RSA: RSA Insurance Group Plc: Final Results

  RSA: RSA Insurance Group Plc: Final Results

UK Regulatory Announcement



                                                              20 February 2013

                                   OF 95.4%

Solid performance, 5% growth^1 in net written premiums

  *Net written premiums up 5% on constant exchange rate basis to £8,353m
  *Underwriting result flat at £375m (2011: £375m) including negative impact
    from UK adverse weather and Italian earthquakes in first half; combined
    operating ratio of 95.4% (2011: 94.9%)
  *Investment income of £515m (2011: £579m), ahead of 2012 guidance
  *Emerging Markets now represents 10% of insurance result
  *Acquisitions in Canada and Argentina completed
  *Operating profit of £684m (2011: £727m); Return on equity of 9.1% (2011:

Balance Sheet remains strong with healthy capital surplus

  *IGD surplus of £1.2bn; covering capital requirement 1.9 times
  *Economic capital surplus of £1.2bn at 99.5% calibration
  *Net asset value per share excluding pension deficit of 107p (2011: 108p)

Strategy is delivering – expecting to achieve 10-12% ROE in 2013

  *Continued growth in premiums as business expands in Emerging Markets,
    Canada and Global Specialty Lines
  *Further improvements to combined ratio anticipated as reshaping in UK,
    remediation in Italy and operating leverage in Emerging Markets deliver
  *Expect to deliver strong premium growth, a COR of better than 95%, around
    £470m of investment income and return on equity of between 10 and 12% in
  *Confident in prospects for further improvements to ROE and COR in medium

Recommendation to rebase dividend. Final dividend of 3.90p per share

  *Reflects prospects of prolonged low bond yield environment
  *Creates sustainable dividend and progressive dividend policy for the
    future consistent with the anticipated underlying growth in earnings
  *Final dividend of 3.90p per share (2011: 5.82p). Board anticipates similar
    percentage reduction in 2013 interim dividend

^1 at constant exchange

Simon Lee, Group Chief Executive of RSA, commented:

“These are a solid set of results demonstrating strong progress in challenging
market conditions. We've seen good growth in premiums up 5% to £8.4bn.
Operating profits of £684m have been impacted by the Italian earthquakes,
extreme wet weather in the UK in the first half of the year and falling bond

“We are continuing to execute our strategy of global growth while maintaining
profitability and underwriting quality. In 2012 over 65% of our premiums were
from outside the UK and as we move more of the business towards higher growth
and higher margin markets, we are optimistic about our future growth

“We are confident that we can deliver sustainable and ongoing improvements in
the combined ratio and return on equity through management actions and we are
not dependent on economic or market recovery to deliver these plans.

“We have leading market positions in Scandinavia, Canada, Latin America,
Ireland and the UK. These are attractive general insurance markets where we
are either already delivering or will deliver strong returns on capital. Where
we do not see a route to achieve target returns on capital we will take
decisive action.

“The Board's decision to rebase the dividend is a prudent move that will
enable us to invest in the opportunities we see for growth and is in the best
interests of our shareholders. It is absolutely the right thing to do for the
business given the prospect of prolonged low bond yields. The new dividend is
appropriate for the business today, sustainable into the future and will allow
a progressive dividend policy going forward.”

 FINANCIAL                                                 12                12
  HIGHLIGHTS                                                                                               Months                      Months
                                                                                                           2012                        2011
  written                                                                                                  £8,353m                     £8,138m
  operating                                                                                                95.4%                       94.9%
  Operating                                                                                                £684m                       £727m
  Earnings                                                                                                 9.5p                        11.9p
  per share
  for the                                                                                                  3.90p                       5.82p
  year per
  for the
  year per                                                                                                 7.31p                       9.16p
  ROE                                                                                                      9.1%                        11.5%


                               2012                                                            2012       2011
                               £m                                                              £m              £m
Net written
premiums                       Personal       Commercial       Specialty                       Total           Total

Scandinavia                    973            589              229                             1,791           1,824
Canada                         1,090          280              244                             1,614           1,483
Emerging                       530            514              193                             1,237           1,103
UK & Western                   1,684          1,290            715                             3,689           3,701
Group Re              -           22            -                    22         27
Total net
written               4,277       2,695         1,381                8,353      8,138
                               Combined Operating Ratio (%)                                    2012            2011
Underwriting                                  2012             2011                            £m              £m
Scandinavia                                   86.6             85.4                            237             264
Canada                                        93.7             91.6                            98              116
Emerging                                      96.9             98.7                            33              3
UK & Western                                  99.5             99.6                            12              1
Group Re                         -             -                    (5)        (9)
underwriting                     95.4          94.9                 375        375
Investment                                                                                     515             579
Unwind of                                                         (84)       (94)
investment                                                        431        485
Insurance                                                         806        860
Other                                                                                          (122)           (133)
Operating                                                         684        727
Profit                                                                                         479             613
before tax
Profit after                                                      351        427
Operating earnings per share –                                                                 10.5            11.2
diluted (pence)
Operating earnings per share –                                                 10.7       11.3
basic (pence)
Earnings per share – diluted                                                                9.4             11.8
Earnings per share – basic                                              9.5        11.9
Dividend per share (pence)                                              7.31       9.16
Net asset value per share –
incl IAS19 pension deficit                                                                     101             104
Net asset value per share –
excl IAS19 pension deficit                                                                     107             108
Tangible Net asset value per
share – incl IAS19 pension                                                                     60              66
deficit (pence)
Tangible Net asset value per
share – excl IAS19 pension                                                         65         70
deficit (pence)
Return on equity (%)                                                                           9.1             11.5
Return on tangible equity (%)                                           14.5       17.1
IGD Surplus (£bn)                                                                              1.2             1.3
IGD Coverage ratio (%)                                                  1.9        2.0
ECA Surplus (1 in 200 year                                                                     1.2             1.2
calibration) (£bn)
ECA Surplus (1 in 1,250 year                                                   0.7        0.8
calibration) (£bn)


