the Baltics.
2007 was a very successful year for the Baltics. the operations in Latvia and Lithuania reaped the benefits of leveraging group best practice to deliver an excellent underwriting result, and we launched our new operation in estonia.
in Lithuania, our business grew faster than the market, increasing its market share by 3% to 37% whilst maintaining its COr below 90%. this rapid growth and improved performance was the result of a structured programme to modernise the operational and sales platforms of the business. We were the first in the market to use differential pricing which allows improved risk selection. Over 60% of business is now renewed automatically, cutting administration costs and allowing our sales network greater time to focus on new business.
2008 will be a busy year for the Baltics as further operational enhancements are made, however we have demonstrated our ability to successfully manage change and we anticipate another strong year of performance.
We are working with our broker partners to develop new propositions targeting Small and Medium sized Enterprises (SMEs). We are looking to automate cover on SMEs, reducing our partners’ servicing costs and we aim to replicate this technology across the region.
Latin america Latin America delivered a 15% growth in net written premiums on constant exchange, reflecting strong growth in Chile as well as in Marine in Brazil and Mexico. The COR improved by 5 points to 98.7% following actions taken to improve profitability. This result was achieved against the backdrop of a number of weather events in the region, including an earthquake in Chile, floods in Mexico and hailstorms and a tornado in Colombia. In December, we took the opportunity to exit the Venezuelan market.
Emerging Markets covers a large number of countries with diverse economic and regulatory environments. Common themes include the continued growth in demand for insurance products in Personal lines, driven by increasing affluence, and in Commercial lines as strong GDP growth continues.
Net written premiums are up 6% to £5.8bn (2006: £5.5bn), demonstrating the strength of our portfolio, with above market growth in International, strong double digit growth in Emerging Markets, and targeted growth in the UK.
Underwriting result The underwriting result of £278m (2006: £310m) reflects a strong performance in challenging conditions and the benefit of management actions, including our prudent reinsurance programme, positive action on rating, and the strong and diversified portfolio. The current year underwriting loss is £70m (2006: underwriting profit of £179m) and includes the impact of the UK floods of £120m, as well as adverse weather (£73m worse than 2006) and large loss experience (£88m worse than 2006) across the Group.
Interest costs are £104m, up from £92m, reflecting the financing costs for the Codan buyout, and the buy back of the residual Yankee bond.
Amortisation of £18m was charged in respect of intangible assets and goodwill on acquired claims provisions, compared with £15m in 2006.
The tax charge is £29m and includes the release of £103m of the deferred tax liabilities that had been held in respect of Codan’s Danish Security Fund and Swedish Safety Reserve. These
Cash and cash equivalents 83 63 32 Land and buildings 17 13 31
Operating cashflow 652 851 Tax paid (127) (118) Interest paid (92) (82) Group dividends (111) (87) Dividend to minorities (31) (9) Net cashflow 291 555 Issue of share capital 304 6 Pension deficit funding (86) (86) Net movement of debt 223 (169) Corporate activity (888) (355) Cash movement (156) (49)
Cashflow – management basis reserves are held in shareholders’ equity and following the minority buyout, we have determined that no future tax liability will arise in respect of them. Accordingly, we have released these deferred tax provisions.
Profit after tax is £628m and benefits from the strong operating result as well as the release of deferred tax reserves in Codan following completion of the minority buyout.
The directors will recommend at the Annual General Meeting, to be held on 19 May 2008, a final dividend of 4.53p (2006: 4.12p) per share. This, together with the interim dividend of 2.48p, will make a total distribution for the year of 7.01p (2006: 5.87p), an increase of 19% for the year.
investment portfolio The investment portfolio totalled £13.3bn at the year end compared with £12.7bn at the start of the year and 83% of the portfolio is invested in high quality fixed income and cash assets. The fixed interest portfolio remains concentrated on high quality short dated assets, with an average duration of 3.1 years. At the end of the year, 99% of the bond portfolio was investment grade, with 86% rated AA or above, a marginal increase over the prior year.
As at 31 December 2007 unrealised gains in the balance sheet were £461m (2006: £575m).
Capital position As at 31 December 2007, the Group had an Insurance Group’s Directive (IGD) surplus of approximately £1.5bn, an increase of £0.2bn from 2006. The coverage ratio has improved from 1.9 times the IGD requirement at the end of 2006 to a very strong 2.5 times the requirement at the end of 2007.
At 31 December 2007, the Group had surplus economic capital of around £2.2bn, up from £2bn at the start of the year, based on a risk tolerance consistent with Standard & Poor’s (S&P) long term A rated bond default curve. This is equivalent to a probability of solvency over one year of 99.94%.
The ICA is a forward looking, economic assessment of the capital requirements of the Group based on our assessment of the risks to which we are exposed. The Group has received its Individual Capital Guidance from the FSA, which at the request of the FSA remains confidential.
In December 2007, S&P upgraded the Group to A (stable), the Group’s target rating. The Group was upgraded to A3 positive outlook by Moody’s in February 2008 and is rated A- positive outlook by AM Best. Details of the Group’s ratings can be found in the Investor Relations section under Bond Investor Information on the Group’s website www.rsagroup.com.
The surplus on the pension scheme as at 31 December 2007 is £116m net of tax compared with £24m at the start of the year. The scheme has benefited from positive market movements and funding payments made during the year. The Group has strengthened the
Actuarial (losses)/gains (22) 6 (16) Deficit funding 62 – 62 Other movements 42 4 46 the table below shows the main movements in the pension fund surplus net of tax during 2007
Financial review continued pension scheme assumptions during the year for both mortality and inflation.
We sold around £900m of equities in the second quarter, reducing the equity holding in the pension fund from 46% to 24% at the end of the year. At the same time, we extended the interest rate and inflation swap programme over the scheme liabilities.
The reduction in the equity exposure has significantly benefited the scheme, with the change in asset mix contributing over £75m to the year end surplus position.
Our objective is to deliver sustainable profitable performance, and this is clearly evident in the Group’s continued delivery of strong results.
george Culmer Chief Financial Officer 26 | rsa | Annual Report and Accounts 2007
The Board is responsible for the Group’s systems of risk management.
The Group has continued to adopt the ‘three lines of defence’ governance model. The framework for the oversight and management of risk is as follows: Management – the first line of defence in setting strategy, performance measurement, establishment and maintenance of internal control and risk management in the business Risk assessment – the second line, operating a formal risk management framework within which, the Group policies and minimum standards are set, and objective oversight and challenge of risk management across the Group is achieved. This is provided by the Board Risk Committee, supported by the Group Risk functions, and a Groupwide network of regional risk committees Independent assurance – the third line of defence, providing independent and objective assurance of the effectiveness of the Group’s systems of internal control established by the first and second lines of defence. This is provided by the Group Audit Committee, supported by Group Internal Audit.
Group risk policy statements set out the minimum standards to be maintained by the Group’s operations in order to manage their risks in a way that is consistent with the risk appetite. Business managers are responsible for complying with Group and local risk policies and for managing risk by taking mitigating actions where risks are outside the appetite. The Board Risk Committee’s oversight and challenge role includes consideration of risk mitigation.
Compliance with policy statements is mandatory. Policies are subject to regular review in order to reflect changes in circumstances and the risk appetite.
Further work has been undertaken in 2007 to refine and improve the Portfolio Classification process, designed to provide a more effective method of evaluating individual and overall portfolio performance.
Claims development and reserving levels are closely monitored by Reserve Committees. Each region’s Reserve Committee determines a recommended level of outstanding claims reserves, in accordance with the Group Reserving Policy. The Group Reserving
Committee considers the reasonableness of these recommendations. It then determines the level of aggregate outstanding claims reserves to be carried by the Group.
Operational risk exists in every facet of the organisation, including those areas that are not viewed as ‘operating units’. As such, all areas of the Group and its major outsourcing providers are involved in addressing and controlling operational risk.
A series of forward looking key risk indicators is used to assess potential future trends in operational risks, whilst data collected on actual operational risk incidents and ‘near misses’ captures past experiences. In addition, the use of scenario analyses enables the Group to assess whether certain operational events that have occurred elsewhere could manifest themselves within the Group. When taken together, the tools provide a complementary set of indicators of the Group’s operational risk profile.
The primary source of liquidity risk is the Group’s treasury activities. Liquidity risk is considered to be a low risk category. Group liquidity is managed by Group Treasury and each operation is required to maintain a minimum level of cash or cash equivalents or highly liquid assets that can be liquidated within a maximum stated period of time. Contingency funding plans are prepared and monitored to ensure that these minimum levels are met even in stressed conditions.
The Group operates in a number of geographical locations with diverse regulatory requirements. The regulatory environment has become more complex and demanding. The Group continues to respond to these developments through its arrangements for regulatory compliance and by ensuring that it maintains open and cooperative relationships with its regulators.
We are committed to underwriting discipline, with a relentless focus on profitability over volume.
Portfolio reviews are carried out across the business to assess the performance of each portfolio against key performance indicators. Key risk indicators are used to monitor emerging trends, opportunities and risks. Any portfolio that triggers a key risk indicator is flagged and investigated, with corrective measures implemented if required.
4. adverse financial markets impact the investment portfolio and the pension fund The Group operates a low risk investment policy, with the investment portfolio dominated by short dated, high quality fixed income and cash assets.
In 2007, we have taken steps to further reduce the Group’s exposure to market risk, including: Reducing equity exposure in the pension fund from 46% to 24% at the year end Selling a net £220m of shareholder equities and hedging up to £800m of the remaining equity portfolio with derivatives to mitigate the impact of equity market falls Ongoing reduction of CDO exposure through selective disposals Extending bond duration to improve liability matching and lock in higher yields
Climate change continued to be a major focus in 2007, generating both risks and opportunities for insurers. RSA has been at the forefront of the debate, helping customers and preparing our business.
During 2007, we have been active in working towards a common approach for responsible procurement in the financial services sector. This approach will help drive environmental and social improvements throughout the supply chain without jeopardising cost or quality.
(1) Inclusion of marketing materials in 50% of operations (2) Revised in CR report 2006 (3) Includes expansion of Canadian reporting, inclusion of Italy and Colombia for first year Note: Data covers 85% of RSA
as a group: We have stretching environmental targets in place. This year we have made excellent progress and achieved over 79% of the original targets. We have set new challenging targets for 2008 We continue to be ‘Carbon Neutral’ in the UK, and only use offsetting, in renewable energy projects of the highest quality, as a last resort We have integrated best practice environmental design into the new Irish HQ and two major site refurbishments in the UK, all due for occupation in 2008.
Road accidents are a major cause of death and injury, which as a leading motor insurer, we are committed to reducing. Our programmes on road safety education continue; in Chile teaching 27,000 children, while in Sweden we donated 180,000 reflective safety vests. In Dubai, in association with the Government, we have started a road safety training and stress reduction campaign for drivers.
Addressing social inclusion continues to be an issue across all our regions and we tackle this in different ways. In the UK, financial inclusion
domestic air travel reduction set is a major issue and alongside our provision of social housing insurance, Bridget McIntyre is a member of the UK Government’s Financial Inclusion Taskforce and chairs the Insurance Working Group.
Our overall charitable donation rose by 13% to £2.3 million in 2007, with 8,850 volunteer hours donated. In 2008, we look forward to our first ever Groupwide volunteer event helping local great causes identified by our employees, and building on the success of the RSA UK National Volunteer Week.
george Culmer Chief Financial Officer George was appointed Chief Financial Officer and Group Director in May 2004. He was previously Head of Capital Management at Zurich Financial Services and Chief Financial Officer of its UK operation. Before that George spent ten years with Prudential.
simon Lee Chief executive, international Businesses Simon has been Chief Executive of RSA’s International business since April 2003. Previously he spent 17 years with the National Westminster Bank Group, in the UK and US including time as Chief Executive, NatWest Offshore and Head of US Retail Banking.
neil macmillan group Director, audit, risk and Compliance Neil joined the Group as UK Director for Internal Audit in June 2003 and was appointed Group Director, Audit, Risk and Compliance in July 2006. Before joining RSA, Neil was Head of Internal Audit for the Royal Bank of Scotland Group’s Wealth Management and Retail Direct Divisions.
timothy mitchell group Underwriting and Claims Director Tim was appointed Group Underwriting and Claims Director in November 2007 when he joined the Group. Tim has over 30 years experience in the insurance industry. He joined RSA from Zurich Financial Services where he held senior underwriting roles including three years as Global Chief Underwriting Officer for General Insurance. Tim has also held senior management roles at AIG and Continental Insurance.
