RSA FY19 Preliminary Results

2019 PRELIMINARY RESULTS

RSA Insurance Group plc 27 February 2020

Strong results for 2019

·; Total Group profits up on all measures

·; Record current year underwriting profit, up by £229m

Excluding exit portfolios1:

·; Group underwriting profit £405m, combined ratio 93.6%

·; Underlying EPS 44.5p per share, return on tangible equity 16.0%

·; UK & International region underwriting profit £144m; combined ratio 95.0%

Statutory profit before tax £492m, impacted by exits and other charges

Dividends 23.1p per share, up 10% (final dividend 15.6p)

__

Stephen Hester, RSA Group Chief Executive, commented:

"We are pleased to report strong results for RSA in 2019. Our profits are up, our dividends are up and return on tangible equity is very good. This progress is driven by improved underwriting, which has produced record current year profits and combined ratio.

2019 was an important period for RSA. Significant management renewal and a repositioning of our UK & International division are showing good promise. Our Groupwide focus on underwriting improvement with strong cost control proved effective. Yet there is plenty more we can do to improve each of our businesses for customers and shareholders. There are challenges, but we are determined to drive further progress and high performance."

Trading results

·; Underlying profit before tax £624m ex. exits (£565m incl. exits). Statutory profit before tax £492m was up 3% despite the impact of exits and other charges (2018: £480m)

·; Group business operating result £656m profit (ex. exits): Scandinavia £286m; Canada £159m; UK & International £279m (£220m incl. exits). Total Group business operating result £597m profit (2018: £517m)

·; Group underwriting profit of £405m (ex. exits). Total Group underwriting profit £346m (2018: £250m); current year underwriting profit of £314m up £229m vs. 2018

·; Group combined ratio of 93.6% (ex. exits): Scandinavia 87.4%; Canada 94.5%; UK & International 95.0%. Group combined ratio (incl. exits) 94.6%; UK & International 97.1%

- Group attritional loss ratio2 improved 1 point vs. 2018

- Group weather costs 2.6% of premiums (2018: 3.7%)

- Large losses 9.7% of premiums (ex. exits), total 10.0% (2018: 11.6%)

- Group prior year loss ratio 0.8% benefit (ex. exits), total 0.6% benefit (2018: 2.6% benefit)

1 Excluding UK&I exit portfolios, refer to pages 32 to 41 for further information2 At constant FX and ex. changes in reinsurance, refer to pages 32 to 41 for further information

·; Net written premiums ('NWP') of £6,417m, down 1%1 vs. 2018 (down 2%2 underlying but broadly flat2 ex. exits):

- NWP up 1%2 in Scandinavia

- NWP up 3%2 in Canada

- NWP down 7%2 in UK & International as underwriting and rating actions take effect (exits account for c.5 points of the reduction)

·; Group written controllable costs £1,346m (2018: £1,343m). Earned controllable cost ratio 20.9%

·; Investment income of £306m (2018: £322m) down 5% as expected

·; Other charges of £73m include £19m for completion of the UK Legacy sale contracted in 2017 (capital accretive), £15m of accounting impact from a reduction in the discount rate on long-term insurance liabilities in Denmark, and UK restructuring charges of £27m. Losses on UK & International exit portfolios were £59m

·; Statutory profit after tax £383m (2018: £372m)

·; Underlying EPS 44.5p excluding exits (inc. exits: 2019: 39.4p; 2018: 34.1p), statutory earnings per share 32.6p (2018: 31.8p)

·; Final dividend of 15.6p per ordinary share proposed, bringing total dividends for 2019 to 23.1p, up 10% (2018: 21.0p). Payout of underlying EPS (ex. exits) of 52%. Target dividend payout range raised from 40-50% to 50-60% from 2020.

Capital & balance sheet

·; Solvency II coverage ratio of 168%3 (31 December 2018: 170%), above 130-160% target range

·; Tangible equity £2.91bn up 1% (31 December 2018: £2.87bn), 282p per share. Shareholders' equity £3.87bn (31 December 2018: £3.79bn)

·; Underlying return on tangible equity of 16.0% excluding exits (14.2% inc. exits), in the upper part of 13-17% target range

·; IFRS pension surplus £211m (31 December 2018: £182m).

Strategic and market update

·; RSA's focus is on building capabilities to outperform in our markets. This drives many continuing initiatives - targeted at customer service, underwriting and costs

·; RSA's particular task for 2019 was to sustain momentum in the large parts of our business that already perform well whilst applying determined actions to improve elsewhere.

- Our Personal Lines businesses (57% of premiums in 2019) achieved an 88.5% combined ratio for 2019 (ex. exits), sustaining their previous excellence

- Across our Commercial Lines businesses the current year combined ratio improved by 6 points to 100% (98.6% ex. exits). This was driven by re-underwriting and re-pricing business where needed or lapsing if necessary; we exceeded the pricing and underwriting actions targeted for 2019 which should give further improvements in 2020. However, results in Canada and Denmark remained poor, though are expected to improve sharply in 2020

1 At constant FX2 At constant FX and excluding changes in reinsurance, refer to pages 32 to 41 for further information3 The Solvency II capital position at 31 December 2019 is estimated

- Underwriting capabilities continue to receive intensive focus across the Group. These include more sophisticated and agile pricing models, underwriter training and portfolio discipline and technology driven insights

·; In our 2018 Preliminary Results, we confirmed London Market portfolio exits and other business lapses targeted at reducing unprofitable business and risk exposures by c.£250m vs. 2017 NWP baseline. This has been substantially accomplished and just c.£15m of earned premium remains to run-off. The validity of these decisions was borne out by exit losses and competitor experience in similar lines in 2019.