12 months ended
31 December                                                                                    
                                                 Emerg-        UK &          Central
                      Scandi-                                                                Group       Group
                                    Canada    ing        Western               
                      navia                                                                  2012        2011
                                                 Markets       Europe        Functions
                      £m            £m           £m            £m            £m              £m          £m
Net written        1,791      1,614     1,237      3,689      22           8,353    8,138
Underwriting          237           98           33            12            (5)             375         375
Investment         94         61        45         233        (2)          431      485
Insurance             331           159          78            245           (7)             806         860
Other              (9)        (7)       (32)       (1)        (73)         (122)    (133)
result             322        152       46         244        (80)         684      727
Interest costs                                                                               (115)       (117)
Realised                                                                                     79          201
impairments and                                                                              (51)        (44)
and impairment                                                                               (42)        (114)
of intangible
Solvency II                                                                                  (32)        (30)
Acquisitions                                                                                 (20)        (10)
and disposals
Reorganisation                                                        (24)     -
Profit before

(per condensed                                                        479      613
operating ratio    86.6       93.7      96.9       99.5       -            95.4     94.9

In 2012, net written premiums were up 5% at constant exchange rates (3% as
reported) to £8,353m (2011: £8,138m as reported; £7,979m at constant
exchange). Premium growth comprised 4% from rate increases on renewed
business, 1% from inorganic activity offset by a 2% reduction from foreign
exchange. On a reported basis, strong growth of 12% and 9% in Emerging Markets
and Canada respectively was offset by a 2% reduction in Scandinavia (due
exclusively to FX effects). Premiums were flat in UK and Western Europe, where
underlying growth in the UK and Ireland was offset by targeted premium
reductions in both UK personal motor and Italy. Our focus on Global Specialty
Lines (GSL) in all regions continues with premiums up 8% to £1,381m and a
combined ratio of 94.3% (2011: 94.7%).

Underwriting result is flat at £375m (2011: £375m) with a current year profit
up 26% to £184m (2011: £146m) and a prior year result of £191m (2011: £229m).
The Group combined operating ratio (COR) is 95.4% (2011: 94.9%) and includes
adverse UK weather in the first half and earthquakes in Italy in May. The
material adverse UK weather in the first half of 2012 was partly offset by
benign weather experience in the rest of the Group during 2012. Taken
together, weather and subsidence affected the COR by 2.2% (2011: 2.4%),
including adverse UK weather which affected the COR by 0.8% (2011: nil).
Whilst long term weather averages are largely unchanged, we have increased our
planning assumptions for weather effects to 2.2% to reflect the relatively
severe weather impact in more recent years. Large losses affected the COR by
7.0% (2011: 7.0%), which is in line with long term averages, even including
the effect of the Italian earthquakes. Prior year profits benefited the COR by
2.2% (2011: 2.8%). We have maintained our prudent reserving policy and
anticipate positive prior year development to continue to be a significant
contributor to profit in the future.

The investment result is down 11% to £431m (2011: £485m) due to the continued
effect of falling bond yields on investment income. Investment income of £515m
(2011: £579m), is ahead of previous guidance.

The insurance result of £806m (2011: £860m) includes a significant 44%
increase in the contribution from Emerging Markets to £78m (2011: £54m) which
now represents 10% of the insurance result. The contribution from UK & Western
Europe was flat at £245m (2011: 246m) and represented 30% of the insurance
result. The contributions from Canada and Scandinavia were £159m and £331m
(2011: £187m and £387m) which represented 19% and 41% of the insurance result

The operating result is £684m (2011: £727m). Profit before tax is £479m (2011:
£613m), with 2011 reflecting high levels of realised gains on the sale of
equity investments. Profit after tax is £351m (2011: £427m). The return on
equity is 9.1% (2011: 11.5%)

The Group’s capital position remains healthy with an IGD surplus of £1.2bn
(2011: £1.3bn) covering the capital requirement 1.9 times (2011: 2.0 times)
and economic capital of £1.2bn (2011: £1.2bn) (on a 1 in 200 year


Our strategy is unchanged and we continue to deliver against it. We are a pure
play general insurer and aim to outperform in each of our chosen markets
through leveraging our strengths in our people, underwriting, distribution and
claims management. The delivery of our strategy is based around some
fundamental principles.

We manage the business with a firm operational grip. RSA is a diverse business
with operations in 32 countries and sells insurance across multiple product
lines in over 140 countries. Over many years we have created processes and
systems which ensure that local, regional and central management have
excellent visibility of and accountability for performance. This structure
ensures that issues arising are dealt with quickly and decisively. At the
centre we deploy rigorous performance management with each business subject to
a detailed quarterly performance review and annual strategy review.

This approach to operational management is supplemented by our commitment to
prudent financial management. We consistently reserve our business to create
prudency in our insurance liabilities which has led to a consistent track
record of positive prior year development. We apply a high quality, low risk
investment strategy. We make prudent use of reinsurance, which protects the
business from extreme natural catastrophes, such that combined ratios have
been very stable over many years.

Our strategy is to maximise returns on capital in mature markets and to have
the flexibility to increase capital allocation to growth markets. Our unique
geographic footprint gives us exposure to some of the most attractive general
insurance markets in the world. In many of these territories, we have achieved
a leading market position which creates economies of scale and distribution
strength. In other markets, we have opportunities to grow both organically and
through selective bolt-on acquisitions. Furthermore, all of our businesses
benefit from being part of a leading global insurer, which provides them with
competitive advantage over local operators.

