9th Nov 2006 07:00
NINE MONTHS RESULTS TO 30 SEPTEMBER 2006 Strong Nine Months -- Core Group(1) net written premiums of £4.1bn up 2% on 2005 -- Combined operating ratio (COR) of 93.1% - 0.5 points better than 2005 -- Operating result(2) of £590m up 21% on 2005 -- Profit before disposals and pension scheme change(2) increased by 40% to £477m -- Shareholders' funds increased by 8% to £3.0bn Delivery Against Strategic Objectives -- Strong performance from all Core businesses -- Driving the business forward through organic profitable growth and bolt on acquisitions -- Realised £12m net benefit of targeted £130m expense savings -- Shareholder approval gained for disposal of US operation -- US delisting completed and SEC deregistration progressing \* T 9 Months 9 Months Movement 2006 2005Core Group(1)Net written premiums £4,087m £4,008m +2%Underwriting result £238m £195m +22%Combined operating ratio 93.1% 93.6% +0.5ptsTotal GroupOperating result(2) £590m £488m +21%Profit before disposals and pension scheme £477m £341m change(2) +40%Profit after tax*(2) £344m £378m -9% 30 September 31 December 2006 2005Balance sheetShareholders' funds £2,957m £2,743m +8%Net asset value per share (post IAS 19) 96p 90p +7%Net asset value per share (pre IAS 19) 101p 103p -2%--------------------------------------------- ---------------- ---------------- ----------------\* T * 2005 profit after tax includes £166m from the disposal of our Japanesebusiness and pension scheme change. Excluding this amount 2006 profit after taxis up 62% on a like for like basis. Andy Haste, Group CEO of Royal & Sun Alliance Insurance Group plc, commented: "It has been a good nine months for the Group. We have again delivered a strongperformance with a 21% increase in the operating result and we have madesignificant progress towards our strategic objectives through organic growth,bolt on acquisitions and organisational change. We have also receivedshareholder approval for the sale of our US operation which, when complete, willresolve our last remaining legacy issue. The Core Group is positioned tocontinue delivering sustainable profitable performance and, as it stands today,we expect to come inside our 2006 full year guidance of a combined operatingratio of around 95%." For further information: \* TAnalysts Press Helen Pickford Phil Wilson-BrownTel: +44 (0) 20 7111 7212 Tel: +44 (0) 20 7111 7047Mobile: +44 (0) 7834 005589 Mobile: +44 (0) 7834 005605 Andrew Wigg Simon Moyse (Finsbury)Tel: +44 (0) 20 7111 7138 Tel: +44 (0) 20 7251 3801Mobile: +44 (0) 7834 944129 Mobile: +44 (0) 7810 505473\* T CONTENTS CEO review Operations review Summary consolidated income statement - management basis Summary consolidated balance sheet - management basis Other information Income statement - Core Group and US operation Core Group regional analysis Estimation techniques, uncertainties and contingencies Statutory information Explanatory notes Important Disclaimer This document contains forward-looking statements as defined in the US PrivateSecurities Litigation Reform Act of 1995. It contains forward-looking statementsand information relating to the Company's financial condition, results ofoperations, business, strategy and plans, premium projections, and generalindustry outlook (including trends in results, prices, volumes, operations,margins, overall market conditions, risk management and exchange rates) based oncurrently available information. These statements are often, but not always,made through the use of words or phrases such as 'aim', 'anticipate', 'believe','continue', 'could', 'estimate', 'expect', 'intend', 'may', 'plan', 'seek','should' or 'will' or the negative of these terms or similar expressions. Thespecific forward-looking statements cover, among other matters, our strategy andoperational objectives; financial results; sustainability of earnings andprofitable growth; restructuring plans; our expense savings; payment of futuredividends; losses related to the US financial enhancement products; reduction inthe Group's US exposures; sale of the US operation which remains subject toregulatory approval; the expected loss upon any sale of the US operation;capital and solvency requirements in the UK; regulatory position in the US;effect of litigation on the Company's financial position; projections of lossesresulting from catastrophic storms; projection of combined ratios for 2006;delays in claims notifications for asbestos and environmental claims and adverseclaims development on long tail business and court judgments. Undue relianceshould not be placed on any such statements because, by their very nature, theyare subject to known and unknown risks and uncertainties and can be affected byother factors that could cause actual results, and the Company's plans andobjectives, to differ materially from those expressed or implied in theforward-looking statements. Such factors include general economic conditions,including in particular economic conditions in the United Kingdom; political andsocial conditions; the frequency, severity and development of insured lossevents, including catastrophes and man made disasters; the availability andpricing of, and ability to collect on, reinsurance; the ability to exclude andto reinsure the risk of loss from terrorism; mortality and morbidity experienceand trends; policy renewal and lapse rates; fluctuations in interest andinflation rates; returns on and fluctuations in the value of the Company'sinvestment portfolios; corporate bankruptcies; fluctuations in foreign currencyexchange rates; the ability of our subsidiaries to pay dividends; a downgrade inthe Company's financial strength or claims paying or other credit ratings;adverse changes in laws and regulations; adverse outcomes in judicial decisionsand rulings and general competitive factors, and other risks and uncertainties,including those detailed in the Company's filings with the US Securities andExchange Commission and the UK Listing Authority. The Company undertakes noobligation to update or revise any of the forward-looking statements publicly,whether as a result of new information, future events or otherwise, save inrespect of any requirement under applicable law or regulation. (1) The Core Group is defined as the UK, International, Scandinavia and GroupRe. (2) For a reconciliation of operating result and profit before disposals andpension scheme changes on a management basis to profit after tax see the SummaryConsolidated Income Statement. CEO REVIEW The Group has delivered another strong result. Net written premiums for the CoreGroup in the nine months are £4.1bn, an increase of 2% on last year. The CoreGroup underwriting result of £238m is a 22% improvement over the prior yearreflecting our disciplined approach to underwriting and claims. The combinedoperating ratio (COR) is 93.1%, 0.5 points better than the same period last year(2005: 93.6%). The Core Group investment result of £419m is marginally ahead ofprior year and includes a 3% increase in investment income to £386m. The USbusiness has delivered an insurance result of £10m compared with a loss of £32min the first nine months of last year. The operating result for the Group of £590m is up 21% on 2005 reflecting theimprovement in both the Core Group and US insurance results and lower centralexpenses. Profit before disposals and pension scheme change is up 40% to £477m.Profit after tax is £344m compared with £378m in 2005, which included £166m fromthe disposal of our Japanese operation and the change to the UK pension schemes.Excluding this amount, profit after tax is up 62% on last year. Business PerformanceSet out below are the combined operating ratios of our Core businesses: \* T 9 Months 2006 9 Months 2005 Movement % % PointsUK Personal 90.5 96.5 6.0UK Commercial 93.2 91.2 (2.0)--------------------------------------------- ---------------- ----------------- -----------------UK Total 92.4 92.9 0.5International 94.2 95.1 0.9Scandinavia 93.1 93.3 0.2--------------------------------------------- ---------------- ----------------- -----------------Core Group 93.1 93.6 0.5============================================= ================ ================= =================\* T Core GroupThe 2% improvement in net written premiums to £4.1bn reflects the strength ofour diversified portfolio and the targeting of profitable growth opportunities.The UK is our most competitive market and we continue to focus on underwritingdiscipline and maintaining technical price. Retention is strong and we aredeveloping a profitable pipeline for the future. In UK Commercial we have signed26 new deals this year. MORE TH>N continues to grow strongly with new businesspolicy sales up 24% on 2005. The Intermediated business is building momentum andtoday we have announced a deal with Paymentshield to underwrite its householdinsurance for seven years. We expect the deal will generate premiums of around£100m in 2007 and over £200m in 2008. International continues to achieve strongdouble digit growth, with premiums up 14% on 2005. Premiums in Latin Americagrew by 36% and in Canada by 19% reflecting a combination of organic growth andthe contribution from acquisitions. In Scandinavia underlying premium growth of6% reflects growth in both Commercial and Personal lines and double digit growthin the Baltics. Each of our Core regions has now achieved eleven consecutive quarters ofcombineds that start with a nine. The Core Group insurance result of £657m is up8% on 2005, reflecting our disciplined approach to underwriting, claims andexpense management. The impact of favourable weather was partially offset byadverse large loss experience in the quarter and while not an event year, a £14mincrease in UK subsidence costs. At the Investor Day in June, we announced anannualised expense savings target of £130m by mid 2008 and have now delivered anet benefit of £12m. Last month we announced a restructuring of the Core Group. While the UK remainsunchanged, our overseas businesses have been reorganised into International(Canada, Ireland, Italy and Scandinavia) and Emerging Markets (Latin America,Asia and the Middle East and the Baltics). International will continue to be runby Simon Lee, who joins the Group Board on 1 January 2007. Emerging Markets