Final Results

27th Feb 2008 07:00

YEAR END RESULTS 2007 Strong performance in challenging conditions -- Net written premiums of £5.8bn up 6% (7% at constant exchange rates) -- Combined operating ratio of 94.9% (92.8% excluding impact of UK flood losses) -- Investment result of £629m ahead of guidance following actions taken to strengthen further the defensive position of the portfolio -- Operating result up 4% to £814m -- Profit after tax of £628m includes release of £103m of deferred tax reserves in Codan following the minority buyout Delivery against strategic objectives -- Delivering sustainable profitable performance -- Maintaining tight operational and financial management -- Continuing to take the right action on rate -- Achieved and increased annualised expense savings targets -- Successful buyout of the Codan minorities and already benefiting from full ownership -- Strengthened capital position and achieved S&P upgrade to A Outlook -- Confident of continuing to deliver sustainable profitable performance -- Final dividend increased 10% to 4.53p, giving a full year dividend increase of 19% -- 2008 COR expected to be around 95% \* T 12 Months 12 Months Movement* 2007 2006 Total GroupNet written premiums £5,837m £5,484m +6%Underwriting result £278m £310m -10%Combined operating ratio 94.9% 93.3% -1.6ptsOperating result(1) £814m £780m +4%Profit before disposals(1) £692m £650m +6%Profit/(loss) after tax (1) £628m £(20)m - 31 December 31 December 2007 2006Balance sheetShareholders' funds £3,077m £2,561m +20%Net asset value per share 91p 82p +11% Dividend for the year per ordinary share 7.01p 5.87p +19%\* T * Reported exchange rate (1) For a reconciliation of operating result to profit after tax see SummaryConsolidated Income Statement. Andy Haste, Group CEO of Royal & Sun Alliance Insurance Group plc, commented: "In challenging market conditions, we have again delivered a strong performance.In 2007, we delivered profitable growth in each of our regions and achieved astrong bottom line result. The results have been delivered against the backdropof a competitive rating environment, adverse large losses and weather, includingthe UK floods, and volatile investment markets. The results clearly demonstratethe benefit of our strong and diversified portfolio and our tight operationaland financial management. With our strong portfolio and the actions we are taking, we are confident thatwe will continue to deliver the profitable performance that we have seen overthe last few years. As it stands today, we expect to deliver a 2008 combinedoperating ratio of around 95%. Given the strong performance in 2007, and ourconfidence in the future, we have increased the final dividend by 10% to 4.53p(2006: 4.12p), bringing the total dividend for the year to 7.01p, up 19%." \* TFor further information: Analysts PressShona Cotterill Thomas CoopsTel: +44 (0) 20 7111 7212 Tel: +44 (0) 20 7111 7047Mobile: +44 (0) 7894 938600 Mobile: +44 (0) 7834 005605 Wendy Hardy Sarah HilyerTel: +44 (0) 20 7111 7140 Tel: +44 (0) 207 111 7327Mobile: +44 (0) 7917 092724 Mobile: +44 (0) 7866 735532 Simon Moyse (Finsbury) Tel: +44 (0) 20 7251 3801 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 Regional analysis of insurance operations Estimation techniques, uncertainties and contingencies Statutory information Explanatory notes Important Disclaimer This document may contain "forward-looking statements" (as defined in the USPrivate Securities Litigation Reform Act of 1995) with respect to certain of theCompany's plans and its current goals and expectations relating to its futurefinancial condition, performance and results. By their nature, allforward-looking statements involve risk and uncertainty because they relate tofuture events and circumstances which are beyond the Company's control,including amongst other things, UK domestic and global economic businessconditions, market-related risks such as fluctuations in interest rates andexchange rates, the policies and actions of regulatory authorities, the impactof competition, inflation, deflation, the timing impact and other uncertaintiesof future acquisitions or combinations within relevant industries, as well asthe impact of tax and other legislation and other regulations in thejurisdictions in which the Company and its affiliates operate. As a result, theCompany's actual future financial condition, performance and results may differmaterially from the plans, goals and expectations set forth in the Company'sforward-looking statements. The Company undertakes no obligation to update anyforward-looking statements, save in respect of any requirement under applicablelaw or regulation. CEO REVIEW The Group continues to deliver strong results in challenging market conditions.Net written premiums are up 6% to £5.8bn (2006: £5.5bn), reflecting above marketgrowth in International, strong double digit growth in Emerging Markets, andtargeted growth in the UK. The underwriting result of £278m (2006: £310m)reflects the benefit of management actions, including our prudent reinsuranceprogramme, positive action on rating, and our strong and diversified portfolio.This result was achieved despite the UK flood losses of £120m, as well asadverse weather and large loss experience across the Group. As expected,International contributed the largest share of the Group's underwriting result,with continued profitable performance from the UK and Emerging Markets. Thecombined operating ratio (COR) is 94.9% (2006: 93.3%) and includes 2.1 pointsfor the UK flood losses. The Group continues to operate a conservative investment policy and took actionin 2007 to strengthen further the defensive position of the portfolio. Theinvestment result is up 13% to £629m, and reflects increased investment incomeas well as a 45% increase in total gains. The increase in total gains drove theinvestment result ahead of our 2007 guidance and followed further action takento reduce equity exposure. The operating result is up 4% to £814m and profitbefore tax is £670m (2006: £649m). Profit after tax is £628m and benefits fromthe strong operating result as well as the release of deferred tax reserves inCodan following the minority buyout. The underlying return on equity remainsstrong at 21.3% for the year. Business Overview Set out below are the net written premiums and combined operating ratios for ourregions: \* T Net written premiums Combined operating ratio 12 Months 12 Months Movement Movement at 12 Months 12 Months Movement 2007 2006 as constant 2007 2006 reported exchange £m £m % % % % Points International 2,513 2,334 8 8 91.3 93.1 1.8UK 2,688 2,618 3 3 97.6 92.3 (5.3)Emerging Markets 615 531 16 19 95.3 97.3 2.0Group Re 21 1 - - - - -------------------------------------------------------------------------------------------------Total Group 5,837 5,484 6 7 94.9 93.3 (1.6)------------------------------------------------------------------------------------------------\* T In International, we are delivering above market growth with net writtenpremiums up 8% to £2.5bn. In Scandinavia, we completed the Codan minoritybuyout. Codan is an attractive business with excellent prospects and this isclearly seen in its continued delivery of strong results and above marketgrowth. Premiums are up by 8% reflecting the strong performance of White Label,our 2006 acquisition, and continuing growth in our bancassurance, car dealershipand internet channels. Following the minority buyout, and as part of our ongoingfinancial management of the Group, we have identified and released £103m ofdeferred tax reserves. In Canada, premiums are up by 6% (9% on constantexchange), with Johnson delivering 8% premium growth (11% on constant exchange)and good performances from both Commercial and Personal Intermediated. Theacquisition of Canadian Northern Shield, which completed in December, makes R&SAthe market leader in British Columbia and the sixth largest general insurer inCanada. In Italy, we continued to deliver above market double digit growth,while in Ireland, the business continues to perform strongly, driven by a goodperformance from EGI, our specialty motor insurer. The UK remains our most competitive market and we continue to take a disciplinedapproach to risk selection and rating, targeting opportunities for profitablegrowth while withdrawing capacity in areas where we cannot achieve our targetreturns. Net written premiums are up 3% to £2.7bn, due primarily to the strongperformance of new Affinity partnerships. In MORE TH>N, premiums have increasedby 8% to £475m, new business sales are up 10%, with average motor premiums 7%higher than 2006. In Affinity, we won 5 new deals worth £50m in premium andincreased premiums by 18%. In Commercial, we continue to focus on profitablespecialty lines, increasing Marine premiums by 8%. During the year, we launched6 specialist trading units, including Property Investors, Construction andEngineering, and Risk Solutions. We