Registered number: 00093792 # ROYAL & SUN ALLIANCE INSURANCE LIMITED FINANCIAL STATEMENTS FOR THE YEAR ENDED 31 DECEMBER 2023 --- 1 # Company information ## Directors¹ Mark Hodges (Chair) Ken Anderson Sally Bridgeland Rosie Harris Louis Marcotte² Susan McInnes Ken Norgrove Andy Parsons Sylvie Paquette² Mathieu Lamy² ## 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 ¹ Changes to the board during the year are detailed on page 8. ² Shareholder nominated director. --- Royal & Sun Alliance Insurance Limited Strategic report for the year ended 31 December 2023 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 2023. The Company's ultimate parent company and controlling party is Intact Financial Corporation (IFC). At a local level the Company is a member of the RSA Insurance Group (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's immediate parent company is Royal Insurance Holdings Limited, whose registered address is St Mark's Court, Chart Way, Horsham, West Sussex, RH12 1XL. 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 and human resources. 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 Appendix A. ## Business review Comparatives are re-stated for first time adoption of International Financial Reporting Standards (IFRS). This includes the adoption of IFRS 17 - Insurance Contracts (IFRS 17) and IFRS 9 - Financial Instruments (IFRS 9). In addition, on first time adoption of IFRS the accounting basis for investments in subsidiaries has been changed from fair value to cost less accumulated impairment losses. Refer to note 3 - First time adoption of IFRS. The Company reports a loss on ordinary activities before tax of £94m (2022: £148m) for the year. Net written premiums¹ for the year ended 31 December 2023 are £3,146m (2022: £2,850m) and net assets at 31 December 2023 are £2,915m (2022: £2,721m). Loss before tax of £94m consists of £43m of underwriting profit (2022: £58m); investment result £164m (2022: £117m); £2m central costs (2022: £2m); and £299m of other charges (2022: £321m other charges). These measures are alternative performance measures (APMs). Refer to note 38 - Alternative performance measures for a reconciliation of these measures to the Income statement, and to Our KPIs below for further information. Other charges includes £151m of Integration and restructuring costs (2022: £91m) and £163m of Insurance finance expense (2022: £16m income). On 27 February 2023, the Company announced that the Trustees of its two major defined benefit pension plans had entered into an agreement with Pension Insurance Corporation plc (PIC), a specialist insurer of defined benefit pension plans, to purchase annuity buy-in insurance contracts (the buy-ins) as part of their de-risking strategy. At the transaction date, the plans transferred the majority of their plan assets and an upfront contribution of £481m to PIC. Refer to note 28 - Employee future benefits for further information on this transaction. On 28 March 2023, the Company announced its exit from the UK personal lines motor insurance market and on 7 December 2023, the Company announced its exit from the UK personal lines home and pet markets. Profit before tax in 2023 is impacted by the de-recognition of £55m of internally generated software assets in relation to these exits. In 2022 software assets with a net book value of £30m were derecognised as part of a strategic reassessment of programme plans for internally generated software assets following the acquisition of the RSA Group by IFC. Refer to note 17 - Intangible assets for further information. On 22 July 2021, it was announced that Motability Operations Ltd had decided to move their business to a different insurer. On 24 June 2023, a contract variation was signed to formalise exit arrangements. This has resulted in the reversal of net written premium¹ of £168m. This reversal of net written premium¹ has no impact on Insurance revenue because it is offset by a reversal of unearned premium. The exit completed with effect from 1 September 2023. On 6 September 2023, the Company announced that it had entered into an agreement to acquire the brokered Commercial lines operations of Direct Line Insurance Group (DLG), a general insurer with leading market positions in the UK (the UK Commercial lines acquisition). The acquisition is expected to strengthen the Company's Commercial lines platform, broaden its broker distribution network and expand its current Commercial lines product offering. The purchase price includes an initial cash consideration of £520m paid on 26 October 2023, with potential for up to a further £30m contingent payment under earnout provisions relating to the financial performance of the quota share arrangement transferring substantially all of the future economics of the business. For further information on this transaction, refer to note 6 - Business combinations and disposals. On 7 December 2023, the Company announced that it had entered into an agreement to sell its UK direct Personal lines operations to Admiral for an initial cash consideration of £85m, with potential further consideration of up to £33m subject to the fulfilment of certain retention thresholds. The Company also announced it will exit its UK Home and Pet partner and broker contracts, resulting in a complete exit from the UK Personal lines market. Refer to note 6 - Business combinations and