8th Mar 2007 07:00
YEAR END RESULTS 2006 Strong Group performance -- Net written premiums of £5.5bn up 3% on 2005 -- Combined operating ratio (COR) of 93.3% - 0.8 points better than last year -- Operating result of £780m up 5% -- Profit before disposals and pension scheme change up 11% to £650m -- Underlying return on equity of 21% -- Loss after tax of £20m includes £499m from the write down and trading loss of the US operation Delivery against strategic objectives -- Strong performance from each region - underwriting result up 18% to £310m -- Driving profitable growth in our target markets - new business up 26% -- Ahead of target to deliver £130m expense savings by mid 2008 -- US disposal complete - resolution of last remaining legacy issue -- US delisting and SEC deregistration complete Dividend -- New dividend policy - final dividend of 4.12p up 35% on 2005 (3.05p) \* T 12 Months 12 Months Movement 2006 2005 (restated)(2)Total GroupNet written premiums £5,484m £5,300m +3%Underwriting result £310m £263m +18%Combined operating ratio 93.3% 94.1% 0.8ptsOperating result(1) £780m £743m +5%Profit before disposals and pension scheme £650m £588m change(1) +11%(Loss)/profit after tax (1) £(20)m £605m - 31 December 31 December 2006 2005 (restated)(3)Balance sheetShareholders' funds £2,561m £2,686m -5%Net asset value per share 82p 88p -7% Dividend for the year per ordinary share 5.87p 4.74p +24%\* T Andy Haste, Group CEO of Royal & Sun Alliance Insurance Group plc, commented: "It has been a good twelve months for the Group. We have achieved another strongperformance with an 18% increase in the underwriting result and continueddelivery against our strategic objectives. The completion of our US disposalresolves the Group's last remaining legacy issue. Our portfolio of businesses isstrong, we are growing profitably in our target trades and we are wellpositioned to continue delivering sustainable profitable performance. As itstands today, we expect the Group to deliver a combined operating ratio ofbetter than 95% for 2007. As a reflection of our confidence in the earnings of the Group and our capitalstrength, we are announcing a 35% increase in the final dividend to 4.12p,bringing the total dividend for the year to 5.87p up 24% on 2005. We plan togrow future dividends at least in line with inflation." \* TFor further information: Analysts PressShona Cotterill Phil Wilson-BrownTel: +44 (0) 20 7111 7212 Tel: +44 (0) 20 7111 7047Mobile: +44 (0) 7894 938600 Mobile: +44 (0) 7834 005605 Andrew Wigg Simon Moyse (Finsbury)Tel: +44 (0) 20 7111 7138 Tel: +44 (0) 20 7251 3801Mobile: +44 (0) 7834 944129 Mobile: +44 (0) 7810 505473\* T CONTENTS CEO review Operations review Summary consolidated income statement - management basis Summary consolidated balance sheet - management basis Other information 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. (1) For a reconciliation of operating result and profit before disposals and pension scheme changes on a management basis to profit after tax on continuing business see page 8. For a reconciliation of the Group loss after tax see page 8. (2) Restated to exclude the US result as the US operation is disclosed as a discontinued operation, see note 2 on page 23. (3) Restated for the change in accounting treatment of the conversion of the perpetual notes from equity to debt in 2005, see note 3 on page 23. CEO REVIEW The Group has delivered another strong result. Net written premiums increased by3% on 2005 to £5.5bn. The underwriting result of £310m is up 18% on prior yeardemonstrating our disciplined approach to underwriting and claims and expensemanagement. The combined operating ratio (COR) is 93.3%, 0.8 points better thanlast year (2005: 94.1%). The investment result of £556m is down 4% due to £39mof lower realised and unrealised gains. The operating result of £780m is up 5%primarily reflecting the improved underwriting result and lower centralexpenses, offset by a lower investment result. The underlying return on equityis strong at 21% while profit after tax from continuing operations is £479mcompared with £635m in 2005, which included £216m from the change to the UKpension schemes and the disposal of our Japanese operation and our Rothschildinvestment. On a like for like basis, profit after tax from continuingoperations is up 14% on last year. Business Performance Set out below are the combined operating ratios for our main regions: \* T 12 Months 2006 12 Months 2005 Movement % % Points UK Personal 91.6 95.6 4.0UK Commercial 92.6 91.9 (0.7)-----------------------------------------------------------------------------------------------UK Total 92.3 93.1 0.8International 94.0 94.7 0.7Scandinavia 93.9 94.4 0.5-----------------------------------------------------------------------------------------------Total Group 93.3 94.1 0.8===============================================================================================\* T The 3% increase in net written premiums to £5.5bn demonstrates the strength ofour diversified portfolio with a disciplined approach in the UK, above marketgrowth in Scandinavia and double digit growth in International. The UK remainsour most competitive market and net written premiums of £2.6bn were in line withlast year, demonstrating our commitment to underwriting discipline andmaintaining technical price. In UK Commercial, retention is strong and we aretargeting profitable growth with new business up 31% to £298m. In UK Personal,net written premiums increased by 2% to £848m and MORE TH>N delivered anotherstrong result, increasing new business by 28%. International continues to deliver double digit growth with premiums increasingby 10% to £1.5bn. Premiums grew by 26% in Latin America and 15% in Canadareflecting a combination of organic growth, acquisitions and favourable exchangerate movements. In Canada, Johnson increased net written premiums by 25% to£260m while Commercial net written premiums grew by 28% to £181m. InScandinavia, underlying premiums grew 6% to £1.4bn reflecting growth in bothPersonal and Commercial lines and double digit growth in the Baltics. Across theGroup we continue to look for opportunities to deliver profitable growth in ourtarget markets and the distribution deals and acquisitions completed this yearwill generate over £400m of premiums at full run rate. Each of our main regions has consistently delivered a strong underwritingperformance and the 2006 underwriting result increased by 18% to £310m withmanagement actions on underwriting, claims and expense management and favourableweather more than offsetting rating and claims inflation. The result is alsoafter strengthening our UK asbestos reserves by £39m and rebalancing ourScandinavian reserves. We continue to follow our prudent reserving policy and atthe year end reserves were stronger than at the start of the year. US On 4 March we completed the sale of our US operation to Arrowpoint Capital. Thisrepresents the resolution of our last remaining legacy issue and bringscertainty and finality to the Group's exposure to the US operation. In the 2006results, we have reclassified the business as 'held for sale' and it is shown asa discontinued operation in the income statement. The write down of the USoperation and the trading loss for the year totals £484m before