have continued to take action on rate,achieving mid single digit increases across Personal lines. In Commercial wehave increased Property and Motor rates by 3% and 8% respectively, whileLiability rates are down 1%, compared with a decrease of 9% at the same timelast year. Retention remains strong across the business at over 80%. In Emerging Markets, we are continuing to drive strong double digit growth,increasing net written premiums by 16% (19% on constant exchange) to £615m,while improving profitability. Growth was particularly strong in the Baltics,with premiums up 35%, and in November we launched our new operation in Estonia.Asia and the Middle East continues to perform strongly, with premiums up 8% (15%on constant exchange) and with our new subsidiary licence, we are acceleratingour expansion plans in China. In Latin America, premiums are up by 11% (15% onconstant exchange), primarily driven by strong growth in Chile, as well as inMarine in Brazil and Mexico. In December, we took the opportunity to exit fromVenezuela, as this was not a market where we wanted to increase our exposure.Our business in Eastern Europe is building momentum and is growing ahead of themarket in Poland and has made a strong start in the Czech Republic since itslaunch in May. The joint venture plans to start writing direct business inRussia in 2008. Across the Group, our objective is sustainable profitable performance and eachof our regions has again delivered a strong underwriting result. InInternational, we achieved a 38% increase in the underwriting profit to £206mand improved the COR by almost 2 points to 91.3%. In the UK, we delivered a CORof 97.6% and an underwriting profit of £65m after the flood losses of £120m.Excluding the flood losses, the UK COR was 93%. In Emerging Markets, theunderwriting result was up 64% to £18m, with a 2 point improvement in the COR to95.3%. Our results continue to be underpinned by our focus on driving operationalexcellence and achieving our expense targets. We delivered our target of £130mannualised expense savings one year ahead of schedule, and in June we announceda further £70m of expense savings to be delivered by mid 2008. As at the yearend, we have delivered £50m of these additional savings on a run rate basis, andare on track to deliver the revised target. Outlook During 2007, we resolved our last remaining legacy issue and we are now fullyfocused on continuing to deliver our objective of sustainable profitableperformance. As we move the business forward, it is now the appropriate time tosimplify and refresh our corporate brand and name, and going forward we will nolonger be known as Royal & Sun Alliance but will instead be known simply as RSA. With our strong portfolio and the actions we are taking, we are confident thatwe will continue to deliver the profitable performance that we have seen overthe last few years. As it stands today, we expect to deliver a 2008 combinedoperating ratio of around 95%. Given the strong performance in 2007, and ourconfidence in the future, we have increased the final dividend by 10% to 4.53p(2006: 4.12p), bringing the total dividend for the year to 7.01p, up 19%. Inline with the positive outlook, the Remuneration Committee has increased the ROEtarget range for the 2008 to 2010 Long Term Incentive Plan from 10% to 16%, to12% to 18%. Andy Haste, Group CEO, Royal & Sun Alliance Insurance Group plc OPERATIONS REVIEW Operating Result The operating result is £814m (2006: £780m), with an improved investment resultoffset by the lower underwriting result. The underwriting result of £278m (2006:£310m) reflects a strong performance in challenging conditions. The current yearunderwriting loss is £70m (2006: underwriting profit £179m) and includes theimpact of the UK floods of £120m, as well as adverse weather (£73m worse than2006) and large loss experience (£88m worse than 2006) across the Group. As in 2006, the prior year underwriting profit has been particularly strong andtotalled £348m in 2007. This reflects a continuation of the trend seen in thefirst six months of the year with strong positive emergence from our UKspecialist claims unit, as well as the cumulative impact of actions taken toreduce claims leakage in Other Europe. This compares with a prior yearunderwriting profit of £131m in 2006, which as reported, was after £164m ofreserve strengthening for Scandinavian PA and UK asbestos reserves. The Groupcontinues to adopt a prudent reserving policy for both current year and overallreserves, and reserves at 31 December 2007 were stronger than at the start ofthe year, with particular strength in International. - International International continued to deliver above market growth while improvingprofitability. Net written premiums increased by 8% to £2,513m (2006: £2,334m),reflecting growth of 8% in Scandinavia, 10% in Other Europe and 6% growth inCanada (9% on constant exchange). In Scandinavia, Personal delivered a 10% increase in net written premiums to£768m, reflecting the strong performance of White Label, our 2006 acquisition,as well as continued double digit growth in the bancassurance and car dealershipchannels. In Commercial, net written premiums increased by 6% to £611m, as wecontinue to focus on underwriting discipline and targeting profitable segments. In Canada, Personal net written premiums increased by 8% (11% on constantexchange), to £520m. Johnson, our direct personal business, delivered 8% growth(11% on constant exchange), with strong organic growth supplemented by theimpact of acquisitions made in 2006. In Commercial, net written premiums wereflat at £183m (4% growth on constant exchange), reflecting a disciplinedapproach in increasingly competitive market conditions. The acquisition ofCanadian Northern Shield diversifies our geographic spread and Personal linesoffering, and makes R&SA the leading insurer in British Columbia and the sixthlargest general insurer in Canada. In Other Europe, Personal net written premiums increased by 6% to £245m, whileCommercial delivered a 16% increase in premiums to £186m reflecting continuedabove market growth in Italy and a strong performance from EGI, the Irishspecialty insurer acquired in 2006. International contributed the largest share of the Group's underwriting result,with a 38% increase in underwriting profit to £206m. The International CORimproved 1.8 points to 91.3%. In Canada, the COR is in line with the prior yearat 92.4%, while in Other Europe, the COR improved by 3.7 points to 89.1%. TheScandinavian COR improved 2.3 points to 91.4%. In 2006, as reported in our fullyear results, we strengthened reserves in Swedish PA and released identifiedsurplus in Danish motor liability reserves. In 2007, the 13.6 point improvementin the Scandinavian Personal COR to 90.5% and the 10.9 point deterioration inthe Commercial COR largely reflect these prior year movements. The movement inthe Personal COR also benefits from improved underlying profitability. The International result has been underpinned by our continued focus onoperational excellence. We delivered our target of £40m annualised expensesavings by mid 2007 one year ahead of schedule and, in June, announced a further£20m of expense savings to be delivered by mid 2008. - UK The UK delivered a strong performance in a competitive market. Net writtenpremiums increased by 3% to £2,688m, driven primarily by the Affinity dealssigned in 2006 and organic growth in MORE TH>N. We have continued to take action on rate, and have once again achieved midsingle digit increases across Personal lines, including a 6% increase in Motor.In Commercial lines, we have achieved rate increases in Property and Motor of 3%and 8% respectively. Liability rates decreased by 1%, compared with a decreaseof 9% at the same time last year. Retention remains strong across the UK at over80%. Personal net written premiums have increased by 27% to £1,074m driven by organicgrowth and recent Affinity deals including Paymentshield. In MORE TH>N, premiumshave increased by 8% to £475m, new business sales are up 10% with average motorpremiums 7% higher than 2006. In Affinity, we won 5 new deals worth around £50min premium and increased premiums by 18%. In Commercial, net written premiumswere down 9% to £1,614m (2006: £1,770m) reflecting our commitment tounderwriting discipline and the withdrawal of capacity from areas of the marketwhere the rate, terms and conditions do not meet our underwriting criteria. Wecontinue to focus on profitable specialty lines, increasing Marine premiums by8%, and during the year, we launched 6 specialist trading units, includingProperty Investors, Construction and Engineering, and Risk Solutions. As part ofour ongoing programme of efficient legacy and capital management, in December,we agreed the sale of Guildhall Insurance Company Limited, a portfolio ofinwards reinsurance run off risks, of mostly US asbestos and environmentalliabilities (£58m before the