8th Aug 2007 07:00
INTERIM RESULTS TO 30 JUNE 2007 Strong half year in challenging conditions -- Net written premiums of £3.0bn up 8% at constant exchange rates -- Combined operating ratio (COR) of 93.3% -- Operating result of £403m -- Profit after tax of £237m -- Interim dividend up 42% to 2.48p Delivery against strategic objectives -- Achieved annualised expense savings target of £130m ahead of schedule -- Announced today a further £70m of expense savings bringing the total to £200m by mid 2008 -- Successful buyout of the Codan minorities and Codan delisted on 31 July 2007 -- Signed Eastern European joint venture -- Awarded China licence -- US disposal completed in March Positive full year outlook -- UK flood losses of £55m in June and £65m in July -- Profitability to remain strong due to continued benefits of management actions and diversified portfolio -- After impact of the floods, expect to deliver a revised COR of around 96% for the full year \* T 6 Months 6 Months Movement* 2007 2006 (restated)(2)Total GroupNet written premiums £2,992m £2,833m +6%Underwriting result £144m £171m -16%Combined operating ratio 93.3% 91.7% -1.6ptsOperating result(1) £403m £416m -3%Profit after tax(1) £237m £238m - 30 June 31 December 2007 2006Balance sheetShareholders' funds £2,704m £2,561m +6%Net asset value per share 81p 82p -1% Interim dividend per ordinary share 2.48p 1.75p +42%**\* T * Reported exchange rate ** Represents an increase of 5% plus the commitment to rebase the dividend by35%, as announced in March 2007 Andy Haste, Group CEO of Royal & Sun Alliance Insurance Group plc, commented: "In challenging market conditions, we've had a good first half - we're drivingprofitable growth in each of our regions and we've achieved a strong bottom lineresult. The results have been delivered against the backdrop of the UK floods inJune, as well as adverse weather and increased large losses across the Group,and clearly demonstrate the benefit of management actions and the strong anddiversified portfolio. The outlook for the Group remains positive. After allowing for the impact of theUK floods in June and July of £120m, as it stands today, we expect to deliver acombined operating ratio for the full year of around 96%. With our strongportfolio and the actions we are taking, we are confident that in 2008 andbeyond, we will continue to deliver the profitable performance that we have seenover the last few years. This is reflected in the 42% increase in the interimdividend to 2.48p (H1 2006: 1.75p)." For further information: \* TAnalysts PressShona Cotterill Phil Wilson-BrownTel: +44 (0) 20 7111 7212 Tel: +44 (0) 20 7111 7047Mobile: +44 (0) 7894 938600 Mobile: +44 (0) 7834 005605 Andrew Wigg Simon Moyse (Finsbury)Tel: +44 (0) 20 7111 7138 Tel: +44 (0) 20 7251 3801Mobile: +44 (0) 7834 944129 Mobile: +44 (0) 7810 505473\* T CONTENTS CEO review Operations review Summary consolidated income statement - management basis Summary consolidated balance sheet - management basis Other information Regional analysis of insurance operations Estimation techniques, uncertainties and contingencies Statutory information Explanatory notes Important Disclaimer This document may contain "forward-looking statements" (as defined in the USPrivate Securities Litigation Reform Act of 1995) with respect to certain of theCompany's plans and its current goals and expectations relating to its futurefinancial condition, performance and results. By their nature, allforward-looking statements involve risk and uncertainty because they relate tofuture events and circumstances which are beyond the Company's control,including amongst other things, UK domestic and global economic businessconditions, market-related risks such as fluctuations in interest rates andexchange rates, the policies and actions of regulatory authorities, the impactof competition, inflation, deflation, the timing impact and other uncertaintiesof future acquisitions or combinations within relevant industries, as well asthe impact of tax and other legislation and other regulations in thejurisdictions in which the Company and its affiliates operate. As a result, theCompany's actual future financial condition, performance and results may differmaterially from the plans, goals and expectations set forth in the Company'sforward-looking statements. The Company undertakes no obligation to update anyforward-looking statements, save in respect of any requirement under applicablelaw or regulation. (1) For a reconciliation of operating result to profit after tax see SummaryConsolidated Income Statement - Management Basis. (2) Restated to exclude the US result as the US operation is disclosed as adiscontinued operation. CEO REVIEW The Group continues to deliver strong results in challenging market conditions.Net written premiums are up 8% on a constant exchange basis to £3.0bn (H1 2006:£2.8bn), reflecting above market growth in International, double digit growth inEmerging Markets, and targeted growth in the UK. The underwriting result of£144m (H1 2006: £171m) reflects the benefit of management actions, including ourprudent reinsurance programme, positive action on rating, and the strong anddiversified portfolio. This result was achieved despite the UK flood event inJune, as well as adverse weather and large loss experience across the Group. Asexpected, International contributed the largest share of the Group'sunderwriting result, with continued strong profitable performance from the UKand Emerging Markets. The combined operating ratio (COR) is 93.3% (H1 2006:91.7%). The investment result of £302m is 3% higher than 2006, while costs for otheractivities are down 10% to £43m. The operating result is £403m, profit beforetax is down 2% at £338m and profit after tax of £237m is in line with 2006. Theeffective tax rate is 26%, which is consistent with the rate in 2006. Theunderlying ROE remains strong at 18.1% for the first half. 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 2007 6 Months 2006 Movement at 6 Months 2007 6 Months 2006 Movement Constant Exchange £m £m % % % Points International 1,324 1,281 7 89.5 90.7 1.2UK 1,365 1,281 7 96.1 91.5 (4.6)Emerging Markets 294 270 15 94.8 95.0 0.2Group Re 9 1 - - - ------------------ ------------- ------------- ------------- ------------- ------------- -------------Total Group 2,992 2,833 8 93.3 91.7 (1.6)----------------- ------------- ------------- ------------- ------------- ------------- -------------\* T We have continued to drive profitable growth across the Group. In International,we are delivering above market growth with net written premiums up 7% to £1.3bn,driven by both strong organic growth and the impact of recent acquisitions. InScandinavia, premiums are up by 7% underpinned by a strong personal linesperformance, where we are seeing the benefits of our strategy to expanddistribution into channels such as bancassurance and car dealerships. In Canada,premiums are up by 6%, with good performances from both Commercial and PersonalIntermediated, and another excellent result from Johnson where we have increasedpremiums by 13%. In Italy, we have delivered double digit growth, while inIreland we are seeing the benefits of our acquisition of EGI in the second halfof last year. In May, we launched an offer for the 24.3% of Codan owned byminority shareholders. We now hold 99.5% and Codan was delisted from theCopenhagen Stock Exchange on 31 July. The acquisition of the outstanding shareswill complete in January 2008. The UK remains our most competitive market and we continue to take a disciplinedapproach to risk selection and rating, while targeting opportunities forprofitable growth. Net written premiums are up 7% to £1.4bn, due primarily tothe strong performance of new Affinity partnerships. We have also achieved goodgrowth in specialist Commercial lines and an 8% increase in premiums from MORETH>N. UK retention remains strong at over 80%. We have continued to take actionon rate, achieving mid single digit increases across Personal lines, while inCommercial lines we have held rate in Property and Liability, while increasingMotor by 4%. In Emerging Markets, our fastest growing region, we