tax. Outlook We have a strong portfolio of businesses in markets at different stages ofdevelopment and at different stages in the cycle. In October, we announced areorganisation of the Group with the UK business unchanged and our overseasbusinesses organised into International (Scandinavia, Canada and Other Europe)and Emerging Markets (Latin America, Asia and the Middle East and the Baltics). This structure provides the best platform to continue driving the businessforward. We have clear plans for each region and the balance of our portfolioenables us to move capacity to where we see the best opportunities forprofitable growth. In 2007 we again expect strong results from each region withInternational representing an increased proportion of the Group's underwritingresult largely driven by our Scandinavian business which we expect to deliver animproved combined operating ratio of 91-93% (90-92% under Danish IFRS). We areconfident in our ability to deliver sustainable earnings and as it stands today,we expect the Group to deliver a combined operating ratio of better than 95% for2007. As a reflection of the Board's confidence in the future earnings of the Groupand capital strength, we are announcing a 35% increase in the final dividend to4.12p (2005: 3.05p). This brings the total dividend for the year to 5.87p, anincrease of 24% on 2005. We will also be increasing the 2007 interim dividend byat least inflation plus 35% and thereafter we will grow dividends at least inline with inflation. The 2006 final dividend is subject to shareholder approvalat the AGM. Andy Haste, Group CEO, Royal & Sun Alliance Insurance Group plc OPERATIONS REVIEW The 2006 results set out the financial performance of the Group's UK,International and Scandinavian businesses. The US operation has beenreclassified as 'held for sale' and is shown as 'Discontinued operations' on oneline in the income statement. In accordance with IFRS 5, the income statementcomparatives have been restated and the balance sheet comparatives are aspreviously reported. Operating result The operating result of £780m is up 5% primarily reflecting the improvedunderwriting result and lower central expenses, offset by the lower investmentresult. The underwriting result of £310m (2005: £263m) comprised £179m for thecurrent year and £131m for the prior year. This result has been achieved in acompetitive rating environment and also includes a £12m increase in subsidencecosts. This has been offset by a £56m benefit from favourable weather,favourable large loss experience and the significant impact of managementactions on underwriting, claims and expense management. We are ahead of our planto deliver £130m of annualised expense savings by mid 2008 and by the year end,had realised £61m of savings against a one off cost of £51m. - UK The UK delivered a good performance with a 0.8 point improvement in the COR to92.3% and a 4% increase in the underwriting result to £160m. In Personal, wehave achieved mid single digit rate increases and in Commercial, rates were offabout 4%. We are focused on driving strong retention and building momentum inour target trades to deliver profitable growth. New business increased by 31% to£559m, while net written premiums were in line with last year, demonstrating ourcommitment to disciplined risk selection and underwriting. Commercial In Commercial, our most competitive market, net written premiums were £1,770m(2005: £1,802m) reflecting our focus on disciplined underwriting, drivingretention and targeting profitable new business. Retention remains strong at 84%and in our target segments we are building momentum: new business salesincreased by 31% to £298m. In November, we acquired Martello UnderwritingLimited a specialist provider of professional indemnity insurance delivering onour strategy of focusing on target trades. We expect this business to deliverpremiums of around £40m in 2007. Commercial delivered another strong result with a COR of 92.6% (2005: 91.9%) andan underwriting result of £95m (2005: £115m). Commercial property improved itsCOR by 2.7 points to 88.9%, motor delivered a COR of 91.5% and casualty a COR of106.9%. The casualty COR includes £39m of asbestos reserve strengthening. Ourmarine business continued to perform strongly, delivering a COR of 91.7%. Personal Net written premiums for UK Personal were up 2% to £848m and new business was up31% to £261m. The underwriting result of £65m was £26m higher than 2005 andincludes the £10m one off commutation benefit announced at the half year. TheCOR improved by 4 points to 91.6%. This primarily reflects a strong householdresult with a COR of 80.9% driven by our continued positive rating, claimsmanagement actions and favourable weather partially offset by increasedsubsidence. In the competitive UK motor market, our business delivered a COR of102.5% (2005: 102.9%). MORE TH>N delivered net written premiums of £441m, up 2% on 2005. New businesssales in the year were up 28%, with average motor premiums 10% higher than 2005.MORE TH>N achieved a COR of 88.7%, 3.7 points better than last year. The expenseratio was 22.0% compared with 24.1% in 2005, and we are on track to achieve ourexpense ratio target of sub 20% by the end of 2007. Our Intermediated business has signed 11 new deals including Paymentshield,which is expected to deliver premiums of over £200m in 2008. This is in linewith our strategy of growing our affinity business by more than 50% by 2010. - International In International, net written premiums increased 10% on 2005 to £1,471mreflecting strong growth in Canada and Latin America, as well as favourableexchange movements. The underwriting result of £85m was up 35% on last year andthe COR improved by 0.7 points to 94.0%. Canadian net written premiums were £662m, an increase of 15% on 2005 reflectinga strong performance by Johnson, our direct personal business, and Commercial aswell as favourable exchange. The Canadian business delivered a 2.8 pointimprovement in the COR to 92.0% and increased the underwriting result by 85% to£48m. This reflects the benefits of our disciplined risk selection, claimsmanagement and the delivery of cost savings. We continue to build our brokernetwork, and in the quarter added 29 new brokers, bringing the total to 82 thisyear. Johnson has signed a number of new affinity deals giving it access to apotential 400,000 new customers. In Latin America, net written premiums of £314m were up 26% on 2005, reflectingorganic growth in Chile, Brazil and Argentina and our Chilean acquisition in2005. The underwriting loss of £8m and the combined of 103.7% mostly reflectsthe integration costs associated with our acquisitions last year and higherreinsurance costs following the 2005 hurricanes. Our European business delivered net written premiums of £392m (2005: £406m) anda COR of 92.8% compared with 92.0% in 2005. In Ireland, we acquired EGI HoldingsLimited, a well established business with strong positions in a number ofspeciality lines. In Asia and the Middle East our business delivered anotherexcellent result, more than doubling its underwriting result to £17m andimproving its COR by 6.4 points to 83.1%. - Scandinavia In Scandinavia net written premiums were £1,394m up 5% on 2005 (£1,324m).Underlying growth was 6% after excluding the