Clare salmon group strategy, marketing and Customer Director Clare joined as Group Strategy, Marketing and Customer Director in June 2007. Previously she was Director of Marketing & Commercial Strategy at ITV plc and a member of the Executive Management Board. Clare is also the former Managing Director of AA Financial Services and has held senior commercial roles at Prudential and British Gas. She is also a nonexecutive director of Alliance Trust plc.
David Weymouth group Operations and it Director David joined as Group Operations and IT Director in June 2007. He spent 27 years with the Barclays Group, where senior positions included Chief Operating Officer for Corporate Banking and Group Chief Information Officer and was part of the Group Executive Committee. He most recently spent two years consulting to a portfolio of blue chip and government organisations and acting as an independent board member at the DTI and for Chordiant Inc, the US Nasdaq quoted software business.
Paul Whittaker CeO of emerging markets Paul was appointed CEO of Emerging Markets in 2006, having been RSA’s Group HR Director since April 2003. He has over 15 years senior management experience in the financial services sector including three years at AXA and 10 years at GE Capital, including work in Asia and Eastern Europe on acquisition integration and business development.
george Culmer Age 45. Chief Financial Officer and Director of the Group from May 2004. Previously Head of Capital Management Zurich Financial Services (insurance) and Chief Financial Officer of its UK operation.
noel harwerth Age 60. Director of the Group from March 2004. Director of Logica CMG, Corporate Services Group plc, Anglo Irish Bank and Partnership Director, London Underground. Deputy Chairman of Sumitomo Mitsui Banking Corporation Europe Limited (finance). Former Chief Operating Officer of Citibank International plc (finance).
edward Lea Age 66. Director of the Group from July 2003. Chairman of the Group Audit Committee from October 2003. Director Redbourn Group plc (property management and investment). Director of IDC Plugs Limited (electrical services). Director of MacIntyre Care (charity). Previously a director of The British United Provident Association (BUPA).
Bridget mcintyre Age 46. UK Chief Executive and Director of the Group from November 2005. Former Executive Director of Norwich Union (insurance).
Left to right: top row: John Napier, Andy Haste, George Culmer middle row: Noel Harwerth, Edward Lea, Malcolm Le May
The directors of Royal & Sun Alliance Insurance Group plc (‘RSA’) present their report and the audited financial statements of the Company for the year ended 31 December 2007.
The Group uses Key Performance Indicators (‘KPIs’) to provide a well balanced and comprehensive review of the Group’s overall performance. KPIs are monitored in a number of areas including financial, employee, customer and the environment and community. Financial KPIs include the Group’s combined operating ratio, expense ratio, operating result and net written premium growth. Employee KPIs include the percentage of staff that have performance related pay, the percentage of staff taking part in the employee survey and the increase in overall employee satisfaction as measured by the survey. Customer KPIs include the levels of customer retention and the Group’s position in the annual benchmarking survey on complaints handling by the Association of British Insurers. Environment and community KPIs include the levels of CO2 emissions and the amount of the Group’s charitable donations. Financial KPIs are detailed in 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. The employee, customer and the environment and community KPIs are detailed in the regional business reviews on pages 14 to 22, the corporate responsibility report on pages 30 to 31 and in this report.
The preferential dividend at the rate of 3.6875% for the period from 1 October 2007 to 31 March 2008 will be paid on 1 April 2008 to holders of preference shares on the register at the close of business on 7 March 2008.
Employment policy The Group’s employment policy reflects our belief that motivated and skilled employees are critical to our success.
The Group continues to focus on the development of employees in order to ensure they can deliver high levels of performance. We believe we can create real competitive advantage by building and maintaining a high performance culture across the Group. In 2007, the focus has been on developing leadership talent and capability for today’s business needs and those of the future. We have continued to accelerate the development of our in house executive talent, through the Executive Development Programme which enters its fourth year in 2008. We have also introduced robust strategies to build capability and performance in the areas of sales, underwriting, claims and actuarial.
A Groupwide programme was introduced during 2006 looking at sales effectiveness, with the aim of equipping our salesforce with the tools, skills, career pathways, training, reward and recognition that an effective salesforce would expect. This programme has now been rolled out in the UK, Scandinavia, Canada, Ireland, Italy and a number of countries in the
Emerging Markets region. The programme will be rolled out in the remaining countries during 2008.
A second year of our accelerated career programme, FastTrack, resulted in us hiring 45 individuals who show potential to swiftly build capability to fulfil leadership positions in the Group. Typically three or four years post graduate, these individuals follow a structured career acceleration programme involving a six month overseas assignment to help bring increased exposure to cultural and organisational differences.
Employees are kept well informed of the overall performance and objectives of the Group.
Supplier payment policy It is the Company’s policy to agree appropriate terms and conditions in advance with its suppliers and to make payment in accordance with those terms and conditions, provided the supplier has complied with them. In most cases, agreements for the supply of goods or services are made under the Group’s standard terms of contract that lay down payment terms. In the UK these are available on request from UK Procurement, Leadenhall Court, 1 Leadenhall Street, London EC3V 1PP.
The Company’s outstanding indebtedness to trade creditors on 31 December 2007 amounted to £5.6m corresponding to 20 days’ payment when averaged over the year.
Share capital During the year, 12,448,823 ordinary shares of 27.5p each were issued in satisfaction of the exercise of employee share options for a total consideration of £9m, and 66,632,200 ordinary shares of 27.5p each were issued under the Company’s scrip dividend scheme for a total consideration of £100m. On 24 May 2007 the Company placed 186,350,000 ordinary shares of 27.5p each, raising gross proceeds of approximately £300m. The placing was part of the financing in respect of the recommended offer to purchase the shares in Codan A/S not already held by the Group.
The Company may purchase any of its own shares (including any redeemable shares). An authority from shareholders for the Company to purchase up to 298,848,845 of its own ordinary shares (representing 10% of its issued share capital as at 22 March 2007) remained in force at 31 December 2007.
The Articles may be amended subject to shareholder approval by special resolution at a general meeting of the Company. We are proposing to amend the Articles at the 2008 AGM, further details of which are set out in the Notice of AGM.
Employee Benefit Trusts The Company operates the Royal & SunAlliance ESOP Trust, the Royal & SunAlliance ESOP Trust No. 2 and the Royal & SunAlliance ESOP Trust No. 3 (the ‘Trusts’). In each case, the trustee is Lloyds TSB Offshore Trust Company Limited. In respect of any shares held in the Trusts, the trustee may vote in respect of those shares, but is not obliged to. In respect of the Royal & SunAlliance ESOP Trust No.3, the trustee may have regard to the financial interests of the beneficiaries in exercising its voting rights over the Company’s shares.
Substantial share interests At the date of this report we have been notified, in accordance with the Disclosure and Transparency Rules, of the following interests in the ordinary share capital of the Company: Number of shares Number of shares Interest in which there is in which there is in issued a direct interest an indirect interest share capital
Goldman Sachs Asset Management – 192,491,038 5.92% Legal & General Group plc 159,445,835 – 4.90% Schroders plc – 147,476,133 4.53% Standard Life Investments 108,621,140 17,201,130 3.87%
Directors The names of the directors, together with biographical details are set out on page 34.
Directors’ indemnity Article 154 of the Company’s Articles provides that, among other things and insofar as permitted by law, every director shall be indemnified by the Company against all costs, charges, expenses, losses or liabilities incurred in the execution and discharge of the director’s duties, power or office.
Related party transactions Related party transactions are set out in note 32 on page 115.
Charitable and political contributions The Company and its subsidiaries worldwide made charitable donations of £2,370,003 during the year. The largest contribution of £251,935 was made for the Danish life buoy programme promoting safety around water.
The Group did not make any donations to European Union (EU) political parties nor to political parties outside the EU during 2007, and it is not the Group’s policy to do so.
This report sets out the Company’s approach to corporate governance in 2007. The report has been prepared in accordance with the Code of Best Practice set out in section 1 of the 2006 FRC Combined Code on Corporate Governance (the ‘Combined Code’) and sets out the extent of our compliance with the Code.
Compliance with the Combined Code Throughout 2007 the Group has complied with the Principles and Provisions of the Combined Code except that the Group has not appointed a senior independent director. The non-executive directors have a unanimous view that the appointment of a senior independent director is not appropriate at this time. All non-executive directors are encouraged to communicate directly with executive directors and senior management outside of formal meetings and an active dialogue is maintained by the Board.
The Board The Board is accountable to shareholders for the creation and delivery of strong sustainable performance and the creation of long term shareholder value. The Board meets regularly and is responsible for organising and directing the affairs of the Company and the Group in a manner that will promote the success of the Company and is consistent with good corporate governance practice, and for ensuring that in carrying out its duties the Company and the Group meet legal and regulatory requirements. The Board is also responsible to the Financial Services Authority (FSA) for ensuring compliance with the Group’s UK regulatory obligations.
A director must not vote in respect of any contract or other proposal in which he (or any person connected with him) has a material interest otherwise than by virtue of his interests in securities of the Company. However, a director shall be entitled to vote in certain limited circumstances which are set out in full in the Articles. Amendments are being proposed to the Articles at the 2008 AGM regarding directors’ conflicts of interest in line with the Companies Act 2006. Further details are set out in the notice of AGM.
The directors restrict the borrowings of the Company so that the aggregate amount, for the time being, remaining borrowed by the Group is not, without the previous sanction of an ordinary resolution of the Company, more than one and a half times the aggregate of: The amount paid up on the issued share capital of the Company
The specific duties of the Board are clearly set out as a formal schedule of matters specifically reserved to it, which can only be amended by the Board itself and which is reviewed annually. Matters reserved to the Board include: Approval of the Group’s long term objectives and commercial strategy
The Board met 13 times during the year ended 31 December 2007. The attendance of directors at meetings of the Board and at Board Committees of which they were members during the year is set out below: Board Board Group Audit Nomination Remuneration Investment Board Risk Notes meetings Committee Committee Committee Committee Committee Committee
Total number of meetings in the year 1 13 6 7 4 5 2 5
Bridget McIntyre 13 John Napier 13* 4* 2 *Chairman of the Board or board committee
Notes 1. In addition to attendance as above, Andy Haste and George Culmer regularly attend, by invitation, meetings of the Group Audit Committee (GAC) and Andy Haste regularly attends meetings of the Remuneration Committee. 2. Simon Lee agreed not to attend the Board meeting on 21 May 2007 due to the business of the meeting creating a potential conflict with his interests as a director of Codan A/S.
Induction and professional development Directors undertake an induction programme and will receive a range of information about the Company when they join the Board. This includes background information on the Group and details of board procedures, governance issues and directors’ responsibilities. The induction programme also includes a series of meetings with members of the Board and various briefings and presentations regarding the business from executives.
Development and training for the directors is an ongoing process which includes briefings on legislative changes and on corporate governance issues. Directors also receive regular presentations about the Company’s operations and there are regular discussions on strategy, customer marketing and employee satisfaction. Opportunity is also created for non-executive directors to make informal visits to different parts of the Group and to meet with local management.
Performance evaluation In 2007 the Board undertook an annual evaluation of its performance to assess how well the Board, its committees and the directors were performing. The review included the use of a comprehensive questionnaire. Responses from the questionnaire were collated and subsequently discussed by the Board. Strong positive feedback on the workings of the Board was received and potential improvements identified through the evaluation process will be implemented. The non-executive directors are responsible for the evaluation of the Chairman’s performance and take into account the views of the executive directors in their evaluation. As part of the ongoing performance evaluation process the Chairman has regular one to one meetings with all the non-executive directors.
The directors must present financial statements for each financial year, in accordance with applicable law, accounting standards and regulations, which give a true and fair view of the state of affairs of the Group and of the profit or loss and cashflows for that period. Financial statements for the Group are prepared in accordance with International Financial Reporting Standards (IFRS), the Companies Acts 1985 and 2006 and Article 4 of the IAS Regulations.
Use the going concern basis unless it is inappropriate to do so.
The directors confirm that they have complied with the above requirements in preparing the financial statements.
Internal control The Board has overall responsibility for the Group’s internal control systems and for monitoring effectiveness. Implementation and maintenance of the internal control systems are the responsibility of the executive directors and senior management. The performance of internal control systems is reviewed regularly by the Group Audit Committee (GAC).