Outlook and Financial Targets

We are excited by the prospects for the business. We expect to continue to
grow net written premiums across the business and anticipate strong premium
growth in 2013. In Emerging Markets we continue to see opportunities to grow
our franchises in Latin America, Asia, the Middle East and Central and Eastern
Europe both organically and inorganically. Through organic growth, we expect
to increase the size of our Emerging Markets business, including our
associates, to £2.2bn of net written premiums by 2015, creating operational
leverage and an improving expense ratio with a consequent improvement in
combined ratio. Where we cannot see a route to outperformance we will take
action to exit markets, as we have done in 2012 in the Czech Republic and
Dutch Caribbean.

In Canada, we expect to see further market consolidation which will allow us
to continue to grow market share and consolidate our position as one of the
top three general insurers. We aim to grow the business both organically and
through selective bolt on acquisitions. We expect the Scandinavian markets to
grow in line with local economic growth and our businesses to grow in line
with the market. We expect Canadian and Scandinavian combined ratios to
continue at around current levels over the medium term.

In the UK, we are reshaping the portfolio in a challenging environment and
expect underlying growth in our chosen segments to be broadly offset by
reductions in less profitable business lines. We expect this will lead to a
trend of improving combined ratios in the UK over the next three years. Italy
is on track to be trading on a break even basis during 2013 and Ireland is
expected to continue to grow both premiums and profit.

We will, however, continue to see the effect of falling investment yields on
investment income and expect to deliver around £470m of investment income in
2013. Assuming the current yield environment persists beyond 2013, we expect
the fall in investment income to continue, but to be less severe over the next
three years.

Overall, we expect to achieve a combined ratio of better than 95% in 2013 and
deliver return on equity of between 10 and 12% with further improvements in
both of these metrics in the medium term.


Earnings in recent years have been reduced by the material fall in bond yields
which has led to a situation where our dividend payout ratio was becoming
unsustainable, and creating a constraint on our ability to invest in future
growth opportunities.

After taking into consideration the expectation of a prolonged low bond yield
environment, the need for a more sustainable dividend going forward and more
opportunities to continue to develop and grow our businesses outside the UK in
the coming years, the Board is recommending a final dividend for 2012 which
will be 33% lower than that of the prior year. The Board expects to recommend
a similar change in the interim dividend for 2013 versus 2012. Thereafter, the
Group intends to pursue a progressive dividend policy in line with the
anticipated underlying growth in earnings. We intend to continue to offer the
option of a scrip dividend.

Simon Lee

Group Chief Executive


               Net written premiums        Underwriting result     Change^1
                  2012            2011        2012    2011            NWP       
                  £m                 £m          £m         £m              %             %
Household         298                309         (10)       (35)            1             70
Motor             391                398         124        147             2             (13)
Accident       284             275      80      136          7          (39)
and Other
Scandinavia    973             982      194     248          3          (20)
Property          306                328         (5)        (20)            (2)           74
Liability         126                128         44         17              4             175
Motor             218                227         (4)        (3)             -             (33)
Marine and     168             159      8       22           11         (62)
Scandinavia    818             842      43      16           2          187
Total          1,791           1,824    237     264          3          (7)
Investment                                       2012       2011                          Change
                                                 £m         £m                            %
Investment                                       133        166                           (20)
Unwind of                             (39)    (43)                   9
investment                            94      123                    (24)
insurance                             331     387                    (14)
Operating         Claims                         Expenses                   Combined
Ratios (%)
                  2012               2011        2012       2011            2012          2011
Household                                                                   103.6         111.3
Motor                                                                       68.3          64.2
Accident                                                                    71.4          49.8
and Other
Scandinavia       64.2               59.7        15.9       15.3            80.1          75.0
Property                                                                    102.0         105.7
Liability                                                                   64.3          86.7
Motor                                                                       102.1         101.8
Marine and                                                                  94.1          87.3
Scandinavia       71.9               77.2        22.7       20.8            94.6          98.0
Total          67.7            67.6     18.9    17.8         86.6       85.4
Increases         Personal                       Commercial
Scandinavia       Motor    Household          Motor             Liability       Property
Dec 12 vs         3           12                 5                 4               1
Dec 11
Sept 12 vs        2           12                 4                 -               6
Sept 11
Jun 12 vs         2           7                  4                 4               1
Jun 11
Mar 12 vs         2           6                  5                 5               4
Mar 11
Dec 11 vs      2        8               7              7            1
Dec 10

^1 at constant exchange rate


RSA is the third largest P&C insurer in Sweden and Denmark, with a growing
presence in Norway. In all three countries we offer a range of products across
Personal and Commercial lines, with particular strengths in Swedish Personal
Accident, Swedish Personal Motor, Danish Renewable Energy and Care.

Net written premiums in Scandinavia were up 3% on a constant exchange rate
basis to £1,791m (2011: £1,824m as reported; £1,744m at constant exchange)
with solid growth across most major product lines. New business volumes more
than offset lapses which together with solid rate increases across all
products led to the growth in premiums. Strong growth in Norway (premiums up
23% at constant exchange) and good growth in Sweden (up 3% at constant
exchange) was partly offset by a decline in premiums in Denmark (down 2% at
constant exchange) where we have been focused on improving profitability.
Swedish underwriting profit was down but remained strong at £157m with a COR
of 83.5%. We saw good improvements in Denmark with an underwriting result of
£75m and a COR of 88.9%, whilst in Norway the underwriting result improved to
£5m with a COR of 96.4%.

Scandinavian underwriting profit was £237m (2011: 264m). A strong current year
underwriting result together with continued positive prior year development
led to a combined operating ratio of 86.6% (2011: 85.4%). The claims ratio was
stable at 67.7% (2011: 67.6%) whilst the expense ratio increased, primarily
reflecting the investments we are making in new systems in Denmark. After
including investment returns of £94m (2011: £123m), the insurance result was
£331m (2011: £387m).