impact of discounting). We received £32mconsideration for net assets of £30m, and after the unwind of the discount ofthe reserves of £8m, this resulted in a loss of £6m. The UK's underwriting result of £65m, which includes the impact of the June andJuly floods of £120m as well as other adverse weather, demonstrates continuedprofitability in challenging conditions. The UK COR of 97.6% includes 4.6 pointsin respect of the UK floods. The UK expense ratio is 34.5% including commissions, compared with 30.1% in2006. This comprises a 5 point increase in the commission ratio following therapid growth in Affinity business, while the expense ratio is down 0.6% to17.5%. The UK delivered its target of £70m annualised expense savings by mid2007, one year ahead of schedule, and is on track to deliver another £50m ofsavings by mid 2008. In 2007, MORE TH>N achieved its target of delivering a sub20% expense ratio with an expense ratio of 19.8%. - Emerging Markets Emerging Markets increased net written premiums by 16% (19% on constantexchange) to £615m, reflecting strong organic growth across all markets,including growth of 35% (34% on constant exchange) in the Baltics, 8% in Asiaand the Middle East and 11% in Latin America (both up by 15% on constantexchange). Premium growth in Latin America reflected strong growth in Chile, as well as inMarine in Brazil and Mexico. In December, we took the opportunity to exit fromVenezuela, (2007: NWP £29m and underwriting loss of £3m) as this was not amarket where we wanted to increase our exposure. The loss on the sale ofVenezuela was £13m, which comprised a £5m loss on the net assets and £8m offoreign exchange, which is recycled from reserves and does not impact Group netassets. In the Baltics, premium growth remains very strong, particularly in Lithuania,where we have continued to grow ahead of the market, increasing market share bya further 3% to 37%. In the second half of 2007, we launched our Estonianoperation, and this business is performing in line with expectations. OurEastern European joint venture, which owns the largest direct insurer in Polandhas delivered growth of 38%, increasing premiums to £47m, and has made a strongstart in the Czech Republic since its launch in May. The joint venture plans tostart writing direct business in Russia in 2008. Asia and the Middle East continued to perform strongly with 15% premium growthon constant exchange driven by strong motor performance in the UAE. We continueto build on our expertise with existing affinity partners to provide basicinsurance products within the region. Following the receipt of our subsidiarylicence, we are accelerating our growth strategy in China. Subject to regulatoryapproval, we aim to open 11 branches by 2011, giving us access to 45% of theChinese market. Emerging Markets' underwriting result is up 64% to £18m and the COR is 2 pointsbetter at 95.3%, with the Latin American COR improving by 5 points to 98.7%following actions taken during the year to improve profitability. - Rating movements Rate movements achieved for risks renewing in December 2007 versus comparablerisks renewing in December 2006 are set out in the table below. Our action onrating demonstrates our commitment to maintaining pricing discipline and todelivering sustainable profitable performance. \* T Personal Commercial Motor Household Motor Liability Property % % % % % UK 6 5 8 (1) 3Scandinavia 1 3 1 8 2Canada 0 5 (7) (5) (4)\* T - Other activities The analysis of the other activities result is as follows: \* T 12 Months 12 Months Movement 2007 2006 £m £m Central expenses (60) (74) +19%Investment expenses and charges (21) (25) +16%Other operating activities (12) 13 -192%---------------------------------------------------------------------------------------------Other activities (93) (86) -8%---------------------------------------------------------------------------------------------\* T Other activities of £93m are £7m higher than in 2006, which reflects a 19%reduction in central expenses to £60m (2006: £74m), offset by the movement inother operating activities. Other operating activities include net gains on noninsurance derivatives, which benefited from a £12m gain in 2006, other noninsurance activities, our share of the results of associates, and other costsprincipally relating to business development in Emerging Markets. - Investment result The analysis of the investment result is as follows: \* T 12 Months 12 Months Movement 2007 2006 £m £m Bonds 391 372 +5%Equities 48 56 -14%Cash and cash equivalents 83 63 +32%Land and buildings 17 13 +31%Other 52 12 --------------------------------------------------------------------------------------------Investment income 591 516 +15% ----------- ----------- -----------Realised gains 174 46 +278%Unrealised gains/(losses), impairments and foreign exchange (55) 36 -253% ----------- ----------- -----------Total gains 119 82 +45%Unwind of discount (81) (42) -93%-------------------------------------------------------------------------------------------Investment result 629 556 +13%-------------------------------------------------------------------------------------------\* T The Group maintains a low risk asset strategy with the portfolio dominated byhigh quality fixed income and cash assets. During 2007, we undertook a number offurther actions to enhance the defensive position of the portfolio, includingselling a net £220m of equities in the second and fourth quarters, reducing ourlimited CDO exposure through selective disposals and extending bond duration toimprove liability matching and lock in higher yields. In the pension fund, wesold around £900m of equities in the second quarter, reducing the equity holdingin the pension fund from 46% to 24% at the year end. At the same time, weextended the interest rate and inflation swap programme over the schemeliabilities. The quality of our portfolio, and the benefit of these management actions areclearly demonstrated in the strength of our investment result. The 2007investment result is up 13% to £629m, and reflects increased investment incomeas well as a 45% increase in total gains. The increase in total gains has driventhe investment result ahead of our 2007 guidance and follows the action taken toreduce equity exposure. Investment income is up 15% to £591m, reflecting an increase in bond and cashyields, with the average underlying yield on the portfolio increasing from 4% to4.4%. Investment income also includes £26m on the funds withheld account on theAdverse Development Cover (ADC) provided to Arrowpoint Capital, which isincluded in the 2007 consolidated accounts for the first time. This is offset by£28m of discount unwind on the related liabilities, which is included in thetotal unwind of discount of £81m. Total gains were £119m (2006: £82m). Within this, realised gains total £174m,reflecting gains on equity sales of £185m, offset by losses on bond disposals. Unrealised losses total £55m and predominantly comprise the mark to marketmovement in the commercial property portfolio of £42m. This compares with a £42mincrease in 2006 and represents a 9.4% fall in the portfolio value, which isbroadly in line with the fall in the IPD index of 10%. Unrealised losses alsoinclude charges for vacant investment property costs of £8m, impairments of £3mand other market movements of £5m, offset by a £3m gain on exchange. The investment portfolio totalled £13.3bn at the year end compared with £12.7bnat the start of the year and 83% of the portfolio is invested in high qualityfixed income and cash assets. The fixed interest portfolio remains concentratedon high quality short dated assets, with an average duration of 3.1 years. Atthe end of the year, 99% of the bond portfolio was investment grade, with 86%rated AA or above, a marginal increase over the prior year. The Group has no holdings in monoline insurers and no exposure to credit insuredbonds, US municipal bonds or US sub prime Residential Mortgage BackedSecurities. The Group's CDO exposure was £130m at the year end and comprisedover £115m of CLOs, which have experienced no downgrades. Since year end we havedisposed of a further £27m of CDOs. At the year end, equities (excluding preference shares and Collective InvestmentVehicles backed by fixed income and cash) comprised 8% of the portfolio comparedwith 10% in 2006. Although the size of the equity portfolio has been reduced, wehave maintained our equity protection strategy, covering up to £800m of ourportfolio. These derivatives are a rolling programme of put and call options,with the quantum and strike levels of coverage adjusted quarterly. Since yearend, we have taken out an additional £50m of protection on our Europeanequities. The commercial property portfolio is only 3% of investment assets and isdefensively positioned. It comprises high quality commercial properties,generating strong and sustainable rental income and does not include anydevelopment properties. For 