7th Aug 2008 07:00
HALF YEARLY FINANCIAL REPORT TO 30 JUNE 2008 Strong Group performance -- Net written premiums of £3.4bn up 12% -- Combined operating ratio (COR) of 93.0% -- Operating result up 9% to £440m -- Profit after tax up 23% to £292m -- Interim dividend up 10% to 2.73p Delivery against strategic objectives -- Strong results in challenging trading and economic conditions -- Results demonstrate the benefits of management actions and the strong and diversified portfolio -- Maintaining tight operational and financial management -- Continuing to take the right action on rate -- Delivered 2008 annualised expense savings target of £200m Full year outlook -- Combined operating ratio for 2008 now expected to be better than 95% \* T 6 Months 6 Months Movement* 2008 2007 Total GroupNet written premiums £3,364m £2,992m +12%Underwriting result £179m £144m +24%Combined operating ratio 93.0% 93.3% 0.3ptsOperating result (1) £440m £403m +9%Profit after tax (1) £292m £237m +23% 30 June 31 December 2008 2007Balance sheetShareholders' funds £3,221m £3,077m +5%Net asset value per share 94p 91p +3%Net asset value per share excluding IAS 19 85p 88p (3)% Interim dividend per ordinary share 2.73p 2.48p +10%\* T * Reported exchange rate Andy Haste, Group CEO of RSA Insurance Group plc, commented: "It has been another good first half and we have once again delivered strongresults in what are challenging trading and economic conditions. These resultscontinue to demonstrate the positive impact of our management actions and thebenefit of the Group's strong and diversified portfolio. With these actions and the strength of the portfolio, we remain confident in theGroup's ability to continue to deliver sustainable profitable performance. As itstands today, we now expect to achieve a combined operating ratio for 2008 ofbetter than 95%. The outlook for the Group is positive, and this is reflected inthe 10% increase in the interim dividend to 2.73p (H1 2007: 2.48p)." \* TFor further information: Analysts PressShona Cotterill Thomas CoopsTel: +44 (0) 20 7111 7212 Tel: +44 (0) 20 7111 7047Mobile: +44 (0) 7894 938600 Mobile: +44 (0) 7834 005605 Wendy Hardy Simon KutnerTel: +44 (0) 20 7111 7140 Tel: +44 (0) 20 7111 7327Mobile: +44 (0) 7917 092724 Mobile: +44 (0) 7795 445656 Simon Moyse (Finsbury) Tel: +44 (0) 20 7251 3801 Mobile: +44 (0) 7810 505473\* T CONTENTS Interim management report CEO review Operations review Summary consolidated income statement - management basis Summary consolidated balance sheet - management basis Other information - management basis Regional analysis of insurance operations Estimation techniques, risks, uncertainties and contingencies Condensed financial statements Responsibility statements Independent review report to RSA Insurance Group plc Shareholder information Financial calendar Important disclaimer Visit www.rsagroup.com for more information. This half yearly report has beenprepared in accordance with the requirements of English Company Law and theliabilities of the directors in connection with this half yearly report shall besubject to the limitations and restrictions provided by such law. This documentmay contain "forward-looking statements" (as defined in the US PrivateSecurities 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 the relevant industries, as wellas the 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. Nothing in this document should be construed to as a profitforecast. (1) For a reconciliation of operating result to profit after tax see SummaryConsolidated Income Statement - Management basis. INTERIM MANAGEMENT REPORT CEO REVIEW The Group continues to deliver strong results in challenging market conditions.Net written premiums are up 12% to £3.4bn (5% on constant exchange), with strongunderlying growth and the benefits of foreign exchange in International andEmerging Markets, and a disciplined approach in the UK. The underwriting resultis up by 24% to £179m, reflecting the benefit of management actions on rate andexpenses, and our tight financial and operational management, while improvedweather was partially offset by higher large losses. As expected, Internationalcontributed the majority of the Group's underwriting result, with continuedprofitable performance in the UK and Emerging Markets. The combined operatingratio (COR) is 93.0% (H1 2007: 93.3%). The investment result is up 3% to £311m and includes an 11% increase ininvestment income to £323m, offset by the expected lower level of total gains(£32m compared with £53m in H1 2007). The operating result is up 9% to £440m,profit before tax has increased by 17% to £395m and includes profit on disposalsof £17m from recycled foreign exchange following the liquidation of a Frenchsubsidiary. Profit after tax is up 23% to £292m and the underlying ROE is strongat 17.9%. Business Overview Set out below are the net written premiums and combined operating ratios for ourregions: \* T Net written premiums Combined operating ratio 6 Months 6 Months Movement Movement at 6 Months 6 Months Movement 2008 2007 as reported constant 2008 2007 exchange £m £m % % % % Points International 1,628 1,324 23 8 89.7 89.5 (0.2)UK 1,377 1,365 1 1 96.2 96.1 (0.1)Emerging Markets 351 294 19 9 96.2 94.8 (1.4)Group Re 8 9 (11) (11) - - - -----------------------------------------------------------------------------------------------------Total Group 3,364 2,992 12 5 93.0 93.3 0.3-----------------------------------------------------------------------------------------------------\* T We have continued to drive profitable growth across the Group, with almost 60%of net written premiums coming from International and Emerging Markets. InInternational, net written premiums are up 23% to £1.6bn (8% on constantexchange), driven by strong organic growth, the impact of acquisitions andforeign exchange. In Scandinavia, premiums are up by 19% to £959m (5% onconstant exchange), driven by a good performance in Commercial in Denmark andNorway, with particularly strong growth in Marine reflecting both organicinitiatives and the acquisition of the Pohjola Marine portfolio last year. InCanada, premiums have increased by 36% to £428m (21% on constant exchange),reflecting strong organic growth and the benefits of the CNS acquisition whichcompleted in December 2007. Johnson continues to perform strongly, increasingpremiums by 28% (14% on constant exchange). In Other Europe, premiums are up by19% to £241m (3% on constant exchange), with strong double digit growth in Italyoffset by a disciplined approach in Ireland, reflecting competitive tradingconditions. The UK market also remains competitive and premiums are up by 1% to £1.4bn. Weare maintaining our strategy of targeting profitable growth, taking the rightaction on rate and selective capacity withdrawal. In Personal, premiums are inline with last year at £548m, reflecting the inwards transfer of thePaymentshield portfolio in the second quarter of 2007, and the impact of lowermortgage originations and new car sales on Affinity business this year. MORETH>N continues to perform well, with premiums up 3%. In Commercial, overallpremiums are up by 1% to £829m, with good growth in specialty lines offsettingthe withdrawal of capacity in lines of business where we cannot achieve ourtarget returns. We have continued to take action on rate, increasing PersonalHousehold and Motor rates by 5%, and achieving increases in Commercial of 2% inLiability, 4% in Property and 8% in Motor. Overall retention remains strong atover 80%. In Emerging Markets, while as expected, we've seen some signs of relativeeconomic slowdown, these markets remain attractive with good growth potential.Premiums are up by 19% to £351m (9% on constant exchange) and increased by 27%(15% on constant exchange) after excluding Venezuela, which we sold in December2007. In Asia and the Middle East, premiums are up by 25% (23% on constantexchange) with continued excellent growth in UAE Motor and the successfulexpansion of our Construction and Engineering business. In Latin America,premiums are up 24% (12% on constant exchange), after adjusting for the sale ofVenezuela, with good growth across all countries. In the Baltics, premiums areup by 33% (16% on constant exchange), driven by a strong motor performance inLatvia and Lithuania, and further growth from our start up in Estonia. Our objective is sustainable profitable performance and each of our regions hasagain delivered a strong result. In International, we have achieved a 27%increase in the underwriting profit to £121m and a COR of 89.7%. In the UK, wehave maintained good profitability, with an underwriting profit of £48m and aCOR of 96.2%. Emerging Markets has delivered an underwriting result of £10m anda COR of 96.2%. Across the Group, we remain focused on increasing operational efficiency andreducing costs. In the first half, we delivered on our 2008 expense savingstargets, and at our Investor Day in May, we announced a new £25m expense savingstarget for Scandinavia. Outlook We have again delivered strong results in challenging conditions. Our managementactions and strong portfolio are driving sustainable profitable performance andwe remain confident about the outlook for the Group. As it stands today, we nowexpect to deliver a combined operating ratio for the full year of better than95%. As a reflection of the Board's confidence in the future performance of theGroup, we are increasing the interim dividend by 10% to 2.73p (H1 2007: 2.48p). Andy Haste, Group CEO, RSA Insurance Group plc OPERATIONS REVIEW Operating Result The operating result is £440m (H1 2007: £403m) and benefits from both improvedunderwriting and investment results. The underwriting result of £179m (H1 2007:£144m) reflects another strong performance. As announced in February, weexpected a more balanced contribution from the current and prior year in the2008 underwriting result. In the first half of 2008, the current yearunderwriting profit is £56m (H1 2007: underwriting loss £31m) while the prioryear profit is £123m (H1 2007: £175m). The improvement in the current yearresult includes improved weather (£83m better than 2007) partly offset byadverse large loss experience (£41m worse than 2007), primarily in the UK. Thestrong prior year result reflects continued positive run off from all threeregions. The Group continues to adopt a prudent reserving