achieved double digit growthincreasing net written premiums by 15% to £294m. Within Emerging Markets, wehave identified priority countries and the actions required to deliver ourgrowth plans. We are expanding distribution and our presence in Affinity, aswell as launching new propositions in broker SME and Construction andEngineering to create a strong platform for future growth. We have strengthenedthe central and regional teams, including appointing new CEOs in India andChina. Through our new joint venture in Eastern Europe, which we signed in May,we are now the number one direct writer in Poland. The joint venture haslaunched operations in the Czech Republic and plans to start writing directbusiness in Russia in 2008. In China, we received approval to convert our branchto a wholly owned subsidiary, which over time, will enable us to expand ourgeographic presence outside Shanghai. Across the Group, our objective is sustainable profitable performance and eachof our regions has delivered a strong underwriting result. In International, wehave achieved a 25% increase in the underwriting profit to £95m and improved thecombined ratio by over a point to 89.5%. In the UK, despite the June floodlosses, we have maintained strong profitability, with a COR of 96.1% and anunderwriting profit of £51m. Emerging Markets has delivered an underwritingresult of £8m and an improved COR of 94.8%. Our results continue to be underpinned by our focus on driving operationalexcellence through technical leadership, disciplined expense management and astrong management team. During the first half, we have added to the strength ofthe Executive team with three new appointments. On expense management, today weare announcing that we have achieved on an annualised basis our targeted £130mof savings ahead of schedule and are increasing this target by £70m to £200m bymid 2008, at an additional cost of £50m which will be charged to theunderwriting result. Outlook In challenging market conditions, the Group has delivered another strongperformance in the first half and we are confident about the outlook for theGroup. Despite the impact of the UK floods in June and July of £120m, as itstands today, we expect to deliver a combined operating ratio for the full yearof around 96%. Within this, we continue to expect International to deliver themajority of the Group's underwriting result, and today reaffirm our guidance forCodan of a full year combined operating ratio of 91-93%. With our strong portfolio and the actions we are taking, we are confident thatin 2008 and beyond, we will continue to deliver the strong profitableperformance that we have seen over the last few years. With our 2006 full yearresults, we announced that we would be increasing the 2007 interim dividend byat least inflation plus 35% and thereafter we will grow dividends by at least inline with inflation. As a reflection of the Board's confidence in the futureearnings of the Group, we are increasing the interim dividend by 5% plus thepreviously committed 35% to 2.48p (H1 2006: 1.75p). Andy Haste, Group CEO, Royal & Sun Alliance Insurance Group plc OPERATIONS REVIEW Operating Result The operating result is £403m (H1 2006: £416m), with an improved investmentresult and lower central expenses offset by a lower underwriting result. Theunderwriting result of £144m (H1 2006: £171m) reflects a strong performance inchallenging conditions. The current year underwriting loss is £31m (H1 2006:underwriting profit £104m) and is after the impact of the UK flood event in Juneof £55m, as well as adverse weather (an additional £9m loss compared with a £52mbenefit in H1 2006) and large loss experience (£18m worse than H1 2006) acrossthe Group. Prior year development has emerged over the first two quarters and totalled£175m (H1 2006: £67m). This includes favourable development from our UKSpecialist claims unit, where double digit case savings have been achieved, aswell as the cumulative impact of actions taken to reduce claims leakage in OtherEurope. The Group continues to adopt a prudent reserving policy for both currentyear and overall reserves, and reserves at 30 June 2007 were stronger than atthe start of the year, with particular strength in International. - International In International, we are successfully driving the business harder, deliveringabove market growth while improving profitability. Net written premiumsincreased by 7% on constant exchange to £1,324m (H1 2006: £1,281m), reflecting7% growth in Scandinavia, and 6% growth in Canada and Other Europe.International contributed the largest share of the Group's underwriting result,with a 25% increase in underwriting profit to £95m. In Scandinavia, Personal performed particularly strongly, delivering a 12%increase in net written premiums to £413m on constant exchange, reflecting thestrong performance of our bancassurance and car dealership Affinity schemes aswell as the 2006 White Label acquisition. In Commercial, net written premiumsincreased by 3% on constant exchange to £394m, as we continue to focus onunderwriting discipline while maintaining a strong pipeline of profitableopportunities. In Canada, Personal net written premiums increased by 8% on a constant exchangebasis to £225m, and Johnson, our direct personal business, continued to deliverdouble digit growth, with strong organic growth supplemented by the impact ofacquisitions made in 2006. The Canadian business has also signed a number ofmajor Affinity deals, including Airmiles, providing access to 7 millionpotential new customers. In Commercial, net written premiums increased by 3% atconstant exchange to £90m reflecting a disciplined approach in increasinglycompetitive market conditions. In Other Europe, Personal net written premiums increased by 1% to £115m, whileCommercial delivered a 13% increase in premiums to £87m reflecting above marketgrowth in Italy and strong performance from EGI, the Irish specialty insureracquired in 2006. The International COR improved 1.2 points to 89.5%. The overall Scandinavian CORimproved 0.4 points to 89.9%; the Personal COR improved by 6.9 points reflectingstrong performance in Sweden, while in Commercial, above average large lossexperience resulted in a 7.0 point increase in the COR to 89.8%. In Canada, theCOR is in line with the prior year at 91.2%, while in Other Europe, the CORimproved by 5.3 points to 90.3%. The result has been underpinned by our continued focus on operationalexcellence. We are on track to achieve our target of reducing the Scandinavianfull year expense ratio to below 15%, and in Canadian Intermediated, the expenseratio is now 10.5% against our target of sub 10%. - UK The UK delivered a strong performance in a competitive market. Net writtenpremiums increased by 7% to £1,365m, driven primarily by the Affinity dealssigned in 2006 and targeted growth in specialist Commercial lines. We havecontinued to take action on rating, and have once again achieved mid singledigit increases across Personal lines. In Commercial lines we have held rate inProperty and Liability, while increasing Motor by 4%. Retention remains strongat over 80%. Personal net written premiums have increased by 28% to £548m driven by organicgrowth and the Affinity deals signed in 2006, including Paymentshield. MORE TH>Ndelivered a 15% increase in new business and an 8% increase in net writtenpremiums to £242m. In Commercial, net written premiums were down 4% to £817m (H12006: £854m) reflecting our commitment to underwriting discipline and thewithdrawal of capacity from areas of the market where the rate, terms andconditions do not meet our underwriting criteria. We continue to focus ondriving profitable growth in target trades and segments, with premiums in Profinand Marine up 10% and 14% respectively. In 2006, we set a target tosignificantly grow the Affinity segment. With the deals signed in 2006,including Paymentshield, our Affinity business has increased by over 50% from H12006. In 2007, we have signed four new deals, including Pendragon. In response to the floods in June and July, we were once again one of the firstinsurers on the ground, setting up Emergency Response Centres and