The Board reviews annually the effectiveness of the Group’s systems of internal control in order to safeguard the Group’s assets and shareholders’ investment. This system includes governance, financial controls, the risk management framework and operational, regulatory and compliance requirements. The systems are designed to manage, rather than eliminate, the risk of failure to achieve business objectives and can only provide reasonable and not absolute assurance against material financial misstatement or loss. Following the review of the internal control systems, the Board confirms that the actions it considers necessary to rectify any significant failings or weaknesses identified as a result of the review have been, or are being, taken.
The Board considers that the current reporting framework delivers sufficient information to monitor the systems of internal control and to review their effectiveness as required by the Combined Code. The Board therefore considers that an ongoing process for identifying, evaluating and managing the significant risks faced by the Group has been in place during 2007 and up to the date of approval of the Annual Report and Accounts. This process is regularly reviewed by the Board and accords with the Turnbull Guidance on the Combined Code.
Further detail on the overall risk framework is set out on pages 27 to 29.
To review all matters relating to the legal integrity of the Group
The GAC meets regularly with internal and external auditors without management present. The partner of the Group’s external auditors, who is responsible for the external audit, attends meetings regularly. Each year, the GAC considers the performance of the external auditors prior to a resolution on their reappointment and remuneration at the AGM.
External auditors During the year, Deloitte & Touche LLP were, on a number of occasions, engaged as advisors. In order to maintain their independence, such appointments are only made in accordance with a protocol developed by the GAC. This gives guidance to businesses within the Group on the appropriateness of engaging the Group’s external auditors as advisors and sets down the procedures to be followed to authorise such an engagement. The GAC is satisfied that this protocol has been followed and there are no matters that would compromise the independence of the auditors or affect the performance of their statutory duties.
Key features of the current internal control systems of the Group include: Internal audit The Group has an internal audit function, whose activities and effectiveness are monitored and reviewed by the GAC. The GAC is responsible for ensuring that adequate access to information and resource is given to the Group Director, Audit, Risk and Compliance and for approving the appointment to, and removal of the holder from, that position.
The Board Risk Committee The BRC, which meets at least quarterly, is chaired by George Culmer, Chief Financial Officer. The BRC also comprises the Group CEO and other members of executive management. The Committee is authorised by the Board under its terms of reference to manage all risks faced by the Group. The Board approved Group risk appetite is set by reference to policies, control limits and other mechanisms. The Committee’s principal duties include: Defining the Group’s risk appetite prior to approval by the Board
Approval of policy and minimum standards that are consistent with the risk appetite
Delegated authorities The Group operates a Delegated Authority Policy which specifies how executive authority is delegated from the Board to the Group CEO and on to other executives in the Group. Individual executive licences set out specific limits of authority in terms of entering into financial, underwriting and other business commitments. Each executive is responsible for ensuring a similar process of delegation is in place within their area of responsibility.
Dialogue with institutional shareholders The Board attaches considerable importance to its relationships and communication with shareholders. Senior management meet principal institutional shareholders on a regular basis and small shareholder groups on request and non-executive directors are available to meet with institutional shareholders as required. In addition, investor relations events are held during the year to increase shareholders’ understanding of the business.
Constructive use of the Annual General Meeting All shareholders are invited to attend the Company’s AGM. The AGM Notice is despatched to shareholders at least 20 working days before the meeting and contains separate resolutions on each substantive issue including a resolution to adopt the Annual Report and Accounts. All directors are requested to attend each AGM. The Chairman and the chairmen of the Group Audit, Nomination and Remuneration Committees make themselves available to take questions from shareholders at and after the AGM.
By order of the Board Mark R Chambers General Counsel and Group Company Secretary 26 February 2008
The tables of defined benefit and defined contribution pensions on pages 52 to 53 and associated footnotes
In constitution and operation the Committee complies fully with the Combined Code as appended to the Listing Rules of the UK Listing Authority and as described in the corporate governance section of this report, on page 40.
Principal duties of the Remuneration Committee The Committee is a formal committee of the Board and is accountable to shareholders through its annual remuneration report, which is voted on at the AGM, and remains committed to reflecting the best interests of shareholders and to the pursuit of best practice in remuneration policy.
The Committee’s principal duties are as follows: The determination of the terms and conditions and remuneration of the Chairman of the Board and the executive directors
Overseeing the operation of the Company’s share based long term incentive schemes, including approving the value and timing of awards and overseeing the operation of performance conditions
Consideration of, and advice to the Board on, the Group’s broader remuneration policy in relation to senior executives reporting to the Group CEO (the ‘Executive Team’).
The review of actual performance of the executive directors in 2006 against agreed goals and objectives
The ongoing review and monitoring of performance conditions and reports on performance for awards under the Share Matching Plan and various share option grants
Executive remuneration and shareholder interests are strongly aligned. This is reflected in the design of the LTIP, which provides a coinvestment opportunity
Positioned appropriately against similar roles, with reference to the median position of similar roles in the comparator companies
Up to 33% of cash bonus paid may be reinvested in voluntarily Deferred Shares under the LTIP
LTIP To reward the creation of sustained growth in shareholder value
Matching shares awarded linked to Deferred Shares, also subject to performance conditions
Defined benefit scheme or defined contribution scheme, and/or cash allowance in lieu of pension contributions
This structure is replicated for other members of the Executive Team.
Personal targets are reviewed and approved by the Committee early in the financial year. The Group CEO’s performance is assessed annually by the Chairman of the Board and members of the Committee. The Group CEO carries out a similar assessment for each of his direct reports, subject to review and sign off by the Committee in the case of executive directors. Assessments also take account of appropriate leadership style and each executive receives a performance rating against the standard scale used at all levels in the business.
Executives are also offered the opportunity to voluntarily invest up to 33% of the cash element of their bonus into Deferred Shares. In 2007 (under the LTIP), an award of Matching Shares was made on a pro rata basis to the Deferred Shares. Matching Shares may vest subject to the performance conditions described on page 56 of this report.
The Committee reserves the right to reduce the permissible investment below this level. However, the LTIP will continue to operate on the same terms in 2008.
Prior to the approval of the LTIP, two share incentive plans were operated: The 2004 Share Matching Plan, which was designed to operate for two years. The final awards under this plan were made in 2005
It is intended that, in 2008, awards of Performance Shares to executive directors will be limited to a maximum face value of 100% of base salary, other than in exceptional circumstances. Awards of Performance Shares to members of the Executive Team in 2008 will be limited to a maximum face value of 80% of base salary, other than in exceptional circumstances. Account will be taken of personal performance in determining the scale of the award to each executive. For executives below this level, awards are made based on a formula which relates the size of award to performance and potential, as measured through the annual performance appraisal process.
exceptional nature which in the view of the Committee do not reflect the underlying performance of the business 50% of the shares comprising the award will vest according to TSR performance against a comparator group of UK and International financial services companies. Below median performance, no part of the award subject to the TSR performance condition will vest. At median performance, 25% of the award will vest. At upper quintile (top 20%), 100% of the award will vest. Vesting will be on a straight line basis in between
Additionally, before any shares subject to the TSR condition vests, the Committee must be satisfied that the Company’s TSR performance is reflective of underlying financial performance.
The TSR comparator group will consist of the following companies: Comparator companies: Aegon AXA Alleanza Allianz AVIVA Baloise Fortis Generali Legal & General Munich Re QBE Swiss Re Zurich Financial Services
During 2007, AGF ceased to be listed and will be removed from the comparator group for the purpose of measuring TSR performance for awards made in 2006 and 2007. The Committee reviews, on an ongoing basis, the composition of the comparator group and will consider adding companies for future awards in the event that the number of constituent companies drops below an acceptable level.
The Group’s TSR will be independently calculated and verified by the Committee for the purposes of awards made in 2008 under the LTIP.
The vesting of Matching Shares related to voluntarily Deferred Shares will be determined solely by the ROE performance condition.
Dilution Dilution levels for all schemes are held strictly within the Association of British Insurers (ABI) limits (10% over 10 years for all schemes and 5% for discretionary schemes). The dilution levels compared to ABI limits as at 31 December 2007 were: ABI limit RSA dilution 10% over 10 years for all share schemes: 5.47% 5% over 10 years for discretionary schemes: 3.22%
The Group CEO is required to build and maintain a minimum shareholding in the Company equivalent to 150% of base salary. The other executive directors have a target of 100% of base salary and other members of the executive team have a target of 50% of base salary. In order to ensure that progress is made towards this target, executives are required to retain shares to a value of 50% of the net of tax gain under all executive schemes until the relevant guideline is attained. This requirement will apply to awards under the LTIP, and will continue to apply to awards under all existing long term incentive plans.
Andy Haste 1,070,829 33% 186% George Culmer 244,407 52% 75% Simon Lee 177,136 609% 71%
Pension provision and other benefits Policy: Reasonable provision in line with arrangements made in similar companies will be made to allow executives to plan effectively for their retirement but the Committee will not compensate executives affected by the tax limits effective 6 April 2006.
Until 31 December 2005, George Culmer participated in a contributory defined contribution occupational pension scheme (the Royal & SunAlliance UK Pension Scheme 2002). From 1 January 2006 this scheme was replaced by the Royal & SunAlliance Stakeholder Pension Plan (the Stakeholder Plan), a contributory defined contribution stakeholder pension scheme. George Culmer became a member of the Stakeholder Plan from 1 January 2006. In 2008, as in 2007, he will receive employer contributions worth 15% of base salary, subject to an employee contribution of 5% of base salary up to the HM Revenue and Customs annual allowance as applicable. Additionally, George Culmer receives a taxable cash allowance of 15% of base salary, in order to bring his overall pension provision closer to the market median.
Bridget McIntyre was enrolled in the Stakeholder Plan as from 1 January 2006. In 2008, as in 2007, she will receive employer contributions worth 15% of base salary, subject to an employee contribution of 5% of base salary up to the HM Revenue and Customs annual allowance as applicable. Additionally, Bridget McIntyre receives a taxable cash allowance of 15% of base salary, in order to bring her overall pension provision closer to the market median.
Andy Haste’s service contract expires under normal circumstances in January 2024. The service contracts for George Culmer, Bridget McIntyre and Simon Lee terminate under normal circumstances in October 2024, July 2023 and March 2023 respectively. These service
External directorships Where appropriate, the Group encourages directors and other senior managers to accept, subject to the approval of the Chairman and the Group CEO, an invitation to join the Board of another company in a non-executive capacity, recognising the value of such wider experience. In these circumstances, they are permitted to retain any remuneration from the non-executive appointment. For executive directors and other members of the executive team, external appointments are limited to one . At the date of this report Bridget McIntyre, Simon Lee and Mark R Chambers all held directorships in not for profit organisations.
Edward Lea 10 July 2003 John Maxwell 10 July 2003 Noel Harwerth 30 March 2004 Malcolm Le May 30 March 2004
The graph shows the TSR of the Group with reference to the FTSE World Europe Non Life Insurance Index and the FTSE 100 Index. The FTSE World Europe Non Life Insurance Index comprises the range of European insurance businesses which most closely match our competitor group, and the TSR comparator group selected for 2006 and 2007 awards under the Long Term Incentive Plan. The FTSE 100 Index comprises the 100 most highly capitalised companies, representing approximately 80% of the UK market. TSR performance relative to the indices is shown over the five years from 31 December 2002 to 31 December 2007.
Directors’ emoluments (audited part) Remuneration for the year ended 31 December was as follows: Base salary Allowances Total Total and fees and benefits Bonuses 2007 2006 Notes £000 £000 £000 £000 £000
4. Simon Lee was appointed to the Board effective from 1 January 2007. He received an annual performance bonus of £352,450 in respect of performance year 2007. His allowances also included 17.5% of base salary as a retirement allowance, paid monthly. During 2007, the amount paid was £64,000. He also received car benefits and additional taxable travel benefits worth £17,000 and medical benefits worth £1,000.
4. The benefits shown above in respect of Andy Haste relate to his membership of a defined benefit pension scheme up to the earnings cap. 5. For Andy Haste the increase in his accrued pension during the year, excluding the effects of inflation, was £1,862p.a. and the transfer value in respect of this less his contributions was 6. Andy Haste is required to contribute to the scheme and also has the option of paying Additional Voluntary Contributions (AVCs). Neither voluntary contributions nor the resulting benefits are included in the table.
