RSA: RSA Insurance Group Plc: Final Results
RSA: RSA Insurance Group Plc: Final Results
UK Regulatory Announcement
LONDON
2012 PRELIMINARY RESULTS
20 February 2013
RSA DELIVERS 5% GROWTH IN PREMIUMS, £684M OPERATING PROFIT AND COMBINED RATIO
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:
11.5%)
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
2013
* Confident in prospects for further improvements to ROE and COR in medium
term
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
yields.
“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
prospects.
“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
Net
written £8,353m £8,138m
premiums
Combined
operating 95.4% 94.9%
ratio
Operating £684m £727m
result
Earnings 9.5p 11.9p
per share
Final
dividend
for the 3.90p 5.82p
year per
ordinary
share
Dividend
for the
year per 7.31p 9.16p
ordinary
share
ROE 9.1% 11.5%
KEY FINANCIAL PERFORMANCE DATA
2012 2012 2011
£m £m £m
Global
Net written
premiums Personal Commercial Specialty Total Total
Lines
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
Markets
UK & Western 1,684 1,290 715 3,689 3,701
Europe
Group Re - 22 - 22 27
Total net
written 4,277 2,695 1,381 8,353 8,138
premiums
Combined Operating Ratio (%) 2012 2011
Underwriting 2012 2011 £m £m
performance
Scandinavia 86.6 85.4 237 264
Canada 93.7 91.6 98 116
Emerging 96.9 98.7 33 3
Markets
UK & Western 99.5 99.6 12 1
Europe
Group Re - - (5) (9)
Total
underwriting 95.4 94.9 375 375
performance
Investment
result
Investment 515 579
income
Unwind of (84) (94)
discount
Total
investment 431 485
result
Insurance 806 860
result
Other (122) (133)
activities
Operating 684 727
result
Profit 479 613
before tax
Profit after 351 427
tax
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
(pence)
Earnings per share – basic 9.5 11.9
(pence)
Dividend per share (pence) 7.31 9.16
Net asset value per share –
incl IAS19 pension deficit 101 104
(pence)
Net asset value per share –
excl IAS19 pension deficit 107 108
(pence)
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)
MANAGEMENT REPORT - 2012 REVIEW
12 months ended
31 December
2012
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
premiums
Underwriting 237 98 33 12 (5) 375 375
result
Investment 94 61 45 233 (2) 431 485
result
Insurance 331 159 78 245 (7) 806 860
result
Other (9) (7) (32) (1) (73) (122) (133)
activities
Operating
result 322 152 46 244 (80) 684 727
(management
basis)
Interest costs (115) (117)
Realised 79 201
gains/(losses)
Unrealised
(losses)/gains,
impairments and (51) (44)
foreign
exchange
Amortisation
and impairment (42) (114)
of intangible
assets
Solvency II (32) (30)
costs
Acquisitions (20) (10)
and disposals
Reorganisation (24) -
costs
Profit before
tax
(per condensed 479 613
consolidated
income
statement)
Combined
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
respectively.
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
calibration).
Strategy
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.
Dividend
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
BUSINESS REVIEW - SCANDINAVIA
Net written premiums Underwriting result Change^1
U/W
2012 2011 2012 2011 NWP
Result
£m £m £m £m % %
Personal
Household 298 309 (10) (35) 1 70
Motor 391 398 124 147 2 (13)
Personal
Accident 284 275 80 136 7 (39)
and Other
Total
Scandinavia 973 982 194 248 3 (20)
Personal
Commercial
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)
Other
Total
Scandinavia 818 842 43 16 2 187
Commercial
Total 1,791 1,824 237 264 3 (7)
Scandinavia
Investment 2012 2011 Change
result
£m £m %
Investment 133 166 (20)
income
Unwind of (39) (43) 9
discount
Scandinavia
investment 94 123 (24)
result
Scandinavia
insurance 331 387 (14)
result
Operating Claims Expenses Combined
Ratios (%)
2012 2011 2012 2011 2012 2011
Personal
Household 103.6 111.3
Motor 68.3 64.2
Personal
Accident 71.4 49.8
and Other
Total
Scandinavia 64.2 59.7 15.9 15.3 80.1 75.0
Personal
Commercial
Property 102.0 105.7
Liability 64.3 86.7
Motor 102.1 101.8
Marine and 94.1 87.3
Other
Total
Scandinavia 71.9 77.2 22.7 20.8 94.6 98.0
Commercial
Total 67.7 67.6 18.9 17.8 86.6 85.4
Scandinavia
Rate
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
SCANDINAVIA – CONTINUING TO DELIVER EXCELLENT RETURNS – COR OF 86.6%
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.
BUSINESS REVIEW - CANADA
Net written premiums Underwriting result Change^1
U/W
2012 2011 2012 2011 NWP
Result
£m £m £m £m % %
Personal
Household 396 349 26 (1) 13 n/a
Motor 694 663 17 75 4 (77)
Total
Canada 1,090 1,012 43 74 7 (42)
Personal
Commercial
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
other
Total
Canada 524 471 55 42 11 28
Commercial
Total 1,614 1,483 98 116 8 (16)
Canada
Investment 2012 2011 Change
result
£m £m %
Investment 63 72 (13)
income
Unwind of (2) (1) (100)
discount
Canada
investment 61 71 (14)
result
Canada
insurance 159 187 (15)
result
Operating Claims Expenses Combined
Ratios (%)
2012 2011 2012 2011 2012 2011
Personal
Household 92.6 99.5
Motor 97.9 88.5
Total
Canada 72.0 67.9 24.1 24.4 96.1 92.3
Personal
Commercial
Property 99.1 98.6
Liability 71.3 76.1
Motor 87.1 89.3
Marine and 88.5 91.8
other
Total
Canada 53.8 54.9 34.4 34.9 88.2 89.8
Commercial
Total 66.2 63.8 27.5 27.8 93.7 91.6
Canada
Rate
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
CANADA – STRONG PREMIUM GROWTH AND COR OF 93.7%
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
loss).
