DocuSign Envelope ID: A4BBD0A7-D694-4DB9-9A8D-1BF552C31035 Registered number: 00093792 Royal & Sun Alliance Insurance Limited Annual report and accounts for the year ended 31 December 2022 --- DocuSign Envelope ID: A4BBD0A7-D694-4DB9-9A8D-1BF552C31035 # Royal & Sun Alliance Insurance Limited ## Table of contents Company information 2 Strategic report 3 Directors' report 10 Statement of directors' responsibilities in respect of the Strategic report, the Directors' report and the Financial statements 13 Auditors report 14 Profit and loss account 21 Statement of comprehensive income 23 Statement of changes in equity 24 Balance sheet 25 Notes to the accounts 1 Basis of preparation 27 2 Adoption of new and revised accounting standards 27 3 Significant accounting policies 28 4 Significant accounting estimates and judgements 35 5 Risk management 38 6 Segmental information 46 7 Exchange rates 46 8 Investment income, expenses and charges 47 9 Auditors' remuneration 47 10 Directors' emoluments 48 11 Employee expenses 48 12 Leases 49 13 Other technical income 49 14 Post-employment benefits and obligations 50 15 Share-based payments 55 16 Taxation 56 17 Dividends paid and proposed 56 18 Intangible assets 57 19 Land and buildings 58 20 Shares in group undertakings 60 21 Financial assets 61 22 Fair value measurement 63 23 Interests in structured entities 66 24 Reinsurers' share of provision for unearned premiums 67 25 Reinsurers' share of provision for losses and loss adjustment expenses 67 26 Debtors from direct insurance operations - intermediaries 68 27 Current tax 68 28 Deferred tax 68 29 Tangible assets 69 30 Deferred acquisition costs 70 31 Share capital 71 32 Total other comprehensive income 71 33 Provision for unearned premiums 72 34 Claims outstanding 72 35 Provisions for other risks 75 36 Borrowings 75 37 Other debtors 76 38 Other creditors 76 39 Finance leases as a lessor 76 40 Capital commitments 76 41 Contingent liabilities 77 42 Parent companies 77 43 Post balance sheet events 77 44 Subsidiaries 78 --- DocuSign Envelope ID: A4BBD0A7-D694-4DB9-9A8D-1BF552C31035 ## Company information ### Directors¹ Mark Hodges (Chair) Ken Anderson (appointed 1 April 2022) Alastair Barbour Sally Bridgeland Claude Dussault Robert Leary Louis Marcotte (appointed 30 June 2022) Susan McInnes (appointed 1 April 2022) Ken Norgrove (appointed 10 January 2022) Andy Parsons ### Secretary Roysun Limited ### Registered Office St Marks Court Chart Way Horsham West Sussex RH12 1XL ### Auditor KPMG LLP 15 Canada Square Canary Wharf London E14 5GL ¹Changes to the board during the year are detailed on page 10. --- DocuSign Envelope ID: A4BBD0A7-D694-4DB9-9A8D-1BF552C31035 # Royal & Sun Alliance Insurance Limited ## Strategic report for the year ended 31 December 2022 The directors present their annual report on the affairs of Royal & Sun Alliance Insurance Limited (the 'Company') and the audited financial statements for the year ended 31 December 2022. The Company is a member of the Intact Financial Corporation Group of Companies ('IFC' or 'Intact'), headed by Intact Financial Corporation ('IFC'). At a local level the Company is a member of the RSA Insurance Group Limited (the 'RSA Group' or 'RSA') headed by RSA Insurance Group Limited (RSAIG). Due to RSAIG's issued securities it provides more detailed reporting on the RSA Group. The Company is a subsidiary of Royal Insurance Holdings Limited. The RSA Group provides the Company with access to all central resources that it needs and provides policies in all key areas including finance, risk, human resources and environment. The Company transacts the majority of the RSA Group's UK business. The directors of the Company have concluded that the RSA Group approach to strategy, risk management, performance review and custody of assets fully meets the needs of the Company as a separate regulated entity. The Company is authorised by the Prudential Regulation Authority ('PRA') and regulated by the PRA and the Financial Conduct Authority ('FCA'). ## Principal activity The principal activity of the Company, its subsidiaries and overseas branches is the transaction of insurance and related financial services. The subsidiary undertakings are listed in note 44 of the Accounts. ## Business review The Company reports a profit on ordinary activities before tax of £193m (2021: £2,701m) for the year, due principally to £133m dividend income from subsidiary undertakings net of impairments (2021: £2,715m), £110m (2021 £118m) of investment income, net of investment expenses, realised and unrealised gains on investments £nil (2021: £68m gain), and foreign exchange losses of £3m (2021: £10m gains), offset by a loss on the technical account of £47m (2021:£210m loss). In Personal lines, the results include losses related to prolonged sub-zero temperatures in December, which resulted in burst pipes in thousands of homes across the UK. In addition, there were a number of non-catastrophe large losses, and inflationary pressures continue to weigh on both Motor and Home. Gross premiums written were £3,763m (2021: £3,847m). The funds attributable to equity holders of the Company were £2,609m as at 31 December 2022 (31 December 2021: £3,469m). During the first half of 2022, an RSA Group-wide project was undertaken to rationalise the intra-group loan position. As part of the project, the Company received £4,000m of dividends from subsidiary entities which were offset against intra-group payables. Separate to the above, the Company received a £279m dividend in specie from its subsidiary entity RSA Finance, consisting of preference shares in another subsidiary entity, Royal International Insurance Holdings Limited. As a consequence of these distributions, the valuation of the Company's investment in its subsidiary entities was impaired and a reduction in value totalling £4,100m was recorded. ## Key performance indicators ('KPIs') The most relevant KPIs to the financial performance of the Company are as follows: - Underwriting performance¹; the Company aims to achieve an underwriting performance that is as sustainably high as possible - that is without uncompetitive pricing or compromising reserves. The Company targets further improvements to its underwriting performance. - Profit before tax; the Company seeks to maximise its profit before tax, which is a key statutory measure of the earnings of the Company. The Company targets continued growth in its profit before tax as performance actions take further effect. ¹Underwriting performance for the Company can be measured using the balance on the technical account for general business. ## Non-Financial KPIs Customer: From a customer perspective, we have aligned our UK customer advocacy ambitions to IFC's strategic objectives to have three out of four customers as advocates and four out of five brokers who value our specialised expertise. We have developed a flightpath to the number over five years, as we improve the service we provide to our customers and brokers. We measure the amount of business that is renewed with us each year. Personal lines renewal was 80% on a premium retention rate basis. For Commercial and Specialty lines, policy retention was 86%. Climate: Our ambition is to achieve Net zero by 2050 and halve operations by 2030. We are working on building plans towards this with IFC across all our geographies. Further information can be found in the Environmental, Social and Governance (ESG) section in the Director's Report on pages 15 to 17 of the RSAIG Annual Report. --- DocuSign Envelope ID: A4BBD0A7-D694-4DB9-9A8D-1BF552C31035 Employees: We aim to be a best employer and have made good progress on our Diversity, Equity and Inclusion agenda. We are proud to have achieved our Women in Finance target of 34% representation in the Management Group by 2023 a year early and we have recalibrated our future targets. We are aiming to achieve 40% female representation in Management by 2025 and gender parity by 2030. Our principal risks below also form the non-financial information. ## Strategic review ### Our operations The Company's operations remained resilient during the year. Where and when government guidelines permitted, we began a voluntary return to office working supported by hybrid arrangements (a mix of home and office working) and, following a successful trial period, this was adopted as our business as usual. Significant resource has been deployed to ensure our people have received the appropriate support regarding physical and mental well-being during remote working. Operationally, we have continued to make improvements to our IT architecture and successfully migrated to a new cloud based mainframe to support our UK systems and processes. ### Our strategy Our ambition is to build on the Company's strengths to deliver a consistently outperforming underwriting result. We will achieve this by leveraging our strong UK domestic Commercial lines and Specialty businesses, growing our direct channels in Personal lines, and continuing to improve our productivity. We are therefore continuing to focus on simplifying our business and distribution channels, investing in our technical and digital capabilities, and building a customer-driven culture that values high performance and develops talent. In Personal lines, work is continuing to finalise the footprint, with scale being required to drive towards outperformance. This is more challenging in Motor than for other Personal lines of business. We will build the customer proposition through alignment with IFC's specialty businesses in North America and the London Market, while continuing to focus on the underwriting excellence which has enabled the performance improvement of recent years. ### Our customers We strive to provide tailored products to meet the evolving needs of our customers by analysing trends and keeping pace with digital developments. A core pillar of our strategy is focused on customer experience and delivering good outcomes – this involves improving products and propositions, omni-channel customer journeys, service levels, and claims experience. Our customer policy sets out standards for the business to help ensure that we treat all customers fairly, that we check products and services continue to offer fair value and meet their needs, and that we monitor customer outcomes to understand performance and take action, where needed. Further information on how we support and engage with our customers is contained in the Section 172 statement on pages 7 to 9. We define customer retention as a measure of the amount of business that is renewed with us each year. Strong customer satisfaction translates to high retention levels and improved underwriting results. Our customer-driven value means we focus on our customers' needs and make sure we are there for them in both the good times and the bad. We target improving retention over time. ### Future outlook We evolve our products and services to ensure that we continue to meet customers' changing needs. We continue to improve the performance and resilience of the business. An ongoing focus is to further simplify what we do and drive and further invest in areas of strength. Markets remain competitive but the Company has the right foundation to target sustainable growth in certain product lines and customer types. The continuation of our programme of business simplification aligned to customer driven values will assist this growth further. ### Events after the reporting period Subsequent to the year-end, on 27 February 2027, the Trustees of the two major defined benefit pension schemes in the UK, the Royal Insurance Group Pension Scheme and the Sal Pension Scheme ("the Schemes"), entered into an agreement with Pension Insurance Corporation plc ("PIC") to purchase bulk annuity insurance policies that operate as investment assets. Such arrangements are commonly referred to as a "buy-in". The Schemes made up around 99% of total defined benefit assets and obligations on the balance sheet at 31 December 2022. The buy-in removes all remaining material pension exposure from the balance sheet, while maintaining the security of benefits to the Scheme members. The buy-in premium has initially been funded through the transfer of the majority of the Schemes' assets to PIC, as well as an upfront contribution from the Company of approximately £480m. The Schemes have retained ownership of various assets, including some less liquid investments, which will be liquidated over the next 12-18 months in order to settle the remainder of the buy-in premium, and cash, some of which will be required to meet ongoing expenses. In addition, the annual pension deficit funding contribution of £75m was paid in January 2023. The upfront contribution of the Company was part funded through a capital injection of approximately £480m by the Company's ultimate parent, IFC, passed down from the Company's immediate parent, Royal Insurance Holdings Limited, in the form of an issue of 25p ordinary shares. --- DocuSign Envelope ID: A4BBD0A7-D694-4DB9-9A8D-1BF552C31035 The Schemes already had coverage against longevity risk for around 30% of the existing pensioner population through an insurance policy entered into in 2009 with Rothesay Life. Together with the newly purchased PIC annuity assurance policies, the Schemes will now have protection against longevity risk and market risk for the material obligations of all deferred and pensioner members. As a result, the pension surplus on the balance sheet at 31 December 2022 of £200m net of tax is expected to be largely removed as the fair value of these insurance policies, held as assets of the Schemes, will be set equal to the value of the defined benefit obligations covered under IAS 19. An initial net loss of approximately £700m, based on recent market conditions, is expected to be recognised through OCI. The fair value of the insurance policies will then fluctuate going forward based on changes in the value of the defined benefit obligations covered. The transaction will temporarily increase the income tax expense as the deductibility of the upfront contribution will be spread out over three years. This results in deferred tax assets being reclassified to Other Comprehensive Income from income tax expense, with a neutral net impact on shareholder's equity. ## Managing risk to deliver for our customers and achieve our goals The Company's aim is to deliver consistently for our customers while delivering outperformance. The Company's operating plan provides a platform for ensuring the business remains aligned with its strategic goals, including strong delivery for our customers and sustainable performance with a robust capital base. The Risk Function takes an active role in challenging the business on its development of our plans and delivery against our objectives and those of our customers. ## Approach to managing risk and our appetite in 2022 Our risk management and controls frameworks were created to ensure that we identify, assess and respond to risks across the Company before they adversely impact on our customers or the business. This information, together with the strength of the Company's capital position, allows the Board to set a risk strategy and appetite that articulates the level of risk the Board is prepared to take in delivering its strategic objectives. Risks are managed within risk appetite, using a risk maturity view. For material financial risks, this was achieved throughout the year and three-year plans assume this will continue. From time to time, certain risks stray outside target and action is taken to manage them back to acceptable positions. This year saw continued progress in some key risk areas, including customer, underwriting discipline, IT and cyber. ## Risk culture – culture of accountability and openness We consider the foundation of an effective risk management framework to be the cultivation of a risk culture that promotes accountability and openness (a willingness to admit mistakes and learn from the past). At RSA, the Board and senior management team has been instrumental in setting the right 'tone from the top', and we gain insights from quarterly culture health reviews and periodic workforce surveys. A key part of our culture is ensuring our customers are at the heart of all we do. We give considerable attention to ensuring our customers are treated fairly and our colleagues are passionate about achieving good customer outcomes. ## Principal risks and uncertainties The Company's principal risks and uncertainties are integrated within and managed together with the principal risks of the RSAIG. The principal risks and uncertainties of the RSA Group, which include those of the Company, are set out in the Risk management note (note 5) of the Company's Accounts and the Strategic report of the 2022 Annual Report & Accounts of RSAIG. ## Employment policy Our people are central to achieving our core purpose, and our culture of support for personal well-being, diversity and equal opportunity to excel is important to us. Alongside our People and Diversity, Equity & Inclusion Strategies, group-wide Employment Practices and Speaking-up & Whistleblowing Policies drive our approach on people matters and are reviewed annually under the governance of our Risk Management Framework. RSA actively promotes inclusivity, including ensuring there is no less favourable treatment on the grounds of sex, sexual orientation, gender re-assignment, marital or civil partnership status, race (including colour, nationality, ethnic or national origin), disability, religion or belief, age, and pregnancy and maternity, and that reasonable adjustments are provided for people with disabilities who are applying to or already working with us. During the year, the Board received and supported a number of updates on people priorities including: activities to further embed our Purpose and Values in day-to-day practice, strengthened succession and development planning, trials of hybrid working patterns, trends from our speaking-up channel, and progress against inclusion ambitions; for example, our UK Gender Pay Gap and Women in Finance representation targets. The Board also received insights from employee feedback gained through frequent leadership meetings, employee surveys and focus groups, and formal and informal dialogue with employee representation groups, including a European Works Council. The Board hosted a lunch with individuals in our talent succession plans to directly exchange views. In addition, some Board members are paired with an employee from an ethnic minority background to directly champion a forthcoming Enable Me initiative designed by our REACH Employee Resource Group for multicultural inclusion. --- DocuSign Envelope ID: A4BBD0A7-D694-4DB9-9A8D-1BF552C31035 # Anti-bribery and Corruption We do not tolerate bribery and corruption anywhere in our business. Our Anti-Bribery and Corruption policy and Conflicts of Interest Gifts and Hospitality Policy apply across the Company. Directors, people leaders and others with supervisory responsibility must ensure that employees, contractors, business partners and suppliers are aware of these policies and comply with them. The policies establish detailed guidance on facilitation payments, gifts and hospitality and relationships with third parties, as well as the systems and controls to ensure effective implementation. All employees, contractors, business partners and suppliers are expected to comply with applicable laws of the UK and