Final Results

2016 Preliminary Results

RSA announces excellent 2016 Results.

Underlying EPS 39.5p, up 42%. Operating profit £655m, up 25%.

Record underwriting profit and combined ratio (£380m, up 73%, 94.2% vs 96.9%).

Final dividend 11p/share (16p total for 2016, up 52%).

Statutory net profit £20m, impacted by non-capital charges for Legacy disposal.

Stephen Hester, RSA Group Chief Executive, commented:

"In 2016 RSA took major strides forward, moving seamlessly from 'successful turnaround' to organic outperformance. Our improvements are both strategic and operational. They are delivering high quality sustainable results.

Our ambition now is to drive RSA's performance towards 'best in class' levels. Industry and financial market conditions will remain tough. We plan to outperform through continuing self-help measures on customer service, underwriting and costs."

2016 Trading results

· Group operating profit £655m up 25% (2015: £523m): Scandinavia £311m; Canada £140m; UK £259m.

· Record1 Group underwriting profit of £380m, up 73% (2015: £220m). Core Group combined ratio of 93.8% (2015: 96.0%). Scandinavia 86.2%; Canada 94.9%; and the UK 95.4%.

· Record1 Group current year underwriting profit of £271m (2015: £129m): Core Group attritional loss ratio 1.4pts better than last year, weather and large losses 0.3pts worse. Group prior year underwriting profit of £109m (2015: £91m).

· Core Group premiums of £6.3bn up 6%, although down slightly on an underlying basis2.

· Investment income £369m (2015: £403m), fell 8% reflecting impact of disposals and low bond yields, partly offset by FX translation benefits.

· Non-capital charge of £204m for disposal of legacy liabilities3; Other non-operating charges3 of £261m (c.90% non-capital in nature);

· Post tax statutory profit of £20m reflecting the non-capital accounting charges above (2015: £244m benefited from disposal gains).

· Underlying earnings per share1 (EPS) 39.5p up 42% (2015: 27.8p).

· Final dividend of 11p/ordinary share proposed, bringing total 2016 dividends to 16p/ordinary share (up 52%).

 1Underlying or alternative performance measure, refer to pgs 28-29 for further explanation; 2 At CFX, excluding Group Re; 3 Refer to page 11 for further explanation.

Capital & balance sheet

· Solvency II coverage ratio of 158% after final dividend (31 December 2015: 143%), at upper end of 130-160% target range; resilient in testing market conditions. Legacy disposal will add a further 17-20 coverage points.

· Reserve margin was also strengthened to 5.5% (2015: 5.0%).

· Tangible equity1 £2.9bn (31 December 2015: £2.8bn), 281p per share.

· Underlying return on opening tangible equity1 of 14.2% (2015: 9.7%), at upper end of 12-15% target range.

Strategic update

· Strategic restructuring and turnaround of RSA delivered ahead of expectations.

· Completed the disposals of our businesses in Latin America and Russia in the first half. This brings to a close our principal disposal programme (total proceeds £1.2bn 2014-16), achieving the desired strategic focus.

· RSA's balance sheet and capital position are stronger and more resilient. In July, we commenced actions to optimise the composition of capital. We retired £200m of subordinated debt, reducing both leverage and interest costs. During the first half of the year we also completed a de-risking of the asset mix in our UK pension schemes.

· On 7 February 2017, we announced the disposal of £834m UK Legacy liabilities to Enstar. This boosts Solvency II coverage by 17-20 points, to be used to accelerate debt retirement in 2017 thereby reducing risk, improving capital quality and improving earnings. Further details on the non-capital charge for this disposal are set out on pages 11 and 30.

· RSA's financial and operational performance is now healthy, and we are focused on moving performance towards 'best in class' for our markets. Our many performance improvement initiatives are proceeding well, targeted at improving customer service, underwriting and costs.

· Core business controllable costs1 for 2016 were reduced 6% year-on-year at constant exchange to £1,455m (comprising 8% cost reductions, offset by 2% inflation). Core Group FTE down 7% year-on-year 2016 vs 2015 and down 19% since start of 2014.

· Our cost reduction programme is ahead of original targets with c.£290m of gross annualised savings achieved by the end of 2016 (original 2016 target of >£180m). Today we are upgrading the cost savings target for a third time to >£400m gross annualised savings by 2018 (previous target >£350m by 2018). 'Costs to achieve' now expected to be lower than originally planned at c.1.3 times.

· We are also increasing our medium term ROTE1 target range to 13-17% (from 12-15% previously) reflecting the progress RSA has made and the impact of the Legacy sale. While market moves make the denominator volatile, we hope to perform in the upper part of this range. Indeed if our 'best in class' ambitions are reached, there is scope to do better still. This implies performance better than most competitors and should be prized as an ambition but not taken for granted.

· Dividend policy unchanged: medium term ordinary dividend payout of 40-50% with additional 'special' payouts where justified.

· RSA is relatively insulated from Brexit impacts with c.70% non-Sterling profits and separate, locally regulated, European subsidiaries.

Note: The Group uses alternative performance measures, including certain underlying measures, to help explain business performance and financial position. Further information on these is set out in the appendix.

1Underlying or alternative performance measure, refer to pgs 28-29 for further explanation.

MANAGEMENT REPORT - KEY FINANCIAL PERFORMANCE DATA

Management basis

1 Underlying or alternative performance measure, refer to pgs 28-29 for further explanation.

CHIEF EXECUTIVE'S STATEMENT

From 'Turnaround' towards 'Outperformance'

The strategic restructuring and turnaround of RSA started three years ago. Since then we have accomplished everything, and more, that was targeted.