·; Our UK & International business significantly restructured its management team and operating structure in 2019 with gratifying early results. A programme targeted at removing >£50m costs annually by 2021 is well advanced, with related restructuring costs of c.1.3x (£27m restructuring charge booked in 2019 with the remainder to come in 2020).

Market conditions

·; Insurance market conditions are competitive across our territories with significant price/ volume trade-offs. However, rate hardening and capacity adjustment is helping us re-price in Canada and in previously loss-making international business lines

·; Financial market conditions are volatile, driven by political developments and their knock-on to monetary and economic trends. RSA is relatively well protected with conservative investment portfolios and a broad array of internationally derived profits. However, bond yields fell c.20-50bps in 2019. This will reduce future investment income in addition to its 'pull to par' impact on capital usage. FX movements also have a translation effect on RSA, costing c.2% at underwriting profit level in 2019 compared to the prior period with similar impact likely again in 2020. The UK's Brexit process is not expected to materially impact RSA beyond any financial market effects.

MANAGEMENT REPORT - KEY FINANCIAL PERFORMANCE DATA

Management basis

CHIEF EXECUTIVE'S STATEMENT

2019 was a pleasing year for RSA with total Group profits up on all measures. We report new records in both the current year underwriting result and combined ratio. Underlying earnings per share1 grew to 44.5p and underlying return on tangible equity1 to 16.0%, despite headwinds from low interest rates and FX. Dividends increase 10% to 23.1p/share for 2019.

RSA's results come in the context of our consistent strategy, to focus on core markets and seek to improve operational capabilities towards 'best in class' levels. While we have much yet to do in pursuit of these ambitions, each of our three regions contributed well to 2019 results. In particular the repositioning of our UK & International region showed good progress with underwriting profits1 of £144m. The costs of this repositioning - losses on exit portfolios and cost restructuring charges - impacted results at a statutory level however.

Strategy and Focus

RSA is a focused international insurance group. We have complementary leadership positions in the large general insurance markets of the UK, Scandinavia and Canada together with supporting international business in Ireland, Continental Europe and Middle East. The Group is well balanced between personal (57%) and business customers (43%), and across product lines and distribution channels.

Our disciplined strategy has enabled important improvements to customer service, underwriting skills and cost effectiveness in recent years. These improvements are driven by significant development of our capabilities and performance culture, as well as in our technology and data science tools. As a result, RSA has recorded its three best underwriting results this century over the last four years.

The Group's only 'down year' since 2013 came in 2018, driven particularly by marketwide losses and weaknesses in the London market portfolios of our UK & International division. In response, we announced the exit of c.£250m of business (NWP) which has been substantially completed. Extensive changes to leadership and management structure in this division were also made and a new programme is well advanced to bring structural costs down further.

Customers

Serving customers well is RSA's raison d'être. For over 300 years we have built our brands and reputation in this way. Modern times bring heightened demands and expectations from our customers. These range from digital delivery of services, to help with new or changing areas of risk such as cyber and climate change. We are committed to doing all we can to improve and to serve customers well.

Across the Group, where our underwriting is stable and producing the expected results, customer retention and satisfaction levels are generally high and even improving. Conversely, when loss challenges require adjustments to pricing or underwriting conditions, we experience more challenges with service and retention. Many initiatives continue across our business, using technology and data science, to serve customers better. And we are striving to meet rising customer expectations with competitive services that deliver good outcomes.

Market Conditions

General insurance markets are relatively mature, consolidated and stable, though with natural intrinsic volatility. Strong levels of competition mean that profitable growth opportunities are modest, and require a continuous focus on strong underwriting discipline and cost efficiency. Nevertheless, well managed companies do produce returns well above cost of capital and

1 Excluding UK&I exit portfolios, refer to pages 32 to 41 for further information 

RSA is clearly in that position. Despite competition, in those market segments challenged by negative loss trends, pricing has increased in 2019 which is helpful. Climate change is a key issue for insurers with heightened weather losses seen, notably in North America and certain international business lines.

Insurers are exposed to financial markets, and through them to political and macro-economic challenges, despite insurance services themselves being relatively insensitive to GDP changes. 2019 saw yield declines in most bond markets off already low levels, which produces further income headwinds for insurers. It is striking that investment income made up c.90% of RSA operating profit in 2010 vs well under 50% today. The intense focus on improving underwriting margins has been a very necessary one. Similarly, since c.75% of RSA's profits come from international business, Sterling's strength post UK election produces an earnings translation challenge for 2020, though our individual business units are well matched in currency terms.