2008, total gains are expected to be in line with 2006's total of £82m. As at 31 December 2007 unrealised gains in the balance sheet were £461m (31December 2006: £575m). OTHER INFORMATION Capital position The regulatory capital position of the Group under the Insurance GroupsDirective (IGD) is set out below: \* T 31 December 31 December 31 December 2007 2007 2006 Requirement Surplus Surplus £bn £bn £bn Insurance Groups Directive 1.0 1.5 1.3\* T The IGD surplus was £1.5bn compared with £1.3bn at 31 December 2006. Thecoverage of our IGD requirement is 2.5 times (31 December 2006: 1.9 times). At 31 December 2007, the Group had surplus economic capital of around £2.2bn, upfrom £2bn at the start of the year, based on a risk tolerance consistent withStandard & Poor's long-term A rated bond default curve. This is equivalent to aprobability of solvency over 1 year of 99.94%. The Group calculates its economic capital position using a global multi-yearstochastic economic capital model. The model is a key decision making tool andis used for a range of strategic, operational and financial management purposesthroughout the Group, and has also been the basis for the Group's IndividualCapital Assessment submissions to the FSA since the 2004 year end. In December 2007, the Group was upgraded to A, stable outlook by Standard andPoor's. The Group is rated A3 stable outlook by Moodys and A- positive outlookby AM Best. Our financing and liquidity position is strong. The next call on any externalfinancing is not until Q4 2009, and our committed £500m senior facility remainsundrawn. Taxation As at 31 December 2006, the Group held deferred tax provisions in respect ofCodan's Danish Security Fund and Swedish Safety Reserve. On acquiring fullownership of Codan in January 2008, the Group was able to determine that nofuture tax liability was likely to arise in respect of these reserves, andaccordingly released a total of £103m deferred tax provisions. Return on Equity Underlying return on equity is the profit after tax attributable to ordinaryshareholders from continuing operations, excluding gains and losses on disposalsand the benefit of the release of deferred tax on Codan's Danish Security Fundand Swedish Safety Reserve brought forward at 1 January 2007, expressed inrelation to opening shareholders' funds attributable to ordinary shareholders. Combined operating ratio 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 COR of 94.9% was basedon net written premiums of £5,837m and net earned premiums of £5,607m. Net asset value per share The net asset value per share at 31 December 2007 was 91p (31 December 2006:82p). At 22 February 2008 the net asset value per share was estimated at 99p. The net asset value per share for 31 December 2007 was based on totalshareholders' funds of £3,077m, adjusted by £125m for preference shares, andshares in issue at the period end of 3,232,915,875 (excluding those held in theESOP trusts). Dividend The directors will recommend at the Annual General Meeting, to be held on 19 May2008, that a final dividend of 4.53p (2006: 4.12p) per share be paid. This,together with the interim dividend of 2.48p paid on 30 November 2007, will makea total distribution for the year of 7.01p (2006: 5.87p). The final dividend will be payable on 6 June 2008 to shareholders on theregister at the close of business on 7 March 2008. Shareholders will be offereda SCRIP dividend alternative. SCRIP dividend mandates need to be received byEquiniti Limited before 8 May 2008. The first preference share dividend for 2008will be payable on 1 April 2008 to holders of such shares on the register at theclose of business on 7 March 2008. Long Term Incentive Plan The Long Term Incentive Plan (LTIP) was introduced in 2006 and is the primarylong term incentive scheme for the Group's executives. Awards made under theLTIP are subject to performance conditions which are measured over a singleperiod of three years with no provision to retest. 50% of the awards will vestsubject to Return on Equity (ROE) targets, and the remaining 50% relate to theGroup's Total Shareholder Return (TSR) performance against a comparator group offinancial services companies. The ROE targets provide that if the underlying average annual ROE target overthree years is below the minimum threshold, no part of the award subject to theROE performance condition will vest. If the underlying average annual ROE targetover three years equals or exceeds the maximum ROE target, 100% of the awardwill vest, with a straight line allocation for performance in between. In linewith the positive outlook on the future prospects of the business, the Group'sRemuneration Committee has approved an increase in the ROE target range of 10%at threshold to 16% at maximum to 12% at threshold to 18% at maximum for awardsmade in 2008. 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 online at www.royalsunalliance.com.A live audiocast of the analyst presentation, including the question and answersession, will be broadcast on the website at 10.30am today and available via alisten only conference call by dialling UK Freephone 0800 358 5260 orInternational dial in: + 44 (0) 207 190 1232. An indexed version of theaudiocast will be available on the website by the end of the day. Copies of theslides to be presented at the analyst meeting will be available on the site from10.30am today. On 8 May, we will be holding a presentation to analysts and investors on ourScandinavian business at our offices at 30 Fenchurch Street, London EC3M 3BD. The half yearly 2008 results will be announced on 7 August 2008. MANAGEMENT BASIS OF REPORTING The following analysis on pages 10 to 16 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 management basis reflectsthe way management monitor the business. The underwriting result includesinsurance premiums, claims and commissions and underwriting expenses. Inaddition the management basis also discloses a number of items separately suchas investment result, interest costs and other activities. Estimationtechniques, uncertainties and contingencies are included on pages 17 to 19.Financial information on a statutory basis is included on pages 20 to 25. SUMMARY CONSOLIDATED INCOME STATEMENT MANAGEMENT BASIS \* T 12 Months 12 Months 2007 2006 £m £m Continuing operationsNet written premiums 5,837 5,484-------------------------------------------------------------------------------------------------- Underwriting result 278 310 -------------- --------------- Investment income 591 516 Realised gains 174 46 Unrealised gains/(losses), impairments and foreign exchange (55) 36 Unwind of discount (81) (42) -------------- ---------------Investment result 629 556--------------------------------------------------------------------------------------------------Insurance result 907 866Other activities (93) (86)--------------------------------------------------------------------------------------------------Operating result 814 780 Interest costs (104) (92)Amortisation (18) (15)Reorganisation costs - (23)--------------------------------------------------------------------------------------------------Profit before disposals 692 650Loss on disposals (22) (1)--------------------------------------------------------------------------------------------------Profit before tax 670 649Taxation (29) (170)--------------------------------------------------------------------------------------------------Profit after tax from continuing operations 641 479 Discontinued operationsLoss after tax from discontinued operations (13) (499)--------------------------------------------------------------------------------------------------Profit/(loss) after tax 628 (20)-------------------------------------------------------------------------------------------------- Earnings per share for profit on continuing operations attributable to the ordinary shareholders of the Company:Basic 19.3p 15.0pDiluted 19.0p 14.8p Earnings per share on profit/(loss) attributable to the ordinary shareholders of the Company:Basic 18.9p (2.1)pDiluted 18.6p (2.1)p\* T SUMMARY CONSOLIDATED BALANCE SHEET MANAGEMENT BASIS \* T 31 December 31 December 2007 2006 £m £mAssetsGoodwill and other intangible assets 663 552Property and equipment 377 385Associated undertakings 105 27Investments -------------- ------------- Investment property 429 454 Equity securities 1,487 1,620 Debt and fixed income securities 9,581 8,568 Other 272 269 -------------- -------------Total investments 11,769 10,911Reinsurers' share of insurance contract liabilities 1,872 1,927Insurance and reinsurance debtors 2,579 2,225Deferred acquisition costs 542 453Other debtors and other assets 1,069 852Cash and cash equivalents 1,509 1,831---------------------------------------------------------------------------------------------Assets associated with continuing operations 20,485 19,163Assets associated with discontinued operations* 108 