RSA: RSA Insurance Group Plc: Half-yearly Report UK Regulatory Announcement LONDON 2013 HALF YEAR RESULTS 1 August 2013 RSA DELIVERS 24% EARNINGS GROWTH TO £190M, AND COMBINED RATIO OF 94.2% Strong operational delivery as a result of management actions *Encouraging progress in UK Commercial and Italy *Strong underlying performances in Canada and Scandinavia despite adverse weather and large losses *Operating leverage continues in Emerging Markets *Net written premiums up 7% on constant exchange rate basis to £4.7bn *Underwriting result up 26% at £188m (H1 2012 restated^1: £149m) *Post tax earnings up 24% to £190m (H1 2012 restated^1: £153m) *Annualised ROE 10.0% (H1 2012 restated^1: 8.0%) *Interim dividend of 2.28p per share (2012: 3.41p) Balance Sheet remains strong on all measures *IGD surplus of £0.9bn; covering capital requirement 1.7 times *Economic capital surplus of £1.3bn on a 1 in 200 year calibration covering the capital requirement 1.6 times *S&P A+ (negative outlook) rating reaffirmed in June *Net asset value per share excluding pension deficit of 103p (H1 2012: 104p) On track to meet guidance in 2013 *Continued growth in premiums as business expands in Emerging Markets, Canada and Global Specialty Lines *Better than 95% combined ratio expected despite material adverse weather in Canada *Investment income of around £470m for full year 2013 *Return on equity of between 10% and 12% expected in 2013 *Confident in prospects for further improvements to ROE and COR in medium term Simon Lee, Group Chief Executive of RSA, commented: “These are a good set of results demonstrating continued progress and the benefits of our diversified business model. We've achieved growth of 7% in premiums to £4.7bn. Despite the £48m impact of extreme weather in Alberta we have delivered a COR of 94.2% and remain on track to meet our full year expectations of a COR of better than 95% and ROE of 10-12%. “We are continuing to deliver strong organic growth in Emerging Markets and Canada. The acquisitions we executed in 2012 are delivering good results. Scandinavian performance remains strong and we are making good progress in the turnaround of performance in UK and Western Europe. The reduction in earnings from lower interest rates is beginning to slow down. The outlook for earnings is positive. “Net assets have contracted at 30 June 2013 due to the increase in interest rates at the end of June. All our capital measures remain strong and we are confident in our ability to deliver balance sheet growth in the medium term. “We are well placed to deliver improved shareholder value through growth in earnings, an attractive dividend and improving return on equity” FINANCIAL HIGHLIGHTS 6 Months 6 Months Movement 2013 2012 at reported FX (restated^1) Net written premiums £4,652m £4,276m 9% Underwriting result £188m £149m 26% Combined operating ratio 94.2% 95.4% 1.2pts Operating result £339m £305m 11% Profit before tax £250m £219m 14% Profit after tax £190m £153m 24% Basic earnings per share 5.0p 4.1p 22% Interim dividend per 2.28p 3.41p (33)% ordinary share Annualised return on 10.0% 8.0% 25% equity Net asset value per share 103p 104p (1)% (excl IAS 19 deficit) ^1 H1 2012 restated for changes to IAS 19 “Employee Benefits”, see page 18 for further details Enquiries: Analysts & Investors Press Matt Hotson Louise Shield Investor Relations Director Director of External Communications Tel: +44 (0) 20 7111 7212 Tel: +44 (0) 20 7111 7047 Email: email@example.com Email: firstname.lastname@example.org Rupert Taylor Rea Jon Sellors Investor Relations Manager Head of Media Relations Tel: +44 (0) 20 7111 7140 Tel: +44 (0) 20 7111 7327 Email: email@example.com Email: firstname.lastname@example.org FURTHER INFORMATION The full text of the above is available online at www.rsagroup.com. A live webcast of the analyst presentation, including the question and answer session, will be broadcast on the website at 10:00am today and is available via a listen only conference call by dialling UK Freephone 0800 358 5256 or International dial in: + 44 (0) 208 515 2313. Participants should quote conference ID 4629597. An indexed version of the webcast will be available on the website by the end of the day. Copies of the slides to be presented at the analyst meeting will be available on the site from 9.30am today. Scanning the QR code opposite will download details of the conference call to a smart phone. MANAGEMENT BASIS OF REPORTING The analysis on pages 16, 18 and 20 to 22 has been prepared on a non statutory basis as management believe that this is the most appropriate method of assessing the financial performance of the Group. The management basis reflects the way management monitor the business. The underwriting result includes insurance premiums, claims and commissions and underwriting expenses. In addition, the management basis also discloses a number of items separately such as investment result, interest costs, reorganisation costs and other activities. Estimation techniques, risks, uncertainties and contingencies are included on pages 23 to 26. Financial information on a statutory basis is included on pages 28 to36. IMPORTANT DISCLAIMER Visit www.rsagroup.com for more information. This press release has been prepared in accordance with the requirements of English company law and the liabilities of the directors in connection with this press release shall be subject to the limitations and restrictions provided by such law. This press release may contain ‘forward-looking statements’ with respect to certain of the Group’s plans and its current goals and expectations relating to its future financial condition, performance, results, strategic initiatives and objectives. Generally, words such as “may”, “could”, “will”, “expect”, “intend”, “estimate”, “anticipate”, “aim”, “outlook”, “believe”, “plan”, “seek”, “continue” or similar expressions identify forward-looking statements. These forward-looking statements are not guarantees of future performance. By their nature, all forward-looking statements involve risk and uncertainty because they relate to future events and circumstances which are beyond the Group’s control, including amongst other things, UK domestic and global economic business conditions, market-related risks such as fluctuations in interest rates and exchange rates, the policies and actions of regulatory authorities (including changes related to capital and solvency requirements), the impact of competition, inflation, deflation, the timing impact and other uncertainties of future acquisitions or combinations within relevant industries, as well as the impact of tax and other legislation or regulations in the jurisdictions in which the Group and its affiliates operate. As a result, the Group’s actual future financial condition, performance and results may differ materially from the plans, goals and expectations set forth in the Group’s forward-looking statements. The Group undertakes no obligation to update any forward-looking statements, save in respect of any requirement under applicable law or regulation. Nothing in this press release should be construed as a profit forecast. INTERIM MANAGEMENT REPORT - KEY FINANCIAL PERFORMANCE DATA H1 2013 H1 H1 2012 2013 £m £m £m Global Net written premiums Personal Commercial Specialty Total Total Lines Scandinavia 563 417 138 1,118 1,056 Canada 568 162 136 866 743 Emerging 317 276 93 686 585 Markets UK & Western 846 645 455 1,946 1,882 Europe Group Re - 36 - 36 10 Total net written 2,294 1,536 822 4,652 4,276 premiums Combined operating ratio (%) H1 H1 2012 2013 H1 2013 H1 2012 (restated) Underwriting (restated) £m £m performance Scandinavia 87.7 83.1 98 130 Canada 98.7 91.7 15 62 Emerging 97.8 99.8 12 7 Markets UK & Western 95.4 101.8 50 (41) Europe Group Re - - 13 (9) Total underwriting 94.2 95.4 188 149 performance Investment result Investment 256 267 income Unwind of (50) (42) discount Total investment 206 225 result Insurance 394 374 result Other (55) (69) activities Operating 339 305 result Profit 250 219 before tax Profit after 190 153 tax Earnings per share – 5.0 4.1 basic (pence) Earnings per share – 4.9 4.1 diluted (pence) Interim dividend per 2.28 3.41 share (pence) Net asset value per share – incl 96 102 IAS19 pension deficit (pence) Net asset value per share – excl 103 104 IAS19 pension deficit (pence) Tangible Net asset value per share – incl IAS19 54 63 pension deficit (pence) Tangible Net asset value per share – excl IAS19 61 65 pension deficit (pence) Annualised return on 10.0 8.0 equity (%) Annualised return on tangible equity 16.9 12.6 (%) IGD Surplus 0.9 1.2 (£bn) IGD Coverage ratio 1.7 1.9 (times) ECA Surplus (1 in 200 year 1.3 0.8 calibration) (£bn) ECA Surplus (1 in 1,250 year 0.8 0.4 calibration) (£bn) INTERIM MANAGEMENT REPORT – HALF YEAR 2013 REVIEW 6 months ended 30 June 2013 Emerg- UK & Group Scandi- Central Group Canada ing Western H1’12 navia Functions H1‘13 Markets Europe (restated) £m £m £m £m £m £m £m Net written 1,118 866 686 1,946 36 4,652 4,276 premiums Underwriting 98 15 12 50 13 188 149 result Investment 62 36 28 124 6 256 267 income Unwind of (20) (1) (5) (17) (7) (50) (42) discount Investment 42 35 23 107 (1) 206 225 result Insurance 140 50 35 157 12 394 374 result Other (3) (3) (12) (3) (34) (55) (69) activities Operating result 137 47 23 154 (22) 339 305 (management basis) Realised 22 37 gains/(losses) Unrealised (losses)/gains, impairments and (4) (3) foreign exchange Interest costs (59) (58) Amortisation of intangible (21) (20) assets Pension net (4) (3) interest costs Solvency II (10) (16) costs Reorganisation (4) (19) costs Acquisitions (9) (4) and disposals Profit before tax (per condensed 250 219 consolidated income statement) Profit after tax (per condensed 190 153 consolidated income statement) Combined operating ratio 87.7 98.7 97.8 95.4 - 94.2 95.4 (%) In the first half of 2013, net written premiums were up 7% at constant exchange rates (9% as reported) to £4,652m (H1 2012: £4,276m as reported; £4,360m at constant exchange). Premium growth comprised 3% from rate increases on renewed business, 1% of increased volumes and 3% from inorganic activity with a further 2% increase from foreign exchange effects. On a reported basis, premiums grew by 17% in Emerging Markets and Canada, whilst Scandinavia was up 6% due to FX effects. Premiums were up 3% in UK and Western Europe. Our Global Specialty Lines (GSL) business grew 8% at constant FX to £822m with a combined ratio of 100.5% (H1 2012: 90.9%) due to heavy weather and large losses in Canada, Scandinavia and Europe. The underwriting result was up 26% to £188m (H1 2012 restated: £149m) with current year profit up 161% to £94m (H1 2012 restated: £36m) and a prior year result of £94m (H1 2012: £113m). The Group combined operating ratio (COR) was 94.2% (H1 2012 restated: 95.4%). The severe flooding in Alberta, Canada, affected Group COR by 1.1%. Despite this, overall weather losses for the Group were within expectations at 2.1% (H1 2012: 2.7%). Large losses contributed 7.2% to the COR (H1 2012: 7.3%), which is broadly in line with long term averages and expectations for 2013, although large losses in H1 2013 were concentrated in Scandinavia and Western Europe leading to depressed underwriting results in these territories. Prior year releases benefited the COR by 3.3% (H1 2012: 3.3%). 