Annual Financial Report

22 March 2017

RSA INSURANCE GROUP PLC

(THE "COMPANY")

2016 ANNUAL FINANCIAL REPORT ANNOUNCEMENT

In accordance with Listing Rule 9.6 and Disclosure and Transparency Rule ("DTR") 4.1, the Company announces that the following documents have been posted to shareholders and have today been submitted to the UK Listing Authority via the National Storage Mechanism:

· Annual Report and Accounts for the year ended 31 December 2016

· Notice of the 2017 Annual General Meeting to be held on 5 May 2017

· Proxy form for the 2017 Annual General Meeting

The above mentioned documents (except for the Proxy form) are available on our website at www.rsagroup.com and www.rsagroup.com/agm2017 and will shortly be made available for inspection at www.morningstar.co.uk/uk/NSM. Shareholders can obtain additional copies of the Proxy form from our Registrar, Equiniti Limited, at Aspect House, Spencer Road, Lancing, West Sussex BN99 6DA or view online at www.shareview.co.uk. 

This announcement should be read in conjunction with the Company's announcement issued on 23 February 2017. Together these constitute the material required by DTR 6.3 to be communicated to the media in full unedited text through a Regulatory Information Service. This material is not a substitute for reading the Company's 2016 Annual Report and Accounts.

An indication of the important events that occurred in 2016 and their impact on the condensed consolidated financial statements, the condensed consolidated financial statements themselves and the responsibility statement were announced to the London Stock Exchange on 23 February 2017, forming part of the Preliminary Results announcement for the year ended 31 December 2016. Additional content forming part of the management report is in the Appendix below.

Enquiries:

Elinor Bell

Deputy Group Company Secretary

RSA Insurance Group plc

Tel: +44 (0) 20 7111 7000

IMPORTANT DISCLAIMER

Visit www.rsagroup.com for more information.

This press release (together with the Annual Report and Accounts referred to herein) has been prepared in accordance with the requirements of English company law and the liabilities of the directors in connection with this press release (together with the Annual Report and Accounts referred to herein) shall be subject to the limitations and restrictions provided by such law. This press release may contain 'forward-looking statements' with respect to certain of the Group's plans and its current goals and expectations relating to its future financial condition, performance, results, strategic initiatives and objectives. Generally, words such as "may", "could", "will", "expect", "intend", "estimate", "anticipate", "aim", "outlook", "believe", "plan", "seek", "continue" or similar expressions identify forward-looking statements. These forward-looking statements are not guarantees of future performance. By their nature, all forward-looking statements are inherently predictive and speculative and involve risk and uncertainty because they relate to future events and circumstances which are beyond the Group's control, including amongst other things, UK domestic and global economic business conditions, market-related risks such as fluctuations in interest rates and exchange rates, the policies and actions of regulatory authorities (including changes related to capital and solvency requirements), the impact of competition, inflation, deflation, the timing impact and other uncertainties of future acquisitions or combinations within relevant industries, as well as the impact of tax and other legislation or regulations in the jurisdictions in which the Group and its affiliates operate. As a result, the Group's actual future financial condition, performance and results may differ materially from the plans, goals and expectations set forth in the Group's forward-looking statements. The Group undertakes no obligation to update any forward-looking statements, save in respect of any requirement under applicable law or regulation. Nothing in this press release (together with the Annual Report and Accounts referred to herein) should be construed as a profit forecast.

APPENDIX

References to page numbers and notes to the accounts made in this Appendix refer to page numbers and notes to the accounts in the 2016 Annual Report and Accounts.

KEY PERFORMANCE INDICATORS

We consider the following nine key performance indicators important in measuring the delivery of our strategic priorities.

Click on or paste the following link into your web browser to view the key performance indicators 

http://www.rns-pdf.londonstockexchange.com/rns/2239A_1-2017-3-22.pdf 

Combined operating ratio1 (%)*

Definition: A measure of underwriting performance - the ratio of underwriting costs (claims, commissions and expenses) expressed in relation to earned premiums.

Commentary: The COR is used as a measure of underwriting efficiency across the industry. The aim is to achieve a COR as sustainably low as possible - that is without uncompetitive pricing or compromising reserves.

Outlook: We target further improvements in combined ratio.

Core Group attritional loss ratio (%)*

Definition: This is the underlying loss ratio (net incurred claims and claims handling expense as a proportion of net earned premiums) of our business prior to volatile impacts from weather, large

losses and prior-year reserve developments.

Commentary: Attritional loss ratios are a key lever in the Group's turnaround of financial performance. Improvements in the business mix together with investments in digitally enabled underwriting and claims excellence are targeted at reducing the attritional loss ratio.