disposals for further information. During 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 2 --- 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. A similar project was undertaken during 2023 and as a result the Company received £294m of dividends. As a consequence of these distributions, the valuation of the Company's investment in its subsidiary entities was impaired and a reduction in value of £288m was recognised in the Income statement in relation to this project. ## Our KPIs The Company uses both IFRS and non-IFRS financial measures to assess performance, including common insurance industry metrics. Refer to note 38 - Alternative performance measures for a reconciliation of these measures to the Income statement. The KPIs most relevant to the financial performance of the Company are as follows: i. Net written premiums¹ £3,146m (2022: £2,850m): premiums incepted in the period, irrespective of whether they have been paid, less the amount shared with reinsurers. They represent how much premium the Company retains for assuming risk. The Company targets growth that does not compromise underwriting performance; ii. Underwriting result¹ £43m (2022: £58m profit): Insurance service result less other expenses as shown in note 38 - Alternative performance measures. The Company aims to provide competitive pricing to customers that delivers a sustainable ongoing underwriting profit for the Company; and iii. Loss before tax £94m (2022: £148m loss): net profit generated before taxes have been deducted. This is a key statutory measure of the earnings performance of the Company. The impact of tax can vary from company to company, therefore excluding this enhances comparability. The Company seeks to maximise its profit before tax. ## Non-financial and sustainability KPI statement Customer: From a customer perspective, our UK customer advocacy ambitions are aligned with the 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 provide tailored products to meet the evolving needs of our customers by analysing trends and keeping pace with market 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 principles for the business to help deliver good customer outcomes and 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 5 to 7. Climate: Our ambition is to achieve net zero by 2050 and halve our operations emissions by 2030. We are working on building plans towards this with IFC across all our geographies. Further information can be found in the Taskforce on Climate-Related Financial Disclosures (TCFD) report on pages 13 to 19 of the RSAIG Annual Report. Employees: We aim to be a best employer and track this primarily through our employee engagement scores. At RSA Group level our employee engagement score was 58% in 2023 and we are targeting 65% in 2024. We also continue to progress 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. ## Principal risks and uncertainties The principal risks and uncertainties of the Company are set out in note 12 - Financial risk and note 14 - Insurance risk. Further detail on how the Company manages its principal risks and uncertainties is set out in the risk management report on page 4. ## Future outlook We continue to improve the performance and resilience of the business. An ongoing focus is to further simplify what we do and drive and focus on areas of strength. We accelerated our path to sustainable outperformance by acquiring the brokered Commercial lines operations of DLG and exiting the UK Personal lines market. We remain disciplined on new business, prioritising quality and profitability. We continue to increase rates to offset claims inflation, while also enhancing pricing and segmentation capabilities. Markets remain competitive but the Company has the right foundation to target sustainable growth in targeted product lines and customer types. ## Events after the reporting period On 16 January 2024, the Court of Appeal handed down its judgment in the Covid business interruption case of Various Eateries Trading Ltd v Allianz Insurance Plc following the appeal hearing in November 2023. The findings were consistent with assumptions already made within the Company's insurance contract liabilities estimates and as such no adjustment has been made to the financial statements in respect of the judgment. The judgment clarifies questions over applicability of multiple limits and reduces the risk that these work in a different way to that already assumed within the Company's insurance reserves. ¹ Net written premiums and the underwriting result are APMs. Refer to note 38 - Alternative Performance Measures. --- Managing risk 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 the development of the business plans and delivery against our objectives and those of our customers. Approach to managing risk and our appetite in 2023 Our risk management and controls frameworks have been updated to ensure that we continue to 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. Risk is managed within risk appetite, with the help of key risk indicators and thresholds. For our principal financial risks, the Company remained within tolerance throughout the year and three-year plans assume this will continue. From time to time, certain risks may exceed tolerance and action is taken to manage them back to acceptable positions. This year saw continued progress in some key risk areas, including customer, underwriting and operational risk (specifically IT systems and information risk). 