countries in which we conduct business, as well as with our Broker Remuneration Policy and Third-Party Contracts Policy, which set out requirements for payments to brokers and procurement activity. All colleagues complete a mandatory e-learning training module covering anti-bribery and corruption. The training is an annual assignment to all staff and is translated into a number of different languages for our colleagues in different parts of the world. Employees are encouraged to identify and escalate concerns to management or through our confidential third-party whistleblowing hotline in line with our Speaking-up & Whistleblowing Policy. Operating countries complete risk assessments that are reviewed and updated annually, supported by a central team to enable continuous improvement to controls. The Audit Committee periodically reviews Internal Audit findings in relation to our Anti-Bribery and Corruption Policy. # Human rights The RSA Group is a signatory of the UN Global Compact, and the Company is committed to aligning its operations with the ten universal principles that together cover our approach to environment, human rights, labour and anti-corruption. Our Human Rights Policy is designed to operationalise the Universal Declaration of Human Rights, the International Labour Organizations Declaration on Fundamental Principles and Rights at Work, and the UN Guiding Principles on Business and Human Rights. It sets the standard we expect for our employment practices, the actions of our supply chain, and principles we apply to our investment and underwriting portfolios. All relevant policies are reviewed on an annual basis, including our Modern Slavery and Human Trafficking Statement, which was published in April 2022 and is linked to a number of policies that provide confidence we are helping to raise awareness of modern slavery with our people and suppliers. This includes policy standards outlining how we recruit, manage and support our people in a working environment that promotes diversity, respect, integrity, safety and wellbeing; our Third Party Contracts & Outsourcing policy which exists to ensure that appropriate assessments of risks associated with services are undertaken to meet our human rights commitments; and our Speaking-up & Whistleblowing Policy, which encourages our people to raise concerns, without fear of retaliation, about how we do business or operate as an employer. Our due diligence programme monitors the approach of our supply chain to human rights, and engages with suppliers to improve transparency where necessary. Supplier Relationship Managers are able to complete our e-learning module, which addresses the potential risks of modern slavery and human trafficking in the supply chain, raises awareness of this issue with our people and the circumstances under which they should seek specialist advice. Our aim is to raise awareness of issues, ensure that procedures are in place to prevent breaches, and conduct appropriate due diligence. We are subscribers to the Financial Services Qualification System (FSQS) operated by Hellios – a community of over 50 financial institutions collaborating to agree a single standard for managing supplier compliance, including ESG policy areas such as modern slavery and environmental impact. --- DocuSign Envelope ID: A4BBD0A7-D694-4DB9-9A8D-1BF552C31035 ## Section 172(1) Companies Act 2006 statement The Board has balanced the views and interests of our stakeholders, alongside the need to promote the long-term success of the Company. The Board has acted in a way that it considers, in good faith, would be most likely to promote the success of the Company for the benefit of its members as a whole. This section sets out how the Board, in doing so, has had regard to the matters set out in Section 172 of the Companies Act 2006. ## A balanced and collaborative approach to stakeholder engagement The Board recognises the importance of positive relationships between RSA and its stakeholders and is committed to fostering strong engagement with them. Open and collaborative dialogue and interaction is in the best interests of RSA and helps us to make a positive contribution to society. Throughout 2022, the Directors and senior management engaged with key stakeholder groups across the business, including IFC as the business further integrated with the wider Group. The Board is committed to maintaining a range of direct and indirect engagement with its stakeholders and has approved the stakeholder engagement plan for 2023. As part of its decision-making throughout the year, the Board has considered and balanced the views and interests gained through its stakeholder engagement, as well as the need to promote the long-term success of the Company. ## Customers ### Why the Board engages Good business starts with our customers and we strive to keep them at the heart of what we do. The Board works hard to increase its understanding of risks to our customers' so that we continue to provide tailored products and services that meet their diverse and evolving needs. Customer satisfaction and customer retention are critical to the long-term sustainable prospects of the Company. ### How the Board engages The Board receives regular updates from senior management on customer and conduct matters, including key indicators that monitor customer outcomes and insights on customer-driven decision-making. These updates keep the Board informed on customer priorities and key risks to the consistent delivery of good customer outcomes, and future areas of focus. During the year, the Board appointed a Non-Executive Director as a "Customer Champion" to support the Chair and the CEO in ensuring that our customer ambitions and the FCA's Consumer Duty requirements are regularly discussed and considered by the Board. The Board was kept well informed on how management was responding to Business Interruption Claims following the Covid-19 pandemic and taking steps to support customers during the cost of living crisis. During the year, the Board received deep-dive updates on customer and market insight and how the business is responding to customer expectations around customer service and digital offerings. The Board has closely monitored RSA's implementation of the FCA's rules on Pricing Practices and Product Governance and preparations for the new Consumer Duty rules, which will further heighten industry focus on customer outcomes. These business reviews have been a forum for the Board and management to discuss long-term strategic goals on customer matters. ### Long-term implications Customer satisfaction and retention are critical to the long-term sustainable prospects of RSA. The Board has engaged with and responded to the needs of customers with this in mind. During the second half of 2022, Board members have reviewed and approved management's plan to implement the FCA's Consumer Duty rules as part of the strategic focus of the Company. ## Workforce ### Why the Board engages The Board recognises that a values-driven, open culture and an engaged workforce are central to achieving our strategic goals. As such, the Board is committed to setting the tone from the top and engaging in a meaningful way with our people. ### How the Board engages The Board has supported management's communication approach to ensure the workforce is informed of and engaged in business strategy and performance. This has included regular intranet articles and 'vlogs', email and online messaging, and team meetings. Employees are encouraged to engage in our financial performance through various means. Alongside our People and Diversity, Equity & Inclusion Strategies, group-wide Employment Practices and Speaking-up & Whistleblowing Policies drive our approach on people matters and are reviewed annually under the governance of our Risk Management Framework. During the year, the Board received and supported a number of updates on people priorities including: activities to further embed our Purpose and Values in day-to-day practice, strengthened succession and development planning, trials of hybrid working patterns, trends from our speaking-up channel, and progress against inclusion ambitions; for example, our UK Gender Pay Gap and Women in Finance representation targets. --- DocuSign Envelope ID: A4BBD0A7-D694-4DB9-9A8D-1BF552C31035 The Board also received insights from employee feedback gained through frequent leadership meetings, employee surveys and focus groups, and formal and informal dialogue with employee representation groups, including a European Works Council. The Board hosted a lunch with individuals in our talent succession plans to directly exchange views. In addition, some Board members are paired with an employee from an ethnic minority background to directly champion a forthcoming Enable Me initiative designed by our REACH Employee Resource Group for multicultural inclusion. ## Long-term implications The Board understands that enabling our people and creating an open and transparent culture is key to our long-term success. The Board reflected on the workforce's views on ways of working and engaged in key decisions to adopt hybrid patterns that support both personal wellbeing and excellent service for our customers. The Board also responded to workforce concerns about cost-of-living pressures through pay enhancements for colleagues at greatest risk of impact. ## Regulators and rating agencies ### Why the Board engages RSA is regulated by the PRA and the FCA and committed to working with its regulators in an open, cooperative and transparent manner. We seek to ensure a strong regulatory compliance culture throughout RSA in order to pre-empt and, where necessary, resolve regulatory issues and to avoid or minimise business impact and the risk of customer harm. The Board continues to have constructive engagement with our regulators, ensuring that they gain a comprehensive view of the Company's financial soundness, strategic and operational priorities, governance and culture, and that we understand the issues of interest to them. The Board regularly engages with RSA's regulators across all the regions that it operates. The PRA and the FCA attended Board meetings in 2022 to discuss regulatory priorities. ### How the Board responds We believe that open and regular dialogue promotes transparency between the Company and its regulators and ensures that we are in a position to reflect the views of our regulators when setting strategy. The outcomes of our engagement with our regulators influence RSA's priorities and focus for the year and are set out in the regulatory compliance plan, which is considered and approved by the Governance, Conduct & Remuneration (GCR) Committee. ### Long-term implications The Board is committed to engagement with the Company's regulators in order to ensure that we maintain positive relationships and take account of their views and interests. ## Environmental, Social and Governance issues ### Why the Board engages The Board is committed to high standards in ESG matters. This is manifested by our contribution to communities and how we work to mitigate the impact of our business on the environment, in particular how we work with business partners, suppliers and customers in relation to our shared response to the challenges posed by climate change. ### How the Board responds The Board has oversight of RSA's policies on climate change and is engaged on how the business is supporting the transition to a low carbon economy. Further information on the Board's oversight and engagement on ESG matters and its oversight of non-financial KPIs is set out in the ESG Report and Environmental Risk Management Report on pages 13 to 15 of the RSAIG Annual Report. ### Long-term implications The Board recognises that stakeholders have an interest in understanding how our business is responding to issues that concern wider society. The Board has been particularly engaged in understanding both the near and long-term risks associated with climate change and in preparing our business to respond to the associated physical, regulatory, social and economic impacts. ## Shareholder The Company's ultimate owner is IFC, a public company listed on the Toronto Stock Exchange. During 2022, RSA adopted the purpose and values of IFC and is aligned with IFC's strategic objectives to deliver outperformance and value for its shareholders. The Company's Board has an equal balance of independent and non-independent Directors. There are three shareholder-nominated Directors on the Board; this supports the Board's understanding and integration with IFC. ## Suppliers Our suppliers are critical to our business and the long-term success of RSA. We have structured supplier management practices in place across all regions and are investing in further tools and processes to manage risk in the supply chain and ensure that our supplier relationships are managed in a cooperative and proportionate manner. Further detail on how we engaged with our suppliers during the year is included in page 14 of the RSAIG annual Report. --- DocuSign Envelope ID: A4BBD0A7-D694-4DB9-9A8D-1BF552C31035 ## Pension schemes The Board continues to view the pension trustees as a key stakeholder group. In 2022, the UK pension trustees were provided with quarterly updates on RSA performance and offered meetings with RSA and IFC senior executives. RSA also continued to engage with and support the development of investment strategy in the pension schemes (noting that this is ultimately controlled by the trustees). By order of the Board Lona Youssouf L Youssouf For and on behalf of Roysun Limited Secretary Approved by the Board of Directors on 2 March 2023 --- DocuSign Envelope ID: A4BBD0A7-D694-4DB9-9A8D-1BF552C31035 # Royal & Sun Alliance Insurance Limited # Directors' report for the year ended 31 December 2022 ## Directors The names of the current directors are listed on page 2. From 1 January 2022 to date the following changes have taken place: | Director | Appointed | Resigned | | --- | --- | --- | | Ken Norgrove | 10 January 2022 | | | Ken Anderson | 1 April 2022 | | | Susan McInnes | 1 April 2022 | | | Louis Marcotte | 30 June 2022 | | | Charlotte Jones | | 1 April 2022 | | Clare Bousfield | | 31 March 2022 | | Charles Brindamour | | 30 June 2022 | ## Directors' responsibilities The directors' responsibilities statement appears on page 13 and is incorporated by reference into this report. None of the directors have any interest in the shares of the Company. ## Dividends Interim dividends of £137m were paid during the year (2021: £6,976m). The directors do not recommend payment of a final dividend (2021: £nil). ## Information included within the Strategic report Information relating to overseas subsidiaries and branches of the Company, financial risk management, likely future developments and the Company's employment policy is contained within the Strategic report on pages 3 to 9 and is incorporated into this report by reference. ## Political donations The Company did not make any political donations during the financial year (2021: £nil). ## Auditor Each of the persons who is a director at the date of approval of this report confirms that: - so far as the director is aware, there is no relevant audit information of which the Company's auditor is unaware; and - the director has taken all reasonable steps that he or she ought to have taken as a director in order to make himself or herself aware of any relevant audit information, and to establish that the Company's auditor is aware of that information. This confirmation is given and should be interpreted in accordance with the provisions of s418 of the Companies Act 2006. ## Directors' indemnity Article 118 of the Articles of Association provides that, among other things and insofar as permitted by law, the Company may indemnify its directors against any liability and may purchase and maintain insurance against any liability. The directors and officers of the Company and its subsidiaries have the benefit of Directors' and Officers' insurance which provides cover in respect of legal actions brought against them. ## Post balance sheet events Post balance sheet events are set out in note 43 of the Accounts. --- DocuSign Envelope ID: A4BBD0A7-D694-4DB9-9A8D-1BF552C31035 ## Going concern The financial statements have been prepared on a going concern basis. In adopting the going concern basis, the Board has reviewed the Company's ongoing commitments for the next twelve months and beyond. The Board's assessment included review of the Company's strategic plans and latest forecasts, capital position and liquidity including on demand capital funding arrangements with IFC. Current economic uncertainty has been considered, including the war in Ukraine, rising inflation, post Covid-19 impacts and transition to a post Brexit environment. These assessments include stress and scenario testing and consider significant areas of risk and uncertainty for the Company in the current challenging economic environment. Scenarios considered include a market risk shock involving several component stresses, plus deterioration of the underwriting result and a subsequent catastrophe loss. In making their assessment, the Board have reviewed the latest position on business interruption losses and availability of reinsurance to recover incurred claims and there have been no significant change in the estimated ultimate position based on these updates. The Board have considered the impact of events after the balance sheet date with none identified which could impact the Company's ability to continue as a going concern. Based on this review no material uncertainties have been identified in relation to the ability of the Company to remain a going concern for at least the next twelve months, from both the date and the approval of the financial statements. ## Corporate governance For the year ended 31 December 2022, under The Companies (Miscellaneous Reporting) Regulations 2018, the Company has applied the Wates Corporate Governance Principles for Large Private Companies (published by the Financial Reporting Council in December 2018 and available at www.frc.org.uk). Details of how the Company has complied with the principles and supporting guidance are set out below. ## Principle 1 – Purpose and Leadership ### Purpose The values of RSA and IFC are strongly aligned. ### Values and culture In line with our purpose, the Company's values are (i) integrity, (ii) respect, (iii) customer-driven, (iv) excellence, (v) generosity. Our values are designed to guide our decision making and everything that we do. They underpin how we seek to deliver for our customers and other stakeholders. We are a people-centred business which aims for a culture of high performance, where working together as a team is valued and the business invests in its people. There are various mechanisms in place to monitor and assess culture, including employee surveys and cultural health assessments. ## Principle 2 – Board composition The directors of the Company are named on page 2, and their biographies can be found on the Group's website www.rsainsurance.co.uk. The Board is composed of the Chair, two executive directors and seven non-executive directors (three of which are shareholder nominated directors). The non-executive directors provide independent challenge to the executives. There is a clear division of responsibility between the Chair and the Chief Executive. The Company's board is composed of the same directors