1. The Group is now focused on its strongest businesses, a key to future outperformance. Divestments to achieve this focus have raised £1.2bn.

2. RSA's balance sheet is transformed. Credit Ratings are restored, regulatory capital and related capital ratios are at the upper end of our target ranges.

3. Performance is transformed. 2016 record underwriting profits of £380m compare to a 2013 profit of £1m1. Underlying return on tangible equity1 of 14.2% in 2016, is now in the upper part of the 12-15% target range we originally set. Dividends are restored and growing.

The quality of the foundations laid during this period, underpinned by the franchise strengths of RSA's 300 year history, gave us confidence at the start of 2016 to lay out new ambitions for the future.

We now aspire to move RSA's performance levels towards 'best in class' for our markets, for customers and shareholders. If we succeed we will outperform over the coming years. 2016 performance provides an encouraging down payment on this aspiration, delivering a combined ratio ('COR') of 94.2%, a record1 for RSA.

Strategy & Focus

RSA is a strong and focused international insurer. We have complementary leadership positions in the major general insurance markets of the UK, Scandinavia and Canada. We have valuable franchise strength and balance across these regions, between commercial and personal customers and across product lines.

The history, dynamics and structure of our markets show that focused regional market leaders can both successfully sustain customer appeal (market position) and achieve superior shareholder performance. This is the course we have set out upon.

External Conditions

The general insurance markets we operate in are relatively mature, consolidated and stable. Attractive performance is possible despite slow growth, economic and competitive challenges. It requires intense operational focus within a disciplined strategic framework.

Financial markets are also important for all insurers. Low interest rates hurt. But they force a greater concentration on the core business of underwriting which can yield significant improvements. 2016 is the first year for RSA where underwriting profits have grown to exceed investment income, a trend we expect to continue.

2016 was a year of volatile financial markets, testing both capital resilience and profits. Bond yields at year end were below those of a year ago in our major markets. Credit spreads were narrower (hurting UK pension accounting). But conversely, a significant Brexit induced weakening of Sterling since June helps RSA, as c.70% of our operating profit is earned outside the UK.

2016 Actions

Strategic Focus: RSA's 3 year 'focus' programme was completed with the sale of our businesses in Latin America and Russia which closed in 2016. Evidence is mounting that the concentration of management focus and resource onto our core businesses will be a key enabler of future performance gains.

1Underlying or alternative performance measure, refer to pgs 28-29 for further explanation

Financial Strength: Our 'A' grade credit ratings are strong and stable. Our Solvency II capital ratio has been improved from 143% (2015) to 158% at the end of 2016 (target range 130-160%), despite retirement of £200m of high cost subordinated debt. Risk reduction in our UK pension scheme assets has also been successfully completed. And 2016 saw testing financial and insurance event volatility which RSA withstood well. Since year end our disposal of UK Legacy liabilities has given us an important boost to capital and the opportunity to improve capital quality still further.

Business Improvement: Our goal is to systematically and determinedly hunt down performance improvement opportunities across our business. We have taken RSA's performance from below that of competitors in 2013 and prior, to 'in the pack'. All efforts are now concentrated on moving towards our 'best in class' ambitions. The plan is substantially the same across our businesses. Focus on improving service to customers, on underwriting and on costs.

Across the Group, our many customer initiatives have sustained retention rates and above average satisfaction measures. Core premiums were up in 2016 but on lower policy volumes. We are determined to compete on quality, with competitive but profitable pricing. We will not chase unprofitable growth. However, there are encouraging signs that continuing underwriting and service capability improvements will restore modest volume growth and we hope to deliver good evidence of that in 2017.

RSA's most important performance lever is our underwriting judgement. Across the Group portfolio disciplines, skills enhancement, data and model improvement and indemnity initiatives are producing strong benefits. Attritional loss ratios for the Core Group improved 1.4 points on 2015 and are 4 points better than those of 2013. We target further improvement still.

Cost efficiency is the other crucial performance ingredient. We have achieved c.£290m of gross annual savings (vs original 2016 target of >£180m). We believe we can raise our savings target for the third time and now expect to deliver over £400m p.a. by 2018. Headcount has reduced 19% since 2013 in our core businesses as our people have become more productive. We expect to enhance their productivity further with continued business re-engineering, enabled by technology and infrastructure renewal programmes covering digitisation, robotics, infrastructure replacement and software upgrades which continue successfully in each region.

Financial Results 2016

Operating profits - our key ongoing measure - rose 25% to £655m. Underlying earnings per share (EPS) rose 42% to 39.5p. Statutory profit after tax of £20m reflects a particularly 'noisy' year in accounting terms. The very strong underlying results were optically offset by planned restructuring costs, debt buy-back costs and non-capital accounting charges. We plan that 2017 should be much cleaner and be the last year of material 'below-the-line' costs.

Core premium income was up 6%, but adjusting for FX and price changes, volumes were modestly down. Premium income was in line with our plan on that basis.

Underwriting profits, the litmus test of performance, rose 73% to a record1 £380m. This represents a combined ratio of 94.2%, also a record1 for RSA. Reserve margins were strengthened to 5.5% (2015: 5%) building some additional cushion against future challenges.

Underlying quality of results was excellent. Current year underwriting profits were a record £271m, up 110%. And volatile weather/large loss items did not help us out, being 0.3 points higher than 2015 at core group level.

1Underlying or alternative performance measure, refer to pgs 28-29 for further explanation

Particularly pleasing was the spread of performance. Each region hit or exceeded its operating plan targets. Scandinavia supplied 47% of operating profits with a COR of 86.2%. The UK recorded its first significant underwriting profit in a decade (£123m). And Canada did well (94.9% COR), despite natural catastrophes in the region. The one sub-regional disappointment was Ireland. Despite dramatic improvement to breakeven on current year operating profit, further prior year reserve strengthening was required taking the Irish COR to 116.2%.