policy for both current andoverall reserves and at 30 June 2008, reserves were ahead of the start of theyear, and significantly to the right side of best estimate. - International International continues to drive the Group forward and has again delivered astrong top and bottom line performance. Net written premiums are up 23% to£1,628m (8% on constant exchange). This reflects 36% growth in Canada (21% onconstant exchange), 19% growth in Scandinavia (5% on constant exchange) and 19%growth in Other Europe (3% at constant exchange). As expected, Internationalcontributed the majority of the Group's underwriting result, with a 27% increasein underwriting profit to £121m. In Scandinavia, Commercial performed strongly, delivering a 21% increase in netwritten premiums to £477m (7% on constant exchange). This reflects good growthin Denmark and Norway, while Marine grew by 18% at constant exchange as a resultof both organic initiatives and the acquisition of the Pohjola Marine portfolioin 2007. In Personal lines, premiums are up 17% to £482m (3% on constantexchange) reflecting strong retention and further growth from White Label inNorway. In Canada, Personal net written premiums increased by 38% to £311m (23% onconstant exchange). Growth in Personal Intermediated reflects positive rate,improved retention and the CNS acquisition which completed in December 2007.Johnson, our direct personal business, continued to perform strongly, delivering28% growth (14% on constant exchange), and adding 12 new sponsorship groups inthe first half. In Commercial, net written premiums increased by 30% to £117m(16% on constant exchange) reflecting the CNS acquisition and strong retention. In Other Europe, premiums are up by 19% to £241m (3% on constant exchange),primarily reflecting above market growth in Italy as we continue to expand ouragency network, adding 24 new agents in the first six months. In Ireland, marketconditions remain competitive and, as a result, premiums are down 2% on lastyear at constant exchange. There are however, opportunities for profitablegrowth and we were recently appointed the sole provider of household insuranceto Bank of Ireland and completed the acquisition of Sertus, the specialist motorunderwriter at the end of March. We are also taking action on rate in Ireland,and have achieved increases across Personal lines, as well as in CommercialProperty and Motor. The International COR was 89.7% (H1 2007: 89.5%). The Scandinavian COR improved2.6 points to 87.3% driven by a strong increase in profitability in Personallines. In Canada, profitability remains strong with a COR of 93.7% (H1 200791.2%), despite adverse weather, with some of the worst winter storms in Ontariofor almost 70 years, while the COR for Other Europe was 94.8% (H1 2007: 90.3%). The result has been underpinned by our continued focus on operationalexcellence. In 2007 we achieved our target of reducing the Scandinavian expenseratio to below 15% and in May, we announced a further cost savings target of£25m. - UK The UK remains our toughest market and we are maintaining our strategy oftargeting profitable growth, taking the right action on rate and selectivecapacity withdrawal. Premiums are up by 1% to £1.4bn, with a COR of 96.2% (H12007: 96.1%). In Personal, premiums are in line with last year at £548m, reflecting theinwards transfer of the Paymentshield portfolio in the second quarter of 2007 of£22m, and the impact of lower mortgage originations and new car sales onAffinity business this year. MORE TH>N continues to perform well, with premiumsup 3%, and new business sales and average motor premiums up by 10% and 11%respectively. In Commercial, overall premiums are up by 1% to £829m, with good growth inspecialty lines, including Marine which is up 9%, Risk Solutions up 4% andtargeted growth in Commercial Fleet, offsetting the withdrawal of capacity inlines of business, such as small and mid corporate Property, where we cannotachieve our target returns. We have continued to take action on rate across the UK, increasing PersonalHousehold and Motor rates by 5%, and achieving increases in Commercial of 2% inLiability, 4% in Property and 8% in Motor. Overall retention remains strong atover 80%. The underwriting result is £48m, compared with £51m in 2007, with the expectedlower level of prior year development and an increased level of large lossesoffsetting the benefits of improved weather. In Commercial lines, the lowerprior year development reduced the Casualty underwriting result, however, thishas been offset by improved profitability in Motor and Other. The UK expense ratio including commissions is 33.3%, compared with 33.5% in2007, reflecting a 1.2% increase in the commission ratio (due to a one offprofit commission payment in 2008 versus a receipt in 2007), and a 1.4%improvement in the expense ratio. - Emerging Markets In Emerging Markets, while as expected, we've seen some signs of relativeeconomic slowdown, these markets remain attractive with good growth potential.Premiums are up by 19% to £351m (9% on constant exchange) and increased by 27%(15% on constant exchange) after excluding Venezuela, which we sold in December2007. The underwriting result is up 25% to £10m and the COR was 96.2% (H1 2007:94.8%). In Asia and the Middle East, premiums are up by 25% (23% on constant exchange)with further excellent growth in UAE Motor. We have also successfully expandedour specialist Construction and Engineering business and we now underwrite fromSingapore, Dubai, Shanghai, Hong Kong and Bahrain. In Latin America, premiums are up 24% (12% on constant exchange), afteradjusting for the sale of our business in Venezuela, with good growth across allcountries. We continue to focus on building our presence in the Affinity market,and in the first six months we have signed deals with seven retailers andfinancial institutions in Brazil and Chile, where Marine also continues toperform strongly. In the Baltics, premiums are up 33% (16% on constant exchange) driven by astrong motor performance in Latvia and Lithuania, and further growth from ourstart up in Estonia. We also launched our new SME proposition in Lithuania whichwill be rolled out across the Baltics later this year. Our joint ventures in India and Central and Eastern Europe continue their goodmomentum, and premiums are up 26% to £64m. These businesses are not consolidatedin our results, however, our ongoing investment in them is shown in 'Otheroperating activities'. The Emerging Markets' expense ratio including commission has increased by 3.9points to 39.6% (H1 2007: 35.7%) reflecting investment in new capabilitiesacross the region, higher commission as a result of increased levels of Affinitybusiness, and a one off receipt of a profit commission in 2007. We continue to leverage Group best practice to strengthen technical expertise,including moving 50 senior staff and managers from our established businessesinto roles across the region. - Rating movements Rate movements achieved for risks renewing in June 2008 versus comparable risksrenewing in June 2007 are set out in the table below. Our action on ratingdemonstrates our commitment to maintaining pricing discipline and to deliveringsustainable profitable performance. \* T Personal Commercial Motor Household Motor Liability Property % % % % % UK 5 5 8 2 4Scandinavia - 3 2 5 3Canada 2 7 (2) (1) (3)\* T - Other activities The analysis of the other activities result is as follows: \* T 6 Months 6 Months Movement 2008 2007 £m £m Central expenses (29) (28) -4%Investment expenses and charges (12) (11) -9%Other operating activities (9) (4) -125% -----------------------------------------------------------------------------------------------Other activities (50) (43) -16%-----------------------------------------------------------------------------------------------\* T Expenses from other activities for the first six months have increased by £7m to£50m. Other operating activities of £9m include the ongoing investment in ourjoint ventures in India and Central and Eastern Europe, as well as businessdevelopment expenses for the Emerging Markets' region. - Investment result The analysis of the investment results is as follows: \* T 6 Months 6 Months Movement 2008 2007 £m £m Bonds 228 187 +22%Equities 30 28 +7%Cash and cash equivalents 35 42 -17%Land and buildings 5 8 -38%Other 25 27 -7%--------------------------------------------------------------------------------------------Investment income 323 292 +11% ------------- ------------ ----------Realised gains 36 63 -43%Unrealised gains/(losses), impairments and foreign exchange (4) (10) +60% ------------- ------------ ----------Total gains 32 53 -40%Unwind of discount including ADC (44) (43) -2% --------------------------------------------------------------------------------------------Investment result 311 302 +3%--------------------------------------------------------------------------------------------\* T The Group continues to maintain a low risk investment strategy with theportfolio dominated by high quality fixed income and cash assets. The investmentresult is up 3% to £311m, and reflects increased investment income offset by theexpected decrease in total gains from £53m in 2007 to £32m in the first half ofthe year. Investment income is up 11% to £323m, reflecting an increase in bond and cashyields as well as foreign exchange gains of £15m. The average underlying yieldon the portfolio (excluding the yield on the ADC funds withheld account) hasincreased by 20 basis points to 4.6% (H1 2007: 4.4%). Total gains were £32m (H1 2007: £53m). Within this, realised gains total £36m,including £15m on equity hedges and other gains of £21m. Unrealised gains and impairments total £4m (H1 2007: £10m) and includeunrealised gains on equity hedges of £45m, offset by the mark to marketmovements on commercial property of £38m, and on CDO's of £5m. Impairments onthe UK equity portfolio total £6m. The Group continues to have no holdings in monoline insurers and no exposure tocredit insured bonds, US municipal bonds or US sub prime Residential MortgageBacked Securities. The Group's CDO exposure has been further reduced, primarilythrough selective disposals, and at the half year was £93m (31 December 2007:£130m) including £82m of CLOs which have experienced no downgrades. As at 30 June, the Group had no equity exposure to US Government SponsoredEnterprises Fannie Mae and Freddie Mac, and fixed interest exposure of just £7m,of which, £5m is due to mature in October 2008. 