Outlook: We target improving attritional loss ratios in the medium term in line with our ambition of best-in-class performance.

Underlying earnings per share (p)

Definition: Operating profit less interest cost, tax, non-controlling interests and preference dividends, per share.

Commentary: A key measure of the underlying earnings power of the Group as it excludes shorter-term and temporary changes, such as restructuring costs which we have indicated will cease from 2018.

Outlook: We target continued growth in underlying EPS as performance improvement actions take effect.

Underlying return on tangible equity (%)*

Definition: Operating profit attributable to ordinary shareholders less interest costs and underlying tax, expressed in relation to opening tangible shareholders' funds, i.e. excluding goodwill and intangible assets.

Commentary: A key measure of shareholder value and one that informs overall valuation in the insurance sector.

Outlook: We have upgraded our target to 13-17 percent in the medium term.

TNAV per share (p)*

Definition: The value of tangible shareholders' funds per share, i.e. excluding goodwill and intangible assets.

Commentary: Growing TNAV generally indicates improving capital metrics. It also represents the underlying asset value of the business, although it is sensitive to external market movements.

Outlook: We expect TNAV per share to increase through retained earnings.

Solvency II coverage ratio2 (%)*

Definition: The Solvency II coverage ratio represents total eligible capital as a proportion of the Solvency Capital Requirement (SCR) under Solvency II.

Commentary: The Solvency II coverage ratio is a measure of the capital adequacy of insurance companies. Our SCR is calculated on our risk profile using the Group's internal capital model.

Outlook: We target a Solvency II coverage ratio in the range of 130-160 percent.

Controllable expenses (£bn)*

Definition: Operating expenses incurred by the Group in undertaking business activities.

Commentary: Reduction of controllable expenses is a key element of the Group's turnaround strategy. We monitor both the absolute level of expense and the expense ratio as part of the turnaround and ongoing performance focus.

Outlook: We have upgraded our target to >£400m reduction in gross controllable expenses by 2018 and aim to improve expense ratios in the medium term, in line with our ambition of best-in-class performance.

Customer retention (%)

Definition: We use direct measures of satisfaction, such as NPS and indirect measures, including retention.

Commentary: Strong customer satisfaction translates to improved underwriting results. By ensuring customers are at the heart of everything we do we can optimise business performance.

Outlook: Target a growing level of customer satisfaction and improving retention over time.

Carbon emissions per FTE (t)

Definition: Gross tonnes of carbon dioxide equivalent per full-time equivalent (FTE).

Commentary: We endeavour to reduce our emissions as far as possible by operating efficiently, procuring sustainable alternatives and promoting sustainable business practices.

Outlook: Having met our Group-wide carbon reduction target, we will set a new one in 2017.

* This icon indicates those KPIs directly linked to executive remuneration. To read more about executive variable remuneration, including the set of financial and non-financial performance measures on which it is based, please turn to pages 90 to 93.

Notes:

1. Combined ratios prior to 2014 restated onto like-for-like basis, refer to page 190 for further detail.

2. Coverage ratio under Solvency II introduced in 2015.

RISK MANAGEMENT

Promoting a risk culture which protects the customer and maximises shareholder risk-adjusted returns.

Risk management approach

As a 300-year-old insurance group we have developed considerable expertise in how to manage risk, which allows us to be selective in retaining risks within our core expertise whilst ensuring that we manage, mitigate and avoid risks where we are not adequately rewarded. As a pure play general insurer our key area of expertise is underwriting property and casualty insurance risks, which means we are able to provide our customers with competitive products that protect them effectively against the uncertainty of future loss events whilst ensuring that the risks we accept are collectively managed to maximise risk-adjusted returns to our investors.

All insurance groups are faced with a number of different risks which for example can range from adverse movements in asset prices, external cyber-attacks and significant increases in claim trends to large catastrophic events (details of all the key risk categories are set out on page 40).

Our risk management and controls frameworks have been created to ensure that we are able to identify, measure and effectively manage these risks in all parts of the group before they adversely impact the business. This information, together with the strength of the Group's capital position, allows the Board to set a risk strategy and appetite which sets out the level of risk the Board is prepared to take in the delivery of its strategic objectives.

Click on or paste the following link into your web browser to view the Operational Planning Cycle

http://www.rns-pdf.londonstockexchange.com/rns/2239A_1-2017-3-22.pdf

The risk appetite is refreshed at least annually to adapt to the evolving risk, regulatory and economic environment, with an increased focus on ensuring that the Group is adequately prepared for evolving IT risks including cyber-attack. Once set, the business regularly monitors compliance with the appetite, both at a regional and group level, to ensure actions can be rapidly taken to manage any risks considered to be outside of the risk appetite tolerance levels.

