RSA FY20 Preliminary Results

2020 PRELIMINARY RESULTS

RSA Insurance Group plc 26 February 2021

· Group business operating result £751m1 up 15% vs 2019

· Group underwriting profit £550m1 up 36%

· Group combined ratio 91.1%1; underlying EPS 51.2p1 per share

· Statutory profit before tax £483m. Underlying ROTE 18.21%

Stephen Hester, RSA Group Chief Executive, commented:

"We are pleased to report excellent results for RSA in 2020. Underwriting profits are sharply up to new record levels and return on tangible equity has risen above our target range. 

Naturally, the impact of COVID-19 was the major feature of our year, as for society as a whole. We prioritised the safety of our employees and sustaining service to customers. The Group paid out some £4.6bn in 'normal' claims whilst also providing for over £250m in COVID-19 specific claims, together with offering a range of other customer support measures.

The Group has delivered on large parts of our "best in class" ambitions. The quality of earnings is excellent which augurs well for RSA's prospects in 2021 and beyond. I am proud of the hard work, dedication and focus of all my colleagues in what was a difficult and turbulent year.

We have built a high performing company and 2020's results showcase the value creation thereby achieved. This in turn drove the 52% premium we were able to negotiate in Q4 through an all cash bid from Intact and Tryg. The Offer is on track to complete in the coming months, ending a chapter for RSA but not the whole story..."

Trading results

· Underlying profit before tax £718m1 up 15%. Statutory profit before tax £483m down 2% driven by market impacts from COVID-19, bid costs, exits and restructuring

· Group business operating result of £751m1 up 15%: Scandinavia £337m; Canada £256m; UK & International £200m1. Group total business operating result of £703m (2019: £597m). In aggregate, the estimated net impact of COVID-19 from premiums, claims and investment income effects is a £42m drag on business operating result

· Group underwriting profit of £550m1 up 36%. Group total underwriting profit £502m (2019: £346m)

· Group combined ratio of 91.1%1: Scandinavia 83.2%; Canada 88.3%; UK & International 96.7%1. Group total combined ratio 91.9%; UK & International (including exits) 98.5%:

- Group attritional loss ratio1 improved 4.5 points vs. 2019 of which an estimated 1.9 points are COVID-19 related

- Group weather costs 2.3%1 of premiums (2019: 2.5%1)

- Large losses 9.9%1 of which an estimated 1.2 points reflect negative COVID-19 impacts (2019: 9.7%1)

1 Excluding UK&I exit portfolios, refer to pages 33 to 43 for further information

- Group prior year underwriting profit of £15m1 (2019: £45m1 profit)

· Personal Lines (56% of net written premiums) combined ratio 86%1, Commercial Lines combined ratio 97%1 (44% of net written premiums)

Net written premiums ('NWP') of £6,220m1 were flat2 vs. 2019 excluding the estimated impacts of COVID-19 of c.£166m (3%). These consisted of price reductions, refunds, coverage changes and specific business line volume impacts. Including these impacts, NWP was down 3%2 overall vs. 2019. In total:

- NWP down 1%2 in Scandinavia

- NWP up 3%2 in Canada excluding the estimated impacts of COVID-19 or down 1%2 overall

- NWP down 2%1,2 in UK & International excluding the estimated impacts of COVID-19 or down 5%1,2 overall

· Group written controllable costs down to £1,339m (2019: £1,346m). Earned controllable cost ratio of 21.5%

· Investment income of £258m down 16%, at the lower end of our predicted range

· Other charges include £40m of mark to market losses/impairments/discount rate change relating to estimated COVID-19 market volatility and £78m for UK cost base restructuring

· Losses on UK&I exit portfolios were £48m reflecting one large claim, certain COVID-19 international construction claims and increased prior year reserves

· Statutory profit after tax £364m (2019: £383m)

· Underlying EPS 51.2p1 is up 15%, statutory earnings per share 30.9p down 5%

Capital & balance sheet

· Solvency II coverage ratio of 189%3 as stated, 170%3 including proforma dividend accrual for full year 2019 and full year 2020 (31 December 2019: 178% as stated, 168% proforma), versus our 130-160% target range

· Tangible equity £3.27bn up 13% (31 December 2019: £2.91bn), 316p per share

· Underlying return on tangible equity of 18.2%1, above the 13-17% target range

· IFRS pension surplus £290m (31 December 2019: £211m). Fall in bond yields increases estimated full year 2021 capital impact of bond 'pull-to-par' to c.£90m post tax

Acquisition update

The recommended bid for RSA by Intact in consortium with Tryg was approved by RSA shareholders in January and good progress is being made in satisfying the various conditions to closing. It is presently estimated that closing is likely to occur during Q2 2021, subject to the conditions being satisfied.