Reflecting RSA's strong progress, a final dividend of 11p/share is proposed making 16p/share total for the year, up 52%. This represents a 41% pay out of underlying EPS (in line with stated policy). It remains our belief that RSA will generate attractive free capital, net of organic growth needs and regular dividend pay outs, once restructuring actions complete and bond 'pull to par' impacts reduce, probably in 2018.

Looking Forward

Our performance target of 12-15% return on tangible net assets1 is still good by industry standards and represents a creditable achievement level for RSA, implying better ongoing underwriting performance than any year prior to 2016. However, given our progress and the Legacy sale, we are raising the target range to 13-17% ROTE1. Additionally the supplementary ambition we have set of moving towards 'best in class' combined ratio performance in our markets, if achieved, should allow us to exceed even this higher range in time. We will try to do just that.

Thanks

RSA is making terrific progress. This is thanks to the efforts of our people and the support of customers, brokers and other stakeholders. Our performance gains are not easy things to achieve, especially with a tough industry backdrop. Sincere thanks and appreciation go to all involved.

RSA has a proud history, despite bumps along the way. We are determined, in performance terms, that the future can be brighter still.

Stephen Hester

Group Chief Executive

22 February 2017

1Underlying or alternative performance measure, refer to pgs 28-29 for further explanation

MANAGEMENT REPORT

SEGMENTAL INCOME STATEMENT

Management basis - 12 months ended 31 December 2016

Note:

UK & International comprises the UK, Ireland and the Middle East

Please refer to appendix for FY 2015 comparatives

1 Total 'non-core' comprises discontinued operations of Latin America and Russia; and non-core operations of UK Legacy.

2 On a statutory basis, interest costs are £138m which include £39m premium on debt buyback (included within other non-operating charges above).

3 Refer to pg 11 for further breakdown and explanation.

4 Non-capital charge.

5 Over £230m of which is non-capital in nature.

6 Underlying or alternative performance measure, refer to pgs 28-29 for further explanation.

Premiums

2016 Core Group net written premiums of £6.3bn were up 6% (though flat year-on-year at constant exchange rates).

We are pleased with the solid 'topline' performance in 2016, reflecting good customer retention and satisfaction levels. Recent evidence points to a strengthening of underlying customer activity as capability improvements take effect. We target this to continue.

Our goal is to serve customers well but profitably. This means that premium volumes have suffered as we introduced tougher underwriting disciplines over the last 3 years. However, across the Group, customer focused capability improvements are strengthening our ability to compete successfully and profitably, and we expect that to show through in stronger volume trends over time.

Regional trends for 2016 include:

· Scandinavian premiums up 7%, though down 4% at constant fx, with growth in Sweden offset by reductions in Denmark and Norway. Premiums were down 1% on an underlying basis2;

· Canadian premiums up 6%, though down 3% at constant fx with Personal down 4% and Commercial flat, reflecting underwriting discipline in competitive market conditions;

· UK & International premiums were up 1% (down 1% at constant fx). UK premiums were down 1% with Personal down 6% and Commercial up 2%. Premiums in Ireland were up 6% driven by continued rating actions. Middle East premiums were down 8% reflecting economic challenges and contract terminations.

Retention trends remained broadly stable with overall retention across our Core regions of around 80%.

1 After impact of Group Re (NWP £148m higher in 2016 mainly due to purchase of 3 year Group aggregate reinsurance cover for £139m in 2015)

2 Underlying or alternative performance measure, refer to pgs 28-29 for further explanation.

Underwriting result

Group underwriting profit of £380m, up 73% year-on-year (2015: £220m, or £232m at constant fx) and comprised £392m from core operations.

Current year profit of £271m (2015: £129m):

· The Core Group attritional loss ratio was 55.2% which showed a 1.4 point improvement from 2015. There were good improvements across all key regions with Canada 2.5 points better (although c.1 point of the improvement is due to better 'attritional' weather in 2016 v 2015), UK 1.8 points better and Scandinavia 0.3 points better. We target further improvements still.

· Total Group weather costs were £166m or 2.5% of net earned premiums (2015: £219m; 3.1%). Core Group weather costs were £165m representing a weather loss ratio of 2.6% (2015: £194m or 3.2%; five year average: 3.1%).

Included within this are net claims costs of £42m for the Alberta wildfires in May, £33m for the UK & European floods in June, and £26m for Hurricane Matthew in October.

· Total Group large losses were £583m or 8.9% of net earned premiums (2015: £556m; 7.9%). Core Group large losses were £582m or 9.2% of premiums (2015: £508m or 8.3%), which was marginally above the five year average of 8.5%. Lower than trend levels in Scandinavia and UK were more than offset by more elevated levels in Canada and Ireland.

Prior year profit was £109m, with prior year development providing a 2.0 point benefit to the Group combined ratio. This included positive development from the UK, Canada, and Scandinavia and negative results in Ireland.

Pleasingly, current year underwriting results in Ireland improved to a small profit from a £29m loss in 2015, on the back of strong pricing action, attritional loss ratio improvement and expense reduction. However, Irish prior year reserves required further strengthening of £50m, principally for accident years 2014/15 where trend data was hard to identify due to the remediation actions we have had to take post 2013. We target a return to profitability overall in Ireland in 2017.

Our assessment of the margin in reserves for the Group (the difference between our actuarial indication and the booked reserves in the financial statements) is 5.5% of booked claims reserves (2015: 5.0%).