helplines inthe worst affected areas. We proactively contacted our customers within 48 hoursand we continue to work closely with local councils and customers to co-ordinateadvice, fast track emergency payments and organise alternative accommodation. The UK's first half result of £51m, which includes the impact of the June floodsof £55m as well as other adverse weather, demonstrates continued profitabilityin challenging conditions with a COR of 96.1%. The UK expense ratio is 33.5% compared with 30.4% in 2006. This comprises a 3.1point increase in the commission ratio following the rapid growth in Affinitybusiness during the first half, while the expense ratio remained flat year onyear. - Emerging Markets Emerging Markets increased net written premiums by 15% on constant exchange to£294m, reflecting strong organic growth across all markets, including 36% growthin the Baltics, 11% in Asia and the Middle East and 9% in Latin America. Across Emerging Markets, we have identified the priority countries and theactions required to deliver our growth plans. We are building a platform tosupport further growth by building capability, expanding distribution anddeveloping new propositions. The management team has been strengthened with theappointment of new heads of Underwriting, Finance, M&A, HR and Legal, as well asnew CEO appointments in India and China. We are focused on building our presence in Affinity markets across the region.In Asia and the Middle East, we have signed five new Affinity deals, while inLatin America, we have recruited the head of ACE's Personal Lines Affinitybusiness to drive this segment forward. We also see opportunities in SME byproviding brokers with efficient servicing models and in Mexico we havedeveloped a solution with Willis that meets their SME needs and gives us firstrefusal on their portfolio. In terms of new propositions, we have partnered withSwiss Re to create Construction and Engineering underwriting centres ofexcellence in Singapore and Dubai. In May, we signed a joint venture agreement that will roll out a directinsurance proposition in Central and Eastern Europe. The joint venture owns thelargest direct insurer in Poland, with annual premiums of over £30m and launchedin the Czech Republic in May. It plans to start writing direct business inRussia in 2008. In China, we received approval to convert our branch to a wholly ownedsubsidiary, which over time, will enable us to expand our geographic presenceoutside Shanghai. We are leveraging Group best practice to strengthen capabilities, includingmoving 20 senior technical staff and managers from our established businessesinto roles across the region. The underwriting result is £8m, down from £10m in 2006 following the impact ofCyclone Gonu in Oman and adverse large loss experience across the region. Inspite of these losses, the COR remained strong at 94.8% and the Latin AmericanCOR has improved from 103.7% at the year end to 99.4% following the actionstaken to improve performance. - Rating movements Rate movements achieved for risks renewing in June 2007 versus comparable risksrenewing in June 2006 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 4 (1) -Scandinavia 3 3 2 5 1Canada - 4 (6) (3) 1\* T - Other activities The analysis of the other activities result is as follows: \* T 6 Months 6 Months Movement 2007 2006 £m £m Central expenses (28) (34) +18%Investment expenses and charges (11) (12) +8%Other operating activities (4) (2) -100%---------------------------------------- ----------------- ----------------- ------------------Other activities (43) (48) +10%---------------------------------------- ----------------- ----------------- ------------------\* T The result from other activities for the first six months has improved by £5m to£43m, driven by the 18% reduction in central expenses to £28m (H1 2006: £34m).Other operating activities include non insurance activities and derivatives,associates as well as business development expenses in Emerging Markets. - Investment result The analysis of the investment results is as follows: \* T 6 Months 6 Months Movement 2007 2006 £m £m Bonds 187 193 -3%Equities 28 29 -3%Cash and cash equivalents 42 29 +45%Land and buildings 8 5 +60%Other 27 6 ---------------------------------------------------------------------------------------------Investment income 292 262 +11% ----------- ----------- -----------Realised gains 63 33 +91%Unrealised (losses)/gains, impairments and foreign exchange (10) 19 -153% ----------- ----------- -----------Total gains 53 52 +2%Unwind of discount (43) (21) -105%--------------------------------------------------------------------------------------------Investment result 302 293 +3%--------------------------------------------------------------------------------------------\* T With the sale of our US operation the investment result now includes the impactof the Adverse Development Cover (ADC) which was put in place in 2003. While theADC has a minimal net impact on the overall investment result, investment incomeincludes £13m in relation to the funds withheld account, offset by £14m ofdiscount unwind on the liabilities included within the unwind of discount totalof £43m. Excluding the ADC, underlying investment income is up 6% to £279m with anincrease in the average yield from 4.0% to 4.4% partially offset by a £0.2bnreduction in the size of the average portfolio. Total realised and unrealisedgains were £53m (H1 2006: £52m). Our investment portfolio stood at £12.5bn at the end of June compared with£12.8bn at the year end. The portfolio is dominated by high quality fixedinterest and cash assets. We have around 1% invested in Collateralised DebtObligations (CDOs) and the vast majority of these are AAA rated. Our ResidentialMortgage Backed Securities exposure is just £2m. The fixed interest portfolio remains concentrated on high quality short datedassets, with an average duration of 3 years. At the end of June, 99% of the bondportfolio was investment grade, with 84% rated AA or above. We continue toexpect that our full year 2007 investment result will be broadly in line with2006 (£556m). As at 30 June 2007 unrealised gains in the balance sheet were £490m (31 December2006: £575m). OTHER INFORMATION US We completed the sale of our US operation on 4 March. In accordance with IFRS,and as noted at our preliminary results announcement, the income statement showsa loss of £13m net of tax for the six months to 30 June 2007, representing therecycling of cumulative US foreign exchange losses. As this amount has beenpreviously recognised in reserves, it is shown outside the operating result andhas no impact on net assets. The income statement comparatives have beenrestated to show the US as discontinued in 2006. The balance sheet comparativeshave not been restated for this disposal. 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 2007 2007 2006 Requirement Surplus Surplus £bn £bn £bn Insurance Groups Directive 1.3 1.2 1.3\* T The IGD surplus was £1.2bn compared with £1.3bn at 31 December 2006. Thecoverage over our IGD requirement is 1.9 times (31 December 2006: 1.9 times). 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. At 31 December 2006, the Group had surplus economic capital of £2.0bn based on arisk tolerance consistent with Standard & Poor's long-term A rated bond defaultcurve. This is equivalent to a probability of solvency over 1 year of 99.94%. The Group is currently rated A- by Standard and Poor's, and continues to targetan insurance financial strength rating of A. We will provide more detail on capital at our presentation to analysts on 10September 2007. Combined operating ratio The combined operating ratio represents the sum of expense and commission costsexpressed in relation to net written premiums and claim costs expressed inrelation to net earned premiums. The calculation of the COR of 93.3% was basedon net written premiums of £2,992m and net earned premiums of £2,731m. Net asset value per share The net asset value per share at 30 June 2007 was 81p (31 December 2006: 82p).At 3 August 2007 the net asset value per share was estimated at 78p. The net asset value per share for 30 June 2007 was based on total shareholders'funds of £2,704m, adjusted by £125m for preference shares, and shares in issueat the period end of 3,190,959,794 (excluding those held in the ESOP trusts). Dividend The directors have declared an interim ordinary dividend of 2.48p per share. Theinterim dividend will be payable on 30 November 2007 to shareholders on theregister at the close of business on 17 August 2007. Shareholders will beoffered a SCRIP dividend alternative. SCRIP dividend mandates need to bereceived by Lloyds TSB Registrars before 2 November 2007. The second preferenceshare dividend for 2007 will be payable on 2 October 2007 to holders of suchshares on the register at the close of business on 31 August 2007. FURTHER INFORMATION The full text of the above is available to the public at 1 Leadenhall Street,London EC3V 1PP. The text is also available on line at www.royalsunalliance.com.A live audiocast of the analyst 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 279 2280 orInternational dial in: + 44 (0) 208 515 2304. 