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 8% to £206m (H1 2012: £225m) due to the continued effect of low bond yields on investment income. Investment income of £256m (H1 2012: £267m), is comfortably in line with full year guidance of £470m. Other operating activities were £55m (H1 2012: £69m) and comprise £29m central expenses (H1 2012: £35m), £14m of investment expenses (H1 2012: £16m) and £12m of other operating activities (H1 2012: £18m). Other operating activities include the ongoing investment in our associates in India and Thailand as well as our direct operations in Central and Eastern Europe. In H1 2013 the start-up charge for our Central and Eastern Europe operations reduced from £12m in H1 2012 to £6m. We expect a similar charge in H2 2013 after which we expect these costs will fall to zero. At 30 June 2013, NAV per share excluding the IAS19 pension deficit was 103p (30 June 2012: 104p) reflecting the impact of retained profits less dividends paid in the period, being more than offset by mark-to-market asset movements and foreign exchange effects. Tangible NAV per share excluding IAS 19 at 30 June 2013 was 61p (30 June 2012: 65p). The Group’s capital position remains healthy with an IGD surplus of £0.9bn (31 December 2012: £1.2bn) covering the capital requirement 1.7 times (31 December 2012: 1.9 times) and economic capital of £1.3bn (31 December 2012: £1.2bn) (on a 1 in 200 year calibration) giving coverage over the economic capital requirement of 1.6 times. Outlook and Financial Targets We are delivering on our plans and remain on track to meet the guidance we issued in February, despite the impact of adverse weather in Canada, which has continued into the second half with severe flooding in Toronto in July. The 2013 Canadian results will be affected by this extreme weather but Canada remains a highly attractive market for the Group. We are making good progress on the turnaround in both UK Commercial and Italy. The Scandinavian markets remain attractive and, while the first half results were impacted by an unusual level of Commercial large losses, Scandinavia will remain a significant profit contributor to the Group going forward. In Emerging Markets we are delivering on our objectives of growth in premiums and improving profitability through operating leverage. Assuming a normal pattern of weather losses in the second half, we remain on track to meet our full year expectations of a combined ratio of better than 95% and return on equity of 10-12%. The Group’s balance sheet will be affected by short term volatility in financial markets. Over the medium term, we expect retained earnings to more than offset the “pull to par” effects in our bond portfolio, leading to medium term balance sheet growth. Cash generation is good and highly fungible; a significant proportion of cash generated is remitted to the centre to fund growth and dividends. Dividend In line with our preliminary results announcement of 20 February 2013, the Board has agreed an ordinary interim dividend of 2.28 pence per share (2012 ordinary interim dividend: 3.41 pence per share). Going forward, it is the Board’s intention to grow the dividend in line with the anticipated underlying growth in earnings. Simon Lee Group Chief Executive BUSINESS REVIEW - SCANDINAVIA Net written premiums Change^1 Underwriting result H1 2013 H1 2012 % H1 2013 H1 2012 £m £m £m £m Personal Household 172 162 1 11 8 Motor 232 224 (2) 57 45 Personal Accident and 159 143 4 55 47 Other Total Scandinavia 563 529 1 123 100 Personal Commercial Property 198 184 3 (37) 1 Liability 92 87 1 8 31 Motor 144 137 - (2) (3) Marine and Other 121 119 (3) 6 1 Total Scandinavia 555 527 - (25) 30 Commercial Total 1,118 1,056 - 98 130 Scandinavia Split by country Sweden 573 522 2 62 74 Denmark 435 439 (4) 31 54 Norway 110 95 12 5 2 Total 1,118 1,056 - 98 130 Scandinavia Investment 42 48 result Scandinavia 140 178 insurance result Operating Ratios Claims Expenses Combined (%) H1 2013 H1 2012 H1 2013 H1 H1 2013 H1 2012 2012 Personal Household 92.3 95.0 Motor 71.1 75.6 Personal Accident and 63.6 66.0 Other Total Scandinavia 60.5 63.7 14.8 15.0 75.3 78.7 Personal Commercial Property 119.6 96.1 Liability 81.6 45.1 Motor 99.1 99.0 Marine and Other 89.8 92.5 Total Scandinavia 84.9 71.5 17.4 16.7 102.3 88.2 Commercial Total 71.6 67.3 16.1 15.8 87.7 83.1 Scandinavia Rate Increases^2 Personal Commercial (%) Scandinavia Household Motor Property Liability Motor Jun 13 vs Jun 12 8 3 3 4 4 Mar 13 vs Mar 12 9 3 3 4 4 Dec 12 vs Dec 11 12 3 1 4 5 Sept 12 vs Sept 12 2 6 - 4 11 ^1 at constant exchange rate ^2 Rating increases reflect rate movements achieved for risks renewing in the month versus comparable risks renewing in the same month the previous year SCANDINAVIA – CONTINUED PROFITABILITY DESPITE ADVERSE LARGE LOSSES Net written premiums of £1,118m in Scandinavia were flat at constant exchange (H1 2012: £1,056m as reported; £1,113m at constant exchange) with good growth in Swedish Personal and Norway offset by falls in Denmark where we continue to focus on improving profitability. Growth in Sweden of 2% was driven by Household (up 5%) and Personal Accident & Other (up 5%) whilst Personal Motor and Commercial were flat. Growth in Norway of 12% was driven by strong growth in Care, as well as good growth of 8% in Personal driven by both Household and Motor. In Denmark we are continuing to prioritise profitability and during the first half we have targeted rate increases whilst maintaining our discipline in risk selection, particularly in Personal Lines. As a result premiums in Denmark were 4% lower at constant exchange. The Scandinavian underwriting result of £98m (H1 2012: £130m) was significantly affected by an unusual level of large Commercial losses (£44m higher than H1 2012) particularly in Swedish Property and Renewable Energy and, as a result, the combined ratio was 87.7% (H1 2012: 83.1%). After including investment returns of £42m (H1 2012: £48m), the insurance result was £140m (H1 2012: £178m). In Scandinavian Personal Lines, profitability was strong with an underwriting result of £123m, up 15% at constant exchange. This reflects an improving performance in Danish Personal with relatively benign weather losses and a better underlying claims ratio. Sweden Personal continues to perform strongly with a 6% increase in the underwriting result. Scandinavia Commercial made an underwriting loss of £25m in the first half. This was driven by an unusual number of large losses particularly in Renewable Energy and Swedish Property, as well as one significant Marine large loss. In Property we have seen a series of unrelated large fire losses whilst Renewable Energy has been impacted by several offshore wind losses. At this stage we haven’t identified any obvious trends in these large losses. Many of the affected customers have been with us for some years. We continue to focus on risk selection, assessment and controls. As a result of these losses, the Scandinavian Commercial COR was 102.3%. Scandinavia – Outlook We continue to expect the Scandinavian P&C markets to grow in line with local GDP growth, and we expect to grow in line with the market in Sweden and Denmark, whilst deploying group capabilities to build market share in Norway. We’re making good progress in improving the balance of profitability across the region. Our focus is on continued strong profitability in Sweden, improving profitability in Denmark whilst focusing on profitable growth in Norway. BUSINESS REVIEW - CANADA Net written premiums Change^1 Underwriting result H1 2013 H1 2012 % H1 H1 2012 2013 (restated^2) £m £m £m £m Personal Household 200 154 28 17 20 Motor 368 331 10 30 18 Total Canada 568 485 16 47 38 Personal Commercial Property 131 111 17 (51) 5 Liability 79 72 8 8 10 Motor 59 49 18 8 7 Marine and 29 26 12 3 2 other Total Canada 298 258 14 (32) 24 Commercial Total 866 743 15 15 62 Canada Investment 35 31 result Canada insurance 50 93 result Operating Claims Expenses Combined Ratios (%) H1 2013 H1 2012 H1 2013 H1 2012 H1 H1 2012 2013 (restated^2) (restated^2) (restated^2) Personal Household 94.5 90.3 Motor 92.1 94.5 Total Canada 67.2 67.7 25.6 25.0 92.8 92.7 Personal Commercial Property 139.3 93.3 Liability 89.6 82.5 Motor 84.0 82.9 Marine and 90.4 94.2 other Total Canada 77.1 54.2 33.8 34.2 110.9 88.4 Commercial Total 70.4 63.5 28.3 28.2 98.7 91.7 Canada Rate Increases^3 Personal Commercial (%) Canada Household Motor Property Liability Motor Jun 13 vs 7 - 4 3 3 Jun 12 Mar 13 vs 7 1 4 2 2 Mar 12 Dec 12 vs 11 3 4 2 2 Dec 11 Sept 12 vs 12 2 3 1 - Sept 11 ^1 at constant exchange rate ^2 H1 2012 restated for changes to IAS 19 “Employee Benefits”, see page 18 for further details ^3 Rating increases reflect rate movements achieved for risks renewing in the month versus comparable risks renewing in the same month the previous year