The Company contributions paid in respect of executive directors who are members of Group defined contribution schemes, were as follows: Company Company contributions paid contributions paid in 2007 in 2006 £ £
Options (audited part) Movements in option holdings during 2007 were as follows: Options Options Options Options Options held at granted exercised lapsed held at 1 January during during during 31 December 2007 the year the year the year 2007
Directors’ emoluments and interests continued 54 | RSA | Annual Report and Accounts 2007
Long term incentive schemes (audited part) Long term incentive scheme interests held during 2007 in respect of the ordinary shares of the Company are as follows: Share Matching Plan
Share awards Share awards Share awards Share awards Share awards Share awards Dates by held at granted vested and vested but not lapsed held at which qualifying 1 January during exercised during exercised during during 31 December conditions must Notes 2007 the year the year the year the year 2007 be fulfilled
Simon Lee 1,3,4 Deferred Share awards 139,409 – 43,327 – – 96,082 08.04.08
Notes 1. The market price of ordinary shares on 14 June 2004, 8 April 2005 and 1 November 2005, the dates on which the above long term incentive scheme interests were granted, was 79.25p, 81.25p and 100p respectively. 2. Bridget McIntyre’s award of Deferred and Matching shares was approved prior to her appointment on 1 November 2005. Due to dealing restrictions in accordance with the Model
4. Awards made in 2004 vested on 14 June 2007. Andy Haste’s 2004 awards were shown in the Annual Report and Accounts 2006 as having vested in that year in order to clarify the lapse of the proportion of the Matching Share awards that failed to meet performance targets. Simon Lee was the only executive director to have exercised awards made in 2004 during the year. The performance condition attaching to Matching Share awards granted in 2005 was met to the extent that three Matching Shares vested for each Deferred Share. Awards made in 2005 are due to vest in 2008.
Share awards Share awards Share awards Date by which held at granted held at qualifying 1 January during 31 December conditions Notes 2007 the year 2007 must be fulfilled
3. Matching Shares are capable of vesting in respect of a maximum of 2.5 times the number of Deferred Shares awarded, subject to the achievement of performance conditions over a three year period. One half of the Matching Shares relating to compulsory Deferred Shares (and all of the Matching Shares relating to voluntary Deferred Shares) are subject to TSR performance relative to other companies specified by the Remuneration Committee. For awards granted in 2006 and 2007 TSR will be measured relative to the following comparator group companies: Aegon, Alleanza, Allianz, AVIVA, AXA, Baloise, Fortis, Generali, Legal & General, Munich Re, QBE, Swiss Re, and Zurich Financial Services. Full vesting will only occur at upper quintile performance; at median performance 25% of the Matching Shares will vest. Vesting will be on a straight line basis in between. The remaining half of the Matching Shares relating to compulsory Deferred Shares are subject to a ROE performance condition. If underlying ROE over three years commencing on the year of grant is below 10%, no part of the award subject to ROE performance will vest. If underlying ROE over three years is 10%, 25% of the award will vest. If underlying average annual ROE over three years is 16% or higher, 100% of the awards will vest. Vesting will be on a straight line basis in between. For the purpose of establishing the number of Matching Shares relating to voluntary Deferred Shares that may be awarded, the gross value of that part of the annual bonus payment that a participant elects to voluntarily defer is used.
4. Performance conditions relating to awards of Performance Shares are the same as those relating to compulsory Deferred Shares as described above. One half of an award of Performance Shares may vest subject to the TSR performance condition and one half may vest subject to the ROE performance condition.
6. No other directors of the Company held long term incentive scheme interests during 2007.
John Maxwell Chairman of the Remuneration Committee, on behalf of the Board 26 February 2008 56 | RSA | Annual Report and Accounts 2007
We have audited the consolidated financial statements of Royal & Sun Alliance Insurance Group plc for the year ended 31 December 2007 which comprise the consolidated income statement, the consolidated statement of recognised income and expense, the consolidated balance sheet, the consolidated cashflow statement, significant accounting policies, estimation techniques, uncertainties and contingencies, risk management and related notes 1 to 34. These consolidated financial statements have been prepared under the accounting policies set out therein. We have also audited the information in the remuneration report that is described as having been audited.
Code specified for our review by the Listing Rules of the Financial Services Authority, and we report if it does not. We are not required to consider whether the Board’s statements on internal control cover all risks and controls, or form an opinion on the effectiveness of the Group’s corporate governance procedures or its risk and control procedures.
Deloitte & Touche LLP Chartered Accountants and Registered Auditors London 26 February 2008
Change in the gross provision for unearned premiums (235) (108) Less: change in provision for unearned premiums, reinsurers’ share 5 (84)
Gross claims incurred (4,044) (3,758) Less: claims recoveries from reinsurers 387 305
Net claims and benefits 3 (3,657) (3,453) Underwriting and policy acquisition costs (1,776) (1,626) Unwind of discount (81) (42) Other operating expenses 4 (119) (151) Total expenses (5,633) (5,272) Results of operating activities 796 741 Finance costs 4 (104) (92) Loss on disposal of subsidiaries (22) (1) Net share of profit after tax of associates 11 – 1 Profit before tax from continuing operations 670 649 Income tax expense 5 (29) (170) Profit for the year from continuing operations 641 479
Discontinued operations Loss for the year from discontinued operations 34 (13) (499) Profit/(loss) for the year 628 (20)
Attributable to: Equity holders of the Parent Company 596 (52) Minority interests 32 32 628 (20)
Earnings per share on profit from continuing operations attributable to the ordinary shareholders of the Parent Company Basic 6 19.3p 15.0p
Exchange gains/(losses) net of tax 140 (151) Fair value (losses)/gains net of tax (67) 32 Pension fund actuarial (losses)/gains net of tax (16) 153 Net gains recognised in equity 57 34 Profit/(loss) for the year 628 (20) Total recognised income for the year 685 14
Consolidated statement of recognised income and expense for the year ended 31 December 2007
Assets Goodwill and other intangible assets 8 663 552 Property and equipment 9 377 385
Equity, reserves and liabilities Equity and reserves Shareholders’ equity 3,077 2,561 Minority interests 67 331 Total equity and reserves 18 3,144 2,892 Liabilities Loan capital 19 1,194 1,192 Insurance contract liabilities 20 13,727 12,790 Insurance and reinsurance liabilities 21 426 391 Borrowings 22 303 8
Consolidated balance sheet as at 31 December 2007 60 | RSA | Annual Report and Accounts 2007
Cash generated from continuing operations 31 66 406 Tax paid (127) (118) Interest received 587 527 Interest paid (101) (82) Dividends received 1 1 Pension deficit funding (86) (86) Cashflows from discontinued operations (37) (531) Net cashflows from operating activities 303 117 Proceeds from sales or maturities of: Investment contracts 8,672 8,166 Investment property 18 55 Property and equipment 26 43 Intangible assets 1 1 Investments in subsidiaries (net of cash disposed of) 30 (407) – Investments in associates 22 –
Cashflows from discontinued operations 83 606 Net cashflows from investing activities (681) 781 Proceeds from issue of share capital 304 6 Purchase of shares from minorities (616) (121) Dividends paid to ordinary shareholders (102) (78) Dividends paid to preference shareholders (9) (9) Dividends paid to minority interests (31) (9) Net movement in long term borrowings (25) 74 Net movement in other borrowings 293 (243) Cashflows from discontinued operations – (9) Net cashflows from financing activities (186) (389) Net (decrease)/increase in cash and cash equivalents and bank overdrafts (564) 509 Cash and cash equivalents and bank overdrafts at beginning of the year 2,040 1,612 Effect of exchange rate changes on cash and cash equivalents 62 (81) Cash and cash equivalents and bank overdrafts at end of the year 17 1,538 2,040
Changes in presentation and comparative information The Group has adopted IFRS 7 ‘Financial Instruments: Disclosures’ and a complementary amendment to IAS 1 ‘Presentation of Financial Statements – Capital Disclosures’. This results in additional disclosures of the Group’s risk management policies and the extent to which the Group is exposed to risk.
The Group accounting policy is to recognise actuarial gains and losses arising from the recognition and funding of the Group’s pension obligations in the statement of recognised income and expense during the period in which they arise. This policy has been adopted as it provides the most relevant basis of recognition of such gains and losses.
Associates Associates are entities over which the Group has significant influence but not control, generally accompanying a shareholding of between 20% and
Income and expenses for each income statement are translated at average exchange rates during each period
Goodwill and other intangible assets Goodwill, being the difference between the cost of a business acquisition and the Group’s interest in the net fair value of the identifiable assets and liabilities acquired, is initially capitalised in the balance sheet at cost and is subsequently recognised at cost less accumulated impairment losses. The cost of the acquisition is the amount of cash paid and the fair value of other purchase consideration given together with associated expenses. Goodwill is allocated to cash generating units for the purpose of impairment testing. Each of those cash generating units represents the Group’s investment in each country of operation. Goodwill is subject to an impairment review at least annually. An impairment review is also carried out whenever there is an indication that goodwill or other intangible assets are impaired. Where the carrying amount is more than the recoverable amount, an impairment is recognised.
Computer software and other intangible assets are carried at cost less accumulated amortisation. Amortisation on computer software and other intangible assets is calculated using the straight line method to allocate the cost over their estimated useful lives, which is normally estimated to be between three and 12 years.
Increases in the carrying amount arising on the revaluation of Group occupied property are credited to revaluation surplus in equity. Decreases that offset the previous increases of the same asset are charged against revaluation surplus directly in equity, other decreases are charged to the income statement. Each year the difference between depreciation based on the fair value of the asset charged to the income statement and depreciation based on the assets original cost is transferred from revaluation surplus to retained earnings.
Investment property Investment property, comprising freehold and leasehold land and buildings, is held for long term rental yields and is not occupied by the Group.
Investment property is recorded at fair value, measured by independent professionally qualified valuers, who hold a recognised and relevant professional qualification and have recent experience in the location and category of the investment property being valued, on an annual basis or more frequently and by internal valuers for interim periods, with reference to current market conditions. Related unrealised gains and unrealised losses or changes thereof are recognised in net investment return.
Hedging Transactions are classified as hedging transactions when the following conditions for hedge accounting are met: There is a formal designation and documentation of the hedging relationship and the Group’s risk management objective and strategy for undertaking the hedge
The hedge is expected to be highly effective in achieving offsetting changes in fair value or cashflows attributable to the hedged risk, consistently with the originally documented risk management strategy for that particular hedging relationship
For cashflow hedges, a forecast transaction that is the subject of the hedge must be highly probable and must present an exposure to variations in cashflows that could ultimately affect profit or loss
For equity securities fair values are based upon quoted market prices
For derivatives, fair values are generally based upon quoted market prices.
Acquisition costs Acquisition costs comprise the direct and indirect costs of obtaining and processing new insurance business. These costs are recognised as a deferred acquisition cost asset and amortised on the same basis as the related premiums are earned.
Insurance liabilities The provision for unearned premium represents the portion of the premiums written relating to periods of insurance coverage subsequent to the balance sheet date.
The change in the present value of the defined benefit obligation and the changes in the fair value of scheme assets resulting from any curtailments and settlements of scheme liabilities during the period are recognised in the income statement. Additionally, any previously unrecognised past service costs related to these liabilities are recognised in the gains or losses on settlement and curtailment.
Actuarial gains and losses arise from changes to actuarial assumptions when revaluing future benefits and from actual experience in respect of scheme liabilities and investment performance of scheme assets being different from previous assumptions. Actuarial gains and losses are recognised in the statement of recognised income and expense.
Minus the fair value at the balance sheet date of the scheme assets out of which the obligations are to be settled directly.
Vesting conditions, which comprise service conditions and performance conditions, other than those based upon market conditions, are not taken into account when estimating the fair value of such awards but are taken into account by adjusting the number of equity instruments included in the ultimate measurement of the transaction amount. The value of the awards is recognised as an expense on a systematic basis over the period during which the employment services are provided. Where an award of options is cancelled by an employee, the full value of the award (less any value previously recognised) is recognised at the cancellation date.
Non current and disposal group assets and liabilities held for sale and discontinued operations Non current and disposal group assets are classified as held for sale if their carrying amount is to be recovered principally through a sale transaction, that is highly probable to complete within one year from the date of classification, rather than through continuing use. Such assets are measured at the lower of carrying amount and fair value less costs to sell and are classified separately from other assets in the balance sheet. Assets and liabilities of a disposal group are not netted. In the period where a non current asset or disposal group is recognised for the first time the balance sheet for the comparative prior period presented is not restated.
Current and non current distinction Assets are classified as current when expected to be realised within the Group’s normal operating cycle of one year. Liabilities are classified as current when expected to be settled within the Group’s normal operating cycle of one year. All other assets and liabilities are classified as non current.
Significant accounting policies continued 68 | RSA | Annual Report and Accounts 2007
a) Published standards and amendments to published standards that are not yet effective and have not been early adopted by the Group On 6 September 2007 the International Accounting Standards Board (IASB) issued a revised version of IAS 1 ‘Presentation of Financial Statements’.