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 periodic culture health reviews and engagement 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 RSAIG. The principal risks and uncertainties of the RSA Group, which include those of the Company, are set out in note 12 - Financial risk and note 14 - Insurance risk of the Company's Accounts and the Strategic report of the 2023 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. RSA actively promotes inclusivity, including ensuring there is no less favourable treatment on the grounds of protected characteristics. The Company gives full and fair consideration to applications for employment from disabled persons, where a disabled person can adequately fulfil the job's requirements. Where existing employees become disabled, the Company's policy, wherever practicable, is to provide continuing employment under normal terms and conditions and make any required changes to their working environment. The Company provides training, career development and promotion to disabled employees. 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 sets out our commitment to 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. 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. 4 --- 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, including: i. the likely consequences of decisions in the long-term; ii. the interest of our employees; iii. the need to further the Company's business relationships with suppliers, customers and others; iv. the impact of the Company's operations on the community and the environment; v. the desirability of the Company to maintain a reputation for high standards of business conduct; and vi. the need to act fairly. Shareholder The RSA Group's ultimate parent is IFC. RSA shares the Purpose and Values of IFC and is aligned with IFC's strategic objectives to deliver outperformance and value for its shareholders. Shareholder representatives are included on the RSA Group Board. Customers 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. 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. The Boards Customer Champion (a Non-Executive Director) supports 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 continues to be kept informed on how management is responding to ongoing Consumer Duty requirements and takes steps to support good customer outcomes to ensure sustainability. Workforce 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. The Board has supported management's communication approach to ensure the workforce is informed of, and engaged in, business strategy and performance. Communications span a range of digital and in-person channels to achieve a broad reach and appeal. This year saw the launch of RSA Connect Live, a quarterly RSA Group-wide interactive townhall hosted onsite by Executive Team members with live-stream to employees across all locations. The Board received insights from employee feedback gained through these communication channels and also from employee surveys and 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 an Enable Me initiative designed by our REACH Employee Resource Group for multicultural inclusion. During the year, the Board received and supported a number of updates on people priorities including: i. our people strategy; culture and engagement assessments; talent and succession initiatives; and progress against our diversity, equity and inclusion ambitions, for example, Gender Pay Gap and Women in Finance. ii. the Board was also apprised of our approach to the people impacts from changes to our business portfolio, the focus being transparent and considerate engagement; iii. our Diversity, Equity & Inclusion (DEI) strategy encompassing customer and employee experience perspectives. A data collection programme was undertaken to better understand the demographic profile of our workforce and inform areas for particular focus; iv. the launch of our UK Equal Parental Leave policy, which applies from 1 January 2024 and is designed to support all colleagues, challenge outdated gender norms and encourage all parents to take time out to care for their child; and v. monitoring progress on all-things people-related through employee surveys, engagement with employee representation groups and review of relevant data points. This ensures we continue to learn and evolve our approach in ways that are meaningful to our people. The Board understands that enabling our people is key to our long-term success. The Board supported our 2023 annual pay review strategy of higher pensionable salary increases for employees at greatest risk of cost-of-living impacts. Regulators RSA is regulated by the PRA and the FCA and is 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 attended a Board meeting in 2023 to discuss regulatory priorities. 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 our 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. ## Community and environment Building resilience is core to the Company's purpose – to help people, businesses and society prosper in good times and be resilient in bad times. 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. 