CANADA – STRONG UNDERLYING PERFORMANCE; PROFITABILITY IMPACTED BY ALBERTA FLOODS Net written premiums in Canada were up 15% on a constant exchange rate basis to £866m (H1 2012: £743m as reported; £752m at constant exchange) with 4% organic growth and the 2012 acquisition of L’Union Canadienne (UC) accounting for 11% of growth. Underwriting profit was £15m (H1 2012 restated: £62m) with profitability severely affected by the June floods in Alberta. As a result, the combined ratio was 98.7% (H1 2012 restated: 91.7%). As we announced on 3 July, major flooding in Calgary and the surrounding areas of Southern Alberta commenced on 19 June following heavy rainfall. Our priority has been to provide care and support to our customers, brokers and impacted local employees. The floods will be one of Canada’s costliest natural catastrophes on record and our gross claims will be significantly above our retention of £48m, leading to the net loss of £48m. Excluding the floods, the Canadian combined ratio was 93.3% reflecting a continued strong underlying performance and an improving operating expense ratio (down from 15.0% in H1 2012 to 13.8% in H1 2013) as we realise synergies from the ongoing integration of UC. The growth in brokered business, led to a 1.3 point increase in the commission ratio. After including investment returns of £35m (H1 2012: £31m), the insurance result was £50m (H1 2012 restated: £93m). Personal premiums were up 16% at constant exchange to £568m (H1 2012: £485m as reported; £491m at constant exchange). Growth was 5% excluding the impact of the acquisition of UC. Personal Household premiums were up 28% to £200m (H1 2012: £154m as reported; £156m at constant exchange) with strong growth in Personal Broker of 38%, driven by the Pacific region and solid retention across the book, and in Johnson where Household premiums grew 11%. Underwriting profit was £17m (H1 2012 restated: £20m). In Personal Motor, premiums grew by 10% driven by growth of 28% in Personal Broker, although Johnson premiums were flat due to our focus on managing the portfolio for profitability, particularly in the Ontario market. Underwriting profit in Personal Motor was £30m (H1 2012: £18m) resulting from improved profitability in Johnson. Following the reserve strengthening in Ontario Auto in 2012, this portfolio has been stable during the first half of 2013. The Personal Motor combined ratio of 92.1% was 2.4 points better than H1 2012 (94.5%). In Commercial lines, premiums were up 14% to £298m (H1 2012: £258m as reported; £261m at constant exchange) with strong growth of 17% in Property and 18% in Motor. Excluding the acquisition of UC, growth was 4% across the Commercial portfolio with good growth in Global Specialty Lines where premiums were up 11% driven mainly by Property. We have seen improving retention across Commercial during the first half and in the second half our focus will be on further rate increases, particularly in our Property portfolio. Overall, Commercial made a first half underwriting loss of £32m (H1 2012 restated: £24m profit) and was heavily impacted by the Alberta floods. Canada – Outlook Following heavy rainfall on 8 July, Toronto and the surrounding areas experienced severe flooding. Although it is still early, our initial estimate of the net loss for RSA is £25m to £40m, which will particularly affect our Personal lines portfolio. The severe weather in Alberta and Toronto will have a material impact on the Canadian combined ratio for 2013. However, we expect the pricing environment to respond positively, returning to COR in the low to mid 90s by 2014. BUSINESS REVIEW – EMERGING MARKETS Net written Change^1 Underwriting premiums result H1 H1 % H1 2013 H1 2013 2012 2012 £m £m £m £m Latin America 399 343 17 3 1 CEEME 209 180 13 6 4 Asia 78 62 20 3 2 Total Emerging 686 585 16 12 7 Markets Asian Associates^2 171 152 11 Asia (incl 249 214 14 Associates) Emerging Markets 857 737 15 (incl Associates) Investment result 23 24 Emerging Markets insurance result (as 35 31 reported) EM start up costs (reported in other (6) (12) activities) Emerging Markets insurance result 29 19 (fully loaded for costs) Operating Ratios (%) Claims Expenses Combined H1 H1 H1 2013 H1 2012 H1 2013 H1 2013 2012 2012 Latin America 99.0 101.1 CEEME 96.4 97.9 Asia 96.6 98.9 Total Emerging 57.1 56.8 40.7 43.0 97.8 99.8 Markets ^1 at constant exchange rate ^2 Asian Associates includes 100% of the premiums of our associates in India and Thailand EMERGING MARKETS – CONTINUED GROWTH AND OPERATING LEVERAGE Our Emerging Markets business has delivered good premium growth and improving profitability, with continued operating leverage. We remain focused on active management of the Emerging Markets portfolio; during the first half we completed the sale of our business in the Dutch Caribbean, whilst the integration of our 2012 acquisitions in Argentina remains on track. Emerging Markets premiums grew 16% at constant exchange to £686m (H1 2012: £585m as reported; £590m at constant exchange). Including non-consolidated associates in India and Thailand, premiums were up 15% at constant exchange to £857m (H1 2012: £737m as reported; £744m at constant exchange). The underwriting result of £12m was up £5m from H1 2012 (£7m) with profit growth coming from all three regions. The combined ratio of 97.8% was 2 points better than H1 2012 with the improvement driven by continued operating leverage on expenses and a lower commission ratio. The operating expense ratio of 21.8% was 1.2 points lower (H1 2012: 23.0%) with improvements across all regions, whilst the commission ratio was lower than H1 2012 due to the non-renewal of some large, low margin, commercial contracts in Latin America that attracted high commission ratios. We expect this commission ratio benefit will partly reverse during the second half. Emerging Markets delivered an investment result of £23m (H1 2012: £24m) leading to an insurance result of £35m which was up 13% from H1 2012. Start-up costs in the first half were £6m (H1 2012: £12m). We expect a similar charge in the second half and that these costs will fall to zero in 2014. In Latin America, premiums were up 17% at constant exchange to £399m (H1 2012: £343m as reported; £340m at constant exchange), including £51m from the acquisitions in Argentina which completed on 31 July 2012. In addition to the 2012 acquisitions, there was organic growth of 4% across the region. Underwriting profits were £3m (H1 2012: £1m). In Central and Eastern Europe and the Middle East (CEEME), premiums were up 13% at constant exchange to £209m (H1 2012: £180m as reported, £185m at constant exchange). Excluding the impact of the exit of our Czech business, CEEME premiums were up 16% at constant exchange. There was strong growth in all countries but particularly Oman (up 26%), Poland (up 12%), and Lithuania (up 9%). The underwriting result of £6m reflected good performance in Lithuania, Poland, UAE and Oman. The combined ratio of 96.4% represented an improvement of 1.5 points on H1 2012. In Asia, premiums were up 20% at constant exchange to £78m (H1 2012: £62m as reported, £65m at constant exchange) with strong double-digit growth across all operations, particularly Hong Kong (up 26%) and Singapore (up 13%). Our associates in Thailand and India grew 11% at constant exchange. Underwriting profit in Asia was £3m (H1 2012: £2m). Emerging Markets Outlook We remain on track to meet our target of £2.2bn of Emerging Markets premiums (including our associates) in 2015. We also expect further improvements in profitability. Notwithstanding the good performance in the first half, the seasonality in our Emerging Markets business typically produces stronger underwriting profits during the second half of the year. We also expect that operating leverage will continue to develop in the expense line. BUSINESS REVIEW – UK & WESTERN EUROPE Net written premiums Change^1 Underwriting result H1 2013 H1 2012 % H1 H1 2012 2013 (restated^2) (restated^2) UK Personal £m £m £m £m Household 334 324 3 47 2 Motor 215 224 (4) (2) 5 Pet 104 113 (8) 3 2 Total UK 653 661 (1) 48 9 Personal UK Commercial Property 258 266 (3) 28 9 Liability 140 137 2 (2) (5) Motor 310 278 12 (7) (28) Marine 176 155 14 6 5 Total UK 884 836 6 25 (19) Commercial Total UK 1,537 1,497 3 73 (10) Western Europe Ireland 197 183 5 10 14 Italy 104 102 (2) (5) (39) European Specialty 108 100 4 (28) (6) Lines Total UK & Western 1,946 1,882 3 50 (41) Europe Investment 107 117 result UK & WE insurance 157 76 result Operating Claims Expenses Combined Ratios (%) Personal H1 2013 H1 2012 H1 2013 H1 2012 H1 H1 2012 2013 (restated^2) (restated^2) (restated^2) Household 86.7 99.7 Motor 101.2 100.3 Pet 98.1 99.9 Total UK 55.5 63.9 37.5 36.1 93.0 100.0 Personal Commercial Property 85.0 91.6 Liability 98.9 102.7 Motor 101.0 110.5 Marine 90.4 98.9 Total UK 65.1 72.2 28.4 29.1 93.5 101.3 Commercial Total UK 60.8 68.4 32.3 32.2 93.1 100.6 Western Europe Ireland 94.8 92.7 Italy 105.2 134.2 European Specialty 134.9 101.1 Lines Total UK & Western 64.4 71.0 31.0 30.8 95.4 101.8 Europe Rate Increases^3 Personal Commercial (%) UK Household Motor Property Liability Motor Jun 13 vs 1 (3) 4 5 3 Jun 12 Mar 13 vs 2 (4) 4 3 4 Mar 12 Dec 12 vs 3 (2) 4 6 10 Dec 11 Sept 12 vs 4 1 4 4 9 Sept 11 ^1 at constant exchange rate ^2 H1 2012 restated for (i) changes to IAS 19 “Employee Benefits”, see page 18 for further details; and (ii) class of business changes in UK Commercial, ESL and Italy, see page 19 for further details ^3 Rating increases reflect rate movements achieved for risks renewing in the month versus comparable risks renewing in the same month the previous year UK & WESTERN EUROPE – ENCOURAGING PROGRESS FROM MANAGEMENT ACTIONS UK & Western Europe premiums increased by 3% in the first half to £1,946m (H1 2012: £1,882m as reported; £1,895m at constant exchange), with an underwriting profit of £50m (H1 2012 restated: £41m loss). The investment result of £107m (H1 2012: £117m) led to an insurance result of £157m (H1 2012 restated: £76m). We have made good progress on our strategy to refocus the business and