86% of the total investment portfolio is invested in high quality fixed incomeand cash assets. The fixed interest portfolio remains concentrated on highquality short dated assets, with 99% of the bond portfolio investment grade, and86% rated AA or above. The bond holdings are well diversified, with 70% investedin currencies other than Sterling, and 45% invested in corporate bonds. Theaverage duration is 2.6 years for the Group, and 1.8 years in the UK. At the half year, equities (excluding preference shares and CollectiveInvestment Vehicles backed by fixed income and cash) comprised 8% of theportfolio. Around 75% of the equity portfolio is protected from the full impactof equity market falls with a rolling programme of put and call options, withthe nominal amount and strike levels of coverage adjusted at least quarterly. The commercial property portfolio is only 3% of investment assets and compriseshigh quality commercial properties, generating strong and sustainable rentalincome and does not include any development properties. The investment portfolio totalled £13.2bn at the half year compared with £13.3bnat the year end, with the movement of £62m reflecting foreign exchange gains of£366m offset by mark to market movements of £345m and other movements of £83m.The foreign exchange benefit reflects the appreciation of the Euro and theDanish and Swedish Kroner against Sterling. The mark to market movement on thebond portfolio is a negative £137m, and the movement on equities a negative£158m. This movement on equities is partially offset by the £60m gain on theequity hedges, giving a net £98m movement. In terms of the full year, our guidance was for total gains to be around £80m,and as it stands today, that still remains our expectation. There may however beopportunities in the second half of the year to take action within the portfolioto lock in higher yields, and in which case, we would look to take advantage ofthis. At 30 June 2008, unrealised gains on the balance sheet were £141m (31 December2007: £461m) which included £310m on the equity portfolio. OTHER INFORMATION Capital position The regulatory capital position of the Group under the Insurance GroupsDirective (IGD) is set out below: \* T 30 June 30 June 31 December 2008 2008 2007 Requirement Surplus Surplus £bn £bn £bn Insurance Groups Directive 1.1 1.4 1.5\* T The IGD surplus was £1.4bn compared with £1.5bn at 31 December 2007 and coverageover the IGD requirement is 2.3 times (31 December 2007: 2.5 times). Thedecrease in IGD surplus primarily reflects investment movements, dividendpayments and pension funding, offset by after tax profits for the period of£292m. At 30 June 2008, the Group had surplus economic capital of around £2.3bn, upfrom £2.2bn at the start of the year, based on a risk tolerance consistent withStandard & Poor's long term A rated bond default curve. This is equivalent to aprobability of solvency over 1 year of 99.94%. The Group calculates its economic capital position using a global multi yearstochastic economic capital model. The model is a key decision making tool andis used for a range of strategic, operational and financial management purposesthroughout the Group, and has also been the basis for the Group's IndividualCapital Assessment submissions to the FSA since the 2004 year end. The Group is currently rated A, stable outlook by Standard & Poor's. The Groupis rated A3 positive outlook by Moody's and A- positive outlook by AM Best. In June, S&P announced changes to their current capital model for non lifeinsurers regarding the treatment of the unearned premium reserve. We arecurrently determining the impact of this change, however, it is expected tosignificantly increase the level of surplus capital held with regard to the S&PA rating requirement. Our financing and liquidity position is strong. The next call on any externalfinancing is not until Q4 2009 and our committed £500m senior facility remainsundrawn. Return on equity Underlying return on equity is 17.9% and is calculated as the profit after taxattributable to ordinary shareholders from continuing operations, excludinggains and losses on disposals, expressed in relation to opening shareholders'funds attributable to ordinary shareholders. Combined operating ratio The combined operating ratio represents the sum of expense and commission costsexpressed in relation to net written premiums and claim costs expressed inrelation to net earned premiums. The calculation of the COR of 93% was based onnet written premiums of £3,364m and net earned premiums of £3,092m. Net asset value per share The net asset value per share at 30 June 2008 was 94p (31 December 2007: 91p).At 1 August 2008, the net asset value per share was estimated at 96p. The net asset value per share at 30 June 2008 was based on total shareholders'funds of £3,221m, adjusted by £125m for preference shares, and shares in issueat the period end of 3,293,779,795 (excluding those held in the ESOP trusts). Dividend The directors have declared an interim ordinary dividend of 2.73p per share. Theinterim dividend will be payable on 28 November 2008 to shareholders on theregister at the close of business on 15 August 2008. Shareholders will beoffered a SCRIP dividend alternative. SCRIP dividend mandates need to bereceived by Equiniti Limited before 31 October 2008. The second preference sharedividend for 2008 will be payable on 1 October 2008 to holders of such shares onthe register at the close of business on 29 August 2008. Risks and uncertainties There are a number of potential risks and uncertainties which could have amaterial impact on the Group's performance over the remaining six months of thefinancial year and could cause actual results to differ materially from expectedand historical results. The Board considers the risks and uncertaintiesdisclosed in the latest Annual Report and Accounts to continue to reflect theprincipal risks and uncertainties of the Group over the remaining six months ofthe financial year, except where specifically mentioned in this half yearlyfinancial report. The principal risks and uncertainties of the Group, as per page 29 of the latestAnnual Report and Accounts, are: rating environment softens significantly in keymarkets; insurance risks are accepted outside the Group's risk appetite or belowtechnical price; adverse loss experience through catastrophic losses arisingfrom an insurance event or series of events, increasing frequency and severityof large losses or deterioration in long tail reserves and adverse financialmarkets impact the investment portfolio and pension funds. Further informationon the risks and uncertainties of the Group is included in the latest AnnualReport and Accounts. Related party transactions In 2008, there have been no related party transactions that have materiallyaffected the financial position of the Group. FURTHER INFORMATION The full text of the above is available to the public at 1 Leadenhall Street,London EC3V 1PP. The text is also available online at www.rsagroup.com. A liveaudiocast of the analyst presentation, including the question and answersession, will be broadcast on the website at 10.30am today and available via alisten only conference call by dialling UK Freephone 0800 358 1448 orInternational dial in: + 44 (0) 208 609 1270. An indexed version of theaudiocast will be available on the website by the end of the day. Copies of theslides to be presented at the analyst meeting will be available on the site from10.00am today. A Q3 interim management statement will be released on 6 November 2008. The full year 2008 results will be announced on 26 February 2009. MANAGEMENT BASIS OF REPORTING The following analysis on pages 10 to 13 has been prepared on a non statutorybasis as management believe that this is the most appropriate method ofassessing the financial performance of the Group. The management basis reflectsthe way management monitor the business. The underwriting result includesinsurance premiums, claims and commissions and underwriting expenses. Inaddition, the management basis also discloses a number of items separately suchas investment result, interest costs and other activities. Estimationtechniques, risks, uncertainties and contingencies are included on pages 16 to18. Financial information on a statutory basis is included on pages 20 to 26. SUMMARY CONSOLIDATED INCOME STATEMENT MANAGEMENT BASIS \* T 6 Months 6 Months 12 Months 2008 2007 2007 £m £m £m Continuing operationsNet written premiums 3,364 2,992 5,837----------------------------------------------------------------------------------------------- Underwriting result 179 144 278 ------------ ------------ --------------- Investment income 323 292 591 Realised gains 36 63 174 Unrealised gains/(losses), impairments and foreign exchange (4) (10) (55) Unwind of discount including ADC (44) (43) (81) ------------ ------------ ---------------Investment result 311 302 629-----------------------------------------------------------------------------------------------Insurance result 490 446 907Other activities (50) (43) (93)-----------------------------------------------------------------------------------------------Operating result 440 403 814 Interest costs (54) (52) (104)Amortisation (9) (8) (18)-----------------------------------------------------------------------------------------------Profit before disposals 377 343 692Profit/(loss) on disposals 18 (5) (22)-----------------------------------------------------------------------------------------------Profit before tax 395 338 670Taxation (103) (88) (29)-----------------------------------------------------------------------------------------------Profit after tax from continuing operations 292 250 641 Discontinued operationsLoss after tax from discontinued operations - (13) (13) -----------------------------------------------------------------------------------------------Profit after tax 292 237 628----------------------------------------------------------------------------------------------- Earnings per share on profit from continuing operations attributable to the ordinary shareholders of the Company:Basic 8.7p 7.2p 19.3pDiluted 8.6p 7.1p 19.0p Earnings per share on profit attributable