2019 Actions

It was a busy year for RSA. Right across the business, improvement programmes continue in pursuit of "best in class" ambitions. They span customer service, underwriting & claims, cost efficiency, technology and people performance. Superimposed on these programmes were decisive actions to address problem areas from 2018 and correct performance. We are encouraged by the results to date.

Management: An important feature of 2019 was senior management change - to reward success and to bolster areas needing better performance. We recruited Charlotte Jones as Group CFO, Scott Egan moved to CEO UK&I Region and Ken Norgrove moved from CEO Ireland to CEO Scandinavia. In their regional executive committees there was also significant change. Christian Baltzer has joined as CEO Codan Denmark, new CEOs of Ireland, Middle East and Europe were hired as was a new Group HRD and head of UK Personal Lines. It is an important measure of RSA's progress that we are able both to internally develop leaders and to hire talented people from outside successfully. And beneath these changes, throughout the organisation professional development and performance delivery are advancing as part of our culture.

RSA's culture is also advancing in other ways. We have met two key diversity & inclusion targets in 2019 - over 33% of the senior management group are now female, as are 40% of my direct reports.

Underwriting & Pricing: At the heart of our business sit the data science driven disciplines of underwriting and claims handling. Every year we seek to move these forward, using modern techniques of analytics and AI, as well as focus on skills and training.

In general our Personal Lines capabilities are in a good place but need continued investment. Exceptions are motor underwriting in the UK where technology driven retooling is underway; and in parts of Canada where claims inflation challenges, especially weather related, are driving further action.

In Commercial Lines we saw the greatest re-underwriting activity in 2019 in addition to substantially completing the UK portfolio exits announced last year. In terms of actions taken, the year went even better than planned. However, while UK & International results improved strongly, Canada and Denmark remained disappointing and further action will need to continue into 2020.

Our additional reinsurance covers for 2019 proved valuable in both Canada and Scandinavia, though a better weather year at Group level meant no recoveries for our GVC layer. The coverage for 2020 is substantially unchanged.

Cost Efficiency & Technology: Data science and technology advancement are at the heart of all we do. We are progressively implementing "backbone" IT platform replacements in all regions whilst pursuing many smaller enhancements. Spend is likely to continue in excess of historic depreciation levels. Technology and better ways of working drive our efficiency efforts, whilst also enabling better underwriting and customer service. Cost efficiency is absolutely vital for any mature, competitive industry. RSA's record is very good in this regard. However, our top line reductions in the UK necessitate a further targeted programme of >£50m p.a. cost saving by end 2021, which is well advanced.

Financial Results 2019: It was a strong year for RSA with total Group profits up on every measure. The best indicator of ongoing performance levels are our underlying results (ex. exits). These show EPS at 44.5p and return on tangible equity of 16.0% (vs 13-17% target). Statutory profit after tax was up 3% despite the impact of exits and restructuring costs in the UK. Proposed dividends are up 10% to 23.1p/share.

Driving our Group results were strong underwriting profits of £405m and combined ratio ('COR') of 93.6% (ex. exits). These were achieved on flat premium income with improvements in each of attritional loss ratio, weather and large loss costs, but a reduction in prior year development.

On a geographic basis, the highlight was a major improvement in our UK & International results, to a combined ratio of 95.0% (ex. exits). Canada improved sharply to 94.5%, Scandinavia was as usual the largest contributor (87.4% COR), though held back by poor Danish Commercial lines results.

The repositioning of RSA's UK&I region in 2019 has driven some significant costs for exit portfolios and restructuring of expense base. Those actions make us more valuable going forward and have been absorbed by our organic capital generation.

Dividends: We propose total dividends for 2019 of 23.1p/share, up 10%. This represents an 52% payout of underlying EPS (ex. exits), above our 40-50% policy range. Our strong capital position and organic capital generation support this, despite the costs of 'below the line' items and bond 'pull to par'. Reflecting the improvements of recent years in RSA's performance and resilience, we are also increasing our target dividend payout range to 50-60% of underlying EPS.

Looking Forward

RSA's focused regional strategy is working well. Our ambition to drive towards "best in class" performance levels remains in place and we are optimistic about the ability of our business to improve further to that end. We target progress in each of our three regions in 2020. We have headwinds from lower investment income and adverse FX translation, but believe that EPS growth overall is again in prospect, subject to normal underwriting volatility.

Thanks

RSA could not perform well for stakeholders, without their heartening and reciprocal support - for which we are very grateful. While customers and shareholders are our primary audience, we are also determined to serve the broader interest of RSA well. All we achieve is driven by the efforts of RSA's people. I am proud to work with and to lead this group. And my sincere thanks go to them for 2019's efforts.

Stephen Hester

Group Chief Executive

26 February 2020

MANAGEMENT REPORT

SEGMENTAL INCOME STATEMENT

Management basis - 12 months ended 31 December 2019

Notes:

UK & International comprises the UK, Europe, Ireland and Middle East. Refer to page 28 for comparatives.

1 Exit portfolios in UK & International which have substantially run-off over the course of 20192 £8m of prior year GVC recoveries relating to UK&I exited business has been reallocated from Central Functions to UK&I Exits and therefore to total UK&I3 Preference dividends of £9m and coupons of £14m paid on Restricted Tier 1 securities 4 On an earned basis

Premiums

Net written premiums ('NWP') of £6,417m were down 1% in the period at constant FX. Underlying premiums were down 2%1 when adjusted for reinsurance changes but broadly flat1,2 excluding the exit portfolios.