impact of foreign exchange and themove to net pricing. This reflects growth in both Personal and Commercial linesand strong double digit growth in the Baltics. The underwriting result of £75mis up 15% on last year reflecting the benefits of our disciplined underwriting,claims and expense management and positive rating. The COR improved by 0.5points to 93.9%. Commercial net written premiums were £637m, up 3% (2005: £621m) reflectinggrowth in Denmark and a particularly strong performance in Latvia and Lithuania.The COR was 82.4% and the underwriting result increased by 21% to £105m. InSweden, net written premiums were £266m (2005: £280m) and we reported anotherexcellent COR of 79.7%. In Personal, net written premiums of £757m were up 8% on 2005 driven by strongDanish household sales, our relaunched personal accident product and theBaltics. The underwriting loss was £30m (2005: £22m loss) and the COR increasedby 1.2 points to 103.7%. Since the arrival of Rickard Gustafson we haveundertaken a detailed review of Scandinavian reserves. Following this review wehave strengthened our Swedish personal accident and motor liability reserves,particularly for accident years 2001 and prior. This strengthening has beenoffset by more favourable recent experience on these lines following managementactions, and the release of identified surplus in our Danish personal andcommercial motor liability reserves. These adjustments have contributed to the£151m underwriting profit in Denmark (2005: £5m) and an underwriting loss of£78m in Sweden (2005: £57m profit). We do not expect any further materialstrengthening of our Swedish personal reserves. In the Baltics, we continued to deliver strong net written premium growth, withpremiums up 31% on 2005 to £114m. - Rating movements Rate movements achieved for risks renewing in December 2006 versus comparablerisks renewing in December 2005 were as follows: \* T Personal Commercial Motor Household Motor Liability Property % % % % % UK 4 6 1 (9) (4)Scandinavia 2 5 - 5 1Canada (1) 2 (4) (5) (5)\* T - Other activities The analysis of the other activities result is as follows: \* T 12 Months 12 Months Movement 2006 2005 £m £m Central expenses (74) (82) +10%Investment expenses and charges (25) (24) -4%Non insurance derivatives 12 3 +300%Associates 1 3 -67%---------------------------------------------------------------------------------------------Other activities (86) (100) +14%=============================================================================================\* T The result from other activities for the year was a charge of £86m (2005:£100m). Central expenses of £74m include costs associated with regulatory andother projects of £16m (2005: £13m); underlying central expenses improved by 16%to £58m. The increase in non insurance derivatives reflects the gain on theexpiration of two derivative contracts. - Investment result The analysis of the investment results is as follows: \* T 12 Months 12 Months Movement 2006 2005 £m £m Bonds 372 346 +8%Equities 56 55 +2%Cash and cash equivalents 63 55 +15%Land and buildings 13 24 -46%Other 12 18 -33%---------------------------------------------------------------------------------------------Investment income 516 498 +4% Realised gains 46 109 -58%Unrealised gains/(losses), impairments and foreign exchange 36 12 +200%Unwind of discount (42) (39) -8%---------------------------------------------------------------------------------------------Investment result 556 580 -4%=============================================================================================\* T Investment income of £516m (2005: £498m) was 4% higher than prior year primarilyreflecting a £0.2bn increase in the average size of the portfolio. The averageyield remained in line with prior year at 4.0%. Total realised and unrealisedgains of £82m (2005: £121m) includes the Rightmove IPO and the sale andleaseback of our Liverpool office. The fixed interest portfolio continues to be concentrated on high quality shortdated bonds. At the end of December, holdings of bonds rated AA or above stoodat 83% of total bond exposure, while holdings in non investment grade bondsrepresented less than 1%. The continuing operations' investment portfolio was£12.8bn at the year end compared with £13bn at the start of the year reflectingthe cash outflow and foreign exchange movements and we currently expect thetotal 2007 investment result will be broadly in line with 2006 (£556m). As at 31 December 2006 unrealised gains in the balance sheet were £575m (31December 2005: £541m). OTHER INFORMATION US In September we announced the sale of the US operation to Arrowpoint Capital, avehicle set up by the R&SA US management team. Following shareholder and theDelaware Insurance Commissioners' approval of the transaction we completed thesale of our US operation on 4 March. The US operation has been written down inaccordance with IFRS 5 resulting in a charge to the income statement of £484mbefore tax. The income statement comparatives have been restated to show the USas discontinued in 2005. The balance sheet comparatives have not been restated.See note 2 on page 23. With the completion of the US disposal and in accordancewith IFRS we will recycle the cumulative foreign exchange losses of around £20mfrom reserves through the income statement in our 2007 results. This will beshown outside the operating result and will have no impact on net assets. Regulatory 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 2006 2006 2005 Requirement Surplus Surplus £bn £bn £bn Insurance Groups Directive 1.4 1.3 1.0\* T The improvement in the IGD surplus from £1.0bn at 31 December 2005 to £1.3bn at31 December 2006 is mainly attributable to the completion of the Yankee Bondexchange and tender offer during the second quarter and continuing operations'profits, offset by the dividend and write down of the US operation. The coverageover our IGD requirement has increased from 1.6 times at 31 December 2005 to 1.9times at 31 December 2006. With the sale of the US operation complete, our IGDsurplus is £1.2bn and the coverage over our IGD requirement increases to 2.0times. 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 93.3% was basedon net written premiums of £5,484m and net earned premiums of £5,292m. Net asset value per share The net asset value per share at 31 December 2006 was 82p (2005 restated: 88p).At 2 March 2007 the net asset value per share was estimated to be unchanged at82p. The net asset value per share for 31 December 2006 was based on totalshareholders' funds of £2,561m, adjusted by £125m for preference shares; andshares in issue at the period end of 2,964,836,634 (excludes those held in theESOP trusts). Operating EPS The operating earnings per share for the year ended 31 December 2006 was 15.7pcompared with 13.7p at 31 December 2005. Operating earnings per share for theyear ended 31 December 2006 was calculated on the operating result afterinterest, minority interests, preference dividends, and related tax of £461m;and the weighted average number of shares for the period of 2,929,452,684(excludes those held in ESOP trusts). Dividend The directors will recommend at the Annual General meeting, to be held on 21 May2007, that a final dividend of 4.12p (2005: 3.05p) per share be paid. This,together