reduce exposure to less attractive segments whilst continuing to grow in areas where we believe we can deliver shareholder value. UK premiums of £1,537m were up 3% (H1 2012: £1,497m) with growth of 6% in Commercial, partly offset by Personal which was 1% lower. Underwriting profits of £73m were up £83m reflecting the impact of our ongoing actions to improve profitability as well as the adverse weather in H1 2012. The COR of 93.1% was 7.5 points better than H1 2012. UK Personal premiums were down 1% to £653m (H1 2012: £661m), with underwriting profits up £39m to £48m. This mainly reflects relatively benign weather in H1 2013 which was better than the prior year, and was around £10m better than our expectations. Household continued to grow steadily (up 3%). Pet declined (down 8%) due to an adjustment to pipeline premium. Underlying growth in Pet was good and there was no impact on the underwriting result from the premium adjustment. In Personal Motor we continue to take a disciplined approach to pricing. In UK Commercial we are making encouraging progress. Premiums were up 6% to £884m driven mainly by rate rather than volume. Growth in Motor reflects significant rate increases in Motability partly offset by the core Motor book shrinking by 11% resulting from a disciplined approach to pricing and targeted exits. Following a change in the timing of the recognition of premiums, Marine topline benefited by £25m, although this will unwind by the end of the year. Underlying Marine premiums were slightly down as we focus on profitability. Underwriting performance in Commercial has been good with profits of £25m (H1 2012 restated: £19m loss) reflecting a strong result in Property driven by improvements in risk selection, a refined approach to reinsurance purchasing and assisted by benign large loss and weather experience. In Commercial Motor (£7m loss; £21m better than H1 2012) we are seeing the benefits of the actions we took in 2012. In Liability, where we continue to take firm underwriting actions, the result has shown a small improvement. WESTERN EUROPE – GOOD PROGRESS IN ITALY; IRELAND CONTINUES TO DELIVER In Italy, premiums of £104m were down 2% at constant exchange reflecting our ongoing discipline around pricing and risk selection as we continue to make good progress in remediating the business. The underwriting loss of £5m in the first half represents a significant improvement of £34m on the prior year, reflecting the underlying progress in the business but also the earthquakes in 2012. Premiums in Ireland of £197m (H1 2012: £183m as reported; £188m at constant exchange) were up 5% in a contracting market, with 123.ie continuing to deliver good growth of 8%. Irish underwriting profits were £10m (H1 2012: £14m) and the combined ratio was 94.8% (H1 2012: 92.7%) impacted by increasing Motor claims frequency experienced across the Irish market. We have taken swift action, including rate increases, to address this. European Specialty delivered 4% growth to £108m and an underwriting loss of £28m (H1 2012: £6m loss) driven mainly by a single large loss in Germany. UK and Western Europe outlook In the UK, our focus will continue to be on underwriting profit over volume. In UK Commercial we will focus on building on the momentum generated in the first half, continuing to drive rate increases and cost reduction. By the end of 2013 we expect to have reduced headcount supporting the UK business by over 11% since January 2012. In June we announced the renewal of our contract with Motability, effective from 1 October 2013, which will further improve profitability in the medium term. Old tranches from the Motability contract will continue to have a negative impact on underwriting in the short term. Under the new quota share arrangement RSA will write 20% of the overall scheme, and we therefore expect premiums to fall significantly from current levels of around £400m p.a. In UK Personal, we are actively responding to a rapidly changing market. Whilst the outlook is still uncertain, we are optimistic that the UK Motor reforms will lead to a more rational and transparent market. Italy remains on track to be trading on a break even basis by the end of 2013. BUSINESS REVIEW – INVESTMENT RESULT Investment Result 6 Months 6 Months Change 2013 2012 £m £m % Bonds 194 207 (6) Equities 27 36 (25) Cash and cash equivalents 7 6 17 Property 14 12 17 Other 14 6 133 Investment income 256 267 (4) Unwind of discount including ADC (50) (42) (19) Investment result 206 225 (8) Attributed to Scandinavia 42 48 (13) Canada 35 31 13 Emerging Markets 23 24 (4) UK & Western Europe 107 117 (9) Central functions (1) 5 Realised and Unrealised Gains Realised gains 22 37 (41) Unrealised (losses)/gains, impairments (4) (3) (33) and foreign exchange Total gains 18 34 (47) Balance sheet unrealised gains 30 June 31 Dec Change % 2013 2012 Bonds 392 638 (39) Equities 103 86 20 Other 5 6 (17) Total 500 730 (32) Portfolio Value Foreign Mark to Other Value Composition Movements 30/6/2013 31/12/2012 Exchange Market £m £m £m £m £m Government 4,207 104 (101) (48) 4,162 bonds Non government 7,517 189 (185) (66) 7,455 bonds Cash 1,329 32 - (111) 1,250 Equities 553 7 31 27 618 Property 340 2 (5) 3 340 Preference shares & 286 3 9 13 311 CIVs^1 Other 97 1 (5) 44 137 Total 14,329 338 (256) (138) 14,273 Split by currency: Sterling 3,855 3,708 Danish Krone 1,353 1,411 Swedish Krona 2,680 2,368 Canadian 3,110 3,113 Dollar Euro 1,500 1,644 Other 1,831 2,029 Total 14,329 14,273 ^1 Collective investment vehicles INVESTMENT RESULT – INCOME IN LINE WITH EXPECTATIONS Investment income of £256m was down 4% (H1 2012: £267m) primarily reflecting the continued low bond yield environment. After accounting for the unwind of discount, the investment result was down 8% to £206m (H1 2012: £225m). The movement in the unwind of discount partly reflects organic growth in Argentina and the acquisitions made there in 2012. Our Motor reserves in Argentina are discounted to reflect wider macro economic conditions. The Group continues to execute a low risk investment strategy. The average underlying yield on the portfolio was 3.6% (H1 2012: 3.7%). Reinvestment rates in the Group’s bond portfolios at 30 June 2013 were around 120bps lower than the underlying portfolio yield. Total gains of £18m (H1 2012: £34m) reflected realised gains from the sale of equities and bonds during the first half of the year partly offset by a modest decline in the value of investment properties and derivatives. Balance sheet unrealised gains of £500m (31 December 2012: £730m) primarily relate to unrealised gains on the bond portfolio. The 32% decline mainly reflects a 39% reduction in unrealised bond gains following the sharp increase in yields at the end of the first half of 2013. Balance sheet unrealised equity gains amounted to £103m (31 December 2012: £86m). The portfolio decreased marginally in value over the first half of the year due to negative mark-to-market movements and some cash outflows in part reflecting payment of the Group’s dividend and interest on debt. These negative movements were partly offset by foreign exchange gains. The portfolio remains invested in widely diversified fixed income securities (81% of the portfolio), with 4% in equities, 9% in cash and 2% in property. During 2013 average duration increased to 3.9 years (31 December 2012: 3.8 years). Following the purchase of increased levels of non-government bonds in 2012, levels have remained consistent in 2013 and non-government bonds continue to make up 64% of the bond portfolio. The quality of the bond portfolio remains very high with 98% investment grade and 68% 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. Investment Income: Outlook In the second half of 2013, we will continue to follow our high quality, low risk strategy. We remain comfortably on track to meet full year investment income guidance of around £470m in 2013. BALANCE SHEET REVIEW MOVEMENT IN NET ASSETS Non Shareholders' Loan Net funds controlling capital assets interests £m £m £m £m Balance at 1 January 3,750 129 1,311 5,190 2013 Profit after tax 185 5 - 190 Exchange gains net of 63 5 1 69 tax Fair value losses net (188) - - (188) of tax Pension fund actuarial (99) - - (99) losses net of tax Amortisation and repayment of loan - - (1) (1) capital Share issue including 54 - - 54 scrip Changes in shareholders’ interests (1) (1) - (2) in subsidiaries Share based payments 12 - - 12 Prior year final (140) (7) - (147) dividend Preference dividend (5) - - (5) Balance at 30 June 2013 3,631 131 1,311 5,073 CAPITAL POSITION 30 June 2013 30 June 2013 31 December 2012 Coverage Surplus Surplus (times) £bn £bn Insurance Groups 1.7 0.9 1.2 Directive Economic Capital (1in 1.6 1.3 1.2 200 Calibration) Economic Capital (1in 1.3 0.8 0.7 1,250 Calibration) BALANCE SHEET – UNDERLYING PROGRESS MASKED BY MARKET EFFECTS Shareholder funds fell by 3% in the period to £3,631m (31 December 2012: £3,750m). Profit after tax of £185m (reported PAT of £190m less non-controlling interests) was more than offset by the after tax impact of mark-to-market falls in the value of the investment portfolio of £188m and actuarial losses, after tax, on the IAS19 pension position of £99m. Scrip dividend take up for the 2012 final dividend was 35% leading to a cash dividend cost of £91m. Net asset value per share was 96p (31 December 2012: 101p per share). Tangible net asset value was £1,987m at 30 June 2013 (31 December 2012: £2,136m). Excluding the IAS19 pension deficit, net asset value was £3,756m or 103p per share at 30 June 2013 (31 December 2012: 107p per share) and tangible net asset value was £2,237m or 61p at 30 June 2013 (31 December 2012: 65p per share) CAPITAL - COMFORTABLE ON ALL CAPITAL MEASURES The IGD surplus at 30 June 2013 was £0.9bn (31 December 2012: £1.2bn) and coverage over the IGD requirement 1.7 times (31 December 2012: 1.9 times). The reduction in the surplus reflects economic capital generated which was more than offset by the impact of the increase in bond yields at the end of H1 2013, the 2012 final dividend and the movement in