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]
RSA: RSA Insurance Group Plc: Final Results
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