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 greenhouse gas (GHG) economy. Further information on the Board's oversight and engagement on climate change is set out in the TCFD report on pages 13 to 19 of RSAIG annual report and accounts. We are focused on building resilient communities. That means helping society and our customers adapt to the impacts of climate change, investing in skills to help communities access opportunities for growth and prepare for the future, as well as supporting the well-being of communities where we operate. RSA reports annually on its performance as part of the IFC Social Impact and Environmental, Social and Governance (ESG) report, available at www.intactfc.com. Our community programmes continue to empower our employees to help build resilient communities by harnessing their generosity and enthusiasm in support of some of the most vulnerable in society. This year, RSA directly contributed over £1.24m to charitable initiatives, supporting causes such as food poverty, education, and mental and physical health. Together with employee contributions, we donated £1.5m, a 20% increase on the previous year, to 650 charities. All RSA employees are provided with two days to volunteer per year. Employees volunteered 8,665 work-time hours in 2023. This represents an increase of 150% compared to 2022, reflecting the enthusiasm of RSA colleagues to demonstrate our value of 'Generosity' by supporting local causes. In 2024, we are focused on sustaining high levels of participation in our volunteering programmes and inspiring greater participation and impact though our community engagement. ## Suppliers Our suppliers are critical to our business and the long-term success of RSA. Our Supplier Code of Conduct sets out the minimum standards we expect from our suppliers. These include respect for human rights, Diversity, Equity and Inclusion and sustainability. In 2023, we built on the work in previous years to continue to engage with our suppliers, through structured supplier management practices, across a range of ESG topics. We are continually evolving the approach to third party management to ensure that our supplier relationships are managed in a cooperative and proportionate manner. ## A balanced and collaborative approach to stakeholder engagement The Board is committed to fostering strong engagement with its shareholders. 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. ## Key strategic decisions in 2023 The Board considers the potential consequences of decisions in the long-term, the stakeholders that might be affected and how they may be impacted as part of the decision-making process. The key strategic decisions undertaken by the Board in 2023 were informed and supported by consideration of the Company's stakeholders. The Board fulfils its duties under the Companies Act through: ### Capital decisions **Stakeholders: Shareholders, Regulator** During the year, collaborative discussions were held with the Company's ultimate owner, IFC, on a number of topics including strategic opportunities, capital management, financial performance and planning and reinsurance arrangements. This included the decision to undertake an RSA Group-wide project to rationalise the intra-group loan position and simplify the capital structure of the RSA Group. ### Strategic decisions **Stakeholders: Shareholders, Regulators, Employees and Customers** The Company considered a number of strategic opportunities within the market during the year. This included detailed reports in respect to opportunities in the market and opportunities for the Company to outperform. On 28 March 2023, the Company announced its exit from the UK Personal lines motor insurance market and on 7 December 2023, the Company announced its exit from the UK Personal lines home and pet market. On 6 September 2023, the Company announced that it had entered into an agreement to acquire the brokered Commercial lines operations of DLG. As part of the decision-making process the Board paid careful consideration to the impact on customers and employees as well as the financial and performance considerations. The Board concluded that in each of the strategic transactions action had been taken to ensure good outcomes for employees and customers and that there was clear and timely communication of the transactions and the impact. The Board was satisfied that the transactions were in the best long-term interests of the Company. --- Pension Buy-In Transaction Stakeholders: Employees, Shareholder and Regulators The announcement that the Trustees of the Company's two major defined benefit pension plans had entered into an agreement with PIC, a specialist insurer of defined benefit pension plans, to purchase annuity buy-in insurance contracts was the result of detailed negotiations and analysis by management and by our shareholder, IFC. The transaction was also funded by a capital injection from IFC. The transaction benefited annuity holders by de-risking their pension funding and also strengthened the Company's capital position. Diversity, Equity & Inclusion Stakeholders: Employees The Company is committed to supporting diversity, equity and inclusion across the organisation to ensure a diverse workplace. A UK Equal Parental Leave Policy was implemented from 1 January 2024 as part of this drive. By order of the Board L. Youssouf L Youssouf For and on behalf of Roysun Limited Secretary Approved by the Board of Directors on 20 March 2024 --- Royal & Sun Alliance Insurance