willbe run by Paul Whittaker, who has significant experience of these markets andwas previously R&SA's Group HR Director. This reorganisation will enable us todrive further improvements in the performance of our International businessesand deliver the profitable growth potential we see in Emerging Markets. We willreport in line with this structure from the start of 2007. Orlagh Hunt, who waspreviously International HR Director, takes over as Group HR Director. We haveannounced today that Rickard Gustafson, who joined us earlier this year from GE,has been appointed as the new CEO of Scandinavia. USOn 28 September we announced the sale of our US business to Arrowpoint Capital,a company set up by the US management team. At the Extraordinary General Meetingon 1 November, the Group received shareholder approval for the transaction.Arrowpoint has filed its Form A application for change of control, the Delawareregulator has appointed a hearing officer and the public hearing is scheduled tocommence on 21 November. Subject to regulatory approval we remain on track forcompletion by the year end. In September the Group also announced its intention to delist from the New YorkStock Exchange and to deregister from the SEC. We received shareholder approvalto amend our Articles of Association to enable deregistration and on 30 October,we terminated our ADR programme and delisted from the NYSE. SummaryIt has been a good nine months for the Group with significant progress towardsour strategic goals and another quarter of strong performance from the CoreGroup. As it stands today we expect to come inside our 2006 full year guidanceof a combined operating ratio of around 95% for the Core Group. Andy Haste, Group CEO, Royal & Sun Alliance Insurance Group plc OPERATIONS REVIEW The table below presents the key financials for the Core Group (UK,International and Scandinavia) and the US operation. \* T Core Group US Group 9 Months 9 Months 9 Months 9 Months 9 Months 9 Months 2006 2005 2006 2005 2006 2005Insurance result (£m) 657 611 10 (32) 667 579Operating result (£m) 598 533 (8) (45) 590 488Profit/(loss) after tax* (£m) 369 450 (25) (72) 344 378Shareholders' funds (£bn) 2.7 2.3 0.3 0.3 3.0 2.6Operating EPS (pence) 12.2 9.6 - - - -Basic EPS (pence) - - - - 10.7 11.5\* T * 2005 profit after tax includes £166m from the disposal of our Japanesebusiness and pension scheme change CORE GROUP The Core Group insurance result of £657m was up 8% on 2005 primarily due to theimprovement in the underwriting result. The underwriting result was £238m (2005:£195m) and comprised £107m for the current year and £131m for the prior year.This result reflects the benefit of the actions we are taking on underwritingand claims. Favourable weather contributed £68m, however this was off set byrating and claims inflation, adverse large loss experience of £29m and while notan event year, a £14m increase in subsidence costs. - UK The UK delivered a strong performance with a 16% increase in the underwritingresult to £129m, and a 0.5 point improvement in the COR to 92.4%. The UK remainsa competitive market and in Personal we have achieved low single digit ratingincreases while in Commercial rates are off 4%. Retention remains strong and weare building momentum with a robust pipeline of new deals coming on line. Newbusiness sales of £382m were up 27% on 2005. Net written premiums of £1.9bn were5% down on prior year (2005: £2.0bn) reflecting our disciplined approach. CommercialIn Commercial, net written premiums were £1,273m (2005: £1,364m) reflecting ourfocus on achieving technical price. The UK market remains our most competitive.We are committed to maintaining our underwriting discipline and drivingretention, which stands at 84%. In our target segments, we are buildingmomentum: new business sales increased 23% to £212m and this year we have signed26 deals. UK Commercial delivered a COR of 93.2% and an underwriting result of £77mcompared with £92m in 2005. This reflects our commitment to underwritingdiscipline, claims management and the impact of favourable weather offset bylarge claims. Commercial property delivered a COR of 90.2%, motor 91.9% and casualty 95.9%.The Commercial 'Other' segment achieved a 10.7 point improvement in the COR andincludes our Marine business which delivered a combined of 93.4%. PersonalNet written premiums for UK Personal were £637m (2005: £639m) with new businesssales up 32% on 2005 to £170m. Today we have announced an agreement withPaymentshield, the UK's leading independent supplier of general insurance tomortgage intermediaries. We expect this deal will generate household premiums ofaround £100m in 2007 and over £200m in 2008. The underwriting result of £52m, which includes £10m from a one off commutationbenefit announced at the half year, was £33m higher than last year and the CORof 90.5% was 6.0 points better than 2005. This primarily reflects a stronghousehold result with a COR of 78.4% driven by claims management actions andcontinued rating actions. MORE TH>N delivered net written premiums of £340m and achieved a COR of 89.6%,4.9 points better than 2005. The expense ratio was 22.9% compared with 24.9% in2005. New business policy sales were 24% higher than 2005, with a 5% increase inaverage motor premiums. - International International net written premiums of £1,085m were up 14% on 2005 reflectingstrong growth in Canada and Latin America, as well as favourable exchangemovements. The underwriting profit of £63m was up 37% on the same period lastyear and the COR improved by 0.9 points to 94.2%. Canadian net written premiums were £501m, an increase of 19% on 2005. Thisreflects strong growth in both Johnson, our direct personal business, andCommercial as well as favourable exchange. The Canadian COR of 92.4% improved by1.6 points and the underwriting result improved by 50% to £33m reflecting thebenefits of our disciplined approach to risk selection, claims actions andfavourable claims experience. We continue to build our broker network and in thequarter added 12 new brokers, bringing the total to 53 this year. In Latin America, net written premiums were £233m, up 36% on last year. Thisreflects organic growth in Chile, Argentina, Brazil and the benefit of ouracquisitions last year of Cruz del Sur in Chile and La Republica in Argentina.The underwriting loss of £5m and the combined operating ratio of 103.7% areafter integration costs associated with these acquisitions, higher reinsurancecosts and a number of weather and large losses in the quarter. In Europe net written premiums were £269m (2005: £279m) and the COR improved by1.7 points to 93.7%. Our Asia and Middle East business delivered anotherexcellent performance and achieved a COR of 80.3%. - Scandinavia In Scandinavia net written premiums were £1,091m up 5% on 2005 (£1,044m).Underlying growth was 6% after excluding the impact of foreign exchange and themove to net pricing in Sweden. This reflects growth in both Commercial andPersonal lines and double digit growth in the Baltics. The underwriting resultof £56m was up 6% on 2005 and the COR improved marginally to 93.1% reflectingthe benefits of our disciplined approach to underwriting and favourable weather. Commercial net written premiums were £514m up 2% on 2005 (£503m) reflectinggrowth in Denmark, Lithuania and Latvia and the COR was 87.1%. In Denmark netwritten premiums increased by 4% driven by a combination of new business andimproved retention. In Sweden net written premiums were £218m and the COR was77.9%. In Personal, net written premiums of £577m were up 7% on 2005, with stronggrowth across all distribution channels. The underwriting result was £6m (2005:loss of £5m) and the COR improved by 2 points to 98.1%. In Denmark the combinedimproved by 11.4 points to 85.4% reflecting the benefits of our disciplined riskselection, claims management and weather. In Sweden, the COR of 104.3% was afterstrengthening personal accident reserves. In Lithuania and Latvia we are consolidating our number one position. Netwritten premiums were £82m, up 30% on 2005 with a combined ratio of 94.7% (2005:94.0%). In October, we completed the acquisition of White Label and Duborgh,specialist providers of affinity products in Norway, which will generateapproximately £50m of net written premiums in 2007. US In the US we continue to make further progress in reducing exposure andinfrastructure. This year we have reduced open claims by 26%, headcount by 29%to 607 employees and expenses by 24%. The insurance result was £10m comparedwith a £32m loss in 2005. On a business as usual basis we continue to expect theUS insurance result to be broadly breakeven in 2006. In September we announced the disposal of the US Operation to ArrowpointCapital, a vehicle set up by the R&SA US management team. The estimated pre taxloss on disposal of £443m is subject to foreign exchange and a closing net assetadjustment. The transaction is subject to regulatory and shareholder approval -shareholder approval was received on 1 November. The regulatory review processis underway and subject to approval, we are targeting completion by the yearend. Investment Result Investment income in the Core Group of £386m (2005: £374m) was 3% higher thanprior year primarily due to the one off benefit of the deal with Resolution Lifeplc that we announced in Q1. The size of the average portfolio increased by£0.4bn over 2005, while there has been a marginal reduction in the yield whichhas moved from 4.0% to 3.9% in 2006. In the US, a 50 basis point increase inyield to 4.7% was offset by a £0.5bn reduction in the average portfolio as wecontinue to realise investments to settle claims. Total gains in the Core Group of £66m (2005: £67m) include a number of one offitems, principally the Rightmove IPO and the sale and leaseback of our Liverpooloffice. Gains in the US of £7m (2005: £6m) include the sale of our US headoffice. We anticipate total realised and unrealised gains for the Group (CoreGroup and US) will be around £80m for the full year. The unwind of discount of£48m (2005: £41m) has increased by £7m on last year reflecting a change in thediscount rate used for Scandinavian annuities. The fixed interest portfolio continues to be concentrated on high quality shortdated