Keeping our focus on the road ahead

One of the key roles of the risk team is to ensure that we support the business by keeping abreast of the demands from a dynamic and ever-changing risk environment. At RSA we perform an annual deep-dive assessment of the emerging risks facing the business, which is informed through the use of subject matter experts, thematic brainstorming workshops, consulting a wide range of key external documentation as well as participating in the CRO Forum's emerging risks working group. The emerging risks set out in the diagram below were presented to the Board Risk Committee for consideration and a decision on which risks should be subject to further deep-dive reviews including performance of appropriate scenario analysis. The results from these reviews satisfied the Board Risk Committee that the Group's risks and controls frameworks were overall effective at managing future threats to the business although it did highlight areas where further refinements could be made, including expanding the scope of our horizon scanning to keep abreast of new entrant and technological advancements.

Click on or paste the following link into your web browser to view the Emerging risk analysis on

http://www.rns-pdf.londonstockexchange.com/rns/2239A_1-2017-3-22.pdf

Operational Planning Cycle:

Risk Management System underpins the Operational Planning Cycle

1. Board sets the business strategy which is incorporated in the three-year operational plan. Risk provide robust challenge of validity and achievability of plan.

2. Risk Strategy creates the overarching principles for establishing a set of indicators (Risk Appetite).

3. Comprehensive policy suite sets the required business processes and controls to deliver the operational plan within appetite. Robust control testing used to identify risks out of appetite.

4. Regional Risk and Control Committees track actions for risks outside of appetite, and escalate to Local & Group Boards.

5. Significant changes in risk assessments are considered by the Internal Model Governance Committee and where appropriate, the Group's internal model is updated.

6. Output from the model is sense checked against non-modelled stress and scenario events to ensure it provides a reliable basis for making business decisions, including capital planning, reinsurance purchase, performance analysis and pricing.

7. The internal model is run regularly throughout the year in order to assess the risks impacting the Group and determines how much capital the Group needs to hold to remain solvent even after a major stress event(s), which forms part of the ORSA process.

8. Output from the model is reported to the Board, so that changes can be made to the three-year operational plan to ensure the Group remains in Appetite. Cycle will continue until the Board is satisfied with the future plan.

KEY RISKS AND MITIGANTS

Risk culture

In our view the most important component to effectively embedding the Group's risk management framework is ensuring that senior management set the right 'tone from the top'. At RSA the senior management team have remained committed to instilling a culture which promotes openness, honesty, integrity and ethical behaviour, which is further underpinned by the Group's continued focus on our quarterly cultural health check.

A key part of our culture is ensuring that our customers are at the heart of all we do, and our staff are passionate about providing brilliant service to our customers. For example, in our UK business we have embedded a Conduct Framework which identifies and addresses conduct risks appropriately, considers the customer impact of decisions we take, and ensures that our customers receive good outcomes.

Risk management in action

As the business has continued to leverage technology to deliver a more efficient customer offering the risk team have provided significant support to the business to ensure risks arising through the increased automation and digitalisation of processes remain transparent and controllable throughout transformation.

· The first step to implementing an appropriate risk and control framework is to identify the key IT risks which can arise with the key focus being on the risks that have the highest impact and likelihood of occurrence.

· The risk team supported the business in evaluating the risks arising and helped prioritise resolution plans which focused on the most significant risks, including ensuring that resourcing needs had been appropriately allowed for in the Group's operating plan.

· All risk assessments together with resolution plans were presented to the Board Risk Committee for approval to ensure remediation plans were considered sufficient to bring risks within appetite.

· Monitoring of these risks will be performed through both a set of key risk indicators which are linked to the risks and provide an early warning if risks have moved outside of appetite as well as the development of line 1 and line 2 control testing frameworks which focus on testing the key controls.

Risk developments in 2016

Transformation risks - the risk teams have supported the business to ensure appropriate level of control and governance over the transformational changes being implemented by the Group. This includes ensuring there is appropriate control over the planning, testing and implementation stages of the programme as well as taking an active role in providing high levels of scrutiny and challenge at the regional and group transformation steering committees.

Delivery of the operating plan - The Group's operating plan provides the platform for ensuring the business remains focused on achieving its key operational and strategic goals, including delivery of profitable growth whilst maintaining a robust capital base. It is therefore essential the plan meets the right balance of achievable stretch targets with realistic assumptions and strategic actions for how this can be achieved. Risk take an active role in challenging the plan, including ensuring the validity of assumptions when compared to economic projections, peer reviews, past experience and current risk assessments, which delivery of planned transformation activity.