to the ordinary shareholders of the Company:Basic 8.7p 6.7p 18.9pDiluted 8.6p 6.6p 18.6p\* T SUMMARY CONSOLIDATED BALANCE SHEET MANAGEMENT BASIS \* T 30 June 30 June 31 December 2008 2007 2007 £m £m £mAssetsGoodwill and other intangible assets 694 589 663Property and equipment 422 366 377Associated undertakings 106 28 105Investments -------------- ------------- ------------- Investment property 396 474 429 Equity securities 1,230 1,649 1,487 Debt and fixed income securities 10,148 8,850 9,581 Other 284 315 272 -------------- ------------- -------------Total investments - management basis 12,058 11,288 11,769Reinsurers' share of insurance contract liabilities 1,832 1,935 1,872Insurance and reinsurance debtors 2,747 2,881 2,579Deferred acquisition costs 577 493 542Other debtors and other assets 1,455 1,124 1,069Cash and cash equivalents 1,158 1,173 1,509---------------------------------------------------------------------------------------------Assets associated with continuing operations 21,049 19,877 20,485Assets associated with discontinued operations* 13 - 108 ---------------------------------------------------------------------------------------------Total assets 21,062 19,877 20,593--------------------------------------------------------------------------------------------- Equity, reserves and liabilities Equity and reservesShareholders' funds 3,221 2,704 3,077Minority interests 68 66 67---------------------------------------------------------------------------------------------Total equity and reserves 3,289 2,770 3,144Loan capital 1,221 1,165 1,194---------------------------------------------------------------------------------------------Total equity, reserves and loan capital 4,510 3,935 4,338--------------------------------------------------------------------------------------------- Liabilities (excluding loan capital)Insurance contract liabilities 14,107 13,749 13,727Insurance and reinsurance liabilities 485 428 426Borrowings 302 121 303Provisions and other liabilities 1,658 1,644 1,734---------------------------------------------------------------------------------------------Liabilities associated with continuing operations 16,552 15,942 16,190Liabilities associated with discontinued operations* - - 65---------------------------------------------------------------------------------------------Total liabilities (excluding loan capital) 16,552 15,942 16,255---------------------------------------------------------------------------------------------Total equity, reserves and liabilities 21,062 19,877 20,593---------------------------------------------------------------------------------------------\* T These summary consolidated half yearly financial statements have been approvedfor issue by the Board of Directors on 6 August 2008. * Assets and liabilities associated with discontinued operations in 2008 relateto property held for sale and in December 2007 to a UK subsidiary and propertyheld for sale. 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 2008 3,077 67 1,194 4,338 Profit after tax 287 5 - 292Exchange gains 35 - 28 63Fair value losses net of tax (242) (2) - (244)Pension fund actuarial gains and losses net of tax 136 - - 136Amortisation of loan capital - - (1) (1)Share issue 69 - - 69Changes in shareholders' interests in subsidiaries (2) - - (2)Share options 13 - - 13Prior year final dividend (147) (2) - (149)Preference dividend (5) - - (5) -------------------------------------------------------------------------------------------------Balance at 30 June 2008 3,221 68 1,221 4,510-------------------------------------------------------------------------------------------------\* T Net assets have increased by £172m to £4,510m. This increase primarily reflectsthe profit after tax for the period of £292m, and pension fund actuarial gainsof £136m, offset by fair value losses of £244m and the 2007 final dividend of£149m. Pension fund surplus The table below provides a reconciliation of the Group pension fund surplus (netof tax) from 1 January 2008 to 30 June 2008. \* T UK Other Group £m £m £m Pension fund at 1 January 2008 154 (38) 116 Actuarial gains/(losses) 139 (3) 136Asset reallocation funding 26 - 26Other movements 22 1 23 -------------------------------------------------------------------------------------------------Pension fund at 30 June 2008 341 (40) 301-------------------------------------------------------------------------------------------------\* T The surplus on the pension scheme as at 30 June 2008 is £301m compared with£116m at the year end. The movement reflects the change in discount rate for theUK schemes from 5.6% to 6.5% in line with increases in bond yields during thefirst six months, offset by the strengthening of the inflation assumption from3.2% to 3.6% and lower asset values. The Group uses medium cohort assumptions for mortality, using PFA92 and PMA92tables. The life expectancy of a male pensioner aged 60 is assumed to be 85.8,and 87.0 for a female pensioner. Cashflow - management basis \* T 6 Months 6 Months 2008 2007 £m £m Operating cashflow 344 350Tax paid (50) (28)Interest paid (42) (34)Group dividends (88) (71)Dividend to minorities (2) (31)-----------------------------------------------------------------------------------------------Net cashflow 162 186Issue of share capital 5 301Pension asset reallocation funding (37) (86)Net movement of debt (5) 49Corporate activity (91) (741) -----------------------------------------------------------------------------------------------Cash movement 34 (291)----------------------------------------------------------------------------------------------- Represented by:Decrease in cash and cash equivalents (408) (680)Purchase of other investments 442 389 ----------------------------------------------------------------------------------------------- 34 (291)-----------------------------------------------------------------------------------------------\* T The Group's operating cashflow is £344m and is in line with 2007. Tax paid of£50m is £22m higher than 2007, primarily due to a one off repayment receivedlast year. Interest paid of £42m is £8m up on 2007, reflecting repo activity andthe foreign exchange impact on Euro loans. The pension funding payment of £37mis part of our pension scheme asset reallocation strategy. The issue of sharecapital and corporate activity in 2007 primarily related to the purchase of theCodan minority. Corporate activity in 2008 of £91m includes three smallacquisitions in the UK and International, further capital investment in ourEastern Europe joint venture and the disposal of run off books in the UK andScandinavia. REGIONAL ANALYSIS OF INSURANCE OPERATIONS SIX MONTHS TO 30 JUNE \* T Increase Increase at Net written premiums as constant 2008 2007 reported exchange £m £m % % United Kingdom 1,377 1,365 1 1 International 1,628 1,324 23 8 Emerging Markets 351 294 19 9 Group Re 8 9 (11) (11) ------------------------------------------------------------------------------------------------ Total Group 3,364 2,992 12 5------------------------------------------------------------------------------------------------ Underwriting result Investment result Insurance result 2008 2007 2008 2007 2008 2007 £m £m £m £m £m £m United Kingdom 48 51 182 181 230 232 International 121 95 107 100 228 195 Emerging Markets 10 8 21 20 31 28 Group Re - (10) 1 1 1 (9) ------------------------------------------------------------------------------------------------ Total Group 179 144 311 302 490 446------------------------------------------------------------------------------------------------ Operating ratios 2008 2007 Claims Expenses Combined Claims Expenses Combined % % % % % % United Kingdom 62.9 33.3 96.2 62.6 33.5 96.1 International 68.7 21.0 89.7 68.8 20.7 89.5 Emerging Markets 56.6 39.6 96.2 59.1 35.7 94.8 ------------------------------------------------------------------------------------------------ Total Group 65.1 27.9 93.0 65.3 28.0 93.3------------------------------------------------------------------------------------------------\* T INVESTMENT RESULT BY REGION SIX MONTHS TO 30 JUNE 2008 \* T UK International Emerging Group Group Markets Re £m £m £m £m £m Investment income 177 112 19 15 323Realised gains 20 13 2 1 36Unrealised gains/(losses), impairments and foreign exchange (3) (1) - - (4)Unwind of discount including ADC (12) (17) - (15) (44)----------------------------------------------------------------------------------------------------Investment result 182 107 21 1 311----------------------------------------------------------------------------------------------------\* T The total investment income is allocated to the regions based on economiccapital requirements. Realised gains, unrealised gains and impairment losses areallocated with reference to the above amounts. The unwind of discount isattributed on an actual basis. UNITED KINGDOM INSURANCE OPERATIONS SIX MONTHS TO 30 JUNE \* T Net written premiums Underwriting result Operating ratio 2008 2007 2008 2007 2008 2007 £m £m £m £m % %PersonalHousehold 279 298 3 3 95.8 98.9Motor 234 227 6 15 97.3 91.3Other 35 23 (3) 1 99.6 91.7------------------------------------------------------------------------------------------------Total UK Personal 548 548 6 19 96.5 96.0------------------------------------------------------------------------------------------------ CommercialProperty 316 340 (17) (9) 109.6 102.0Casualty 147 147 8 23 99.3 86.2Motor 258 230 25 11 87.7 95.7Other 108 100 26 7 71.6 92.0------------------------------------------------------------------------------------------------Total UK Commercial 829 817 42 32 96.0 96.2------------------------------------------------------------------------------------------------Total UK 1,377 1,365 48 51 96.2 96.1------------------------------------------------------------------------------------------------\* T INTERNATIONAL INSURANCE OPERATIONS SIX MONTHS TO 30 JUNE \* T Net written premiums Underwriting result Operating ratio 2008 2007 2008 2007 2008 2007 £m £m £m £m % %PersonalScandinavia 482 413 58 31 86.0 90.2Canada 311 225 13 22 95.7 90.5Other Europe 140 115 3 11 97.9 89.1------------------------------------------------------------------------------------------------Total Personal 933 753 74 64 91.0 89.7------------------------------------------------------------------------------------------------ CommercialScandinavia 