COVID-19 impacts

· While the impacts of COVID-19 are ongoing, we discuss the principal areas affected below with data for 2020:

- Financial market movements will continue to affect balance sheet, solvency ratios, pension surplus and investment income. Data as at year end 2020 is presented above.

1 Excluding UK&I exit portfolios, refer to pages 33 to 43 for further information2 At constant FX3The Solvency II capital position at 31 December 2020 is estimated

- During 2020, non COVID-19 claims frequency was down vs prior year in a range 9-34% providing partial mitigation to the negative impacts for COVID-19 claims, investment income reductions and lower premiums.

- On 15 January 2021, the Supreme Court handed down judgment relating to the FCA "test case" on business interruption coverage wordings in the UK. As a result of this judgment, gross loss reserving for 2020 increased but RSA does not currently expect the net loss estimates in relation to the policies before the Court to change materially from those previously reported.

- In 2020 RSA booked group wide gross claims costs (including substantial IBNR reserves) of £259m1.

- Reinsurance recoverables arise to mitigate gross claims costs under travel insurance protection, the Group GVC and Cat programmes. Please see page 28 for further details of the GVC and Group Cat programmes.

- There is also a COVID-19 effect on premium income for 2020, which totalled c.£166m reduction. This results from a range of customer driven coverage changes, volume impacts and specific premium relief schemes across our different territories.

- RSA itself was able to adjust well to substantially all employees working from home and business as usual for customer service has largely been sustained. We have prioritised health and welfare of our staff and have not taken part in government furlough programmes.

1 Gross numbers are net of specific quota share and facultative reinsurance impacts   

MANAGEMENT REPORT - KEY FINANCIAL PERFORMANCE DATA

Management basis

CHIEF EXECUTIVE'S STATEMENT

Dear Shareholders,

This is likely to be my last letter to you at RSA, assuming the takeover bid by Intact/Tryg completes as expected in the coming months. It therefore seems appropriate to offer something of a retrospective view of the changes at RSA since I joined in 2014 and what they have delivered.

But first it is right to recognise the context of 2020, and indeed the start of 2021. COVID-19 has blighted the world in so many ways, from health to economics and beyond. All those badly affected deserve our sincere sympathies and understanding. For our own part, RSA has prioritised sustaining customer service during these difficult times. In addition to paying out claims of some £4.6bn for business as usual, COVID-19 related claims of over £250m have been provided for, on top of a range of other customer support measures from premium rebates to bill forbearance and charitable donations. 

In 2020 RSA produced excellent underlying profits, record underwriting results and a return on tangible equity of 18.2%1, above the top end of the targeted range and exceptional for a capital intensive financial institution. This was our fourth record underwriting result in 5 years. Many companies in our industry and elsewhere fared worse and, like them, RSA's results had to be achieved despite a drag on profits from COVID-19 as well as coping with the many other severe challenges it posed - to capital and operations, and most especially to customer service. RSA's results for 2020 are a remarkable achievement, a reflection of 7 years of business building and in turn were the foundation for showcasing the attractiveness of RSA's business in discussions with Intact and Tryg.

As noted above, the other major feature of 2020 for RSA was the all cash takeover bid we negotiated, valuing our Company at a 52% premium over the undisturbed share price. The high value placed on our business was testimony to its strength and attractiveness. We were not looking to sell and RSA's future was bright as an independent company. But in a liberal market based economy, shareholder value is rightly prized, forming the basis as it does of savings and pension returns and a well functioning economy. There is no doubt this bid offers our shareholders exceptional value. But the future for other stakeholders is also safeguarded. Our businesses will live on with their new owners, our people will have the opportunity of great careers and our customers will continue to be serviced well. 

History and Inheritance

RSA can trace its history back 300 years to the inception of the insurance industry after the Great Fire of London, though today's company is the product of many mergers and acquisitions since that time. This proud history gave us a powerful business franchise with customer loyalty, goodwill and recognition going back decades. It also brought us expert staff, with longevity, and an ethos prizing customer service and teamwork. These business assets lie at the heart of what we have been able to accomplish. 

However, RSA in early 2014 also had a legacy of key weaknesses - in capital, in performance, in management, in costs and capability and in a strategy that had not evolved to deal with modern realities. Some of these weaknesses will take still more years to completely eliminate. However, during 2014/15 a fundamental restructuring of the company set right much that was failing, put RSA on a stronger footing and allowed a second phase to begin, aiming not at rescue, but at business outperformance.

1 Excluding UK&I exit portfolios, refer to pages 33 to 43 for further information

What did we do?