Group retention remained strong at 80% (2018: 80%). We are pleased to report improvements across Scandinavia, and in UK Personal Lines. In Commercial Lines, retention was down in the UK and Canada, where we have been taking the most rating and underwriting action.

Regional trends for 2019 include:

·; Scandinavian premiums were flat or up 1% excluding changes in reinsurance, both at constant FX. Personal Lines premiums were flat1 3 and included underlying growth of 2% in Sweden. Premiums were up 2%1 in Commercial Lines. Rate was ahead of our plans and last year, but was dampened by a reduction in volumes as higher retention was more than offset by lower new business

·; Premiums grew 3% in Canada at constant FX. This was driven by 6%1 growth in Personal Lines led by Johnson. We achieved high single-digit rate and hard market conditions meant that retention remained strong at c.90% for Johnson. Overall, policies-in-force (PIFs) were up 4% in Johnson with continued organic growth supplemented by our new partnership with Scotiabank commencing in the spring. Premiums in Commercial Lines decreased by 4%1 where a reduction in volumes was partly offset by strong rate. Lower volumes were driven by targeted lapses and were in line with our plans

·; Premiums were down 7% in the UK & International region at constant FX. Exits accounted for c.5 points of the reduction. UK Personal Lines premiums were down 11% in the period, with exits driving c.1.5 points of the reduction. Household was down 10% with the sale of Oak Home accounting for c.3 points of the reduction. Importantly, we have continued to achieve good rate increase through our Household book. Motor and Pet premiums also decreased. Commercial Lines premiums (which now exclude Europe which is reported separately) were down 7%1 excluding reinsurance changes, but up c.5%1 2 excluding exits; rate was positive in all major lines of business, although this impacted retention. Premiums in Europe were down 7%1 reflecting the reshaping of the portfolio. Irish premiums increased by 6%1 helped by strong new business in Personal Motor. In the Middle East, premiums were down 5%1 largely due to lower volumes in Commercial Lines and rating pressure in Personal Lines

·; Net written premiums in the UK & International exit portfolios were £17m. Net earned premiums were higher at £88m reflecting the ongoing run-off of exposures. Earned premiums will reduce significantly to c.£15m in 2020.

More detail is provided in the regional reviews on pages 16 to 21.

1 At constant FX and excluding changes in reinsurance, refer to pages 32 to 41 for further information2 Excluding UK & International exit portfolios, refer to pages 32 to 41 for further information3 Excluding a one-off adjustment in Swedish Personal Accident in Q1 2018

Underwriting result 

Total Group underwriting result:

·; The Group attritional loss ratio of 55.0% was 11 point better than 2018. The ratio improved by 0.41 points in Scandinavia, with improvements in Danish Personal and Norway, partly offset by Danish Commercial for which action plans are in place to address. In Canada, the attritional loss ratio improved by 2.1 points and was better across all major lines. In particular, Personal Auto was c.2 points better as rate and claims initiatives started to impact. Property also showed pleasing improvements. The UK & International attritional loss ratio improved by 1.21 points. In the UK, improvements in Household, Pet, and Commercial Property were partly offset by an increase in Motor. Household improved by 2.5 points reflecting the actions taken to address the 'escape of water' claims inflation issue which presented in 2017

·; Weather losses amounted to £167m or 2.6% of net earned premiums (2018: 3.7%; five year average: 2.9%2). Overall, weather for the year was around half a point better than our expectations, with experience in H2 relatively benign at 2.0% of premiums. This compares to 3.2% reported for H1 which included heavy experience in Canada

·; Large losses were £645m or 10.0% of net earned premiums (2018: 11.6%; five year average: 10.0%2). This was 9.7% excluding UK&I exit portfolios. All regions reported improvements vs 2018 with Scandinavia and Canada each around 1 point better, and the UK & International 3 points better

·; Reinsurance: The retentions were not reached in 2019 on the Group Volatility Cover ('GVC'). However, we made recoveries of £15m and £17m on our regional aggregate covers in Canada and Scandinavia respectively. Please see page 27 for further details of our reinsurance covers for 2020.

Group prior year profit of £45m provided a 0.8 point benefit excluding exits to the combined ratio (0.6 points inc. exits; 2018: 2.6 points; five year average: 2.0%). This included positive development from each of our three regions (ex. exits), although negative development in UK Personal Lines dampened this in the UK & International. Overall Group PYD for the year was impacted by a flat first quarter which included negative prior year development in Commercial Lines arising from refinements to loss estimates relating to the 2018 accident year.

Our assessment of the margin in reserves for the Group (the difference between our actuarial indication and the booked reserves in the financial statements) remains at its target level at c.5% of best estimate claims reserves.

1 At constant FX and excluding changes in reinsurance, refer to pages 32 to 41 for further information

2 2015 - 2019

Underwriting operating expenses

The Group underwriting expense ratio of 14.7% increased as expected. Scandinavian and Canadian expense ratios increased slightly vs 2018, while the expense ratio in UK & International increased by 1 point, in line with expectations and reflecting the contraction in premiums. We have commenced a further UK focused cost programme to address this (see further details below).