the pension fund. When calibrated to a risk tolerance consistent with the expected Solvency II calibration, equivalent to a probability of insolvency over one year of 1 in 200, the ECA surplus was £1.3bn (31 December 2012: £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 £0.8bn (31 December 2012: £0.7bn). Profits generated and the impact of increasing bond yields at the end of H1 2013 have been partly offset by the final dividend for 2012. In addition, for the half year we have disclosed economic capital coverage ratios. These show the coverage over the economic capital requirement to be 1.6 times on a 1 in 200 calibration and 1.3 times on a 1 in 1,250 calibration. Our economic capital model is a stochastic model centred around the Group’s three year plan. The plan is stressed through an economic scenario generator and insurance liability model which simulates a variety of business outcomes. The economic capital requirement is the capital needed to meet the Group’s obligations at the given probability level. Capital resources represent our own view of the Group’s economic capital which comprises our IFRS capital base adjusted to exclude items such as intangible assets and goodwill. We consider the economic capital model to represent a prudent view of the capital requirements for the Group. Our financing and liquidity position remains strong. Capital generation is good and highly fungible; a significant proportion of capital generated is remitted to the centre to fund growth and dividends. The Group has the option to call the £450m subordinated guaranteed perpetual notes in December 2014 and its committed £500m senior facility continues to remain undrawn. The Group’s current Standard & Poor’s rating of A+ (negative outlook) was reaffirmed in June. The Group is rated A2 by Moody’s. PENSION FUND The table below provides a reconciliation of the movement in the Group’s pension fund position (net of tax) from 1 January 2013 to 30 June 2013. UK Other Group £m £m £m Pension fund at 1 January 2013 (111) (96) (207) Actuarial (losses)/gains (111) 12 (99) Deficit funding 50 - 50 Other movements 3 2 5 Pension fund at 30 June 2013 (169) (82) (251) The UK pension fund position has deteriorated by £58m since 31 December 2012 to a deficit of £169m. This is driven by an increase in the inflation rate partly offset by returns on assets and an increase in the discount rate. Within actuarial assumptions, the inflation rate increased to 3.0% (31 December 2012: 2.6%) while the discount rate increased by a smaller amount to 4.5% (31 December 2012: 4.3%). Consequently the yield gap has decreased from 1.7% to 1.5%. The overseas pension deficit has improved by £14m since 31 December 2012 to a deficit of £82m principally due to an increase in the discount rate applied to the Canadian pension scheme from 4.35% to 4.70%. This reflects increases in the AA corporate bond yields in Canada. IAS 19 RESTATEMENT Following the issue of a revised IAS 19 “Employee Benefits” the group has made changes to its accounting for employee benefits. Under the revised standard, expected returns on plan assets will no longer be recognised in profit or loss. Expected returns are replaced by recording interest in the income statement, which is calculated using the discount rate used to measure the pension obligations. The effect of this is to increase the charge in the income statement, with a corresponding reduction in other comprehensive income. There is no change to the statement of financial position. We have restated the comparative figures in the condensed consolidated Income Statement and a corresponding opposite entry in the condensed consolidated Statement of Comprehensive Income. The net income statement impact of these changes on the H1 2012 comparatives is a £9m reduction to the underwriting result, a 0.2pt increase in the combined ratio, an £11m reduction to the operating result and an £11m reduction to profit after tax. A restatement of the full year 2012 income statement is provided on page 20. Corresponding ratios and other metrics have also been restated. CONCLUSION OF PENSION SCHEME VALUATIONS In July we announced that the Group had agreed, with the Trustees of our main UK pension schemes, the pension deficit funding contributions following the completion of the latest triennial actuarial valuations. As at 31 March 2012, the main UK schemes, Royal Insurance Group Pension Scheme (“RIGPS”) and the SAL Pension Scheme (“SALPS”) were c93% funded on the prudent measure that the Trustees are required to use, with a combined deficit of £442m. This compares to a combined deficit of £692m at 31 March 2009. Guaranteed deficit funding contributions of c£61m p.a. will be paid in 2014, 2015 and 2016. This compares with deficit funding contributions of c£70m in 2012 and c£63m in 2013. RATIOS, DEFINITIONS AND OTHER INFORMATION Underlying return on equity Underlying return on equity is 9.7% (H1 2012 restated: 7.5%) and is calculated as the profit after tax attributable to ordinary shareholders from continuing operations, excluding acquisitions, disposals, reorganisation costs and net investment gains or losses, impairments and foreign exchange 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 94.2% is based on net written premiums of £4,652m and net earned premiums of £4,298m. Net asset value per share Net asset value per share data at 30 June 2013 was based on total shareholders’ funds of £3,631m, adjusted by £125m for preference shares. Earnings per share 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. On a basic and diluted basis these were 3,607,475,744 and 3,648,295,336 respectively (excluding those held in ESOP and SIP trusts). The number of shares in issue at 30 June 2013 was 3,650,296,860 (excluding those held in ESOP and SIP trusts). Related party transactions In 2013, there have been no related party transactions that have materially affected the financial position of the Group. Changes to management basis reporting The prior half year and full year comparatives have been restated for changes to IAS 19 “Employee Benefits”, see page 18 for further details. In addition, two further changes impact the prior half year comparatives. Firstly, in UK Commercial, there have been some small reclassifications between Property and Motor in order to better reflect the composition of these two classes. Secondly, Risk Solutions business written in Italy has now been reclassified from European Specialty Lines to Italy in order to report both parts of the Italian business in one place. Reporting and Dividend Timetable 9 August 2013 Record date for the second preference dividend for 2013 25 September 2013 Ex dividend date for the ordinary interim dividend for 2013 27 September 2013 Record date for the ordinary interim dividend for 2013 1 October 2013 Payment date for the second preference dividend for 2013 2 October 2013 Announcement of the scrip dividend price for the ordinary interim dividend for 2013 25 October 2013 Deadline for the receipt of scrip dividend mandates 7 November 2013 Q3 2013 interim management statement 12 November 2013 Scandinavia investor and analyst briefing 22 November 2013 Payment of the ordinary interim dividend for 2013 SUMMARY CONSOLIDATED INCOME STATEMENT MANAGEMENT BASIS 6 Months 6 Months 12 Months 2013 2012 2012 (restated^1) (restated^1) £m £m £m Net written premiums 4,652 4,276 8,353 Underwriting result 188 149 358 Investment income 256 267 515 Unwind of discount including ADC (50) (42) (84) Investment result 206 225 431 Insurance result 394 374 789 Other activities (55) (69) (130) Operating result 339 305 659 Realised gains 22 37 79 Unrealised gains/(losses), (4) (3) (51) impairments and foreign exchange Interest costs (59) (58) (115) Amortisation and impairment of (21) (20) (42) intangible assets Pension net interest cost (4) (3) (6) Solvency II costs (10) (16) (32) Reorganisation costs (4) (19) (24) Acquisitions and disposals (9) (4) (20) Profit before tax 250 219 448 Taxation (60) (66) (121) Profit after tax 190 153 327 Earnings per share on profit attributable to the ordinary shareholders of the Parent Company: Basic 5.0p 4.1p 8.8p Diluted 4.9p 4.1p 8.7p ^1 Restated for the impact of changes to IAS 19 ‘Employee Benefits’ SUMMARY CONSOLIDATED STATEMENT OF FINANCIAL POSITION MANAGEMENT BASIS 30 June 30 June 31 December 2013 2012 2012 £m £m £m Assets Goodwill and other intangible assets 1,519 1,363 1,489 Property and equipment 269 267 272 Associated undertakings 45 32 40 Investments Investment property 340 350 340 Equity securities 929 1,002 839 Debt and fixed income securities 11,617 11,237 11,724 Other 137 102 97 Total investments - management basis 13,023 12,691 13,000 Reinsurers' share of insurance contract 2,165 2,066 1,949 liabilities Insurance and reinsurance debtors 3,861 3,512 3,592 Other debtors and other assets 1,217 1,185 1,114 Cash and cash equivalents 1,250 1,376 1,329 23,349 22,492 22,785 Assets held for sale 1 - - Total assets 23,350 22,492 22,785 Equity and liabilities Equity Shareholders' funds 3,631 3,730 3,750 Non-controlling interests 131 119 129 Total equity 3,762 3,849 3,879 Loan capital 1,311 1,312 1,311 Total equity and loan capital 5,073 5,161 5,190 Liabilities (excluding loan capital) Insurance contract liabilities 15,662 14,830 14,854 Insurance and reinsurance liabilities 596 596 558 Borrowings 300 298 296 Provisions and other liabilities 1,719 1,607 1,887 Total liabilities (excluding loan capital) 18,277 17,331 17,595 Total equity and liabilities 23,350 22,492 22,785 SUMMARY CONSOLIDATED STATEMENT OF CASHFLOWS MANAGEMENT BASIS 6 Months 6 Months 2013 2012 £m £m Operating cashflow 392 312 Tax paid (100) (139) Interest paid (76) (75) Pension deficit funding (66) (59) Cash generation 150 39 Group dividends (95) (202) Dividend to non controlling (7) - interests Issue of share capital 4 7 Net movement of debt 3 (1) Corporate activity (30) (12) Cash movement 25 (169) Represented by: Movement in cash and cash (111) 135 equivalents Purchase/(sales) of other 136 (304) investments 25 (169) ESTIMATION TECHNIQUES, RISKS, UNCERTAINTIES AND