We implemented a focused strategy to divest underperforming or ill suited business and concentrate all our resources on our strongest franchises which collectively had coherence and complementarity. We restored capital and risk profile to undoubted strength. We made extensive management changes and began to implement a harder driving performance culture married to the positives of the historic legacy. We cut costs substantially to recognise the essential nature of competitiveness in a mature industry without patents. And we embarked on a comprehensive rebuilding of capabilities across the company, centred on the effective service of customers.

Phase two, the quest for "best in class performance"

With success in restoring RSA to robust health, the mission was expanded to seek excellence, or "best in class" performance as we labelled it. 2016-20 have been spent in pursuit of that mission. This has involved unswerving focus on improving underwriting disciplines, cost efficiency, capability modernisation through technology and ways of working and, at its heart, a focus on winning with and for customers in those areas we could be strong. And enabling all these efforts was continued strategic discipline and performance focus and a drive to make both a permanent part of the RSA culture. 

2020 results point to considerable success from these efforts. In all our overseas businesses, which constitute 80% or more of the Group's value, we have achieved best in class results. But "best in class" is a mission more than a destination. Our competitors will keep improving, and we must also to sustain the gains so painfully won. Even in the UK, our most difficult market, performance is much improved (at least ex covid impacts), and we can see our way to the targeted results within the coming few years. 

Business resilience 

2020 has shown so well the vital nature of business resilience, a lesson especially relevant in financial services where you are selling a promise to customers to be there when their need arises.

RSA has shown it learnt this lesson. It's not just about strong capital. It's also about strong operations and effective risk management. But above all it's about the ability to absorb blows, externally or internally generated, and to come back effectively. No business can be perfect. Mistakes will occur, weaknesses be uncovered and the unexpected transpire. Our record since 2014 has blemishes. We saw that in excessive exposure to natural catastrophes in 2018. And perhaps in our part of the industrywide wording ambiguities that left some customers uncertain of how policies responded to COVID-19, a position now addressed in the UK by the Supreme Court verdict. But we have and will continue to take the results of weaknesses and mistakes head on, to put things right and to build back stronger.

People, culture and customers

All businesses need the right tools, whether technology, capital, expertise etc. But it's humans that wield those tools and must be accountable for what is made with them. And in particular its leadership. In most businesses the workforce are hard working, dedicated and want their company to succeed. But how well their efforts and talents are aimed and organised, and whether the tools they need are provided, these are the tasks of leadership. And business outcomes so often reflect the effectiveness or otherwise of leadership. 

RSA's leadership, our top 100, has changed immensely in recent years, in lineup, in attitudes and in effectiveness. Our accomplishments are a team tribute to this group of people. And for that I am immensely grateful.

But truism as it is, companies are nothing without their ability to satisfy customer needs. In a changing world the basics of need often change slowly, though expectations on how customers are served and through what channels increase and change rather faster. This is no more so than in financial services. RSA has prioritised serving customers well throughout its history. Today the urge is no less strong and high levels of digital investment and investment in skills support more modern delivery. The pandemic has required us to do all this whilst suddenly shifting to home working. We met this challenge well. However, there is always more we aspire to do and plenty of room to improve. That is a challenge that will never subside.

Thank you

Thank you to our customers for their trust which is the lifeblood that motivates our Company. Thank you to our forebears for the inheritance of RSA. Thank you to the Board for constant support and constructive challenge. Thank you to an amazing Chairman, the best I have worked with. Thank you to all my colleagues. Together we achieved a lot. And thank you to our shareholders without whose encouragement and support the urge to achieve would have been much weaker. 

RSA's journey is not over. We have momentum into 2021. I'm confident we will do well up to when ownership changes and beyond, and in the unlikely event the bid does not complete, the future will be bright nevertheless.

Stephen Hester

Group Chief Executive

25 February 2021

MANAGEMENT REPORT

SEGMENTAL INCOME STATEMENT

Management basis - 12 months ended 31 December 2020

Notes:

1 Included within Scandinavia is a reduction of £22m to gross written and gross earned premium which reflects premium recognised over a number of years in respect of cancelled insurance policies and an increase of £10m to expenses in relation to write-off of aged debtors, following completion of a balance sheet remediation programme in Sweden. 

2 Exit portfolios in UK & International which was substantially run off in 2020, with residual premium still to earn out in 20213 Preference dividends of £9m and coupons of £16m paid on Restricted Tier 1 securities4 On an earned basis 

Premiums

Net written premiums ('NWP') of £6,220m1 were flat2 vs. 2019 excluding the estimated impacts of COVID-19 of c.£166m (3%). These consisted of price reductions, refunds, coverage changes and specific business line volume impacts. Including these impacts, NWP was down 3%2 overall vs. 2019. Outside of COVID-19 impacts, areas of profitable growth were balanced by planned underwriting effects in portfolios being remediated, with the process largely complete.