Limited Directors' report for the year ended 31 December 2023 # Directors Mark Hodges (Chair) Ken Anderson Alastair Barbour (resigned 20 July 2023) Sally Bridgeland Claude Dussault (resigned 31 December 2023) Rosie Harris (appointed 1 June 2023) Mathieu Lamy (appointed 31 December 2023) Rob Leary (resigned 30 June 2023) Louis Marcotte Susan McInnes Ken Norgrove Andy Parsons Sylvie Paquette (appointed 1 June 2023) # Directors' responsibilities The directors' responsibilities statement appears on page 11 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 £nil were paid during the year (2022: £137m). The directors do not recommend payment of a final dividend (2022: £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 2 to 3 and is incorporated into this report by reference. # Political donations The Company did not make any political donations during the financial year (2022: £nil). # Charitable donations During the year donations to charities were made amounting to £1.24m (2022: £0.92m). # Auditor Each of the persons who is a director at the date of approval of this report confirms that: i. so far as the director is aware, there is no relevant audit information of which the Company's auditor is unaware; and ii. 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. # Auditor tenure KPMG was appointed as the Company's external auditor in 2013 and has been re-appointed each subsequent year. During the year, the Audit Committee undertook a joint audit tender alongside the IFC Audit Committee and recommended the appointment of Ernst & Young LLP (EY) as the Company's external auditor, effective for the year ending 31 December 2024. The appointment of EY was approved by the Board on 2 November 2023. # Directors' indemnity Article 82 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 39 of the Accounts. # 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 at least the next twelve months. 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. The risk profile, both current and emerging, has been considered, as well as the implications for capital. These --- assessments include sensitivity analysis and stress testing of the forward-looking capital projections, assessing a 1-in-10 year market risk shock and reduction of longer-term underwriting profitability. Key risk indicators demonstrate that the risk appetite is aligned to the available capital. 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 2023, 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 The values of RSA and IFC are strongly aligned. ### Purpose Our Purpose is to help people, business and society prosper in good times and be resilient in bad times. ### 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 1, and their biographies can be found on the RSA 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 40% 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 Company. 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 internal-facilitated review was completed in the second half of 2023. 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 GCR Committee for relevant matters. The Board shares these committees with RSAIG. Further information on the work of the committees can be found in the Annual Report and Accounts of RSAIG. --- 10 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. In 2024, Ernst & Young LLP (EY) will take over as the Company's external auditor. 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 RSAIG. The principal risks and uncertainties of the RSA Group, which include those of the Company, are set out in note 12 - Financial risk and note 14 - Insurance risk of the Company's Accounts and the Strategic report of the 2023 Annual Report & 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 5 to 7 of the Company's Strategic report. Signed by order of the Board L. Youssouf For and on behalf of Roysun Limited Secretary Approved by the Board of Directors on 20 March 2024 --- # STATEMENT OF DIRECTORS' RESPONSIBILITIES IN RESPECT OF THE ANNUAL REPORT AND THE FINANCIAL STATEMENTS The directors are responsible for preparing the Annual 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 Company financial statements in accordance with UK-adopted International Accounting Standards (IAS) and applicable law. 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: i. select suitable accounting policies and then apply them consistently; ii. make judgements and estimates that are reasonable, relevant and reliable; iii. state whether they have been prepared in accordance with UK-adopted IAS; iv. assess the Company's ability to continue as a going concern, disclosing, as applicable, matters related to going concern; and v. 