477 394 23 17 89.2 89.8Canada 117 90 13 6 87.9 92.5Other Europe 101 87 11 8 91.7 91.9------------------------------------------------------------------------------------------------Total Commercial 695 571 47 31 87.8 89.1------------------------------------------------------------------------------------------------ TotalScandinavia 959 807 81 48 87.3 89.9Canada 428 315 26 28 93.7 91.2Other Europe 241 202 14 19 94.8 90.3------------------------------------------------------------------------------------------------Total International 1,628 1,324 121 95 89.7 89.5------------------------------------------------------------------------------------------------\* T ESTIMATION TECHNIQUES, RISKS, 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 represent the company's estimate of the cost of settlement ofclaims that have occurred by the balance sheet date but have not yet beenfinally settled. In addition to the inherent uncertainty of having to make provision for futureevents, there is also considerable uncertainty as regards the eventual outcomeof the claims that have occurred by the balance sheet date but remain unsettled.This includes claims that may have occurred but have not yet been notified tothe company and those that are not yet apparent to the insured. As a consequence of this uncertainty, the insurance company needs to applysophisticated estimation techniques to determine the appropriate provisions. Estimation techniques Claims and unexpired risks provisions are determined based upon previous claimsexperience, knowledge of events and the terms and conditions of the relevantpolicies and on interpretation of circumstances. Particularly relevant isexperience with similar cases and historical claims payment trends. The approachalso includes the consideration of the development of loss payment trends, thepotential longer term significance of large events, the levels of unpaid claims,legislative changes, judicial decisions and economic and political conditions. Where possible, the Group adopts multiple techniques to estimate the requiredlevel of provisions. This assists in giving greater understanding of the trendsinherent in the data being projected. The Group's estimates of losses and lossexpenses are reached after a review of several commonly accepted actuarialprojection methodologies and a number of different bases to determine theseprovisions. These include methods based upon the following: -- the development of previously settled claims, where payments to date are extrapolated for each prior year; -- estimates based upon a projection of claims numbers and average cost; -- notified claims development, where notified claims to date for each year are extrapolated based upon observed development of earlier years; and -- expected loss ratios. In addition, the Group uses other methods such as the Bornhuetter-Fergusonmethod, which combines features of the above methods. The Group also usesbespoke methods for specialist classes of business. In selecting its bestestimate, the Group considers the appropriateness of the methods and bases tothe individual circumstances of the provision class and underwriting year. Theprocess is designed to select the most appropriate best estimate. Large claims impacting each relevant business class are generally assessedseparately, being measured either at the face value of the loss adjusters'estimates or projected separately in order to allow for the future developmentof large claims. Provisions are calculated gross of any reinsurance recoveries. A separateestimate is made of the amounts that will be recoverable from reinsurers basedupon the gross provisions and having due regard to collectability. The claims provisions are subject to close scrutiny both within the Group'sbusiness units and at Group Corporate Centre. In addition, for major classeswhere the risks and uncertainties inherent in the provisions are greatest,regular and ad hoc detailed reviews are undertaken by advisers who are able todraw upon their specialist expertise and a broader knowledge of current industrytrends in claims development. As an example, the Group's exposure to asbestosand environmental pollution is examined on this basis. The results of thesereviews are considered when establishing the appropriate levels of provisionsfor outstanding claims and unexpired periods of risk. It should be emphasised that the estimation techniques for the determination ofinsurance liabilities involve obtaining corroborative evidence from as wide arange of sources as possible and combining these to form the overall estimate.This technique means that the estimate is inevitably deterministic rather thanstochastic. A stochastic valuation approach, whereby a range of possibleoutcomes is estimated and probabilities assigned thereto, is only possible in alimited number of situations. The pension assets and pension and post retirement liabilities are calculated inaccordance with International Accounting Standard 19 (IAS 19). The assets,liabilities and income statement charge, calculated in accordance with IAS 19,are sensitive to the assumptions made from time to time, including inflation,interest rate, investment return and mortality. IAS 19 compares, at a givendate, the current market value of a pension fund's assets with its long termliabilities, which are calculated using a discount rate in line with yields on'AA' rated bonds of suitable duration and currency. As such, the financialposition of a pension fund on this basis is highly sensitive to changes in bondrates and will also be impacted by changes in equity markets. Uncertainties and contingencies The uncertainty arising under insurance contracts may be characterised under anumber of specific headings, such as: -- uncertainty as to whether an event has occurred which would give rise to a policyholder suffering an insured loss; -- uncertainty as to the extent of policy coverage and limits applicable; -- uncertainty as to the amount of insured loss suffered by a policyholder as a result of the event occurring; and -- uncertainty over the timing of a settlement to a policyholder for a loss suffered. The degree of uncertainty will vary by policy class according to thecharacteristics of the insured risks and the cost of a claim will be determinedby the actual loss suffered by the policyholder. There may be significant reporting lags between the occurrence of the insuredevent and the time it is actually reported to the Group. Following theidentification and notification of an insured loss, there may still beuncertainty as to the magnitude and timing of the settlement of the claim. Thereare many factors that will determine the level of uncertainty such as inflation,inconsistent judicial interpretations and court judgments that broaden policycoverage beyond the intent of the original insurance, legislative changes andclaims handling procedures. The establishment of insurance liabilities is an inherently uncertain processand, as a consequence of this uncertainty, the eventual cost of settlement ofoutstanding claims and unexpired risks can vary substantially from the initialestimates, particularly for the Group's long tail lines of business. The Groupseeks to provide appropriate levels of claims provision and provision forunexpired risks taking the known facts and experience into account. The Group has exposures to risks in each class of business within each operatingsegment that may develop and that could have a material impact upon the Group'sfinancial position. The geographic and insurance risk diversity within theGroup's portfolio of issued insurance policies make it not possible to predictwhether material development will occur and, if it does occur, the location andthe timing of such an occurrence. The estimation of insurance liabilitiesinvolves the use of judgments and assumptions that are specific to the insurancerisks within each territory and the particular type of insurance risk covered.The diversity of the insurance risks results in it not being possible toidentify individual judgments and assumptions that are more likely than othersto have a material impact on the future development of the insuranceliabilities. The sections below identify a number of specific risks relating to asbestos andenvironmental claims. There may be other classes of risk which could develop inthe future and that could have a material impact on the Group's financialposition. The Group evaluates the concentration of exposures to individual and cumulativeinsurance risk and establishes its reinsurance policy to reduce such exposure tolevels acceptable to the Group. Asbestos and environmental claims The estimation of the provisions for the ultimate cost of claims for asbestosand environmental pollution is subject to a range of uncertainties that isgenerally greater than those encountered for other classes of insurancebusiness. As a result it is not possible to determine the future development ofasbestos and environmental claims with the same degree of reliability as withother types of claims, particularly in periods when theories of law are in flux.Consequently, traditional techniques for estimating claims provisions cannotwholly be relied upon and the Group employs specialised techniques to determineprovisions using the extensive knowledge of both internal asbestos andenvironmental pollution experts and external legal and professional advisors. Factors contributing to this higher degree of uncertainty include: -- the long delay in reporting claims from the date of exposure (for example, cases of mesothelioma can have a latent period of up to 40 years). This makes estimating the ultimate number of claims we will receive particularly difficult; -- issues of allocation of responsibility among potentially responsible parties and insurers; -- emerging court decisions and the possibility of retrospective legislative changes 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 RSAoperations. 