with the interim dividend of 1.75p paid on 30 November 2006, will makea total distribution for the year of 5.87p (2005: 4.74p). The final dividend will be payable on 1 June 2007 to shareholders on theregister at the close of business on 16 March 2007. Shareholders will be offereda scrip dividend alternative. Scrip dividend mandates need to be received byLloyds TSB Registrars before 9 May 2007. FURTHER INFORMATION The full text of the above is available to the public at 1 Leadenhall Street,London EC3V 1PP. The text is also available on line at www.royalsunalliance.com.A live audiocast of the analyst meeting, including the question and answersession, will be broadcast on the website at 9.30am today and an indexed versionwill be available by the end of the day. Copies of the slides to be presentedduring the conference call will be available on the site from 8.30am today. In 2007 we will report under the new structure comprising: UK, International andEmerging Markets and will circulate the 2006 interim and full year results onthis new basis. The interim 2007 results will be announced on 9 August 2007. MANAGEMENT BASIS OF REPORTING The following analysis on pages 8 to 12 has been prepared on a non statutorybasis as management believe that this is the most appropriate method ofassessing the financial performance of the Group. The estimation techniques,uncertainties and contingencies are included on pages 16 to 18. Financialinformation on a statutory basis is included on pages 19 to 24. The comparatives have been restated to reflect a change in accounting treatmenton the conversion of the perpetual notes from equity to debt in 2005. A fairvalue adjustment has been made to the loan capital increasing its value at 31December 2005 by £81m and recognising a related deferred tax asset of £24m. Theeffect is to reduce shareholders' funds by £57m at 31 December 2005. See note 3on page 23. SUMMARY CONSOLIDATED INCOME STATEMENT MANAGEMENT BASIS \* T 12 Months 12 Months 2006 2005 (restated)* £m £m Continuing operationsNet written premiums 5,484 5,300=============================================================================================== Underwriting result 310 263 -------------- --------------- Investment income 516 498 Realised gains 46 109 Unrealised gains/(losses), impairments and foreign exchange 36 12 Unwind of discount (42) (39) -------------- ---------------Investment result 556 580-----------------------------------------------------------------------------------------------Insurance result 866 843Other activities (86) (100)-----------------------------------------------------------------------------------------------Operating result 780 743 Interest costs (92) (107)Amortisation (15) (11)Reorganisation costs (23) (37)-----------------------------------------------------------------------------------------------Profit before disposals and pension scheme change 650 588Benefit on change in pension scheme design - 180(Loss)/profit on disposals (1) 126-----------------------------------------------------------------------------------------------Profit before tax 649 894Taxation (170) (259)-----------------------------------------------------------------------------------------------Profit after tax from continuing operations 479 635 Discontinued operations -------------- --------------- Loss before tax (484) (29) Taxation (15) (1) -------------- ---------------Loss after tax from discontinued operations (499) (30)-----------------------------------------------------------------------------------------------(Loss)/profit after tax (20) 605===============================================================================================Earnings per share for profit from continuing operations attributable to the ordinary shareholders of the Company:Basic 15.0p 19.9pDiluted 14.8p 19.7p Earnings per share for (loss)/profit attributable to the ordinary shareholders of the Company:Basic (2.1)p 18.9pDiluted (2.1)p 18.7p\* T * The comparatives have been restated to show the US operation as discontinued. SUMMARY CONSOLIDATED BALANCE SHEET MANAGEMENT BASIS \* T 31 December 31 December 2006 2005 (restated)* £m £mAssetsGoodwill and other intangible assets 552 450Property and equipment 385 410Investments -------------- -------------- Investment property 454 435 Investment in associated undertakings 27 29 Equity securities 1,620 1,683 Debt and fixed income securities 8,568 11,609 Other 269 241 -------------- --------------Total investments 10,938 13,997Reinsurers' share of insurance contract liabilities 1,927 4,406Insurance and reinsurance debtors 2,225 2,547Deferred acquisition costs 453 465Other debtors and other assets 852 693Cash and cash equivalents 1,831 1,617---------------------------------------------------------------------------------------------Assets associated with continuing operations 19,163 24,585Assets associated with discontinued operations 3,485 36---------------------------------------------------------------------------------------------Total assets 22,648 24,621============================================================================================= Equity, reserves and liabilities Equity and reservesShareholders' funds 2,561 2,686Minority interests 331 391---------------------------------------------------------------------------------------------Total equity and reserves 2,892 3,077Loan capital 1,192 1,152---------------------------------------------------------------------------------------------Total equity, reserves and loan capital 4,084 4,229--------------------------------------------------------------------------------------------- Liabilities (excluding loan capital)Insurance contract liabilities 12,790 17,204Insurance and reinsurance liabilities 391 475Borrowings 8 251Provisions and other liabilities 1,781 2,462--------------------------------------------------------------------------------------------- 14,970 20,392Liabilities associated with discontinued operations 3,594 ----------------------------------------------------------------------------------------------Total liabilities (excluding loan capital) 18,564 20,392---------------------------------------------------------------------------------------------Total equity, reserves and liabilities 22,648 24,621=============================================================================================\* T Assets and liabilities associated with discontinued operations relate to thediscontinued US business, see note 2 page 23. These summary consolidated financial statements have been approved for issue bythe Board of Directors on 7 March 2007. * The comparatives have been restated to reflect the fair value adjustment ofthe loan capital, see note 3 on page 23. 