Group retention remained stable at 80% in the period (2019: 80%).  

Regional trends for 2020 include:

· Scandinavian premiums3 were down 1% at constant FX. Personal Lines premiums were down 2%2, albeit Swedish Personal Accident, our most profitable portfolio, grew by 3%2. Premiums were flat in Commercial Lines at constant FX, with planned contraction in Denmark offset by growth in Sweden and Norway.

· Premiums in Canada were up 3%2 excluding the estimated impacts of COVID-19. This was led by growth in Johnson of 9%2 (of which 4% organic growth). We continued to achieve 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 1% in Johnson. Premiums in Commercial Lines decreased by 1%2 where volumes broadly offset strong rate. Premiums in Canada were down 1%2 overall, including an estimated £70m of COVID-19 related customer relief measures impacting written premiums, which also included the delayed renewal of a block of travel business which has been deferred to 2021.

· Premiums were down 2%1,2 in the UK & International region excluding the estimated impacts of COVID-19. Premiums were down 5%1 overall at constant FX, including an estimated £86m impact from COVID-19. UK Personal Lines premiums were down 7% excluding the estimated impacts of COVID-19 (down 9% overall). Household premiums were down slightly reflecting a lower renewal base. Pleasingly, retention was up nearly 5 points despite pushing good rate and Pet premiums decreased as we continue to prioritise margin improvements. UK Commercial Lines premiums grew by 4% excluding the estimated impacts of COVID-19 (up 1% overall). We achieved rate significantly ahead of our plans across all major lines of business and retention was better than prior year across most lines of business. Premiums in Europe were down by 3%2 driven by planned business lapses in Commercial Lines. Premiums in Ireland decreased by 2%2 excluding the estimated impacts of COVID-19 (down 7%2 overall) due to lower Personal Motor new business. In the Middle East, premiums were down 11%2 excluding the estimated impacts of COVID-19 (down 18%2 overall) largely due to lower volumes in Commercial Lines and rating pressure in Personal Lines.

· Although there was negligible net written premium in the UK&I exit portfolios, there was £15m of premium earned in 2020. Although now largely run-off, the remainder of any residual unearned premium will earn through in 2021.

More detail is provided in the regional reviews on pages 16 to 22.1 Excluding UK&I exit portfolios, refer to pages 33 to 43 for further information2 At constant FX3 Included within Scandinavia is a reduction of £22m to gross written and gross earned premium which reflects premium recognised over a number of years in respect of cancelled insurance policies and an increase of £10m to expenses in relation to write-off of aged debtors, following completion of a balance sheet remediation programme in Sweden. 

Underwriting result1

Total Group underwriting result:

· The impacts of COVID-19 provided an estimated £25m underwriting loss overall. COVID-19 related frequency benefits were offset by lower premiums, direct COVID-19 related claims, claims provisions and projected claims inflation impacting both the prior year and current year.

· The Group attritional loss ratio of 50.4% was 4.5 points better than 2019. Excluding the estimated impacts of COVID-19 the attritional loss ratio was 52.3%, a 2.6 points improvement. The ratio improved by 3.0 points in Scandinavia (of which COVID-19 provided a 1.8 point benefit). In Canada, the attritional loss ratio improved by 8.5 points (of which COVID-19 provided a 3.9 point benefit). The UK & International attritional loss ratio improved by 3.3 points (of which COVID-19 provided a 1.4 point benefit).

· Weather losses amounted to £140m or 2.3% of net earned premiums (2019: 2.5%; five year average: 2.8%2) a little better than prior year. Weather costs were adverse in the UK & International due to February flooding in the UK, while Canada was better overall.

· Large losses were £615m or 9.9% of net earned premiums (Inc. exits: 10.1%; 2019: 9.7%; five year average: 10.4%2). Excluding the estimated impacts of COVID-19 the large loss ratio was 8.7%, a c.1 point improvement versus 2019. Scandinavia improved by 0.6 points. Large losses were 1.1 points better in Canada. The UK & International was 10.6% excluding COVID-19 and 2.5 points worse than 2019 altogether.

· Reinsurance: A net recovery was made on the Group Volatility Cover ('GVC'). There was also a modest recovery on the Scandinavian regional aggregate cover. Please see page 28 for further details of the relevant covers for 2021.

Group prior year profit provided 0.2% of benefit to the combined ratio or £15m (2019: 0.8 points benefit to the combined ratio).

Our assessment of the margin in reserves for the Group (the difference between our actuarial indication and the booked reserves in the financial statements) increased during the year to c.5.5% of best estimate claims reserves, above our 5% target level.