Underwriting operating expenses

The overall Group underwriting expense ratio improved 0.5 points to 15.2% in 2016 and at a Core Group level was 0.5 points better. There were improvements of 1.6 points in Scandinavia and 0.2 points in Canada, whilst the UK ratio was 0.3 points higher. We expect continued improvements in the expense ratio over the coming years.

Commissions

The Group commission ratio in 2016 of 14.4% was down from 15.9% in 2015, driven mainly by the disposal of Latin America which carried a higher commission ratio. The Core Group commission ratio 14.0% was down 0.3 points (2015: 14.3%). We expect the Core Group's commission ratio to be broadly stable in 2017.

Investment result

The investment result was £298m (2015: £322m, or £335m at constant fx) with investment income of £369m (2015: £403m), investment expenses of £12m (2015: £14m) and the liability discount unwind of £59m (2015: £67m).

Investment income is down 8% on prior year, primarily reflecting the impact of the Latin American disposal and continued low bond yield environment, partly offset by the benefit from the weakening of Sterling. The average book yield across our major bond portfolios was down slightly to 2.5% (2015: 2.8%).

At current market forward rates, and updating for the Legacy sale, we expect investment income of £300m, £275m, and £265m in 2017, 18 & 19 respectively. Discount unwind is now expected to be in the range £30-35m per annum. The sale of legacy liabilities has reduced investment income but this has been broadly offset by a lower discount unwind. Refer to page 17 for further details.

Total controllable costs1

As at the end of 2016 our cost reduction programme has delivered total gross annualised cost reductions of around £290m, ahead of our original 2016 target of >£180m. We are raising our target for a third time to greater than £400m cost reductions by the end of 2018 (up from our previous target of greater than £350m). 'Costs to achieve' is now expected to be lower than originally planned at around 1.3 times the annual cost savings once fully achieved, and we still expect 2017 to be the last year of these 'below-the-line' costs.

Total Group controllable costs1 were down 16% year-on-year at constant exchange to £1,515m. Core business controllable costs were down 6% in the same period at constant exchange to £1,455m (comprising 8% cost reductions, offset by 2% inflation).

The majority of the year-on-year core business cost reduction has come from our Canadian and Scandinavian business (both delivering 'real' reductions of 10%). UK delivered 3% 'real' reductions.

Core Group FTE2 is down 19% since the start of 2014 to 13,394 at December 2016, and is down 7% FY 2016 v 2015.

1 Underlying or alternative performance measure, refer to pgs 28-29 for further explanation.

2 Full time equivalent employees.

Non-operating items

Provision for sale of legacy liabilities:

· As announced on 7 February 2017, we have booked in 2016 a £204m charge (non-capital) ahead of the sale of the UK Legacy book, primarily reflecting the difference between the reinsurance premium of £799m to be paid and the IFRS carrying value of the legacy liabilities (the IFRS accounts hold the legacy liabilities using a 4% discount to face value, £567m v £834m undiscounted).

· In 2017, we expect to recognise an IFRS gain of c.£65m in respect of this transaction mainly relating to the realised gains on the mark-to-market of the bonds transferred to the buyer.

Please refer to Appendix (page 30) for further details on this transaction and the associated impacts.

· The sale of the legacy liabilities means the Group's Adverse Development Cover reinsurance protection bought in 2014 to partly protect these liabilities, is no longer valuable. Accordingly, we have agreed to commute it for a one-time charge in 2017 of £22m.

Other non-operating charges:

· Tangible disposal gains in 2016 of £159m, relate to the completed Latin America and Russian disposals (and as included in our H1 2016 results);

· £176m non-capital charge relating to the Latin American and Russian disposals (£165m for Latin America of which £100m recycling of foreign exchange losses (in the FCTR1), and £65m of intangibles disposed; and £11m of FCTR3 recycling in respect of Russia, all of which was included in our H1 2016 results);

· Realised investment gains were £30m, mainly relating to bond sales;

· £39m premium (non-capital) paid on the July buyback of £200m nominal value subordinated debt;

· £30m goodwill write-down (RSA share £10m) relating to the requirement to IPO our Oman business in 2017;

1 Foreign currency translation reserve.

· Reorganisation costs were £168m and included £49m in respect of redundancy and £119m in respect of transformation activities. Linked to our remaining and increased cost savings targets we expect to record the last of our reorganisation costs in 2017 of c.£100m;

· Solvency II costs were £7m. We expect these costs to fall to zero in 2017 and thereafter;

· Economic assumption changes relate to a £6m charge taken in the first half for a change in the rate used to discount Danish long-tail liabilities (discount rate reduced from 1.75% to 1.5%). This follows a decline in market yields for the assets we hold backing these liabilities;

· £16m of amortisation of customer related intangible assets.

Tax

The Group has reported a tax charge of £71m for 2016, giving an effective tax rate (ETR) of 78%. The Group underlying tax rate in 2016 was 24%.

The £71m tax charge largely comprises of tax on overseas profits and other overseas tax charges; net local tax costs of £12m on the Latin American disposals; partly offset by a £52m upward revaluation of UK deferred tax assets, an amount dampened by expected new UK rule changes slowing the utilisation of tax losses.

RSA's ETR is impacted by the IFRS loss on the sale of the UK Legacy liabilities. Although this loss is tax deductible in the UK, no immediate tax credit arises due to RSA's existing unrecognised UK tax losses.

The carrying value of the Group's net deferred tax asset at 31 December 2016 was £216m (of which £212m is in the UK). At current tax rates, a further c.£183m of deferred tax assets remain available for use but not recognised on balance sheet; these are predominantly in the UK and Ireland.