3,485---------------------------------------------------------------------------------------------Total assets 20,593 22,648--------------------------------------------------------------------------------------------- Equity, reserves and liabilities Equity and reservesShareholders' funds 3,077 2,561Minority interests 67 331---------------------------------------------------------------------------------------------Total equity and reserves 3,144 2,892Loan capital 1,194 1,192---------------------------------------------------------------------------------------------Total equity, reserves and loan capital 4,338 4,084--------------------------------------------------------------------------------------------- Liabilities (excluding loan capital)Insurance contract liabilities 13,727 12,790Insurance and reinsurance liabilities 426 391Borrowings 303 8Provisions and other liabilities 1,734 1,781---------------------------------------------------------------------------------------------Liabilities associated with continuing operations 16,190 14,970Liabilities associated with discontinued operations* 65 3,594---------------------------------------------------------------------------------------------Total liabilities (excluding loan capital) 16,255 18,564---------------------------------------------------------------------------------------------Total equity, reserves and liabilities 20,593 22,648---------------------------------------------------------------------------------------------\* T * Assets and liabilities associated with discontinued operations in 2007 relateto a UK subsidiary held for sale and property. In 2006 the assets andliabilities relate to the US business. These summary consolidated financial statements have been approved for issue bythe Board of Directors on 26 February 2008. OTHER INFORMATION MANAGEMENT BASIS Movement in net assets \* T Shareholders' Minority Loan Net funds interest capital assets £m £m £m £m Balance at 1 January 2007 2,561 331 1,192 4,084 Profit after tax 596 32 - 628Exchange gains 140 - 30 170Fair value losses net of tax (50) (17) - (67)Pension fund actuarial gains and losses net of tax (16) - - (16)Repayment and amortisation of loan capital - - (28) (28)Share issue 404 - - 404Changes in shareholders' interests in subsidiaries (368) (248) - (616)Share options 21 - - 21Prior year final dividend (123) (31) - (154)Current year interim dividend (79) - - (79)Preference dividend (9) - - (9) -------------------------------------------------------------- ----------- ------------ ------------Balance at 31 December 2007 3,077 67 1,194 4,338-------------------------------------------------------------- ----------- ------------ ------------\* T In the year to 31 December 2007, shareholders' funds increased by 20% from£2,561m to £3,077m driven predominantly by the strong retained profits of £596m. The exchange gain in the year of £140m is primarily due to the movement in theDanish Kroner, Canadian Dollar and Euro against Sterling on openingshareholders' funds. Fair value losses net of tax of £50m reflect unrealisedgains on the Group's available for sale investment portfolio and Group occupiedproperties, offset by realised gains taken to the income statement. Therepayment and amortisation of loan capital of £28m includes the repurchase ofthe majority of the remaining Yankee bond, following the debt exchangetransaction in 2006. The share issue of £404m includes the equity placing tofund the acquisition of the Codan minority interest and the scrip dividend.Changes in shareholders' interests in subsidiaries of £368m relates to thepurchase of the remaining Codan minority interest. Pension fund surplus The table below provides a reconciliation of the Group pension fund surplus (netof tax) from 1 January 2007 to 31 December 2007. \* T UK Other Group £m £m £m Pension fund at 1 January 2007 72 (48) 24 Actuarial (losses)/gains (22) 6 (16)Deficit funding 62 - 62Other movements 42 4 46 -------------------------------------------------------------------------------------------------Pension fund at 31 December 2007 154 (38) 116-------------------------------------------------------------------------------------------------\* T The surplus on the pension scheme as at 31 December 2007 is £116m compared with£24m at the start of the year. The scheme has benefited from positive marketmovements and funding payments made during the year. The Group has strengthenedthe pension scheme assumptions during the year for both mortality and inflation. The Group uses medium cohort assumptions for mortality, using PFA92 and PMA92tables. In 2007, mortality assumptions were strengthened increasing the lifeexpectancy of a male pensioner aged 60 in 2007 to 85.8 (2006: 84.7), and of afemale pensioner to 87.0 (2006: 86.8). We sold around £900m of equities in the second quarter, reducing the equityholding in the pension fund from 46% to 24% at the year end. At the same time,we extended the interest rate and inflation swap programme over the schemeliabilities. The reduction in the equity exposure has significantly benefitedthe scheme, with the change in asset mix contributing over £75m to the surplusposition. The pension position remains sensitive to market movements and since year end,the movement in corporate bond yields has meant that as of 22 February 2008, thesurplus on the UK schemes is just under £400m net of tax. Cashflow - management basis \* T 12 Months 12 Months 2007 2006 £m £m Operating cashflow 652 851Tax paid (127) (118)Interest paid (92) (82)Group dividends (111) (87)Dividend to minorities (31) (9)--------------------------------------------------------------------------------------------------Net cashflow 291 555Issue of share capital 304 6Pension deficit funding (86) (86)Net movement of debt 223 (169)Corporate activity (888) (355)--------------------------------------------------------------------------------------------------Cash movement (156) (49)-------------------------------------------------------------------------------------------------- Represented by:(Decrease)/increase in cash and cash equivalents (352) 443Purchase/(sale) of other investments 196 (492)-------------------------------------------------------------------------------------------------- (156) (49)--------------------------------------------------------------------------------------------------\* T The Group's operating cashflow was £652m in 2007, a decrease of 23% on 2006. Thereduction on 2006 reflects the impact of the UK floods as well as adverseweather and large loss experience across the Group. The £22m increase in thedividend to minorities to £31m reflects the minorities' share of an exceptionaldividend paid by the Group's non-wholly owned UK subsidiary British AviationInsurance Company, in which the Group has a 57% holding. In 2007, the Groupissued £304m of share capital, largely to fund the Codan minority buyout. The£223m net movement in debt is the partial repurchase of the Yankee bond offsetby an increase in borrowings, partly to fund the Codan minority buyout.Corporate activity of £888m includes the buyout of the Codan minorities of£590m, the disposal of the US operation and a number of acquisitions inInternational and Emerging Markets, notably our Eastern Europe joint venture andCanadian Northern Shield. The 2006 cashflow has been reanalysed to show tax paid and issue of sharecapital separately and to reclassify a £78m investment sale from operatingcashflow to sale of other investments. Loss development tables The table below presents the general insurance claims provisions net ofreinsurance for the accident years 2001 and prior, through to 2007. The top halfof the table shows the estimate of cumulative claims at the end of the initialaccident year and how these have developed over time. The bottom half of thetable shows the value of claims paid for each accident year in each subsequentyear. The current year provision for each accident year is calculated as theestimate of cumulative claims at the end of the current year less the cumulativeclaims paid. Group The loss development table below is presented on an undiscounted basis. Prioryear development in 2007 showed favourable experience across all accident yearsand totalled £336m, which primarily comprises favourable development from our UKspecialist claims unit, as well as the cumulative impact of actions taken toreduce claims leakage in Other Europe. On a discounted basis, prior yearunderwriting profit in 2007 was £348m, compared with a profit of £131m in 2006,which was after £164m of reserve strengthening for Scandinavia PA and UKasbestos reserves. The total discounting at the end of 2007 was £601mrepresenting an increase of £29m in the year, due mostly to the impact ofincluding the Adverse Development Cover (ADC) following the disposal of the USbusiness. In Scandinavia certain long tail liabilities are settled by an annuityand the discounted value of these annuities is shown