Personal net written premiums of £973m were up 3% on a constant exchange rate
basis (2011: £982m as reported; £942 at constant exchange). Household premiums
were up 1% with strong rate increases throughout the year, leading to an
improved combined ratio of 103.6% (2011: 111.3%). Personal Motor premiums were
up 2% to £391m (2011: £398m as reported; £382 at constant exchange) including
31% growth in Norway as we benefit from our distribution deal with the
Norwegian Automobile Federation. The Personal Motor COR was 68.3% (2011:
64.2%) with continued strong performances in both current year and prior year
in Sweden leading to a Scandinavian Personal Motor underwriting result of
£124m (2011: £147m). In Personal Accident we have a leading position in
Sweden. Premiums were up 7% but underwriting profits were down 39% to £80m
(2011: £136m) due to lower positive prior year development.

Commercial net written premiums of £818m were up 2% on a constant exchange
rate basis (2011: £842m as reported; £802 at constant exchange). Commercial
Property premiums were down 2% whilst the underwriting result improved to a
£5m underwriting loss (2011: £20m underwriting loss) due to fewer weather
events and lower large losses in 2012. Commercial Liability premiums were flat
at constant exchange but the underwriting result improved to £44m (2011: £17m)
with improved contributions across all three markets. Commercial Motor
premiums were flat at constant exchange and the combined ratio was stable at
102.1% (2011: 101.8%) as claims inflation was offset by rate increases. Marine
performance was in line with 2011 whilst Care profitability was down mainly
due to the exceptionally low COR in Danish Care in 2011.

Scandinavia – Outlook

We expect the Scandinavian markets to continue to grow in line with local GDP
growth. We expect to grow in line with the market in Sweden and Denmark whilst
continuing to build market share in Norway. We expect continued strong levels
of profitability as we benefit from our established market positions across
Personal, Commercial and Specialty.


              Net written premiums     Underwriting result      Change^1
                 2012     2011            2012     2011            NWP    
                 £m          £m              £m          £m              %          %
Household        396         349             26          (1)             13         n/a
Motor         694      663          17       75           4       (77)
Canada        1,090    1,012        43       74           7       (42)
Property         233         208             -           1               11         (100)
Liability        139         127             38          29              9          27
Motor            95          85              11          8               10         38
Marine and    57       51           6        4            12      50
Canada        524      471          55       42           11      28
Total         1,614    1,483        98       116          8       (16)
Investment                                   2012        2011                       Change
                                             £m          £m                         %
Investment                                   63          72                         (13)
Unwind of                         (2)      (1)                 (100)
investment                        61       71                  (14)
insurance                         159      187                 (15)
Operating        Claims                      Expenses                    Combined
Ratios (%)
                 2012        2011            2012        2011            2012       2011
Household                                                                92.6       99.5
Motor                                                                    97.9       88.5
Canada           72.0        67.9            24.1        24.4            96.1       92.3
Property                                                                 99.1       98.6
Liability                                                                71.3       76.1
Motor                                                                    87.1       89.3
Marine and                                                               88.5       91.8
Canada           53.8        54.9            34.4        34.9            88.2       89.8
Total         66.2     63.8         27.5     27.8         93.7    91.6
Increases        Personal                    Commercial
Canada           Motor       Household       Motor       Liability       Property
Dec 12 vs        3           11              2           2               4
Dec 11
Sept 12 vs       2           12              -           1               3
Sept 11
Jun 12 vs        3           11              1           1               3
Jun 11
Mar 12 vs        5           12              1           1               3
Mar 11
Dec 11 vs     4        13           3        1            3
Dec 10

^1 at constant exchange rate


RSA is the third largest general insurer in Canada with a market share of
around 7%. RSA Canada comprises a leading Personal and Commercial broker
business, our direct business, Johnson, and our commercial brokerage, Noraxis.

Net written premiums in Canada were up 8% on a constant exchange rate basis to
£1,614m (2011: £1,483m as reported; £1,493m at constant exchange) driven
predominantly by strong organic growth across Personal and Commercial broker
product lines, supplemented by three months benefit from the acquisition of
L’Union Canadienne in Quebec which contributed 2% of the growth. Underwriting
profit was £98m (2011: £116m) including a specific strengthening of prior year
reserves in Personal Motor. Consequently, combined ratios worsened to 93.7%
(2011: 91.6%). After including investment returns of £61m (2011: £71m), the
insurance result was £159m (2011: £187m).

Personal premiums were up 7% on constant exchange to £1,090m (2011: £1,012m as
reported; £1,019m at constant exchange). In Personal Motor, premiums grew by
4% but underwriting profit was down to £17m (2011: £75m) due to the
identification and resolution of adverse development in the bodily injury and
accident benefits reserves in the pre-reform Johnson Ontario motor book. As a
consequence the Personal Motor combined ratio was 97.9% (2011: 88.5%). A
thorough review of motor reserves in Canada has been completed which has given
comfort over the adequacy of current reserves.

Personal Household premiums were up 13% to £396m (2011: £349m as reported;
£351 at constant exchange) with good growth in both Johnson and Personal
Broker business driven by strong rating action across all provinces and
continued good retention rates. The combined ratio improved to 92.6% (2011:
99.5%) generating an underwriting profit of £26m (2011: £(1)m underwriting

In Commercial lines, premiums were up 11% at constant exchange to £524m (2011:
£471m as reported; £474m at constant exchange) with strong growth across all
product lines and significant new business wins amongst large commercial
brokers. Our Commercial proposition continues to benefit from the acquisition
of GCAN in 2011. Underwriting profits were up 28% to £55m (2011: £42m) with
particular strength in Liability.