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 from9.30am today. The full year 2007 results will be announced on Wednesday 27 February 2008. MANAGEMENT BASIS OF REPORTING The following analysis has been prepared on a non statutory basis as managementbelieve that this is the most appropriate method of assessing the financialperformance of the Group. Estimation techniques, uncertainties and contingenciesare included below. Financial information on a statutory basis is alsopresented. SUMMARY CONSOLIDATED INCOME STATEMENT MANAGEMENT BASIS \* T 6 Months 6 Months 12 Months 2007 2006 2006 (restated)* £m £m £m Continuing operationsNet written premiums 2,992 2,833 5,484------------------------------------------------------ ---------------------------------------------- Underwriting result 144 171 310 -------------- -------------- -------------- Investment income 292 262 516 Realised gains 63 33 46 Unrealised (losses) / gains impairments and foreign exchange (10) 19 36 Unwind of discount (43) (21) (42) -------------- -------------- --------------Investment result 302 293 556------------------------------------------------------ ----------------------------------------------Insurance result 446 464 866Other activities (43) (48) (86)------------------------------------------------------ ----------------------------------------------Operating result 403 416 780 Interest costs (52) (48) (92)Amortisation (8) (7) (15)Reorganisation costs - (14) (23)------------------------------------------------------ ----------------------------------------------Profit before disposals 343 347 650Loss on disposals (5) (1) (1)------------------------------------------------------ ----------------------------------------------Profit before tax 338 346 649Taxation (88) (91) (170)------------------------------------------------------ ----------------------------------------------Profit after tax from continuing operations 250 255 479 Discontinued operationsLoss after tax from discontinued operations (13) (17) (499)------------------------------------------------------ ----------------------------------------------Profit after tax 237 238 (20)------------------------------------------------------ ----------------------------------------------\* T \* TEarnings per share for profit from continuing operations attributable to the ordinary shareholders of the Company:Basic 7.2p 8.0p 15.0pDiluted 7.1p 7.9p 14.8p Earnings per share on profit/(loss) attributable to the ordinary shareholders of the Company:Basic 6.7p 7.4p (2.1)pDiluted 6.6p 7.3p (2.1)p\* T * The comparatives have been restated to show the US operations as discontinued. SUMMARY CONSOLIDATED BALANCE SHEET MANAGEMENT BASIS \* T 30 June 30 June 31 December 2007 2006 2006 (restated)* £m £m £mAssetsGoodwill and other intangible assets 589 479 552Property and equipment 366 383 385Investments -------------- -------------- ------------- Investment property 474 451 454 Investment in associated undertakings 28 27 27 Equity securities 1,649 1,568 1,620 Debt and fixed income securities 8,850 10,995 8,568 Other 315 239 269 -------------- -------------- -------------Total investments 11,316 13,280 10,938Reinsurers' share of insurance contract liabilities 1,935 3,617 1,927Insurance and reinsurance debtors 2,881 2,513 2,225Deferred acquisition costs 493 465 453Other debtors and other assets 1,124 1,004 852Cash and cash equivalents 1,173 1,564 1,831------------------------------------------------------ ---------------------------------------------Assets associated with continuing operations 19,877 23,305 19,163Assets associated with discontinued operations - - 3,485------------------------------------------------------ ---------------------------------------------Total assets 19,877 23,305 22,648------------------------------------------------------ --------------------------------------------- Equity, reserves and liabilities Equity and reservesShareholders' funds 2,704 2,863 2,561Minority interests 66 379 331------------------------------------------------------ ---------------------------------------------Total equity and reserves 2,770 3,242 2,892Loan capital 1,165 1,208 1,192------------------------------------------------------ ---------------------------------------------Total equity, reserves and loan capital 3,935 4,450 4,084------------------------------------------------------ --------------------------------------------- Liabilities (excluding loan capital)Insurance contract liabilities 13,749 16,259 12,790Insurance and reinsurance liabilities 428 439 391Borrowings 121 6 8Provisions and other liabilities 1,644 2,151 1,781------------------------------------------------------ ---------------------------------------------Liabilities associated with continuing operations 15,942 18,855 14,970Liabilities associated with discontinued operations - - 3,594------------------------------------------------------ ---------------------------------------------Total liabilities (excluding loan capital) 15,942 18,855 18,564------------------------------------------------------ ---------------------------------------------Total equity, reserves and liabilities 19,877 23,305 22,648------------------------------------------------------ ---------------------------------------------\* T Assets and liabilities associated with discontinued operations relate to thediscontinued US business. These summary consolidated interim financial statements have been approved forissue by the Board of Directors on 7 August 2007. * The comparatives have been restated to reflect the fair value adjustment ofthe loan capital, see note 3 below. OTHER INFORMATION MANAGEMENT BASIS Movement in net assets \* T Shareholders' Minority Loan Net funds interest capital assets £m £m £m £m Balance at 1 January 2007 2,561 331 1,192 4,084 Profit after tax 208 29 - 237Exchange gains 21 - - 21Fair value losses net of tax (38) (17) - (55)Pension fund actuarial gains and losses net of tax 88 - - 88Repayment and amortisation of dated loan capital - - (27) (27)Share 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 1,165 3,935---------------------------------------------- --------------- ----------- ------------- -------------\* T The repayment and amortisation of dated loan capital of £27m includes therepurchase of the majority of the remaining Yankee bond, following the debtexchange transaction in 2006. Share issue of £354m includes the equity placingto fund the acquisition of the Codan minority interest and the scrip dividend.Changes in shareholders' interests in subsidiaries of £614m relates to twotransactions; the purchase by Codan of its own shares in the first quarter of2007 and the purchase by the Group of the remaining Codan minority interest inMay. Pension fund surplus The table below provides a reconciliation of the Group pension fund surplus (netof tax) from 1 January 2007 to 30 June 2007. \* T UK Other Group £m £m £m Pension fund at 1 January 2007 72 (48) 24 Actuarial gains and losses 89 (1) 88Deficit funding 62 - 62Other movements 32 (1) 31 ----------------------------------------------------------- ------------- ------------- -------------Pension