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, disputes and investigations The Group, in common with the insurance industry in general, is subject tolitigation, mediation and arbitration, and regulatory, governmental and othersectoral inquiries and investigations in the normal course of its business. Inaddition the Group is exposed to the risk of litigation in connection with itsformer ownership of the US operation. The directors do not believe that anycurrent mediation, arbitration, regulatory, governmental or sectoral inquiriesand investigations and pending or threatened litigation or dispute will have amaterial adverse effect on the Group's financial position, although there can beno assurance that losses or financial penalties resulting from any currentmediation, arbitration, regulatory, governmental or sectoral inquiries andinvestigations and pending or threatened litigation or dispute will notmaterially affect the Group's financial position or cash flows for any period. Reinsurance The Group is exposed to disputes on, and defects in, contracts with itsreinsurers and the possibility of default by its reinsurers. The Group is alsoexposed to the credit risk assumed in fronting arrangements and to potentialreinsurance capacity constraints. In selecting the reinsurers with whom we dobusiness our strategy is to seek reinsurers with the best combination of creditrating, price and capacity. We publish internally a list of authorisedreinsurers who pass our selection process and which our operations may use fornew transactions. The Group monitors the financial strength of its reinsurers, including those towhom risks are no longer ceded. Allowance is made in the financial position fornon recoverability due to reinsurer default by requiring operations to provide,in line with Group standards, having regard to companies on the Group's 'WatchList'. The 'Watch List' is the list of companies whom the directors believe willnot be able to pay amounts due to the Group in full. Changes in foreign exchange rates may impact our results We publish our consolidated financial statements in Pounds Sterling. Therefore,fluctuations in exchange rates used to translate other currencies, particularlyother European currencies and the US dollar, into Pounds Sterling will impactour reported consolidated financial condition, results of operations and cashflows from period to period. These fluctuations in exchange rates will alsoimpact the Pound Sterling value of our investments and the return on ourinvestments. Income and expenses for each income statement item are translated at averageexchange rates. Balance sheet assets and liabilities are translated at theclosing exchange rates at the balance sheet date. Investment risk The Group is exposed to credit risk on its invested assets. Credit risk includesthe non performance of contractual payment obligations on invested assets andadverse changes in the credit worthiness of invested assets including exposuresto issuers or counterparties for bonds, equities, deposits and derivatives. Ourinsurance investment portfolios are concentrated in listed securities with verylow levels of exposure to assets without quoted market prices. We use modelbased analysis to verify asset values when market values are not readilyavailable. We use derivative financial instruments to reduce our exposure to adversefluctuations in interest rates, foreign exchange rates and equity markets. Wehave strict controls over the use of derivative instruments. Rating agencies The ability of the Group to write certain types of insurance business isdependent on the maintenance of the appropriate credit ratings from the ratingagencies. The Group has the objective of maintaining single 'A' ratings. At thepresent time the ratings are 'A' (stable) from S&P upgraded from 'A-' inDecember 2007, 'A-' (positive outlook) from AM Best and 'A3' (stable) fromMoody's. Any worsening in the ratings could have an adverse impact on theability of the Group to write certain types of general insurance business. Regulatory environment The legal, regulatory and accounting environment is subject to significantchange in many of the jurisdictions in which we operate. We continue to monitorthe developments and react accordingly. In particular the Group is continuing to monitor and respond to ongoingconsultation following publication of the Solvency II Framework Directive, whichis intended, in the medium term, to achieve greater harmonisation of approachacross European member states to assessing capital resources and requirements.The directors are confident that the Group will continue to meet all futureregulatory capital requirements. Condensed Financial Statements \* TCondensed consolidated income statementCondensed statement of recognised income and expenseCondensed consolidated balance sheetCondensed cashflow statementExplanatory notes to the condensed consolidated financial statements\* T CONDENSED CONSOLIDATED INCOME STATEMENT STATUTORY BASIS \* T 6 Months 6 Months 12 Months 2008 2007 2007 (audited) £m £m £mContinuing operations Income Gross written premiums 3,767 3,438 6,596Less: reinsurance premiums (403) (446) (759)------------------------------------------------------------------------------------------------Net written premiums 3,364 2,992 5,837 ----------- ---------- ------------ Change in the gross provision for unearned premiums (294) (275) (235) Less: change in provision for unearned premiums, reinsurers' share 22 14 5 ----------- ---------- ------------Change in provision for unearned premiums (272) (261) (230)------------------------------------------------------------------------------------------------Net earned premiums 3,092 2,731 5,607Net investment return 355 346 709Other operating income 54 50 113------------------------------------------------------------------------------------------------Total income 3,501 3,127 6,429------------------------------------------------------------------------------------------------ Expenses ----------- ---------- ------------ Gross claims incurred (2,118) (2,025) (4,044) Less: claims recoveries from reinsurers 106 239 387 ----------- ---------- ------------Net claims and benefits (2,012) (1,786) (3,657)Underwriting and policy acquisition costs (950) (845) (1,776)Unwind of discount including ADC (44) (43) (81)Other operating expenses (54) (59) (119)------------------------------------------------------------------------------------------------Total expenses (3,060) (2,733) (5,633)------------------------------------------------------------------------------------------------ Results of operating activities 441 394 796 Finance costs (54) (52) (104)Profit/(loss) on disposals 18 (5) (22)Net share of (loss)/profit after tax of associates (10) 1 -------------------------------------------------------------------------------------------------Profit before tax 395 338 670 Income tax expense (103) (88) (29)------------------------------------------------------------------------------------------------Profit after tax from continuing operations 292 250 641------------------------------------------------------------------------------------------------ Discontinued operationsLoss after tax from discontinued operations - (13) (13) ------------------------------------------------------------------------------------------------Profit after tax 292 237 628------------------------------------------------------------------------------------------------ Attributable to:Equity holders of the Company 287 208 596Minority interests 5 29 32 ------------------------------------------------------------------------------------------------Profit after tax 292 237 628------------------------------------------------------------------------------------------------ Earnings per share on profit from continuing operations attributable to the ordinary shareholders of the Company:Basic 8.7p 7.2p 19.3pDiluted 8.6p 7.1p 19.0p Earnings per share on profit attributable to the ordinary shareholders of the Company:Basic 8.7p 6.7p 18.9pDiluted 8.6p 6.6p 18.6p\* T The attached notes are an integral part of these condensed consolidatedfinancial statements. For dividend information refer to note 8. CONDENSED STATEMENT OF RECOGNISED INCOME AND EXPENSE STATUTORY BASIS \* T 6 Months 6 Months 12 Months 2008 2007 2007 (audited) £m £m £m Exchange gains 35 21 140Fair value losses net of tax (244) (55) (67)Pension fund actuarial gains/(losses) net of tax 136 88 (16)-----------------------------------------------------------------------------------------------Net (losses)/gains recognised in equity (73) 54 57 Profit after tax 292 237 628 -----------------------------------------------------------------------------------------------Total recognised income for the year 219 291 685----------------------------------------------------------------------------------------------- Attributable to:Equity holders of the Company 216 279 670Minority interests 3 12 15 ----------------------------------------------------------------------------------------------- 219 291 685-----------------------------------------------------------------------------------------------\* T The attached notes are an integral part of these condensed consolidatedfinancial statements. CONDENSED CONSOLIDATED BALANCE SHEET STATUTORY BASIS \* T 30 June 30 June 31 December 2008 2007 2007 (audited) £m £m £mAssetsGoodwill and other intangible assets 694 589 663Property and equipment 422 366 377 ------------ ------------ --------------- Investment property 396 474 429 Investments in associates 106 28 105 Financial assets 11,662 10,814 11,340 ------------ ------------ ---------------Total investments 12,164 11,316 11,874Reinsurers' share of insurance contract liabilities 1,832 1,935 1,872Insurance and reinsurance debtors 2,747 2,881 2,579Deferred acquisition costs 577 493 542 ------------ ------------ --------------- Current tax assets 26 21 19 Deferred tax assets 140 18 87 Other debtors and other assets 1,289 1,085 963 ------------ ------------ --------------- 1,455 1,124 1,069Cash and cash equivalents 1,158 1,173 1,509----------------------------------------------------------------------------------------------- 21,049 19,877 20,485 Non current and disposal group assets held for sale* 13 - 108 -----------------------------------------------------------------------------------------------Total assets 21,062 19,877 20,593----------------------------------------------------------------------------------------------- Equity, reserves and liabilities Equity and reservesShareholders' funds 3,221 2,704 3,077Minority interests 68 66 67 -----------------------------------------------------------------------------------------------Total equity and reserves 3,289 