bonds. At the end of September, holdings of bonds rated AA or above stoodat 80% of total bond exposure, while holdings in non investment grade bondsrepresented less than 1%. As at 30 September 2006 unrealised gains in the balance sheet were £543m (31December 2005: £541m). \* T 9 Months 2006 9 Months 2005 Core US Total Core US Total £m £m £m £m £m £mBonds 282 74 356 258 80 338Equities 45 2 47 44 3 47Cash and cash equivalents 41 4 45 45 4 49Land and buildings 10 - 10 11 - 11Other 8 - 8 16 1 17-------------------------------------------------- ------- ------- -------- ------- ------- --------Investment income 386 80 466 374 88 462 Realised gains 40 7 47 66 6 72Unrealised gains/(losses), impairments and foreign exchange 26 - 26 1 - 1Unwind of discount (33) (15) (48) (25) (16) (41)-------------------------------------------------- ------- ------- -------- ------- ------- --------Investment result 419 72 491 416 78 494================================================== ======= ======= ======== ======= ======= ========\* T Other Activities Result The analysis of the other activities result is as follows: \* T 9 Months 9 Months Movement 2006 2005 £m £mCentral expenses (51) (60) 15%Investment expenses and charges (33) (36) 8%Non insurance activities 2 (1) -Non insurance derivatives 4 5 20%Associates 1 1 --------------------------------------------------- --------------- --------------- --------------Other activities (77) (91) 15%================================================== =============== =============== ==============\* T The result from other activities for the first nine months was a charge of £77m(2005: £91m). Central expenses of £51m are 15% lower than prior year and includecosts associated with regulatory and other projects of £10m (2005: £11m). Regulatory Capital Position The regulatory capital position of the Group under the Insurance GroupsDirective (IGD) is set out below: \* TAs at 30 September 30 September 31 December 2006 2006 2005 Requirement Surplus Surplus £bn £bn £bnInsurance Groups Directive 1.5 1.5 1.0\* T The improvement in the Insurance Groups Directive (IGD) surplus from £1.0bn at31 December 2005 to £1.5bn at 30 September 2006 is mainly attributable to thefavourable result for the period and the completion of the Yankee Bond exchangeand tender offer during the second quarter. The coverage over our IGDrequirement has increased from 1.6 times at the year end to 2.0 times as at 30September 2006. Core Group COR The combined operating ratio represents the sum of expense and commission costsexpressed in relation to net written premiums and claim costs expressed inrelation to net earned premiums. The calculation of the Core Group COR of 93.1%was based on net written premiums of £4,087m and net earned premiums of £3,955m. Net Asset Value per Share The net asset value per share at 30 September 2006 post IAS 19 was 96p and preIAS 19 was 101p (30 June 2006: post IAS 19 was 95p and pre IAS 19 was 99p). At 3November 2006 the net asset value per share post IAS 19 was estimated at 97p andpre IAS 19 was estimated at 101p. The pre IAS 19 net asset value per share for 30 September 2006 was based ontotal shareholders' funds of £2,957m, with adjustments of £129m for the pensiondeficit and £125m for preference shares; and shares in issue at the period endof 2,937,938,691 (excludes those held in the ESOP trusts). Operating EPS for Core Group The Core Group operating earnings per share for the nine months ended 30September 2006 was 12.2p compared with 9.6p at 30 September 2005. Operatingearnings per share for the nine months ended 30 September 2006 was calculated onthe Core Group operating result after interest, minority interests, preferencedividends, and related tax of £356m; and the weighted average number of sharesfor the period of 2,923,231,277 (excludes those held in ESOP trusts). Rating Movements Rate movements achieved for risks renewing in September 2006 versus comparablerisks renewing in September 2005 were as follows: \* T Personal Commercial Motor Household Motor Liability Property % % % % %UK 4 6 (2) (9) (4)Scandinavia 4 6 - 6 -Canada (1) 1 (4) (5) (5)\* T FURTHER INFORMATION The full text of the above is available to the public at 1 Leadenhall Street,London EC3V 1PP. The text is also available on line at www.royalsunalliance.com.A live audiocast of the conference call, including the question and answersession, will be broadcast on the website at 9.30am today and an indexed versionwill be available by the end of the day. Copies of the slides to be presentedduring the conference call will be available on the site from 8.30am today. The full year 2006 results will be announced on 8 March 2007. The interim 2007results will be announced on 9 August 2007. MANAGEMENT BASIS OF REPORTING The following analysis on pages 8 to 15 has been prepared on a non statutorybasis as management believe that this is the most appropriate method ofassessing the financial performance of the Group. The estimation techniques,uncertainties and contingencies are included on pages 16 to 20. Financialinformation on a statutory basis is included on pages 21 to 25. SUMMARY CONSOLIDATED INCOME STATEMENT MANAGEMENT BASIS \* T 9 Months 9 Months 12 Months 2006 2005 2005 £m £m £mCore Group net written premiums 4,087 4,008 5,300------------------------------------------------------- ------------ ------------- --------------Core Group underwriting result 238 195 263 ------------ ------------- -------------- Investment income 386 374 498 Realised gains 40 66 109 Unrealised gains/(losses), impairments and foreign exchange 26 1 12 Unwind of discount (33) (25) (39) ------------ ------------- --------------Core Group investment result 419 416 580------------------------------------------------------- ------------ ------------- --------------Core Group insurance result 657 611 843US run off insurance result 10 (32) (29)Other activities (77) (91) (116)------------------------------------------------------- ------------ ------------- --------------Operating result 590 488 698 Interest costs (71) (82) (107)Amortisation (14) (12) (17)Reorganisation costs (28) (53) (86)------------------------------------------------------- ------------ ------------- --------------Profit before disposals and pension scheme change 477 341 488Benefit on change in pension scheme design - 180 180(Loss)/profit on disposals (4) 62 197------------------------------------------------------- ------------ ------------- --------------Profit before tax 473 583 865Taxation (129) (205) (260)------------------------------------------------------- ------------ ------------- --------------Profit after tax 344 378 605======================================================= ============ ============= ============== Earnings per share attributable to the ordinary shareholders of the Company during the period: Basic 10.7p 11.5p 18.9pDiluted 10.6p 11.4p 18.7p\* T SUMMARY CONSOLIDATED BALANCE SHEET MANAGEMENT BASIS \* T 30 September 30 September 31 December 2006 2005 2005 £m £m £mAssetsGoodwill and other intangible assets 473 397 450Property and equipment 374 403 410Investments ------------- ------------- ------------- Investment property 450 422 435 Investment in associated undertakings 26 27 29 Equity securities 1,605 1,640 1,683 Debt and fixed income securities 10,666 11,366 11,609 Other 217 350 241 ------------- ------------- -------------Total investments 12,964 13,805 13,997Reinsurers' share of insurance contract liabilities 3,463 4,206 4,406Insurance and reinsurance debtors 2,394 2,507 2,547Deferred acquisition costs 456 465 465Other debtors and other assets 995 741 669Cash and cash equivalents 1,948 1,516 1,617--------------------------------------------- ------------- ------------- -------------Assets associated with continuing business 23,067 24,040 24,561Assets associated with discontinued business - 319 36--------------------------------------------- ------------- ------------- -------------Total assets 23,067 24,359 24,597============================================= ============= ============= ============= Equity, reserves and liabilities Equity and reservesShareholders' funds 2,957 2,647 2,743Perpetual notes - 444 -Minority interests 333 385 391--------------------------------------------- ------------- ------------- -------------Total equity and reserves 3,290 3,476 3,134Loan capital 1,120 616 1,071--------------------------------------------- ------------- ------------- -------------Total equity, reserves and loan capital 4,410 4,092 4,205--------------------------------------------- ------------- ------------- ------------- Liabilities (excluding loan capital)Insurance contract liabilities 15,980 16,929 17,204Insurance and reinsurance liabilities 411 506 475Borrowings 2 290 251Provisions and other liabilities 2,264 2,384 2,462--------------------------------------------- ------------- ------------- ------------- 18,657 20,109 20,392Liabilities associated with groups held for sale - 158 ---------------------------------------------- ------------- ------------- -------------Total liabilities (excluding loan capital) 18,657 20,267 20,392--------------------------------------------- ------------- ------------- -------------Total equity, reserves and liabilities 23,067 24,359 24,597============================================= ============= ============= =============\* T These summary consolidated interim financial statements have been approved forissue by the Board of Directors on 8 November 2006. OTHER INFORMATION MANAGEMENT BASIS Movement in Net Assets \* T 2006 2005 Total Minority Loan Net Net Shareholders' Interest Capital Assets Assets Funds £m £m £m £m £mBalance at 1 January 2,743 391 1,071 4,205 3,740Profit after tax 319 25 - 344 378Exchange (losses)/gains (59) (6) (25) (90) 39Fair value (losses)/gains net of tax (21) (1) - (22) 45Pension fund actuarial gains net of tax 118 - - 118 27New debt issue - - 74 74 -New share issue 35 - - 35 5Changes in shareholders' interests in subsidiaries (41) (67) - (108) -Share options 8 - - 8 7Prior year final dividend (89) (9) - (98) (95)Current year interim dividend (51) - - (51) (49)Preference dividend (5) - - (5) (5)----------------------------------------- -------------- ---------- --------- ----------- ---------Balance