Commissions

The Group commission ratio of 12.9% decreased by 0.7 points (2018: 13.6%), mainly due to a higher proportion of Personal Lines in net earned premiums.

Investment result

The investment result was £263m (2018: £275m) with investment income of £306m (2018: £322m), investment expenses of £12m (2018: £14m) and the liability discount unwind of £31m (2018: £33m).

Investment income was down 5% on prior year, primarily reflecting the impact of reinvestment at lower yields which was partly offset by increased income from actions taken on the portfolios to increase exposure to less liquid credit investments. The average book yield across our major bond portfolios was 2.1% (2018: 2.3%).

Based on current forward bond yields and FX rates, it is estimated that investment income will be c.£255-270m for 2020, c. £240-255m for 2021, and c.£235-250m for 2022. The discount unwind is expected to be c.£30m per annum and investment expenses c.£14m per annum.

Controllable costs

Group written controllable costs were £1,346m (2018: £1,343m). This comprised 2% cost reductions, offset by 2% inflation. At CFX and gross of inflation, Scandinavia written controllable costs of £379m were flat vs 2018, Canada (£294m) was 2% lower, and UK & International (£667m) was 2% lower. 

The earned controllable expense ratio of 20.9% was up slightly versus 2018 (20.4%) mainly due to UK&I business exits. The ratio is down by c.3.51 points since 2013 and our ambition of an earned controllable expense ratio of less than 20% is unchanged.

Group FTE2 was 12,378 at 31 December 2019, down 25% (excluding disposals) since the beginning of 2014.

We have commenced a new cost reduction programme in our UK business. This is targeting the removal of >£50m costs by 2021. Associated restructuring costs of c.1.3x are expected, with £27m booked in 2019 and the remainder to be booked in 2020.

1 At constant FX and ex. disposals (where relevant)2 Full time equivalent employees

Other items

Interest costs:

·; Interest costs were £32m (£46m including the Tier 1 securities), up from £25m in 2018. The increase reflects changes to lease accounting (IFRS 16), mainly on properties

·; Coupon costs of £14m (2018: £14m) for the 2017 Tier 1 securities are presented at the bottom of the management P&L as 'other equity costs'. Under IFRS, these are recognised in the statement of changes in equity.

Other charges:

·; Net losses of £23m in 2019 included £19m of final costs relating to the disposal of UK Legacy liabilities to Enstar Group Limited. This follows the sanction of the Part VII transfer of these liabilities by the High Court of Justice of England and Wales on 13 June 2019. The completion of this transaction provided a net benefit to capital

·; £27m of restructuring charges were incurred relating to the cost reduction programme that has commenced in the UK business (see previous page for further details)

·; Changes in economic assumptions represents £15m for the accounting impact of a reduction in the discount rate in H1 on long-term insurance liabilities in Denmark.

Tax

The Group reported a tax charge of £109m for 2019, giving an effective tax rate ('ETR') of 22% (2018: 23%). The tax charge largely comprises tax on overseas profits. The Group's ETR of 22% is higher than the UK statutory rate of 19% mainly due to higher tax rates in some of the Group's core overseas jurisdictions and withholding taxes. The Group underlying tax rate for 2019 was 20% (2018: 20%). Excluding UK&I exited business the Group underlying tax rate for 2019 was 19%. 

The carrying value of the Group's deferred tax assets at 31 December 2019 was £209m (31 December 2018: £234m), of which £180m (31 December 2018: £189m) are in the UK. The decrease in the Group's deferred tax assets in 2019 was largely due to accelerated tax depreciation in Canada and a small reduction in the UK deferred tax asset reflecting lower investment income outlook. At expected tax rates, a further £254m (31 December 2018: £260m) of deferred tax assets remain available for use but not recognised on balance sheet; these are predominantly in the UK and Ireland. The carrying value of the Group's deferred tax liabilities at 31 December 2019 was £84m (31 December 2018: £79m), the majority of which are in Sweden and Denmark.

For 2020 we expect the Group's ETR and underlying tax rate to continue to be in the region of 20%, given the scale of unrecognised UK and Irish tax assets.

Dividend

We are pleased to declare a final dividend of 15.6p per ordinary share (2018: 13.7p). Together with the interim dividend of 7.5p, this brings the total dividend for the year to 23.1p (up 10%), representing a payout of 52% of underlying EPS (ex. exits). This is above our 40-50% policy range, supported by our strong capital position and organic capital generation, despite the costs of 'below the line' items and bond 'pull to par'.

Reflecting the improvements of recent years in RSA's performance and resilience, we are also increasing our target dividend payout range to 50-60% of underlying EPS.

Outlook

RSA is targeting further progress in 2020. We expect to sustain a consistent strategy and operational focus and to work towards our unchanged financial targets.

At this early stage of the year we are assuming insurance market conditions broadly comparable to 2019. Using current bond yields, investment income is expected to be £255-270m in 2020 (see guidance on page 11), and current FX rates imply a 2% headwind in £ terms on operating profits versus 2019.