The acquisition of L’Union Canadienne (UC) was completed on 1 October 2012.
Integration is underway and progressing in line with our business case
assumptions. This acquisition, which is around 70% Personal lines and 30%
Commercial lines, will increase RSA’s penetration in the attractive Quebec
market (the second largest provincial market in Canada) and makes RSA the
fifth largest insurer in Quebec. During the fourth quarter UC contributed £38m
of net written premium.

Canada – Outlook

The Canadian P&C market will remain a highly attractive market for RSA. We
expect continued single digit market growth led by a strong and stable economy
and an established insurance market, characterised by underwriting discipline.
We expect to outperform the market in terms of growth and profitability as we
continue to drive organic growth from our unique distribution model, realise
the benefits from the recent acquisitions we have made and look for further
opportunities to participate in market consolidation.


               Net written          Underwriting       Change^1
                  premiums                result
                  2012     2011        2012    2011       NWP      U/W
              £m       £m       £m      £m      %        %
Latin             766         670         21         19         20          24
CEE               224         219         (2)        (5)        9           60
Middle East       127         115         9          6          10          50
Asia           120      99       5       (17)    19       
Emerging       1,237    1,103    33      3       17       
Asian          303      292                    11       
Asia (incl     423      391                    13       
Markets        1,540    1,395                  16       
Investment                                2012       2011                   Change
                                          £m         £m                     %
Investment                                49         52                     (6)
Unwind of                      (4)     (1)             
Markets                        45      51              (12)
Markets                        78      54              44
Operating         Claims                  Expenses              Combined
Ratios (%)
                  2012        2011        2012       2011       2012        2011
Latin                                                           96.0        95.7
CEE                                                             100.6       101.4
Middle East                                                     93.1        94.4
Asia                                                            99.0        118.2
Emerging       55.8     56.6     41.1    42.1    96.9     98.7
^1 at constant exchange rate


Our Emerging Markets business operates in twenty countries across Latin
America, Asia, the Middle East and Central and Eastern Europe. During the year
we have materially strengthened our position in Argentina with the
acquisitions of El Comercio and ACG and have taken steps to release capital by
exiting the Czech Republic and selling our operation in the Dutch Caribbean.

Emerging Markets delivered strong premium growth of 17% at constant exchange
to £1,237m (2011: £1,103m as reported; £1,061m at constant exchange).
Including non-consolidated associates in India and Thailand, premiums were up
16% at constant exchange to £1,540m (2011: £1,395m as reported; £1,333m at
constant exchange). As we build scale in Emerging Markets, we are starting to
benefit from operating leverage on expenses. Underwriting expenses were up 6%
leading to an improved expense ratio (excluding commissions) of 21.6% (2011:
22.8%) and improved combined ratio of 96.9% (2011: 98.7%) and a significantly
better underwriting result of £33m (2011: £3m). The business delivered an
investment result of £45m (2011: £51m) leading to an insurance result up 44%
to £78m. Start-up costs of £19m in 2012 will fall to zero by 2014. Emerging
Markets is already delivering attractive returns on capital given the low
capital intensity of the products sold.

In Latin America, we have attractive and developing market positions which
give us access to approximately 80% of the general insurance markets in the
region. We are the number one general insurer in Chile, number one private
general insurer in Uruguay and a leading insurer in Argentina. Latin American
premiums were up 20% at constant exchange to £766m (2011: £670m as reported;
£640m at constant exchange), including £43m from the acquisitions in Argentina
which completed on 31 July 2012. Premiums were up in all territories including
7% growth in Chile and 79% growth in Argentina (36% growth excluding 2012
acquisitions). Underwriting profits were £21m (2011: £19m) with strong
contributions from Argentina, Chile, Mexico and our leading Marine business in

In Central and Eastern Europe (CEE) we are the leading insurer across the
Baltic States and we have leading direct businesses in Poland and Russia.
Premiums were up 9% at constant exchange to £224m with strong growth in
Estonia (up 67%), Russia (up 25%) and Poland (up 11%). The underwriting result
was a £2m loss (2011: £5m underwriting loss) with a combined ratio of 100.6%
(2011: 101.4%). Economic conditions are improving and we expect the business
to deliver a profit in 2013.

In Asia and the Middle East, RSA has a strong Specialty business with exposure
across the region. In addition we have retail businesses in China, Singapore
and Hong Kong and minority stakes in businesses in India and Thailand. We are
one of the leading insurers in the Middle East with a number one position in
Oman and have businesses in UAE, Bahrain and the Kingdom of Saudi Arabia.
Asian premiums were up 19% at constant exchange to £120m (2011: £99m as
reported, £101m at constant exchange) with strong growth in Specialty lines
and up 13% to £423m including non-consolidated associates in India and
Thailand. Underwriting profit in Asia improved to £5m (2011: £17m underwriting
loss). In the Middle East we delivered 10% growth in premiums to £127m (2011:
£115m as reported and at constant exchange) and an increase in the
underwriting profit to £9m (2011: £6m).

Emerging Markets Outlook

We expect to continue to deliver strong growth from our Emerging Markets
franchises and are on track to meet our target of £2.2bn of premiums
(including our associates) in 2015. We anticipate achieving this target
without further M&A activity, although we continue to seek opportunities to
grow the business through selective bolt-on acquisitions. As we grow the scale
of our Emerging Markets business, we expect further operating leverage to
emerge in the expense line, leading to improved combined ratios, growth in
underwriting profit and further improvement in return on capital.