1 Excluding UK&I exit portfolios, refer to pages 33 to 43 for further information2 2016 to 2020 for Total Group. 

Underwriting operating expenses

The Group underwriting expense ratio of 16.1% increased as expected due to lower premiums from COVID-19 impacts. Scandinavia increased by 0.4 points, Canada increased by 2.3 points and the UK & International increased by 1.5 points. The Canadian expense ratio also reflected increased amortisation (as guided) but was impacted by lower premiums driven by COVID-19.

Commissions

The Group commission ratio of 13.0% was up slightly versus prior year (2019: 12.6%)

Investment result

The investment result was £213m (2019: £263m) with investment income of £258m (2019: £306m), investment expenses of £14m (2019: £12m) and the liability discount unwind of £31m (2019: £31m).

Investment income was down 16% on prior year, primarily reflecting the impact of reinvestment at lower yields. The average book yield across our bond portfolios was 1.9% (2019: 2.1%). Approximately £17m of the reduction in investment income was a result of COVID-19 market impacts.

Based on year end 2020 forward bond yields and FX rates, it is estimated that investment income will be c.£230-245m for 2021. The discount unwind is expected to be c.£30m per annum and investment expenses c.£15m per annum.

Controllable costs

Group written controllable costs were £1,339m (2019: £1,346m). This comprised 2% cost reductions, offset by 1% inflation. At CFX and gross of inflation, Scandinavia written controllable costs of £371m were down 4% vs. 2019, UK & International £637m was down 6% and Canada costs of £325m was up 10% (as expected).

Group FTE2 of 11,840 was down 4% versus 2019 primarily reflecting actions taken in the UK cost programme as well as other cost actions across our regions as we continue to automate business processes. Group FTE2 is down 28% (excluding disposals) vs. a 2013 baseline.

The earned controllable expense ratio of 21.5% (ex. exits) was up versus 2019 (20.9%) due to a lower premium base driven by both portfolio actions and the estimated premium impacts of COVID-19. Cost action plans are in place across our regions and our ambition of an earned controllable expense ratio of less than 20% in each region by the end of 2022 remains unchanged.

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

Other charges

Interest costs:

· Interest costs were £33m (£49m including the Tier 1 issuance), up from £32m in 2019.

· Coupon costs of £16m (2019: £14m) for the 2017 Tier 1 issuance 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 £77m were incurred, of which an estimated £32m related to COVID-19 market volatility. There was also a £14m goodwill write-down relating to our Norwegian business.

· £78m of restructuring charges were incurred relating to the UK cost reduction programme. This included charges relating to the original £50m programme which was completed in 2020 as well as charges relating to the new simplification programme which commenced in 2020.

· Changes in economic assumptions represents £8m for the accounting impact of a reduction in the discount rate on long-term insurance liabilities in Denmark driven by COVID-19 impacts on interest rates, while there was also £14m of transaction related costs arising from the proposed sale of the business.

Tax

The Group reported a tax charge of £119m for 2020, giving an effective tax rate ('ETR') of 25% (2019: 22%). The tax charge largely comprises tax on overseas profits in Canada and Scandinavia. The Group's ETR of 25% is higher than the UK statutory rate of 19% due to higher tax rates in some of the Group's core overseas jurisdictions, withholding taxes, disallowable costs, and a reduction in the carrying value of the Norway deferred tax asset. The Group underlying tax rate for 2020 was 21% (2019: 20%). Excluding UK&I exited business the Group underlying tax rate for 2020 was 21% (2019: 19%). The slightly increased underlying tax rate, compared to 2019, is mainly due to a greater proportion of Canada profits which are taxed at a higher rate.

The carrying value of the Group's deferred tax assets at 31 December 2020 was £199m (31 December 2019: £209m), of which £181m (31 December 2019: £180m) are in the UK. The decrease in the Group's deferred tax assets in 2020 included a reduction in the Norwegian deferred tax asset of £8m. At expected tax rates, a further £312m (31 December 2019: £254m) of deferred tax assets remain available for use but not recognised on balance sheet; these are predominantly in the UK, Ireland and Norway. The significant increase in the year is mainly due to the change in future UK tax rate from 17% to 19% enacted early in 2020, and with effect from 1 April 2020.

The carrying value of the Group's deferred tax liabilities at 31 December 2020 was £105m (31 December 2019: £84m), the majority of which are in Sweden and Denmark.

For 2021, 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

Consistent with the 2.7 statement regarding the recommended cash offer for RSA Insurance Group plc on the 18th November 2020, a final dividend for 2020 is not being proposed as this would reduce the cash consideration payable under the terms of the acquisition. However, were the transaction not to complete, the Directors would intend to declare catchup payments thereafter (including in relation to the suspended final dividend for 2019).