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.
BUSINESS REVIEW – EMERGING MARKETS
Net written Underwriting Change^1
premiums result
2012 2011 2012 2011 NWP U/W
Result
£m £m £m £m % %
Latin 766 670 21 19 20 24
America
CEE 224 219 (2) (5) 9 60
Middle East 127 115 9 6 10 50
Asia 120 99 5 (17) 19
Total
Emerging 1,237 1,103 33 3 17
Markets
Asian 303 292 11
Associates
Asia (incl 423 391 13
Associates)
Emerging
Markets 1,540 1,395 16
(incl
Associates)
Investment 2012 2011 Change
result
£m £m %
Investment 49 52 (6)
income
Unwind of (4) (1)
discount
Emerging
Markets 45 51 (12)
investment
result
Emerging
Markets 78 54 44
insurance
result
Operating Claims Expenses Combined
Ratios (%)
2012 2011 2012 2011 2012 2011
Latin 96.0 95.7
America
CEE 100.6 101.4
Middle East 93.1 94.4
Asia 99.0 118.2
Total
Emerging 55.8 56.6 41.1 42.1 96.9 98.7
Markets
^1 at constant exchange rate
EMERGING MARKETS – CONTINUED STRONG PREMIUM GROWTH, DELIVERING OPERATING
LEVERAGE
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
Brazil.
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.
BUSINESS REVIEW – UK & WESTERN EUROPE
Net written premiums Underwriting result Change^1
U/W
2012 2011 2012 2011 NWP
Result
UK £m £m £m £m % %
Personal
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
Personal
UK
Commercial
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)
Commercial
Total UK 3,007 2,958 39 62 2 (37)
Western
Europe
Ireland 348 353 25 24 5 14
Italy 200 261 (51) (63) (18) 14
European
Specialty 134 129 (1) (22) 11 95
Lines
Total UK &
Western 3,689 3,701 12 1 1 140
Europe
Investment 2012 2011 Change
result
£m £m %
Investment 262 276 (5)
income
Unwind of (29) (31) 6
discount
UK & WE
investment 233 245 (5)
result
UK & WE
insurance 245 246 -
result
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
Personal
Commercial
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
Commercial
Total UK 65.7 66.5 32.5 30.8 98.2 97.3
Western
Europe
Ireland 94.2 92.6
Italy 125.1 123.6
European
Specialty 100.4 118.3
Lines
Total UK &
Western 67.8 69.0 31.7 30.6 99.5 99.6
Europe
Rate
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 – ON TRACK TOWARDS IMPROVED PROFITABILITY AND RETURNS
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).
WESTERN EUROPE – IRELAND CONTINUES TO DELIVER, ITALY REMEDIATION ON TRACK
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 123.ie, 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.
BUSINESS REVIEW – INVESTMENT RESULT
Investment Result 12 12 Months Change
Months
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
December
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
Market
£m £m £m £m £m
Government 4,707 (52) (3) (445) 4,207
bonds
Non
government 6,967 (90) 99 541 7,517
bonds
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
CIVs
Other 104 (2) (14) 9 97
Total 14,458 (183) 119 (65) 14,329
INVESTMENT RESULT – CONTINUED PRESSURE FROM LOW BOND YIELDS
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
years.
OTHER INFORMATION - MANAGEMENT BASIS
Movement in net assets
Non
Shareholders' Loan Net
funds controlling capital assets
interests
£m £m £m £m
Balance at 1 3,801 114 1,313 5,228
January 2012
Profit after 344 7 - 351
tax
Exchange
losses net of (66) (4) - (70)
tax
Fair value
gains net of 115 1 - 116
tax
Pension fund
actuarial (161) - - (161)
losses net of
tax
Amortisation
and repayment - - (2) (2)
of loan
capital
Share issue 58 4 - 62
Changes in
shareholders’ (11) 10 - (1)
interests in
subsidiaries
Share based 6 - - 6
payments
Prior year
final (206) (3) - (209)
dividend
Current year
interim (121) - - (121)
dividend
Preference (9) - - (9)
dividend
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
Pension
fund at 1 (65) (75) (140)
January
2012
Actuarial (124) (37) (161)
losses
Deficit 54 - 54
funding
Other 24 16 40
movements
Pension
fund at
31 (111) (96) (207)
December
2012
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.
CAPITAL POSITION
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
Directive
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
100bps
Equity
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.
OTHER ACTIVITIES
12 12 Change
Months Months
2012 2011
£m £m %
Central (59) (63) 6
expenses
Investment
expenses (33) (34) 3
and
charges
Other
operating (30) (36) 17
activities
Other (122) (133) 8
activities
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.
TAX
The effective tax rate for the year was 27% (2011: 30%).
RATIOS AND DEFINITIONS
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
shareholders.
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).
RELATED PARTY TRANSACTIONS
In 2012, there have been no related party transactions that have materially
affected the financial position of the Group.
CHANGE OF AUDITORS
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
independence.
SUMMARY CONSOLIDATED INCOME STATEMENT
MANAGEMENT BASIS
12 Months 12 Months
2012 2011
£m £m
Net written premiums 8,353 8,138
Underwriting result 375 375
Investment income *Story too large*
[TRUNCATED]
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