We are committed to delivering sustainable returns, targeted profitable growth and continuous operational excellence.
Results Operating result £780m £743m Profit before disposals and pension scheme change £650m £588m Profit after tax from continuing operations £479m £635m (Loss)/profit after tax £(20m) £605m
Emerging Markets delivered an excellent 21% increase in net written premiums in 2006 and a combined operating ratio of 97.3%.
• Our operational improvement programme and other cost initiatives are ahead of target,
• The delisting from the New York Stock Exchange (NYSE) and deregistration from the Securities and Exchange Commission (SEC).
In terms of expenses, we have now achieved our original goal of £270m of savings ahead of schedule. In June, we announced a new target to reduce headcount by over 1,500 and to deliver a further £130m of expense savings by the middle of 2008. We are making good progress. We have reduced headcount by over 1,000 and are on track to deliver the new savings targets ahead of schedule.
Over the past four years, we’ve built a track record of delivering on our commitments. And we take this same level of energy, drive and ambition into the next phase of the Company’s development.
International brings together our businesses in Scandinavia (Sweden, Denmark and Norway), Canada, Ireland and Italy enabling us to drive strategies for growth in mature markets on a regional basis. International delivered excellent results in 2006, with a 5% increase in net written premiums and a COR of 93.1%.
Overview of major strategies We continue to focus on driving sustainable profitable growth ahead of the market and building market share in our target segments. We are delivering this through a combination of organic growth and acquisitions in existing territories.
Net written premiums 2,334 2,221 Underwriting result 149 122 Combined operating ratio (COR) 93.1% 93.9%
Ireland produced another good result in a competitive market. We continue to hold the number one market position in household. ‘Enterprise’, a local telephone-based service offering for brokers, underpinned a positive commercial lines performance.
Italy outperformed the market in terms of top line growth, and delivered a strong increase in underwriting profit. We continue to invest in our broker extranet, which is increasing the efficiency of our broker business. Electronic broker transactions increased by 126% during the year. Our non-tied agent recruitment is on track with a further 35 appointments during the year.
Outlook Our Baltic operations are leading the modernisation of the industry in the region, through the introduction of call centres, centralised claims handling and more sophisticated pricing techniques. We are focused on writing business profitably in all of our markets and in 2007, have increased prices and introduced deductibles in Latvia to combat strong claims inflation.
The Group’s holding in equities has remained stable for a number of years with approximately £1.6bn or 12.5% of the investment portfolio invested in equities. We do not envisage any significant change to the Group’s investment strategy.
As at 31 December 2006, the Group had an IGD surplus of approximately £1.3bn, an increase of £0.3bn from 2005. The improvement in IGD surplus is mainly attributable to the completion of the Yankee Bond Exchange and Tender Offer, the profits of the continuing operations, offset by the dividend and writedown of the US operation. The coverage ratio has improved from 1.6 at the end of 2005 to a very strong 1.9 times the IGD requirement at the end of 2006.
We are also implementing a number of capital management initiatives, including optimising the Group’s regulatory structure and looking at options to improve the capital efficiency of our discontinued lines of business.
Rating agencies Standard & Poor’s (S&P), AM Best and Moody’s Investor Service provide insurer financial strength ratings for the Group and its principal subsidiaries. These ratings are based on the detailed financial modelling of the Group and a regular assessment of the Group’s strategic direction. Details of the Group’s ratings can be found in the Investor Relations section under Bond Investor Information on the Group’s website www.royalsunalliance.com.
Employees Over the last few years we have been building a high performance culture across the business. It means attracting, developing and rewarding top talent, as well as giving people responsibility and accountability for their actions.
During 2006, we launched the Technical Academy, aimed at building on our technical mastery in underwriting, claims and actuarial to support the Group’s growth objectives.
The Company’s outstanding indebtedness to trade creditors on 31 December 2006 amounted to £2,837,991corresponding to 13 days’ payment when averaged over the year.
Enclosed with this report is a letter from the Chairman to shareholders. Attached to the letter is the Notice convening the meeting which will include items of ordinary and special business that are explained in the letter.
• The table of disclosure of directors’ share options and share awards on pages 42 to 44 and associated footnotes.
• The review of proposed annual objectives and performance goals of executive directors for 2006,
Following shareholder approval at the 2006 AGM, the primary long term incentive is the Long Term Incentive Plan, the key features of which (and associated policies) are summarised in the sections below.