fund at 30 June 2007 255 (50) 205----------------------------------------------------------- ------------- ------------- -------------\* T Cashflow - management basis \* T 6 Months 6 Months 2007 2006 £m £m Operating cashflow 322 292Interest paid (34) (16)Group dividends (71) (60)Dividend to minorities (31) (6)----------------------------------------------------------------------- ------------- -------------Net cashflow 186 210Issue of share capital 301 3Pension deficit funding (86) (86)Net movement of debt 49 (166)Corporate activity (741) (40)----------------------------------------------------------------------- ------------- -------------Cash movement (291) (79)----------------------------------------------------------------------- ------------- ------------- Funded by:Decrease in cash and cash equivalents (680) (8)Purchase / (sale) of other investments 389 (71)----------------------------------------------------------------------- ------------- ------------- (291) (79)----------------------------------------------------------------------- ------------- -------------\* T The Group's operating cashflow of £322m increased 10% on 2006. The increase ininterest payments to £34m reflects a change in interest payment dates followingthe Yankee Bond exchange in 2006. The £25m increase in the dividend tominorities to £31m reflects the minorities' share of an exceptional dividendpaid by our non-wholly owned UK subsidiary British Aviation Insurance Company,in which we have a 57% holding. The £49m net movement in debt is the partialrepurchase of the Yankee Bond offset by an increase in borrowings to fund theCodan minority buyout. Corporate activity of £741m includes the disposal of theUS operation, the buyout of the Codan minorities and a number of smallacquisitions in International and Emerging Markets. REGIONAL ANALYSIS OF INSURANCE OPERATIONS SIX MONTHS TO 30 JUNE \* T Increase at constant Increase as Net written premiums exchange reported 2007 2006 £m £m % % United Kingdom 1,365 1,281 7 7International 1,324 1,281 7 3Emerging Markets 294 270 15 9Group Re 9 1 - ----------------------- ----------- ------------- ------------ ----------- ----------- ------------Total Group 2,992 2,833 8 6---------------------- ----------- ------------- ------------ ----------- ----------- ------------ Underwriting result Investment result Insurance result 2007 2006 2007 2006 2007 2006 £m £m £m £m £m £m United Kingdom 51 95 181 168 232 263International 95 76 100 106 195 182Emerging Markets 8 10 20 18 28 28Group Re (10) (10) 1 1 (9) (9)---------------------- ----------- ------------- ------------ ----------- ----------- ------------Total Group 144 171 302 293 446 464---------------------- ----------- ------------- ------------ ----------- ----------- ------------ Operating ratios 2007 2006 Claims Expenses Combined Claims Expenses Combined % % % % % %United Kingdom 62.6 33.5 96.1 61.1 30.4 91.5International 68.8 20.7 89.5 69.3 21.4 90.7Emerging Markets 59.1 35.7 94.8 55.7 39.3 95.0---------------------- ----------- ------------- ------------ ----------- ----------- ------------Total Group 65.3 28.0 93.3 64.5 27.2 91.7---------------------- ----------- ------------- ------------ ----------- ----------- ------------\* T INVESTMENT RESULT BY REGION SIX MONTHS TO 30 JUNE 2007 \* T UK International Emerging Group Re Group Markets £m £m £m £m £m Investment income 162 98 17 15 292Realised gains 37 22 4 - 63Unrealised losses, impairments and foreign exchange (6) (3) (1) - (10)Unwind of discount (12) (17) - (14) (43)-------------------------------------------------- ------ ------------- -------- -------- -------Investment result 181 100 20 1 302-------------------------------------------------- ------ ------------- -------- -------- -------\* T The total investment income is allocated to the regions based on economiccapital requirements. Realised gains, unrealised gains and impairment losses areallocated with reference to the above amounts. The unwind of discount isattributed on an actual basis. This method has been revised from 2006 andcomparatives have been restated. UNITED KINGDOM INSURANCE OPERATIONS SIX MONTHS TO 30 JUNE \* T Net written premiums Underwriting result Operating ratio 2007 2006 2007 2006 2007 2006 £m £m £m £m % %PersonalHousehold 298 193 3 42 98.9 77.4Motor 227 217 15 (7) 91.3 102.0Other 23 17 1 3 91.7 84.3---------------------- ----------- ----------- ----------- ----------- -------------- ------------Total UK Personal 548 427 19 38 96.0 89.5---------------------- ----------- ----------- ----------- ----------- -------------- ------------ CommercialProperty 340 359 (9) 25 102.0 91.7Casualty 147 146 23 19 86.2 89.7Motor 230 260 11 19 95.7 90.2Other 100 89 7 (6) 92.0 108.3---------------------- ----------- ----------- ----------- ----------- -------------- ------------Total UK Commercial 817 854 32 57 96.2 92.4---------------------- ----------- ----------- ----------- ----------- -------------- ------------Total UK 1,365 1,281 51 95 96.1 91.5---------------------- ----------- ----------- ----------- ----------- -------------- ------------\* T INTERNATIONAL INSURANCE OPERATIONS SIX MONTHS TO 30 JUNE \* T Net written premiums Underwriting result Operating ratio 2007 2006 2007 2006 2007 2006 £m £m £m £m % %PersonalScandinavia 413 376 31 6 90.2 97.1Canada 225 227 22 22 90.5 90.3Other Europe 115 116 11 9 89.1 91.8---------------------- ----------- ----------- ----------- ----------- -------------- ------------Total Personal 753 719 64 37 89.7 93.4---------------------- ----------- ----------- ----------- ----------- -------------- ------------ CommercialScandinavia 394 387 17 35 89.8 82.8Canada 90 97 6 4 92.5 91.7Other Europe 87 78 8 - 91.9 101.1---------------------- ----------- ----------- ----------- ----------- -------------- ------------Total Commercial 571 562 31 39 89.1 86.2---------------------- ----------- ----------- ----------- ----------- -------------- ------------ TotalScandinavia 807 763 48 41 89.9 90.3Canada 315 324 28 26 91.2 91.3Other Europe 202 194 19 9 90.3 95.6---------------------- ----------- ----------- ----------- ----------- -------------- ------------Total International 1,324 1,281 95 76 89.5 90.7---------------------- ----------- ----------- ----------- ----------- -------------- ------------\* T ESTIMATION TECHNIQUES, UNCERTAINTIES AND CONTINGENCIES Introduction One of the purposes of insurance is to enable policyholders to protectthemselves against uncertain future events. Insurance companies accept thetransfer of uncertainty from policyholders and seek to add value through theaggregation and management of these risks. The uncertainty inherent in insurance is inevitably reflected in the financialstatements of insurance companies. The uncertainty in the financial statements principally arises in respect of theinsurance liabilities of the company. The insurance liabilities of an insurance company include the provision forunearned premiums and unexpired risks and the provision for outstanding claims.Unearned premiums and unexpired risks represent the amount of income set asideby the company to cover the cost of claims that may arise during the unexpiredperiod of risk of insurance policies in force at the balance sheet date.Outstanding claims represents the company's estimate of the cost of settlementof claims that have occurred by the balance sheet date but have not yet beenfinally settled. In addition to the inherent uncertainty of having to make provision for futureevents, there is also considerable uncertainty as regards the eventual outcomeof the claims that have occurred by the balance sheet date but remain unsettled.This includes claims that may have occurred but have not yet been notified tothe company and those that are not yet apparent to the insured. As a consequence of this uncertainty, the insurance company needs to applysophisticated estimation techniques to determine the appropriate provisions. Estimation techniques Claims and unexpired risks provisions are determined based upon previous claimsexperience, knowledge of events and the terms and conditions of the relevantpolicies and on interpretation of