In 2017, we expect the Group's ETR to return to a rate closer to the statutory tax rates in our Core territories. The underlying tax rate, given the scale of unrecognised UK tax assets (which given expected changes in UK legislation are likely to last well over 10 years) may trend towards 20% over the next few years.

Dividend

We are pleased to propose a final dividend of 11p per ordinary share, up 57% year-on-year (2015: 7.0p). Together with the interim dividend of 5.0p, this brings the total dividend for the year to 16p (up 52%), representing 41% payout of underlying EPS.

Our medium term policy of between 40-50% ordinary dividend payouts remains, with additional payouts where justified. Potential for additional payouts should follow the completion of restructuring and progress in the unwind of unrealised bond gains.

1Underlying or alternative performance measure, refer to pgs 28-29 for further explanation.

BALANCE SHEET

Movement in Net Assets

Tangible net assets1 have increased by 1% to £2.9bn during 2016. The increase was driven by profits in the period (including tangible disposal gains), positive foreign exchange movements, and fair value mark-to-market gains due to lower bond yields, partly offset by negative IAS 19 pension movements due to narrower credit spreads, disposal impacts (notably the sale of UK Legacy liabilities), the payment of the 2015 final and 2016 interim dividends, and intangible asset additions.

1 Underlying or alternative performance measure, refer to pgs 28-29 for further explanation.

CAPITAL POSITION

The Solvency II surplus1 increased to £1.1bn (31 December 2015: £0.9bn) during 2016 with the coverage ratio of 158% (post final dividend) up 15 points.

Since the year end, the sale of UK Legacy liabilities has provided a boost to RSA's Solvency II position with coverage uplift of 17-20 points, giving pro forma coverage of 175-178%. Please refer to Appendix (page 30) for further details on this transaction and the associated capital impacts.

The key drivers of the increase in the year to 158% were as follows:

· Underlying capital generation added 29 points of coverage. This reflects tangible profit after tax adjusted for restructuring costs and other non-capital P&L items;

· Restructuring costs and other non-operating charges reduced the ratio by 10 points;

· Pull-to-par on unrealised bond gains accounted for a 8 point reduction;

· 12 points of benefit from the Latin American and Russian disposals, completed in the period;

· Market movements added 11 points of coverage, mainly driven by positive foreign exchange and narrower credit spreads;

· Pension movements, mainly reflecting narrower AA corporate bond spreads, reduced the coverage ratio by 15 points;

· 2016 interim and final dividends reduced the coverage ratio by 10 points;

· SCR modelling updates added 6 points of coverage.

Please refer to Appendix (page 31) for further Solvency II details (including sensitivities).

Debt retirement

On 12 July we completed the retirement of £200m (nominal value) of subordinated debt (the target instrument was our £500m subordinated notes with 9.4% coupon). The retirement was achieved at a small premium to the prevailing market value.

Our 2016 results include a one-off P&L non-capital charge of c.£39m reflecting the premium paid above market value to buyback the debt. Annualised run-rate interest costs will be lower by c.£19m.

Our ambition is to further improve the quality of our capital mix and reduce the cost of our debt. We are currently exploring the possibility of an issuance of restricted Tier 1 securities and opportunities for early debt retirement.

1 The Solvency II capital position at 31 December 2016 is estimated

OUTLOOK

In 2017, our goal is unchanged: the further raising of performance levels.

Markets will remain competitive. Our priority is to maintain underwriting discipline. Nevertheless, we hope to report premium growth overall.

We target further attritional loss ratio improvements, albeit at a moderated pace, together with further reductions in controllable costs.

Costs from weather/large losses are inherently volatile though bounded by reinsurance protection at levels largely unchanged from 2016.

Investment income is expected to be c.£300m for 2017 assuming current market implied rates, with discount unwind in the range £30-35m. Both numbers have been adjusted for the UK Legacy sale with lower investment income broadly offset by reduced discount unwind. Financial market volatility remains a risk factor.

Non-operating items in 2017 are expected to include the last year of restructuring costs (associated with our increased cost savings target), together with legacy sale related impacts.

We expect to be able to use the capital generated from the Legacy sale to accelerate debt retirement in 2017 thereby further reducing risk, improving capital quality and improving earnings

Overall we target attractive performance in 2017, building from the quality base now established.

BUSINESS REVIEW - INVESTMENT PERFORMANCE

Management basis

INVESTMENT PERFORMANCE

Investment income of £369m (2015: £403m) was offset by investment expenses of £12m (2015: £14m) and the liability discount unwind of £59m (2015: £67m). Investment income was down 8% on prior year, primarily reflecting the impact of the Latin American disposal and continued low bond yield environment, partly offset by favourable FX movements.

The average book yield over the period on the total portfolio was 2.6% (2015: 2.9%), with average yield on the bond portfolios of 2.5% (2015: 2.8%). Reinvestment rates in the Group's major bond portfolios over the year was approximately 1.4%.

Average duration of the Group's bond portfolios is 3.7 years (31 December 2015: 4.0 years) with the reduction driven by the movement of assets associated with UK legacy business to a held-for-sale basis.

The investment portfolio grew by 5% during 2016 to £13.6bn. The movement was driven primarily by the impact of weakening of Sterling, positive mark-to-market on bond holdings, and positive cash flow, including proceeds from completed disposals in the year, partly offset by the transfer of legacy assets to held-for-sale. 

At 31 December 2016, high quality widely diversified fixed income securities represented 85% of the portfolio (31 December 2015: 86%). Equities represented 1% (31 December 2015: 1%) and cash 7% of the total portfolio (31 December 2015: 6%).

The quality of the bond portfolio remains very high with 98% investment grade and 70% rated AA or above. We remain well diversified by sector and geography.