at 30 September 2,957 333 1,120 4,410 4,092========================================= ============== ========== ========= =========== =========\* T Changes in shareholders' interests in subsidiaries relate to Codan's share buyback and Codan's buyout of the Baltic minority interests. Pension Fund Deficit The table below provides a reconciliation of the Group pension fund deficit (netof tax) from 1 January 2006 to 30 September 2006. \* T UK Other Core US Total Group £m £m £m £m £mPension fund at 1 January 2006 (211) (28) (239) (131) (370) Market movement 118 - 118 - 118Deficit funding 60 - 60 24 84Other movements 32 (1) 31 8 39----------------------------------------- -------------- ---------- --------- ---------- --------- Pension fund at 30 September 2006 (1) (29) (30) (99) (129)========================================= ============== ========== ========= ========== =========\* T EXCHANGE RATES \* T£/local currency 9 Months 2006 9 Months 2005 12 Months 2005 Average Closing Average Closing Average ClosingUS Dollar 1.82 1.87 1.84 1.77 1.82 1.72Canadian Dollar 2.06 2.08 2.25 2.05 2.20 2.01Danish Kroner 10.90 10.99 10.88 10.95 10.90 10.86\* T SUMMARY CONSOLIDATED INCOME STATEMENT ANALYSED BETWEEN CORE GROUP AND USOPERATION ON A MANAGEMENT BASIS NINE MONTHS TO 30 SEPTEMBER \* T 2006 2005 Core US Group Core US Group Group Group £m £m £m £m £m £m Net written premiums 4,087 (1) 4,086 4,008 130 4,138---------------------------------------------------- -------- ------ --------- -------- ------- -------- Underwriting result 238 (62) 176 195 (110) 85 -------- ------ --------- -------- ------- -------- Investment income 386 80 466 374 88 462 Realised gains 40 7 47 66 6 72 Unrealised gains/(losses), impairments and foreign exchange 26 - 26 1 - 1 Unwind of discount (33) (15) (48) (25) (16) (41) -------- ------ --------- -------- ------- -------- Investment result 419 72 491 416 78 494---------------------------------------------------- -------- ------ --------- -------- ------- -------- Insurance result 657 10 667 611 (32) 579 Other activities (59) (18) (77) (78) (13) (91)---------------------------------------------------- -------- ------ --------- -------- ------- -------- Operating result 598 (8) 590 533 (45) 488 Interest costs (71) - (71) (82) - (82) Amortisation (10) (4) (14) (8) (4) (12) Reorganisation costs (18) (10) (28) (31) (22) (53)---------------------------------------------------- -------- ------ --------- -------- ------- -------- Profit/(loss) before disposals and pension scheme changes 499 (22) 477 412 (71) 341 Benefit on change in pension scheme design - - - 180 - 180 (Loss)/profit on disposals (1) (3) (4) 62 - 62---------------------------------------------------- -------- ------ --------- -------- ------- -------- Profit/(loss) before tax 498 (25) 473 654 (71) 583 Taxation (129) - (129) (204) (1) (205)---------------------------------------------------- -------- ------ --------- -------- ------- -------- Profit/(loss) after tax 369 (25) 344 450 (72) 378==================================================== ======== ====== ========= ======== ======= ========\* T SUMMARY CASHFLOW STATEMENT ANALYSED BETWEEN CORE GROUP AND US OPERATION NINE MONTHS TO 30 SEPTEMBER \* T 2006 2005 Core US Group Core US Total Group Group £m £m £m £m £m £mNet cashflows from operating activities 617 (436) 181 587 (648) (61)Net cashflows from financing activities (350) 6 (344) (147) 12 (135)---------------------------------------------------- -------- ------ --------- -------- ------- --------Net cashflows from operating activities after financing activities 267 (430) (163) 440 (636) (196)Net cashflows from investing activities 120 421 541 (590) 457 (133)---------------------------------------------------- -------- ------ --------- -------- ------- --------Net increase/(decrease) in cash and cash equivalents 387 (9) 378 (150) (179) (329) Cash and cash equivalents at the beginning of the period 1,440 172 1,612 1,523 341 1,864Effect of exchange rate changes on cash and cash equivalents (28) (14) (42) 26 22 48---------------------------------------------------- -------- ------ --------- -------- ------- --------Cash and cash equivalents at the end of the period 1,799 149 1,948 1,399 184 1,583 Add: bank overdrafts - - - 3 - 3Less: discontinued operations - - - - (70) (70)---------------------------------------------------- -------- ------ --------- -------- ------- --------Cash and cash equivalents per balance sheet 1,799 149 1,948 1,402 114 1,516==================================================== ======== ====== ========= ======== ======= ========\* T The Core Group's cash and cash equivalents increased by £387m in the first ninemonths of 2006. This is after the repayment of our senior debt of £233m, Codan'sshare buy back of £55m and Codan's buy out of the minority interests in theBaltics of £53m. The Core Group's cashflow from operating activities hasincreased by 5% on 2005 to £617m. The reduction in the US cash and cashequivalents of £9m reflects the expected continued settlement of claims. REGIONAL ANALYSIS OF INSURANCE OPERATIONS FOR CORE GROUP NINE MONTHS TO 30 SEPTEMBER \* T Net Written Premiums 2006 2005 £m £m United Kingdom 1,910 2,003 International 1,085 955 Scandinavia 1,091 1,044 Group Re 1 6------------------------ ----------- ------------ ------------ ----------- ----------- -------------- Core Group 4,087 4,008======================== =========== ============ ============ =========== =========== ============== Underwriting Result Investment Result Insurance Result 2006 2005 2006 2005 2006 2005 £m £m £m £m £m £m United Kingdom 129 111 231 228 360 339 International 63 46 104 102 167 148 Scandinavia 56 53 84 86 140 139 Group Re (10) (15) - - (10) (15)------------------------ ----------- ------------ ------------ ----------- ----------- -------------- Core Group 238 195 419 416 657 611======================== =========== ============ ============ =========== =========== ============== Operating Ratios 2006 2005 Claims Expenses Combined Claims Expenses Combined % % % % % % United Kingdom 61.9 30.5 92.4 61.5 31.4 92.9 International 60.7 33.5 94.2 62.3 32.8 95.1 Scandinavia 74.9 18.2 93.1 74.7 18.6 93.3------------------------ ----------- ------------ ------------ ----------- ----------- -------------- Core Group 65.1 28.0 93.1 65.3 28.3 93.6======================== =========== ============ ============ =========== =========== ==============\* T INVESTMENT RESULT BY REGION NINE MONTHS TO 30 SEPTEMBER 2006 \* T UK International Scandinavia Core Group £m £m £m £mInvestment income 212 88 86 386Realised gains 22 10 8 40Unrealised gains/(losses), impairments and foreign exchange 14 6 6 26Unwind of discount (17) - (16) (33)----------------------------------------------------------- ------------ ----------------- --------------- -------------Investment result 231 104 84 419=========================================================== ============ ================= =============== =============\* T The investment result is reported on an actual basis for the Core Group intotal. Within the Core Group, investment income is allocated to the regionsbased on technical reserves, working capital and the local regulatory capitalrequirements. Realised gains, unrealised gains and impairment losses areallocated with reference to the above amounts. The unwind of discount isattributed on an actual basis. UNITED KINGDOM INSURANCE OPERATIONS NINE MONTHS TO 30 SEPTEMBER \* T Net Written Premiums Underwriting Result Operating Ratio 2006 2005 2006 2005 2006 2005 £m £m £m £m % %PersonalHousehold 281 289 60 29 78.4 92.7Motor 329 319 (13) (10) 102.8 102.2Other 27 31 5 - 84.8 92.0------------------------ ----------- ------------- ------------ ------------- --------------- ------------------Total UK Personal 637 639 52 19 90.5 96.5------------------------ ----------- ------------- ------------ ------------- --------------- ------------------ CommercialProperty 515 546 52 74 90.2 87.5Casualty 227 243 12 11 95.9 96.6Motor 392 467 22 29 91.9 88.7Other 139 108 (9) (22) 106.7 117.4------------------------ ----------- ------------- ------------ ------------- --------------- ------------------Total UK Commercial 1,273 1,364 77 92 93.2 91.2------------------------ ----------- ------------- ------------ ------------- --------------- ------------------Total UK 1,910 2,003 129 111 92.4 92.9======================== =========== ============= ============ ============= =============== ================== Underwriting Result Investment Result Insurance Result 2006 2005 2006 2005 2006 2005 £m £m £m £m £m £mPersonal 52 19 54 56 106 75Commercial 77 92 177 172 254 264------------------------ ----------- ------------- ------------ ------------- --------------- ------------------Total UK 129 111 231 228 360 339======================== =========== ============= ============ ============= =============== ==================\* T INTERNATIONAL INSURANCE OPERATIONS NINE MONTHS TO 30 SEPTEMBER \* T Net Written Premiums Underwriting Result Operating Ratio 2006 2005* 2006 2005* 2006 2005* £m £m £m £m % %PersonalCanada 363 319 26 14 91.9 94.8Europe 168 173 16 13 90.7 93.0Latin America 124 77 - (1) 100.0 99.5Asia & Middle East 20 24 2 4 85.4 83.4----------------------- ------------ ------------- ------------ ------------- ----------------- -----------------Total Personal 675 593 44 30 92.9 94.4----------------------- ------------ ------------- ------------ ------------- ----------------- ----------------- CommercialCanada 138 103 7 8 92.8 91.8Europe 101 106 5 5 99.4 100.0Latin America 109 94 (5) - 107.7 100.1Asia & Middle East 62 59 12 3 78.7 91.7----------------------- ------------ ------------- ------------ ------------- ----------------- -----------------Total Commercial 410 362 19 16 96.6 96.3----------------------- ------------ ------------- ------------ ------------- ----------------- ----------------- TotalCanada 501 422 33 22 92.4 94.0Europe 269 279 21 18 93.7 95.4Latin America 233 171 (5) (1) 103.7 99.9Asia & Middle East 82 83 14 7 80.3 88.9----------------------- ------------ ------------- ------------ ------------- ----------------- -----------------Total International 1,085 955 63 46 94.2 95.1======================= ============ ============= ============ ============= ================= ================= Underwriting Result Investment Result Insurance Result 2006 2005* 2006 2005* 2006 2005* £m £m £m £m £m £mPersonal 44 30 49 48 93 78Commercial 19 16 55 54 74 70----------------------- ------------ ------------- ------------ ------------- ----------------- -----------------Total International 63 46 104 102 167 148======================= ============ ============= ============ ============= ================= ================= Canada 33 22 62 58 95 80Europe 21 18 31 32 52 50Latin America (5) (1) 6 5 1 4Asia & Middle East 14 7 5 7 19 14----------------------- ------------ ------------- ------------ ------------- ----------------- -----------------Total International 63 46 104 102 167 148======================= ============ ============= ============ ============= ================= =================\* T * The 2005 comparatives for Asia & Middle East and Total International include£8m of net written premiums and a £2m underwriting result from our Japanesebusiness which was sold in first quarter 2005. SCANDINAVIA INSURANCE OPERATIONS NINE MONTHS TO 30 SEPTEMBER \* T Net Written Premiums Underwriting Result Operating Ratio 2006 2005 2006 2005 2006 2005 £m £m £m £m % %PersonalDenmark 172 167 20 2 85.4 96.8Sweden 354 332 (16) (8) 104.3 102.0Other 51 42 2 1 90.3 92.4---------------------- ------------ ------------- ------------ ------------- ------------ -------------Total Personal 577 541 6 (5) 98.1 100.1---------------------- ------------ ------------- ------------ ------------- ------------ ------------- CommercialDenmark 254 245 11 12 93.5 92.9Sweden 218 229 40 47 77.9 76.4Other 42 29 (1) (1) 98.4 99.8---------------------- ------------ ------------- ------------ ------------- ------------ -------------Total Commercial 514 503 50 58 87.1 85.5---------------------- ------------ ------------- ------------ ------------- ------------ ------------- TotalDenmark 426 412 31 14 90.2 94.4Sweden 572 561 24 39 94.5 91.9Other 93 71 1 - 94.1 95.6---------------------- ------------ ------------- ------------ ------------- ------------ -------------Total Scandinavia 1,091 1,044 56 53 93.1 93.3====================== ============ ============= ============ ============= ============ ============= Underwriting Result Investment Result Insurance Result 2006 2005 2006 2005 2006 2005 £m £m £m £m £m £mPersonal 6 (5) 44 48 50 43Commercial 50 58 40 38 90 96---------------------- ------------ ------------- ------------ ------------- ------------ -------------Total Scandinavia 56 53 84 86 140 139---------------------- ------------ ------------- ------------ ------------- ------------ ------------- Denmark 31 14 31 29 62 43Sweden 24 39 48 54 72 93Other 1 - 5 3 6 3---------------------- ------------ ------------- ------------ ------------- ------------ -------------Total Scandinavia 56 53 84 86 140 139====================== ============ ============= ============ ============= ============ =============\* T ESTIMATION TECHNIQUES, UNCERTAINTIES AND CONTINGENCIES IntroductionOne of the purposes of insurance is to enable policyholders to protectthemselves against uncertain future events. Insurance companies accept thetransfer of uncertainty from policyholders and seek to add value through theaggregation and management of these risks. The uncertainty inherent in insurance is inevitably reflected in the financialstatements of insurance companies. The uncertainty in the financial statementsprincipally arises in respect of the insurance liabilities of the company. The insurance liabilities of an insurance company include the provision forunearned premiums and unexpired risks and the provision for outstanding claims.Unearned premiums and unexpired risks represent the amount of income set asideby the company to cover the cost of claims that may arise during the unexpiredperiod of risk of insurance policies in force at the balance sheet date.Outstanding claims represents the company's estimate of the cost of settlementof claims that have occurred by the balance sheet date but have not yet beenfinally settled. In addition to the inherent uncertainty of having to make provision for futureevents, there is also considerable uncertainty as regards the eventual outcomeof the claims that have occurred by the balance sheet date but remain unsettled.This includes claims that may have occurred but have not yet been notified tothe company and those that are not yet apparent to the insured. As a consequence of this uncertainty, the insurance company needs to applysophisticated estimation techniques to determine the appropriate provisions. Estimation techniquesClaims and unexpired risks provisions are determined based upon previous claimsexperience, knowledge of events and the terms and conditions of the relevantpolicies and on interpretation of circumstances. Particularly relevant isexperience with similar cases and historical claims payment trends. The approachalso includes the consideration of the development of loss payment trends, thelevels of unpaid claims, legislative changes, judicial decisions and economicconditions. Where possible the Group adopts multiple techniques to estimate the requiredlevel of provisions. This assists in giving greater understanding of the trendsinherent in the data being projected. The Group's estimates of losses and lossexpenses are reached after a review of several commonly accepted actuarialprojection methodologies and a number of different bases to determine theseprovisions. These include methods based upon the following: -- the development of previously settled claims, where payments to date are extrapolated for each prior year; -- estimates based upon a projection of claims numbers and average cost; -- notified claims development, where notified claims to date for each year are extrapolated based upon observed development of earlier years; and -- expected loss ratios. In addition, the Group uses other methods such as the Bornhuetter-Fergusonmethod, which combines features of the above methods. The Group also usesbespoke methods for specialist classes of business. In selecting its bestestimate, the Group considers the appropriateness of the methods and bases tothe individual circumstances of the provision class and underwriting year. Theprocess is designed to select the most appropriate best estimate. Large claims impacting each relevant business class are generally assessedseparately, being measured either at the face value of the loss adjusters'estimates or projected separately in order to allow for the future developmentof large claims. Provisions are calculated gross of any reinsurance recoveries. A separateestimate is made of the amounts that will be recoverable from reinsurers basedupon the gross provisions and having due regard to collectability. The claims provisions are subject to close scrutiny both within the Group'sbusiness units and at Group Corporate Centre. In addition, for major classeswhere the risks and uncertainties inherent in the provisions are greatest,regular and ad hoc detailed reviews are undertaken by advisers who are able todraw upon their specialist expertise and a broader knowledge of current industrytrends in claims development. As an example, the Group's exposure to asbestosand environmental pollution is examined on this basis. The results of thesereviews are considered when establishing the appropriate levels of provisionsfor outstanding claims and unexpired periods of risk. It should be emphasised that the estimation techniques for the determination ofinsurance liabilities involve obtaining corroborative evidence from as wide arange of sources as possible and combining these to form the overall estimate.This technique means that the estimate is inevitably deterministic rather thanstochastic. A stochastic valuation approach, whereby a range of possibleoutcomes is estimated and probabilities assigned thereto, is only possible in alimited number of situations. The pension assets and pension and post retirement liabilities are calculated inaccordance with International Accounting Standard 19 (IAS 19). The assets,liabilities and income statement charge, calculated in accordance with IAS 19,are sensitive to the assumptions made, including inflation, interest rate,investment return and mortality. IAS 19 compares, at a given date, the currentmarket value of a pensions fund's assets with its long term liabilities, whichare calculated using a discount rate in line with yields on 'AA' rated bonds ofsuitable duration and currency. As such, the financial position of a pensionfund on this basis is highly sensitive to changes in bond rates and equitymarkets. Uncertainties and contingenciesThe uncertainty arising under insurance contracts may be characterised under anumber of specific headings, such as: -- uncertainty as to whether an event has occurred which would give rise to a policyholder suffering an insured loss; -- uncertainty as to the extent of policy coverage and limits applicable; -- uncertainty as to the amount of insured loss suffered by a policyholder as a result of the event occurring; and -- uncertainty over the timing of a settlement to a policyholder for a loss suffered. The degree of uncertainty will vary by policy class according to thecharacteristics of the insured risks and the cost of a claim will be determinedby the actual loss suffered by the policyholder. There may be significant reporting lags between the occurrence of the insuredevent and the time it is actually reported to the Group. Following theidentification and notification of an insured loss, there may still beuncertainty as to the magnitude and timing of the settlement of the claim. Thereare many factors that will determine the level of uncertainty such as inflation,inconsistent judicial interpretations and court judgments that broaden policycoverage beyond the intent of the original insurance, legislative changes andclaims handling procedures. The establishment of insurance liabilities is an inherently uncertain processand, as a consequence of this uncertainty, the eventual cost of settlement ofoutstanding claims and unexpired risks can vary substantially from the initialestimates, particularly for the Group's long tail lines of business. The Groupseeks