              Net written premiums            Underwriting result     Change^1
                 2012              2011          2012    2011            NWP       
UK               £m                   £m            £m         £m              %             %
Household        670                  653           54         57              3             (5)
Motor            416                  514           10         -               (19)          -
Pet           233               197        6       3            18         100
Total UK      1,319             1,364      70      60           (3)        17
Property         491                  453           22         12              8             83
Liability        280                  276           (21)       4               1             (625)
Motor            598                  572           (44)       (37)            5             (19)
Marine        319               293        12      23           9          (48)
Total UK      1,688             1,594      (31)    2            6          (1,650)
Total UK      3,007             2,958      39      62           2          (37)
Ireland          348                  353           25         24              5             14
Italy            200                  261           (51)       (63)            (18)          14
Specialty     134               129        (1)     (22)         11         95
Total UK &
Western       3,689             3,701      12      1            1          140
Investment                                          2012       2011                          Change
                                                    £m         £m                            %
Investment                                          262        276                           (5)
Unwind of                                (29)    (31)                   6
investment                               233     245                    (5)
insurance                                245     246                    -
Operating        Claims                             Expenses                   Combined
Ratios (%)
Personal         2012                 2011          2012       2011            2012          2011
Household                                                                      91.5          90.4
Motor                                                                          99.9          100.7
Pet                                                                            97.4          96.1
Total UK         60.1                 63.9          35.5       31.8            95.6          95.7
Property                                                                       94.6          99.1
Liability                                                                      107.1         99.7
Motor                                                                          106.8         105.9
Marine                                                                         96.2          91.1
Total UK         70.4                 68.8          30.0       29.9            100.4         98.7
Total UK         65.7                 66.5          32.5       30.8            98.2          97.3
Ireland                                                                        94.2          92.6
Italy                                                                          125.1         123.6
Specialty                                                                      100.4         118.3
Total UK &
Western       67.8              69.0       31.7    30.6         99.5       99.6
Increases        Personal                 Commercial
UK               Motor    Household       Motor                 Liability    Property
Dec 12 vs        (2)         3               10                       6               4
Dec 11
Sept 12 vs       1           4               9                        4               4
Sept 11
Jun 12 vs        4           5               9                        6               3
Jun 11
Mar 12 vs        8           7               9                        2               3
Mar 11
Dec 11 vs     17       6            7                     5            4
Dec 10

^1 at constant exchange rate


UK & Western Europe delivered a 1% increase in net written premiums to £3,689m
(2011: £3,701m as reported; £3,654 at constant exchange) and underwriting
profit of £12m (2011: £1m). With investment result of £233m (2011: £245m), the
insurance result was £245m (2011: £246m).

In the UK we are a leading Commercial insurer and a top five Personal lines
insurer through direct and affinity channels. In Commercial we offer a full
suite of products across Property, Liability, Motor and Marine and distribute
predominantly through insurance brokers. In Personal we provide Household,
Motor and Pet insurance through insurance brokers and affinity partners as
well as MORE TH>N and eChoice, our direct businesses.

UK premiums were up 2% to £3,007m (2011: £2,958m) as targeted reductions in
Personal Motor (down 19%) were offset by growth in Household (up 3%), Pet (up
18%) and Commercial lines (up 6%). UK underwriting profits were £39m (2011:
£62m) primarily driven by the impact of adverse weather in the first half and
weaker performance in Marine and Commercial Liability leading to a combined
ratio of 98.2% (2011: 97.3%).

UK Personal premiums were down 3% to £1,319m (2011: £1,364m), whilst
underwriting profit improved by 17% to £70m (2011: £60m). Following poor
weather in the first half, Personal Household underwriting profit was down 5%
to £54m (2011: £57m). The focus on profit over volume in Personal Motor
delivered £10m of underwriting profit (2011: break even) although softening
prices throughout the year continue to make this a challenging market. Pet
insurance delivered a stronger underwriting profit of £6m (2011: £3m).

We are actively dealing with the challenges in the UK Commercial Market. We
remain selective regarding the brokers we want to work with and have driven
rate increases across the business. Premiums were up 6% to £1,688m (2011:
£1,594m). Commercial Property performed well with premiums up 8% and
underwriting profits of £22m (2011: £12m) benefitting from sustained rating
activity. Liability premiums were up 1% to £280m (2011: £276m) but an
underwriting loss of £21m (2011: £4m underwriting profit) reflected a number
of large losses and an increase in the frequency of “slip and trip” claims. We
are addressing this trend through underwriting and rating action. Included in
the Commercial Motor result is a large Commercial Motor contract which
represents the majority of Commercial Motor premiums and the underwriting
loss. We are working on the details of new arrangements for this contract, to
be effective from October 2013, however, Commercial Motor will continue to be
negatively affected by the contract’s old tranches for the next few years. We
are confident that we are making progress in the Commercial Motor market.
Excluding the large contract, Commercial Motor premiums were down 12%. During
the year we have exited a number of Commercial Motor markets including Risk
Managed Motor and Motor Trade which represented the balance of the Commercial
Motor underwriting loss. Marine premiums grew by 9% to £319m (2011: £293m) but
the underwriting result suffered from large losses including the Costa
Concordia and Superstorm Sandy leading to a profit of £12m (2011: £23m).


Premiums in Ireland of £348m (2011: £353m as reported; £331m at constant
exchange) were up 5% in a market that was expected to contract by 6% in 2012.
Underwriting profits were up 14% driven by continued impressive performance
from, our direct insurer acquired in 2010, leading to a combined ratio
of 94.2% (2011: 92.6%). In Italy, remediation is on track with premiums down
18% to £200m (2011: £261m as reported; £244m at constant exchange). Including
the impact of the Italian earthquakes and some adverse weather in the first
half, the underwriting loss was £51m (2011: £63m). Importantly, the Italian
underwriting loss in the second half has reduced to £10m. European Specialty
delivered 11% growth in premiums and an underwriting loss of £1m (2011: £22m
underwriting loss).