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. The directors are responsible for the maintenance and integrity of the corporate and financial information included on the Company's website. Legislation in the UK governing the preparation and dissemination of financial statements may differ from legislation in other jurisdictions. ## Responsibility statement We confirm that to the best of our knowledge: - the financial statements on pages 19 to 23, prepared in accordance with the applicable set of accounting standards, give a true and fair view of the assets, liabilities, financial position and profit or loss of the Company and the undertakings included in the consolidation taken as a whole; and - the Strategic Report on pages 2 to 3 includes a fair review of the development and performance of the business and the position of the issuer and the undertakings included in the consolidation taken as a whole, together with a description of the principal risks and uncertainties that they face. We consider the Annual Report and Accounts, taken as a whole, is fair, balanced and understandable and provides the information necessary for shareholders to assess the Company's position and performance, business model and strategy. ![img-0.jpeg](img-0.jpeg) Ken Anderson Chief Financial Officer 20 March 2024 --- 12 # 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 2023 which comprise the income statement, statement of comprehensive income, statement of changes in equity, statement of financial position, statement of cash flows, and the related notes, including the accounting policies in note 4. In our opinion the financial statements: - give a true and fair view of the state of the Company’s affairs as at 31 December 2023 and of its loss for the year then ended; - have been properly prepared in accordance with UK-adopted international accounting standards; - 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 eleven financial years ended 31 December 2023. 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, 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. --- 13 | Valuation of liability for incurred claims 2023: £4,816 million of the total insurance contract liabilities of £5,339 million; 2022: £4,616 million of £5,376 million (restated) Risk vs 2022 ▲ Refer to pages 28-33 (accounting policy) and pages 54-63 (financial disclosures) | | | --- | --- | | The risk | Our response | | Subjective valuation: The liability for incurred claims represents the single largest liability for the Company and comprises the discounted unbiased probability weighted estimate of the cashflows and a risk adjustment. There is a significant risk around the valuation of the liability for incurred claims driven by the risk of inappropriate estimation in respect of the future cash flows. Valuation of incurred but not reported claims (IBNR) is the most subjective component of the incurred claims liability, requiring a number of assumptions to be made with high estimation uncertainty. This is heightened due to the need for adjustments to the historical claims pattern to reflect uncertainty driven by COVID-19 and by the current inflationary environment and judgmental allowance for the effect of events not in the historic claims data. 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. The adoption of IFRS 17 affects the measurement of the liability for incurred claims, for example by including a risk adjustment and requiring discounting. The effect of these matters is that, as part of our risk assessment, we determined that the valuation of the liability for incurred claims 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 13) disclose the sensitivity estimated by the Company. | With the assistance of our own actuarial specialists, our procedures included: — Independent re-performance: We performed independent re-projections on the liability for incurred claims (fulfilment cashflows) 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 re-projections. We performed incremental tests to separate the impacts on frequency and severity, including inflation and other factors such as ongoing distortions as a result of COVID-19. — Assessing consistency: We assessed the consistency of the allowance for events not in data to other reporting by the Company, including the value in the Company's regulatory reporting, in respect of groups of contracts in the transition and prior year as well as the current year. We considered through inquiry with management and with our broader understanding of any changes in the Company's risks. — Tests of details: We tested the accuracy of the policy data elements relied upon within actuarial models in our independent re-projections of the liability for incurred claims. 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. Further, we have sample tested other data elements relevant to the valuation of liability for incurred claims such as premium inputs. 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. — Assessing transparency: We considered the adequacy of the Company's disclosures in respect of the sensitivity of the valuation of liability for incurred claims and key assumptions applied to key areas of judgement and estimation uncertainty. 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 above. Our results We found the valuation of liability for incurred claims to be acceptable (2022 result: acceptable). | --- 14 | Valuation of deferred tax assets 2023: £221 million represents deferred tax assets recognised supported by future taxable profits; 2022: £186 million Risk vs 2022 ▼ Refer to page 38 (accounting policy) and pages 73-77 (financial disclosures). | | | --- | --- | | The risk | Our response | | Forecast-based assessment: The recoverability of the recognised deferred tax assets is dependent on the future profitability of 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, particularly in the current economic climate. 