Bridget McIntyre was enrolled in the Stakeholder Plan as from 1 January 2006. As in 2006, 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. Due to Bridget McIntyre not being able to join the Royal & SunAlliance UK Pension Scheme 2002, further employer contributions of 15% of base salary, and employee contributions of 5% of base salary were paid during the year to cover the period from 1 November 2005 to 31 December 2005. 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.
The inset graph shows the TSR of the Group with reference to the same index over the 24 month period ending 31 December 2006.
Notes: 1. 2006 bonuses were calculated as described in the remuneration report on page 37. In 2006 a maximum cash bonus of 100% of salary was achievable. 2. George Culmer received an annual performance bonus of £380,562 in respect of performance year 2006. His allowances include 15% of base salary as a retirement allowance, paid monthly. During 2006 the amount paid was £65,000. He also received car benefits worth £28,000 and medical and life assurance benefits worth £4,000. 3. Andy Haste received an annual performance bonus of £773,847 in respect of performance year 2006. His allowances include an age related percentage of base salary as a retirement allowance, paid monthly. During 2006 the allowance was 27% and the amount paid was £215,000. He also received car benefits worth £41,000 and medical and life assurance benefits worth £8,000.
4. The performance condition attaching to the Matching Share awards granted in 2004 was met to the extent that 1.126 Matching Shares vested for each Deferred Share. The maximum number of Matching Shares has been adjusted accordingly. The number of Matching Shares shown in respect of Andy Haste have been adjusted from a maximum award of 591,138 to an actual award of 221,873 in relation to awards made in 2004.
Current tax assets 23 17 40 Deferred tax assets 23 29 57 Other debtors and other assets 16 806 596
Current tax liabilities 23 56 55 Deferred tax liabilities 23 319 236 Provisions 24 380 693 Other liabilities 25 1,026 1,478
• For US liabilities from our London market business, developments in the tactics of US plaintiff lawyers and court decisions and awards.
Acquisitions and disposals The Group makes acquisitions and disposals of businesses as part of its normal operations. All acquisitions are made after due diligence, which will include, amongst other matters, assessment of the adequacy of claims reserves, assessment of the recoverability of reinsurance balances, inquiries with regard to outstanding litigation and inquiries of local regulators and taxation authorities. Consideration is also given to potential costs, risks and issues in relation to the integration of any proposed acquisitions with existing R&SA operations. The Group will seek to receive the benefit of appropriate contractual representations and warranties in connection with any acquisition and, where necessary, additional indemnifications in relation to specific risks although there can be no guarantee that such protection will be adequate in all circumstances.
We publish internally a list of authorised reinsurers who pass our selection process and which our operations may use for new transactions.
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.
Financial assets A financial asset is initially recognised, on the date the Group commits to purchase the asset, at fair value plus, in the case of all financial assets not classified as at fair value through the income statement, transaction costs that are directly attributable to its acquisition. A financial asset is derecognised when the rights to receive cashflows from the investment have expired or have been transferred and the Group has also transferred substantially the risks and rewards of ownership of the asset.
The amounts charged (or credited where relevant) in the income statement relating to post retirement benefits in respect of defined benefit schemes are as follows: • The current service cost,
– An entity to give descriptive information about the way that the operating segments were determined, the products and services provided by the segments, differences between the measurements used in reporting segment information and those used in the entity’s financial statements, and changes in the measurement of segment amounts from period to period.
Reporting in Hyperinflationary Economies (effective from 1 March 2006). IFRIC 7 provides guidance on how to apply requirements of IAS 29 in a reporting period in which an entity identifies the existence of hyperinflation in the economy of its functional currency, when the economy was not hyperinflationary in the prior period. As none of the Group entities has a currency of a hyperinflationary economy as its functional currency, IFRIC 7 is not relevant to the Group’s operations.
The Royal & SunAlliance ESOP Trust holds ordinary shares in the Parent Company, which may subsequently be transferred to employees (other than the executive directors). At 31 December 2006, the Trust held 17,751,097 ordinary shares (2005: 19,182,272) in the Parent Company with a nominal value of £5m (2005: £5m) and a mid market value, based on the market value of the Parent Company’s shares at the close of business on 29 December 2006 as shown in the Official List of the London Stock Exchange, of £27m (2005: £24m).
Estimate of cumulative claims At end of accident year 9,182 3,053 2,981 2,504 2,622 2,275
In April 2002, the primary UK defined benefit schemes were effectively closed to new entrants and in 2005, following discussions with the Trustees and consultation with the members, the UK defined benefit schemes were altered from providing benefits on a final salary basis to benefits on a revalued average salary basis with effect from 1 January 2006. Under the new benefit formula, the accrued benefits of current active members are based on salaries at the date of change and will increase in line with inflation each year (limited to 5% in any year) up to their retirement date. Benefits earned in each year from 1 January 2006 will be based on salaries in that year and similarly will be revalued up to retirement. As a result of the changes, the projected benefit obligations of the schemes are reduced from the date of change. The figures shown in the tables below reflect that reduction and the one-off benefit of £180m arising from the reduction was recorded in the income statement in 2005.