CONTINGENCIES Introduction One of the purposes of insurance is to enable policyholders to protect themselves against uncertain future events. Insurance companies accept the transfer of uncertainty from policyholders and seek to add value through the aggregation and management of these risks. The uncertainty inherent in insurance is inevitably reflected in the financial statements of insurance companies. The uncertainty in the financial statements principally arises in respect of the insurance contract liabilities of the company. The insurance contract liabilities of an insurance company include the provision for unearned premiums and unexpired risks and the provision for losses and loss adjustment expenses. Unearned premiums and unexpired risks represent the amount of income set aside by the company to cover the cost of claims that may arise during the unexpired period of risk of insurance policies in force at the end of the reporting period. Outstanding claims represent the company’s estimate of the cost of settlement of claims that have occurred by the end of the reporting period but have not yet been finally settled. In addition to the inherent uncertainty of having to make provision for future events, there is also considerable uncertainty as regards the eventual outcome of the claims that have occurred by the end of the reporting period but remain unsettled. This includes claims that may have occurred but have not yet been notified to the company and those that are not yet apparent to the insured. As a consequence of this uncertainty, the insurance company needs to apply sophisticated estimation techniques to determine the appropriate provisions. Estimation techniques Claims and unexpired risks provisions are determined based upon previous claims experience, knowledge of events and the terms and conditions of the relevant policies and on interpretation of circumstances. Particularly relevant is experience with similar cases and historical claims payment trends. The approach also includes the consideration of the development of loss payment trends, the potential longer term significance of large events, the levels of unpaid claims, legislative changes, judicial decisions and economic, political and regulatory conditions. Where possible, the Group adopts multiple techniques to estimate the required level of provisions. This assists in giving greater understanding of the trends inherent in the data being projected. The Group’s estimates of losses and loss expenses are reached after a review of several commonly accepted actuarial projection methodologies and a number of different bases to determine these provisions. These include methods based upon the following: *the development of previously settled claims, where payments to date are extrapolated for each prior year; *estimates based upon a projection of claims numbers and average cost; *notified claims development, where notified claims to date for each year are extrapolated based upon observed development of earlier years; and *expected loss ratios. In addition, the Group uses other methods such as the Bornhuetter-Ferguson method, which combines features of the above methods. The Group also uses bespoke methods for specialist classes of business. In selecting its best estimate, the Group considers the appropriateness of the methods and bases to the individual circumstances of the provision class and underwriting year. The process is designed to select the most appropriate best estimate. Large claims impacting each relevant business class are generally assessed separately, being measured either at the face value of the loss adjusters’ estimates or projected separately in order to allow for the future development of largeclaims. Provisions are calculated gross of any reinsurance recoveries. A separate estimate is made of the amounts that will be recoverable from reinsurers based upon the gross provisions and having due regard to collectability. The provisions for losses and loss adjustment expenses are subject to close scrutiny both within the Group’s business units and at Group Corporate Centre. In addition, for major classes where the risks and uncertainties inherent in the provisions are greatest, regular and ad hoc detailed reviews are undertaken by advisers who are able to draw upon their specialist expertise and a broader knowledge of current industry trends in claims development. As an example, the Group’s exposure to asbestos and environmental pollution is examined on this basis. The results of these reviews are considered when establishing the appropriate levels of provisions for losses and loss adjustment expenses and unexpired periods of risk. It should be emphasised that the estimation techniques for the determination of insurance contract liabilities involve obtaining corroborative evidence from as wide a range of sources as possible and combining these to form the overall estimate. This technique means that the estimate is inevitably deterministic rather than stochastic. The pension assets and pension and post retirement liabilities are calculated in accordance with International Accounting Standard 19 (IAS 19). The assets, liabilities and income statement charge, calculated in accordance with IAS 19, are sensitive to the assumptions made from time to time, including inflation, interest rate, investment return and mortality. IAS19 compares, at a given date, the current market value of a pension fund’s assets with its long term liabilities, which are calculated using a discount rate in line with yields on ‘AA’ rated bonds of suitable duration and currency. As such, the financial position of a pension fund on this basis is highly sensitive to changes in bond rates and will also be impacted by changes in equity markets. Uncertainties and contingencies The uncertainty arising under insurance contracts may be characterised under a number of specific headings, such as: *uncertainty as to whether an event has occurred which would give rise to a policyholder suffering an insured loss; *uncertainty as to the extent of policy coverage and limits applicable; *uncertainty as to the amount of insured loss suffered by a policyholder as a result of the event occurring; and *uncertainty over the timing of a settlement to a policyholder for a loss suffered. The degree of uncertainty will vary by policy class according to the characteristics of the insured risks and the cost of a claim will be determined by the actual loss suffered by the policyholder. There may be significant reporting lags between the occurrence of the insured event and the time it is actually reported to the Group. Following the identification and notification of an insured loss, there may still be uncertainty as to the magnitude and timing of the settlement of the claim. There are many factors that will determine the level of uncertainty such as inflation, inconsistent judicial interpretations and court judgments that broaden policy coverage beyond the intent of the original insurance, legislative changes and claims handling procedures. The establishment of insurance contract liabilities is an inherently uncertain process and, as a consequence of this uncertainty, the eventual cost of settlement of outstanding claims and unexpired risks can vary substantially from the initial estimates, particularly for the Group’s long tail lines of business. The Group seeks to provide appropriate levels of provisions for losses and loss adjustment expenses and provision for unexpired risks taking the known facts and experience into account. The Group has exposures to risks in each class of business within each operating segment that may develop and that could have a material impact upon the Group’s financial position. The geographic and insurance risk diversity within the Group’s portfolio of issued insurance policies mean it is not possible to predict whether material development will occur and, if it does occur, the location and the timing of such an occurrence. The estimation of insurance contract liabilities involves the use of judgments and assumptions that are specific to the insurance risks within each territory and the particular type of insurance risk covered. The diversity of the insurance risks results in it not being possible to identify individual judgments and assumptions that are more likely than others to have a material impact on the future development of the insurance contractliabilities. The sections below identify a number of specific risks relating to asbestos and environmental claims. There may be other classes of risk which could develop in the future and that could have a material impact on the Group’s financial position. The Group evaluates the concentration of exposures to individual and cumulative insurance risk and establishes its reinsurance policy to reduce such exposure to levels acceptable to the Group. Asbestos and environmental claims The estimation of the provisions for the ultimate cost of claims for asbestos and environmental pollution is subject to a range of uncertainties that is generally greater than those encountered for other classes of insurance business. As a result it is not possible to determine the future development of asbestos and environmental claims with the same degree of reliability as with other types of claims, particularly in periods when theories of law are in flux. Consequently, traditional techniques for estimating provisions for losses and loss adjustment expenses cannot wholly be relied upon and the Group employs specialised techniques to determine provisions using the extensive knowledge of both internal asbestos and environmental pollution experts and external legal and professional advisors. Factors contributing to this higher degree of uncertainty include: *the long delay in reporting claims from the date of exposure (for example, cases of mesothelioma can have a latent period of up to 40 years). This makes estimating the ultimate number of claims the Group will receive particularly difficult; *issues of allocation of responsibility among potentially responsible parties and insurers; *emerging