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. We assessed the risk reduced reflecting the increase in contingency in the UK business profit forecast. Financial statements (note 26) 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, expenses 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 within 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. 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 above. Our results As a result of our work, we found the level of deferred tax assets recognised to be acceptable (2022 result: acceptable). | --- 15 | Valuation of acquired intangible assets 2023: £219 million New Risk in 2023 Refer to page 35 (accounting policy) and pages 40-42 (financial disclosures). | | | --- | --- | | The risk | Our response | | Subjective valuation: The valuation of acquired intangible assets acquired as part of the acquisition of business from Direct Line Group in October 2023, comprising customer relationships and distribution networks, are based on assumptions that are used in determining the level of expected future cashflows. The assumptions of broker attrition rates and useful economic lives for the distribution channels are based on historical information as well as expected future changes based on a market participant's view. Judgement is required to determine appropriate royalty rates and discount rates that reflect a market participant's view. The effect of these matters is that, as part of our risk assessment, we determined that the valuation of the intangible assets recognised in respect of this acquisition has a high degree of estimation uncertainty. Financial statements (note 6) disclose the sensitivity estimated by the Company. | With the assistance of our own valuations specialists, our procedures included: — Assessing valuer's credentials: We evaluated the Company's external valuer's competence, objectivity, capability and scope of work. — Methodology choice: We assessed the appropriateness of the methodologies used in the valuation compared to our industry experience and the requirements of IFRS. — Our sector experience and benchmarking assumptions: We applied our market and valuation experience, and knowledge of the industry, to challenge the methodology and key assumptions applied by the Company's valuer and benchmark the key assumptions and the valuation as a whole against industry peers. — Sensitivity analysis: We carried out independent sensitivity analysis of the valuation of intangible assets to reasonably possible alternative assumptions related to attrition rates, royalty rates, useful economic lives and the discount rate. — Assessing transparency: We assessed the adequacy of the Company's disclosures in respect of assumptions applied in the valuation and the sensitivity of the valuation of intangible assets to key assumptions. 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 above. Our results As a result of our work, we found the valuation of intangible assets recognised on acquisition to be acceptable (2022 result: not applicable). | Following the successful completion of the pension buy-in transaction during the year, the sensitivity of the financial statements to changes in the valuation of post employment benefits and obligations has significantly reduced. Therefore it is not separately identified as a Key Audit Matter in our report this year, but continues to be subject to audit procedures. ## 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 £35.5m (2022: £27m based on net earned premiums), determined with reference to a benchmark of insurance revenue (of which it represents 1% (2022: 0.9% of net earned premiums)). We have changed the benchmark from net earned premiums in the prior year to insurance revenue in the current year to reflect the change in financial statement captions with the adoption of IFRS 17. 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 65% (2022: 75%) of materiality for the financial statements as a whole, which equates to £23m (2022: £20m). We applied this percentage in our determination of performance materiality this year based on the level of aggregation risk following business transactions and the adoption of IFRS 17. We agreed to report to the Audit Committee any corrected or uncorrected identified misstatements exceeding £1.7m (2022: £1.3m), in addition to other identified misstatements that warranted reporting on qualitative grounds. Investments and intra group reinsurance arrangements are either managed centrally at the Intact Financial Corporation group level in Canada or by other entities within the ultimate group. Accordingly, we engaged the auditors of those entities to perform specified risk-focussed procedures over investments and intra-group reinsurance arrangements. We communicated our audit risk assessment in respect these areas to these other audit teams, agreed the scoping of the planned audit procedures and the --- information to be reported back and reviewed these audit teams' documentation to evaluate the quality of execution of the work on these areas. All other audit procedures were performed by the audit team in the UK. The scope of the audit work performed was predominately substantive as we placed limited reliance upon the Company's internal control over financial reporting. ## 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 their 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 their 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; and - 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. 