The revised standard will come into effect for the annual periods beginning on or after 1 January 2009, but early adoption is permitted. The revised standard has not yet been adopted by the EU. The revisions will result in changes to the presentation of the financial statements but are not expected to change the results or the earnings per share of the current period, the comparative period or earlier periods, and the Group’s financial position at the end of each such period.
Total comprehensive income is attributed to a non controlling interest even if this results in the non controlling interest having a deficit balance
A change in a controlling interest arising from a transaction between a controlling interest and a non controlling interest that does not result in a loss of control, is accounted for as an equity transaction
In a business combination, the acquiring company must measure the non controlling interest at either fair value or as the non controlling interest’s proportionate share of the identifiable net assets. Currently only the second basis is permitted
b) Other Standards and Interpretations to published standards issued that are not relevant for the Group’s operations or not expected to change accounting policies
On 4 July 2007 the IFRIC published Interpretation IFRIC 14, IAS 19 ‘The Limit on a Defined Benefit Asset, Minimum Funding Requirements and their Interaction’. This interpretation clarifies the value that may be placed upon an asset arising from the surplus within a pension fund sponsored by the reporting entity and also the impact of its commitments to provide funding to its pension funds.
On 17 January 2008 the IASB issued an amendment to IFRS 2 ‘Share Based Payment’. The amendment clarifies the accounting treatment of the cancellation of share option arrangements by the option holder.
Estimates based upon a projection of claims numbers and average cost
Estimation techniques, uncertainties and contingencies 70 | RSA | Annual Report and Accounts 2007
Uncertainties and contingencies The uncertainty arising under insurance contracts may be characterised under a number of specific headings, such as: Uncertainty as to whether an event has occurred which would give rise to a policyholder suffering an insured loss
The degree of uncertainty will vary by policy class according to the characteristics of the insured risks and the cost of a claim will be determined by the actual loss suffered by the policyholder.
The Group has exposures to risks in each class of business within each operating segment that may develop and that could have a material impact upon the Group’s financial position. The geographical and insurance risk diversity within the Group’s portfolio of issued insurance policies make it not possible to predict whether material development will occur and, if it does occur, the location and the timing of such an occurrence. The estimation of insurance liabilities involves the use of judgments and assumptions that are specific to the insurance risks within each territory and the particular type of insurance risk covered. The diversity of the insurance risks results in it not being possible to identify individual judgments and assumptions that are more likely than others to have a material impact on the future development of the insurance liabilities.
Factors contributing to this higher degree of uncertainty include: The long delay in reporting claims from the date of exposure (for example, cases of mesothelioma can have a latent period of up to 40 years). This makes estimating the ultimate number of claims we will receive particularly difficult
Issues of allocation of responsibility among potentially responsible parties and insurers
For US liabilities from our London market business, developments in the tactics of US plaintiff lawyers and court decisions and awards.
Litigation, mediation and arbitration The Group, in common with the insurance industry in general, is subject to litigation, mediation and arbitration, and regulatory, governmental and other sectoral inquiries in the normal course of its business. In addition the Group is subject to litigation in connection with its former ownership of the US operation. The directors do not believe that any current mediation, arbitration, regulatory, governmental or sectoral inquiries and pending or threatened litigation or dispute will have a material adverse effect on the Group’s financial position, although there can be no assurance that losses resulting from any current mediation, arbitration, regulatory, governmental or sectoral inquiries and pending or threatened litigation or dispute will not materially affect the Group’s financial position or cashflows for any period.
Reinsurance The Group is exposed to disputes on, and defects in, contracts with its reinsurers and the possibility of default by its reinsurers. The Group is also exposed to the credit risk assumed in fronting arrangements and to potential reinsurance capacity constraints. In selecting the reinsurers with whom we do business our strategy is to seek reinsurers with the best combination of credit rating, price and capacity. We publish internally a list of authorised reinsurers who pass our selection process and which our operations may use for new transactions.
We use derivative financial instruments to reduce our exposure to adverse fluctuations in interest rates, foreign exchange rates and equity markets. We have strict controls over the use of derivative instruments.
Estimation techniques, uncertainties and contingencies continued 72 | RSA | Annual Report and Accounts 2007
The Group has a Group Reserving Committee consisting of the Group Chief Executive Officer, Chief Financial Officer, Group Underwriting and Claims Director and Group Chief Actuary. A similar committee has been established in each of the Group’s major operating segments. The Group Reserving Committee monitors the decisions and judgments made by the business units as to the level of reserves recommended and makes the final decision on the reserves to be included within the consolidated financial statements (‘Management Best Estimate’). In making its judgment, the Group Reserving Committee’s aim is that, over the longer term, reserves should be more likely to run off favourably than adversely. However, there can be no assurance that reserves will not develop adversely and exceed the Management Best Estimate. In making its judgment of the Management Best Estimate of reserves to include in the consolidated financial statements, the Group Reserving Committee adopts the following approach: The Group’s actuaries provide an indication of ultimate losses together with an assessment of risks and possible favourable or adverse developments that may not have been fully considered in calculating these indications. At the end of 2007 these risks and developments include: the possibility of future legislative change having retrospective effect on open claims; changes in claims settlement procedures potentially leading to future claims payment patterns differing from historical experience; the possibility of new types of claim, such as disease claims, emerging from business written several years ago; general uncertainty in the claims environment; the emergence of latent exposures such as asbestos; the outcome of litigation on claims received; failure to recover reinsurance and unanticipated changes in claims inflation
Emerging and legal risks These are risks that have been identified as potentially affecting the Group but for which the extent of risk has not yet been identified. Existing or potential future risk exposures are investigated in a structured way, using internal and external resources, and actions to mitigate, contain or remove these risks are taken.
The ability of the business units in each territory to assess the aggregation risk of a single event impacting on thousands of policyholders is vital. The Group employs proprietary exposure measurement systems to assess these risks. In some markets, particularly in the UK, the Group has in addition developed its own expertise in catastrophe modelling that is used in conjunction with outside consultants. The accurate estimation of the potential expected maximum loss for a catastrophe is critical and is the primary factor considered in designing the Group’s catastrophe reinsurance programme.
Notes 1. The insurance and reinsurance debtors classified as not rated comprise personal policyholders and small corporate customers that do not have individual credit ratings. The overall credit risk to the Group is deemed to be low as the cover could be cancelled if payment were not received on a timely basis.
The Group is exposed to concentrations of risk with individual reinsurers, due to the nature of the reinsurance market and the restricted range of reinsurers that have acceptable credit ratings. Reinsurance counterparties are subject to a rigorous internal assessment process on an ongoing basis to ensure that their creditworthiness continues to be satisfactory and the potential impact from reinsurer default is measured regularly and managed accordingly. The Group Reinsurance Credit Committee oversees the management of these risks. Group standards are set such that reinsurers that have a financial strength rating of less than ‘A-’ with Standard & Poor’s, or a comparable rating with AM Best, are removed from the Group’s authorised list unless the Group’s internal review discovers exceptional circumstances in favour of the reinsurer. Collateral is taken to mitigate exposures where appropriate to acceptable levels or the size or credit quality of the exposure. At 31 December 2007 the Group held collateral against £65m (2006: £87m) of reinsurers’ share of insurance contract liabilities.
Other financial assets 151 – – – – – 151 – Short term investments 121 – – – – – 121 – Reinsurers’ share of insurance contract liabilities 1,859 – – – – 13 1,872 (3) Insurance and reinsurance debtors 2,399 90 33 11 26 20 2,579 3 Derivative assets 33 – – – – – 33 –
Risk management continued 76 | RSA | Annual Report and Accounts 2007
Debt securities 8,564 – – – – 4 8,568 – Other financial assets 154 – – – 1 – 155 – Short term investments 114 – – – – – 114 – Reinsurers’ share of insurance contract liabilities 1,892 – – – – 35 1,927 (2) Insurance and reinsurance debtors 1,953 147 23 17 39 46 2,225 – Derivative assets 17 – – – – – 17 –
At 31 December 2007, the Group had entered into short term sale and repurchase agreements for UK government securities (repos). The Group continues to recognise the debt securities on the balance sheet as the Group remains exposed to the risks and rewards of ownership. The carrying value of these debt securities recognised on the balance sheet is £295m (2006: £nil) and the carrying value of the associated liabilities is £295m (2006: £nil).
A number of the Group’s property holdings are Group occupied and therefore are reported within property and equipment. The Group’s investment in investment property is recorded as such and is invested in as part of an efficient portfolio management strategy.
Structural foreign currency exchange risk is managed at a Group level through forward foreign exchange contracts. Derivatives are used to manage exposures within the limits that have been set. In managing structural foreign currency exchange risk, net assets maintained by the Group’s subsidiaries in local currencies are taken into account to satisfy local regulatory solvency and internal risk based capital requirements. These assets should prove adequate to support local insurance activities irrespective of foreign currency exchange rate movements. Consequently, this may affect the value of the consolidated shareholders’ equity expressed in Sterling.
Shareholders’ equity – 31 December 2007 482 690 798 441 349 317 3,077 Shareholders’ equity – 31 December 2006 626 556 655 203 (9) 530 2,561
Risk management continued 78 | RSA | Annual Report and Accounts 2007
Cross currency Asset 1 – – 1 – 4 4 Liability 29 – 2 31 – 1,247 170 Credit Asset – – – – 4 – 37 Liability – – – – 7 – 46 Equity/index Asset 32 – – 32 12 see below see below Liability 31 – – 31 21 see below see below
At 31 December 2007 there were derivative contracts in place to protect the value of the UK equity portfolios of the Group. These provided limited protection against declines in market levels whilst also capping participation in any appreciation of the market. In total, this strategy covered an underlying equity value up to approximately £800m. If UK equity markets decreased by 15%, the impact of these derivatives as of 31 December 2007, would be to decrease the impact of the decline by £47m (2006: £41m).
Decrease of equity markets (note 4): Direct impact on equities of a 15% fall in equity markets – – (223) (243) Mitigating impact arising from derivatives held 47 41 – –
Notes 1. This analysis assumes that there is no correlation between equity price, interest rate and property market rate risks. It also assumes that all other assets and liabilities remain unchanged and that no management action is taken. This analysis does not represent management’s view of future market change, but reflects management’s view of key sensitivities. 2. The sensitivity of the fixed interest securities of the Group has been modelled by reference to a reasonable approximation of the average interest rate sensitivity of the investments held within each of the portfolios.
3. The impact on the fair value of the loan capital is an increase of £124m (2006: £85m). 4. The effect of movements in equity and property markets is reflected as a one time decrease of worldwide equity and property markets on 1 January 2008 and 1 January 2007 which results in a 15% decline in the value of the Group’s assets in these investment categories.
Risk management continued 80 | RSA | Annual Report and Accounts 2007
Maturity periods or contractual repricing The following table summarises the contractual repricing or maturity dates (whichever is earlier) for financial assets and financial liabilities, that are subject to fixed and variable interest rates. Equity instruments are not subject to interest rate risk. Insurance assets and liabilities are also presented and are analysed by remaining duration.
Financial assets Debt securities 2,416 1,610 1,285 947 535 1,138 637 8,568 Other financial assets 91 14 16 13 11 8 2 155 Short term investments 114 – – – – – – 114 Reinsurers’ share of provision for unearned premiums 166 12 4 2 1 4 – 189 Reinsurers’ share of provision for losses and loss adjustment expenses 538 374 238 165 104 184 135 1,738 Insurance and reinsurance debtors 2,225 – – – – – – 2,225 Derivative assets 12 – – – – – 5 17 Cash and cash equivalents 1,831 – – – – – – 1,831 Total 7,393 2,010 1,543 1,127 651 1,334 779 14,837
The analysis above is based upon the contractual terms of the financial assets within the Group’s investment portfolios. The financial assets are mainly highly liquid marketable securities which would normally be readily realisable before maturity.
As at 31 December 2007 the Group had an IGD surplus of approximately £1.5bn (2006: £1.3bn). The improvement in IGD surplus is mainly attributable to the profits for the year, continuing actions to enhance capital efficiency including agreement with the FSA to adopt the accounting consolidation method as a basis for preparing the IGD return and the issue of equity shares, offset by the dividend and by the purchase of the minority interest in Codan. The coverage ratio stood at 2.5 times at 31 December 2007 (2006: 1.9 times).