separately. At the year endthe annuity reserves were £327m (2006: £308m). \* T 2001 and prior 2002 2003 2004 2005 2006 2007 Total £m £m £m £m £m £m £m £mEstimate of cumulative claims At end of accident year 7,090 2,359 2,147 2,016 2,152 2,169 2,214 1 year later 7,345 2,310 2,154 1,885 2,032 2,139 2 years later 7,465 2,316 2,083 1,719 1,946 3 years later 7,803 2,298 1,981 1,653 4 years later 7,859 2,223 1,924 5 years later 8,284 2,175 6 years later 8,235 Claims paid 1 year later 2,247 963 771 630 821 861 2 years later 1,149 324 270 231 260 3 years later 1,008 240 189 169 4 years later 523 158 98 5 years later 392 83 6 years later 250------------------------------------------------------------------------------------------------------Cumulative claims paid 5,569 1,768 1,328 1,030 1,081 861------------------------------------------------------------------------------------------------------Current year provision before discounting 2,666 407 596 623 865 1,278 2,214 8,649Exchange adjustment to closing rates 312Discounting (601)Annuity reserves 327 -----------------------------------------------------------------Present value recognised in the balance sheet 8,687------------------------------------------------------------------------------------------------------\* T Asbestos reserves The technical provisions include £927m for asbestos in the UK. These provisionscan be analysed by survival ratio. Survival ratio is an industry standardmeasure of a company's reserves, expressing recent year claims payments ornotifications as a percentage of liabilities. The following table outlines theasbestos provisions as at 31 December 2007 analysed by risk and survival ratio: \* T Total UK risks US risks written written in the in the UK UKProvisions in £m Net of reinsurance 927 816 111 Net of discount 492 418 74Survival ratios (Gross of discount) - On payment One year 41 54 15 Three year average 37 55 11Survival ratios (Gross of discount) - On notifications One year 35 43 14 Three year average 37 44 18\* T REGIONAL ANALYSIS OF INSURANCE OPERATIONS 12 MONTHS TO 31 DECEMBER \* T Net written premiums Increase Increase 2007 2006 as at reported constant exchange £m £m % % United Kingdom 2,688 2,618 3 3 International 2,513 2,334 8 8 Emerging Markets * 615 531 16 19 Group Re 21 1 - ----------------------------------------------------------------------------------------------- Total Group 5,837 5,484 6 7---------------------------------------------------------------------------------------------- Underwriting result Investment result Insurance result 2007 2006 2007 2006 2007 2006 £m £m £m £m £m £m United Kingdom 65 160 372 321 437 481 International 206 149 212 199 418 348 Emerging Markets * 18 11 42 35 60 46 Group Re (11) (10) 3 1 (8) (9)---------------------------------------------------------------------------------------------- Total Group 278 310 629 556 907 866---------------------------------------------------------------------------------------------- Operating ratios 2007 2006 Claims Expenses Combined Claims Expenses Combined % % % % % % United Kingdom 63.1 34.5 97.6 62.2 30.1 92.3 International 68.5 22.8 91.3 70.1 23.0 93.1 Emerging Markets 58.0 37.3 95.3 56.5 40.8 97.3---------------------------------------------------------------------------------------------- Total Group 65.2 29.7 94.9 65.2 28.1 93.3----------------------------------------------------------------------------------------------\* T *Note: The 2007 net written premiums for Venezuela were £29m, and theunderwriting result a £3m loss. INVESTMENT RESULT BY REGION 12 MONTHS TO 31 DECEMBER 2007 \* T UK International Emerging Group Re Group Markets £m £m £m £m £m Investment income 328 198 35 30 591Realised gains 101 61 11 1 174Unrealised gains/(losses), impairments and foreign exchange (32) (19) (4) - (55)Unwind of discount (25) (28) - (28) (81)---------------------------------------------------------------------------------------------------Investment result 372 212 42 3 629---------------------------------------------------------------------------------------------------\* T The total investment income is allocated to the regions based on economiccapital requirements. Realised gains, unrealised gains and impairment losses areallocated with reference to the above amounts. The unwind of discount isattributed on an actual basis. This method has been revised from 2006 andcomparatives have been restated. UNITED KINGDOM INSURANCE OPERATIONS 12 MONTHS TO 31 DECEMBER \* T Operating Net written premiums Underwriting result ratio 2007 2006 2007 2006 2007 2006 £m £m £m £m % %PersonalHousehold 591 389 (15) 71 102.6 80.9Motor 436 423 4 (13) 98.7 102.5Other 47 36 7 7 80.7 81.8---------------------------------------------------------------------------------------------------Total UK Personal 1,074 848 (4) 65 100.6 91.6--------------------------------------------------------------------------------------------------- CommercialProperty 634 661 (22) 85 104.4 88.9Casualty 331 330 36 (21) 89.5 106.9Motor 465 592 42 20 90.8 91.5Other 184 187 13 11 91.4 94.1---------------------------------------------------------------------------------------------------Total UK Commercial 1,614 1,770 69 95 95.9 92.6---------------------------------------------------------------------------------------------------Total UK 2,688 2,618 65 160 97.6 92.3---------------------------------------------------------------------------------------------------\* T INTERNATIONAL INSURANCE OPERATIONS 12 MONTHS TO 31 DECEMBER \* T Operating Net written premiums Underwriting result ratio 2007 2006 2007 2006 2007 2006 £m £m £m £m % %PersonalScandinavia 768 701 70 (30) 90.5 104.1Canada 520 481 32 40 93.3 91.0Other Europe 245 231 36 27 83.1 88.0----------------------------------------------------------------------------------------------Total Personal 1,533 1,413 138 37 90.4 97.0---------------------------------------------------------------------------------------------- CommercialScandinavia 611 579 46 103 92.4 81.5Canada 183 181 18 8 90.3 94.0Other Europe 186 161 4 1 97.2 99.8----------------------------------------------------------------------------------------------Total Commercial 980 921 68 112 93.0 87.0---------------------------------------------------------------------------------------------- TotalScandinavia 1,379 1,280 116 73 91.4 93.7Canada 703 662 50 48 92.4 92.0Other Europe 431 392 40 28 89.1 92.8----------------------------------------------------------------------------------------------Total International 2,513 2,334 206 149 91.3 93.1----------------------------------------------------------------------------------------------\* T ESTIMATION TECHNIQUES, UNCERTAINTIES AND CONTINGENCIES Introduction One 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 techniques Claims 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, thepotential longer term significance of large events, the levels of unpaid claims,legislative changes, judicial decisions and economic and political conditions. 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 from time to time, including inflation,interest rate, investment return and mortality. IAS 19 compares, at a givendate, the current market value of a pension fund's assets with its long termliabilities, which are calculated using a discount rate in line with yields on'AA' rated bonds of suitable duration and currency. As such, the financialposition of a pension fund on this basis is highly sensitive to changes in bondrates and will also be impacted by changes in equity markets. Uncertainties and contingencies The 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. There may be other classes of risk which could develop inthe future and that could have a material impact on the Group's financialposition. 