circumstances. Particularly relevant isexperience with similar cases and historical claims payment trends. The approachalso includes the consideration of the development of loss payment trends, thepotential longer term significance of large events, the levels of unpaid claims,legislative changes, judicial decisions and economic 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, including inflation, interest rate,investment return and mortality. IAS 19 compares, at a given date, the currentmarket value of a pension fund's assets with its long term liabilities, whichare calculated using a discount rate in line with yields on 'AA' rated bonds ofsuitable duration and currency. As such, the financial position of a pensionfund on this basis is highly sensitive to changes in bond rates and equitymarkets. Uncertainties and contingencies The uncertainty arising under insurance contracts may be characterised under anumber of specific headings, such as: -- uncertainty as to whether an event has occurred which would give rise to a policyholder suffering an insured loss; -- uncertainty as to the extent of policy coverage and limits applicable; -- uncertainty as to the amount of insured loss suffered by a policyholder as a result of the event occurring; and -- uncertainty over the timing of a settlement to a policyholder for a loss suffered. The degree of uncertainty will vary by policy class according to thecharacteristics of the insured risks and the cost of a claim will be determinedby the actual loss suffered by the policyholder. There may be significant reporting lags between the occurrence of the insuredevent and the time it is actually reported to the Group. Following theidentification and notification of an insured loss, there may still beuncertainty as to the magnitude and timing of the settlement of the claim. Thereare many factors that will determine the level of uncertainty such as inflation,inconsistent judicial interpretations and court judgments that broaden policycoverage beyond the intent of the original insurance, legislative changes andclaims handling procedures. The establishment of insurance liabilities is an inherently uncertain processand, as a consequence of this uncertainty, the eventual cost of settlement ofoutstanding claims and unexpired risks can vary substantially from the initialestimates, particularly for the Group's long tail lines of business. The Groupseeks to provide appropriate levels of claims provision and provision forunexpired risks taking the known facts and experience into account. The Group has exposures to risks in each class of business within each operatingsegment that may develop and that could have a material impact upon the Group'sfinancial position. The geographical and insurance risk diversity within theGroup's portfolio of issued insurance policies make it not possible to predictwhether material development will occur and, if it does occur, the location andthe timing of such an occurrence. The estimation of insurance liabilitiesinvolves the use of judgments and assumptions that are specific to the insurancerisks within each territory and the particular type of insurance risk covered.The diversity of the insurance risks results in it not being possible toidentify individual judgments and assumptions that are more likely than othersto have a material impact on the future development of the insuranceliabilities. The sections below identify a number of specific risks relating to asbestos andenvironmental claims. There may be other classes of risk which could develop inthe future and that could have a material impact on the Group's financialposition. The Group evaluates the concentration of exposures to individual and cumulativeinsurance risk and establishes its reinsurance policy to reduce such exposure tolevels acceptable to the Group. Asbestos and environmental claims The estimation of the provisions for the ultimate cost of claims for asbestosand environmental pollution is subject to a range of uncertainties that isgenerally greater than those encountered for other classes of insurancebusiness. As a result it is not possible to determine the future development ofasbestos and environmental claims with the same degree of reliability as withother types of claims, particularly in periods when theories of law are in flux.Consequently, traditional techniques for estimating claims provisions cannotwholly be relied upon and the Group employs specialised techniques to determineprovisions using the extensive knowledge of both internal asbestos andenvironmental pollution experts and external legal and professional advisors. Factors contributing to this higher degree of uncertainty include: -- the long delay in reporting claims from the date of exposure (for example, cases of mesothelioma can have a latent period of up to 40 years). This makes estimating the ultimate number of claims we will receive particularly difficult; -- issues of allocation of responsibility among potentially responsible parties and insurers; -- emerging court decisions increasing or decreasing insurer liability; -- the tendency for social trends and factors to influence court awards; -- developments pertaining to the Group's ability to recover reinsurance for claims of this nature; and -- for US liabilities from our London market business, developments in the tactics of US plaintiff lawyers and court decisions and awards. Acquisitions and disposals The Group makes acquisitions and disposals of businesses as part of its normaloperations. All acquisitions are made after due diligence, which will include,amongst other matters, assessment of the adequacy of claims reserves, assessmentof the recoverability of reinsurance balances, inquiries with regard tooutstanding litigation and inquiries of local regulators and taxationauthorities. Consideration is also given to potential costs, risks and issues inrelation to the integration of any proposed acquisitions with existing R&SAoperations. The Group will seek to receive the benefit of appropriatecontractual representations and warranties in connection with any acquisitionand, where necessary, additional indemnifications in relation to specific risksalthough there can be no guarantee that such protection will be adequate in allcircumstances. The Group may also provide relevant representations, warrantiesand indemnities to counterparties on any disposal. While such representations,warranties and indemnities are essential components of many contractualrelationships, they do not represent the underlying purpose for the transaction.These clauses are customary in such contracts and may from time to time lead tous receiving claims from counterparties. Contracts with third parties The Group enters into joint ventures, outsourcing contracts and distributionarrangements third parties in the normal course of its business and is reliantupon those third parties performing their obligations in accordance with theterms and conditions of the contracts. Litigation, mediation and arbitration The Group, in common with the insurance industry in general, is subject tolitigation, mediation and arbitration, and regulatory, governmental and othersectoral inquiries in the normal course of its business. In addition the Groupis subject to litigation in connection with its former ownership of the USoperation. The directors do not believe that any current mediation, arbitration,regulatory, governmental or sectoral inquiries and pending or threatenedlitigation or dispute will have a material adverse effect on the Group'sfinancial position, although there can be no assurance that losses resultingfrom any current mediation, arbitration, regulatory, governmental or sectoralinquiries and pending or threatened litigation or dispute will not materiallyaffect the Group's financial position or cash flows for any period. Reinsurance The Group is exposed to disputes on, and defects in, contracts with itsreinsurers and the possibility of default by its reinsurers. The Group is alsoexposed to the credit risk assumed in fronting arrangements. In selecting thereinsurers with whom we do business our strategy is to seek reinsurers with thebest