BALANCE SHEET

Movement in Net Assets

Tangible net assets increased by 13% to £3.27bn at 31 December 2020.

The increase was driven by profit after tax of £446m3 and foreign exchange gains and fair value mark-to-market movements of £147m, mainly reflecting translational gains from weaker sterling and lower bond yields respectively. Tangible net assets were reduced by investment of £121m in intangible assets which were primarily IT related (net investment of £35m after amortisation of £86m shown as part of profit).

The pension schemes generated a loss of £25m in net asset terms driven mainly by updates to financial assumptions, as well as increases in tax deductions due to a larger surplus at year end. The IAS 19 surplus at 31 December 2020 was £290m, please see page 27 for more details.

TNAV per share increased by 12% to 316p.1 Ordinary shareholders' funds including preference share capital of £125m

2 Includes preference dividends of £9m and coupons of £16m 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 increased to 189% during the period:

Please refer to appendix (page 26) for further Solvency II details (including sensitivities).

Note: The increase in the IAS19 pension surplus over the year has resulted in an increase to the Solvency II unrecognised pension buffer. The buffer has increased by 7 points to 10 points.

1 The Solvency II capital position at 31 December 2020 is estimated and for both year end 2019 and year end 2020 excludes an accrual for a final dividend

2 Impact of restructuring costs net nil as already recognised in FY19 SCR 

REGIONAL REVIEW - SCANDINAVIA1

Management basis

1 Included within Scandinavia is a reduction of £22m to gross written and gross earned premium which reflects premium recognised over a number of years in respect of cancelled insurance policies and an increase of £10m to expenses in relation to write-off of aged debtors, following completion of a balance sheet remediation programme in Sweden.

SCANDINAVIA

Scandinavia delivered a business operating result of £337m for 2020, up 18%. The combined ratio of 83.2% was 4.2 points better than prior year. Excluding the estimated impacts of COVID-19 the combined ratio was 85.0%. Personal Lines performance remained excellent with a combined ratio of 78.5%. Commercial Lines improved significantly by 11 points to 90.1% with the Danish Commercial Lines generating a £16m profit (2019: £48m loss).

Net written premiums of £1,764m decreased by 1% at constant FX. Personal Lines premiums were down 2%1 although Swedish Personal Accident, our most profitable lines of business was up 3%1.

Net written premiums were flat1 in Commercial Lines where growth in Sweden and Norway offset planned contraction in Denmark. Danish Commercial premiums were down 3%1 as planned volume contractions more than offset rate.

Large losses of 7.2% improved versus prior year (2019: 7.8%). The attritional loss ratio of 60.4% included an estimated 1.8 points of COVID-19 related frequency benefits. Excluding the estimated impacts of COVID-19 the attritional loss ratio of 62.2% was 1.2 points better than 2019.

Written controllable expenses of £371m were down 3%1 vs. 2019 driven by cost saving initiatives implemented in 2020. The earned controllable cost ratio of 21.0% decreased by 0.7 points.

Geographically, Sweden generated an underwriting profit of £237m (2019: £263m1) and a combined ratio of 77% (2019: 75%). Improved current year performance was more than offset by lower (but still positive) reserve releases. Denmark reported an underwriting profit of £62m (2019: £19m1 loss) and a combined ratio of 89.4% (2019: 102.9%). This was supported by a strong turnaround in Danish Commercial Lines performance. The underwriting loss in Norway of £8m was lower (2019: £14m1 loss) driven by modest improvements in the attritional loss ratio and expenses.

1 At constant FX

REGIONAL REVIEW - CANADA

Management basis

 CANADA

Canada delivered a business operating result of £256m for 2020, up 61% versus last year. The combined ratio improved by 6.2 points to 88.3%. Excluding the estimated impacts of COVID-19 the combined ratio was 91.4%. Personal Lines continued to perform well and the combined ratio improved by over 6 points to 84.9%. Pleasingly, Personal Broker performance showed continued improvement and is now operating at target profitability levels. The combined ratio in Commercial Lines improved by 5 points to 97.3% (2019: 102.3%) driven by improved attritional and large loss performance.

Premiums in Canada were up 3%1 excluding the estimated impacts of COVID-19. This was led by growth in Johnson of 9%1 (of which 4% organic growth). We continued to achieve 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 1% in Johnson. Premiums in Commercial Lines decreased by 1%1 where volumes broadly offset strong rate. Premiums in Canada were down 1%1 overall, including an estimated £70m of COVID-19 related customer relief measures impacting written premiums, which also included the delayed renewal of a block of travel business which has been deferred to 2021.