as the RSAIG board. The Board is responsible for reviewing the structure, size and composition of the Board and committees and is responsible for ensuring appropriate succession plans are in place for the Board and reviews executive succession planning. The Board recognises the importance of diversity, including gender, social and ethnic backgrounds, and of cognitive and personal strengths. The Board values the breadth of perspective that such diversity can bring and the beneficial effect it can have on the Board's effectiveness. As at the date of this report, the Board is composed of 20% women. The Company will continue to seek out opportunities to further improve diversity and inclusion on the Board and across the Company while always seeking to appoint the most appropriate candidates based on merit. The Board considers that five members of the Board are independent of the Group. The Non-Executive Directors, led by the chair, seek to challenge executive management on their execution of the Company's operating plan and strategy. The non-executive directors ensure there is objective judgement in all Board decisions. The Chair encourages a culture of openness and debate. ### Effectiveness The Board conducts an annual review of its effectiveness, including engagement of an external provider to carry out a review every three years. An externally- facilitated review was completed in the second half of 2022. The results of the review were shared with the Board, its Committees and with regular attendees, and action plans to address the areas highlighted in the review were agreed. ## Principle 3 – director responsibilities ### Accountability The Board is committed to effective governance, sound risk management and a robust control environment. We consider the foundation of an effective risk management framework to be the cultivation of a risk culture that promotes accountability and openness. ### Committees In order that it can operate efficiently and give the right level of attention and consideration to relevant matters, the Board delegates authority to the Audit Committee, the Risk Committee and the GRC for relevant matters. The Board shares these committees with the RSAIG. Further information on the work of the committees can be found in the Annual Report and Accounts of RSAIG. --- DocuSign Envelope ID: A4BBD0A7-D694-4DB9-9A8D-1BF552C31035 ## Integrity of information The Board receives regular and timely information on all aspects of the Company's business. This includes financial performance, strategy, performance against the operational plan, internal audit, risk and compliance, and governance. Internal processes and systems are robust which ensures that management information is accurate and timely. The Company's financial statements are audited by KPMG LLP on an annual basis. ## Principle 4 – opportunity and risk ### Opportunity The long-term opportunities for the Company are aligned with its ultimate owners IFC. ### Risk The Company's principal risks and uncertainties are integrated within and managed together with the principal risks of the RSA Group. The principal risks and uncertainties of the Group, which include those of the Company, are set out in the Risk Management note on pages 38 to 45 of the Accounts and the Strategic report of the 2022 Annual Report and Accounts of RSAIG. ### Responsibilities The Risk Committee supports the Board to ensure that the key risks to the Company are identified, understood and effectively managed within risk appetite. The Risk Committee advises the Board on risk management matters, including solvency needs and the risk management arrangements for the Company. It monitors the Company's solvency by reviewing the outputs of the ORSA process, the Internal Model and conclusions of model validation, making recommendations to the Board on capital adequacy. The primary purpose of the Corporate Audit Services' (CAS) (Internal Audit) is to 'keep RSA safe and improving'. Specifically, it helps the Board and executive management to protect the assets, reputation and sustainability of the RSA Group and the Company. CAS does this by assessing whether all significant risks are identified and appropriately reported by management and the second line of defence to the Board and executive management; assessing whether they are adequately controlled and by challenging executive management to improve the effectiveness of governance, risks management and internal controls. The CAS is an independent and objective function reporting to the Board through the Audit Committee. CAS's scope of activities is unrestricted, and its audit universe extends to all legal entities, joint ventures and other business partnerships, outsourcing and reinsurance arrangements. It includes first line of defence control validation and second line of defence assurance activities, and the system of governance as set out under Solvency II. ## Principle 5: remuneration ### Setting remuneration The GCR Committee reviews and challenges the Company's remuneration policy and ensures this promotes the long-term sustainable success of the Company. This includes challenging and setting the remuneration of executive directors and the Chair of the Board. The Committee also reviews workforce remuneration and related policies. It also ensures alignment between incentives and culture, and takes these into account when setting the policy for executive director remuneration. ## Principle 6 – stakeholder relationships and engagement Information on the Company's stakeholder relationships and engagement can be found in the section 172(1) statement on pages 7 to 9 of the Company's Strategic report. Signed by order of the Board Lona Youssouf L Youssouf For and on behalf of Roysun Limited Secretary Approved by the Board of Directors on 2 March 2023 --- DocuSign Envelope ID: A4BBD0A7-D694-4DB9-9A8D-1BF552C31035 # Directors' responsibilities in respect of the Strategic report, the Directors' report and the Financial statements The directors are responsible for preparing the Strategic report, Directors' report and the Financial statements in accordance with applicable law and regulations. Company law requires the directors to prepare such financial statements for each financial year. Under that law they have elected to prepare the financial statements in accordance with United Kingdom (UK) Accounting Standards and applicable law (UK Generally Accepted Accounting Practice), including FRS 101 Reduced Disclosure Framework. Under company law the directors must not approve the financial statements unless they are satisfied that they give a true and fair view of the state of affairs of the Company and of the profit or loss of the Company for that period. In preparing these financial statements, the directors are required to: - select suitable accounting policies and then apply them consistently; - make judgements and estimates that are reasonable and prudent; - state whether applicable UK Accounting Standards have been followed, subject to any material departures disclosed and explained in the financial statements; - assess the Company's ability to continue as a going concern, disclosing, as applicable, matters related to going concern; and - use the going concern basis of accounting unless they either intend to liquidate the Company or to cease operations, or have no realistic alternative but to do so. The directors are responsible for keeping adequate accounting records that are sufficient to show and explain the Company's transactions and disclose with reasonable accuracy at any time the financial position of the Company and enable them to ensure that the financial statements comply with the Companies Act 2006. They are responsible for such internal control as they determine is necessary to enable the preparation of financial statements that are free from material misstatement, whether due to fraud or error, and have general responsibility for taking such steps as are reasonably open to them to safeguard the assets of the Company and to prevent and detect fraud and other irregularities. Under applicable law and regulations, the directors are also responsible for preparing a Strategic report and a Directors' report that complies with that law and those regulations. --- DocuSign Envelope ID: A4BBD0A7-D694-4DB9-9A8D-1BF552C31035 # Independent auditor's report to the members of Royal & Sun Alliance Insurance Limited ## 1 Our opinion is unmodified We have audited the financial statements of Royal & Sun Alliance Insurance Limited (“the Company”) for the year ended 31 December 2022 which comprise the Balance Sheet, Profit and Loss Account, Statement of Comprehensive Income and Statement of Changes in Equity, and the related notes, including the accounting policies in note 3. In our opinion the financial statements: - give a true and fair view of the state of Company’s affairs as at 31 December 2022 and of its profit for the year then ended; - have been properly prepared in accordance with UK accounting standards, including FRS 101 Reduced Disclosure Framework; and - have been prepared in accordance with the requirements of the Companies Act 2006. ## Basis for opinion We conducted our audit in accordance with International Standards on Auditing (UK) (“ISAs (UK)”) and applicable law. Our responsibilities are described below. We believe that the audit evidence we have obtained is a sufficient and appropriate basis for our opinion. Our audit opinion is consistent with our report to the Audit Committee. We were first appointed as auditor by the shareholders on 13 May 2013. The period of total uninterrupted engagement is for the ten financial years ended 31 December 2022. We have fulfilled our ethical responsibilities under, and we remain independent of the Company in accordance with, UK ethical requirements including the FRC Ethical Standard as applied to public interest entities. No non-audit services prohibited by that standard were provided. ## 2 Key audit matters: our assessment of risks of material misstatement Key audit matters are those matters that, in our professional judgement, were of most significance in the audit of the financial statements and include the most significant assessed risks of material misstatement (whether or not due to fraud) identified by us, including those which had the greatest effect on: the overall audit strategy; the allocation of resources in the audit; and directing the efforts of the engagement team. We summarise below the key audit matters (unchanged from 2021), in decreasing order of audit significance, in arriving at our audit opinion above, together with our key audit procedures to address those matters and, as required for public interest entities, our results from those procedures. These matters were addressed, and our results are based on procedures undertaken, in the context of, and solely for the purpose of, our audit of the financial statements as a whole, and in forming our opinion thereon, and consequently are incidental to that opinion, and we do not provide a separate opinion on these matters. | Valuation of claims outstanding Claims outstanding 2022: £5,245 million gross, £3,715 million net 2021:£4,850 million gross, £3,438 million net; relating to provision for losses and loss adjustment expenses Risk vs 2021 ←→ Refer to page 32 (accounting policy) and page 72-75 (financial disclosures) | | | --- | --- | | The risk | Our response | | Subjective valuation: Claims outstanding represent the single largest liability for the Company. Valuation of incurred but not reported claims (IBNR) is highly subjective, requiring a number of assumptions to be made with high estimation uncertainty. Certain lines of business have greater inherent uncertainty, such as those where claims emerge slowly over time, or where there is greater potential exposure to large losses due to the effect of uncertain or unknown incurred events. Additional uncertainty remains as a result of the Covid-19 pandemic and the resulting claims and reinsurance recoveries. For business interruption cases (BI) the result of the FCA Test Case ruling, and other legal decisions and pending appeals on such judgements, whilst not significant in isolation do alongside the uncertain long term distortion to | With the assistance of our own actuarial specialists, our procedures included: - Independent re-performance: We performed independent re-projections of reserve balances using our own models for certain classes of business. The determination of which classes to re-project was based on risk assessment and consideration of the evidence available from other alternative data analysis procedures; - Our sector experience: We applied our industry experience and market benchmarks to support our consideration and challenge of the Company’s reserving methodology, key judgements and assumptions for the most significant and subjective classes of business; - Challenge of key assumptions: Our audit approach responded to the increased uncertainty in the current economic environment, making explicit allowance for inflation in our independent | --- DocuSign Envelope ID: A4BBD0A7-D694-4DB9-9A8D-1BF552C31035 claims experience continues to evolve. Further uncertainty arises in classes more sensitive to the assumptions made around future inflation rates. A margin is added to the actuarial best estimate of claims outstanding to make allowance for specific risks and uncertainties that are not specifically allowed for in establishing the actuarial best estimate. The appropriate margin to recognise is a subjective judgment and estimate taken by the directors, based on the perceived uncertainty and potential for volatility in the underlying claims. The effect of these matters is that, as part of our risk assessment, we determined that the valuation of claims outstanding in relation to IBNR, has a high degree of estimation uncertainty, with a potential range of reasonable outcomes greater than our materiality for the financial statements as a whole, and possibly many times that amount. The financial statements (note 34) disclose the sensitivity estimated by the Company. re-projections. We performed incremental tests to separate the impacts on frequency and severity, including inflation and other factors such as changes in driving patterns since Covid-19. - Assessing principles: We inspected the legal advice received by management in relation to Covid-19 business interruption (BI) claims and considered the appropriateness of judgements against this advice. We agreed a sample of reinsurance recoveries received in the year to appropriate evidence. - Tests of details: We compared samples of claims case reserves to appropriate documentation, such as reports from loss adjusters in order to test the valuation of individual claims reserves focused on portfolios deemed higher risk, whether that be due to size, complexity or uncertainty. This covered the accuracy of the relevant policy data elements relied upon within actuarial methods in their testing of the valuation of insurance liabilities. Further, we have sample tested other data elements relevant to the valuation of insurance liabilities such as premium inputs and relevant reinsurance contracts, and recalculated the resulting reinsurance recoveries. From a completeness perspective, we reconciled the policy level claims listing subject to sampling, to the actuarial triangles used for our independent reprojections, with the output then reconciled to the financial statements. - Margin evaluation: We evaluated the appropriateness of the margin to be applied to the actuarial best estimate. In order to do this we assessed management approach to setting the margin. In particular we considered the allowance for uncertainties inherent in the data and assumptions in developing the actuarial best estimate through inquiry with management and with respect to our understanding of any changes in the Company's risks. We also applied our broader sector experience of approaches to setting the margin and the level of margin held by the Company's peers. - Assessing transparency: We considered the adequacy of the Company's disclosures in respect of the sensitivity of the claims outstanding and key assumptions applied to key areas of judgement and estimation uncertainty. - Control design and implementation: We assessed the design and implementation of controls in relation to the above valuation. We did not seek to place reliance on the Company's controls because the nature of the balance is such that we would expect to obtain audit evidence primarily through the detailed procedures described. Our results We found the valuation of claims outstanding to be acceptable (2021 result: acceptable). --- DocuSign Envelope ID: A4BBD0A7-D694-4DB9-9A8D-1BF552C31035 | Valuation of deferred tax assets (2022: £186 million of the total deferred tax assets of £260 million; 2021: £146 million) Risk vs 2021 *❄️* Refer to page 33 (accounting policy) and pages 68-69 (financial disclosures). | | | --- | --- | | The risk | Our response | | **Forecast-based assessment:** The recoverability of the recognised deferred tax asset is dependent on the future profitability the Company. There is inherent uncertainty involved in developing the Company's operational plan upon which forecast future taxable profits are based and further judgement in assessing to what extent the deferred tax assets can be recovered against those forecast taxable profits. These forecasts determine the extent to which deferred tax assets are, or are not, recognised in the financial statements. The effect of these matters is that, as part of our risk assessment, we determined that the recoverable amount of deferred tax assets has a high degree of estimation uncertainty, with a potential range of reasonable outcomes greater than our materiality for the financial statements as a whole. The financial statements (note 28) disclose the sensitivity estimated by the Company. | Our procedures included: - **Historical comparisons:** We assessed the accuracy of the Company's approved operating plan in relation to the forecasting process in the past. We considered whether projected margins are achievable with reference to recent business performance, operating plans, and allowing for adjustments including the contingency applied in determining the value of the deferred tax asset. - **Our experience:** We assessed the Company's approach to the assessment of recoverability and challenged the approach with reference to our understanding of the business, forecast periods used by peers, and the requirements of the relevant accounting standards. - **Sensitivity analysis:** We carried out independent sensitivity analyses of taxable profits to assumptions such as expected weather losses, the development of claims reserves and claims inflation and projected future growth rates. - **Our tax expertise:** With the support of our own tax specialists and their knowledge of tax legislation, we also assessed the extent to which projected profits were taxable, in particular the Company's assumptions about how accumulated tax losses and other similar items can be utilised by the Company. - **Assessing transparency:** We assessed the adequacy of the Company's disclosures in respect of the assumptions applied in the calculation and the adequacy of the Company's disclosures in respect of the sensitivity of the valuation of the deferred tax asset to key assumptions. - **Control design and implementation:** We assessed the design and implementation of controls in relation to the above valuation. We did not seek to place reliance on the Company's controls because the nature of the balance is such that we would expect to obtain audit evidence primarily through the detailed procedures described. **Our results** As a result of our work, we found the level of deferred tax assets recognised to be acceptable (2021 result: acceptable). | 16 --- DocuSign Envelope ID: A4BBD0A7-D694-4DB9-9A8D-1BF552C31035 | Valuation of post-employment benefits and obligations (2022: £5,395 million; 2021: £8,576 million) Risk vs 2021 *Refer to page 33-34 (accounting policy) and pages 50-54 (financial disclosures).