2,770 3,144----------------------------------------------------------------------------------------------- LiabilitiesLoan capital 1,221 1,165 1,194Insurance contract liabilities 14,107 13,749 13,727Insurance and reinsurance liabilities 485 428 426Borrowings 302 121 303 ------------ ------------ --------------- Current tax liabilities 133 126 92 Deferred tax liabilities 277 269 224 Provisions 287 286 331 Other liabilities 961 963 1,087 ------------ ------------ ---------------Provisions and other liabilities 1,658 1,644 1,734----------------------------------------------------------------------------------------------- 17,773 17,107 17,384Non current and disposal group liabilities held for sale* - - 65 -----------------------------------------------------------------------------------------------Total liabilities 17,773 17,107 17,449----------------------------------------------------------------------------------------------- Total equity, reserves and liabilities 21,062 19,877 20,593-----------------------------------------------------------------------------------------------\* T These condensed consolidated half yearly financial statements have been approvedfor issue by the Board of Directors on 6 August 2008. The attached notes are an integral part of these condensed consolidatedfinancial statements. * Non current and disposal group assets and liabilities held for sale in 2008relate to property and in December 2007 relate to a UK subsidiary and property. CONDENSED CASHFLOW STATEMENT STATUTORY BASIS \* T 6 Months 6 Months 12 Months 2008 2007 2007 (audited) £m £m £mCash generated from continuing operations 48 (158) 66Tax paid (50) (28) (127)Interest received 320 283 587Interest paid (42) (41) (101)Dividends received 1 1 1Pension asset reallocation funding (37) (86) (86)Cashflows from discontinued operations - (37) (37)------------------------------------------------------------------------------------------------Net cashflows from operating activities 240 (66) 303------------------------------------------------------------------------------------------------Proceeds from sales or maturities of: Investment contracts 2,805 4,111 8,672 Investment property 1 3 18 Property and equipment 2 5 26 Intangible assets 2 22 1 Investments in subsidiaries (net of cash disposed of) (21) (255) (407) Investments in associates - - 22Purchase or settlement of: Investment contracts (3,246) (4,438) (8,878) Investment property (1) (5) (8) Property and equipment (31) (11) (28) Intangible assets (23) (66) (66) Investments in subsidiaries (net of cash acquired) (21) (10) (52) Investments in associates (25) - (64)Cashflows from discontinued operations - 83 83------------------------------------------------------------------------------------------------Net cashflows from investing activities (558) (561) (681)------------------------------------------------------------------------------------------------Proceeds from issue of share capital 5 297 304Purchase of shares from minorities - (554) (616)Dividends paid to ordinary shareholders (83) (66) (102)Dividends paid to preference shareholders (5) (5) (9)Dividends paid to minority interests (2) (31) (31)Net movement in long term borrowings - (24) (25)Net movement in other borrowings (5) 118 293------------------------------------------------------------------------------------------------Net cashflows from financing activities (90) (265) (186)------------------------------------------------------------------------------------------------Net decrease in cash and cash equivalents and bank overdrafts (408) (892) (564) Cash and cash equivalents and bank overdrafts at beginning of the year 1,538 2,040 2,040Effect of exchange rate changes on cash and cash equivalents 24 25 62 ------------------------------------------------------------------------------------------------Cash and cash equivalents and bank overdrafts at end of the period 1,154 1,173 1,538------------------------------------------------------------------------------------------------\* T A reconciliation of cash and cash equivalents and bank overdrafts at the end ofthe period to the condensed consolidated balance sheet is included in note 7. The attached notes are an integral part of these condensed consolidatedfinancial statements. EXPLANATORY NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS 1. Changes in significant accounting policies The annual financial statements are prepared in accordance with InternationalFinancial Reporting Standards (IFRSs) as adopted by the European Union. Thecondensed financial information in this half yearly report has been prepared inaccordance with International Accounting Standard 34 (IAS 34). There have beenno significant changes in accounting policy and methods of computation in thesix months to 30 June 2008. A full list of accounting policies can be found inthe 2007 Annual Report and Accounts (see note 10 below). 2. Operating segments 6 months ended 30 June 2008 \* T UK International Emerging Central Group Markets functions £m £m £m £m £m Net written premiums 1,377 1,628 351 8 3,364---------------------------------------------------------------------------------------------------- Underwriting result 48 121 10 - 179Investment result 182 107 21 1 311----------------------------------------------------------------------------------------------------Insurance result 230 228 31 1 490Other activities 1 (2) (11) (38) (50)----------------------------------------------------------------------------------------------------Operating result (management basis) 231 226 20 (37) 440Amortisation (9)Net share of loss after tax of associates 10 ------------------------------------------------------------------------------ ---------------------Results of operating activities(per condensed consolidated income statement) 441------------------------------------------------------------------------------ --------------------- Combined operating ratio (%) 96.2 89.7 96.2 - 93.0---------------------------------------------------------------------------------------------------- Segment assets (£m) 8,845 9,547 1,545 1,006 20,943----------------------------------------------------------------------------------------------------\* T 6 months ended 30 June 2007 \* T UK International Emerging Central Group Markets functions £m £m £m £m £m Net written premiums 1,365 1,324 294 9 2,992--------------------------------------------------------------------------------------------------- Underwriting result 51 95 8 (10) 144Investment result 181 100 20 1 302---------------------------------------------------------------------------------------------------Insurance result 232 195 28 (9) 446Other activities (1) (5) (3) (34) (43)---------------------------------------------------------------------------------------------------Operating result (management basis) 231 190 25 (43) 403Amortisation (8)Net share of profit after tax of associates (1) ---------------------------------------------------------------------------------------------------Results of operating activities(per condensed consolidated income statement) 394--------------------------------------------------------------------------------------------------- Combined operating ratio (%) 96.1 89.5 94.8 - 93.3--------------------------------------------------------------------------------------------------- Segment assets (£m) 9,128 7,923 1,356 1,442 19,849---------------------------------------------------------------------------------------------------\* T The Group's half yearly results are not subject to any significant impactarising from the seasonality or cyclicality of operations, although there issome seasonality in the regions within which the Group operates. The information above (including the 2007 comparative data) has been prepared onthe same basis as reported in the 2007 Annual Report and Accounts. The segmentassets exclude investment in associates and non current and disposal groupassets held for sale. 3. Earnings per share The earnings per share is calculated by reference to the result attributable tothe equity shareholders and the weighted average number of shares in issueduring the period. On a basic and diluted basis this was 3,244,352,809 and3,279,798,363 respectively (excluding those held in ESOP trusts). The number ofshares in issue at 30 June 2008 was 3,293,779,795 (excluding those held in ESOPtrusts). 4. Changes in estimates of amounts reported in prior financial years During the first half of the year, changes to claims reserve estimates made inprior years as a result of reserve development is included in the prior yearprofit of £123m (H1 2007: £175m). The Group pension fund surplus as at 30 June 2008 is £301m (31 December 2007:£116m). Further information on the pension fund surplus is included on page 12. 5. Business combination and other changes in the structure of the Group On 11 February 2008, the Group acquired 100% of the share capital of Fyfe GroupLimited in the UK. On 31 March 2008, the Group acquired 100% of the sharecapital of Sertus Underwriting Limited in Ireland. The total consideration was£20m and goodwill of £19m arose. The acquisitions do not have a material impacton the Group's results for the first half of 2008. On 29 February 2008 the Group obtained regulatory approval for the disposal ofGuildhall Insurance Company Limited. The disposal generated a £1m pre taxprofit. The net assets were classified as held for sale at 31 December 2007. On18 May 2008 the Group dissolved a French subsidiary, Royal & Sun Alliance SA,that generated a £17m pre tax profit. The profits on disposal represent foreignexchange, which is recycled from shareholders' funds and does not impact totalequity. 