The Group received its Individual Capital Guidance (based on its ICA submission) from the FSA in late 2007, which at the request of the FSA remains confidential. The ICA is a forward looking, economic assessment of the capital requirements of the Group based on its assessment of the risks to which it is exposed. The models used to determine the ICA have been integrated into the Group’s business processes and are used to enhance the management of the Group.
1. Operating segments On 1 January 2007, the Group was reorganised into three operating segments – International, Emerging Markets and the UK. The UK is the Group’s country of domicile and principal market (based on value of premium written in a single country). International comprises operations in Scandinavia, Canada, Ireland and Italy and Emerging Markets comprises the Group’s operations in Latin America, Asia and the Middle East, the Baltics and the Group’s new joint venture in Central and Eastern Europe. All operations are engaged in providing personal and commercial general insurance services. Central functions include the Group’s internal reinsurance function and Group Corporate Centre.
In the previous Group structure the Group’s non UK businesses were organised into Scandinavia (including the Baltics) and International (Canada, Ireland, Italy, Latin America and Asia and the Middle East). The new structure brings together operations with similar challenges and opportunities in order to give due focus to achieving the Group’s objective of profitable growth across the business. Each operating segment is managed by a Chief Executive Officer (CEO) who is directly accountable to the Group CEO and the Board of Directors.
Other activities primarily comprise administration and other expenses and investment expenses and charges.
Notes to the financial statements 84 | RSA | Annual Report and Accounts 2007
Amortisation (15) Reorganisation costs (23) Less: net share of profit after tax of associates (1)
No other material non cash expenses are reported internally by segment.
Segment assets 8,716 8,977 1,474 1,213 20,380 Investment in associates – 4 101 – 105
Segment assets 9,033 7,816 1,229 1,058 19,136 Investment in associates – – 27 – 27
Total assets of continuing operations 9,033 7,816 1,256 1,058 19,163 Non current and disposal group assets held for sale 3,485
1. Operating segments continued Net written premiums by major geographical territories 2007 2006 £m £m
UK 2,688 2,618 Scandinavia 1,379 1,280 Canada 703 662 Other Europe 431 392 Other 636 532
Other Europe principally comprises the Group’s businesses in Ireland and Italy.
2. Net investment return A summary of the gross investment income, net realised and net unrealised gains/(losses) included in the income statement is given below.
Net realised Net unrealised Investment income gains/(losses) gains/(losses) Impairments Total investment return
Investment property 19 13 12 12 (42) 42 – – (11) 67 Equity securities 48 56 185 52 (2) – (1) (3) 230 105 Debt securities 391 372 (29) (27) – – (2) – 360 345 Other investments: Loans secured by mortgages 1 1 1 – – – – – 2 1 Other loans 5 3 – 16 – – – – 5 19 Other 31 8 (4) 7 (8) – – – 19 15 Deposits, cash and cash equivalents 83 63 1 – – – – – 84 63 Derivatives 15 1 8 (14) (3) (2) – – 20 (15)
Unrealised capital gains and losses recognised directly in equity for available for sale assets are as follows: Net realised gains/ Net unrealised (losses) transferred Impairments transferred Net movement gains/(losses) to income statement to income statement recognised in equity 3. Net claims and benefits 2007 2006 £m £m
Gross claims paid 4,145 3,910 Gross changes in insurance contract liabilities for claims (101) (152) Reinsurance recoveries on losses and loss expenses paid (519) (603) Reinsurers’ share of change in insurance contract liabilities for claims 132 298
4. Profit before tax The following items have been included in arriving at the profit before tax on continuing operations: Other operating income
Other lease payments The operating lease payments recognised as an expense during the year were £48m (2006: £75m). The Group has no significant lease agreements that include contingent rents.
Fees payable to the Company’s auditors for audit of the Company’s
During 2007 PricewaterhouseCoopers LLP resigned as auditors and Deloitte & Touche LLP were appointed.
4. Profit before tax continued Directors’ emoluments The aggregate emoluments of the directors, including amounts received from subsidiaries, were as follows: Emoluments of executive directors 4,479 4,257 Fees and other payments to non-executive directors 556 556
The average number of employees of the continuing operations during the year was as follows: 2007 2006 Number Number
Discontinued operations The loss before tax from discontinued operations includes the following: Reorganisation expenses 1 11 Investment expenses and charges – 23 Amortisation and impairment of intangible assets 1 5
Auditors’ remuneration of £nil was paid in 2007. In 2006 £1m was paid to PricewaterhouseCoopers LLP in respect of the audit services for the discontinued operation.
5. Income tax expense The tax amounts charged in the income statement are as follows: Taxation attributable to the continuing operations 29 170
UK corporation tax is calculated at 30% (2006: 30%) of the estimated assessable profit for the year. Since the Group operates around the world, it is subject to income taxes in many different jurisdictions. Taxation for jurisdictions other than the UK is calculated at the rates prevailing in those jurisdictions. Of the above taxation attributable to the Group £37m (2006: £74m) relates to UK corporation tax and £(8)m (2006: £96m) to overseas taxation.
Diluted Diluted earnings per share is calculated by adjusting the weighted average number of ordinary shares outstanding to assume conversion of all dilutive potential ordinary shares. The Parent Company has only one category, share options, of dilutive potential ordinary shares.
6. Earnings per share attributable to the ordinary shareholders of the Parent Company continued The calculation is performed for the share options to determine the number of shares that could have been acquired at fair value (determined as the average annual market share price of the Parent Company’s shares) based on the monetary value of the subscription rights attached to outstanding share options. The number of shares calculated as above is compared with the number of shares that would have been issued assuming the exercise of the share options.
Ordinary dividend: Final paid in respect of prior year 4.12 3.05 123 89 Interim paid in respect of current year 2.48 1.75 79 51
No goodwill and other intangible assets as at 31 December 2007 have been impaired.
Notes to the financial statements continued 90 | RSA | Annual Report and Accounts 2007
Transfer to non current and disposal group assets held for sale – (100) (12) – (112)
Accumulated impairment At 1 January 2006 617 – – – 617 Exchange adjustment (74) – – – (74) Transfer to non current and disposal group assets held for sale (543) – – – (543)
Net book amount at 31 December 2006 213 24 254 61 552
Impairment tests for goodwill Goodwill is allocated to the Group’s cash generating units (CGUs) as follows: Emerging Markets 45 44
When testing for impairment, the recoverable amount of a CGU is determined based on value in use calculations. These calculations use cashflow projections based on financial budgets approved by management covering a five year period. Cashflows beyond the five year period are extrapolated using the estimated growth rates which do not exceed the long term average past growth rate for the insurance business in which the CGU operates.
A number of other assumptions and estimates are involved in the application of a cashflow model to forecast operating cashflows, premium volumes, expenses and working capital requirements. Forecasts of future cashflows are based on the best estimates of future premiums, operating expenses using historical trends, general geographical market conditions, industry trends and forecasts and other available information. These assumptions are subject to review by management and the Group Audit Committee. The cashflow forecasts are adjusted by an appropriate discount rate. The discount rates used are pre tax and reflect specific risks relating to the relevant segments at the date of evaluation. The weighted average growth rates used are consistent with the forecasts included in industry reports.
9. Property and equipment Group occupied property – land and buildings Other Total £m £m £m
Group occupied property – land and buildings Other Total £m £m £m
The Group occupied property was revalued on 31 December 2007 by independent valuers.
Notes to the financial statements continued 92 | RSA | Annual Report and Accounts 2007
10. Investment property Investment property consists of the following: Land and buildings: Freehold and long leasehold 426 451 Short leasehold 3 3
Movement in the carrying value of investment property is detailed below: Investment property at 1 January 454 435 Additions from subsequent expenditure 9 1 Transfer from property and equipment 10 – Sales and purchases 1 (21) Fair value (losses)/gains (50) 40 Exchange adjustment 5 (1)
11. Investments in associates The Group has the following investments in associates: Ordinary Country shareholding
Some associates that do not materially affect the results or assets of the Group have been omitted from this statement.
The Group does not hold significant financial assets classified as fair value through the income statement.
Reinsurers’ share of provision for unearned premiums 215 189 Reinsurers’ share of provision for losses and loss adjustment expenses 1,657 1,738
Reinsurers’ share of provision for losses and loss adjustment expenses at 31 December 1,657 1,738 14. Insurance and reinsurance debtors
Credit to income statement in the year 61 10 Acquisition of subsidiaries 8 1 Transfer to non current and disposal group assets held for sale – (5)
Cash and cash equivalents and bank overdrafts (as reported within the cashflow statement) 1,538 2,040 Add: bank overdrafts 3 4 Less: transfer to non current and disposal group assets held for sale (32) (213)
18. Equity and reserves Changes in equity Changes in equity for the year ended 31 December 2007
Balance at 1 January 821 857 (57) 125 456 8 (81) 432 2,561 331 2,892 Total recognised (expense)/income for the year – – – – (43) – 136 577 670 15 685 Dividends – paid (note 7) – – – – – – – (211) (211) (31) (242) Issued by scrip 19 81 – – – – – – 100 – 100 Issued for cash 55 5 – – – – – 244 304 – 304 Treasury shares utilised – – 19 – – – – (19) – – – Changes in shareholders’ interests
During the year, Codan A/S purchased £24m of its own shares on the market. In addition, the Group launched a voluntary conditional public tender offer for the acquisition of all the outstanding issued shares and voting rights in Codan A/S. As a result the Group acquired sufficient shareholding to effect a compulsory acquisition of the remaining shares and, as the transaction is not reversible, to account for 100% of the subsidiary. The total consideration was £590m. At 31 December 2007, the Group owned 99.5% of Codan A/S and completed the compulsory acquisition process to acquire the remaining 0.5% in January 2008. The two transactions reduced minority interests by £246m and shareholders’ funds by £368m.
Balance at 1 January 807 804 (57) 125 432 8 50 517 2,686 391 3,077 Total recognised income/(expense)
for the year – – – – 14 – (131) 107 (10) 24 14 Dividends – paid (note 7) – – – – – – – (149) (149) (9) (158) Issued by scrip 12 49 – – – – – – 61 – 61 Issued for cash 2 4 – – – – – – 6 – 6 Changes in shareholders’ interests
During 2006, the Group purchased the minority interest of its subsidiaries in Latvia and Lithuania for £55m. Codan A/S purchased £66m of its own shares on the market. This increased the Group’s ownership of Codan A/S from 71.1% to 74.5%.
In such other circumstances as the directors may determine prior to the allotment of any preference shares.
If the Parent Company is wound up, the liquidator may, with the sanction of an extraordinary resolution of the Parent Company divide among the shareholders the whole or any part of the assets of the Parent Company and may, for such purpose, set such value as he deems fair upon any property to be divided. The liquidator may also, with like sanction, vest the whole of any part of the Parent Company’s assets in trustees upon such trusts for the benefit of the contributories as the liquidator shall think fit. No shareholder shall be compelled to accept any shares or other securities or other assets that are subject to any liability.
No shareholder is, unless the directors otherwise determine, entitled to attend or vote either personally or by proxy at any general meeting if: Any call or any sum presently payable by him to the Parent Company in respect of such share remains unpaid or
The shareholder has failed to comply with a notice under section 793 of the Companies Act 2006 and is in default for a period of 14 days from the date of service of such notice.
Further, if a shareholder who holds 0.25% or more (in nominal value) of the issued shares is in default of a section 793 notice then the directors may also withhold the payment of any dividend and restrict the transfer of shares held by such shareholder.
The directors may also refuse to register any transfer of any certificated share unless: A duly stamped instrument of transfer is delivered to the Parent Company’s registered office together with the certificates of the shares to which it relates and any other evidence that the directors may reasonably require to show the right of the transferor to make the transfer and
The directors can require a shareholder to provide evidence that shares held by such shareholder are not held by or on behalf of a US Holder (as defined in the Articles of Association). The directors may require a US Holder to sell its shares to a non US resident, failing which the Parent Company may effect a sale of such shares on such US Holder’s behalf. The directors may refuse to register a transfer by a US Holder where it is made to a US resident.