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 2006 (as reported) 2,743 391 1,071 4,205Prior year adjustment (57) - 81 24---------------------------------------------------------------------------------------------Balance at 1 January 2006 (restated) 2,686 391 1,152 4,229 -------------------------------------------------Profit after tax from continuing operations 447 32 - 479Loss after tax from discontinued operations (499) - - (499) -------------------------------------------------(Loss)/profit after tax (52) 32 - (20)Exchange losses (142) (9) (29) (180)Fair value gains net of tax 27 5 - 32Pension fund actuarial gains/(losses) net of tax 157 (4) - 153New debt issue - - 74 74Amortisation of loan capital - - (5) (5)New share issue 67 - - 67Changes in shareholders' interests in subsidiaries (46) (75) - (121)Share options 13 - - 13Prior year final dividend (89) (9) - (98)Current year interim dividend (51) - - (51)Preference dividend (9) - - (9) ---------------------------------------------------------------------------------------------Balance at 31 December 2006 2,561 331 1,192 4,084=============================================================================================\* T Opening shareholders' funds have been restated by £57m to reflect the fair valueadjustment to the loan capital net of deferred tax, see note 3 on page 23. Theexchange loss in the year of £142m is primarily due to the effect of themovement in the US dollar and Canadian dollar against sterling on openingshareholders' funds. Changes in shareholders' interests in subsidiaries of £46mrelate to Codan's share buy back and Codan's buyout of the Baltic minorityinterests. Pension fund deficit The table below shows the movement in the net position in the pension fund from1 January 2006 to 31 December 2006. \* T UK Other Continuing Group £m £m £m Pension fund at 1 January 2006 (211) (28) (239) Market movement 170 (2) 168Deficit funding 60 - 60Other movements 53 (18) 35 -----------------------------------------------------------------------------------------------------Pension fund at 31 December 2006 72 (48) 24=====================================================================================================\* T Loss development tables The table below presents the general insurance claims provisions net ofreinsurance for the accident years 2001 and prior, through to 2006. 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 Prior year development in 2006 showed continued favourable experience in the2002 to 2005 accident years, offset by reserve strengthening in the 2001 andprior accident years. The movement in the 2001 and prior years primarilyreflects the strengthening of our UK Asbestos reserves by £169m and our longtail Scandinavia reserves by £260m. The positive run off in the years 2002 to2005 comes from all main businesses and reflects the benefits of recentmanagement actions as well as the release of surplus reserves within our Danishpersonal and commercial motor business. The loss development table below ispresented on an undiscounted basis and the total discounting of £572m compareswith £462m in 2005. The increase predominantly reflects the impact of theincrease in UK Asbestos reserves. In Scandinavia certain long tail liabilitiesare settled by an annuity and the discounted value of these annuities is shownseparately. At the year end the annuity reserves were £308m (2005: £296m). \* T 2001 2002 2003 2004 2005 2006 Total £m £m £m £m £m £m £mEstimate of cumulative claims At end of accident year 7,178 2,380 2,171 2,043 2,164 2,132 1 year later 7,435 2,328 2,058 1,919 2,074 2 years later 7,559 2,335 1,985 1,773 3 years later 7,902 2,317 1,886 4 years later 7,961 2,241 5 years later 8,398Claims paid 1 year later 2,262 965 785 638 825 2 years later 1,164 327 268 247 3 years later 1,017 244 192 4 years later 534 159 5 years later 398Cumulative claims paid 5,375 1,695 1,245 885 825 ------------------------------------------------------------------------------------------------Current year provision before discounting 3,023 546 641 888 1,249 2,132 8,479Exchange adjustment to closing rates (132)Discounting (572)Scandinavian annuity reserves 308-----------------------------------------------------------------------------------------------Present value recognised in the balance sheet 8,083===============================================================================================\* T Asbestos reserves The technical provisions include £906m 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 2006 analysed by risk and survival ratio: \* T Total UK risks written US risks written in the UK in the UKProvisions in £m Net of reinsurance 906 781 125 Net of discount 472 383 89Survival ratios (Gross of discount) - On payment One year 41 52 17 Three year average 35 48 13Survival ratios (Gross of discount) - On notifications One year 49 52 39 Three year average 36 40 22\* T Cashflow - management basis \* T 12 Months 12 Months 2006 2005 £m £m Operating cashflow 817 766Interest paid (82) (107)Dividends (96) (138)Pension deficit funding (86) (86)Net repayment of debt (169) (86)Corporate activity (355) 97-----------------------------------------------------------------------------------------------Cash surplus 29 446=============================================================================================== Funded by:Increase/(decrease) in cash and cash equivalents 443 (127)(Sale)/purchase of other investments (414) 573----------------------------------------------------------------------------------------------- 29 446===============================================================================================\* T The Group's operating cashflow increased by 7% to £817m in 2006. During the yearwe serviced our debt and dividends, made our agreed deficit funding payment andrepaid our senior debt of £233m. After acquisitions, distribution deals andCodan's buy out of minority interests in the Baltics and its share buyback theGroup generated surplus cash of £29m in the year. REGIONAL ANALYSIS OF INSURANCE OPERATIONS \* T Net written premiums 2006 2005 £m £m United Kingdom 2,618 2,632 International 1,471 1,337 Scandinavia 1,394 1,324 Group Re 1 7----------------------------------------------------------------------------------------------- Total Group 5,484 5,300=============================================================================================== Underwriting result Investment result Insurance result 2006 2005 2006 2005 2006 2005 £m £m £m £m £m £m United Kingdom 160 154 306 321 466 475 International 85 63 136 144 221 207 Scandinavia 75 65 114 115 189 180 Group Re (10) (19) - - (10) (19)----------------------------------------------------------------------------------------------- Total Group 310 263 556 580 866 843=============================================================================================== Operating ratios 2006 2005 Claims Expenses Combined Claims Expenses Combined % % % % % % United Kingdom 62.2 30.1 92.3 61.2 31.9 93.1 International 60.2 33.8 94.0 61.4 33.3 94.7 Scandinavia 75.5 18.4 93.9 74.4 20.0 94.4----------------------------------------------------------------------------------------------- Total Group 65.2 28.1 93.3 64.9 29.2 94.1===============================================================================================\* T INVESTMENT RESULT BY REGION \* T UK International Scandinavia Total Group £m £m £m £m Investment income 282 117 117 516Realised gains 25 11 10 46Unrealised gains/(losses), impairments and foreign exchange 20 8 8 36Unwind of discount (21) - (21) (42)----------------------------------------------------------------------------------------------------Investment result 306 136 114 556====================================================================================================\* T The investment result is