court decisions and the possibility of retrospective legislative changes increasing or decreasing insurer liability; *the tendency for social trends and factors to influence court awards; *developments pertaining to the Group’s ability to recover reinsurance for claims of this nature; and *for US liabilities from the Group’s London market business, developments in the tactics of US plaintiff lawyers and court decisions and awards. Potential change in discount rate for lump sum damages awards Legislative changes may affect the Group’s liability in respect of unsettled claims in the use of predetermined factors used by courts to calculate compensation claims. For example, in the UK, standard formulae are used as an actuarial measure by the courts to assess lump sum damages awards for future losses (typically loss of earnings arising from personal injuries and fatal accidents). The calibration of these standard formulae can be updated by the UK Government and the Lord Chancellor may review the methodology to be applied in determining the discount rate to calculate the appropriate settlements, or the discount rate itself, in due course. A reduction in the prescribed discount rate would increase the value of future claims settlements. Acquisitions and disposals The Group makes acquisitions and disposals of businesses as part of its normal operations. All acquisitions are made after due diligence, which will include, amongst other matters, assessment of the adequacy of claims reserves, assessment of the recoverability of reinsurance balances, inquiries with regard to outstanding litigation and inquiries of local regulators and taxation authorities. Consideration is also given to potential costs, risks and issues in relation to the integration of any proposed acquisitions with existing RSA operations. The Group will seek to receive the benefit of appropriate contractual representations and warranties in connection with any acquisition and, where necessary, additional indemnifications in relation to specific risks although there can be no guarantee that these processes and any such protection will be adequate in all circumstances. The Group may also provide relevant representations, warranties and indemnities to counterparties on any disposal. While such representations, warranties and indemnities are essential components of many contractual relationships, they do not represent the underlying purpose for the transaction. These clauses are customary in such contracts and may from time to time lead to the Group receiving claims from counterparties. Contracts with third parties The Group enters into joint ventures, outsourcing contracts and distribution arrangements with third parties in the normal course of its business and is reliant upon those third parties being willing and able to perform their obligations in accordance with the terms and conditions of the contracts. Litigation, disputes and investigations The Group, in common with the insurance industry in general, is subject to litigation, mediation and arbitration, and regulatory, governmental and other sectoral inquiries and investigations in the normal course of its business. In addition the Group is exposed to the risk of litigation in connection with its former ownership of the US operation. The directors do not believe that any current mediation, arbitration, regulatory, governmental or sectoral inquiries and investigations and pending or threatened litigation or dispute will have a material adverse effect on the Group’s financial position, although there can be no assurance that losses or financial penalties resulting from any current mediation, arbitration, regulatory, governmental or sectoral inquiries and investigations and pending or threatened litigation or dispute will not materially affect the Group’s financial position or cashflows for any period. Reinsurance The Group is exposed to disputes on, and defects in, contracts with its reinsurers and the possibility of default by its reinsurers. The Group is also exposed to the credit risk assumed in fronting arrangements and to potential reinsurance capacity constraints. In selecting the reinsurers with whom the Group conducts business its strategy is to seek reinsurers with the best combination of financial strength, price and capacity. The Group Corporate Centre publishes internally a list of authorised reinsurers who pass the Group’s selection process and which its operations may use for new transactions. The Group monitors the financial strength of its reinsurers, including those to whom risks are no longer ceded. Allowance is made in the financial position for non recoverability due to reinsurer default by requiring operations to provide, in line with Group standards, having regard to companies on the Group’s ‘Watch List’. The ‘Watch List’ is the list of companies whom the directors believe will not be able to pay amounts due to the Group in full. Investment risk The Group is exposed to market risk and credit risk on its invested assets. Market risk includes the risk of potential losses from adverse movements in market rates and prices including interest rates, equity prices, property prices and foreign exchange rates. The Group’s exposure to market risks is controlled by the setting of investment limits in line with the Group’s risk appetite. From time to time the Group also makes use of derivative financial instruments to reduce exposure to adverse fluctuations in foreign exchange rates and equity markets. The Group has strict controls over the use of derivative instruments. Credit risk includes the non performance of contractual payment obligations on invested assets and adverse changes in the credit worthiness of invested assets including exposures to issuers or counterparties for bonds, equities, deposits and derivatives. Limits are set at both a portfolio and counterparty level based on likelihood of default to manage the Group’s overall credit profile and specific concentrations within risk appetite. The Group’s insurance investment portfolios are concentrated in listed securities with very low levels of exposure to assets without quoted market prices. The Group uses model based analysis to verify asset values when market values are not readily available. The current economic crisis adds further uncertainty and volatility to underlying levels of market and credit risk in the Eurozone. The Group has, however, very limited direct exposure via its investment portfolio to the Eurozone and to the peripheral Eurozone countries in particular. As with all other invested assets, limits are set in line with the Group's risk appetite. The Group continues to monitor the situation closely and take action to manage its exposure as required. Rating environment The ability of the Group to write certain types of insurance business is dependent on the maintenance of the appropriate credit ratings from the rating agencies. The Group has the objective of maintaining single ‘A’ ratings. At the present time the ratings are ‘A+’ (negative outlook) from S&P and ‘A2’ (stable outlook) from Moody’s. A worsening in the ratings could have an adverse impact on the ability of the Group to write certain types of general insurance business. In assessing credit risk in relation to reinsurance and investments, the Group takes into account a variety of factors, including credit rating. If any such rating changes, or is otherwise reassessed, this has potential implications for the relatedexposures. Foreign exchange risk The Group publishes consolidated financial statements in Pounds Sterling. Therefore, fluctuations in exchange rates used to translate other currencies, particularly other European currencies and the Canadian Dollar, into Pounds Sterling will impact the reported consolidated financial position, results of operations and cashflows from period to period. These fluctuations in exchange rates will also impact the Pound Sterling value of, and the return on, the Group’s investments. Income and expenses for each income statement item are translated at average exchange rates. Assets and liabilities, as reported in the statement of financial position, are translated at closing exchange rates at the end of the reportingperiod. Regulatory environment The legal, regulatory and accounting environment is subject to significant change in many of the jurisdictions in which the Group operates, including developments in response to changes in the economic and political environment and the recent financial crisis. The Group continues to monitor the developments and react accordingly. The new solvency framework for insurers being developed by the EU, referred to as ‘Solvency II’, is intended in the medium term to achieve greater harmonisation of approach across EU member states to assessing capital resources and requirements. There remains continued uncertainty as delays in agreeing the rules have caused the planned implementation date of 2014 to be delayed. The Group is actively participating in shaping the outcome through its involvement with European and UK regulators and industry bodies, whilst appropriately progressing its implementation plans and the directors are confident that the Group will continue to meet all future regulatory capital requirements. Condensed Consolidated Financial Statements Condensed consolidated income statement 28 Condensed consolidated statement of comprehensive income 29 Condensed consolidated statement of changes in equity 29 Condensed consolidated statement of financial position 30 Condensed consolidated statement of cashflows 31 Explanatory notes to the condensed consolidated financial 32 statements CONDENSED CONSOLIDATED INCOME STATEMENT STATUTORY BASIS 6 Months 6 Months 12 Months 2013 2012 2012 (restated^1) (restated^1) £m £m £m Income Gross written premiums 5,208 4,880 9,397 Less: reinsurance premiums (556) (604) (1,044) Net written premiums 4,652 4,276 8,353 Change in the gross provision for (381) (382) (188) unearned premiums Less: change in provision for 27 88 2 unearned premiums, reinsurers' share Change in provision for