Subordinated guaranteed US$ bonds 11 37 Subordinated guaranteed Euro bonds 365 335
Provision for losses and loss adjustment expenses at 31 December 10,344 9,821
Claims on certain classes of business have been discounted as follows: Average number Discount rate of years to settlement
Estimate of cumulative claims At end of accident year 8,865 3,021 2,951 2,458 2,588 2,288 2,591 One year later 9,408 2,801 2,798 2,263 2,533 2,313 Two years later 9,595 2,878 2,699 2,101 2,432 Three years later 9,906 2,852 2,593 2,030 Four years later 10,222 2,784 2,516 Five years later 10,649 2,735 Six years later 10,536
Estimate of cumulative claims At end of accident year 7,090 2,359 2,147 2,016 2,152 2,169 2,214 One year later 7,345 2,310 2,154 1,885 2,032 2,139 Two years later 7,465 2,316 2,083 1,719 1,946 Three years later 7,803 2,298 1,981 1,653 Four years later 7,859 2,223 1,924 Five years later 8,284 2,175 Six years later 8,235
Claims paid One year later 2,247 963 771 630 821 861 Two years later 1,149 324 270 231 260 Three years later 1,008 240 189 169 Four years later 523 158 98 Five years later 392 83 Six years later 250
Reconciliation to the balance sheet Current year provision before discounting 2,666 407 596 623 865 1,278 2,214 8,649 Exchange adjustment to closing rates 312 Discounting (601)
The loss development tables above are presented on an undiscounted basis. Prior year development in 2007 showed favourable experience across all accident years and totalled £336m, net of reinsurance, which primarily comprises favourable development from the Group’s UK specialist claims unit, as well as the cumulative impact of actions taken to reduce claims leakage in Other Europe. In 2006 adverse run off was £26m. On a discounted basis, prior year underwriting profit in 2007 was £348m, compared with £131m in 2006, which included £164m of reserve strengthening for Scandinavia personal accident and UK asbestos reserves. The total discounting at the end of 2007 was £601m representing an increase of £29m in the year, due mostly to the impact of including the Adverse Development Cover (ADC) following the disposal of the US operation. In Scandinavia certain long tail liabilities are settled by an annuity and the discounted value of these annuities is shown separately. At the year end the annuity reserves were £327m (2006: £308m).
At 31 December 2007 total unsecured loans from credit institutions under committed credit facilities of £500m (2006: £500m) were available to the Group. There were no amounts outstanding at 31 December 2007 (2006: £nil). The facility expires in 2012.
At 31 December 2007 and 2006 the Group had in place a one billion US Dollar Euro commercial paper program. There were no amounts outstanding at 31 December 2007 (2006: £nil).
(Charge)/credit to the income statement for the year – (48) 31 3 103 49 138 (Charge)/credit to equity for the year (2) 9 – 24 – (7) 24 Acquisition/disposal of subsidiaries – – 1 1 – (15) (13)
Effect of change in tax rate – income statement – – (3) (1) – 5 1 – equity (2) 4 – 6 – – 8
The deferred income tax credited/(charged) to equity is as follows: Fair value reserves in shareholders’ equity Available for sale financial assets 30 (2) Group occupied property (4) (2) Retirement benefit obligations 13 (74) Share options (3) 5 Reclassification of debt (4) (2)
The aggregate current tax relating to items that were credited or charged to equity is £3m (2006: £8m).
At the balance sheet date, the Group had unused tax losses of £1,244m (2006: £653m) and unused tax credits of £33m (2006: £30m) available for offset against future profits. A deferred tax asset of £2m (2006: £14m) has been recognised in respect of losses included within other temporary differences at 31 December 2007. No deferred tax asset has been recognised in respect of £1,237m (2006: £639m) tax losses and unused tax credits of £33m (2006: £30m) due to the unpredictability of future profit streams. Included in unrecognised tax losses are losses of £51m (2006: £39m) which will expire by 2016. Other tax losses and unused credits may be carried forward indefinitely.
Of the above, £139m is due to be settled outside of 12 months (2006: £173m).
Other provisions includes £nil (2006: £51m) of provisions relating to the disposal of the discontinued US operation. In addition, there are provisions of £65m (2006: £52m) held relating to vacant property leases, dilapidations and refurbishments, the costs relating to which will be borne across the period over which the leases expire, which is up to 20 years. Other provisions also includes various litigation provisions of £10m (2006: £9m), the payment of which is dependent upon legal processes and Motor Insurance Bureau provision of £33m (2006: £33m).
Movements during the year on reorganisation and other provisions Reorganisation Other provisions provisions £m £m
Provisions at 1 January 2007 27 197 Exchange adjustment – 1 Credited 19 73 Utilised (9) (94) Released – 2 Acquisition of subsidiary – 10
In 2003 a subsidiary of the Group wrote an Adverse Development Cover (ADC) contract with its former US subsidiary. Prior to the disposal of the US operation, the assets and liabilities arising from the ADC eliminated on consolidation. As part of the disposal of the US operation, and as publicly disclosed in 2006, the original contract was amended and restated.
For the two main UK defined benefit schemes, the level of contributions in 2007 were 23% and 22% of pensionable salaries (2006: 23% and 21%). Additional contributions totalling £86m (2006: £86m) were made to the schemes, in accordance with the plan to reduce their funding deficits. Expected contributions to pension and post retirement benefit schemes for the year ending 31 December 2008 are approximately £70m, including a further £37m of additional contributions.
The actuarial (losses)/gains recognised in equity are as follows: UK Other Total Total £m £m £m £m
Actual return on scheme assets 375 8 383 280 Less: expected return on scheme assets (279) (15) (294) (288)
Actual return on assets in excess of/(below) expectations 96 (7) 89 (8) Experience (losses)/gains on liabilities (72) (6) (78) 41 Change in actuarial assumptions (61) 22 (39) 193
The following is a reconciliation of the Group’s retirement benefit obligations: Retirement benefit obligations at 1 January 4,838 5,439 Current service costs 52 60 Past service costs 12 15 Interest costs 243 255 Contributions by scheme participants 2 3 Actuarial loss/(gains) on obligations 117 (234) Gain on curtailments (4) (9) Benefits paid (226) (248) Acquisition of subsidiary 13 – Exchange rate adjustment 39 (82) Transfer to non current and disposal group assets and liabilities held for sale – (361)
26. Retirement benefit obligations continued Additional information for the current annual period and previous three annual periods: At 31 December Present value of defined benefit obligation 5,086 4,838 5,439 4,939 Fair value of schemes assets 5,244 4,870 4,967 4,226
Assumptions The principal actuarial assumptions used were as follows: UK Other
Assumptions used in calculation of retirement benefit obligation: Discount rate 5.6 5.1 5.4 4.9 Annual rate of general inflation 3.2 2.7 2.5 2.5 Annual rate of increase in salaries 4.7 4.2 4.4 4.4 Annual rate of increase in pensions 3.2 2.7 2.5 2.5
Assumptions used in calculation of income statement credit/charge in year: Discount rate 5.1 4.7 4.9 5.0 Expected return on: Expected return on schemes’ assets The weighted average expected return on schemes’ assets across the Group for 2007 was 6% (2006: 6%). The expected return on schemes’ assets are determined for each asset class by considering both market conditions at the opening balance sheet date and any expectations for longer term changes in current returns. All returns are net of investment expenses.
Reductions in future mortality rates are allowed for using the ‘medium cohort’ projection and using the projected mortality rates applicable to calendar year 2014 for current pensioners and 2032 for future pensioners. The weighted average assumptions imply that a current pensioner aged 60 has an expected future lifetime of 25.8 years (males) and 27.0 years (females) and a future pensioner aged 60 has a future lifetime of 27.2 years (males) and 28.2 years (females).
Post retirement medical benefits The valuation of liabilities for post retirement liabilities in Canada assumes 10% decreasing to 5% in 10 years for drugs (2006: 9% decreasing to 5% in eight years), 4% (2006: 4%) for hospitals and 3% (2006: 3%) for other.
The effect of an increase of one percentage point and the effect of a decrease of one percentage point in the assumed medical cost trend rates in Canada on the following is set out below: 1% increase 1% decrease
Aggregate of the current service cost and interest components of net periodic post employment medical costs 0.4 0.4 0.3 0.3
The performance conditions in respect of awards under the Executive Share Option Scheme are described on page 54. The exercise price of all options is the fair value of the ordinary shares on the date of grant. All options expire 10 years after the date of the grant.
Additional information with respect to the Executive Share Option Scheme at 31 December is as follows: Weighted average Weighted average Range of exercise prices Number of shares exercise price* Number of shares exercise price*
Weighted average Weighted average Range of exercise prices Number of shares exercise price* Number of shares exercise price*
Options outstanding at 1 January 59,964,593 77.16 60,137,543 74.98 Granted 17,174,075 105.00 9,550,434 108.36 Exercised (9,889,250) 64.72 (5,559,918) 71.65 Forfeited (3,614,970) 79.70 (2,782,453) 77.90 Expired (1,327,293) 173.94 (1,381,013) 218.64 *Sterling (pence)
Under the Sharesave Plan, the weighted average estimated fair value per option granted by the Parent Company during 2007 was 45.84p (2006: 46.66p). The fair value of share options granted under the Sharesave Plan during 2007 was £8m (2006: £4m). 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 150.57p (2006: 143.42p).
Fair values for the options granted under the Sharesave Plan were estimated as of the date of grant using the Black Scholes pricing model with the following weighted average assumptions: dividend yields of 4.0% (2006: 3.5%); expected volatilities of 30% (2006: 35%); ordinary share price of 142.90p (2006: 138.51p); risk free interest rates of 5.0% (2006: 4.8%); and expected terms equal to the vesting terms of three or five years. An estimate based on past experience is made of the number of forfeitures during the vesting period due to employees leaving the Group. The actual share price at 31 December 2007 was 148.2p (2006: 152.5p). The expected volatility is determined by reference to the actual volatility of the share price over the appropriate term ending on the grant date.
The performance conditions in respect of awards under the Share Matching Plan are described in the footnote to the long term incentive schemes table (audited part) on page 55. Under the plan, Deferred Share awards granted are held in trust for three years and are normally forfeited upon an employee leaving the Group. No further performance conditions apply.
Further information on the Share Matching Plan may be found in the footnote to the long term incentive schemes table (audited part) on page 55.
27. Share based compensation continued Additional information with respect to Deferred and Matching Share awards at 31 December is as follows: 2007 2006 Number of Number of shares shares
Outstanding Deferred Share awards at 31 December 2,992,113 3,433,720 Potential Matching Share awards 7,326,649 8,230,850
Under the Share Matching Plan there were no awards granted in 2007. In 2006 the fair value of each Deferred Share award granted by the Parent Company was 114.40p and the fair value of each potential Matching Share award was 38.10p. The total fair value of the awards granted under the plan during 2006 was £nil.
Long Term Incentive Plan The Long Term Incentive Plan for executive directors and other selected executives was adopted following approval obtained at the 2006 AGM. Awards were made during 2006 and 2007 following shareholder approval.
Additionally, the Remuneration Committee may make conditional awards of Performance Shares to senior executives, and conditional awards of Restricted Shares to other executives and senior managers.
Voluntary Compulsory Restricted Deferred Deferred Performance Shares Shares Shares Shares Total
Total potential share awards outstanding at 31 December 8,063,261 7,304,639 10,860,311 9,274,148 35,502,359
Total potential share awards outstanding at 31 December 4,208,357 3,538,741 5,677,600 4,829,205 18,253,903
Under the Long Term Incentive Plan, the weighted average estimated fair value of each Restricted Share award granted by the Parent Company in 2007 was 140.68p (2006: 114.81p). The fair value of each Voluntary Deferred Share award was £nil (2006: £nil) and the fair value of each potential associated Matching Share was 164.00p (2006: 126.00p). The fair value of each Compulsory Deferred Share award was 164.00p (2006: 127.00p) and the fair value of each potential associated Matching Share was 113.50p (2006: 87.85p). The fair value of each Performance Share award granted was 112.07p (2006: 88.71p). The total fair value of the awards granted under the plan in 2007 was £24m (2006: £18m).
Further information on derivatives, including those designated as hedging instruments, can be found in the risk management section.
United Kingdom Royal Insurance Holdings plc (note 1) Holding company Royal & Sun Alliance Insurance plc General insurance British Aviation Insurance Company Limited (57.1%) General insurance The Globe Insurance Company Limited General insurance The Marine Insurance Company Limited General insurance Martello Underwriting Limited General insurance Royal International Insurance Holdings Limited General insurance Royal & Sun Alliance Reinsurance Limited General insurance Sun Alliance and London Insurance plc General insurance Sun Insurance Office Limited General insurance
Canada Roins Financial Services Limited Holding company Quebec Assurance Company General insurance The Johnson Corporation Holding company Royal & Sun Alliance Insurance Company of Canada General insurance Western Assurance Company General insurance Canadian Northern Shield Insurance Company General insurance
Denmark Codan A/S (note 2) Holding company Codan Forsikring A/S (note 2) General insurance
Notes 1. 100% direct subsidiary of Royal & Sun Alliance Insurance Group plc. 2. During the year, Codan A/S purchased £24m of its own shares on the market. In addition the Group launched a voluntary conditional public tender offer for the acquisition of all the outstanding issued shares and voting rights in Codan A/S. As a result the Group acquired sufficient shareholding to effect a compulsory acquisition of the remaining shares and, as the transaction is not reversible, to account for 100% of the subsidiary. At 31 December 2007 the Group owned 99.5% of Codan A/S and completed the compulsory acquisition process to acquire the remaining 0.5% in January 2008.