We expect Net Written Premiums to be similar in 2020 vs 2019 at constant FX, and Net Earned Premiums slightly lower reflecting residual earn through of 2019 actions.

Subject to natural loss ratio volatility, we target improved underwriting profit overall and from each region.

BALANCE SHEET

Movement in Net Assets

Tangible net assets increased by 1% to £2.91bn at 31 December 2019.

The increase was driven by profit after tax of £443m3 and positive fair value mark-to-market movements of £122m, mainly reflecting tightening credit spreads and falling bond yields. Tangible net assets were reduced by payment of the 2018 final dividend (£141m) and 2019 interim dividend (£78m), together with investment of £143m in intangible assets which were primarily IT related (net investment of £59m after amortisation of £84m shown as part of profit).

The pension schemes generated a loss of £86m in net asset terms and this was primarily as a result of tighter 'AA' corporate bond spreads, by which liabilities are discounted. The IAS 19 surplus at 31 December 2019 was £211m, please see page 26 for more details.

TNAV per share increased by 1% to 282p.

1 Ordinary shareholders' funds including preference share capital of £125m

2 Includes preference dividends of £9m and coupons of £14m paid on 2017 issued restricted tier 1 securities

3 Adjusted for items relating to goodwill and intangible assets

CAPITAL POSITION

The Solvency II coverage ratio1 decreased to 168% during the period:

Please refer to appendix (page 25) for further Solvency II details (including sensitivities).

1 The Solvency II capital position at 31 December 2019 is estimated

REGIONAL REVIEW - SCANDINAVIA

Management basis

SCANDINAVIA

The Scandinavian business operating result was strong at £286m profit, down 3%1 on 2018. The combined ratio of 87.4% was 0.6 points higher. Personal Lines showed continued excellent performance with a combined ratio of 77.8%. Commercial Lines increased by 3.2 points to a combined ratio of 101.1% - higher attritional losses and expenses, and lower PYD contributed, while large losses were better but still elevated.

Net written premiums of £1,764m were unchanged at constant FX or up 1%2 on an underlying basis. Personal Lines premiums were unchanged2,3. This included Swedish Personal Lines growth of 2%2,3 with Household, Motor and Personal Accident all up. Mid-single digit rates and strong retention of 85% contributed. 

Net written premiums increased by 2%2 in Commercial Lines. Rate was ahead of our plans last year in all lines of business but was dampened by a 4% reduction in volumes. Higher retention was more than offset by lower new business where action to improve performance in Motor and Property has impacted premiums.

Customer metrics continue to improve. An 'effortless' measure determines and tracks how seamless customer interactions are against defined targets. Our Personal Lines businesses across the region continue to report scores at or close to target levels. Customer satisfaction scores improved in Denmark versus Q4 2018 and our newly introduced satisfaction measure in Sweden is near to benchmark level. Overall, retention improved to 83% (2018: 81%) and was better in all countries.

Large losses of 7.8% were better than last year (2018: 8.9%) but above the five year average of 6.8% driven by Denmark, particularly Commercial Property. Sweden and Norway both reported lower large losses vs 2019. Recoveries of £17m were made in 2019 from local aggregate reinsurance protection in Scandinavia. The attritional loss ratio of 63.4% was flat versus 2018 or around half a point better excluding the impact of 2019 reinsurance changes. Significant improvements in Norway and Danish Personal Lines were offset by Danish Commercial Lines (mainly Property) and Sweden (to support topline). We have taken strong action in Danish Commercial to re-price, re-underwrite and lower capacity where required.

Written controllable expenses were up 2%1 in 2019, with costs flat pre-inflation. The earned controllable cost ratio of 21.7% increased by around half a point in part due to flat topline. We continue to invest in important areas of the business such as pricing sophistication, data analytics, the IT hub in Malmö and a talent acquisition hub.

Geographically, Sweden generated an underwriting profit of £257m (2018: £251m) and a combined ratio of 75% (2018: 76%) driven by lower large losses and better expenses. Denmark reported an underwriting loss of £18m (2018: £6m profit) and a combined ratio of 103% (2018: 99%). Danish Personal Lines performed well with an underwriting profit of £30m (up 9%1) but the result was driven by poor Danish Commercial Lines performance (as reported at the first half), with higher attritional and large losses, notably in Motor (large losses only) and Property. The underwriting loss in Norway of £16m (2018: £19m loss) included a prior year underwriting loss of £6m, while the current year performance included significantly improved attritional and large loss ratios.

1 At constant FX2 At constant FX and excluding changes in reinsurance, refer to pages 32 to 41 for further information 3 Excluding a one-off adjustment in Swedish Personal Accident in Q1 2018

REGIONAL REVIEW - CANADA 

Management basis

CANADA

Canada delivered a pleasing business operating result of £159m profit for 2019, almost double that of last year. The combined ratio improved by 4 points to 94.5%. Personal Lines improved by c.6 points to 91.3%, helped by lower weather losses for the year (despite a heavy first half). The combined ratio in Commercial Lines was disappointing and increased by around one and a half points with flat prior year development for the year more than offsetting better (but still elevated) weather and large losses, and lower attritional claims.