reported on an actual basis for the Group in total.Within the Group, investment income is allocated to the regions based ontechnical reserves, working capital and the local regulatory capitalrequirements. Realised gains, unrealised gains and impairment losses areallocated with reference to the above amounts. The unwind of discount isattributed on an actual basis. UK INSURANCE OPERATIONS \* T Net written premiums Underwriting result Operating ratio 2006 2005 2006 2005 2006 2005 £m £m £m £m % %PersonalHousehold 389 383 71 49 80.9 90.4Motor 423 404 (13) (11) 102.5 102.9Other 36 43 7 1 81.8 88.9-----------------------------------------------------------------------------------------------Total UK Personal 848 830 65 39 91.6 95.6----------------------------------------------------------------------------------------------- CommercialProperty 661 711 85 72 88.9 91.6Casualty 330 348 (21) 12 106.9 96.8Motor 592 599 20 37 91.5 88.9Other 187 144 11 (6) 94.1 101.9-----------------------------------------------------------------------------------------------Total UK Commercial 1,770 1,802 95 115 92.6 91.9-----------------------------------------------------------------------------------------------Total UK 2,618 2,632 160 154 92.3 93.1===============================================================================================\* T INTERNATIONAL INSURANCE OPERATIONS \* T Net written premiums Underwriting result Operating ratio 2006 2005 2006 2005 2006 2005 £m £m £m £m % %PersonalCanada 481 436 40 18 91.0 94.9Europe 231 237 27 33 88.0 86.5Latin America 161 109 - (2) 101.2 100.4Asia & Middle East 28 30 3 4 85.3 84.1-----------------------------------------------------------------------------------------------Total Personal 901 812 70 53 91.9 92.8----------------------------------------------------------------------------------------------- CommercialCanada 181 142 8 8 94.0 94.6Europe 161 169 1 1 99.8 99.4Latin America 153 140 (8) (3) 106.4 102.1Asia & Middle East 75 74 14 4 82.2 91.7-----------------------------------------------------------------------------------------------Total Commercial 570 525 15 10 97.5 97.6----------------------------------------------------------------------------------------------- TotalCanada 662 578 48 26 92.0 94.8Europe 392 406 28 34 92.8 92.0Latin America 314 249 (8) (5) 103.7 101.4Asia & Middle East 103 104 17 8 83.1 89.5-----------------------------------------------------------------------------------------------Total International 1,471 1,337 85 63 94.0 94.7===============================================================================================\* T SCANDINAVIAN INSURANCE OPERATIONS \* T Net written premiums Underwriting result Operating ratio 2006 2005 2006 2005 2006 2005 £m £m £m £m % %PersonalDenmark 212 207 99 (1) 52.6 99.5Sweden 476 440 (130) (23) 127.7 104.7Other 69 56 1 2 92.6 92.4-----------------------------------------------------------------------------------------------Total Personal 757 703 (30) (22) 103.7 102.5----------------------------------------------------------------------------------------------- CommercialDenmark 310 299 52 6 82.6 97.4Sweden 266 280 52 80 79.7 72.4Other 61 42 1 1 93.4 91.4-----------------------------------------------------------------------------------------------Total Commercial 637 621 105 87 82.4 85.5----------------------------------------------------------------------------------------------- TotalDenmark 522 506 151 5 70.4 98.3Sweden 742 720 (78) 57 110.0 91.7Other 130 98 2 3 92.9 91.9-----------------------------------------------------------------------------------------------Total Scandinavia 1,394 1,324 75 65 93.9 94.4===============================================================================================\* 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, thelevels of unpaid claims, legislative changes, judicial decisions and economicconditions. Where possible the Group adopts multiple techniques to estimate the requiredlevel of provisions. This assists in giving greater understanding of the trendsinherent in the data being projected. The Group's estimates of losses and lossexpenses are reached after a review of several commonly accepted actuarialprojection methodologies and a number of different bases to determine theseprovisions. These include methods based upon the following: -- the development of previously settled claims, where payments to date are extrapolated for each prior year; -- estimates based upon a projection of claims numbers and average cost; -- notified claims development, where notified claims to date for each year are extrapolated based upon observed development of earlier years; and -- expected loss ratios. In addition, the Group uses other methods such as the Bornhuetter-Fergusonmethod, which combines features of the above methods. The Group also usesbespoke methods for specialist classes of business. In selecting its bestestimate, the Group considers the appropriateness of the methods and bases tothe individual circumstances of the provision class and underwriting year. Theprocess is designed to select the most appropriate best estimate. Large claims impacting each relevant business class are generally assessedseparately, being measured either at the face value of the loss adjusters'estimates or projected separately in order to allow for the future developmentof large claims. Provisions are calculated gross of any reinsurance recoveries. A separateestimate is made of the amounts that will be recoverable from reinsurers basedupon the gross provisions and having due regard to collectability. The claims provisions are subject to close scrutiny both within the Group'sbusiness units and at Group Corporate Centre. In addition, for major classeswhere the risks and uncertainties inherent in the provisions are greatest,regular and ad hoc detailed reviews are undertaken by advisers who are able todraw upon their specialist expertise and a broader knowledge of current industrytrends in claims development. As an example, the Group's exposure to asbestosand environmental pollution is examined on this basis. The results of thesereviews are considered when establishing the appropriate levels of provisionsfor outstanding claims and unexpired periods of risk. It should be emphasised that the estimation techniques for the determination ofinsurance liabilities involve obtaining corroborative evidence from as wide arange of sources as possible and combining these to form the overall estimate.This technique means that the estimate is inevitably deterministic rather thanstochastic. A stochastic valuation approach, whereby a range of possibleoutcomes is estimated and probabilities assigned thereto, is only possible in alimited number of situations. The pension assets and pension and post retirement liabilities are calculated inaccordance with International Accounting Standard 19 (IAS 19). The assets,liabilities and income statement charge, calculated in accordance with IAS 19,are sensitive to the assumptions made, including inflation, interest rate,investment return and mortality. IAS 19 compares, at a given date, the currentmarket value of a pensions fund's assets with its long term liabilities, whichare calculated using a discount rate in line with yields on 'AA' rated bonds ofsuitable