Unrealised bond gains and pull-to-par

Balance sheet unrealised gains of £629m (pre-tax) increased by £214m during the year (31 December 2015: £415m) driven by lower bond yields and positive foreign exchange movements, partly offset by the pull-to-par of existing bonds.

In 2017 we expect to realise c.£80m of these gains on the transfer of bonds to the buyer of our Legacy liabilities. We expect the remaining gains to largely unwind over the next 4 years, based on current forward yields.

Outlook

Based on current forward1 bond yields and foreign exchange rates it is estimated that investment income will be c.£300m for 2017, c.£275m for 2018 and c.£265m for 2019. These projected income numbers are, however, sensitive to changes in market conditions. We expect a discount unwind in the range £30-35m per annum. The sale of legacy liabilities has reduced investment income but this has been broadly offset by a lower discount unwind.

1 If current yields and FX were kept flat, instead of using forward rates, our guidance would be unchanged for 2017&18, and c.£15m lower for 2019. A +/-5% movement in Sterling against all other currencies would move investment income by around +/-£10m.

REGIONAL REVIEW - SCANDINAVIA

Management basis

1 RFX = reported foreign exchange rates; CFX = constant foreign exchange rates

2 Rate changes reflect changes for risks renewing in the year-to-date versus comparable risks renewing in the same period the previous year

SCANDINAVIA

In 2016 Scandinavia delivered a 130% increase in underwriting profits (at constant fx) driven by strong current year profitability, with record current year profits in Sweden.

We have also made good progress with our customer agenda. In Denmark we've seen positive development in customer 'trust' scores, and we've increased our engagement with lower 'trust' score customers to gain fresh insights. We're ranked 2nd for SME customer satisfaction in Denmark, and first for overall customer satisfaction in Norway. Our retention rates across the region have remained steady at almost 80%.

Net written premiums of £1,721m were up 7% but down 4% on a constant exchange rate basis (2015: £1,606m as reported), with volumes down 7% and rate up 3%.

Excluding the impact of the transfer of the Marine portfolio to the UK and the non-repeat of two large multi-year deals (as previously flagged at H1 2016), underlying1 Scandinavian premiums were down 1% (Personal up 1% underlying; Commercial down 3% underlying), reflecting slow market conditions overall.

The underwriting result was £239m (2015: £94m as reported) with a strong current year profit of £213m.

The current year attritional loss ratio was 64.2%, better than 2015 at 64.5%. Benign weather and large losses across the regions reduced weather losses to 0.4% compared to 1.0% in 2015, while large losses of 5.0% compared to 6.3% in 2015. The prior year effect on the loss ratio was a benefit of 1.6%. The overall combined ratio was 86.2% (2015: 94.0%).

After including an investment result of £72m (2015: £69m), the total operating profit was £311m, up 91%.

The Scandinavian transformation programme has delivered well in 2016, with particular success in pricing and claims sophistication improvements, process automation, online quote capabilities, and customer satisfaction.

Total controllable expenses were down 8% year-on-year, with 10% cost reductions offset by 2% inflation. Headcount was down 7% in 2016 and is now down 16% since the end of 2013.

Scandinavia - Outlook

We continue to expect the Scandinavian P&C markets to grow in line with local GDP growth and we target growth broadly in line with the market, subject to maintaining underwriting discipline.

Our focus remains on further improving the underlying performance of the business, particularly attritional loss ratios and cost improvements, as we drive towards our ambition COR of

1 Underlying or alternative performance measure, refer to pgs 28-29 for further explanation.

REGIONAL REVIEW - CANADA

Management basis

1 RFX = reported foreign exchange rates; CFX = constant foreign exchange rates

2 Rate changes reflect changes for risks renewing in the year-to-date versus comparable risks renewing in the same period the previous year

CANADA

We have had a strong and resilient year in Canada, absorbing our share of losses from Fort McMurray, the largest natural catastrophe in Canadian history, yet still delivering an underwriting profit of £74m and COR of 94.9%.

We have been working hard to enhance our Customer offering. In Johnson our service and sales metrics have been outperforming benchmarks. In our broker distributed businesses, faster response times and new digital tools are being offered with promising early results. Customer retention rates have improved by 2pts year-on-year to 84%.

Net written premiums of £1,443m were up 6% but down 3% at constant exchange rate (2015: £1,360m as reported), with volumes down 4% and rate increases of 1%.

The portfolio actions of the last two years are now complete. However, conditions remain competitive, particularly in the Commercial Broker channel. Our priority continues to be on sustained underwriting discipline. Personal premiums were down 4%, driven by rate reductions in Personal Motor and lower volumes. Premium reduction trends have been gradually moderating and Q4 2016 saw flat premiums overall.

The underwriting profit for the year of £74m (£116m in 2015) was in line with our expectations, even after absorbing the impact of the Fort McMurray wildfire losses in May where our reinsurance programme limited our exposure to a net claims cost of £42m. The weather ratio was therefore elevated at 5.7% (1.4 points worse than long term averages). Large losses were higher than expected at 6.4% driven by a small number of large claims in Commercial Property.

The current year attritional loss ratio showed a strong improvement of 2.5 points from prior year to 57.8% demonstrating the benefits of our underwriting and portfolio actions. Current year profits of £6m were supported by a continued strong prior year performance with a £68m profit or 4.7% benefit to COR. We expect continued positive prior year development in Canada but at lower levels than the last two years. The overall combined ratio was 94.9%, 3.2 points higher than previous year mainly due to the wildfire losses.

Our transformation programme in Canada has progressed well during the year, delivering customer retention actions, deployment of new pricing tools, process simplification, and the implementation of the Guidewire claims system proceeding as planned.