combination of credit rating, price and capacity. We publish internally alist of authorised reinsurers who pass our selection process and which ouroperations may use for new transactions. The Group monitors the financial strength of its reinsurers, including those towhom risks are no longer ceded. Allowance is made in the financial position fornon recoverability due to reinsurer default by requiring operations to provide,in line with Group standards, having regard to companies on the Group's 'WatchList'. The 'Watch List' is the list of companies whom the directors believe willnot be able to pay amounts due to the Group in full. Changes in foreign exchange rates may impact our results We publish our consolidated financial statements in pounds sterling. Therefore,fluctuations in exchange rates used to translate other currencies, particularlyother European currencies and the US dollar, into pounds sterling will impactour reported consolidated financial condition, results of operations and cashflows from period to period. These fluctuations in exchange rates will alsoimpact the pound sterling value of our investments and the return on ourinvestments. Income and expenses for each income statement item are translated at averageexchange rates. Balance sheet assets and liabilities are translated at theclosing exchange rates at the balance sheet date. Investment risk The Group is exposed to credit risk on its invested assets. Credit risk includesthe non performance of contractual payment obligations on invested assets andadverse changes in the credit worthiness of invested assets including exposuresto issuers or counterparties for bonds, equities, deposits and derivatives. Ourinsurance investment portfolios are concentrated in listed securities. We usederivative financial instruments to reduce our exposure to adverse fluctuationsin interest rates, foreign exchange rates and equity markets. We have strictcontrols over the use of derivative instruments. Rating agencies The ability of the Group to write certain types of insurance business isdependent on the maintenance of the appropriate credit ratings from the ratingagencies. The Group has the objective of maintaining single 'A' ratings. At thepresent time the ratings are 'A-' from S&P, 'A-' (positive outlook) from AM Bestand 'A3' (stable) from Moodys'. Any worsening in the ratings could have anadverse impact on the ability of the Group to write certain types of generalinsurance business. Regulatory environment The legal, regulatory and accounting environment is subject to significantchange in many of the jurisdictions in which we operate. We continue to monitorthe developments and react accordingly. In particular the Group is continuing to monitor and respond to ongoingconsultation following publication of the Solvency II Framework Directive, whichis intended, in the medium term, to achieve greater harmonisation of approachacross European member states to assessing capital resources and requirements.The directors are confident that the Group will continue to meet all futureregulatory capital requirements. Statutory Information Summary consolidated income statement Summary consolidated balance sheet Summary statement of recognised income and expense Summary cashflow statement Explanatory notes to the summary consolidated financial statements SUMMARY CONSOLIDATED INCOME STATEMENT STATUTORY BASIS \* T 6 Months 6 Months 12 Months 2007 2006 2006 (restated)* (audited) £m £m £mContinuing operationsNet written premiums 2,992 2,833 5,484----------------------------------------------------- ------------------------------------------- Income ------------- ------------- ------------- Net earned premiums 2,731 2,625 5,292 Net investment return 346 314 600 Other operating income 50 60 121 ------------- ------------- -------------Total income 3,127 2,999 6,013Expenses ------------- ------------- ------------- Net claims and benefits (1,786) (1,693) (3,453) Underwriting and policy acquisition costs (845) (816) (1,626) Unwind of discount (43) (21) (42) Other operating expenses (59) (75) (151) ------------- ------------- -------------Total expenses (2,733) (2,605) (5,272)----------------------------------------------------- -------------------------------------------Results of operating activities 394 394 741 Finance costs (52) (48) (92)Loss on disposals (5) (1) (1)Net share of profit after tax of associates 1 1 1----------------------------------------------------- -------------------------------------------Profit before tax 338 346 649 Income tax expense (88) (91) (170)----------------------------------------------------- -------------------------------------------Profit after tax from continuing operations 250 255 479----------------------------------------------------- ------------------------------------------- Discontinued operationsLoss after tax from discontinued operations (13) (17) (499)----------------------------------------------------- -------------------------------------------Profit after tax 237 238 (20)----------------------------------------------------- ------------------------------------------- Attributable to:Equity holders of the Company 208 220 (52)Minority interests 29 18 32----------------------------------------------------- -------------------------------------------Profit after tax 237 238 (20)----------------------------------------------------- -------------------------------------------\* T \* TEarnings per share for profit from continuing operations attributable to the ordinary shareholders of the Company:Basic 7.2p 8.0p 15.0pDiluted 7.1p 7.9p 14.8p Earnings per share for profit/(loss) attributable to the ordinary shareholders of the Company:Basic 6.7p 7.4p (2.1)pDiluted 6.6p 7.3p (2.1)p\* T The attached notes are an integral part of these summary consolidated financialstatements. For dividend information refer to note 6. * The comparatives have been restated to show the US operation as discontinued. SUMMARY CONSOLIDATED BALANCE SHEET STATUTORY BASIS \* T 30 June 30 June 31 December 2007 2006 2006 (restated)* (audited) £m £m £mAssetsGoodwill and other intangible assets 589 479 552Property and equipment 366 383 385Investment property 474 451 454Investment in associated undertakings 28 27 27Financial assets ------------- ------------- --------------- Equity securities 1,649 1,568 1,620 Debt and fixed income securities 8,850 10,995 8,568 Other 315 239 269 ------------- ------------- ---------------Total financial assets 10,814 12,802 10,457Reinsurers' share of insurance contract liabilities 1,935 3,617 1,927Insurance and reinsurance debtors 2,881 2,513 2,225Deferred acquisition costs 493 465 453Other debtors and other assets 1,124 1,004 852Cash and cash equivalents 1,173 1,564 1,831-------------------------------------------------- --------------------------------------------- 19,877 23,305 19,163Non current assets and assets of operations held for sale - - 3,485-------------------------------------------------- ---------------------------------------------Total assets 19,877 23,305 22,648-------------------------------------------------- --------------------------------------------- Equity, reserves and liabilities Equity and reservesShareholders' funds 2,704 2,863 2,561Minority interests 66 379 331-------------------------------------------------- ---------------------------------------------Total equity and reserves 2,770 3,242 2,892-------------------------------------------------- --------------------------------------------- LiabilitiesLoan capital 1,165 1,208 1,192Insurance contract liabilities 13,749 16,259 12,790Insurance and reinsurance liabilities 428 439 391Borrowings 121 6 8Provisions and other liabilities 1,644 2,151 1,781-------------------------------------------------- --------------------------------------------- 17,107 20,063 16,162Liabilities of operations held for sale - - 3,594-------------------------------------------------- ---------------------------------------------Total liabilities 17,107 20,063 19,756-------------------------------------------------- ---------------------------------------------Total equity, reserves and liabilities 19,877 23,305 