Scandinavia accounts for 55% of International premiums. Our businesses, Codan in Denmark and Trygg-Hansa in Sweden, are ranked third largest in their respective markets. We have recently increased our presence in Norway and expanded into Finland.
Our Personal business is ranked third largest in the UK, and writes business through the broker, affinity and direct channels. MORE TH>N®, our direct business has around 2.3 million covers in place and provides household, motor, travel and pet insurance. Our Affinity business provides a range of insurance products to the retail customers of our corporate partners, and has grown by 23% since 2005.
Our financial and strategic results are commendable in their own right, but even more so when it is considered that they were achieved against a background of greater financial and market turbulence and adverse large losses and unexpected weather results, particularly in the UK. The UK floods gave an additional challenge to our management who responded actively and sensitively to the needs of our customers affected by the flood calamities. 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.
Chairman’s statement 4 | RSA | Annual Report and Accounts 2007
‘ While 2007 was a strong year, our goal is to deliver sustainable profitable performance over the long term, and that is what we have achieved over the last four years with combineds in the mid 90’s.’
Our new brand As we move the business forward, now is an appropriate time to simplify and refresh our corporate brand. Royal & SunAlliance was created over 10 years ago as the product of the merger and given the fundamental changes that the business has gone through we wanted to develop a new brand strategy to support our growth plans. As part of this we have refreshed and modernised our identity and will now be known simply as RSA.
‘ Strong GDP growth and low insurance penetration continue to present exciting market opportunities.’
Unrealised gains/(losses), impairments and foreign exchange (55) 36 (253) Total gains 119 82 45 Unwind of discount (81) (42) (93)
The Group calculates its economic capital position using a global multi year stochastic economic capital model. The model is a key decision making tool and is used for a range of strategic, operational and financial management purposes throughout the Group, and has also been the basis for the Group’s Individual Capital Assessment (ICA) submissions to the FSA since the 2004 year end.
The Group has a process for setting risk appetite and for monitoring compliance with this. The Group risk appetite sets business volumes for certain higher risk insurance classes, stipulates loss retention limits, reinsurance protection, targets for credit rating and solvency margins, and other appropriate measures.
1. rating environment softens significantly in key markets The Group’s overriding objective is to deliver sustainable profitable performance. Our strong and diverse portfolio provides exposure to markets at different stages of development at different points in the insurance cycle. We actively use the portfolio to shift capacity to where we see the best returns.
While the value of the Group’s general insurance bond holdings will be impacted by interest rate movements, the short dated average term of these holdings mitigates their sensitivity to such movements.
Product innovation is key to our success and across the business we adopt clear segmentation methods to create tailored and relevant products for specific customer groups. Social and environmental changes are always generating new insurance demands, and we have continued to develop insurance solutions that provide additional social or environmental benefits: In the UK, we launched the pilot of ‘Green Telematics’ using satellite technology, aimed at reducing the environmental impact of driving, through advising on driving behaviour We’re expanding our global commercial renewable energy insurance propositions and continue to be a leading provider of both off-shore and on-shore wind cover In Italy and Canada, based on our successful 50 plus products in Scandinavia, we have launched similar propositions targeting the over 50s, tailoring our insurance to the needs of this important and growing demographic.
John napier Age 65. Director of the Group from January 2003 and Chairman of the Group from March 2003. Chairman of the Nomination Committee from March 2003. Non-executive Chairman of Kelda Group plc (water utility). Former Executive Chairman and Chief Executive of Kelda Group plc. Former Chairman of Booker plc (cash and carry). Former Managing Director of Hays plc (business services) from 1991 to 1998. Former Managing Director of AGB plc (international market research and information services).
We encourage equal opportunities and diversity across the Group. This involves recruiting, engaging, retaining, rewarding and developing people solely on the grounds of ability to do the job, and establishing and promoting a working environment which is free from discrimination.
The Group is committed to the promotion of equal opportunities for all employees including those with a disability. In order to do this, we will ensure that any reasonable adjustment is made, where it is appropriate to do so, to provide equal opportunities to all in respect of recruitment, terms and conditions of employment, promotions, transfers, grievances, redundancies and vocational training. The Group is committed wherever possible, to supporting the rehabilitation and return to work of employees who become disabled during their career with us.
The Group actively encourages employees to become involved in supporting their local communities. Further details are provided in the corporate responsibility report on pages 30 to 31.
The Company can increase its share capital and authorise the directors to allot further securities by ordinary resolution. As at 31 December 2007, the directors had authority to allot securities up to a nominal amount of £432,165,676.
Deloitte & Touche LLP have confirmed their willingness to continue in office as auditors of the Company for the year ending 31 December 2008. A resolution for their reappointment will be proposed at the 2008 AGM.