Pension de-risking - The Group has continued to explore opportunities for further reducing the volatility created by our pension scheme exposures, including reducing our more volatile growth asset exposures from c.25 percent to c.15 percent in the year and reaching a concluding agreement to close the UK schemes to further accrual from 31 March 2017.

Management of peripheral businesses - There has been an increased focus in strengthening the control frameworks of the Group's peripheral businesses, with all businesses having been subjected to a detailed assessment.

IT risk monitoring framework - The Group has developed an IT risk monitoring framework which links key IT risks to a set of key risk indicators. This provides management with feedback on the effectiveness of the IT control framework, which has been strengthened through the appointment of Regional Chief Information Security Officers (CISO), enhancing their teams and developing robust control frameworks and remediation plans which are in progress.

UK Legacy disposal - as described on page 33, the Group materially reduced long-tail reserve risk through the economic transfer of £834m of undiscounted UK legacy liabilities net of reinsurance.

Solvency II and Solvency Capital Requirement (SCR)

Solvency II is the new EU-wide insurance regulatory regime that became effective on 1 January 2016.

One of the key aims of Solvency II is to introduce a harmonised prudential framework for insurers promoting transparency, comparability and competitiveness amongst European insurers.

The Directive has three pillars that have impacted how RSA manages risk and how it reports to both regulators and shareholders: Pillar one relates to the quantitative requirements and introduces a risk-based methodology to calculating the Group's Solvency Capital Requirement (SCR). Insurers are required to calculate the level of capital required based on their unique risk profile. For RSA this is calculated using our own Internal Model that was approved by the regulator in December 2015.

Pillar two incorporates qualitative governance requirements, including the way the risk management function operates within the business and how key systems and controls are documented and reviewed.

Pillar three relates to enhanced and standardised disclosure requirements, including increased transparency of the risk strategy and risk appetite of the business. In 2017, RSA will publish its first 'Solvency & Financial Condition Report'; these will contain extensive information on how RSA manages its risks and exposures and report on the financial position of the company using Solvency II valuation principles.

Brexit

RSA has been actively monitoring the impact of the referendum result and the potential impact on RSA's business. The vast majority of business written within the '27 remaining countries' of the EU is written by subsidiaries domiciled in these countries. Plans are being evaluated for creating an appropriate structure for the remaining business written through branches of our main UK entity.

RISK AND CAPITAL MANAGEMENT

Insurance Risk

The Group is exposed to risks arising from insurance contracts as set out below:

A) Underwriting risk

B) Reinsurance risk

C) Reserving risk

A) Underwriting risk

Underwriting risk refers to the risk that underwritten business is less profitable than planned due to insufficient pricing.

The majority of underwriting risk to which the Group is exposed, is of a short-term nature, and generally does not exceed 12 months. The Group's underwriting strategy aims to ensure that the underwritten risks are well diversified in terms of the type, amount of risk, and geography in order to ensure that the Group is not exposed to a concentration of risk which would result in a volatile insurance result.

Underwriting limits are in place to enforce appropriate risk selection criteria and pricing with all of the Group's underwriters having specific licences that set clear parameters for the business they can underwrite, based on their expertise.

The Group has developed enhanced methods of recording exposures and concentrations of risk and has a centrally managed forum looking at Group underwriting issues, reviewing and agreeing underwriting direction and setting policy and directives where appropriate. The Group has a quarterly portfolio management process across all its business units where key risk indicators are tracked to monitor emerging trends, opportunities and risks. This provides greater control of exposures in high risk areas as well as enabling a prompt response to claims from policyholders should there be a catastrophic event such as an earthquake.

Pricing for the Group's products is generally based upon historical claims frequencies and claims severity averages, adjusted for inflation and modelled catastrophes, trended forward to recognise anticipated changes in claims patterns after making allowance for other costs incurred by the Group, conditions in the insurance market and a profit loading that adequately covers the cost of capital.

B) Reinsurance risk

Reinsurance risk refers to the risk of loss to the Group from the failure to enforce payment under the contracts from one or more of its reinsurers.

Decisions on how much insurance risk to pass on to other insurers through the use of reinsurance is another key strategy employed in managing the Group's exposure to insurance risk. The Group Board determines a maximum and the Group Corporate Centre determines a minimum level of risk to be retained by the Group as a whole and, therefore, the amount of central reinsurance cover purchased. This is then distributed across the Group in accordance with deemed risk appetite. Local operations may also purchase additional reinsurance within agreed local reinsurance appetite parameters.