22,648-------------------------------------------------- ---------------------------------------------\* T Assets and liabilities associated with operations held for sale at 31 December2006 relate to the discontinued US business. These summary consolidated interim financial statements have been approved forissue by the Board of Directors on 7 August 2007. The attached notes are an integral part of these summary consolidated financialstatements. * The comparatives have been restated to reflect the fair value adjustment ofthe loan capital. See note 3 below. SUMMARY STATEMENT OF RECOGNISED INCOME AND EXPENSE STATUTORY BASIS \* T 6 Months 6 Months 12 Months 2007 2006 2006 (audited) £m £m £m Profit/(loss) after tax 237 238 (20) ------------- ------------- ------------- Exchange gains/(losses) 21 (37) (151) Fair value (losses)/gains net of tax (55) (130) 32 Pension fund actuarial gains and losses net of tax 88 163 153 ------------- ------------- -------------Net gains/(losses) not recognised in income statement 54 (4) 34 --------------------------------------------------- -------------------------------------------Total recognised income for the year 291 234 14--------------------------------------------------- ------------------------------------------- Attributable to:Equity holders of the Company 279 229 (10)Minority interests 12 5 24--------------------------------------------------- ------------------------------------------- 291 234 14--------------------------------------------------- -------------------------------------------\* T SUMMARY CASHFLOW STATEMENT STATUTORY BASIS \* T 6 Months 2007 6 Months 2006 Continuing Total Continuing Total operations Group operations Group £m £m £m £m Net cashflows from operating activities (29) (66) 314 (38)Net cashflows from investing activities (386) (561) (81) 266Net cashflows from financing activities (265) (265) (241) (251)---------------------------------------------------- -------------------------------------------Net decrease in cash and cash equivalents (680) (892) (8) (23) Cash and cash equivalents at the beginning of the period 1,827 2,040 1,440 1,612Effect of exchange rate changes on cash and cash equivalents 26 25 (17) (29)---------------------------------------------------- -------------------------------------------Cash and cash equivalents at the end of the period 1,173 1,173 1,415 1,560---------------------------------------------------- ------------------------------------------- 6 Months 2007 6 Months 2006 Continuing Total Continuing Total operations Group operations Group £m £m £m £m Cash and cash equivalents per cashflow statement 1,173 1,173 1,415 1,560Add: bank overdrafts - - 4 4---------------------------------------------------- -------------------------------------------Cash and cash equivalents per balance sheet 1,173 1,173 1,419 1,564---------------------------------------------------- -------------------------------------------\* T The attached notes are an integral part of these summary consolidated financialstatements. EXPLANATORY NOTES TO THE SUMMARY CONSOLIDATED FINANCIAL STATEMENTS 1. Changes in significant accounting policies The unaudited interim results and the summary financial information have beenprepared in accordance with the Listing Rules issued by the Financial ServicesAuthority. There have been no significant changes in accounting policy in thesix months to 30 June 2007. A full list of accounting policies can be found inthe 2006 Annual Report and Accounts, (see note 9 below). The Group has notadopted IAS 34 'Interim Financial Reporting'. 2. Purchase of minority interests Through two transactions in 2007, the Group has entered into agreements topurchase the remaining 25.49% minority interest in Codan. During Q1 2007, Codan purchased £24m of its own shares from minority holders.These shares continue to be in issue and are held as treasury shares. This hadthe effect of reducing shareholders' funds by £10m and minority interests by£14m. This increased the Group's holding in Codan by 0.83% to 75.34%. On 24 May 2007, the Group launched a voluntary conditional public tender offerfor the acquisition of all the outstanding issued shares and voting rights inCodan. The offer expired on 21 June, by which time the Group had acquiredsufficient shareholding to effect a compulsory acquisition of the remainingshares. The Group has exercised this right. The total consideration was £590m. The Group increased its holding in Codan to 97.43% at 30 June 2007, up from74.51% at the start of the year and as the transaction is not reversible, Codanhas been accounted for as a 100% subsidiary of the Group at 30 June 2007. Thetransaction reduced minority interests by £232m and shareholders' funds wasreduced by £358m. The purchase was funded by an equity placing of £300m and existing resources. The Group now owns 99.5% of Codan and the compulsory acquisition process toacquire remaining 0.5% will complete in January 2008. On 31 July 2007 Codandelisted from the Copenhagen stock exchange. 3. Prior year restatement due to change in accounting treatment The terms of the Group's £450m of perpetual notes were revised during 2005 toalign the accounting treatment with the economic substance of the notes beingdebt. At that time there was no change in the carrying value of the notes as theconversion was treated as an exchange. During 2006, the International Financial Reporting Interpretations Committeeprovided guidance on its understanding of the accounting to be used in thesecircumstances. As a result, the Group changed its accounting treatment andrecognised the notes at fair value at the date of the revision to the terms. The carrying value of the notes at 30 June 2006 has been increased by £81m inline with the new treatment and a corresponding deferred tax asset of £24m hasalso been recognised, resulting in a net £57m reduction to shareholders' fundsas previously stated. 4. 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 3,011,688,024 and3,057,641,909 respectively (excluding those held in ESOP trusts). The number ofshares in issue at 30 June 2007 was 3,190,959,794 (excluding those held in ESOPtrusts). 5. Changes in total equity and reserves for the period to 30 June \* T Shareholders' Minority Total funds interest equity and reserves £m £m £m Balance at 1 January 2007 2,561 331 2,892 Total recognised income for the period 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 6. Dividends \* T 30 June 2007 30 June 2006 Per share Total Per share Total p £m p £mOrdinary dividend Final paid in respect of prior year 4.12 123 3.05 89 Interim proposed/paid in respect of current year 2.48 79 1.75 51----------------------------------------------------------------------------------------------- 6.60 202 4.80 140Preference dividend 5 5----------------------------------------------------------------------------------------------- 207 145-----------------------------------------------------------------------------------------------\* T 7. Taxation Of the £88m (H1 2006: £91m) of income tax expense in the year, £41m (H1 2006:£42m) relates to UK corporation tax and £47m (H1 2006: £49m) to overseastaxation. 8. Exchange rates \* T£/local currency 6 Months 2007 6 Months 2006 12 Months 2006 Average Closing Average Closing Average Closing Canadian Dollar 2.23 2.13 2.04 2.06 2.09 2.28Danish Kroner 11.04 11.05 10.86 10.79 10.95 11.07US Dollar 1.97 2.01 1.79 1.85 1.85 1.96\* T 9. Results for 2006 The results for the year ended 31 December 2006 and the balance sheet at thatdate, which have been included as comparatives in these summary consolidatedinterim financial statements, are not statutory accounts but have been abridgedfrom the statutory accounts. The statutory Group financial statements of Royal &Sun Alliance Insurance Group plc for the year ended 31 December 2006 have beendelivered to the Registrar of Companies. The independent auditors' report on theGroup financial statements for the year ended 31 December 2006 is unqualifiedand does not contain a statement under Section 237(2) or (3) of the CompaniesAct 1985. Copyright Business Wire 2007Related Shares:
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