Net written premiums of £1,735m increased by 3% at constant FX or 3%1 on an underlying basis. Personal Lines reported growth of 6%1 driven by Johnson. The rating environment was strong in 2019, and we applied rate increases of c.8% in Personal Auto and c.11% in Household. This helped to combat ongoing and significant claims inflation and build an allowance for heavier weather losses expected as a result of climate change. Hard market conditions meant that retention remained strong at c.90% for Johnson, our direct business. Personal broker reported a 6 point decrease to 83% reflecting targeted actions to improve profitability. Johnson reported organic growth of 7% and policies-in-force were up 4%. We commenced writing new business for Scotiabank in April and renewals followed in July; the partnership has so far outperformed our expectations. Premiums in Commercial Lines decreased by 4%1 where a 13% reduction in volumes was partly offset by rate of 9%. Lower volumes were in line with our plans and mainly driven by targeted lapses. We expect to continue to prioritise profitability over volume in 2020.

Our customer metrics continue to track well, although rating action has impacted service levels throughout the year. Johnson sales and service NPS3 was +45 in Q4, with first contact resolution for inbound calls at 93%, while our fast track process for simple low cost claims reported NPS of +53 in Q4.

While the weather loss ratio reduced by 1.8 points to 5.0%, it was again above the five year average of 4.7%. This reflected a heavy first half of the year for cat losses across the Canadian industry. Experience in the second half was more 'normal' and we benefitted from our new local aggregate reinsurance cover (overall recoveries of £15m, of which £7m relate to weather losses). The large loss ratio of 8.0% was 1.4 points better than last year but still 0.7 points above the five year average. This large loss experience impacted mainly Commercial Property.

The attritional loss ratio of 56.0% improved by 2 points in 2019 and was better across all major lines of business. Personal Auto improved by c.2 points as rate and claims initiatives started to take effect. We expect to continue to apply rate in 2020, subject to regulatory approval. Personal Property was 1.2 points better, and we saw good improvements across Commercial Auto and Property.

2019 was a busy year from a technology perspective. Guidewire Claims is now full deployed across the business and our new Claims Portal is now live for Personal Broker and Johnson providing a quicker and more efficient claims journey for our customers. Radar Live is fully deployed in all major lines and is improving the speed and efficacy of our non-regulatory rate filings.

Written controllable expenses of £294m were flat2 versus last year, with 2% cost reductions absorbing 2% inflation. The earned controllable expense ratio of 16.9% was 0.4 points lower than last year and better than our plans. We expect the ratio to rise in 2020 as technology related amortisation builds, but to remain within our target zone of

1 At constant FX and excluding changes in reinsurance, refer to pages 32 to 41 for further information2 At constant FX

3 Net Promoter Score

REGIONAL REVIEW - UK & INTERNATIONAL1

1 Europe, previously reported within UK Commercial, is now reported separately. 2018 comparatives have been restated.

2 £8m of prior year GVC recoveries relating to UK&I exited business has been reallocated from Central Functions to UK&I Exits and therefore to total UK&I; 3 Adjusted for changes in UK&I business mix resulting from exits.

UK & INTERNATIONAL

The UK & International region delivered a sharply improved business operating result of £279m profit for 2019 (£220m1 inc. exits) with a combined ratio of 95.0% (97.1%1 inc. exits).

The UK reported an underwriting profit of £50m and a combined ratio of 97.7%, excluding exit portfolios. This was driven by better current year results offset by lower prior year development. Including exits, the COR was 99.9%1. Across the rest of the UK&I region performance was very strong with Europe delivering a combined ratio of 92.6% (97.6% including exits), Ireland 87.1% and the Middle East 83.0%.

UK net written premiums of £2,120m were down 9% as reported. Exits accounted for c.6 points of the reduction. Personal Lines premiums decreased by 11%; Household was down 10% with the sale of Oak Home accounting for c.3 points of this. We have continued to achieve good rate increases in Household and pleasingly new business in More Than Home doubled in 2019. Motor and Pet premiums decreased. While retention improved, new business was down as we continued to hold our discipline on rate. Commercial premiums were down 7% excluding reinsurance changes, but up c.5%2,3 excluding exits. Rate was ahead of plan and prior year in all major lines; e.g. Commercial Property achieved rate of 6% and Marine achieved 10%. However, pricing and underwriting actions have impacted retention.

Premiums in Europe decreased by 7%3 as a result of underwriting actions in Property and Marine. In Ireland premiums increased by 6%3 helped by strong new business in Personal Motor, and in the Middle East premiums were down 5%3 largely as a result of lower volumes in Commercial Lines and rating pressure in Personal Lines.

UK&I weather costs of 2.5% (2.3% ex. exits) were 3.2 points lower than 2018 with better experience across all parts of the region. Large losses of 11.2% (10.4% ex. exits) improved by 3pts versus prior year driven by UK Commercial, Europe and Ireland. The attritional loss ratio of 49.1% (48.7% ex. exits) improved by 1 point with improvements seen particularly across the UK and Europe. Within the UK, Household was 2.5 points better as strong rate earned through. Prior year development added 0.31 points to the COR (0.1 point benefit ex. exits) compared to a benefit of 2.4 points in 2018. This was mainly due to the impact of the Ogden discount rate change and strengthening on recent accident years including 2018. This was offset by strong positive development in Ireland and the Middle East.