Ensuring that risks that are outside the appetite are mitigated in an appropriate manner
Membership of the Remuneration Committee During the year the directors who served on the Committee were John Maxwell (Chairman), Edward Lea and Malcolm Le May. All of the nonexecutive directors on the Committee were determined by the Board to be independent. The attendance of members in 2007 is shown in the table on page 41.
conflict of interest arising from cross directorships. Fees for serving as a committee member and chairing committees of the Board are described in the non-executive directors section of this report on page 52.
The observation of existing share ownership guidelines to further enhance the alignment of shareholder interests with those of executive directors
That, where relevant, there is consideration of environmental, social and governance risks when determining remuneration for executive directors and senior managers to ensure that positive behaviours are reinforced.
Up to 33% of base salary is awarded in the form of compulsorily Deferred Shares under the LTIP
For the purposes of the charts, the bonus value is based on the cash bonus plus the fair value of the compulsory Deferred Shares. The LTI value is based on the fair value of awards of Performance Shares and half of the maximum potential number of Matching Shares that may vest (subject to performance) relating to voluntary and compulsory Deferred Shares under the LTIP. Details of how the fair values have been calculated are set out in note 27 on page 111.
Base salary Policy: Base salary is set with reference to the median level for equivalent roles in similar companies.
Base salaries are primarily reviewed on the basis of market movements. The Committee analyses the remuneration details of a comparator group comprising 14 FTSE 100 financial services companies and awards salary increases with reference to the median position for equivalent roles in that group.
As an indication of the balance of remuneration, including long term incentives (LTIs), the following charts illustrate the remuneration attributable to the executive directors over the year (excluding allowances and pension provision): G overnance
5. Bridget McIntyre received an annual performance bonus of £292,500 in respect of performance year 2007. Her allowances include 15% of base salary as a retirement allowance, paid monthly. During 2007 the amount paid was £58,000. She also received car benefits and additional taxable travel benefits worth £21,000 and medical benefits worth £1,000.
We review whether the corporate governance statement reflects the Company’s compliance with the nine provisions of the 2006 Combined
The Group has adopted IFRS 8 ‘Operating Segments’. This results in the disclosure of financial information about the Group based upon the information used internally to evaluate the performance of the operating divisions and the allocation of resources to those divisions. The Group has chosen to adopt IFRS 8 for a period earlier than the period for which adoption is mandatory. The directors believe that the information provided is more useful to users of the Group’s financial statements than that required under the previous standard IAS 14 ‘Segment Reporting’ because the new standard aligns with the performance measures of the operating divisions used for internal performance measurement.
50% of the voting rights. Investments in associates are accounted for by the equity method of accounting and are initially recognised at cost.
Significant accounting policies continued 64 | RSA | Annual Report and Accounts 2007
If the market for a financial asset is not active, the Group establishes
Pre existing equity interests in an acquiree are remeasured to fair value at the date of, and immediately before, the business combination and any resulting gain or loss is recognised in profit or loss.
Investment risk The Group is exposed to credit risk on its invested assets. Credit risk includes the non performance of contractual payment obligations on invested assets and adverse changes in the credit worthiness of invested assets including exposures to issuers or counterparties for bonds, equities, deposits and derivatives. Our insurance investment portfolios are concentrated in listed securities with very low levels of exposure to assets without quoted market prices. We use model based analysis to verify asset values when market values are not readily available.
The following table provides information regarding the aggregated credit risk exposure for financial assets of the Group as at 31 December 2007.
Cash and cash equivalents 1,509 – – – – – 1,509 –
Regional operations are responsible for assessing and monitoring the creditworthiness of their counterparties (e.g. brokers and policyholders). Local credit committees are responsible for ensuring these exposures are within the risk appetite of the local operations within the overall financial control framework. Exposure monitoring and reporting is embedded throughout the organisation with aggregate credit positions reported and monitored at Group level. Invested assets credit risk is discussed in more detail below.
Equity price risk The Group’s portfolio of equity securities is subject to equity risk arising from changes in market price. Thus if the value of equities rise so will the fair value of its portfolio and vice versa as set out in the sensitivity analysis on page 80.
Financial liabilities Subordinated guaranteed US$ bonds – – – – – – 11 11 Subordinated guaranteed Euro bonds – 365 – – – – – 365 Subordinated Sterling perpetual guaranteed bonds – – – – – 305 – 305 Subordinated guaranteed perpetual notes – – – – – 513 – 513 Provision for unearned premiums 3,134 152 59 8 5 9 16 3,383 Provision for losses and loss adjustment expenses 3,392 1,847 1,322 921 641 1,363 858 10,344 Direct insurance creditors 165 1 – – – – – 166 Reinsurance creditors 250 10 – – – – – 260 Borrowings 302 1 – – – – – 303 Deposits due to reinsurers 47 16 1 – – – – 64
Other segment items included in the income statement: Investment income 328 198 35 30 591 Interest expense – (6) (6) (9) (21)
Direct operating expenses (including repairs and maintenance) arising from investment properties were not material in 2007 and 2006.