* | | | --- | --- | | The risk | Our response | | Subjective valuation: The value of the defined benefit pension schemes obligations is significant and, being long-dated liabilities, the valuations are particularly sensitive to small changes in assumptions such as the discount rate, RPI inflation rate and mortality rate, which are highly sensitive to market and geographic circumstances. The effect of these matters is that, as part of our risk assessment, we determined that the valuation of post-employment benefits and obligations has a high degree of estimation uncertainty, with a potential range of reasonable outcomes greater than our materiality for the financial statements as a whole and possibly many times that amount. The financial statements (note 14) disclose the sensitivity estimated by the Company. | With the assistance of our own pension actuarial specialists, our procedures included: - Benchmarking assumptions and our experience: We compared the key assumptions such as discount rate, RPI inflation rate and mortality rate against our independent models, using external data and information relating to the pension schemes' liability and demographic profile. - Assessing valuer's credentials: We evaluated the Company's external valuer's competence, objectivity, capability and scope of work. - Assessing principles: We assessed the Company's methodology against the requirements of IAS 19. - Assessing transparency: We considered the adequacy of the Company's disclosures in respect of the sensitivity of the defined pension obligation to these assumptions and of the post balance sheet event disclosed in note 43. - Control design and implementation: We assessed the design and implementation of controls in relation to the above valuation. We did not seek to place reliance on the Company's controls because the nature of the balance is such that we would expect to obtain audit evidence primarily through the detailed procedures described. Our results We found the valuation of the post-employment benefits and obligations to be acceptable (2021 result: acceptable). | # 3 Our application of materiality and an overview of the scope of our audit Materiality for the financial statements as a whole was set at £27m (2021: £27m), determined with reference to a benchmark of net earned premiums (of which it represents 0.9% (2021: 1.0%)). We continue to consider net earned premiums to be the most appropriate benchmark and a fair reflection of revenue from the Company's operations because it is a revenue metric per the accounting standard, is less distorted by seasonal fluctuations and takes into account the reinsurance programme in place. In line with our audit methodology, our procedures on individual account balances and disclosures were performed to a lower threshold, performance materiality, so as to reduce to an acceptable level the risk that individually immaterial misstatements in individual account balances add up to a material amount across the financial statements as a whole. Performance materiality for the Company was set at 75% (2021: 65%) of materiality for the financial statements as a whole, which equates to £20m (2021: £17m). We applied this percentage in our determination of performance materiality based on the improved control environment. We agreed to report to the Audit Committee any corrected or uncorrected identified misstatements exceeding £1.3m (2021: £1.0m), in addition to other identified misstatements that warranted reporting on qualitative grounds. --- DocuSign Envelope ID: A4BBD0A7-D694-4DB9-9A8D-1BF552C31035 The scope of this audit work was predominately substantive as we placed limited reliance upon the Company's internal control over financial reporting. The audit procedures over the completeness and accuracy of the investment balances were performed by EY's Intact Financial Corporation audit team in Canada. We communicated our audit risk assessment, participated in the scoping of planned audit procedures, agreed the information to be reported back and auditor oversight procedures were performed, including review of the audit documentation. All other audit procedures were performed by the audit team. In the prior year we instructed component audit teams to perform specified audit procedures over the intra-group reinsurance arrangements. In the current year this was performed by our audit team. ## 4 Going concern The directors have prepared the financial statements on the going concern basis as they do not intend to liquidate the Company or to cease its operations, and as they have concluded that the Company's financial position means that this is realistic. They have also concluded that there are no material uncertainties that could have cast significant doubt over its ability to continue as a going concern for at least a year from the date of approval of the financial statements ("the going concern period"). We used our knowledge of the Company, its industry, and the general economic environment to identify the inherent risks to its business model and analysed how those risks might affect the Company's financial resources or ability to continue operations over the going concern period. The risks that we considered most likely to adversely affect the Company's available financial resources over this period were: - adverse insurance reserves development and operational performance - a deterioration in claims experience, potentially caused by market wide catastrophe event(s) or economic factors such as inflation; - a deterioration in the valuation of the Company's investments arising from a significant change in the economic environment and any resulting impact on liquidity and capital strength; and - the impact of the post balance sheet event as disclosed in note 43. We considered whether these risks could plausibly affect the Company's regulatory capital or liquidity in the going concern period by assessing the Directors' sensitivities over the level of available financial resources indicated by the Company's financial forecasts taking account of severe but plausible adverse effects that could arise from these risks individually and collectively. Our procedures also included: - Evaluation of the consistency, arithmetical accuracy and reasonableness of the data and assumptions used in management's Going Concern assessment paper. - Consideration of whether the going concern disclosure in note 1 to the financial statements gives a full and accurate description of the directors' assessment of going concern, including the identified risks, dependencies, and related sensitivities. Our conclusions based on this work: - we consider that the directors' use of the going concern basis of accounting in the preparation of the financial statements is appropriate; - we have not identified, and concur with the directors' assessment that there is not, a material uncertainty related to events or conditions that, individually or collectively, may cast significant doubt on the Company's ability to continue as a going concern for the going concern period; and - we found the going concern disclosure in note 1 to be acceptable. However, as we cannot predict all future events or conditions and as subsequent events may result in outcomes that are inconsistent with judgements that were reasonable at the time they were made, the above conclusions are not a guarantee that the Company will continue in operation. ## 5 Fraud and breaches of laws and regulations – ability to detect Identifying and responding to risks of material misstatement due to fraud To identify risks of material misstatement due to fraud ("fraud risks") we assessed events or conditions that could indicate an incentive or pressure to commit fraud or provide an opportunity to commit fraud. Our risk assessment procedures included: - Enquiring of directors, the Audit Committee, internal audit and management and inspection of policy documentation as to the Company's high-level policies and procedures to prevent and detect fraud, including the internal audit function, and the Company's channel for "whistleblowing", as well as whether they have knowledge of any actual, suspected or alleged fraud. - Reading Board, Audit Committee and Risk Committee minutes. - Considering remuneration incentive schemes and performance targets for management and directors. - Using professionals with forensic knowledge to assist us in identifying fraud risks and designing appropriate procedures based on discussions of the circumstances of the Company. --- DocuSign Envelope ID: A4BBD0A7-D694-4DB9-9A8D-1BF552C31035 - Performing analytical procedures to identify any unusual or unexpected fluctuations and relationships in the account balances. We communicated identified fraud risks throughout the audit team and remained alert to any indications of fraud throughout the audit. As required by auditing standards, we perform procedures to address the risk of management override of controls, in particular the risk that management may be in a position to make inappropriate accounting entries, and the risk of bias in accounting estimates and judgements. In view of the overall quantum of pipeline premium as a proportion of total premiums, and the minimal judgement and estimation involved in the recognition of the remaining premium income, we rebutted the presumed risk of fraud in revenue recognition. We also identified fraud risks related to the valuation of claims outstanding and the valuation of deferred tax assets, in response to the level of estimation and judgement in these balances and possible pressures to meet profit targets. Further detail in respect of the valuation of claims outstanding and deferred tax asset is set out in the key audit matter disclosures in section 2 of this report. We performed procedures including: - Identifying journal entries to test based on risk criteria and comparing the identified entries to supporting documentation. These included those posted to seldom-used accounts and those posted by individuals who do not typically post journals. - Assessing significant accounting estimates for bias. Identifying and responding to risks of material misstatement due to non-compliance with laws and regulations We identified areas of laws and regulations that could reasonably be expected to have a material effect on the financial statements from our general commercial and sector experience, and through discussion with the directors and other management (as required by auditing standards), and from inspection of the Company's regulatory and legal correspondence and discussed with the directors and other management the policies and procedures regarding compliance with laws and regulations. As the Company is regulated, our assessment of risks involved gaining an understanding of the control environment including the entity's procedures for complying with regulatory requirements. We communicated identified laws and regulations throughout our team and remained alert to any indications of non-compliance throughout the audit. The potential effect of these laws and regulations on the financial statements varies considerably. Firstly, the Company is subject to laws and regulations that directly affect the financial statements including financial reporting legislation (including related companies legislation), distributable profits legislation, pension legislation and taxation legislation, and we assessed the extent of compliance with these laws and regulations as part of our procedures on the related financial statement items. Secondly, the Company is subject to many other laws and regulations where the consequences of non-compliance could have a material effect on amounts or disclosures in the financial statements, for instance through the imposition of fines or litigation or the loss of the Company's licence to operate. We identified the following areas as those most likely to have such an effect: regulatory capital and liquidity, conduct regulation and certain aspects of company legislation recognising the financial and regulated nature of the Company's activities. Auditing standards limit the required audit procedures to identify non-compliance with these laws and regulations to enquiry of the directors and other management and inspection of regulatory and legal correspondence, if any. Therefore, if a breach of operational regulations is not disclosed to us or evident from relevant correspondence, an audit will not detect that breach. Context of the ability of the audit to detect fraud or breaches of law or regulation Owing to the inherent limitations of an audit, there is an unavoidable risk that we may not have detected some material misstatements in the financial statements, even though we have properly planned and performed our audit in accordance with auditing standards. For example, the further removed non-compliance with laws and regulations is from the events and transactions reflected in the financial statements, the less likely the inherently limited procedures required by auditing standards would identify it. In addition, as with any audit, there remained a higher risk of non-detection of irregularities, as these may involve collusion, forgery, intentional omissions, misrepresentations, or the override of internal controls. Our procedures are designed to detect material misstatement. We are not responsible for preventing non-compliance and cannot be expected to detect non-compliance with all laws and regulations. # 6 We have nothing to report on the strategic report and the directors' report The directors are responsible for the strategic report and the directors' report. Our opinion on the financial statements does not cover those reports and we do not express an audit opinion thereon. --- DocuSign Envelope ID: A4BBD0A7-D694-4DB9-9A8D-1BF552C31035 Our responsibility is to read the strategic report and the directors' report and, in doing so, consider whether, based on our financial statements audit work, the information therein is materially misstated or inconsistent with the financial statements or our audit knowledge. Based solely on that work: - we have not identified material misstatements in those reports; - in our opinion the information given in the strategic report and the directors' report for the financial year is consistent with the financial statements; and - in our opinion those reports have been prepared in accordance with the Companies Act 2006. ## 7 We have nothing to report on the other matters on which we are required to report by exception Under the Companies Act 2006, we are required to report to you if, in our opinion: - adequate accounting records have not been kept, or returns adequate for our audit have not been received from branches not visited by us; or - the financial statements are not in agreement with the accounting records and returns; or - certain disclosures of directors' remuneration specified by law are not made; or - we have not received all the information and explanations we require for our audit. We have nothing to report in these respects. ## 8 Respective responsibilities ### Directors' responsibilities As explained more fully in their statement set out on page 13, the directors are responsible for: the preparation of the financial statements including being satisfied that they give a true and fair view; such internal control as they determine is necessary to enable the preparation of financial statements that are free from material misstatement, whether due to fraud or error; assessing the Company's ability to continue as a going concern, disclosing, as applicable, matters related to going concern; and using the going concern basis of accounting unless they either intend to liquidate the Company or to cease operations, or have no realistic alternative but to do so. ### Auditor's responsibilities Our objectives are to obtain reasonable assurance about whether the financial statements as a whole are free from material misstatement, whether due to fraud or error, and to issue our opinion in an auditor's report. Reasonable assurance is a high level of assurance, but does not guarantee that an audit conducted in accordance with ISAs (UK) will always detect a material misstatement when it exists. Misstatements can arise from fraud or error and are considered material if, individually or in aggregate, they could reasonably be expected to influence the economic decisions of users taken on the basis of the financial statements. A fuller description of our responsibilities is provided on the FRC's website at www.frc.org.uk/auditorsresponsibilities. ## 9 The purpose of our audit work and to whom we owe our responsibilities This report is made solely to the Company's members, as a body, in accordance with Chapter 3 of Part 16 of the Companies Act 2006. Our audit work has been undertaken so that we might state to the Company's members those matters we are required to state to them in an auditor's report and for no other purpose. To the fullest extent permitted by law, we do not accept or assume responsibility to anyone other than the Company and the Company's members, as a body, for our audit work, for this report, or for the opinions we have formed. Thomas Tyler (Senior Statutory Auditor) for and on behalf of KPMG LLP, Statutory Auditor Chartered Accountants 15 Canada Square London E14 5GL 02 March 2023 --- DocuSign Envelope ID: A4BBD0A7-D694-4DB9-9A8D-1BF552C31035 # Royal & Sun Alliance Insurance Limited | | Profit and Loss Account | | | | --- | --- | --- | --- | | | For the year ended 31 December 2022 | | | | Technical account - General business | Note | 2022 £m | 2021 £m | | Gross written premiums | 6 | 3,763 | 3,847 | | Outward reinsurance premiums | | (913) | (866) | | Premiums written, net of reinsurance | | 2,850 | 2,981 | | Change in the gross provision for unearned premiums | 33 | (46) | (32) | | Change in provision for unearned premiums, reinsurers' share | 24 | 74 | (42) | | Earned premiums, net of reinsurance | | 2,878 | 2,907 | | Other technical income, net of reinsurance | 13 | 64 | 63 | | Claims paid | | | | | Gross amount | | (2,267) | (2,231) | | Reinsurer's share | | 548 | 492 | | | | (1,719) | (1,739) | | Change in the provision for claims | | | | | Gross amount | 34 | (286) | (444) | | Reinsurer's share | 25 | 99 | 159 | | | | (187) | (285) | | Claims incurred, net of reinsurance | | (1,906) | (2,024) | | Acquisition costs | | (818) | (852) | | Change in deferred acquisition costs | 30 | 7 | 6 | | Administrative expenses | | (295) | (326) | | Reinsurance commissions and profit participation | | 23 | 16 | | Net operating expenses | | (1,083) | (1,156) | | Balance on the technical account for general business | 6 | (47) | (210) | --- DocuSign Envelope ID: A4BBD0A7-D694-4DB9-9A8D-1BF552C31035 Royal & Sun Alliance Insurance Limited Profit and Loss Account (continued) For the year ended 31 December 2022 | Non-technical account | Note | 2022 | 2021 | | --- | --- | --- | --- | | | | £m | £m | | Balance on the technical account for general business | | (47) | (210) | | Dividends from group undertakings | 8 | 4,391 | 6,914 | | Investment income | 8 | 132 | 161 | | Realised (losses)/gains on investments | 8 | (6) | 6 | | Unrealised gains on investments | 8 | 6 | 62 | | Investment expenses, charges and interest | 8 | (22) | (43) | | Impairment of group undertakings | 8 | (4,258) | (4,199) | | Foreign exchange (losses)/gains | | (3) | 10 | | Operating profit | | 193 | 2,701 | | Profit on ordinary activities before tax | | 193 | 2,701 | | Income tax credit | 16 | 5 | 10 | | Profit for the financial year | | 198 | 2,711 | The attached notes on pages 27 to 80 form an integral part of these financial statements. --- DocuSign Envelope ID: A4BBD0A7-D694-4DB9-9A8D-1BF552C31035 # Royal & Sun Alliance Insurance Limited Statement of Comprehensive Income For the year ended 31 December 2022 | | Note | 2022 £m | 2021 £m | | --- | --- | --- | --- | | Profit for the financial year | | 198 | 2,711 | | Items that may be reclassified to profit or loss when specific conditions are met: | | | | | Exchange gains net of tax on translation of foreign operations | 32 | 2 | 1 | | Fair value losses on other financial instruments classified as available for sale financial assets net of tax | 8, 20, 32 | (562) | (2,112) | | | | (560) | (2,111) | | Items that will not be reclassified to profit or loss: | | | | | Pension – remeasurement of net defined benefit asset/liability net of tax | 14, 32 | (358) | (69) | | Movement in property revaluation surplus net of tax | 19 | (3) | - | | | | (361) | (69) | | Total other comprehensive expense for the year | 32 | (921) | (2,180) | | Total comprehensive (expense)/income for the year | | (723) | 531 | The attached notes on pages 27 to 80 form an integral part of these financial statements. --- DocuSign Envelope ID: A4BBD0A7-D694-4DB9-9A8D-1BF552C31035 # Royal & Sun Alliance Insurance Limited Statement of Changes in Equity For the year ended 31 December 2022 | | Called up share capital £m | Share premium account £m | Revaluation reserves £m | Foreign currency translation reserve £m | Profit and loss account £m | Shareholders' funds equity £m | | --- | --- | --- | --- | --- | --- | --- | | Balance at 1 January 2021 | 1,215 | 2,954 | 2,637 | 37 | 2,066 | 8,909 | | Profit for the year | - | - | - | - | 2,711 | 2,711 | | Other comprehensive (expense)/income (note 32) | - | - | (2,112) | 1 | (69) | (2,180) | | Total comprehensive (expense)/income for the year | - | - | (2,112) | 1 | 2,642 | 531 | | Share issue | 1,005 | - | - | - | - | 1,005 | | Capital reduction¹ | (2,130) | (1,100) | | - | 3,230 | - | | Dividends paid (note 17) | - | - | - | - | (6,976) | (6,976) | | Balance at 1 January 2022 | 90 | 1,854 | 525 | 38 | 962 | 3,469 | | Profit for the year | - | - | - | - | 198 | 198 | | Other comprehensive (expense)/income (note 32) | - | - | (565) | 2 | (358) | (921) | | Total comprehensive (expense)/income for the year | - | - | (565) | 2 | (160) | (723) | | Dividends paid (note 17) | - | - | - | - | (137) | (137) | | Balance at 31 December 2022 | 90 | 1,854 | (40) | 40 | 665 | 2,609 | ¹A reduction of the Company's share capital of £2,130m and share premium of £1,100m was affected in June 2021 by special resolution supported by a solvency statement which resulted in the creation of distributable reserves of £3,230m The attached notes on pages 27 to 80 form an integral part of these financial statements. --- DocuSign Envelope ID: A4BBD0A7-D694-4DB9-9A8D-1BF552C31035 Royal & Sun Alliance Insurance Limited Registered number: 00093792 Balance Sheet As at 31 December 2022 | | Note | 2022 £m | 2021 £m | | --- | --- | --- | --- | | Assets | | | | | Intangible assets | 18 | 289 | 250 | | Investments | | | | | Land and buildings | 19 | 342 | 400 | | Investments in group undertakings and participating interests | | | | | Shares in group undertakings | 20 | 1,295 | 5,518 | | Other financial investments | | | | | Shares and other variable yield securities and units in unit trusts | | 265 | 575 | | Debt securities and other fixed income securities | | 4,189 | 4,058 | | Other loans | | 433 | 359 | | | 21 | 4,887 | 4,992 | | Deposits with ceding undertakings | | 38 | 48 | | Total investments | | 6,562 | 10,958 | | Reinsurers' share of technical provisions | | | | | Provision for unearned premiums | 24 | 694 | 616 | | Claims outstanding | 25 | 1,530 | 1,412 | | | | 2,224 | 2,028 | | Debtors | | | | | Debtors arising out of direct insurance operations – policyholders | | 321 | 341 | | Debtors arising out of direct insurance operations – intermediaries | | 1,227 | 1,151 | | Debtors arising out of reinsurance operations | | 197 | 207 | | Amounts owed by group undertakings | | 318 | 480 | | Other debtors (including current taxation) | 37 | 321 | 591 | | | | 2,384 | 2,770 | | Other assets | | | | | Tangible assets | 29 | 42 | 33 | | Deferred taxation | 28 | 260 | 146 | | Cash at bank and in hand | | 142 | 66 | | | | 444 | 245 | | Prepayments and accrued income | | | | | Accrued interest and rent | | 43 | 39 | | Deferred acquisition costs | 30 | 426 | 410 | | Other prepayments and accrued income | | 38 | 39 | | | | 507 | 488 | | Total assets | | 12,410 | 16,739 | 25 --- DocuSign Envelope ID: A4BBD0A7-D694-4DB9-9A8D-1BF552C31035 # Royal & Sun Alliance Insurance Limited | | | Balance Sheet As at 31 December 2022 | | | --- | --- | --- | --- | | Shareholders' funds and Liabilities | | 2022 | 2021 | | | Note | £m | £m | | Capital and reserves | | | | | Called up share capital | 31 | 90 | 90 | | Share premium account | | 1,854 | 1,854 | | Revaluation reserve | | (40) | 525 | | Foreign currency translation reserve | | 40 | 38 | | Profit and loss account | | 665 | 962 | | Shareholders' funds | | 2,609 | 3,469 | | Liabilities | | | | | Provision for unearned premiums | 33 | 2,232 | 2,151 | | Claims outstanding | 34 | 5,245 | 4,850 | | | | 7,477 | 7,001 | | Provisions for other risks | 35 | 29 | 41 | | Creditors | | | | | Creditors arising out of direct insurance operations | | 37 | 37 | | Creditors arising out of reinsurance operations | | 798 | 702 | | Amounts owed to credit institutions | 36 | 20 | 15 | | Amounts owed to Group undertakings | | 1,009 | 5,058 | | Other creditors (including taxation and social security) | 38 | 218 | 191 | | | | 2,082 | 6,003 | | Accruals and deferred income | | 213 | 225 | | Total shareholders' funds and liabilities | | 12,410 | 16,739 | The attached notes on pages 27 to 80 form an integral part of these financial statements. The financial statements were approved on 2 March 2023 by the Board of Directors and are signed on its behalf by: Ken Anderson Chief Financial Officer --- DocuSign Envelope ID: A4BBD0A7-D694-4DB9-9A8D-1BF552C31035 # Basis of preparation and significant accounting policies ## 1) Basis of preparation The Company is a wholly owned subsidiary of Royal Insurance Holdings Limited and is incorporated and domiciled in the UK. The Company's ultimate parent company and controlling party is IFC. RSA Insurance Group Limited (RSAIG) is the immediate parent company and is registered in England and Wales. RSAIG has prepared its consolidated financial statements in accordance with UK-adopted International Accounting Standards and the requirements of Companies Act 2006. These financial statements have been prepared in accordance with Financial Reporting Standard 101 (FRS 101) Reduced Disclosure Framework and the requirements of Companies Act 2006. The financial statements are prepared on a historical cost basis. Where other bases are applied, these are identified in the relevant accounting policy. The financial statements have been prepared on a going concern basis. In adopting the going concern basis, the Board has reviewed the Company's ongoing commitments for the next twelve months and beyond. The Board's assessment included review of the Company's strategic plans and latest forecasts, capital position and liquidity including on demand capital funding arrangements with IFC. Current economic uncertainty has been considered, including the war in Ukraine, rising inflation, post Covid-19 impacts and transition to a post Brexit environment. These assessments include stress and scenario testing and consider significant areas of risk and uncertainty for the Company in the current challenging economic environment. Scenarios considered include a market risk shock involving several component stresses, plus deterioration of the underwriting result and a subsequent catastrophe loss. In making their assessment, the Board have reviewed the latest position on business interruption losses and availability of reinsurance to recover incurred claims and there has been no significant change in the estimated ultimate position based on these updates. The Board have considered the impact of events after the balance sheet date with none identified which could impact the Company's ability to continue as a going concern. Based on this review no material uncertainties have been identified in relation to the ability of the Company to remain a going concern for at least the next twelve months, from both the date of the balance sheet and the approval of the financial statements. The Company's financial statements are presented in pounds sterling (£), and rounded to the nearest million (£m) except where otherwise indicated. In preparing these financial statements, the Company applies the recognition, measurement and disclosure requirements of international accounting standards in conformity with the requirements of the Companies Act 2006 ("Adopted IFRSs"), but makes amendments where necessary in order to comply with Companies Act 2006 and has set out below where advantage of the FRS 101 disclosure exemptions has been taken. The exemptions used by the Company are as follows: - Cash flow statement and related notes - The effects of new but not yet effective IFRSs (IAS 8.30-31) - Certain disclosures required by IFRS 16 Leases - Disclosures in respect of the compensation of Key Management Personnel - Disclosures in respect of transactions between two or more wholly owned subsidiaries of the group - Disclosures required by IFRS 5 Non-current Assets Held for Sale and Discontinued Operations in respect of the cash flows of discontinued operations As the consolidated financial statements of RSAIG include the equivalent disclosures, the Company has also taken the exemptions under FRS 101 available in respect of the following disclosures: - Certain disclosures required by IAS 36 Impairment of Assets in respect of the impairment of goodwill and indefinite life intangible assets - Certain disclosures required by IFRS 3 Business Combinations in respect of business combinations undertaken by the Company in the current and prior periods including the comparative period reconciliation for goodwill - Certain disclosures required by IFRS 13 Fair Value Measurement for non-financial instruments The Company has taken advantage of the exemption under Section 400 of the Companies Act 2006 from the requirement to prepare consolidated financial statements as it is a wholly-owned subsidiary of RSA Insurance Group Limited, which prepares group financial statements. The Annual Report and Accounts containing these consolidated financial statements can be found at www.rsainsurance.co.uk. ## 2) Adoption of revised accounting standards There are a small number of narrow scope amendments to standards that are applicable to the Company for the first time in 2022, none of which have had a significant impact on the financial statements. The following narrow scope amendments have been adopted by the Company: ### Extension of the temporary exemption from applying IFRS 9 IFRS 9 has been issued to replace IAS 39 'Financial Instruments: Recognition and Measurement' (IAS 39). IFRS 4 'Insurance Contracts' (IFRS 4) permits an insurance company that meets the criteria a temporary exemption from applying IFRS 9 and continue to apply IAS 39. The exemption has been extended by two years to annual periods beginning before 1 January 2023. The Company meets the criteria and has elected to defer the application of IFRS 9 to the reporting period beginning on 1 January 2023, alongside IFRS 17. --- DocuSign Envelope ID: A4BBD0A7-D694-4DB9-9A8D-1BF552C31035 # Interest Rate Benchmark Reform (IBOR) —Phase 2 In August 2020, the IASB issued amendments to IAS 39, IFRS 7 ‘Financial instruments: Disclosures’ (IFRS 7), IFRS 4 and IFRS 16 ‘Leases’ (IFRS 16). The amendments complement those issued in 2019 and focus on the effects on financial statements when an entity replaces an old interest rate benchmark with an alternative risk-free rate (ARRs) as part of the IBOR reform. The amendments clarify that, if the contractual cash flows of a financial instrument are modified as a result of the reform, an entity updates the effective interest rate to reflect the change instead of derecognising it or adjusting its carrying amount. In addition, hedge accounting relationships shall not be discontinued if changes are required by the reform, as long as the hedge meets other hedge accounting criteria. The Company’s exposure to IBORs (Interbank Offered Rates) that have yet to transition from LIBOR and USD IBOR to Sterling Overnight Index Average (SONIA) and Secured Overnight Financing Rate (SOFR) is £34m as at 31 December 2022 and relates to illiquid investments. Given the transition to ARRs has no significant impact on the Company, there has been no significant change in the risk management strategies as result of the IBOR reform. The amendment did not impact the financial statements. ## Other standards Other amendments to UK-adopted IAS became mandatory as of 1 January 2022. The Company has evaluated these changes, none of which have had a significant impact on the financial statements. From 1 January 2023, the financial statements of the Company will be prepared in accordance with UK-adopted International Accounting Standards (IAS) and the requirements of the Companies Act 2006. ## 3) Selection of significant accounting policies The significant accounting policies used in the preparation of these financial statements, as set out below, have been applied consistently to all periods presented. ### (i) Translation of foreign currencies Items included in the financial statements of each of the Company’s branches are measured using the currency of the primary economic environment in which the branch operates (the functional currency). The results and balance sheet of those Company branches whose functional currency is not Sterling are translated into Sterling as follows: - Assets and liabilities for each balance sheet presented are translated at closing exchange rates at the end of the period - Income and expenses for each profit and loss account are translated at average exchange rates during each period - All resulting exchange differences are recognised in other comprehensive income within the foreign currency translation reserve When a branch or the business of the branch is sold, the cumulative exchange differences relating to that branch are recognised in the profit and loss account as part of the gain or loss on sale. Foreign currency transactions are translated into the functional currency of the Company’s business operations using the exchange rates prevailing at the time of the transaction. Foreign exchange gains and losses resulting from the settlement of such transactions and from the translation at year end exchange rates of monetary assets and liabilities denominated in foreign currencies are recognised in the profit and loss account. ### (ii) Intangible assets #### Internally developed and externally acquired software The Company capitalises internal and external software development costs where the software is separately identifiable; the Company has control over the software; and where it can be demonstrated that they provide future economic benefits for the Company through facilitating revenue or improved processes. In respect of internally developed software, the costs capitalised include administrative and other general overhead expenditure when they can be directly attributed to the software development and preparing it for use. Amortisation is calculated on a straight line basis and commences when the asset is available for use in the manner intended by management. The useful economic life of externally acquired and internally generated software is normally estimated to be between three and ten years, and is reviewed on an annual basis. Where no future economic benefits are expected from its use or disposal, the software asset is derecognised. Any gain or loss arising from the derecognition of the asset is determined as the difference between the net disposal proceeds, if any, and the carrying amount of the asset and is recognised in profit or loss when the asset is derecognised. #### Other intangible assets Other intangible assets are valued at cost less accumulated amortisation, and less any accumulated impairment losses. Other intangible assets mainly comprise other acquired identifiable non-monetary assets without physical form. The useful economic lives are generally estimated to be between one and five years and are amortised on a straight line basis across this period. --- DocuSign Envelope ID: A4BBD0A7-D694-4DB9-9A8D-1BF552C31035 ## Impairment of intangible assets Intangible assets not yet available to use are subject to an impairment test on an annual basis or more frequently if there has been an indication of impairment. Other intangible assets, and internally developed and externally acquired software, are reviewed for indications of impairment on an annual basis and are subject to an impairment test only if there is an indication of impairment. Intangible assets are allocated to cash generating units (CGUs) for the purpose of impairment testing. When testing for impairment, the recoverable amount of a CGU is determined based on value in use calculations. Further information on how value in use is calculated can be found in note 18. Where the carrying amount is more than the recoverable amount, impairment of intangible assets is recognised in the profit and loss account. Impairment losses previously recognised on intangible assets may be reversed in subsequent periods provided that the revised carrying amount does not exceed the value that would have been determined (net of amortisation) had no impairment loss been recognised. ## (iii) Tangible assets Tangible assets comprise fixtures, fittings and other equipment (including computer hardware and motor vehicles) and are initially recognised at cost. Tangible assets are stated at cost less accumulated depreciation and accumulated impairment losses. Cost includes expenditure that is directly attributable to the acquisition of the items. Subsequent costs are included in the asset only when it is probable that the expenditure will result directly in future economic benefits to the Company, and the cost can be measured reliably. Tangible assets are depreciated to their residual values on a straight line basis over the useful economic life of the asset; depreciation is charged to the profit and loss account. The estimated useful lives of property and equipment are as follows: | Fixtures and fittings | 10 years | | --- | --- | | Equipment | 3 – 5 years | The useful economic life and residual value are reviewed on an annual basis. Where the carrying