The UK&I expense ratio increased by a point as expected, savings of 3% gross of inflation were offset by the impact of lower premiums. These topline reductions have necessitated a further targeted cost programme in the UK of >£50m p.a. cost saving by end 2021. This is already well advanced, and associated restructuring costs of c.1.3x are expected, with £27m booked in 2019 and the remainder to be booked in 2020.

Exit portfolios

In 2018, we announced portfolio exits and changes in underwriting appetite for our London Market business. Additional exits included two UK generalist MGA schemes and certain European branch business. This was in response to challenging market conditions as well as our own strategic reassessment. The total net written premium we targeted for exit was c.£250m against a 2017 baseline, of which substantially all has been implemented.

The underwriting loss from these portfolios was £59m1 in 2019. Net written premiums were £17m. Net earned premiums were higher at £88m reflecting the ongoing run-off of exposures. A further c.£15m of exited premiums are expected to be earned out in 2020.

1 £8m of prior year GVC recoveries relating to UK&I exited business has been reallocated from Central Functions to UK&I Exits and therefore to total UK&I; 2 Excluding changes in reinsurance, see pages 32 to 41 for further information; 3 At constant FX

INVESTMENT PERFORMANCE

Management basis

INVESTMENT PERFORMANCE

Investment income of £306m (2018: £322m) was offset by investment expenses of £12m (2018: £14m) and the liability discount unwind of £31m (2018: £33m). Investment income was down compared to last year reflecting the impact of reinvestment at lower yields which was partly offset by enhanced income from actions taken on the portfolios to increase exposure to less liquid credit investments.

The average book yield for 2019 on the total portfolio was 2.4% (2018: 2.5%), with an average yield on the bond portfolios of 2.1% (2018: 2.3%). Reinvestment rates in the Group's major bond portfolios were approximately 1.2% (2018: 1.6%).

At 31 December 2019, the average duration of the Group's bond portfolios was 3.9 years (31 December 2018: 3.8 years).

The investment portfolio increased by 1% during the period to £12.6bn.

At 31 December 2019, high quality widely diversified fixed income securities represented 82% of the portfolio (31 December 2018: 83%). Equities (largely REITs1) represented 2% (31 December 2018: 2%) and cash was 7% of the total portfolio (31 December 2018: 6%).

The quality of the bond portfolio remains very high with 98% investment grade and 69% rated AA or above. We remain well diversified by sector and geography.

Based on current forward bond yields and foreign exchange rates, it is estimated that investment income will be c.£255-270m in 2020, c.£240-255m in 2021, and c.£235-250m in 2022. The discount unwind is expected to be c.£30m per annum and investment expenses are expected to be c.£14m per annum.

Unrealised bond gains and pull-to-par

At 31 December 2019, balance sheet unrealised gains of £371m (pre-tax) had increased by £121m over the year, principally driven by positive mark-to-market on bond holdings due to declining government bond yields and tightening credit spreads. Yield movements since year end have further increased the unrealised gains.

This higher opening balance, together with flattening yield curves, has meant that the predicted period of time for the AFS gain to unwind has increased. If yield curves were to stay as they are currently, it is now estimated that the gains would take around 7 to 8 years to fully unwind, with around 50% within the next 3 years. AFS unwind is estimated to be c.£80m post tax for 2020. The capital impact of this amount is c.£70m with the balance being projected yield change. The capital impact from pull-to-par is expected to fall significantly in 2021 and 2022 based on current market forward yield curves.

1 Real Estate Investment Trusts

APPENDIX I

Further information

CAPITAL

Solvency II sensitivities

The above sensitivities have been considered in isolation. The impact of a combination of sensitivities may be different to the individual outcomes stated above. Where an IFRS valuation of a pension scheme surplus is restricted under Solvency II, downside pension sensitivities may be dampened relative to those shown.

Reconciliation of IFRS total capital to Eligible Own Funds

1 The impact of pensions depends significantly on the opening position of the schemes and market conditions. As such, the sensitivities shown are point-in-time estimates that will vary and should not be extrapolated

2 The interest rate sensitivity assumes a non-parallel shift in the yield curve to reflect that the long end of the yield curve is typically more stable than the short end

3 The asymmetry in credit spread sensitivities reflects the fact that upside pension sensitivities are restricted to the surplus cap. Sensitivities assume that credit spreads of different rating all move by the same amount and hence reflect an assumed offset between the impact on assets held and the IFRS value of pension scheme obligations which could differ

PENSIONS

The table below provides a reconciliation of the movement in the Group's pension fund position under IAS 19 (net of tax) from 1 January 2019 to 31 December 2019:

At an aggregate level, the pension fund surplus under IAS 19 increased during 2019 from a £182m surplus at 1 January to a surplus of £211m at 31 December (net of tax).

The UK IAS 19 position benefited from strong equity performance over the year as well as deficit funding contributions paid by the Group (£86m pre-tax); however, these gains were partly offset by an increase in liabilities driven by a material (25-30bps) tightening of AA credit spreads.