Total controllable expenses were down 8% year-on-year (comprising 10% cost reductions, partly offset by 2% inflation). Headcount was down 7% in the year, and is down 19% since the end of 2013.

Canada - Outlook

We target a stabilisation of premiums in 2017 and continued progress towards our combined ratio ambition of

REGIONAL REVIEW - UK

Management basis

1 RFX = reported foreign exchange rates; CFX = constant foreign exchange rates

2 Rate changes reflect changes for risks renewing in the year-to-date versus comparable risks renewing in the same period the previous year

UK

The UK delivered the best underwriting result in over a decade at £123m and a COR of 95.4%. Continued delivery from our performance improvement programme has driven this strong result against a competitive landscape.

Customer satisfaction metrics remain strong with further improvements delivered from 2015. Of note More Than Net Promoter Scores ("NPS") increased by 39% from 2015 and Motability NPS remained at market leading levels of +80. The creation of two new trading divisions in Commercial Lines are enabling us to better serve customers and compete more effectively.

Premiums were down 1% overall which included the impact of portfolio remediation in personal broker motor and delegated business.

UK Personal net written premiums contracted by 6% following the exit of Broker Motor during 2016. The growth of our highly successful Telematics proposition continues at pace with 90% growth from 2015 and helped deliver underlying 15% growth in Personal Motor. Underlying shrinkage (excluding the exited business) was 1% driven by remediation of the Delegated Authority Home portfolio offsetting strong growth in Personal Motor enabled by Telematics performance.

UK Commercial net written premiums grew by 2% following the transfer of Scandinavian Marine portfolio during 2016. Excluding this transfer UK Commercial net written premium growth was flat to 2015.

The UK underwriting result of £123m was underpinned by improving attritional loss ratios (1.8 points better) demonstrating the continuing underwriting discipline across the business. Favourable weather experience (3.3 points better than last year) was offset by adverse large loss experience (0.8 points adverse), whilst prior year development of 2.5% included £14m of favourable development from the December 2015 Storms.

The UK Personal underwriting result of £48m was £1m favourable to 2015 with improvements in attritional loss ratios across Personal Motor and Pet. In Commercial, an underwriting profit of £75m was £110m favourable to 2015 with a 2.4 point improvement in the attritional loss ratio following improvements in Marine and Commercial Motor. The Marine large loss performance was 5.6pts improved from 2015 following the remediation programme in 2016, although this was offset by more elevated large loss levels in Motor and Liability.

The continuing change activity across the UK helped deliver further improvements to controllable expenses which were down 1%, comprising 3% gross cost reduction offset by 2% inflation. Headcount was down 5% in the year and is down 18% since the end of 2013.

UK - Outlook

January renewals have delivered in line with expectations and premium trends are expected to continue to deliver modest growth through 2017.

Despite a challenging external landscape, we have ambitious plans to continue transforming the UK business, investing in capabilities and delivering sustainable 'best in class' performance. Our medium target COR of below 94% remains.

REGIONAL REVIEW - IRELAND & MIDDLE EAST

Ireland - management basis

Middle East - management basis

1 RFX = reported foreign exchange rates; CFX = constant foreign exchange rates

2 Rate changes reflect changes for risks renewing in the year-to-date versus comparable risks renewing in the same period the previous year

IRELAND

In Ireland, while the headline underwriting loss of £49m is disappointing, the current year underwriting result has returned to profit with an improvement of £30m year on year. Full year premiums of £306m were up 6% at constant FX versus 2015 with significant rate being carried during 2016.

The underwriting loss of £49m comprises a £1m current year profit (2015: £29m loss) and a £50m prior year loss (2015: £6m loss). The current year improvement reflects an attritional loss ratio of 66.2% which was 8 points better than last year, significant rate increases, and further cost reductions.

The prior year loss is predominantly in the Republic of Ireland Commercial and Motor portfolios where a combination of higher than expected claims and the distortion of our reserving patterns following the events of 2013 have resulted in further strengthening of reserves during 2016. These issues have been amplified by a challenging Irish market, characterised by aggressive claims inflation and increasing litigation mitigated by a very hard rating environment.

Just over £30m of the development relates to three classes: Motor, Liability and SME where we put through significant price increases in 2016 ahead of our plans, with further increases planned for 2017. Much of the remainder of the adverse development relates to business we have now exited.

Within the underwriting result, the impact of weather and large losses, taken together, was broadly in line with long term averages although weather losses were nil while large losses were relatively high.

The performance improvement plan continues in Ireland. Irish FTE was down 9% in 2016 and is down 33% since the end of 2013, with total controllable expenses down 24% year-on-year.

Ireland - Outlook

We are targeting a return to operating profitability in 2017 through continued underwriting improvement, portfolio remediation and cost reduction. The challenging market environment, in particular for claims inflation with the Book of Quantum revision, PPO legislation and judicial reviews, demands that we continue our focus on securing adequate rate in each of our portfolios, and may give rise to additional reserve volatility.

MIDDLE EAST

The Middle East region delivered a sub-96% COR for the 5th consecutive year, against a backdrop of a sustained economic downturn and tough trading conditions.

Premiums of £187m were down 8% at constant FX as a result of the challenging trading conditions resulting from the macroeconomic difficulties and portfolio action taken in KSA.

The underwriting result of £14m is £6m better than 2015 and the COR improved by 2.6 points to 92.8%. Underwriting actions have been taken across the portfolios which have delivered 4.7 point improvement in the attritional loss ratio to 57.2% (2015: 61.9%).