value of an asset is deemed to be greater than its recoverable amount, the asset is impaired. Impairment losses on non-revalued assets are recognised in the profit and loss account. Impairment losses on revalued assets are recognised in other comprehensive income to the extent that the impairment loss does not exceed the amount in the revaluation surplus for that same asset. Impairment losses may be subsequently reversed if there is a change in the estimates used to determine the asset's recoverable amount since the last impairment loss was recognised. If this is the case, the increased carrying amount of an asset shall not exceed the carrying amount that would have been determined had no impairment loss been recognised in prior years. Reversals of impairment losses are recognised in the profit and loss account except for reversals of impairment losses on revalued assets which are recognised in other comprehensive income similarly to the initially recorded impairment loss. ## (iv) Leases ### The Company as lessee A lease liability and right-of-use asset is recognised for all lease obligations the Company has as a lessee, except for the following recognition exemptions that the Company has elected to use: lease contracts that at the commencement date have a lease term of 12 months or less and that do not contain a purchase option; and lease contracts for which the underlying asset is of low value. The lease liability is recognised at the inception of a lease as the present value of the fixed and certain variable lease payments, plus any guaranteed residual values, any termination penalties if the lease term assumes termination options will be exercised, and the purchase option value if it is reasonably certain that it will be exercised. Interest is accrued on the lease liability based on the discount rate at commencement of the lease, and is accounted for in investment expenses, charges and interest. The discount rate is the rate implicit in the lease, except where this rate cannot be readily determined, in which case the Company's incremental borrowing rate is used. Subsequent payments are deducted from the lease liability. The right-of-use asset is initially measured as the value of the lease liability, adjusted for any initial direct costs incurred to obtain the lease, restoration provisions and any lease payments made before the commencement of the lease. The right-of-use asset is subsequently measured at cost less accumulated depreciation and impairment losses. It is depreciated over the shorter of the useful life or the period of the contract on a straight line basis. The Company applies IAS 36 to determine whether a right-of-use asset is impaired and accounts for any identified impairment loss as described in the 'Tangible assets' policy. The lease liability is subsequently remeasured when there are changes in lease term, in the expectation regarding whether a purchase option would be exercised or not, in any expected residual value guarantee or changes in variable lease payments that are dependent upon an index or rate (from the date that these take effect). Remeasurements in the lease liability are reflected in the measurement of the corresponding right-of-use asset with reductions being restricted to the carrying value with any remaining remeasurement being recognised in the profit and loss account. ### The Company as lessor Where the Company act as a lessor the lease will be classified as a finance lease if it transfers substantially all the risk and rewards incidental to ownership of the underlying asset, or otherwise classified as an operating lease (see 'Investment property' accounting policy). When the Company is an intermediate lessor, it accounts for the head lease and the sub-lease as two separate contracts. The sub-lease is classified as a finance or operating lease by reference to the right-of-use asset arising from the head lease. --- DocuSign Envelope ID: A4BBD0A7-D694-4DB9-9A8D-1BF552C31035 Amounts due from lessees under finance leases are recognised as receivables within other debtors at the amount of the Company's net investment in the lease. Finance lease income is allocated to accounting periods so as to reflect a constant periodic rate of return on the Company's net investment outstanding in respect of the leases. Finance lease income is calculated with reference to the gross carrying amount of the lease receivables. ## (v) Land and buildings and rental income Land and buildings comprise investment property and Company occupied property. ### Investment property Investment property is stated at fair value. The fair value methodology is set out in more detail in note 19. Unrealised gains and unrealised losses are recognised in the profit and loss account. Rental income from operating leases on investment property is recognised in the profit and loss account on a straight line basis over the length of the lease. ### Company property Company occupied property is stated at fair value, less subsequent depreciation for buildings. The fair value methodology is set out in note 19. Increases in the carrying amount arising on revaluation are recognised in other comprehensive income and credited to a separate revaluation reserve within equity. Decreases in the carrying amount arising on revaluation are recognised in other comprehensive income and reduce the revaluation reserve, to the extent they offset previous revaluation increases; further decreases are charged to the profit and loss account. Buildings are depreciated to their residual value on a straight line basis over the useful economic life of the building; depreciation is charged to the profit and loss account except where a building has been revalued upwards, in which case the amount of the depreciation relating to the difference between the building's revalued amount and the original cost is transferred from revaluation reserve to retained earnings. Land is not depreciated. The estimated useful lives of Company occupied property is normally 30 years. ## (vi) Financial Instruments ### Classification and measurement of financial assets and financial liabilities The Company initially recognises financial instruments at their fair value on the date at which they are purchased. At initial measurement, the Company classifies its financial assets and financial liabilities in one of the following categories: - Designated at fair value through profit and loss (FVTPL) - Available for sale (AFS) - Cash and cash equivalents - Loans and receivables - Financial liabilities - Derivatives not designated as hedging instruments Transaction costs that are directly attributable to the acquisition of financial assets and financial liabilities that are not FVTPL are added to their fair value in their initial measurement. 30 --- DocuSign Envelope ID: A4BBD0A7-D694-4DB9-9A8D-1BF552C31035 | Category | Financial instrument | Description | Subsequent measurement | Recognition of change in fair value | | --- | --- | --- | --- | --- | | Designated FVTPL on initial recognition | Debt securities | Where the investment return is managed on the basis of the total return on investment (including unrealised investment gains) | Fair value using prices at the end of the period | Profit & loss account – unrealised gains/(losses); realised gains/(losses) when derecognised | | AFS | Debt securities, equity securities | Where the investment return on equity or debt securities is managed on the basis of the periodic cash flows arising from the investment | Fair value using prices at the end of the period | Other comprehensive income - unrealised gains/(losses) Profit & loss account – realised gains/(losses) when derecognised; Investment expenses, charges and interest when impaired | | | Shares in group undertakings | Investments which provide the Company with control of the investee | Fair value applying the income approach using discounted cash flows | Other comprehensive income - unrealised gains/(losses) Profit & loss account – realised gains/(losses) when derecognised; Investment expenses, charges and interest when impaired | | Loans and receivables | Loans, reinsurance deposits, other deposits and financial assets arising from non-investment activities, and loans made for investment purposes | Financial assets with fixed or determinable payments not quoted in an active market | Amortised cost using the effective interest method | Profit & loss account – realised gains/(losses) when derecognised; Investment expenses, charges and interest when impaired | | Financial liabilities | Other borrowings | Financial liabilities with fixed or determinable payments | Amortised cost using the effective interest method | Profit & loss account – realised gains/(losses) when derecognised | | Derivative assets/(liabilities) not designated as hedging instruments | Derivative assets/(liabilities) not designated as hedging instruments | Economic hedges that do not qualify for hedge accounting | Carried at fair value Derivatives are carried as assets when fair value is positive and as liabilities when fair value is negative | Profit & loss account – unrealised gains/(losses); realised gains/(losses) when derecognised | ## Investment income Dividends on equity investments are recognised as investment income in the profit and loss account on the date at which the investment is priced 'ex dividend'. Interest income is recognised in the profit and loss account using the effective interest rate method. ## Impairment of financial instruments The Company determines, at each reporting date, whether there is evidence that the value of a financial asset or a group of financial assets, other than those measured as FVTPL or derivatives not designated as hedging instruments are impaired. A financial asset is impaired if there is objective evidence that indicates that an event has occurred after the initial recognition of the asset that may have resulted in a loss of value as a result of having a negative effect on the estimated future cash flows generated by that asset which can be estimated reliably. Financial assets are impaired according to either a debt, equity, or loans and receivables impairment model. The appropriate impairment model is determined based on the characteristics of each instrument. An impairment loss in respect of debt instruments is calculated as the difference between its carrying amount and the present value of the estimated future cash flows discounted at the original effective interest rate of the instrument and is recognised in the profit and loss account. Interest on the impaired asset continues to be recognised using the effective interest rate method. --- DocuSign Envelope ID: A4BBD0A7-D694-4DB9-9A8D-1BF552C31035 An equity security is considered impaired if there is objective evidence that the cost may not be recovered. In addition to qualitative impairment criteria, a significant or prolonged decline in fair value below cost is considered as indication of potential impairment. Impairment is considered to have occurred when the decline in fair value relative to cost has been more than 25% for a continuous nine-month period. Unless there is evidence to the contrary, an equity security is also considered impaired when the decline in fair value relative to cost is more than 50% at the end of the reporting period, or when it has been in an unrealised loss position for a continuous fifteen-month period. Where there is objective evidence that impairment exists, the cumulative unrealised loss previously recognised in other comprehensive income is reclassified to the profit and loss account. If the fair value of a previously impaired debt security increases and the increase can be objectively related to an event occurring after the impairment loss was recognised, the impairment loss is reversed and the reversal recognised in the profit and loss account. Impairment losses on equity investments are not reversed. ## IFRS 9 'Financial Instruments' IFRS 9 has been issued to replace IAS 39 'Financial Instruments: Recognition and Measurement' (IAS 39). IFRS 4 permits an insurance company that meets the criteria a temporary exemption from applying IFRS 9 and to continue to apply IAS 39 for annual periods beginning before 1 January 2023. The exemption has been extended by two years to annual periods beginning before 1 January 2023. The Company meets the criteria and has elected to defer the application of IFRS 9 to the reporting period beginning on 1 January 2023, alongside IFRS 17. Information required by IFRS 4 when applying the temporary exemption can be found in note 5 and note 21. ## (vii) Insurance Contracts ### Product classification Insurance contracts are those contracts that transfer significant insurance risk at the inception of the contract. Insurance risk is transferred when the Company agrees to compensate a policyholder if a specified uncertain future event (other than a change in financial variable) adversely affects the policyholder. Any contracts not meeting the definition of an insurance contract under IFRS are classified as investment contracts or derivative contracts, as appropriate. ### Premium income Premium written is recognised in the period in which the Company is legally bound through a contract to provide insurance cover. It represents the full amount of premiums receivable under the contract, including estimates where the amounts are not known at the date they are written. These are deferred as a provision for unearned premiums until recognised as revenue principally computed on a monthly or daily pro-rata basis. Premiums are shown before deduction of commission and exclude any sales-based taxes or duties. ### Insurance debtors Premium debtors due from policyholders or intermediaries at the end of the reporting period are presented within debtors arising out of direct insurance operations (policyholders) and debtors arising out of direct insurance operations (intermediaries) in the balance sheet. The amount recoverable is reduced when there is an event arising after the initial recognition that provides objective evidence that the Company may not receive all amounts due under the insurance contract. Impairment losses for non-recoverable amounts are charged to administrative expenses in the profit and loss account and directly reduce the carrying amount of insurance debtors in the balance sheet. ### Technical provisions The provision for unearned premium represents the portion of the premiums written relating to the periods of insurance coverage subsequent to the end of the reporting period after the deduction of related acquisition costs. Claims incurred represent the cost of agreeing and settling insurance claims on insurance contracts underwritten by the Company, net of reinsurance recoveries. Gross claims outstanding are recognised at the estimated ultimate cost, net of expected salvage and subrogation recoveries when a claim is incurred. Gross claims outstanding and related reinsurance recoveries are discounted where there is a long period from incident to claims settlement or when nominal interest rates are high and where there exists a suitable claims payment pattern from which to calculate the discount. In defining those claims with a long period from incident to claims settlement, an average period settlement of six years or more has been used as a guide. The discount rate used is based upon an investment return expected to be earned by financial assets which are appropriate in value and duration to match the claims outstanding being discounted during the period expected before the final settlement of such claims. Differences between the estimated cost and subsequent settlement of claims or re-estimated costs are recognised in the profit and loss account in the year in which they are settled or in which the claims outstanding are re-estimated. Acquisition costs comprise the direct and indirect costs of obtaining and processing new insurance business. Levies payable are treated as costs of underwriting business. These costs are recognised as deferred acquisition costs (DAC). DAC is amortised on the same basis as the related unearned premiums are earned. At the end of each reporting period liability tests are performed to ensure the adequacy of the technical provisions by considering the cash flows associated with the provision for unearned premium net of related DAC. In performing these tests, best estimates of future contractual cash flows, including loss adjustment and administrative expenses as well as investment income on financial assets backing such liabilities are used. Any deficiency is charged to the technical account immediately by establishing a provision for liability adequacy known as the unexpired risk provision. The requirement for an unexpired risk provision is assessed in aggregate for business classes which, in the opinion of the directors, are managed together. 