3. Except where indicated all holdings are of equity shares and represent 100% of the nominal issued capital. In all cases the proportion of voting power held equals the proportion of ownership interest.
4. Some subsidiaries have been omitted from this statement to avoid providing particulars of excessive length but none materially affects the results or assets of the Group.
The disposal of its Venezuelan business on 14 December 2007. The transaction generated proceeds, net of costs, of £nil and generated a pre tax loss of £13m which comprises a £5m loss on net asset value and £8m of foreign exchange, which is recycled from shareholders’ funds and does not impact total equity.
Other disposals in the year generated proceeds, net of costs, of £8m and generated a pre tax loss of £3m.
Net assets 16 Cumulative translation differences 27 Loss on disposal (35)
Net profit for the year before tax on continuing operations 670 649 Adjustments for: Depreciation 32 35 Amortisation 56 61 Fair value (gains)/losses (including (gain)/loss on disposal) on property and equipment (4) 1 Fair value gains (including gain on disposal) on investments (159) (38) Fair value losses/(gains) (including loss/(gain) on disposal) on investment property 30 (53) Impairment charge on available for sale financial assets 3 3 Share of profit from associates – (1) Loss on disposal of subsidiaries 22 1 Foreign exchange gain (53) (34) Amortisation of available for sale investments 7 78 Other non cash movements 312 193 Changes in operating assets/liabilities: Movement in technical provisions Unearned premiums 230 191 Losses and loss adjustment expenses 94 176 Movement in working capital (624) (419) Movement in deferred acquisition costs (61) (14) Reclassification of interest received (489) (423)
32. Related party transactions The ultimate Parent Company of the Group is Royal & Sun Alliance Insurance Group plc which is incorporated in Great Britain and registered in England and Wales.
The following transactions were carried out with related parties: Key management compensation
Salaries and other short term employee benefits 4 4 Bonus awards 3 4 Pension benefits 1 1 Share based awards 4 3
Investments in associates Included within liabilities in the balance sheet at 31 December 2007 is £25m (2006: £nil) payable as a capital injection to an associated company Global Direct Insurance Investments BV.
33. Commitments Capital commitments The Group’s significant capital commitments in respect of property and equipment and intangible assets are detailed in the table below: Property and equipment 27 2 Intangible assets 18 –
Bank loan guarantees In Canada, the Group guarantees outstanding loan repayments in the event of bank loan default by broker subsidiaries and special relationship brokers. The bank loan guarantees amount in total to £8m (2006: £7m) and have a term of up to 10 years. It is not anticipated that any of the brokers will default, and full recourse is available on any default. In 2006 the Group had financial and performance guarantees of £2m in Scandinavia.
One year or less 58 55 2 2 Between one and five years 192 184 2 2 After five years 134 158 – –
An analysis of the result of discontinued operations is as follows: Total income 26 124 Total expenses (26) (209)
Notes to the financial statements continued 116 | RSA | Annual Report and Accounts 2007
Non current and disposal group assets and liabilities held for sale During 2007 the Group has classified an office property within the UK operating segment as a non current asset held for sale. The Group currently occupies, but is in the process of vacating, the property. The Group is actively marketing the property and expects to complete a sale within one year. No gain or loss has been recognised in the income statement since the reclassification.
During 2006 the Group reclassified the assets and liabilities of its US operation as a disposal group.
We planned and performed our audit so as to obtain all the information and explanations which we considered necessary in order to provide us with sufficient evidence to give reasonable assurance that the Parent Company financial statements are free from material misstatement, whether caused by fraud or other irregularity or error. In forming our opinion we also evaluated the overall adequacy of the presentation of information in the Parent Company financial statements.
Opinion In our opinion: The Parent Company financial statements give a true and fair view, in accordance with IFRS as adopted by the European Union as applied in accordance with the provisions of the Companies Act 1985, of the state of the Parent Company’s affairs as at 31 December 2007
The Parent Company financial statements have been properly prepared in accordance with the Companies Act 1985
We have reported separately on the Group financial statements of Royal & Sun Alliance Insurance Group plc for the year ended 31 December 2007 and on the information in the remuneration report that is described as having been audited.
Our responsibility is to audit the Parent Company financial statements in accordance with relevant legal and regulatory requirements and International Standards on Auditing (UK and Ireland).
Equity, reserves and liabilities Equity and reserves Share capital 4 1,020 946
The separate 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
Share options – – – – – 19 19 Fair value losses net of tax – – – (200) – – (200)
Profit for the year – – – – – 143 143 Dividends – paid (note 7) – – – – – (149) (149) Issued by scrip 12 49 – – – – 61 Issued for cash 2 4 – – – – 6 Share options – – – – – 13 13 Fair value gains net of tax – – – 863 – – 863
Parent Company cashflow statement for the year ended 31 December 2007
Notes to the separate financial statements 1. Significant accounting policies Royal & Sun Alliance Insurance Group plc, domiciled in the United Kingdom, is the ultimate Parent Company (the ‘Company’) of the RSA group of companies. The principal activity of the Company is to hold investments in its subsidiaries and the receipt and payment of dividends.
The accounting policies that are used in preparation of these separate financial statements are consistent with the accounting policies used in preparation of the consolidated financial statements of Royal & Sun Alliance Insurance Group plc as set out in those financial statements.
Investments at 1 January – at valuation 5,811 4,870 (Disposals)/additions during the year (24) 78 Fair value adjustments (200) 863 Investments at 31 December – at valuation 5,587 5,811
The directors believe that the methodology used supports the inclusion of the investments in subsidiaries on the balance sheet, at the fair values ascribed to them. The market value of the Company’s ordinary shares at 31 December 2007 was 148.2p. A movement of 1% in the share price would have an impact of £48m on the fair value.
5. Loan capital Full details of the loan capital of the Company are set out in note 19 to the consolidated financial statements.
To be settled within 12 months 26 57 To be settled after 12 months – – 26 57
Deferred tax assets at 1 January – 24 2 26 Charge to equity for the year – (2) – (2) Credited/(charged) to income for the year 5 – (1) 4 Deferred tax assets at 31 December 2006 5 22 1 28 Effect of change of rate in deferred tax – (2) – (2) Charge to equity for the year – (2) – (2) Charge to income for the year (3) – – (3) Deferred tax assets at 31 December 2007 2 18 1 21
The aggregate current tax relating to items that are credited to equity is £4m (2006: £2m).
Notes to the separate financial statements continued 9. Related party transactions Royal & Sun Alliance Insurance Group plc (incorporated in Great Britain and registered in England and Wales) is the ultimate Parent Company of the RSA group of companies.
Issue of share options and share awards to employees of subsidiaries. Costs are charged for annually based on the underlying value of the awards granted calculated in accordance with the guidance set out within IFRS 2.
Other transactions Year end balances with related parties are set out below: Receivable from related parties: Receivable from subsidiaries, interest bearing loans 995 1,009 Receivable from subsidiaries, non interest bearing 278 203 Total receivable from related parties 1,273 1,212 Payable to related parties: Payable to subsidiaries, interest bearing loans 131 427 Payable to subsidiaries, non interest bearing 101 113 Total payable to related parties 232 540
Additional loans to subsidiaries of £379m (2006: £401m) as disclosed within note 2 have been made. Of this, £294m (2006: £294m) and £78m (2006: £78m) are subordinated loans on which interest is charged at 8.5% and 6.701% respectively with the remaining loan balance interest free with no specified repayment date.
Company website The Annual Report and Accounts, interim results and other useful information about the Company, such as the current share price, is available on the website www.rsagroup.com. Frequently asked questions and answers in respect of shareholding matters are detailed on the Company’s website.
Registrar The Company’s share register is maintained by Equiniti Limited. Queries regarding your shareholding should be addressed to Equiniti at the following address: Equiniti Limited Aspect House Spencer Road Lancing West Sussex BN99 6DA Telephone: +44 (0)871 384 2048
Please quote the company reference number 0059 and your shareholder account number (on your share certificate and dividend tax vouchers) when contacting or corresponding with Equiniti.
Annual General Meeting Ordinary shareholders are invited to attend the Company’s Annual General Meeting (AGM), which will be held in The Queen Elizabeth II Conference Centre, Broad Sanctuary, Westminster, London SW1P 3EE at 11.00am on 19 May 2008. Ordinary shareholders who are unable to attend the AGM to ask a question in person are invited to send the Chairman an email via the Company’s website or to write to the Chairman at the Registered Office address above.
Share ownership RSA is listed on the London Stock Exchange under the code RSA. The average total daily trading volume during 2007 was approximately 28m ordinary shares. The opening market price of an ordinary share on 2 January 2007 was 152.50p and closing market price on 31 December 2007 was 148.20p. The highest daily closing price of an ordinary share was 172.10p on 18 May 2007 and lowest daily closing price was 128.30p on 30 July 2007. Further details of the ordinary and preference shares are found in note 18 on pages 96 to 97.
Capital gains tax The market value at 31 March 1982 of each post consolidation ordinary share of 27.5p in the Company, for capital gains tax purposes after relevant adjustments, was 146.41p (25p shares 133.1p) for former Royal Insurance shareholders and 57.97p (25p shares 52.7p) for former Sun Alliance shareholders. An adjustment to tax cost is required to take account of the 2003 rights issue, according to whether the rights were taken up or sold. Similarly, for former Royal Insurance shareholders an adjustment to tax cost is required to take account of the 1993 rights issue, according to whether the rights were taken up or sold.
American Depositary Receipts The Company terminated its listing, in the form of American Depositary Shares, on the New York Stock Exchange on 30 October 2006.
Managing your shareholding Share Register Fraud: protecting your investment It is required by law that our shareholder register is available for public inspection and we are unable to control the use of information obtained by persons inspecting the register. Please treat any approaches purporting to originate from RSA with caution. RSA will never contact its shareholders directly to provide recommendation or advice regarding your shareholding and neither does it appoint third parties to do so.
Tips on protecting your shares Keep any documentation that contains your shareholder reference number in a safe place and destroy any documentation which you no longer need by shredding it Inform Equiniti promptly when you change your address Be aware of dividend payment dates and contact the registrars if you do not receive your dividend cheque, or better still, make arrangements to have the dividend paid directly into your bank account Consider holding your shares electronically in a CREST account via a nominee.
Announcement of the full year results for 2007, the ordinary final dividend for 2007 and the first preference dividend for 2008
Ex dividend date for the ordinary final dividend for 2007 and the first preference dividend for 2008
Record date for the ordinary final dividend for 2007 and the first preference dividend for 2008
Payment date for the ordinary final dividend for 2007 (subject to shareholder approval at the AGM)
Important disclaimer This document contains ‘forward looking statements’ (as defined in the US Private Securities Litigation Reform Act of 1995) with respect to certain of the Company’s plans and its current goals and expectations relating to its future financial condition, performance and results. These statements are often, but not always, made through use of words or phrases such as ‘will likely result’, ‘are expected to’, ‘will continue’, ‘believe’, ‘is anticipated’, ‘estimated’, ‘intends’, ‘plans’, ‘seeks’, ‘projection’, ‘outlook’ and ‘aims’. By their nature, all forward looking statements involve risk and uncertainty because they relate to future events and circumstances which are beyond the Company’s control, including amongst other things, UK domestic and global economic business conditions, market related risks such as fluctuations in interest rates and exchange rates, the policies and actions of regulatory authorities (including changes related to capital and solvency requirements), the impact of competition, inflation, deflation, the timing impact and other uncertainties of future acquisitions or combinations within relevant industries, as well as the impact of tax and other legislation and other regulations in the jurisdictions in which the Company and its affiliates operate. As a result, the Company’s actual future financial condition, performance and results may differ materially from the plans, goals and expectations set forth in the Company’s forward looking statements. The Company undertakes no obligation to update any forward looking statements save in respect of any requirement under applicable law or regulation.
Our portfolio of businesses is diverse and provides exposure to markets at different points in the insurance cycle.
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 auditor’s 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
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