The region secured a new major bank assurance partnership with First Gulf Bank and a new health partnership with NowHealth in Dubai, as well as the opening of new branches and the enhancement of digital offerings.

Middle East - Outlook

The medium term outlook for our Middle East business remains positive. Targeted growth plans are in place for 2017 and work is underway to further develop capabilities throughout the region including underwriting and pricing sophistication. With our affinity and bank assurance partnerships, we are well positioned to take early advantage of any economic upturn.

DISCONTINUED & NON-CORE OPERATIONS

1 Non-core

2 Includes Latin America, Hong Kong, Singapore, China, India, Italy, UK Engineering, and Russia.

Disposal programme

In 2014 we commenced a major disposal programme with the intention of focusing RSA on its strongest businesses. Significant progress has been made to date, as follows:

Completed disposals:

· Baltics (Lithuania, Latvia, Estonia): announced 17 April 2014, completed 30 June 2014 Latvia, 31 October 2014 Lithuania and Estonia. Total proceeds: £215m. Gain on sale: £124m.

· Poland: announced 17 April 2014, completed 15 September 2014. Total proceeds: £74m. Gain on sale: £29m.

· Noraxis: announced 19 May 2014, completed 2 July 2014. Total proceeds: £220m. Gain on sale: £164m.

· Thailand associate: announced and completed 19 December 2014. Total proceeds: £37m. Gain on sale: £21m.

· Hong Kong & Singapore: announced 21 August 2014, completed 31 March 2015. Total proceeds: £123m. Gain on sale: £103m.

· China: announced 3 July 2014, completed 14 May 2015. Total proceeds: £69m. Gain on sale: £28m.

· India associate: announced 18 February 2015, completed 29 July 2015. Total proceeds: £46m. Gain on sale: £21m.

· Italy: announced 17 October 2014, completed 31 December 2015. Total proceeds: £18m. Gain on sale: £29m.

· UK Engineering Inspection: Completed 1 November 2015. Gain on sale: £2m.

· Russia: announced 9 December 2015, completed 29 January 2016. Total proceeds: £5m. Tangible gain on sale: £1m. Total loss on sale: £10m.

· Latin America: announced 8 September 2015, completed during FY 2016. Total proceeds: £434m. Tangible gain on sale: £158m. Total loss on sale: £19m.

Announced disposals:

· UK Legacy liabilities: announced 7 February 2017. Disposal of £834m of undiscounted UK legacy insurance liabilities net of reinsurance. Transaction takes form of initial reinsurance agreement, to be effective at 31 December 2016, and which substantially effects economic transfer, to be followed by a subsequent legal transfer of the business. Further details included in Appendix (pg30).

APPENDIX

UNDERLYING AND ALTERNATIVE PERFORMANCE MEASURES

The Group uses alternative performance measures, including certain underlying measures, to help explain business performance and financial position. Where not defined in the body of this announcement, further information is set out below.

Note 7 on pages 61-63 of the condensed consolidated financial statements presents a reconciliation of the management basis to statutory income statement.

Underlying premiums

Underlying growth rate in Scandinavia has been calculated by adjusting Scandinavian 2015 premiums downwards by £26m for the non-repeat of two large multi-year deals and also by £33m for the transfer of Marine business from Scandinavia to the UK in FY 2016.

Combined operating ratio

The Group's combined operating ratio (COR) is calculated on an 'earned' basis as follows:

COR = loss ratio + commission ratio + expense ratio

Where:

Loss ratio = net incurred claims / net earned premiums

Commission ratio = commissions / net earned premiums

Expense ratio = operating expenses / net earned premiums

Underlying profit before tax

Underlying profit before tax is calculated as operating profit less interest costs.

Underlying Core Group tax rate

The underlying Core Group tax rate mainly comprises the local statutory tax rates in our territories applied to underlying regional profits (operating profits less interest costs).

Net asset value and tangible net asset value per share

Net asset value per share data at 31 December 2016 was based on total shareholders' funds of £3,715m, adjusted by £125m for preference shares. Tangible net asset value per share was based on a tangible book value of £2,862m (equal to shareholders' funds of £3,715m, less goodwill & intangible assets of £728m, less £125m preference share capital).

Earnings per share

The earnings per share (EPS) is calculated using the result attributable to the ordinary shareholders of the Parent Company and the weighted average number of shares in issue during the period. On a basic and diluted basis these were 1,018,174k and 1,024,449k respectively (net of RSA owned shares). The number of shares in issue at 31 December 2016 was 1,019,555k (net of RSA owned shares).

Stated EPS uses profit attributable to ordinary shareholders (profit after tax less non-controlling interests and preference share dividends). Underlying EPS uses an underlying profit measure calculated as operating profit less interest costs taxed at an underlying tax rate of 24% for FY 2016, less non-controlling interests and preference share dividends.

Constant exchange (CFX)

Prior period comparative translated at current period exchange rates.

Controllable costs

Total controllable costs are stated on a 'written' basis, and include underwriting operating expenses, claims expenses, investment expenses, central expenses, and Solvency II costs.

Current year underwriting result

The profit or loss earned from business for which protection has been provided in the current financial period.

Prior year underwriting result

The profit or loss arising from settling claims incurred in previous years at a better or worse level than the previous estimated costs.

'Record' underwriting performance

Record FY Group underwriting profit and combined ratio considers the FY periods for 2006-2016. In order to compare on a 'like-for-like' basis, historical periods have been adjusted for central expense reallocation changes made in 2015, Scandinavian discount rate changes made in 2014, and IAS 19 pension net interest cost changes made in 2012. In the case of the expense reallocations and IAS 19 changes, the restatement value applied in the year of change has been applied to all preceding years back to 2006.

Return on equity and tangible equity