32 --- DocuSign Envelope ID: A4BBD0A7-D694-4DB9-9A8D-1BF552C31035 ## Reinsurance ceded Outward reinsurance premiums payable are recognised in the period in which the reinsurance contract is entered into and include estimates where the amounts are not finalised at the end of the reporting period. The ceded written premiums are recognised in the profit and loss account over the period of the reinsurance contract, based on the expected earning pattern in relation to the underlying insurance contract(s). Gains or losses on buying retroactive reinsurance are recognised in the profit or loss account immediately at the date of purchase and are not amortised. Premiums ceded and claims reimbursed are presented on a gross basis in the profit and loss account and balance sheet as appropriate. Reinsurers' share of technical provisions includes the reinsurers' share of claims outstanding and the provision for unearned premiums. The Company reports third party reinsurance balances in the balance sheet on a gross basis to present the exposure to credit risk related to third party reinsurance. The amount recoverable is reduced when there is an event arising after the initial recognition that provides objective evidence that the Company may not receive all amounts due under the reinsurance contract. Annuities purchased by the Company to make payments under structured settlement arrangements are accounted for as reinsurance ceded and a corresponding reinsurers' share of technical provisions if the Company remains liable for the settlement in the event of default by the annuity provider. Any gain or loss arising on the purchase of an annuity is recognised in the profit and loss account at the date of purchase. ## (viii) Other technical income Other technical income is comprised principally of: - Administration fee income is received from policyholders in order for certain changes to be made to their policy or policyholder details within their period of cover and is recognised in full on the date that the change is made. - Premium policy instalment fee income is received from policyholders as a finance charge on premiums paid in instalments and is recognised over the period that the instalments are made on a straight line basis. - Introductory commission income is received from third parties for introducing business to them and is recognised when the introduction is made. - Service income refers to income received for operating a settlement function primarily for the Company and its Global Network Partners which is recognised over the period in which service is provided whilst the relevant business is earned. ## (ix) Current and deferred tax Current and deferred tax are recognised in the profit and loss account, except to the extent that the tax arises from a transaction or event recognised either in other comprehensive income (OCI) or directly in equity. Any exceptions permitted under IAS 12 'Income Taxes' are disclosed in the notes. To the extent that deferred tax assets are recognised or derecognised in the period and it is not possible to attribute this directly to either the profit and loss account or OCI, as is the case typically for brought forward tax losses, then these amounts are attributed between the profit and loss account and OCI transactions using a reasonable pro rata split based on historical movements. Current taxation is based on profits and income for the year as determined in accordance with the relevant tax legislation, together with adjustments for prior years. Deferred tax is provided in full using the liability method on temporary differences arising between the tax bases of assets and liabilities and the carrying amounts in the financial statements. However, if the deferred tax arises from initial recognition of an asset or liability in a transaction other than a business combination that at the time of the transaction affects neither accounting, nor taxable profit or loss, it is not accounted for. Deferred tax is determined using tax rates (and laws) that have been enacted or substantively enacted by the end of the reporting period and are expected to apply when the related deferred tax asset is realised or the related deferred tax liability is settled. Deferred tax in respect of the unremitted earnings of overseas subsidiaries and principal associated undertakings is recognised as an expense in the year in which the profits arise, except where the remittance of earnings can be controlled and it is probable that remittance will not take place in the foreseeable future, in which case the tax charge is recognised on the dividends received. Deferred tax assets are recognised to the extent that it is probable that future taxable profits will be available against which unused tax losses and temporary differences can be utilised. IFRIC 23 is applied to the recognition and measurement of both current and deferred tax assets and liabilities. In cases where the applicable tax regulation is subject to interpretation, the positions taken in tax returns are recognised in full in the determination of the tax charge in the financial statements, if the Company considers that it is probable that the taxation authority will accept those positions. Otherwise, provisions are established based on management's estimate and judgement of the likely amount of the liability/recovery by providing for the single best estimate of the most likely outcome or the weighted average expected value where there are multiple outcomes. ## (x) Employee benefits ### Post employment benefits and obligations The Company operates both defined contribution and defined benefit schemes. A defined contribution scheme is a pension scheme under which the Company pays fixed contributions and has no further payment obligations once the contributions have been paid. Contributions to defined contribution pension schemes are charged in the profit and loss account in the period in which the underlying employment services are provided to the Company. --- DocuSign Envelope ID: A4BBD0A7-D694-4DB9-9A8D-1BF552C31035 A defined benefit scheme refers to any other pension scheme; specifically, the Company's defined benefit schemes define an amount of pension benefit that an employee will receive on retirement, usually dependent on one or more factors such as age, years of service and salary. The value of the net defined benefit liability/asset recognised in the balance sheet for each individual post-employment scheme is calculated as the difference between the present value of the defined benefit obligations of the scheme and the fair value of the scheme assets out of which the obligations are to be settled. For those schemes in a net liability (deficit) position, the net liability is recognised in the balance sheet in provisions. For those schemes in a net asset (surplus) position, the net asset is recognised in the balance sheet in other debtors and other assets only to the extent that the Company can realise an economic benefit, in the form of a refund or a reduction in future contributions, at some point during the life of the scheme or when the scheme liabilities are settled. The amounts charged (or credited where relevant) in the profit and loss account relating to post-employment defined benefit schemes are as follows: - The current service cost: this is the present value of additional benefits payable for employees' services provided during the reporting period. - The past service costs and gains or losses on settlement: these are changes to the obligations already established for past service costs that have arisen from an amendment to the terms of the scheme or a curtailment of the benefits payable by the scheme. These are recognised at the earlier of when the terms of the scheme are amended or the curtailment occurs or, where applicable, when the Company recognises related restructuring costs or termination benefits. - Net interest on the net defined benefit liability/asset: this is determined by applying the discount rate applied to the defined benefit obligation for the period to the net defined benefit liability/asset, and results in a net interest expense/income. - The administration costs of operating the pension schemes. Remeasurements of the net defined benefit liability/asset recognised in other comprehensive income comprises actuarial gains and losses as a result of changes in assumptions and experience adjustments in the calculation of the defined benefit obligation, and return on scheme assets excluding interest during the year. The most significant of these is the selection of the discount rate used to calculate the defined benefit obligation, details of which are set out in note 14. ## Termination benefits Termination benefits are payable when either employment is terminated by the Company before the normal retirement date, or whenever an employee accepts voluntary redundancy in exchange for these benefits. Termination benefit expenses are recognised in the profit and loss account at the earlier of the date when the Company can no longer withdraw the offer and the date when any related restructuring costs are recognised. Benefits falling due more than 12 months after the end of the reporting period are discounted to present value. ## Share-based payments The fair value of the employee share options and other equity settled share-based payments is calculated at the grant date and recognised as an expense over the vesting period. The vesting/maturity of share awards is dependent on service and performance conditions, as well as market conditions. The assumption of the number of shares expected to vest is revised at the end of each reporting period, with the corresponding credit or charge recognised immediately in the profit and loss account. Where an option is cancelled by an employee, the full value of the option (less any value previously recognised) is recognised at the cancellation date. The cash-settled awards are recognised as an expense over the vesting period with a corresponding financial liability reported in other creditors. This liability is remeasured at each reporting date based on the current share price, with any fluctuations in the liability also recorded as an expense until it is settled. ## (xi) Provisions A provision is recognised when the Company has a present legal or constructive obligation as a result of past events that are more likely than not to result in an outflow of economic resources in order to settle the obligation, and the amount of that outflow can be reliably estimated. The associated expense of the reorganisation provisions is recognised in the administrative expenses of the profit and loss account and comprises of reorganisation, acquisition and integration costs. Reorganisation costs represent external and clearly identifiable internal costs that are necessarily incurred and directly attributable to the Company's restructuring programme that was completed in 2020. The aim of the restructuring programme was to both reduce operating costs and improve profitability. Acquisition costs represent expenses incurred to effect the acquisition of RSA by IFC and include restructuring costs incurred prior to the acquisition. Integration costs represent expenses directly attributable to the integration of the Company into IFC. They predominantly include restructuring costs incurred after the acquisition. Employee termination costs included in the administrative expenses are only recognised when they are part of a restructuring programme or a detailed plan of redundancies that has been communicated to those affected. The employee termination costs that are uncertain in terms of their amount and timing are included within provisions (see note 35). ## (xii) Dividends to shareholders Dividends payable on the Company's ordinary shares are recognised in equity in the period in which they are declared and authorised. --- DocuSign Envelope ID: A4BBD0A7-D694-4DB9-9A8D-1BF552C31035 ## (xiii) Portfolio transfers Premium portfolio transfers to other insurance entities are treated as premium cancellations with an accompanying unwind of the provision for unearned premium through the profit and loss account to recognise that the Company is no longer legally on risk for providing cover in future periods and therefore will not earn any future income in respect of the insurance contracts transferred. Claims portfolio transfers to other insurance entities are treated as settlement of claims outstanding which recognises that the Company has provided consideration under the terms of the transfer as a consequence of which it no longer has a legal obligation to settle claims in respect of the insurance contracts transferred which are de-recognised. ## (xiv) Current and non-current distinction Assets are classified as current when expected to be realised within the Company's normal operating cycle of one year. Liabilities are classified as current when expected to be settled within the Company's normal operating cycle of one year. All other assets and liabilities are classified as non-current. The Company's balance sheet is not presented using current and non-current classifications. However, the following balances are generally classified as current: cash at bank and in hand, debtors arising out of direct insurance operations (policyholders), debtors arising out of reinsurance operations, deposits with ceding undertakings, creditors arising out of direct insurance operations, amounts owed to group undertakings, accruals and deferred income, accrued interest and rent and amounts owed to credit institutions. The following balances are generally classified as non-current: intangible assets, tangible assets, investments; shares in group undertakings, land and buildings and deferred taxation. The remaining balances are of a mixed nature. The non-current portions of such balances are set out in the respective notes or the risk management section. ## 4) Significant accounting estimates and judgements In preparing these financial statements, management has made judgements and calculated estimates in accordance with the Company's accounting policies. Estimates are based on management's best knowledge of current circumstances and expectation of future events and actions, which may subsequently differ from those used in determining the accounting estimates. Estimates and their underlying assumptions are reviewed on an ongoing basis. Revisions to estimates are recognised prospectively. The most significant estimates are described below. Additional information on estimation techniques and assumptions is presented in the relevant note in order to provide context to the figures presented. ## (i) Valuation of claims outstanding The Company makes judgements when determining the assumptions used in the estimation of the eventual outcome of the claim events that have occurred but remain unsettled at the end of the reporting period. The methodology of measuring claims outstanding is described below. The results of applying this methodology and assumptions applied are set out in note 34. The assumptions used in the estimation of the ultimate outcome of the claim events that have occurred but remain unsettled at the end of the reporting period. Key assumptions include prior experience and trends to the extent they are a reliable guide to future outcomes, changes in various key areas such as pricing, underwriting, claims, reinsurance, inflation and the wider economic environment, which could affect claims experience, and Covid-19 estimates which remain a heightened area of uncertainty with respect to the valuation of the insurance contract liabilities. Covid-19 business interruption (BI) gross claims cost uncertainty remains high but reduces over time as initial estimates are replaced with maturing claims and case information, updates for which have been included in the claims estimates at 31 December 2022. Key points which could give rise to significant changes in the BI claims cost estimates continue to be challenged (and appealed) in high profile industry court cases such as Stonegate. These uncertainties are likely to persist for some time and, in the meantime, our booked reserves reflect our up-to-date views on the expected outcomes and are supported by our latest legal advice The ultimate Covid-19 BI claims liability could be materially different from the current estimate as claims information develops further, as legal and regulatory interpretations throughout the industry evolve and clarify the criteria for eligible claims and the level of cover available and as claims information matures given the complexity. Whilst the Company has considerable reinsurance protection against changes in gross estimate, the net estimate is dependent on the extent to which losses are recoverable under the reinsurance contracts and how this compares to the Company's expectations. Aside from direct BI losses, Covid-19 has increased the level of estimation uncertainty for many classes of business and loss types with key assumptions impacted such as frequency, severity and claims development patterns. Many of the drivers of the uncertainty in these areas are external factors and require estimation to assess the impact. In addition, management continually monitors claims experience, emerging trends and changes in the business or in the external environment to help ensure the key assumptions and estimation techniques used to determine best estimate provisions reflect up-to-date information and remain appropriate. As a result of management's review given the current uncertain economic environment, including inflationary increases, and in alignment with IFC practice, reserves have been strengthened during 2022 and additional margin is held. Given the emergence of increased inflation trends over the past 1-2 years, our Inflation Committee and Working Groups have increased the frequency of meetings and depth of analysis, new methods have been adopted in some areas, increasing weight has been assigned to more recent trends where appropriate, and extensive sensitivity analysis has been carried out to help inform selections. An external reserve review was commissioned and completed on major segments of our reserves during 2022 to give management comfort that our internal estimates were robust and reflected external perspectives. The Adverse Development cover (ADC) reinsurance contract placed in late 2021 provides significant protection against inflation increases on 2020 and prior accident years. 35 --- DocuSign Envelope ID: A4BBD0A7-D694-4DB9-9A8D-1BF552C31035 Climate change trends are giving rise over time to different weather patterns and therefore general insurance claims experience. During 2022, the UK observed severe windstorms in February and record high temperatures in the summer, leading to heightened storm, subsidence and fire loss experience in the year. It is possible that climate change is a factor in this weather experience. The judgements made in respect of claims reserves and claims provisions take our observed reported experience into account and use common actuarial techniques to estimate ultimate costs. When we selected our future weather event claims experience assumption for our operational plan, we consider average experience over a recent period plus a judgemental allowance in recognition of climate change trends, along with any other relevant considerations such as exposure changes. Refer to note 34 for additional information. (ii) Recognition of deferred tax assets Recognition of deferred tax assets: availability of future taxable profits against which deductible temporary differences and tax losses carried forward can be utilised. Management apply judgement in the application of contingency on the estimation of future forecast taxable profits in determining the value of deferred tax asset to be recognised. Management use a 5 year forecast period when calculating future forecast taxable profits (previously 7 years). There has been a £114m increase in the deferred tax asset at 31 December 2022. This has been predominantly driven by the recognition of a deferred tax asset of £79m in respect of unrealised losses on the available-for-sale bond portfolio and £35m relating to the increase in forecast profits. The increase in forecast profits includes the impact of the transition to IFRS17. Refer to note 28 for additional information. (iii) Measurement of defined benefit obligations Measurement of defined benefit obligations: the use of key actuarial assumptions, such as discount rates, inflation rates and mortality rates. The valuation of the defined benefit pension schemes is sensitive to small changes in key assumptions. The setting of assumptions involves significant judgment by Management. Updates to the inflation and mortality assumptions have been made at 31 December 2022 following advice from Management's in house pension specialists, supported by independent third party actuarial advice. These updates result in a net balance sheet gain of £30m. The asset valuation on the UK pension scheme requires assumptions to be made around the complex and bespoke arrangement that provides coverage against longevity risk. Refer to note 14 for additional information. (iv) Valuation of shares in group undertakings The Company uses estimation techniques when valuing its shares in group undertakings, which are accounted for as available for sale financial assets and are included in the accounts at fair value. Fair value has been calculated by applying the income approach which uses discounted cash flow valuation models to assess the present value of expected future economic benefits for the major operating entities. Key assumptions relate to discount rate, growth rate and cash flows. Cash flows are based on the latest Board approved operational plan. The remaining subsidiaries are held at fair value which has been determined to be net asset value. Net asset value includes intercompany balances with RSAI Limited. There is a corresponding intercompany creditor within amounts owed to Group undertakings. In the event that intercompany balances are settled, the fair value of shares in