Reinsurance arrangements in place include proportional, excess of loss, stop loss, catastrophe and adverse development coverage. These arrangements ensure that the Group should not suffer total net insurance losses beyond the Group's risk appetite in any one year.

The Group remains primarily liable as the direct insurer on all risks reinsured, although the reinsurer is liable to the Group to the extent of the insurance risk it has contractually accepted responsibility for.

C) Reserving risk

Reserving risk refers to the risk that the Group's estimates of future claims will be insufficient.

The Group establishes a provision for losses and loss adjustment expenses for the anticipated costs of all losses that have already occurred but have not yet been paid. Such estimates are made for losses already reported to the Group as well as for the losses that have already occurred but are not yet reported losses together with a provision for the future costs of handling and settling the outstanding claims.

There is a risk to the Group from the inherent uncertainty in estimating provisions at the end of the reporting period for the eventual outcome of outstanding notified claims as well as estimating the number and value of claims that are still to be notified. In particular, the estimation of the provisions for the ultimate costs of claims for asbestos and environmental pollution is subject to a range of uncertainties that is generally greater than those encountered for other classes of business due to the slow emergence and longer settlement period for these claims.

The Group seeks to reduce its reserving risk through the use of experienced regional actuaries who estimate the actuarial indication of the required reserves based on claims experience, business volume, anticipated change in the claims environment and claims cost. This information is used by local reserving committees to recommend to the Group Reserving Committee the appropriate level of reserves for each region - which will include adding a margin onto the actuarial indication as a provision for unforeseen developments such as future claims patterns differing from historical experience, future legislative changes and the emergence of latent exposures such as asbestosis. The Group Reserving Committee review these local submissions and recommend the final level of reserves to be held by the Group. The Group has a Group Reserving Committee which is chaired by the Group Chief Financial Officer and includes the Group Chief Executive, Group Underwriting Director, Group Chief Actuary and Group Chief Risk Officer. A similar committee has been established in each of the Group's major operating segments. The Group Reserving Committee monitors the decisions and judgements made by the business units as to the level of reserves to be held. It then recommends to the Group Board via the Group Audit Committee for the final decision on the level of reserves to be included within the consolidated financial statements. In forming its collective judgement, the Committee considers the following information:

· The actuarial indication of ultimate losses together with an assessment of risks and possible favourable or adverse developments that may not have been fully reflected in calculating these indications. At the end of 2016, these risks and developments include: the possibility of future legislative change having retrospective effect on open claims; changes in claims settlement procedures potentially leading to future claims payment patterns differing from historical experience; the possibility of new types of claim, such as disease claims, emerging from business written several years ago; general uncertainty in the claims environment; the emergence of latent exposures such as asbestos; the outcome of litigation on claims received; failure to recover reinsurance and unanticipated changes in claims inflation;

· The views of internal peer reviewers of the reserves and of other parties including actuaries, legal counsel, risk directors, underwriters and claims managers;

· The outcome from independent assurance reviews performed by the Group actuarial function to assess the reasonableness of regional Actuarial Indication estimates;

· How previous actuarial indications have developed.

Financial risk

Financial risk refers to the risk of financial loss predominantly arising from investment transactions entered into by the Group, and also to a lesser extent arising from insurance contracts, and includes the following risks:

· Credit risk;

· Market risk including price, interest rate and currency rate risks;

· Liquidity risk.

The Group undertakes a number of strategies to manage these risks including the use of derivative financial instruments for the purpose of reducing its exposure to adverse fluctuations in interest rates, foreign exchange rates, and long term inflation. The Group does not use derivatives to leverage its exposure to markets and does not hold or issue derivative financial instruments for speculative purposes. The policy on use of derivatives is approved by the Board Risk Committee (BRC).

Credit risk

Credit risk is the risk of loss resulting from the failure of a counterparty to honour its financial or contractual obligations to the Group. The Group's credit risk exposure is largely concentrated in its fixed income investment portfolio and to a lesser extent, its premium receivables, and reinsurance assets.

Credit risk is managed at both a Group level and at a local level. Local operations are responsible for assessing and monitoring the creditworthiness of their counterparties (e.g. brokers and policyholders). Local credit committees are responsible for ensuring these exposures are within the risk appetite of the local operations. Exposure monitoring and reporting is embedded throughout the organisation with aggregate credit positions reported and monitored at Group level.

The Group's credit risk strategy appetite and credit risk policy are developed by the BRC and are reviewed and approved by the Board on an annual basis. This is done through the setting of Group policies, procedures and limits.

In defining its appetite for credit risk the Group looks at exposures at both an aggregate and business unit level distinguishing between credit risks incurred as a result of offsetting insurance risks or operating in the insurance market (e.g. reinsurance credit risks and risks to receiving premiums due from policyholders and intermediaries) and credit risks incurred for the purposes of generating a return (e.g. invested assets credit risk).