to provide appropriate levels of claims provision and provision forunexpired risks taking the known facts and experience into account. The Group has exposures to risks in each class of business within each operatingsegment that may develop and that could have a material impact upon the Group'sfinancial position. The geographical and insurance risk diversity within theGroup's portfolio of issued insurance policies make it not possible to predictwhether material development will occur and, if it does occur, the location andthe timing of such an occurrence. The estimation of insurance liabilitiesinvolves the use of judgments and assumptions that are specific to the insurancerisks within each territory and the particular type of insurance risk covered.The diversity of the insurance risks results in it not being possible toidentify individual judgments and assumptions that are more likely than othersto have a material impact on the future development of the insuranceliabilities. The sections below identify a number of specific risks relating to asbestos andenvironmental claims and to insurance risks remaining within the Group'sdiscontinuing US operations. There may be other classes of risk which coulddevelop in the future and that could have a material impact on the Group'sfinancial position. The Group evaluates the concentration of exposures to individual and cumulativeinsurance risk and establishes its reinsurance policy to reduce such exposure tolevels acceptable to the Group. Asbestos and environmental claimsThe estimation of the provisions for the ultimate cost of claims for asbestosand environmental pollution is subject to a range of uncertainties that isgenerally greater than those encountered for other classes of insurancebusiness. As a result it is not possible to determine the future development ofasbestos and environmental claims with the same degree of reliability as withother types of claims, particularly in periods when theories of law are in flux.Consequently, traditional techniques for estimating claims provisions cannotwholly be relied upon and the Group employs specialised techniques to determineprovisions using the extensive knowledge of both internal asbestos andenvironmental pollution experts and external legal and professional advisors. Factors contributing to this higher degree of uncertainty include: -- plaintiffs' expanding theories of liability, compounded by inconsistent court decisions and judicial interpretations; -- a few large claims, accompanied by a very large number of small claims or claims made with no subsequent payment, often driven by intensive advertising by lawyers seeking claimants; -- the tendency for speculative, inflated and/or unsupported claims to be made to insurers, with the aim of securing a settlement on advantageous terms; -- the long delay in reporting claims and exposures, since the onset of illness and disability arising from exposure to harmful conditions may only become apparent many years later (for example, cases of mesothelioma can have a latent period of up to 40 years); -- inadequate development patterns; -- difficult issues of allocation of responsibility among potentially responsible parties and insurers; -- complex technical issues that may give rise to delays in notification arising from unresolved legal issues on policy coverage and the identity of the insureds; -- the tendency for social trends and factors to influence jury verdicts; and -- developments pertaining to the Group's ability to recover reinsurance for claims of this nature. Further information on specific developments in the US in relation to asbestosand environmental claims is discussed below. Acquisitions and disposalsThe Group makes acquisitions and disposals of businesses as part of its normaloperations. All acquisitions are made after due diligence, which will include,amongst other matters, assessment of the adequacy of claims reserves, assessmentof the recoverability of reinsurance balances, inquiries with regard tooutstanding litigation and inquiries of local regulators and taxationauthorities. Consideration is also given to potential costs, risks and issues inrelation to the integration of any proposed acquisitions with existing R&SAoperations. The Group will seek to receive the benefit of appropriatecontractual representations and warranties in connection with any acquisitionand, where necessary, additional indemnifications in relation to specific risks.The Group may also provide relevant representations, warranties and indemnitiesto counterparties on any disposal. While such representations, warranties andindemnities are essential components of many contractual relationships, they donot represent the underlying purpose for the transaction. These clauses arecustomary in such contracts and may from time to time lead to us receivingclaims from counterparties. Financial enhancement productsIn the UK and US the Group has exposures to financial enhancement products,which provide surety to banks, lending institutions and credit facilities thatinsure principal and interest repayment on debt securities. The Group no longerwrites such business; however, the nature of such contracts is normally that theGroup is on risk for more than one year and therefore liabilities remain for anextended period. Further information on financial enhancement products in the USis discussed below. Litigation, mediation and arbitrationThe Group, in common with the insurance industry in general, is subject tolitigation, mediation and arbitration, and regulatory, governmental and othersectoral inquiries in the normal course of its business. The directors do notbelieve that any current mediation, arbitration, regulatory, governmental orsectoral inquiries and pending or threatened litigation or dispute, as outlinedelsewhere in this note, will have a material adverse effect on the Group'sfinancial position, although there can be no assurance that losses resultingfrom any pending mediation, arbitration, regulatory, governmental or sectoralinquiries and threatened litigation or dispute will not materially affect theGroup's financial position or cash flows for any period. Further information onUS litigation is discussed below. ReinsuranceThe Group is exposed to disputes on, and defects in, contracts with itsreinsurers and the possibility of default by its reinsurers. The Group is alsoexposed to the credit risk assumed in fronting arrangements. In selecting thereinsurers with whom we do business our strategy is to seek reinsurers with thebest combination of credit rating, price and capacity. We publish internally alist of authorised reinsurers who pass our selection process and which ouroperations may use for new transactions. The Group monitors the financial strength of its reinsurers, including those towhom risks are no longer ceded. Allowance is made in the financial position fornon recoverability due to reinsurer default by requiring operations to provide,in line with Group standards, having regard to companies on the Group's 'WatchList'. The 'Watch List' is the list of companies whom the directors believe willnot be able to pay amounts due to the Group in full. Changes in foreign exchange rates may impact our resultsWe publish our consolidated financial statements in pounds sterling. Therefore,fluctuations in exchange rates used to translate other currencies, particularlyother European currencies and the US dollar, into pounds sterling will impactour reported consolidated financial condition, results of operations and cashflows from period to period. These fluctuations in exchange rates will alsoimpact the pound sterling value of our investments and the return on ourinvestments. Income and expenses for each income statement item are translated at averageexchange rates. Balance sheet assets and liabilities are translated at theclosing exchange rates at the balance sheet date. Investment riskThe Group is exposed to credit risk on its invested assets. Credit risk includesthe non performance of contractual payment obligations on invested assets andadverse changes in the credit worthiness of invested assets including exposuresto issuers or counterparties for bonds, equities, deposits and derivatives. Ourinsurance investment portfolios are concentrated in listed securities. We usederivative financial instruments to reduce our exposure to adverse fluctuationsin interest rates, foreign exchange rates and equity markets. We have strictcontrols over the use of derivative instruments. Rating agenciesThe ability of the Group to write certain types of insurance business isdependent on the maintenance of the appropriate credit ratings from the ratingagencies. The Group has the objective of maintaining single 'A' ratings. At thepresent time the ratings are 'A-' from S&P and 'A-' from AM Best. Any worseningin the ratings would have an adverse impact on the ability of the Group to writecertain types of general insurance business. Regulatory environmentThe regulatory environment is subject to significant change in many of thejurisdictions in which we operate. We continue to monitor the developments andreact accordingly. The directors are confident that the Group will continue tomeet all future regulatory capital requirements. In addition the Group is continuing to monitor and respond to consultation onthe latest Solvency II proposals, which are intended, in the medium term, toachieve greater harmonisation of approach across European member states toassessing capital resources and requirements. US Operations In addition to the disclosures above there are a number of specific risks andissues pertaining to our US Operations as follows: Asbestos and environmental claimsIn respect of asbestos and environmental claims the position in the US isparticularly problematic, as plaintiffs have expanded their focus to defendantsbeyond the 'traditional' asbestos manufacturers and distributors. This hasarisen as a consequence of the increase in the number of insureds seekingbankruptcy protection because of asbestos related litigation and the exhaustionof their policy limits. Plaintiffs, supported by lawyers remunerated on acontingent fee basis, are now seeking to draw in a wide cross section ofdefendants who previously only