Weather losses of 3.7% of earned premiums was 1.3 points better than both prior year and the five year average2. The large loss charge of 6.9% was 1.1 points better than 2019. The attritional loss ratio of 47.5% improved by 8.5 points in 2020. Excluding the estimated impacts of COVID-19 the attritional loss ratio was 51.4%.

Written controllable expenses of £325m were 12%1 higher than 2019 driven primarily by an increase in both planned software amortisation charges as well as higher staff costs (also planned) relating to the Scotiabank partnership and some one-off items. The earned controllable expense ratio was 18.8%.

1 At constant FX2 2016-2020  

REGIONAL REVIEW - UK & INTERNATIONAL

1 Excluding UK&I exit portfolios, refer to pages 33 to 43 for further information2 Adjusted for changes in UK&I business mix resulting from exits.

UK & INTERNATIONAL

The UK & International region delivered a business operating result of £200m1 for the period (£152m including exits), down on prior year due to COVID-19 related losses and lower investment income. The business delivered a combined ratio of 96.7%1 (98.5% including exits). However, excluding the estimated impacts of COVID-19, the business operating result was £278m1 the combined ratio was 94.0%1. The attritional loss ratio improved by 3.3%1 of which 1.4 points related to the estimated positive COVID-19 net frequency benefits, while large losses were 2.5%1 worse of which 2.3 points related to direct COVID-19 claims. Premiums were down 5% overall in the UK & International region at constant FX, this included an estimated £86m impact from COVID-19.

UK1

The UK reported an underwriting profit of £11m in the period and a combined ratio of 99.5%. This was heavily impacted by a negative COVID-19 impact of £77m. Included within these results are the estimated impact of the Supreme Court Judgment relating to the FCA's business interruption court proceedings, handed down on 15th January 2021. Excluding the estimated impacts of COVID-19 the business delivered an underwriting profit of £88m and a combined ratio of 95.8%.

Net written premiums of £2,030m were down 4% overall, reflecting COVID-19 impacts plus the underwriting and pricing action taken in 2018 and 2019. UK Personal Lines premiums were down 7% excluding the estimated COVID-19 impacts (down 9% overall). Overall retention improved by 3 points during 2020 and was partly helped by lower churn in new business due to the UK lockdown. Household premiums were down slightly but pleasingly we were able to grow our More Than Home book by 8%. Pet premiums decreased as we continue to prioritise margin improvements. UK Commercial Lines premiums grew by 4% excluding the estimated impacts of COVID-19 (1% growth overall). We achieved rate significantly ahead of our plans across all major lines of business and retention was better than prior year across most lines of business. Regions business continued to show strong performance with growth of 9%, supported by growth in new business and rate and retention ahead of our plans.

The weather ratio of 4.1% was 1.2 points worse than prior year and was driven by the February floods which cost c.£35m. The large loss ratio of 14.0% was 2.7 points worse than last year, but was stable versus prior year excluding COVID-19 impacts. The attritional loss ratio of 45.0% was 2.8 points better than 2019 helped by frequency benefits associated with COVID-19 and improved by 1.8 points excluding COVID-19. Prior year underwriting result was an £6m profit or 0.3% benefit to the combined ratio (2019: 0.5% loss). The expense ratio increased slightly due to premium shortfalls but controllable expenses fell in absolute terms. A new simplification programme commenced in 2020 targeting the key levers of people, property and IT, with the associated benefits expected to come through in 2021.

International1

International portfolios performed well generating a consolidated underwriting result of £79m (2019: £94m). Continued improved performance in Europe was offset by lower profitability in Ireland and the Middle East (both impacted by lower premiums as a result of COVID-19).

Premiums in Europe were down 3%2 driven by planned business lapses. Premiums in Ireland decreased by 2%2 excluding estimated COVID-19 impacts (down 7%2 overall) due to lower Personal Motor new business.

1 Excluding UK&I exit portfolios, refer to pages 33 to 43 for further information2 At constant FX

In the Middle East, premiums were down 11%1 excluding COVID-19 impacts (down 18%1 overall) largely due to lower volumes in Commercial Lines and rating pressure in Personal Lines.

Exit portfolios

The underwriting loss from these portfolios was £48m for the period. Net written premiums were negligible, while net earned premiums were £15m reflecting the ongoing run-off of exposures. The portfolios have materially run-off with de minimis premiums left to earn in 2021.

1 At constant FX

INVESTMENT PERFORMANCE

Management basis

INVESTMENT PERFORMANCE

Investment income of £258m (2019: £306m) was offset by investment expenses of £14m (2019: £12m) and the liability discount unwind of £31m (2019: £31m). Investment income was down on the prior year primarily reflecting the impact of reinvestment at lower yields but also negatively impacted by lower cash rates and reduced dividend income from the REIT1 portfolio.