Limits are set at both a portfolio and counterparty level based on likelihood of default, derived from the rating of the counterparty, to ensure that the Group's overall credit profile and specific concentrations are managed and controlled within risk appetite.

The Group's investment management strategy primarily focuses on debt instruments of high credit quality issuers and seeks to limit the overall credit exposure with respect to any one issuer by ensuring limits have been based upon credit quality. Restrictions are placed on each of the Group's investment managers as to the level of exposure to various rating categories including unrated securities.

The Group is also exposed to credit risk from the use of reinsurance in the event that a reinsurer fails to settle its liability to the Group.

The Group Reinsurance Credit Committee oversees the management of credit risk arising from the reinsurer failing to settle its liability to the Group. Group standards are set such that reinsurers that have a financial strength rating of less than 'A-' with Standard & Poor's, or a comparable rating, are removed from the Group's authorised list of approved reinsurers unless the Group's internal review discovers exceptional circumstances in favour of the reinsurer. Collateral is taken, where appropriate, to mitigate exposures to acceptable levels. At 31 December 2016 the extent of collateral held by the Group against reinsurers' share of insurance contract liabilities was £159m (2015: £69m). The UK Legacy reinsurance announced on 7 February 2017 will involve additional extensive collateral arrangements.

The Group's use of reinsurance is sufficiently diversified that it is not concentrated on a single reinsurer, or any single reinsurance contract. The Group regularly monitors its aggregate exposures by reinsurer group against predetermined reinsurer Group limits, in accordance with the methodology agreed by the BRC. The Group's largest reinsurance exposures to active reinsurance groups are Munich Re, Lloyd's, and Berkshire Hathaway Inc. At 31 December 2016 the reinsurance asset recoverable from these groups does not exceed 2.4% (2015: 2.8%) of the Group's total financial assets. Stress tests are performed by reinsurer counterparty and the limits are set such that in a catastrophic event, the exposure to a single reinsurer is estimated not to exceed 6.1% (2015: 7.1%) of the Group's total financial assets.

The credit profile of the Group's assets exposed to credit risk is shown below. The credit rating bands are provided by independent rating agencies. The table below sets out the Group's aggregated credit risk exposure for its financial and insurance assets as at 2016 and 2015.

As at 31 December 2016

Credit rating relating to financial assets that are neither past due nor impaired

Note:

1. The insurance and reinsurance debtors classified as not rated comprise personal policyholders and small corporate customers that do not have individual credit ratings. The overall credit risk to the Group is deemed to be low as the cover could be cancelled if payment were not received on a timely basis.

As at 31 December 2015

Credit rating relating to financial assets that are neither past due nor impaired

Note:

1. The insurance and reinsurance debtors classified as not rated comprise personal policyholders and small corporate customers that do not have individual credit ratings. The overall credit risk to the Group is deemed to be low as the cover could be cancelled if payment were not received on a timely basis.

With the exception of government debt securities, the largest single aggregate credit exposure does not exceed 3% of the Group's total financial assets.

Ageing of financial assets that are past due but not impaired

The following table provides information regarding the carrying value of financial assets that have been impaired and the ageing of financial assets that are past due but not impaired as at 31 December 2016, excluding those assets that have been classified as held for sale.

As at 31 December 2016

Financial assets that are past due but not impaired

As at 31 December 2015

Financial assets that are past due but not impaired

Market risk

Market risk is the risk of adverse financial impact resulting, directly or indirectly from fluctuations from equity and property prices, interest rates and foreign currency exchange rates. Market risk arises in our operations due to fluctuations in both the value of liabilities and in the value of investments held. At Group level, it also arises in relation to the overall portfolio of international businesses. Market risk is subject to the Board Risk Committee risk management framework, which is subject to review and approval by the Board.

Market risk can be further broken down into three key components:

i. Price risk

The Group classifies its investment portfolio in debt securities and equity securities in accordance with the accounting definitions under IFRS.

At 31 December 2016 the Group held investments classified as equity securities of £692m (2015: £585m). These include interests in structured entities (as disclosed in note 27) and other investments where the price risk arises from interest rate risk rather than from equity market price risk. The Group considers that within equity securities, investments with a fair value of £170m (2015: £159m) may be more affected by equity index market price risk than by interest rate risk. On this basis a 15% fall in the value of equity index prices would result in the recognition of losses of £26m (2015: £24m) in other comprehensive income.