unearned (354) (294) (186) premiums Net earned premiums 4,298 3,982 8,167 Net investment return 275 295 534 Other operating income 77 68 141 Total income 4,650 4,345 8,842 Expenses Gross claims incurred (3,246) (2,914) (5,837) Less: claims recoveries from 415 240 448 reinsurers Net claims and benefits (2,831) (2,674) (5,389) Underwriting and policy acquisition (1,348) (1,228) (2,552) costs Unwind of discount including ADC (50) (42) (84) Other operating expenses (104) (116) (242) Total expenses (4,333) (4,060) (8,267) Finance costs (63) (61) (121) Acquisitions and disposals (3) (3) - Net share of loss after tax of (1) (2) (6) associates Profit before tax 250 219 448 Income tax expense (60) (66) (121) Profit for the year 190 153 327 Attributable to: Equity holders of the Parent Company 185 151 320 Non controlling interests 5 2 7 190 153 327 Earnings per share on profit attributable to the ordinary shareholders of the Parent Company: Basic 5.0p 4.1p 8.8p Diluted 4.9p 4.1p 8.7p The attached notes are an integral part of these condensed consolidated financial statements. For divi dend information refer to note 6. ^1 Restated for the impact of changes to IAS 19 ‘Employee Benefits’ CONDENSED CONSOLIDATED STATEMENT OF COMPREHENSIVE INCOME STATUTORY BASIS 6 Months 6 Months 12 Months 2013 2012 2012 (restated^1) (restated^1) £m £m £m Profit after tax 190 153 327 Items that may be reclassified to the income statement: Exchange gains/(losses), net of tax 68 (63) (70) Share of associates’ other - - 1 comprehensive income Fair value (losses)/gains on available for sale financial assets, (188) 14 111 net of tax (120) (49) 42 Items that will not be reclassified to the income statement: Pension fund actuarial (99) 12 (137) (losses)/gains, net of tax Movement in property revaluation - 1 4 surplus, net of tax (99) 13 (133) Total comprehensive (expense)/income (29) 117 236 for the period Attributable to: Equity holders of the Parent Company (39) 116 232 Non controlling interests 10 1 4 (29) 117 236 ^1 Restated for the impact of changes to IAS 19 ‘Employee Benefits’ CONDENSED CONSOLIDATED STATEMENT OF CHANGES IN EQUITY STATUTORY BASIS Shareholders' Non controlling Total funds interests equity £m £m £m Balance at 1 January 2013 3,750 129 3,879 Total comprehensive (39) 10 (29) (expense)/income for the period Share issue including scrip 54 - 54 Changes in shareholders' interests (1) (1) (2) in subsidiaries Share based payments 12 - 12 Prior year final dividend (140) (7) (147) Preference dividend (5) - (5) Balance at 30 June 2013 3,631 131 3,762 Balance at 1 January 2012 3,801 114 3,915 Total comprehensive income for the 116 1 117 period Share issue including scrip 12 4 16 Changes in shareholders' interests (2) - (2) in subsidiaries Share based payments 14 - 14 Prior year final dividend (206) - (206) Preference dividend (5) - (5) Balance at 30 June 2012 3,730 119 3,849 The attached notes are an integral part of these condensed consolidated financial statements. CONDENSED CONSOLIDATED STATEMENT OF FINANCIAL POSITION STATUTORY BASIS 30 June 30 June 31 December 2013 2012 2012 (audited) £m £m £m Assets Goodwill and other 1,519 1,363 1,489 intangible assets Property and equipment 269 267 272 Investment property 340 350 340 Investment in associates 45 32 40 Financial assets 12,683 12,341 12,660 Total investments 13,068 12,723 13,040 Reinsurers' share of insurance contract 2,165 2,066 1,949 liabilities Insurance and reinsurance 3,861 3,512 3,592 debtors Current tax assets 94 44 76 Deferred tax assets 334 261 285 Other debtors and other 789 880 753 assets 1,217 1,185 1,114 Cash and cash equivalents 1,250 1,376 1,329 23,349 22,492 22,785 Assets held for sale 1 - - Total assets 23,350 22,492 22,785 Equity and liabilities Equity Shareholders' funds 3,631 3,730 3,750 Non controlling interests 131 119 129 Total equity 3,762 3,849 3,879 Liabilities Loan capital 1,311 1,312 1,311 Insurance contract 15,662 14,830 14,854 liabilities Insurance and reinsurance 596 596 558 liabilities Borrowings 300 298 296 Current tax liabilities 46 63 58 Deferred tax liabilities 94 94 139 Provisions 489 370 487 Other liabilities 1,090 1,080 1,203 Provisions and other 1,719 1,607 1,887 liabilities Total liabilities 19,588 18,643 18,906 Total equity and liabilities 23,350 22,492 22,785 These condensed consolidated financial statements have been approved for issue by the Board of Directors on 31 July2013. The attached notes are an integral part of these condensed consolidated financial statements. CONDENSED CONSOLIDATED STATEMENT OF CASHFLOWS STATUTORY BASIS 6 Months 6 Months 2013 2012 £m £m Cashflows from operations 186 82 Tax paid (100) (139) Investment income 266 284 Interest paid (76) (75) Pension deficit funding (66) (59) Net cashflows from operating activities 210 93 Proceeds from sales or maturities of: Financial assets 2,198 2,679 Investment property 2 - Property and equipment 1 21 Investments in subsidiaries (net of cash 2 - disposed of) Purchase of: Financial assets (2,332) (2,375) Investment property (5) (1) Property and equipment (9) (16) Intangible assets (68) (58) Investments in subsidiaries (net of cash (11) (12) acquired) Investments in associates (4) - Net cashflows from investing activities (226) 238 Proceeds from issue of share capital 4 7 Dividends paid to ordinary shareholders (90) (197) Dividends paid to preference (5) (5) shareholders Dividends paid to non controlling (7) - interests Net movement in other borrowings 3 (1) Net cashflows from financing activities (95) (196) Net (decrease)/increase in cash and cash (111) 135 equivalents Cash and cash equivalents at beginning 1,329 1,258 of the year Effect of exchange rate changes on cash 32 (17) and cash equivalents Cash and cash equivalents at the end of 1,250 1,376 the period The attached notes are an integral part of these condensed consolidated financial statements. EXPLANATORY NOTES TO THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS 1. Changes in significant accounting policies The annual financial statements are prepared in accordance with International Financial Reporting Standards (IFRSs) as adopted by the European Union. The condensed financial information in this half yearly report has been prepared in accordance with International Accounting Standard 34 ‘Interim Financial Reporting’ (IAS 34) and the Disclosure and Transparency Rules of the Financial Conduct Authority. These condensed financial statements have been prepared by applying the accounting policies used in the 2012 Annual Report and Accounts (see note 11 below) except for the following changes which have been made by the group from 1 January 2013. Following the issue of a revised IAS 19 “Employee Benefits” the group has made changes to its accounting for employee benefits. The revised standard replaces expected returns on plan assets by recording interest in the Income Statement, which is calculated using the discount rate used to measure the pension obligations. Any difference in the actual return is recognised in Other Comprehensive Income. This has resulted in a restatement of the comparative figures in the condensed consolidated Income Statement and corresponding opposite entries in the condensed consolidated Statement of Comprehensive Income. The impact of these restatements is to reduce profit after tax by £11m for the 6 months ended 30 June 2012 and by £24m for the 12 months to 31 December 2012. There is no change to the condensed consolidated Statement of Financial Position. Following an amendment to IAS 1 “Presentation of Financial Statements” the group has made a change to the disclosure of items in the condensed consolidated Statement of Comprehensive Income by separately classifying those items that will ultimately be recycled through the Income Statement and those items that will remain in equity. The comparatives in the condensed consolidated Statement of Comprehensive Income have been classified in accordance with this new requirement. Following the issue of IFRS 13 “Fair Value Measurement”, which establishes a framework for measuring fair value and associated disclosures, the Group has adopted the disclosure requirements in respect of financial instruments in the notes to these condensed consolidated financial statements. Financial assets and financial liabilities measured at fair value continue to be valued using the techniques set out in the accounting policies used in the 2012 Annual Report and Accounts. The Board have reviewed the Group's ongoing financial commitments for the next 12 months and beyond. The Board's review included consideration of the Group's underwriting plans, strong regulatory capital surplus, diverse insurance risk profile, considerable undrawn financing facilities and highly liquid investment portfolio. As a result of this review, the Directors have satisfied themselves that it is appropriate to prepare these financial statements on a going concern basis. 2. Operating segments <td class="bwpadl0 bwnowrap bwpadr0 bwvertalignb *Story too large* Six months ended 30 June 2013 UK & Emerging Central Scandinavia Canada Western Functions Group Markets Europe £m £m £m £m £m £m Net written 1,118 866 1,946 686 36 4,652 premiums Underwriting 98 15 50 12 13 188 result Investment 42 35 107 23 (1) 206 result Insurance 140 50 157 35 12 394 result Other (3) (3) (3) (12) (34) (55) activities Operating result 137 47 154 23 (22) 339 (management basis) Realised gains 22 Unrealised gains/(losses), impairments and (4) foreign exchange Interest costs (59) Amortisation of intangible (21) assets Pension net (4) interest costs Solvency II (10) costs Reorganisation (4) costs Acquisitions (9) and disposals Profit before tax (per condensed 250 consolidated income statement) Combined operating ratio 87.7 98.7 95.4 97.8 - 94.2 (%) Six months ended 30 June 2012 UK & Emerging Central Scandinavia Canada Western Functions Group Markets Europe £m £m £m £m £m £m Net written 1,056 743 1,882 585 10 4,276 premiums Underwriting 130 62 (41) 7 (9) result [TRUNCATED]
RSA: RSA Insurance Group Plc: Half-yearly Report
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