Reductions in future mortality rates were allowed for using the ‘medium cohort’ projection and using the projected mortality rates applicable to calendar year 2012 for current pensioners and 2030 for future pensioners. The weighted average assumptions imply that a current pensioner aged 60 has an expected future lifetime of 24.7 years (males) and 26.8 years (females) and a future pensioner aged 60 has a future lifetime of 26.1 years (males) and 28.1 years (females).
The structure of the plan allows for a number of different types of awards to be made. Voluntary Deferred Shares are purchased by participants from net bonus payable (limited to a maximum value of 33% of net bonus); in addition, for senior executives, the Remuneration Committee may defer a portion of an individual’s bonus (limited to 33% of that bonus) into an award over shares referred to for the purpose of the plan as compulsory Deferred Shares. Deferred shares are held in trust for three years and compulsory Deferred Shares are normally forfeited on an employee leaving the Group. No further performance conditions apply. The Remuneration Committee may make a conditional award of shares on a ‘matched’ basis to voluntary and compulsory Deferred Shares (Matching Shares).
Total potential awards outstanding 31 December 4,208,357 3,538,741 5,677,600 4,829,205 18,253,903
Underwriting risk and pricing Disciplined underwriting, encompassing risk assessment, risk management, pricing and exposure control is critical to the Group’s success.
• Monitors and reports on the Group’s approach to managing risks.
Property insurance Property insurance covers a diverse collection of risks and therefore property insurance contracts are subdivided into four risk groups: fire, business interruption, weather damage and theft. The insurance risk arising from these contracts is not concentrated in any of the territories in which the Group operates, and there is a balance between commercial and personal properties in the overall portfolio of insured buildings. Large risks are reinsured via treaty reinsurance arrangements.
• The Group monitors changes in the financial security of all of its reinsurers to see whether their ability to pay recoverables in full is doubtful. Where a reinsurer’s ability to pay in full is believed to be doubtful, the Group Corporate Centre sets guidelines for provisioning for uncollectible reinsurance. These guidelines apply to all operations. Group Corporate Centre analyses local provisions against the Group’s guidelines.
Credit profile of Group reinsurance counterparties The table below sets forth the rating assigned by Standard & Poor’s to the Group’s primary property and casualty treaty reinsurers and the amounts ceded to them under outward reinsurance contracts during 2006 and 2005. This type of reinsurance requires the reinsurer to assume insurance risk, on a predetermined basis, for all of the contracts underwritten by the Group and that are covered by the treaty. For each reinsurance group, the table shows the rating category of each reinsurance group as of 31 December 2006 together with the rating category of that reinsurance group as of 31 December 2005.
Financial liabilities Amounts owed to credit institutions – unsecured: Subordinated guaranteed US$ bonds – – – – – 37 37 Subordinated guaranteed Euro bonds – – 335 – – – 335 Subordinated guaranteed perpetual notes – – – – – 519 519 Subordinated Sterling perpetual guaranteed bonds – – – – – 301 301 Derivative trading liabilities 21 – – – – 7 28 96 Royal & SunAlliance Annual Report & Accounts 2006
29. Hedge accounting At 1 January 2005, the Group designated the loan capital denominated in foreign currencies as hedging instruments against the net investment in designated subsidiaries to reduce the foreign currency exchange risk exposure. The book value of the hedging instruments at 31 December 2006 was £335m (2005: £626m). The fair value of the hedging instruments at 31 December 2006 was £353m (2005: £735m ).
Operating lease commitments where the Group is the lessee The future aggregate minimum lease payments under non cancellable operating leases are as follows: Land and buildings Other £m £m £m £m
Net movement in amounts owed to/by subsidiaries (52) 235 Purchase of fixtures and fittings (2) –
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 Royal & Sun Alliance Insurance Group.
A Such transactions need not involve a stockbroker; you can use a stock transfer form. The form can be obtained from Lloyds TSB Registrars or printed from their website www.shareview.co.uk.
Q How do I register the death of a shareholder? A The first step is to write to Lloyds TSB Registrars, to let them know what you are going to do. They will then place a temporary marker on the register to ensure that further dividend payments are not issued in the late shareholder’s name. They will also send you the forms that you will need to complete.