had peripheral or secondary involvement inasbestos litigation. This may include companies which have distributed orincorporated asbestos containing parts in their products or operated premiseswhere asbestos was present. There are also increasing signs of attempts toreopen and reclassify into other insurance coverages previously settled claims,and the filing of claims under the non aggregate premises or operations sectionof general liability policies. There are also indications that plaintiffs mayseek damages by asserting that insurers had a duty to protect the public fromthe dangers of asbestos. Although the prospects of some form of asbestos reform, including a no faultTrust Fund, have substantially diminished, the risk remains of reformprogressing in a way that does not ensure finality and allows claims to bebrought by individuals who have failed to establish genuine medical criteria. Against this background and in common with the industry generally, the Group inthe US receives notifications and approaches from, and on behalf of, insuredswho previously had peripheral or secondary involvement in asbestos litigationindicating that they may be seeking coverage under Group policies. Given theuncertainties outlined above as to the potential of loss suffered, theavailability of coverage and the often long delay in reporting these issues itis difficult to predict the outcome of these notifications and approaches. Thegreatest difficulty is with estimating whether the Group has any liability asmany of these are discharged at no cost to the Group or have been settled belowthe quantum sought, although there can be no certainty that this will always bethe case. It is clear that there is unlikely to be any firm direction in caselaw or legislation which would allow for these issues to be resolvedsatisfactorily in the near term and no likelihood of the plaintiffs' bar in theUS easing its aggressive stance with litigation. Management, therefore, expectthat these notifications and approaches will continue to be received for sometime to come. One such approach received during 2004 from General MotorsCorporation is now the subject of ongoing litigation. Financial enhancement productsWithin the financial enhancement portfolio of Financial Structures Limited, asubsidiary of the US Group, are a variety of financial enhancement productexposures including collateralised debt obligations (CDO), credit enhancementand residual value insurance contracts. These products are no longer written. During February 2006 one of the remaining two contracts was terminated for a netpre tax gain of $4m. The fair value of the remaining contract at 30 September2006 was a liability of $64m, compared with a liability of $75m at 31 December2005. LitigationAs discussed above, in the normal course of its business the Group is subject tolitigation, mediation and arbitration, and regulatory and other sectoralinquiries, which in turn may give rise to threatened litigation or disputes.This is particularly so in respect of its US Operation where there are a numberof ongoing litigations. The status of two major US litigations is as follows: Student Finance CorporationIn early 2002, issues arose in connection with a series of credit risk insurancepolicies covering loans made to students in various post secondary tradeschools, primarily truck driving schools. The original loan portfolio had a facevalue of approximately $501m. In mid July 2002, Royal Indemnity Company, a USsubsidiary ('Royal Indemnity'), filed lawsuits in Texas state court, seekingamong other things rescission of these policies in response to a systematicpattern of alleged fraud, misrepresentation and cover up by various parties,which among other things concealed the default rate of the loans. Since RoyalIndemnity's lawsuits seek rescission of these policies, all the Group'sfinancial accounting entries associated with the transactions have beenreversed. The ultimate outcome of the suits is uncertain. The foregoing rescission actions gave rise to other related lawsuits filed inDelaware by MBIA Insurance Corporation ('MBIA') and various banks, seeking toenforce the Royal Indemnity credit risk insurance policies. Plaintiffs in theDelaware actions included Wells Fargo Bank Minnesota, NA ('Wells Fargo'), in itscapacity as trustee of a number of securitisations that were collateralised bystudent loans, and MBIA which insured the obligations issued through thesesecuritisations. These actions were heard in US District Court, District ofDelaware. Plaintiffs in the Delaware actions moved for summary judgement. TheCourt granted summary judgement to MBIA and Wells Fargo on 30 September 2003. Royal Indemnity appealed each of these judgements. PNC Bank and Wilmington Trustagreed to discontinue their parts of the legal action following agreedsettlements; only the MBIA / Wells Fargo judgement remains open. With respect tothe MBIA / Wells Fargo judgement, on 3 October 2005, the Court of Appeals upheldthe District Court's ruling that Royal Indemnity had waived its right to rescindits policies based on Student Finance Corporation's fraud and that the policiestherefore remain in force. However, the Court of Appeals also concluded thatRoyal Indemnity raised a triable issue as to whether all of the losses claimedby MBIA / Wells Fargo are covered by those policies. As a result, the Courtoverturned the remainder of the summary judgement and returned the case to theDistrict Court to determine whether all of the claims asserted against the RoyalIndemnity policies fall within the scope of coverage provided by the policies.The case is now before the District Court and discovery is underway. At 30 September 2006, the claims asserted by MBIA / Wells Fargo totalled$353.5m. To the extent that the District Court determines that claims falloutside the scope of the Royal Indemnity policies, they would be excluded fromany judgement award. Interest on any judgement award would also vary, dependingupon the amount of any award. The ultimate outcome of these lawsuits is necessarily uncertain. Any loss on theloan portfolio will be reduced to the extent of reinsurance available to RoyalIndemnity, recoveries from the original borrowers on the defaulted loans, andreserves, if any. Any losses may be further offset by recoveries from otherthird parties. To that end, Royal Indemnity is actively pursuing recoveryactions against certain trucking school entities and professional advisers.However, there can be no assurance that the outcome of these lawsuits, theavailability of reinsurance recoveries, the extent and amount of recoveries fromthe borrower under the respective loan programmes and/or reserves, if any, amongother factors, will be resolved in favour of Royal Indemnity. Based on current knowledge of the circumstances, legal advice received and therange of other actions available to the Group to manage any insurance exposure,the directors believe that the resolution of the legal proceedings in respect ofthese credit risk insurance policies will not have a material adverse effect onthe Group's financial position. World Trade CenterThe estimated cost of the insurance losses associated with the terrorist actionof 11 September 2001 is a gross loss in excess of £1bn, reduced to £280m net ofreinsurance. This was an unprecedented event, which still has unresolved issuesin respect of both the gross loss and consequent extent of the reinsurancerecoveries. The loss estimate has been prepared on the basis of the informationcurrently available as to the magnitude of the claims, including businessinterruption losses. The final cost may be different from the current estimatedue to the uncertainty associated amongst other things, with the valuation andallocation process which is currently underway in respect of the Twin Towerscomplex. Appraisal hearings are scheduled to continue through July 2007.Nevertheless, the directors believe their estimate of the gross and net loss isappropriate based on the information available to them and that there will be nomaterial adverse effect on the Group's financial position. US Regulatory CapitalOur US subsidiaries are subject to government regulation in their state ofdomicile and also in each of the jurisdictions in which they are licensed orauthorised to do business. In the US, the conduct of insurance business isregulated at the state level and not by the federal government and oursubsidiaries are subject to state supervision of their regulatory capital andsurplus positions. At 30 September 2006 our consolidated US regulatory capitaland surplus capital position was 2.3 times the NAIC ratio. Disposal of US OperationOn 28 September 2006 the Group announced the sale of our US Operation (the "USDisposal"). Under the terms of the agreement the Group will receive deferredconsideration in the form of non-interest bearing subordinate notes with anagreed principal amount of $300m. The present value of the deferredconsideration is calculated at £70m to reflect the Purchaser's projectedperformance, and in turn, timing for any payments. On receipt of regulatoryapprovals and with Completion, the Group will make a $287.5m capitalcontribution into the US Operation. The US Disposal was approved by shareholders at an Extraordinary General Meetingheld on 1 November 2006. Completion of the Disposal is also conditional onreceipt of required regulatory approvals in the United States and Bermuda,without limitation or condition being imposed. One such required approval isfrom the Delaware Department of Insurance (the "DDI"). In accordance with itsnormal process, the DDI has convened a public hearing to commence on 21 November2006 to determine whether the Purchaser meets the statutory standards necessaryfor approval of the change of control. It is important to note that there isconsiderable discretion as to how the review process is handled by the DDI.Subject to regulatory approval, the Group is targeting completion by year end2006 and it is expected that the review process will be completed within two tothree months. However, there is a risk that this process could be delayed. Ifthe required regulatory approvals for the US Disposal are not received, thetransaction cannot complete. Statutory Information Summary