group undertakings would reduce with a corresponding reduction in amounts owed to Group undertakings. Sensitivities have been used to assess the impact of changes in key assumptions on fair value, details of which can be found in note 20. (v) Measurement and impairment of intangible assets Management apply judgement in the valuation of the recoverable amount and the estimation of the useful economic life. In the year to 31 December 2022, £30m of internally generated software assets were identified as no longer generating future economic benefit and were derecognised (12 months to 31 December 2021: £70m). Refer to note 18 for additional information. (vi) Valuation of level 3 financial assets and investment property Significant unobservable inputs are used by the Company in the valuation of level 3 financial assets and investment properties. The current ongoing economic uncertainty means that asset valuation techniques that rely on unobservable inputs have a greater degree of estimation uncertainty. Refer to note 22 for additional information. Management apply judgement when deciding how to classify financial instruments for which immediate prices are available as being level 1 in the fair value hierarchy and financial assets for which observable prices are also available as level 2 on the basis of a lower level of activity in the market from which those prices are quoted. Refer to note 22 for additional information. In addition, management apply judgement in determining if there is objective evidence of impairment. In the year to 31 December 2022, £10m of impairments have been recognised (2021: £6m) (note 8). The value of unrealised losses, net of tax, in the revaluation reserve at 31 December 2022 is £562m (31 December 2021: losses of £2,112m) (note 32). Investment properties are valued, at least annually, at their highest and best use. The fair value of property has been determined by external, independent valuers, having appropriate recognised professional qualifications and recent experience in the location and category of the property being valued. The valuations of investment properties are based on the comparative method of valuation with reference to sales of other vacant buildings. Fair value is then determined based on the locational qualities and physical building characteristics (principally condition, size, specification and layout) together with factoring in the occupational lease terms and tenant covenant strength as appropriate. The areas where management has applied judgement are as follows: --- DocuSign Envelope ID: A4BBD0A7-D694-4DB9-9A8D-1BF552C31035 - Classification of financial assets in the fair value hierarchy: management apply judgement when deciding to classify financial instruments for which immediate prices are available as being level 1 in the fair value hierarchy and financial assets for which observable prices are also available as level 2 on the basis of a lower level of activity in the market from which those prices are quoted. Refer to note 22 for additional information. - Impairment of financial assets: determining if there is objective evidence of impairment requires judgement and, in the year to 31 December 2022, £10m of impairments have been recognised on a continuing operations basis (31 December 2021: £nil). Refer to note 8 for additional information. The value of unrealised losses from continuing operations in the revaluation reserve at 31 December 2022 is £461m (31 December 2021: losses of £2,112m). Refer to note 32 for additional information. - Valuation of intangible assets: Determining if existing internally generated software would no longer generate future economic benefit and should therefore be derecognised requires judgement. In the year to 31 December 2022, £30m of internally generated software assets were identified as no longer generating future economic benefit and were derecognised (12 months to 31 December 2021: £70m). Refer to note 18 for additional information. The Audit Committee reviews the reasonableness of significant judgements and estimates. --- DocuSign Envelope ID: A4BBD0A7-D694-4DB9-9A8D-1BF552C31035 # Risk management ## 5) Risk management ### Insurance risk RSAIG, of which the Company is an important part, is managed along divisional lines. The Company transacts the majority of the Group's UK business. The directors of the Company have considered whether the Group's approach to strategy, risk management, performance review and custody of assets fully meets the needs of the Company as a separate regulated entity. They have concluded that it does. The following discussion sets out the approach of the Group, and hence of the Company, to risk management. The Company is exposed to risks arising from insurance contracts as set out below: - Underwriting risk - Reserving risk ### (i) Underwriting risk Underwriting risk refers to the risk that claims arising are higher (or lower) than assumed in pricing due to bad experience including catastrophes, weakness in controls over underwriting or portfolio management, claims management issues or policy wording interpretation issues. The majority of underwriting risk to which the Company is exposed is of a short-term nature, and generally does not exceed 12 months. Annual policies allow the Company to respond to changing weather patterns when managing the global catastrophe risk. The Company's underwriting strategy aims to ensure that the underwritten risks are well diversified in terms of the type, amount of risk, and geography in order to ensure that the Company minimises the volatility of its insurance result. Underwriting limits are in place to enforce appropriate risk selection criteria and pricing with all of the Company's underwriters having specific licences that set clear parameters for the business they can underwrite, based on their expertise. The Company has developed enhanced methods of recording exposures and concentrations of risk and has a centrally managed forum looking at Company underwriting issues, reviewing and agreeing underwriting direction and setting policy and directives where appropriate. The Company has a monthly portfolio management process where key risk indicators are tracked to monitor emerging trends, opportunities and risks. This provides greater control of exposures in high risk areas as well as enabling a prompt response to adverse claims development. Pricing for the Company's products is generally based upon historical claims frequencies and claims severity averages, adjusted for inflation and modelled catastrophes, trended forward to recognise anticipated changes in claims patterns after making allowance for other costs incurred by the Company, conditions in the insurance market and a profit loading that adequately covers the cost of capital. For climate risk exposures, weather peril models and geolocation tools are employed to support sophisticated risk assessments and underwriting of residential and commercial properties. Passing elements of our insurance risk to reinsurers is another key strategy employed in managing the Group's exposure to insurance risk, including protection against losses from severe weather events. The Group Board determines a maximum level of risk to be retained by the Group as a whole. The net retained risk is distributed across the Group in accordance with Group and local risk appetite. The strategy is dependent on being able to secure reinsurance cover on appropriate commercial and contractual terms and the nature of the programme presents risks in that recoveries are contingent on the particular pattern of losses and aggregation across the Group. The Company remains primarily liable as the direct insurer on all risks reinsured, although the reinsurer is liable to the Company to the extent of the insurance risk it has contractually accepted responsibility for. ### (ii) Reserving risk Reserving risk refers to the risk that the Company's estimates of future claims payments will be insufficient. The Company establishes a provision for losses and loss adjustment expenses for the anticipated costs of all losses that have already occurred but have not yet been paid. Such estimates are made for losses already reported to the Company as well as for the losses that have already occurred but are not yet reported together with a provision for the future costs of handling and settling the outstanding claims. There is a risk to the Company from the inherent uncertainty in estimating provisions at the end of the reporting period for the eventual outcome of outstanding notified claims as well as estimating the number and value of claims that are still to be notified. This is especially true due to the heightened uncertainty arising as the direct and indirect impacts of the Covid-19 pandemic evolve. There is also uncertainty in the level of future costs of handling and settling the outstanding claims. --- DocuSign Envelope ID: A4BBD0A7-D694-4DB9-9A8D-1BF552C31035 The Company seeks to reduce its reserving risk through the use of experienced, regional actuaries who estimate the actuarial indication of the required reserves based on claims experience, business volume, anticipated change in the claims environment and claims cost. This information is used by local reserving committees to recommend to the RSAIG Reserving Committee the appropriate level of reserves. This will include adding a margin onto the actuarial indication as a provision for unforeseen developments such as future claims patterns differing from historical experience or assumed trends, future legislative changes and the emergence of latent exposures beyond levels assumed. The RSAIG Reserving Committee reviews these regional level submissions and recommends the final level of reserves. The RSAIG Reserving Committee is chaired by the Chief Financial Officer and includes the Chief Executive, Underwriting Director, Claims Director, Managing Directors for key business operating segments, Chief Actuary and Chief Risk Officer. A similar committee has been established for the UK operating segments. The RSAIG Reserving Committee monitors the decisions and judgments made by the operating segment as to the level of reserves to be held. It then recommends to the Board via the Audit Committee the final decision on the level of reserves to be included within the financial statements. In forming its collective judgment, the committee considers the following information: - The actuarial indication of ultimate losses together with an assessment of risks and possible favourable or adverse developments that may not have been fully reflected in calculating these indications. These risks and developments include: the possibility of future legislative change having a retrospective effect on open claims or changes in interpretation or regulatory application of existing legislation; changes in claims settlement practice or procedures and supply chain delays potentially leading to future claims payment patterns differing from historical experience; the possibility of new types of claim arising either from changes in business mix, or, such as disease claims emerging from historical business; general uncertainty in the claims environment and emerging claims trends; the emergence of latent exposures; the outcome of litigation on claims received; failure to recover reinsurance as the Company expects and unanticipated changes in claims inflation. - How previous actuarial indications have developed as claims experience has evolved. - The views of internal peer reviewers of the reserves and of other parties including actuaries, legal counsel, risk directors, underwriters and claims managers. - The outcome from independent assurance reviews performed by both external actuarial consultants and the IFC Group Actuarial Function to assess the reasonableness of regional actuarial indication estimates. - Emerging trends where Covid-19 has caused changes in experience along with analysis to demonstrate the impact on reserving estimates. Some areas such as business interruption have observed direct claims, whereas other lines have seen indirect changes in policyholder behaviour such as reduced motor frequency during lockdown which can change the mix of claims. - Changes in the external claims environment in areas such as legal and medical activities, settlement & supply chain delays which impact the speed of claims development. The distortions in data caused by Covid-19 means identification of trends is more difficult than normal. Claims experience may exhibit different characteristics and runoff trends compared to historic experience, resulting in increased uncertainty relating to actuarial indications of ultimate losses. - Covid-19 claims experience, which continues to be monitored closely and the Group is engaging with its reinsurers as payment and settlement activity grows. Whilst experience has tracked in line with expectations to this stage, many key areas of uncertainty remain such as the value of eligible claims and the extent to which reinsurance will ultimately respond compared to how the Group expects. The current assessment of Claims liabilities reflects court judgements across the jurisdictions that the business operates in, including those recently announced in the UK in October 2022. These most recent judgments are complex and create a number of uncertainties and the Company will continue to monitor the progression of the judgments, including the appeals. - There is considerable uncertainty in the economic environment beyond 2022, and changes such as ongoing inflationary pressure could have an impact on claims costs. This is a key uncertainty that is monitored by the RSAIG Reserving Committee with sensitivity testing to monitor, assess and understand potential impacts should the risks manifest. ## Financial risk Financial risk refers to the risk of financial loss predominantly arising from investment transactions entered into by the Company, and also to a lesser extent arising from insurance contracts, and includes the following risks: - Credit risk - Market risk including price, interest rate and currency rate risks - Liquidity risk The Company undertakes a number of strategies to manage these risks including the use of derivative financial instruments for the purpose of reducing its exposure to adverse fluctuations in interest rates, foreign exchange rates and long-term inflation. The Company does not use derivatives to leverage its exposure to markets and does not hold or issue derivative financial instruments for speculative purposes. The policy on use of derivatives is approved by the Board Risk Committee (BRC). --- DocuSign Envelope ID: A4BBD0A7-D694-4DB9-9A8D-1BF552C31035 # Credit risk Credit risk is the risk of loss resulting from the failure of a counterparty to honour its financial or contractual obligations to the Company. The Company ensures that assets are closely matched in duration and currency with insurance liabilities to hedge volatility. The Company's credit risk exposure is largely concentrated in its predominantly Investment Grade fixed income investment portfolio reducing the risk of default. Also to a lesser extent credit risk exists in its premium receivables and reinsurance assets. Credit risk is managed at both a Group level and at an operational level. Local operations are responsible for assessing and monitoring the creditworthiness of their counterparties (e.g. brokers and policyholders). Local credit committees are responsible for ensuring that these exposures are within the risk appetite of the local operations. Exposure monitoring and reporting for fixed income investments and premium receivables is embedded throughout the organisation with aggregate credit positions reported and monitored at Group and local level. In addition, the Credit Ratings Review Committee reviews the credit ratings of material investment exposures and unrated investments. The Group's credit risk appetite and credit risk policy are developed by the BRC and are reviewed and approved by the Board on an annual basis, to ensure limits remain within its quantitative appetite. This is done through the setting of Group policies, procedures and limits. In defining its appetite for credit risk the Group looks at exposures at both an aggregate and business unit level distinguishing between credit risks incurred as a result of offsetting insurance risks or operating in the insurance market (e.g. reinsurance credit risks and risks to receiving premiums due from policyholders and intermediaries) and credit risks incurred for the purposes of generating a return (e.g. invested assets credit risk). Limits are set at both a portfolio and counterparty level based on likelihood of default, derived from the credit rating of the counterparty, to ensure that the Group's overall credit profile and specific concentrations are managed and controlled within risk appetite. The Company's investment management strategy primarily focuses on debt instruments of Investment Grade issuers and seeks to limit the overall credit exposure with respect to any one issuer by ensuring limits have been based upon credit quality. Restrictions are placed the Company's core fixed income investment manager as to the level of exposure to various credit rating categories including unrated securities. The Company is also exposed to credit risk from the use of reinsurance in the event that a reinsurer fails to settle its liability to the Company. The Reinsurance Credit Committee oversees the management of credit risk arising from the reinsurer failing to settle its liability to the Company. Group standards are set such that reinsurers that have a financial strength rating of less than 'A -' with Standard & Poor's, or a comparable rating, are rarely used and are excluded from the Group's list of approved reinsurers. The exceptions are fronting arrangements for captives, where some form of collateral is generally obtained, and some global network partners. At 31 December 2022 the extent of collateral held by the Company against reinsurers' share of insurance contract liabilities was £44m (2021: £36m), which in the event of a default would be called and recognised on the balance sheet. The Company's use of reinsurance is sufficiently diversified that it is not concentrated on a single reinsurer, or any single reinsurance contract. The Company monitors its aggregate exposures by reinsurer group, being total exposure (as defined in the Reinsurance Risk Management Policy (RRMP)) as a percentage of IFC's shareholders' equity, the maximum percentages allowed depending on the Reinsurer's financial credit rating. The Company regularly monitors its aggregate exposures by reinsurer group against predetermined reinsurer group limits, in accordance with the RRMP. The Company's largest reinsurance exposures to active reinsurance groups are Berkshire Hathaway, Lloyd's of London and Talanx. At 31 December 2022 the reinsurance asset recoverable from these groups does not exceed $7.3\%$ (2021: $6.3\%$) of the Company's total financial assets. 40 --- DocuSign Envelope ID: A4BBD0A7-D694-4DB9-9A8D-1BF552C31035 The credit profile of the Company's assets exposed to credit risk is shown below. The table below sets out the Company's aggregated credit risk exposure for its financial and insurance assets. As at 31 December 2022 | | Credit rating relating to financial assets that are neither past due nor impaired | | | | | | | | --- | --- | --- | --- | --- | --- | --- | --- | | | AAA £m | AA £m | A £m | BBB £m |