In addition the Group holds investments in properties and in group occupied properties which are subject to property price risk. A decrease of 15% in property prices would result in the recognition of losses of £50m (2015: £55m) in the income statement and £5m (2015: £6m) in other comprehensive income.

This analysis assumes that there is no correlation between interest rate and property market rate risks. It also assumes that all other assets and liabilities remain unchanged and that no management action is taken. This analysis does not represent management's view of future market change, but reflects management's view of key sensitivities.

This analysis is presented gross of the corresponding tax credits/(charges).

ii. Interest rate risk

Interest rate risk arises primarily from the Group's investments in long-term debt and fixed income securities and their movement relative to the value placed on insurance liabilities. This impacts both the fair value and amount of variable returns on existing assets as well as the cost of acquiring new fixed maturity investments.

Given the composition of the Group's investments as at 31 December 2016, the table below illustrates the impact to the income statement and other comprehensive income of hypothetical 100bps change in interest rates on long-term debt and fixed income securities that are subject to interest rate risk.

Changes in the income statement and other comprehensive income:

The Group manages interest rate risk by holding investment assets (predominantly fixed income) that generate cashflows which broadly match the duration of expected claim settlements and other associated costs.

The sensitivity of the fixed interest securities of the Group has been modelled by reference to a reasonable approximation of the average interest rate sensitivity of the investments held within each of the portfolios. The effect of movement in interest rates is reflected as a one time rise of 100bps on 1 January 2017 and 1 January 2016 on the following year's income statement and other comprehensive income.

iii. Currency risk

The Group incurs exposure to currency risk in two ways:

· Operational currency risk - by holding investments and other assets and by underwriting and incurring liabilities in currencies other than the currency of the primary environment in which the business units operate the Group is exposed to fluctuations in foreign exchange rates that can impact both its profitability and the reported value of such assets and liabilities;

· Structural currency risk - by investing in overseas subsidiaries the Group is exposed to the risk that fluctuations in foreign exchange rates impact the reported profitability of foreign operations to the Group, and the value of its net investment in foreign operations.

Operational currency risk is principally managed within the Group's individual operations by broadly matching assets and liabilities by currency and liquidity. Operational currency risk is not significant.

Structural currency risk is managed at a Group level through currency forward contracts and foreign exchange options within predetermined limits set by the Group Investment Committee. In managing structural currency risk the needs of the Group's subsidiaries to maintain net assets in local currencies to satisfy local regulatory solvency and internal risk based capital requirements are taken into account. These assets should prove adequate to support local insurance activities irrespective of exchange rate movements but may affect the value of the consolidated shareholders' equity expressed in Sterling.

At 31 December 2016, the Group's total shareholders' equity deployed by currency was:

Shareholders' equity is stated after taking account of the effect of currency forward contracts and foreign exchange options. The analysis aggregates the Danish Krone exposure and the Euro exposure as the Danish Krone continues to be pegged closely to the Euro. The Group considers this aggregate exposure when reviewing its hedging strategy.

The table below illustrates the impact of a hypothetical 10% change in Danish Krone/Euro, Canadian Dollar or Swedish Krona exchange rates on shareholders' equity when retranslating into Sterling:

Changes arising from the retranslation of foreign subsidiaries' net asset positions from their primary currencies into Sterling are taken through the foreign currency translation reserve and so consequently these movements in exchange rates have no impact on profit.

Liquidity risk

Liquidity risk refers to the risk of loss to the Group as a result of assets not being available in a form that can immediately be converted into cash, and therefore the consequence of not being able to pay its obligations when due. To help mitigate this risk, the BRC sets limits on assets held by the Group designed to match the maturities of its assets to that of its liabilities.

A large proportion of investments is maintained in short-term (less than one year) highly liquid securities, which are used to manage the Group's operational requirements based on actuarial assessment and allowing for contingencies.

The following table summarises the contractual repricing or maturity dates, whichever is earlier. Provision for unearned premium and provision for losses and loss adjustment expenses are also presented and are analysed by remaining estimated duration until settlement.

As at 31 December 2016

As at 31 December 2015

The maturity analysis above is presented on an undiscounted basis. The carrying values in the statement of financial position are discounted where appropriate in accordance with Group accounting policy.

The capital and interest payable on the bonds and notes have been included until the dates on which the Group has the option to call the instruments and the interest rates are reset. For further information on terms of the bonds and notes, see note 34.

Capital Management

It is a key regulatory requirement that the Group maintains sufficient capital to support its exposure to risk. Accordingly, the Group's capital management strategy is closely linked to its monitoring and management of risk. The Group's capital objectives consist of striking the right balance between the need to support claims liabilities and ensure the confidence of policyholders, exposure to other risks, support competitive pricing strategies, meet regulatory capital requirements, and providing adequate returns for its shareholders.