duration and currency. As such, the financial position of a pensionfund on this basis is highly sensitive to changes in bond rates and equitymarkets. Uncertainties and 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 40 or more 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. In selecting thereinsurers with whom we do business our strategy is to seek reinsurers with thebest combination of credit rating, price and capacity. We publish internally alist of authorised reinsurers who pass our selection process and which ouroperations may use for new transactions. The Group monitors the financial strength of its reinsurers, including those towhom risks are no longer ceded. Allowance is made in the financial position fornon recoverability due to reinsurer default by requiring operations to provide,in line with Group standards, having regard to companies on the Group's 'WatchList'. The 'Watch List' is the list of companies whom the directors believe willnot be able to pay amounts due to the Group in full. Changes in foreign exchange rates may impact our 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. We usederivative financial instruments to reduce our exposure to adverse fluctuationsin interest rates, foreign exchange rates and equity markets. We have strictcontrols over the use of derivative instruments. Rating 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-' from S&P and 'A-' from AM Best. Any worseningin the ratings would have an adverse impact on the ability of the Group to writecertain types of general insurance business. Regulatory environment The regulatory environment is subject to significant change in many of thejurisdictions in which we operate. We continue to monitor the developments andreact accordingly. The directors are confident that the Group will continue tomeet all future regulatory capital requirements. In addition the Group is continuing to monitor and respond to consultation onthe latest Solvency II proposals, which are intended, in the medium term, toachieve greater harmonisation of approach across European member states toassessing capital resources and requirements. 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 * The comparatives have been restated to show the US operation as discontinued.See note 2 on page 23. SUMMARY CONSOLIDATED INCOME STATEMENT STATUTORY BASIS \* T 12 Months 12 Months 2006 2005 (audited) (audited) (restated)* £m £mContinuing operationsNet written premiums 5,484 5,300================================================================================================ Income ----------------- ------------------- Net earned premiums 5,292 5,239 Net investment return 600 668 Other operating income 121 99 ----------------- -------------------Total income 6,013 6,006Expenses ----------------- ------------------- Net claims and benefits (3,453) (3,389) Underwriting and policy acquisition costs (1,626) (1,649) Profit on change of pension scheme design - 180 Unwind of discount (42) (39) Other operating expenses (151) (176) ----------------- -------------------Total expenses (5,272) (5,073)------------------------------------------------------------------------------------------------Results of operating activities 741 933 Finance costs (92) (107)(Loss)/profit on disposals (1) 65Net share of profit after tax of associates 1 3------------------------------------------------------------------------------------------------Profit before tax 649 894 Income tax expense (170) (259)------------------------------------------------------------------------------------------------Profit after tax from continuing operations 479 635------------------------------------------------------------------------------------------------ Discontinued operationsLoss after tax from discontinued operations (499) (30)------------------------------------------------------------------------------------------------(Loss)/profit after tax (20) 605================================================================================================ Attributable to:Equity holders of the Company (52) 555Minority interests 32 50------------------------------------------------------------------------------------------------(Loss)/profit after tax (20) 605================================================================================================Earnings per share for profit from continuing operations attributable to the ordinary shareholders of the Company:Basic 15.0p 19.9pDiluted 14.8p 19.7p Earnings per share for (loss)/profit attributable to the ordinary shareholders of the Company:Basic (2.1)p 18.9pDiluted (2.1)p 18.7p\* T The attached notes are an integral part of these summary consolidated financialstatements. For dividend information refer to note 7. SUMMARY CONSOLIDATED BALANCE SHEET STATUTORY BASIS \* T 31 December 31 December 2006 2005 (audited) (audited) (restated)* £m £mAssetsGoodwill and other intangible assets 552 450Property and equipment 385 410Investment property 454 435Investment in associated undertakings 27 29Financial assets ----------------- ----------------- Equity securities 1,620 1,683 Debt and fixed income securities 8,568 11,609 Other 269 241 ----------------- -----------------Total financial assets 10,457 13,533Reinsurers' share of insurance contract liabilities 1,927 4,406Insurance and reinsurance debtors 2,225 2,547Deferred acquisition costs 453 465Other debtors and other assets 852 693Cash and cash equivalents 1,831 1,617---------------------------------------------------------------------------------------------- 19,163 24,585 Non current assets and assets of operations held for sale 3,485 36----------------------------------------------------------------------------------------------Total assets 22,648 24,621============================================================================================== Equity, reserves and liabilities Equity and reservesShareholders' funds 2,561 2,686Minority interests 331 391----------------------------------------------------------------------------------------------Total equity and reserves 2,892 3,077---------------------------------------------------------------------------------------------- LiabilitiesLoan capital 1,192 1,152Insurance contract liabilities 12,790 17,204Insurance and reinsurance liabilities 391 475Borrowings 8 251Provisions and other liabilities 1,781 2,462---------------------------------------------------------------------------------------------- 16,162 21,544Liabilities of operations held for sale 3,594 -----------------------------------------------------------------------------------------------Total liabilities 19,756 21,544----------------------------------------------------------------------------------------------Total equity, reserves and liabilities 22,648 24,621==============================================================================================\* T Assets and liabilities associated with operations held for sale at 31 December2006 relate to the discontinued US business, see note 2 page 23. These summary consolidated financial statements have been approved for issue bythe Board of Directors on 7 March 2007. The attached notes are an integral part of these summary consolidated financialstatements. SUMMARY STATEMENT OF RECOGNISED INCOME AND EXPENSE