consolidated income statement - statutory basis Summary consolidated balance sheet - statutory basis Summary statement of recognised income and expense Summary cashflow statement Explanatory notes to the summary consolidated financial statements SUMMARY CONSOLIDATED INCOME STATEMENT STATUTORY BASIS \* T 9 Months 9 Months 12 Months 2006 2005 2005 (audited) £m £m £mNet written premiums 4,086 4,138 5,400----------------------------------------------- --------------- --------------- ----------------- Income --------------- --------------- ----------------- Net earned premiums 3,968 4,086 5,382 Net investment return 530 535 806 Other operating income 90 65 111 --------------- --------------- -----------------Total income 4,588 4,686 6,299Expenses --------------- --------------- ----------------- Net claims and benefits (2,591) (2,730) (3,595) Underwriting and policy acquisition costs (1,271) (1,321) (1,738) Profit on change of pension scheme design - 180 180 Unwind of discount (48) (41) (61) Other operating expenses (131) (172) (252) --------------- --------------- -----------------Total expenses (4,041) (4,084) (5,466)----------------------------------------------- --------------- --------------- -----------------Results of operating activities 547 602 833 Finance costs (71) (82) (107)(Loss)/profit on disposals (4) 62 136Net share of profit after tax of associates 1 1 3----------------------------------------------- --------------- --------------- -----------------Profit before tax 473 583 865 Income tax expense (129) (205) (260)----------------------------------------------- --------------- --------------- -----------------Profit after tax 344 378 605=============================================== =============== =============== ================= Attributable to:Equity holders of the Company 319 338 555Minority interests 25 40 50----------------------------------------------- --------------- --------------- -----------------Profit after tax 344 378 605=============================================== =============== =============== ================= Earnings per share attributable to the ordinary shareholders of the Company during the period: Basic 10.7p 11.5p 18.9pDiluted 10.6p 11.4p 18.7p\* T There are no discontinued operations in either the current period or the prioryear. SUMMARY CONSOLIDATED BALANCE SHEET STATUTORY BASIS \* T 30 September 30 September 31 December 2006 2005 2005 (audited) £m £m £mAssetsGoodwill and other intangible assets 473 397 450Property and equipment 374 403 410Investment property 450 422 435Investment in associated undertakings 26 27 29Financial assets -------------- ------------- ------------- Equity securities 1,605 1,640 1,683 Debt and fixed income securities 10,666 11,366 11,609 Other 217 383 241 -------------- ------------- -------------Total financial assets 12,488 13,389 13,533Reinsurers' share of insurance contract liabilities 3,463 4,206 4,406Insurance and reinsurance debtors 2,394 2,507 2,547Deferred acquisition costs 456 465 465Other debtors and other assets 995 708 669Cash and cash equivalents 1,948 1,516 1,617------------------------------------------------ -------------- ------------- ------------- 23,067 24,040 24,561Non current assets held for sale - 319 36------------------------------------------------ -------------- ------------- -------------Total assets 23,067 24,359 24,597================================================ ============== ============= ============= Equity, reserves and liabilities Equity and reservesShareholders' funds 2,957 2,647 2,743Perpetual notes - 444 -Minority interests 333 385 391------------------------------------------------ -------------- ------------- -------------Total equity and reserves 3,290 3,476 3,134------------------------------------------------ -------------- ------------- ------------- LiabilitiesLoan capital 1,120 616 1,071Insurance contract liabilities 15,980 16,929 17,204Insurance and reinsurance liabilities 411 506 475Borrowings 2 290 251Provisions and other liabilities 2,264 2,384 2,462------------------------------------------------ -------------- ------------- ------------- 19,777 20,725 21,463Liabilities of operations held for sale - 158 ------------------------------------------------- -------------- ------------- -------------Total liabilities 19,777 20,883 21,463------------------------------------------------ -------------- ------------- -------------Total equity, reserves and liabilities 23,067 24,359 24,597================================================ ============== ============= =============\* T These summary consolidated interim financial statements have been approved forissue by the Board of Directors on 8 November 2006. The attached notes are an integral part of these summary consolidated financialstatements. SUMMARY STATEMENT OF RECOGNISED INCOME AND EXPENSE \* T 9 Months 9 Months 12 Months 2006 2005 2005 (audited) £m £m £mProfit after tax 344 378 605 -------------- ------------- ----------- Exchange (losses)/gains (65) 30 62Fair value (losses)/gains net of tax (22) 45 (35)Pension fund actuarial gains/(losses) net of tax 118 27 (53) -------------- ------------- -----------Net gains/(losses) not recognised in income statement 31 102 (26)--------------------------------------------------- -------------- ------------- ----------- Total recognised income for the period 375 480 579=================================================== ============== ============= ===========\* T SUMMARY CASHFLOW STATEMENT \* T 9 Months 9 Months 12 Months 2006 2005 2005 (audited) £m £m £mNet cashflows from operating activities 181 (61) 31Net cashflows from investing activities 541 (133) (130)Net cashflows from financing activities (344) (135) (225)--------------------------------------------------- -------------- -------------- -----------Net increase/(decrease) in cash and cash equivalents 378 (329) (324) Cash and cash equivalents at the beginning of the period 1,612 1,864 1,864Effect of exchange rate changes on cash and cash equivalents (42) 48 72--------------------------------------------------- -------------- -------------- -----------Cash and cash equivalents at the end of the period 1,948 1,583 1,612=================================================== ============== ============== =========== 30 September 30 September 12 Months 2006 2005 2005 (audited) £m £m £mCash and cash equivalents per cashflow statement 1,948 1,583 1,612Add: bank overdrafts - 3 5Less: discontinued operations - (70) ---------------------------------------------------- -------------- -------------- -----------Cash and cash equivalents per balance sheet 1,948 1,516 1,617=================================================== ============== ============== ===========\* T The attached notes are an integral part of these summary consolidated financialstatements. EXPLANATORY NOTES TO THE SUMMARY CONSOLIDATED FINANCIAL STATEMENTS 1. Changes in Significant Accounting Policies There have been no significant changes in accounting policy in the nine monthsto 30 September 2006. A full list of accounting policies can be found in the2005 statutory Group financial statements, see note 7 below. 2. Changes in Total Equity and Reserves for Nine Months to 30 September \* T 2006 2005 Total Minority Total Total Shareholders' Interest Equity and Equity and Funds Reserves Reserves £m £m £m £mBalance at 1 January 2,743 391 3,134 3,133Total recognised income for the period 357 18 375 480New share issue 35 - 35 5Changes in shareholders' interests in subsidiaries (41) (67) (108) -Share options 8 - 8 7Prior year final dividend (89) (9) (98) (95)Current year interim dividend (51) - (51) (49)Preference dividend (5) - (5) (5)------------------------------------------ --------------- ----------- --------------- -------------Balance at 30 September 2,957 333 3,290 3,476========================================== =============== =========== =============== =============\* T 3. Earnings Per Share The earnings per share is calculated by reference to the result attributable tothe equity shareholders and the weighted average number of shares in issueduring the period. On a basic and diluted basis this was 2,923,231,277 and2,968,142,045 respectively (excluding those held in ESOP trusts). The number ofshares in issue at 30 September 2006 was 2,937,938,691 (excluding those held inESOP trusts). 4. Purchase of Minority Interests The minority interests in both the Latvian and Lithuanian businesses have beenbought by Codan for DKK 599m (£55m). Codan has also purchased DKK 591m (£53m) oftheir own shares from the market, reducing the minority interest from 28.30% to25.98%. The total effect of these transactions is to reduce shareholders' fundsby £41m and minority interests by £67m. 5. Taxation Of the £129m (2005: £205m) of income tax expense in the year, £62m (2005: £130m)relates to UK corporation tax and £67m (2005: £75m) to overseas taxation. 6. Non Current Assets and Liabilities of Operations Held for Sale The Group announced the sale of the US business and subject to shareholder andregulatory approvals is targeting completion by the year end. The US operationhas not been categorised as held for sale at 30 September 2006 as the Group doesnot consider the transaction to be highly probable until the regulatory approvalprocess is further progressed. The non current assets and liabilities of operations held for sale at 30September 2005 related to the Group's holdings in Rothschilds ContinuationsHoldings AG and Nonstandard Auto. Non current assets held for sale at 31December 2005 related to property. 7. Results for 2005 The results for the year ended 31 December 2005 and the balance sheet at thatdate, which have been included as comparatives in these summary consolidatedinterim financial statements, are not statutory accounts but have been abridgedfrom the statutory accounts. The statutory Group financial statements of Royal &Sun Alliance Insurance Group plc for the year ended 31 December 2005 have beendelivered to the Registrar of Companies. The independent auditors' report on theGroup financial statements for the year ended 31 December 2005 is unqualifiedand does not contain a statement under Section 237(2) or (3) of the CompaniesAct 1985. Copyright Business Wire 2006Related Shares:
RSA.L