The Group's overall capital position is primarily comprised of shareholders' equity and subordinated loan capital and aims to maximise shareholder value, while maintaining financial strength and maintaining adequate regulatory capital. In addition the Group also aims to hold sufficient capital so as to maintain its single 'A' credit rating.

The Group operates in many countries, and its regulated entities hold appropriate levels of capital to satisfy applicable local regulations. Compliance with local regulatory requirements is embedded within the BRC mandate, for the protection of the Group's policyholders and the continuation of the Group's ability to underwrite.

Regulatory solvency position during 2016

The Group's Solvency II Internal Model was approved by the PRA in December 2015 and forms the basis of the primary Solvency II solvency capital ratio (SCR) measure.

The Internal Model is used to support, inform and improve the Group's decision making across the Group. It is used to determine the Group's optimum capital structure, its investment and hedging strategy, its reinsurance programme and to determine the pricing and target returns for each portfolio.

At 31 December 2016, the estimated SCR and corresponding eligible own funds were as follows:

The disposal of £834m of undiscounted UK legacy insurance liabilities net of reinsurance was announced on 7 February 2017. The transaction takes the form of an initial reinsurance agreement, to be effective at 31 December 2016 and which substantially effects economic transfer, to be followed by a subsequent legal transfer of the business. This disposal will add a further 17-20 coverage points to RSA's Solvency II SCR coverage.

The first solvency and financial condition report as required by Solvency II for the year ended 31 December 2016 will be publicly available in May 2017.

The impact on the Solvency II coverage ratio of a range of sensitivities is set out below:

Notes:

1. Sensitivities exclude second order impacts from the application of Tier 1 eligibility rules.

2. RSA has updated its approach to interest rate sensitivities, from a parallel shift in the yield curve to a non-parallel shift. This is to reflect that the long end of the yield curve is typically more stable than the short end.

The above sensitivities have been considered in isolation. Should insensitivities impact in combination there may be some natural offsets between them.

Own Risk and Solvency Assessment (ORSA)

The Solvency II directive introduced a requirement for undertakings to conduct an ORSA.

The Group defines its ORSA as a series of inter-related activities by which it establishes:

· The quantity and quality of the risks which it seeks to assume;

· The level of capital required to support those risks;

· The actions it will take to achieve and maintain the desired levels of risk and capital.

The assessment considers both the current position and the positions that may arise during the planning horizon of the Group (typically the next three years). It looks at both the expected outcome and the outcome arising when the plan assumptions do not materialise as expected.

The assessments of how much risk to assume and how much capital to hold are inextricably linked. In some situations, it may be desirable to increase the amount of risk assumed or retained in order to make the most efficient use of capital available or else to return excess capital to capital providers. In other situations, where the risks assumed give rise to a capital requirement that is greater than the capital immediately available to support those risks, it will be necessary either to reduce the risk assumed or to obtain additional capital.

The assessment of risk and solvency needs is in principle carried out continuously. In practice, the assessment consists of a range of specific activities and decisions carried out at different times of the year as part of an annual cycle, supplemented as necessary by ad hoc assessments of the impact of external events and developments and of internal business proposals.

Papers are presented to the Board throughout the year dealing with individual elements that make up the ORSA. The information contained in those papers and the associated decisions taken are summarised in an annual ORSA report, which is submitted to the Group's regulators as part of the normal supervisory process.

The ORSA is approved by the BRC.

Related party transactions

The following transactions were carried out with key management:

Key management personnel comprise members of the Group Executive Committee, executive directors, and non-executive directors.

Included in salaries and other short-term employee benefits and bonus awards is £5,239,000 (2015: £5,378,000) paid in respect of directors. These amounts exclude the value of share options granted to directors and gains made on the exercise of such options, Group contributions paid in respect of pension schemes and cash or other assets received or receivable under long-term incentive schemes. The total value of the directors' remuneration (including values for these excluded items) and other details are disclosed in the remuneration report.

A number of the directors, other key managers, their close families and entities under their control have general insurance policies with subsidiary companies of the Group. Such policies are available at discounted rates to all employees including executive directors

Responsibility statement

We confirm to the best of our knowledge:

• The financial statements on pages 109 to 113, prepared in accordance with the applicable set of accounting standards, give a true and fair view of the assets, liabilities, financial position and profit or loss of the Group and Parent Company; and

• The Strategic Report on pages 4 to 41, includes a fair review of the development and performance of the business and the position of the Group, together with a description of the principal risks and uncertainties the Group faces.

Signed by order of the Board