STATUTORY BASIS \* T 12 Months 12 Months 2006 2005 (audited) (audited) (restated)* £m £m (Loss)/profit after tax (20) 605 ----------------- ----------------- Exchange (losses)/gains (151) 62 Fair value gains/(losses) net of tax 32 (35) Pension fund actuarial gains/(losses) net of tax 153 (53) Tax effect of prior year adjustment - 24 ----------------- -----------------Net gains/(losses) not recognised in income statement 34 (2) ----------------------------------------------------------------------------------------------Total recognised income for the year 14 603==============================================================================================\* T SUMMARY CASHFLOW STATEMENT STATUTORY BASIS \* T 12 Months 2006 12 Months 2005 Continuing Total Continuing Total operations Group operations Group £m £m £m £m Net cashflows from operating activities 648 117 843 31Net cashflows from investing activities 175 781 (745) (130)Net cashflows from financing activities (380) (389) (225) (225)-----------------------------------------------------------------------------------------------Net increase/(decrease) in cash and cash equivalents 443 509 (127) (324)Cash and cash equivalents at the beginning of the year 1,440 1,612 1,523 1,864Effect of exchange rate changes on cash and cash equivalents (56) (81) 44 72-----------------------------------------------------------------------------------------------Cash and cash equivalents at the end of the year 1,827 2,040 1,440 1,612=============================================================================================== 31 December 2006 31 December 2005 Continuing Total Continuing Total operations Group operations Group £m £m £m £m Cash and cash equivalents per cashflow statement 1,827 2,040 1,440 1,612Add: bank overdrafts 4 4 5 5-----------------------------------------------------------------------------------------------Cash and cash equivalents per balance sheet 1,831 2,044 1,445 1,617===============================================================================================\* T The attached notes are an integral part of these summary consolidated financialstatements. EXPLANATORY NOTES TO THE SUMMARY CONSOLIDATED FINANCIAL STATEMENTS 1. Changes in significant accounting policies 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 2006. A full list of accounting policies can be found in the 2006statutory Group financial statements, see note 10 below. 2. Non current assets and liabilities of operations held for sale The US operation has been classified as held for sale and written down inaccordance with IFRS 5. The write down and disposal costs of £399m and thetrading loss for the year of £85m have been shown on one line in the incomestatement as a discontinued operation. The income statement comparatives havebeen restated to show the US as discontinued. The total assets and totalliabilities of the US operation, including the write down, have each been shownnet of inter company balances on one line in the balance sheet. The balancesheet comparatives have not been restated. Non current assets held for sale at 31 December 2005 related to property. 3. Prior year restatement due to change in accounting treatment The Group's £450m of perpetual notes were classified as debt under UK GAAP buthad to be reclassified as equity on conversion to IFRS. During 2005, the termsof the notes were revised to align the accounting treatment under IFRS with theeconomic substance of the notes being debt. There was no change in the carryingvalue of the notes as the conversion was treated as an exchange. During 2006, the International Financial Reporting Interpretations Committeeprovided guidance on its understanding of the accounting to be used in thesecircumstances. As a result, the Group has changed its accounting treatment andrecognised the notes at fair value at the date of conversion. The carrying value of the notes at 31 December 2005 has been increased by £81min line with the new treatment. A corresponding deferred tax asset of £24m hasalso been recognised, resulting in a £57m reduction to shareholders' funds at 31December 2005. 4. Changes in total equity and reserves for year to 31 December \* T Shareholders' Minority Total funds interest equity and reserves £m £m £m Balance at 1 January 2006 (as reported) 2,743 391 3,134Prior year restatement (57) - (57)----------------------------------------------------------------------------------------------Balance at 1 January 2006 (restated) 2,686 391 3,077 Total recognised income for the year (10) 24 14New share issue 67 - 67Changes in shareholders' interests in subsidiaries (46) (75) (121)Share options 13 - 13Prior year final dividend (89) (9) (98)Current year interim dividend (51) - (51)Preference dividend (9) - (9) ----------------------------------------------------------------------------------------------Balance at 31 December 2006 2,561 331 2,892==============================================================================================\* T 5. Earnings per share The earnings per share is calculated by reference to the result attributable tothe equity shareholders and the weighted average number of shares in issueduring the period. On a basic and diluted basis this was 2,929,452,684 and2,959,286,554 respectively (excluding those held in ESOP trusts). The number ofshares in issue at 31 December 2006 was 2,964,836,634 (excluding those held inESOP trusts). 6. Purchase of minority interests The minority interests in both the Latvian and Lithuanian businesses have beenbought by Codan for DKK 599m (£55m). Codan has also purchased DKK 736m (£66m) oftheir own shares from the market. The Group now owns 74.51% of Codan, up from71.70% at the start of the year. The total effect of these transactions is toreduce shareholders' funds by £46m and minority interests by £75m. 7. Dividends \* T 2006 2005 Per share Total Per share Total p £m p £mOrdinary dividend Final paid in respect of prior year 3.05 89 2.96 86 Interim paid in respect of current year 1.75 51 1.69 49----------------------------------------------------------------------------------------------- 4.80 140 4.65 135Preference dividend 9 9----------------------------------------------------------------------------------------------- 149 144===============================================================================================\* T 8. Taxation Of the £170m (2005 restated: £259m) of income tax expense in the year, £74m(2005 restated: £176m) relates to UK corporation tax and £96m (2005 restated:£83m) to overseas taxation. 9. Exchange rates \* T£/local currency 12 Months 2006 12 Months 2005 Average Closing Average Closing US Dollar 1.85 1.96 1.82 1.72Canadian Dollar 2.09 2.28 2.20 2.01Danish Kroner 10.95 11.07 10.90 10.86\* T 10. Results for 2006 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 2006 of Royal & Sun Alliance Insurance Group plc will be deliveredto the Registrar of Companies following the Annual General Meeting to be held on21 May 2007. The independent auditors' report on the Group financial statementsfor the year ended 31 December 2006 is unqualified and does not contain astatement under Section 237(2) or (3) of the Companies Act 1985. Copyright Business Wire 2007Related Shares:
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