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 claims The 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: -- the long delay in reporting claims from the date of exposure (for example, cases of mesothelioma can have a latent period of up to 40 years). This makes estimating the ultimate number of claims we will receive particularly difficult; -- issues of allocation of responsibility among potentially responsible parties and insurers; -- emerging court decisions increasing or decreasing insurer liability; -- the tendency for social trends and factors to influence court awards; -- developments pertaining to the Group's ability to recover reinsurance for claims of this nature; and -- for US liabilities from our London market business, developments in the tactics of US plaintiff lawyers and court decisions and awards. Acquisitions and disposals The Group makes acquisitions and disposals of businesses as part of its 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 risksalthough there can be no guarantee that such protection will be adequate in allcircumstances. The Group may also provide relevant representations, warrantiesand indemnities to counterparties on any disposal. While such representations,warranties and indemnities are essential components of many contractualrelationships, they do not represent the underlying purpose for the transaction. These clauses are customary in such contracts and may from time to time lead tous receiving claims from counterparties. Contracts with third parties The Group enters into joint ventures, outsourcing contracts and distributionarrangements with third parties in the normal course of its business and isreliant upon those third parties performing their obligations in accordance withthe terms and conditions of the contracts. Litigation, mediation and arbitration The 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. In addition the Groupis subject to litigation in connection with its former ownership of the USoperation. The directors do not believe that any current mediation, arbitration,regulatory, governmental or sectoral inquiries and pending or threatenedlitigation or dispute will have a material adverse effect on the Group'sfinancial position, although there can be no assurance that losses resultingfrom any current mediation, arbitration, regulatory, governmental or sectoralinquiries and pending or threatened litigation or dispute will not materiallyaffect the Group's financial position or cash flows for any period. Reinsurance The 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 and to potentialreinsurance capacity constraints. In selecting the reinsurers with whom we dobusiness our strategy is to seek reinsurers with the best combination of creditrating, price and capacity. We publish internally a list of authorisedreinsurers who pass our selection process and which our operations may use fornew 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 results We 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 risk The 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 with verylow levels of exposure to assets without quoted market prices. We use modelbased analysis to verify asset values when market values are not readilyavailable. We use derivative financial instruments to reduce our exposure to adversefluctuations in interest rates, foreign exchange rates and equity markets. Wehave strict controls over the use of derivative instruments. Rating agencies The 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' (stable) from S&P upgraded from 'A-' inDecember 2007, 'A-' (positive outlook) from AM Best and 'A3' (stable) fromMoodys'. Any worsening in the ratings could have an adverse impact on theability of the Group to write certain types of general insurance business. Regulatory environment The legal, regulatory and accounting environment is subject to significantchange in many of the jurisdictions in which we operate. We continue to monitorthe developments and react accordingly. In particular the Group is continuing to monitor and respond to ongoingconsultation following publication of the Solvency II Framework Directive, whichis intended, in the medium term, to achieve greater harmonisation of approachacross European member states to assessing capital resources and requirements.The directors are confident that the Group will continue to meet all futureregulatory capital requirements. Statutory Information Summary consolidated income statement Summary consolidated balance sheet 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 12 Months 12 Months 2007 2006 (audited) (audited) £m £mContinuing operationsNet written premiums 5,837 5,484------------------------------------------------------------------------------------------------- Income --------------- ----------------- Net earned premiums 5,607 5,292 Net investment return 709 600 Other operating income 113 121 --------------- -----------------Total income 6,429 6,013Expenses --------------- ----------------- Net claims and benefits (3,657) (3,453) Underwriting and policy acquisition costs (1,776) (1,626) Unwind of discount (81) (42) Other operating expenses (119) (151) --------------- -----------------Total expenses (5,633) (5,272)-------------------------------------------------------------------------------------------------Results of operating activities 796 741 Finance costs (104) (92)Loss on disposals (22) (1)Net share of profit after tax of associates - 1-------------------------------------------------------------------------------------------------Profit before tax 670 649 Income tax expense (29) (170)-------------------------------------------------------------------------------------------------Profit after tax from continuing operations 641 479------------------------------------------------------------------------------------------------- Discontinued operationsLoss after tax from discontinued operations (13) (499)-------------------------------------------------------------------------------------------------Profit/(loss) after tax 628 (20)------------------------------------------------------------------------------------------------- Attributable to:Equity holders of the Company 596 (52)Minority interests 32 32-------------------------------------------------------------------------------------------------Profit/(loss) after tax 628 (20)------------------------------------------------------------------------------------------------- Earnings per share on profit on continuing operations attributable to the ordinary shareholders of the Company:Basic 19.3p 15.0pDiluted 19.0p 14.8p Earnings per share on profit/(loss) attributable to the ordinary shareholders of the Company:Basic 18.9p (2.1)pDiluted 18.6p (2.1)p\* T The attached notes are an integral part of these summary consolidated financialstatements. For dividend information refer to note 8. SUMMARY CONSOLIDATED BALANCE SHEET STATUTORY BASIS \* T 31 December 31 December 2007 2006 (audited) (audited) £m £mAssetsGoodwill and other intangible assets 663 552Property and equipment 377 385Investment property 429 454Investments in associates 105 27Financial assets ------------- -------------- Equity securities 1,487 1,620 Debt and fixed income securities 9,581 8,568 Other 272 269 ------------- --------------Total financial assets 11,340 10,457Reinsurers' share of insurance contract liabilities 1,872 1,927Insurance and reinsurance debtors 2,579 2,225Deferred acquisition costs 542 453Other debtors and other assets 1,069 852Cash and cash equivalents 1,509 1,831------------------------------------------------------------------------------------------- 20,485 19,163 Non current and disposal group assets held for sale* 108 3,485-------------------------------------------------------------------------------------------Total assets 20,593 22,648------------------------------------------------------------------------------------------- Equity, reserves and liabilities Equity and reservesShareholders' funds 3,077 2,561Minority interests 67 331-------------------------------------------------------------------------------------------Total equity and reserves 3,144 2,892------------------------------------------------------------------------------------------- LiabilitiesLoan capital 1,194 1,192Insurance contract liabilities 13,727 12,790Insurance and reinsurance liabilities 426 391Borrowings 303 8Provisions and other liabilities 1,734 1,781------------------------------------------------------------------------------------------- 17,384 16,162Non current and disposal group liabilities held for sale* 65 3,594-------------------------------------------------------------------------------------------Total liabilities 17,449 19,756-------------------------------------------------------------------------------------------Total equity, reserves and liabilities 20,593 22,648-------------------------------------------------------------------------------------------\* T * Non current and disposal group assets and liabilities held for sale in 2007relate to a UK subsidiary and property. In 2006 the assets and liabilitiesrelate to the US business. These summary consolidated financial statements have been approved for issue bythe Board of Directors on 26 February 2008. SUMMARY STATEMENT OF RECOGNISED INCOME AND EXPENSE STATUTORY BASIS \* T 12 Months 12 Months 2007 2006 (audited) (audited) £m £m Profit/(loss) after tax 628 (20) -------------- -------------- Exchange gains/(losses) 140 (151) Fair value (losses)/gains net of tax (67) 32 Pension fund actuarial (losses)/gains net of tax (16) 153 -------------- --------------Net gains not recognised in income statement 57 34 ---------------------------------------------------------------------------------------------Total recognised income for the year 685 14--------------------------------------------------------------------------------------------- Attributable to:Equity holders of the Company 670 (10)Minority interests 15 24--------------------------------------------------------------------------------------------- 685 