Notes to the financial statements continued 88 | RSA | Annual Report and Accounts 2007
Profit/(loss) attributable to the ordinary shareholders of the Parent Company 609 447 596 (52) Less: cumulative preference dividends (9) (9) (9) (9)
At the Annual General Meeting (AGM) on 19 May 2008, a dividend in respect of 2007 of 4.53p per share amounting to a total dividend of £146m is to be proposed. The proposed dividend will be paid and accounted for in shareholders’ equity as an appropriation of retained earnings in the year ending 31 December 2008.
Transfer to non current and disposal group assets held for sale (543) (110) (12) – (665)
Additions of software development comprise £17m (2006: £82m) of external software and £34m (2006: £12m) of internally developed software.
Accumulated depreciation At 1 January 2007 – 227 227 Depreciation charge 4 28 32 Depreciation on disposals – (5) (5) Revaluation adjustment (4) – (4) Exchange adjustment – 8 8
• Comparatives are not provided for Global Direct Insurance Investments BV, which was acquired during 2007.
Total assets 251 207 Total liabilities 173 135 Total revenue 116 147 Goodwill on acquisition 56 5 Profit for the year after tax 2 8
Ordinary and preference shares During the year 12,448,823 (2006: 6,804,499) ordinary shares were issued on the exercise of employee share options for a cash consideration of £9m (2006: £6m). The Parent Company also issued 66,632,200 (2006: 45,604,849) ordinary shares during the year under the scrip scheme as approved by shareholders. To fund the acquisition of Codan A/S the Parent Company issued 186,350,000 ordinary shares in a placing raising gross proceeds of approximately £300m. The total nominal value of ordinary shares issued during the year was £74m (2006: £14m).
The aggregate fair value of the dated loan capital, subordinated Sterling perpetual guaranteed bonds, and subordinated guaranteed perpetual notes at 31 December 2007 is £1,234m (2006: £1,291m).
Provision for unearned premiums The following changes have occurred in the provision for unearned premiums during the year: Provision for unearned premiums at 1 January 2,969 3,001 Premiums written 6,596 6,270 Less: premiums earned (6,361) (6,191)
Continuing operations analysed: Defined benefit pension schemes 214 (30) 184 56 Other post retirement benefits – (26) (26) (24)
27. Share based compensation continued The following share options under the Executive Share Option Scheme are outstanding or exercisable at 31 December: Options outstanding
Notes to the financial statements continued 108 | RSA | Annual Report and Accounts 2007
The valuation of CNS is provisional as the purchase completed at the end of the financial year.
Loss before tax of discontinued operations (19) (484) Tax on loss on disposal and writedown 6 (15)
Amounts owed by subsidiaries 9 1,273 1,212 Current tax assets 6 26 57 Deferred tax assets 6 21 28 Other debtors and other assets 3 4 6
Cash generated from operations 8 70 63 Net movement in amounts owed to/by subsidiaries (239) (52) Investments in subsidiaries – (2) Net cashflows from investing activities (239) (54) Proceeds from issue of share capital 304 6 Dividends paid (111) (87) (Repayment)/proceeds from issuance of long term borrowings (25) 74 Net cashflows from financing activities 168 (7) Net (decrease)/increase in cash and cash equivalents (1) 2 Cash and cash equivalents at beginning of the year 2 – Cash and cash equivalents at end of the year 1 2
Net profit for the year before tax 63 111 Realised losses 21 – Foreign exchange loss/(profit) 20 (29) Changes in operating assets/liabilities (34) (19) Cash generated from operations 70 63
Salaries and other short term employee benefits 4 4 Bonus awards 3 4 Pension benefits 1 1 Share based awards 4 3 Total 12 12
Amalgamation of accounts Shareholders who receive duplicate sets of Company mailings owing to multiple accounts in their name should write to Equiniti to request that their accounts be amalgamated.
7 August 2008* Announcement of the half year results for the six months ended 30 June 2008, the ordinary interim dividend for 2008 and the second preference dividend for 2008 13 August 2008* Ex dividend date for the ordinary interim dividend for 2008 15 August 2008* Record date for the ordinary interim dividend for 2008 21 August 2008* Announcement of the scrip dividend price for the ordinary interim dividend for 2008 27 August 2008* Ex dividend date for the second preference dividend for 2008 29 August 2008* Record date for the second preference dividend for 2008 1 October 2008* Payment date for the second preference dividend for 2008 31 October 2008* Deadline for the receipt of scrip dividend mandates by Equiniti Limited in relation to the ordinary interim dividend for 2008 28 November 2008* Payment of the ordinary interim dividend for 2008 *provisional date