6. Changes in total equity and reserves for the period to 30 June \* T Total Shareholders' Minority equity and funds interest reserves £m £m £m Balance at 1 January 2008 3,077 67 3,144 Total recognised income for the year 216 3 219Share issue 69 - 69Changes in shareholders' interests in subsidiaries (2) - (2)Share options 13 - 13Prior year final dividend (147) (2) (149)Preference dividend (5) - (5) ------------------------------------------------------------------------------------------------Balance at 30 June 2008 3,221 68 3,289------------------------------------------------------------------------------------------------ Total Shareholders' Minority equity and funds interest reserves £m £m £m Balance at 1 January 2007 2,561 331 2,892 Total recognised income for the year 279 12 291Share issue 354 - 354Changes in shareholders' interests in subsidiaries (368) (246) (614)Share options 6 - 6Prior year final dividend (123) (31) (154)Preference dividend (5) - (5) ------------------------------------------------------------------------------------------------Balance at 30 June 2007 2,704 66 2,770------------------------------------------------------------------------------------------------\* T During the six months to 30 June 2008, 6,631,414 (H1 2007: 2,539,009) ordinaryshares were issued on the exercise of employee share options. The Company alsoissued 50,784,107 (H1 2007: 35,178,729) ordinary shares under the scrip schemeapproved by the shareholders at the 2008 Annual General Meeting. During 2007,the Company issued 186,350,000 ordinary shares in a placing to fund theacquisition of Codan A/S. 7. Cashflow \* T 6 Months 2008 6 Months 2007 £m £mCash and cash equivalents and bank overdrafts (as reported within the condensedcashflow statement) 1,154 1,173Add: bank overdrafts 4 --------------------------------------------------------------------------------------------------Total cash and cash equivalents 1,158 1,173-------------------------------------------------------------------------------------------------\* T 8. Dividends \* T 30 June 2008 30 June 2007 Per share Total Per share Total p £m p £mOrdinary dividend Final paid in respect of prior year 4.53 147 4.12 123 Interim proposed/paid in respect of current year 2.73 90 2.48 79------------------------------------------------------------------------------------------------- 7.26 237 6.60 202Preference dividend 5 5------------------------------------------------------------------------------------------------- 242 207-------------------------------------------------------------------------------------------------\* T 9. Exchange rates \* T£/local currency 6 Months 2008 6 Months 2007 12 Months 2007 Average Closing Average Closing Average Closing Canadian Dollar 1.99 2.02 2.23 2.13 2.14 1.96Danish Kroner 9.63 9.42 11.04 11.05 10.88 10.15Euro 1.29 1.26 1.49 1.47 1.46 1.36\* T 10. Results for 2007 The financial information for the year ended 31 December 2007 does notconstitute statutory accounts as defined in Section 240 of the Companies Act1985, but has been abridged from the statutory accounts. The statutory Groupfinancial statements of RSA Insurance Group plc (previously Royal & Sun AllianceInsurance Group plc) for the year ended 31 December 2007 have been delivered tothe Registrar of Companies. The independent auditors' report on the Groupfinancial statements for the year ended 31 December 2007 is unqualified and doesnot contain a statement under Section 237(2) or (3) of the Companies Act 1985. RESPONSIBILITY STATEMENTS We confirm that to the best of our knowledge: a) The condensed set of financial statements on pages 20 to 26 has been preparedin accordance with IAS 34 'Interim Financial Reporting', b) The interim management report on pages 3 to 18 includes a fair review of theinformation required by DTR 4.2.7R (indication of important events during thefirst six months and description of principal risks and uncertainties for theremaining six months of the year), and c) The interim management report on pages 3 to 18 includes a fair review of theinformation required by DTR 4.2.8R (disclosure of related party transactions andchanges therein). Signed on behalf of the Board \* TAndy Haste George CulmerChief Executive Officer Chief Financial Officer 6 August 2008 6 August 2008\* T INDEPENDENT REVIEW REPORT TO RSA INSURANCE GROUP PLC Introduction We have been engaged by the Company to review the condensed set of financialstatements in the half yearly financial report for the six months ended 30 June2008 which comprises the condensed consolidated income statement, the condensedstatement of recognised income and expense, the condensed consolidated balancesheet, the condensed cashflow statement and related notes 1 to 10. We have readthe other information contained in the half yearly financial report andconsidered whether it contains any apparent misstatements or materialinconsistencies with the information in the condensed set of financialstatements. This report is made solely to the Company in accordance with InternationalStandard on Review Engagements 2410 issued by the Auditing Practices Board. Ourwork has been undertaken so that we might state to the Company those matters weare required to state to them in an independent review report and for no otherpurpose. To the fullest extent permitted by law, we do not accept or assumeresponsibility to anyone other than the Company, for our review work, for thisreport, or for the conclusions we have formed. Directors' responsibilities The half yearly financial report is the responsibility of, and has been approvedby, the directors. The directors are responsible for preparing the half yearlyfinancial report in accordance with the Disclosure and Transparency Rules of theUnited Kingdom's Financial Services Authority. As disclosed in note 1, the annual financial statements of the Group areprepared in accordance with IFRSs as adopted by the European Union. Thecondensed set of financial statements included in this half yearly financialreport has been prepared in accordance with International Accounting Standard 34'Interim Financial Reporting', as adopted by the European Union. Our responsibility Our responsibility is to express to the Company a conclusion on the condensedset of financial statements in the half yearly financial report based on ourreview. Scope of review We conducted our review in accordance with International Standard on ReviewEngagements (UK and Ireland) 2410, 'Review of Interim Financial InformationPerformed by the Independent Auditor of the Entity' issued by the AuditingPractices Board for use in the United Kingdom. A review of interim financialinformation consists of making enquiries, primarily of persons responsible forfinancial and accounting matters, and applying analytical and other reviewprocedures. A review is substantially less in scope than an audit conducted inaccordance with International Standards on Auditing (UK and Ireland) andconsequently does not enable us to obtain assurance that we would become awareof all significant matters that might be identified in an audit. Accordingly, wedo not express an audit opinion. Conclusion Based on our review, nothing has come to our attention that causes us to believethat the condensed financial statements in the half yearly financial report forthe six months ended 30 June 2008 is not prepared, in all material respects, inaccordance with International Accounting Standard 34 as adopted by the EuropeanUnion and the Disclosure and Transparency Rules of the United Kingdom'sFinancial Services Authority. \* TDeloitte & Touche LLPChartered Accountants and Registered Auditor6 August 2008London, UK\* T SHAREHOLDER INFORMATION Registered office and Group Corporate Centre 9th Floor, One Plantation Place, 30 Fenchurch Street, London EC3M 3BD.Telephone: +44 (0)20 7111 7000. Registered in England No. 2339826. Company website The Annual Report and Accounts, half yearly results and other useful informationabout the Company, such as the current share price, is available on our websitewww.rsagroup.com. Frequently asked questions and answers in respect ofshareholding matters are detailed on the Company's website. Registrar The Company's share register is maintained by Equiniti Limited. Queries regarding your shareholding should be addressed to Equiniti at thefollowing address: Equiniti Limited, Aspect House, Spencer Road, Lancing, WestSussex, BN99 6DA. Telephone: +44 (0)871 384 2048. Overseas callers should use+44 (0)121 415 7064. Shareholders with a text phone facility should use +44(0)871 384 2255. Please quote the company reference number 0059 and your shareholder accountnumber (on your share certificate and dividend tax vouchers) when contacting orcorresponding with Equiniti. Low cost share dealing facilities A telephone and internet dealing service is available through Equiniti whichprovides a simple way of buying and selling RSA shares. Commission is 1.5% witha minimum charge of £25 for telephone dealing and 1% with a minimum charge of£20 for internet dealing. For telephone sales, call +44 (0)845 6037 037 between8.00am and 4.30pm, Monday to Friday, and for internet sales log on towww.shareview.co.uk/dealing. You will need your shareholder reference number asshown on your share certificate. Share dealing services are also widely providedby other organisations. Scrip dividend The Company operates a Scrip Dividend Scheme whereby ordinary shareholders canreceive dividends in the form of shares. The Scheme enables shareholders toincrease their holding in the Company without incurring dealing costs or stampduty. The price of the shares for the 2008 interim dividend is fixed byreference to the average of the Company's middle market closing price for thefive consecutive dealing days commencing on the ex dividend date of 13 August2008. If you wish to participate in the Scheme please contact Equiniti Limited, eitherby telephone or by writing to them at the contact details. Mandate forms withrespect to the 2008 interim dividend should be returned to Equiniti Limited toarrive no later than 31 October 2008. FINANCIAL CALENDAR \* T13 August 2008Ex dividend date for the ordinary interim dividend for 2008 15 August 2008Record date for the ordinary interim dividend for 2008 21 August 2008Announcement of the scrip dividend price for the ordinary interim dividend for 2008 27 August 2008Ex dividend date for the second preference dividend for 2008 29 August 2008Record date for the second preference dividend for 2008 1 October 2008Payment date for the second preference dividend for 2008 31 October 2008Deadline for the receipt of scrip dividend mandates by Equiniti Limited in relation to ordinary interim dividend 2008 6 November 2008Announcement of Q3 interim management statement 28 November 2008Payment of the ordinary interim dividend for 2008 26 February 2009Announcement of the full year results for 2008, the ordinary final dividend for 2008 and the first preference dividend for 2009\* T Copyright Business Wire 2008Related Shares:
RSA.L