14---------------------------------------------------------------------------------------------\* T SUMMARY CASHFLOW STATEMENT STATUTORY BASIS \* T 12 Months 2007 12 Months 2006 Continuing Total Continuing Total operations Group operations Group (audited) (audited) (audited) (audited) £m £m £m £mNet cashflows from operating activities 340 303 648 117Net cashflows from investing activities (506) (681) 175 781Net cashflows from financing activities (186) (186) (380) (389)--------------------------------------------------------------------------------------------------Net (decrease)/increase in cash and cash equivalents (352) (564) 443 509 Cash and cash equivalents at the beginning of the period 1,827 2,040 1,440 1,612Effect of exchange rate changes on cash and cash equivalents 63 62 (56) (81)--------------------------------------------------------------------------------------------------Cash and cash equivalents at the end of the period 1,538 1,538 1,827 2,040-------------------------------------------------------------------------------------------------- 12 Months 2007 12 Months 2006 Continuing Total Continuing Total operations Group operations Group (audited) (audited) (audited) (audited) £m £m £m £mCash and cash equivalents per cashflow statement 1,538 1,538 1,827 2,040Add: bank overdrafts 3 3 4 4Transfer to non current and disposal group assets held for sale (32) (32) - (213)--------------------------------------------------------------------------------------------------Cash and cash equivalents per balance sheet 1,509 1,509 1,831 1,831--------------------------------------------------------------------------------------------------\* 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 The consolidated financial statements, from which these summary consolidatedfinancial statements have been extracted, are prepared in accordance withInternational Financial Reporting Standards (IFRS) as adopted by the EuropeanUnion. The consolidated financial statements are prepared under the historicalcost convention as modified by the revaluation of available for sale financialassets, investment property, Group occupied property and financial assets andfinancial liabilities held for trading (which include all derivative contracts). There have been no significant changes in accounting policy in the year to 31December 2007. A full list of accounting policies can be found in the 2007Annual Report and Accounts (see note 11 below). 2. Purchase of minority interests In 2007, the Group increased its holding in Codan from 74.51% at the start ofthe year. At 31 December 2007, Codan has been accounted for as a 100%subsidiary. During the first quarter, Codan purchased £24m of its own shares from minorityholders. This had the effect of reducing shareholders' funds by £10m andminority interests by £14m. This increased the Group's holding in Codan by 0.83%to 75.34%. On 24 May 2007, the Group launched a voluntary conditional public tender offerfor the acquisition of all the outstanding issued shares and voting rights inCodan. As a result the Group acquired sufficient shareholding to effect acompulsory acquisition of the remaining shares and, as the transaction is notreversible, to account for 100% of the subsidiary. The purchase was funded by anequity placing of £300m and existing resources. The transaction reducedshareholders' funds by £358m and minority interests by £232m. On 31 July 2007 Codan delisted from the Copenhagen stock exchange. At 31 December 2007, the Group owned 99.5% of Codan and completed the compulsoryacquisition process to acquire the remaining 0.5% in January 2008. 3. Non current and disposal group assets and liabilities of operations held forsale In 2007, the Group classified a UK subsidiary as a disposal group held for saleand a property as a non current asset held for sale. In 2006, the non current and disposal group assets and liabilities held for salerelated to the discontinued US business. 4. Adverse Development Cover (ADC) In 2003, a subsidiary of the Group wrote an Adverse Development Cover (ADC)contract with its former US subsidiary. Prior to the disposal of the USbusiness, the assets and liabilities arising from the ADC eliminated onconsolidation. As part of the disposal of the US business, and as publiclydisclosed in 2006, the original contract was amended and restated. The liabilities arising under the ADC contract comprise an insurance componentand a deposit component. The liability arising under the insurance component of£0.1bn represents the timing risk on the settlement of those liabilities. Thefinancial liability arising under the deposit component is offset by the valueof funds held in a trust fund whose trust deed only permits the trust fundassets to be used to settle amounts due under the ADC. The value of the fundsheld in trust at 31 December 2007 is £0.4bn and the value of the liability ofthe deposit component is £0.4bn. Following the signing of the amended and restated contract the accountingtreatment has been reviewed; the insurance component is accounted for withininsurance liabilities and the deposit component, offset by the value of thefunds held in the trust account, is recognised under other liabilities. 5. Equity securities The Group's portfolio of equity securities comprises ordinary shares and unittrusts of £1,132m (2006: £1,309m) and other equity instruments of £355m (2006:£311m). Other equity instruments include preference shares, collectiveinvestment vehicles primarily invested in cash and bond assets. The performanceof these assets is typically not expected to correlate strongly to theperformance of ordinary shareholdings. 6. 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 3,106,016,760 and3,149,885,007 respectively (excluding those held in ESOP trusts). The number ofshares in issue at 31 December 2007 was 3,232,915,875 (excluding those held inESOP trusts). 7. Changes in total equity and reserves for the period to 31 December \* T Total Shareholders' Minority equity and funds interest reserves £m £m £m Balance at 1 January 2007 2,561 331 2,892 Total recognised income for the year 670 15 685Share issue 404 - 404Changes in shareholders' interests in subsidiaries (368) (248) (616)Share options 21 - 21Prior year final dividend (123) (31) (154)Current year interim dividend (79) - (79)Preference dividend (9) - (9) -------------------------------------------------------------------------------------------------Balance at 31 December 2007 3,077 67 3,144-------------------------------------------------------------------------------------------------\* T 8. Dividends \* T 31 December 2007 31 December 2006 Per share Total Per share Total p £m p £mOrdinary dividend Final paid in respect of prior year 4.12 123 3.05 89 Interim paid in respect of current year 2.48 79 1.75 51-------------------------------------------------------------------------------------------------- 6.60 202 4.80 140Preference dividend 9 9-------------------------------------------------------------------------------------------------- 211 149--------------------------------------------------------------------------------------------------\* T 9. Taxation International Financial Reporting Standards require Codan's Danish Security Fundand Swedish Safety Reserve to be recognised within shareholders' equity ratherthan as liabilities. At 31 December 2006, the Group held £101m of deferred taxliability (adjusted for £2m foreign exchange movement in 2007) in respect ofthese reserves. During 2007, the Group acquired the minority interest in itsScandinavian subsidiaries. In light of this change in circumstance the Group hasconcluded that no tax base and associated temporary tax difference exists inrespect of these reserves. The deferred tax liability held at 31 December 2006in respect of the Danish Security Fund and Swedish Safety Reserve has thereforebeen released in the period. Of the £29m (2006: £170m) of income tax expense in the year, £37m (2006: £74m)relates to UK corporation tax and £(8)m (2006: £96m) to overseas taxation. 10. Exchange rates \* T£/local currency 12 Months 2007 12 Months 2006 Average Closing Average Closing Canadian Dollar 2.14 1.96 2.09 2.28Danish Kroner 10.88 10.15 10.95 11.07Euro 1.46 1.36 1.47 1.48\* T 11. Results for 2007 This preliminary statement of annual results and dividends does not constitutefull statutory Group financial statements within the meaning of Section 240 ofthe Companies Act 1985. The statutory Group financial statements for the year to31 December 2007 of Royal & Sun Alliance Insurance Group plc will be deliveredto the Registrar of Companies following the Annual General Meeting to be held on19 May 2008. The independent auditors' report on the Group financial statementsfor the year ended 31 December 2007 is unqualified and does not contain astatement under Section 237(2) or (3) of the Companies Act 1985. - Ends - Copyright Business Wire 2008

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