The average book yield for 2020 on the total portfolio was 2.0% (2019: 2.4%), with an average yield on the bond portfolios of 1.9% (2019: 2.1%). Reinvestment rates in the Group's major bond portfolios were approximately 0.6% (2019: 1.2%).

At 31 December 2020, the average duration of the Group's bond portfolios of 4.12 years was slightly higher than at the prior year-end (31 December 2019: 3.9 years).

The investment portfolio increased by 4.5% during the period to £13.2bn.

At 31 December 2020, high quality widely diversified fixed income securities represented 81% of the portfolio (31 December 2019: 82%). Equities (largely REITs1) represented 1% (31 December 2019: 2%) and cash was 8% of the total portfolio (31 December 2019: 7%).

The quality of the bond portfolio remains very high with 99% investment grade and 65% rated AA or above. The bond portfolio remains well diversified by sector and geography.

Based on year end 2020 forward bond yields and foreign exchange rates, our investment income guidance is c.£230-245m for 2021. The discount unwind is expected to be in the region of c.£30m per annum and investment expenses are expected to be c.£15m per annum.

Unrealised bond gains and pull-to-par

At 31 December 2020, balance sheet unrealised gains of £491m (pre-tax) had increased by £120m from 31 December 2019 principally driven by positive mark-to-market on bond holdings due to declining yields, partially offset by negative movements in our REIT1 holdings.

If yield curves were to stay as they were at year end 2020, it is estimated that the bond gains would take around 6 to 7 years to fully unwind, with around 60% within the next 3 years (AFS unwind is estimated to be c.£105m post tax for 2021). The capital impact of this amount is c.£90m with the balance being projected yield change.

1 Real Estate Investment Trusts2 Includes swap overlay

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. In particular, given the level of pension surplus at YE 20, we would expect Group capital sensitivities to be more in line with the ex-pensions view above for more modest levels of market movements.

In Q1 2020, RSA were granted approval to apply the volatility adjustment, which reduces our exposure to spread movements and is reflected in the sensitivities above.

Reconciliation of IFRS total capital to Eligible Own Funds

1 Sensitivities have been calibrated to a FY20 coverage ratio that includes dividend accrual, further adjusted for the UK pension contributions paid in January 2021.

2 The impact of pensions depends significantly on the opening position of the schemes and market conditions and as such should not be extrapolated.

3 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

4 The asymmetry in credit spread and interest rate sensitivities reflects the fact that upside pension sensitivities are restricted to the surplus cap. Sensitivities reflect an assumed offset between the impact on assets held and the IFRS value of pension scheme obligations which could differ in practice.

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 2020 to 31 December 2020:

At an aggregate level, the pension fund surplus under IAS 19 improved during 2020 from a £211m surplus at 1 January to a surplus of £290m at 31 December (net of tax). This was driven primarily by deficit funding contributions paid in January (£75m pre-tax) with the impact of market movements and experience also positive in aggregate.

1 Actuarial gains/ (losses) are gross of tax and include pension investment expenses, variance against expected returns, change in actuarial assumptions and experience losses

2 Other movements are gross of tax and include regular contributions, service/ administration costs, expected returns, interest costs and settlement gains/ (losses)

REINSURANCE

On 1 January 2021, RSA renewed the Group Volatility Cover (GVC) on a one year basis. We chose to place 75% of the GVC in order to balance the cost versus benefit of this protection.

The key terms of the renewed GVC are as follows:

· Cover protects catastrophe event and individual large losses from our Property and Construction & Engineering portfolios

· Qualifying GVC losses are accumulated across our financial year

· Cover attaches where the total of our qualifying losses is greater than £160m.

· Qualifying losses are calculated net of our main catastrophe and large loss reinsurance covers

· Catastrophe event losses qualify in full when they exceed £10m

· Individual large losses qualify in excess of a £5m deductible

· Limit of cover is £125m

Counterparties are high credit quality reinsurers (42.5% AA- or better; 32.5% A+, A or A-)

Alongside the GVC, we continued to purchase additional aggregate cover for large losses below C$10m in Canada. We chose not to renew the large loss aggregate covers in the UK and Scandinavia.

Our main Catastrophe retentions remain at £75m for the UK and Europe combined, £50m for Europe excluding the UK and $75m for Canada.

We chose to increase our UK and Ireland Motor retentions for 2021 to just below £3m / €3m respectively. This is an increase from the 2020 level of £1m / €1m.

MANAGEMENT REPORT

SEGMENTAL INCOME STATEMENT

Management basis - 12 months ended 31 December 2019