Outlook – UK and Western Europe

Our focus will continue to be on underwriting profit over volume. We will
continue with our intensive approach to portfolio management and expect only
modest growth in premiums. Italy is on track to be trading on a break even
basis during 2013. We expect year on year improvements in combined ratios as
we deliver the strategy in UK and Western Europe.

Investment Result                                 12           12 Months       Change
                                                  2012         2011
                                                  £m           £m              %
Bonds                                             403          446             (10)
Equities                                          57           63              (10)
Cash and cash equivalents                         15           15              -
Land and buildings                                28           37              (24)
Other                                          12        18           (33)
Investment income                                 515          579             (11)
Unwind of discount including ADC               (84)      (94)         11
Investment result                              431       485          (11)
Attributed to
Scandinavia                                       94           123             (24)
Canada                                            61           71              (14)
Emerging Markets                                  45           51              (12)
UK & Western Europe                               233          245             (5)
Realised and Unrealised Gains
Realised gains                                    79           201             (61)
Unrealised (losses)/gains, impairments and     (51)      (44)         (16)
foreign exchange
Total gains                                    28        157          
Balance sheet unrealised gains at 31
Bonds                                             638          507             26
Equities                                          86           93              (8)
Other                                          6         3            100
Total                                          730       603          21
                  Value            Foreign        Mark         Other           Value
Portfolio                                   to
Composition       31/12/2011       Exchange                    Movements       31/12/2012
                  £m               £m             £m           £m              £m
Government        4,707            (52)           (3)          (445)           4,207
government        6,967            (90)           99           541             7,517
Cash              1,258            (29)           -            100             1,329
Equities          771              (3)            64           (279)           553
Property          362              (1)            (24)         3               340
Prefs &           289              (6)            (3)          6               286
Other          104           (2)         (14)      9            97
Total          14,458        (183)       119       (65)         14,329


The Group continued to execute a low risk investment strategy which delivered
£515m of investment income in 2012 (2011: £579m). After accounting for the
unwind of discount, the investment result was down 11% to £431m (2011: £485m).

The 11% fall in investment income primarily reflects the impact of falling
sovereign and corporate bond yields partly offset by a number of factors.
Income from equities in 2012 was enhanced by both the weighting of our
holdings to higher yielding stocks and the receipt of a number of one-off
equity dividends which we do not expect to be repeated in 2013. Investment
income in 2011 was enhanced by around £25m following the settlement of a
rental dispute in Denmark.

The average underlying yield on the portfolio was 3.6% (2011: 3.9%).
Reinvestment rates in the Group’s main bond portfolios at 31 December 2012
were around 150bps lower than the underlying portfolio yield.

Total gains of £28m (2011: £157m) reflected realised gains from the sale of
equities and bonds during the year partly offset by a decline in the value of
investment properties.

Balance sheet unrealised gains of £730m (2011: £603m) primarily relate to
unrealised gains on the bond portfolio which we expect to reduce over time as
our bond holdings reach maturity. Balance sheet unrealised equity gains
amounted to £86m (2011: £93m).

The portfolio decreased marginally in value over the year due to negative FX
and cash flow used to fund corporate activity.

The portfolio is invested in widely diversified fixed income securities, with
4% in equities, 9% in cash and 2% in property. During 2012 we increased
investments in longer duration assets with average duration increasing to 3.8
years (2011: 3.4 years). In addition, we reduced our sovereign debt holdings
and purchased increased levels of non-government bonds which now make up 64%
of the bond portfolio (2011: 60%). The quality of the bond portfolio remains
very high with 98% investment grade and 69% rated AA or above. We are well
diversified by sector and geography. Peripheral European sovereign debt
amounts to less than 1% of the portfolio and is primarily backing the
liabilities of our insurance operations in Ireland and Italy.

During the year we reduced our equity exposure by £279m which now represent 4%
of the portfolio (2011: 5%). Around 65% of the equity portfolio is hedged
providing protection down to a FTSE100 level of 4,400.

Investment Income: Outlook

In 2013, we will continue to follow our high quality, low risk strategy. Given
current portfolio disposition and market levels further increases in bond
duration and non-government bond holdings are likely to be modest. We will
however continue to seek opportunities to enhance yield within our low risk
framework and would anticipate income of around £470m in 2013. Assuming the
current yield environment persists beyond 2013, we expect the fall in
investment income to continue but to be less severe over the following three


Movement in net assets

                    Shareholders'                         Loan          Net
                 funds            controlling    capital    assets

                    £m                  £m                £m            £m
Balance at 1        3,801               114               1,313         5,228
January 2012
Profit after        344                 7                 -             351
losses net of       (66)                (4)               -             (70)
Fair value
gains net of        115                 1                 -             116
Pension fund
actuarial           (161)               -                 -             (161)
losses net of
and repayment       -                   -                 (2)           (2)
of loan
Share issue         58                  4                 -             62
Changes in
shareholders’       (11)                10                -             (1)
interests in
Share based         6                   -                 -             6
Prior year
final               (206)               (3)               -             (209)
Current year
interim             (121)               -                 -             (121)
Preference          (9)                 -                 -             (9)
Balance at 31    3,750            129            1,311      5,190
December 2012

Pension fund position

The table below provides a reconciliation of the Group’s pension fund position
(net of tax) from 1 January 2012 to 31 December 2012.

                                     UK          Other      Group
                                                                £m                £m              £m
fund at 1                                                       (65)              (75)            (140)
Actuarial                                                       (124)             (37)            (161)
Deficit                                                         54                -               54
Other                                                           24                16              40
fund at
31                                   (111)       (96)       (207)

The UK pension fund position has deteriorated by £46m since 31 December 2011
to a deficit of £111m. This is driven by a decrease in the discount rate
partly offset by greater than expected returns on assets and a reduction in
the pension inflation rate.

Within actuarial assumptions, the discount rate decreased to 4.3% (31 December
2011: 4.9%) reflecting the yield on duration adjusted AA corporate bonds,
whilst the pension inflation rate decreased to 2.6% (31 December 2011: 2.8%).
Consequently the yield gap has decreased from 2.1% to 1.7%.

The overseas pension deficit has deteriorated by £21m since 31 December 2011
to a deficit of £96m principally due to a fall in the discount rate on the
Canadian pension scheme from 5.3% to 4.4%, reflecting the AA corporate bond
yield in Canada.


The capital position of the Group is set out below:
                                    31 December        31             31
                                    2012               December       December
                                                       2012           2011
                                    Requirement        Surplus        Surplus
                                    £bn                £bn            £bn
Insurance Groups                    1.3                1.2            1.3
Economic Capital (1in                                  1.2            1.2
200 Calibration)
Economic Capital (1in                                  0.7            0.8
1,250 Calibration)

The IGD surplus is unchanged since the end of the third quarter at £1.2bn (31
December 2011: £1.3bn) and coverage over the IGD requirement remains strong at
1.9 times (31 December 2011: 2.0 times). The reduction in the surplus over the
year reflects profits offset by dividends and the acquisitions in Argentina
and Canada.

When calibrated to a risk tolerance consistent with the expected Solvency II
calibration of 1 in 200 per annum, the ECA surplus was £1.2bn (31 December
2011: £1.2bn). When calibrated to Standard & Poor’s long term A rated bond
default curve, equivalent to a probability of insolvency over one year of 1 in
1,250 the ECA surplus was £0.7bn at 31 December 2012 (31 December 2011:
£0.8bn). The decline in risk free yields and the impact of goodwill from
acquisitions have been largely offset by capital generated, improved modelling
of our assets in run-off, and the impact of the proposed new dividend policy.

The further delay in the implementation date for Solvency II is frustrating.
We have rephased our implementation project to minimise costs whilst ensuring
that we remain on track for implementation. In 2012 Solvency II costs were
£32m (2011: £30m). We expect the costs of Solvency II to fall by around 50%
from their 2012 level for the next two years. We still do not anticipate that
Solvency II will cause any fundamental change to the way we run the business.

Capital                        IGD          ECA          ECA
sensitivities                                                     Surplus           Surplus
                                                                  1 in              1 in
                                                Surplus           200               1,250
                                                                  year              year
                                                £bn               £bn               £bn
Increase in
risk free                                       (0.2)             0.3               0.3
yields by
markets rise                                    0.0               0.1               0.1
by 10%
FX declines                                     (0.1)             0.0               0.0
by 10%

Our financing and liquidity position remains strong. The next call on any
external financing is on the £450m subordinated guaranteed perpetual notes in
December 2014 and our committed £500m senior facility has remained and
continues to remain undrawn.

The Group is currently rated A+ (negative outlook) by Standard & Poor’s and A2
by Moody’s.


                              12          12             Change
                                                 Months           Months
                                                 2012             2011
                                                 £m               £m                     %
Central                                          (59)             (63)                   6
expenses                                         (33)             (34)                   3
operating                     (30)        (36)           17
Other                         (122)       (133)          8

Other operating activities include the ongoing investment in our associate in
India and our direct operations in Central and Eastern Europe, for which the
charge in 2012 reduced by £7m to £19m and is expected to fall further in 2013
and to zero in 2014.


The effective tax rate for the year was 27% (2011: 30%).


Return on equity

Underlying return on equity is 10.0% (2011: 11.6%) and is calculated as the
profit after tax attributable to ordinary shareholders from continuing
operations, excluding acquisitions, disposals and reorganisation costs
expressed in relation to opening shareholders’ funds attributable to ordinary

Combined operating ratio

The combined operating ratio represents the sum of expense and commission
costs expressed in relation to net written premiums and claim costs expressed
in relation to net earned premiums. The calculation of the COR of 95.4% is
based on net written premiums of £8,353m and net earned premiums of £8,167m.

Net asset value per share

The net asset value per share at 31 December 2012 excluding IAS 19 was 107p
(31 December 2011: 108p) and including the pension deficit was 101p (31
December 2011: 104p).

The net asset value per share at 31 December 2012 was based on total
shareholders’ funds of £3,750m, adjusted by £125m for preference shares.

Earnings per share

Earnings per share on profit attributable to the ordinary shareholders of the
Parent Company:
Basic                               9.5p                      11.9p
Diluted                                9.4p                        11.8p
Operating earnings per share on profit attributable to the ordinary
shareholders of the Parent Company:
Basic                                  10.7p                       11.3p
Diluted                                10.5p                       11.2p

The earnings per share is calculated by reference to the result attributable
to the ordinary shareholders of the Parent Company and the weighted average
number of shares in issue during the period. Operating earnings per share is
calculated by reference to the after tax result attributable to the equity
shareholders excluding amortisation, reorganisation costs, Solvency II costs
and acquisitions and disposals and the weighted average number of shares in
issue during the period. On a basic and diluted basis these were 3,534,577,360
and 3,576,531,553 respectively (excluding those held in ESOP and SIP trusts).
The number of shares in issue at 31 December 2012 was 3,589,761,696 (excluding
those held in ESOP and SIP trusts).


In 2012, there have been no related party transactions that have materially
affected the financial position of the Group.


At the 2013 Annual General Meeting we intend to recommend to shareholders that
they appoint KPMG as auditors for 2013. This follows the impending appointment
of our current auditors, Deloitte, to undertake additional consultancy work in
Scandinavia which we and they felt could impair the perception of their


                                            12 Months    12 Months
                                                   2012            2011
                                                   £m              £m
Net written premiums                        8,353        8,138
Underwriting result                                375             375
Investment income              *Story too large*

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