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. - 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 insurance revenue, and the 16 --- 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 liability of incurred claims, valuation of deferred tax assets and valuation of intangible 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 valuation of liability for incurred claims, deferred tax asset and intangible assets is set out in the key audit matter disclosures in section 2 of this report. We performed procedures including: - Identifying journal entries to test for the full scope component, 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 related to 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 other information in the Annual Report The directors are responsible for the other information presented in the Annual Report together with the financial statements. Our opinion on the financial statements does not cover the other information and, accordingly, we do not express an audit opinion or, except as explicitly stated below, any form of assurance conclusion thereon. Our responsibility is to read the other information 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 the other information. ## Strategic report and directors' report Based solely on our work on the other information: - we have not identified material misstatements in the strategic report and the directors' report; - in our opinion the information given in those reports 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 by the Company, 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 11, 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. ![img-1.jpeg](img-1.jpeg) Thomas Tyler (Senior Statutory Auditor) for and on behalf of KPMG LLP, Statutory Auditor Chartered Accountants 15 Canada Square London E14 5GL 20 March 2024 --- # STATEMENT OF FINANCIAL POSITION | As at | 31 December 2023 | 31 December 2022 | 1 January 2022 | | --- | --- | --- | --- | | | Note | £m | £m | | Assets | | | | | Cash and cash equivalents | 7 | 168 | 220 | | Financial assets | 7 | 4,933 | 4,807 | | Investment property | 7/18 | 283 | 289 | | Investments in subsidiaries | 10 | 860 | 1,227 | | Reinsurance contract assets | 13 | 1,363 | 1,464 | | Income taxes receivable | | 1 | - | | Property and equipment | 16 | 86 | 95 | | Intangible assets | 17 | 529 | 289 | | Goodwill | 17 | 326 | - | | Other assets | 19 | 332 | 760 | | Deferred tax assets | 26 | 253 | 260 | | Total assets | | 9,134 | 9,411 | | Liabilities | | | | | Insurance contract liabilities | 13 | 5,337 | 5,361 | | Financial liabilities related to investments | 8 | 40 | 26 | | Other liabilities | 19 | 842 | 1,298 | | Income taxes payable | 26 | - | 5 | | Total liabilities | | 6,219 | 6,690 | | Equity | | | | | Equity attributable to shareholders | | 2,915 | 2,721 | | Total equity and liabilities | | 9,134 | 9,411 | The following explanatory notes form an integral part of these financial statements. The financial statements were approved on 20 March 2024 by the Board of Directors and are signed on its behalf by: ![img-2.jpeg](img-2.jpeg) Ken Anderson Chief Financial Officer --- INCOME STATEMENT | For the year ended | | 31 December 2023 | 31 December 2022 | | --- | --- | --- | --- | | | Note | £m | £m | | Income | | | | | Insurance revenue | 13 | 3,552 | 3,710 | | Insurance service expense | 13/24 | (3,207) | (3,469) | | Insurance service result from insurance contracts | | 345 | 241 | | Expenses from reinsurance contracts | 13 | (687) | (809) | | Income from reinsurance contracts | 13 | 434 | 650 | | Net expense from reinsurance contracts | | (253) | (159) | | Insurance service result | | 92 | 82 | | Net investment income | 22 | 458 | 4,508 | | Net losses on investment portfolio | 22 | (355) | (4,634) | | Net investment return | | 103 | (126) | | Insurance finance (expense) income | 22 | (163) | 16 | | Reinsurance finance income (expense) | 22 | 57 | (23) | | Net insurance financial result | | (106) | (7) | | Net investment return and net insurance financial result | | (3) | (133) | | Other net (losses) gains | 23 | (8) | 16 | | Other income | 28 | 29 | 6 | | Other expense | 24 | (53) | (27) | | Integration and restructuring costs | 25 | (151) | (91) | | Finance costs | | - | (1) | | Loss before tax | | (94) | (148) | | Income tax (expense) credit | 26 | (73) | 39 | | Loss for the year | | (167) | (109) | The following explanatory notes form an integral part of these financial statements. 20 --- # STATEMENT OF COMPREHENSIVE INCOME | For the year ended | 31 December | 31 December | | --- | --- | --- | | | 2023 | 2022 | | | £m | £m | | Loss for the period | (167) | (109) | | Items that may be reclassified to the Income statement: | | | | Exchange gains net of tax on translation of foreign operations | - | 2 | | Fair value gains (losses) on FVTOCI assets net of tax | 59 | (217) | | | 59 | (215) | | Items that will not be reclassified to the Income statement: | | | | Pension – remeasurement of defined benefit asset (liability) net of tax | (741) | (358) | | Movement in property revaluation surplus net of tax | (3) | (3) | | | (744) | (361) | | Total other comprehensive expense for the period | (685) | (576) | | Total comprehensive expense for the period | (852) | (685) | | Attributable to: | | | | Shareholders | (852) | (685) | | | (852) | (685) | The following explanatory notes form an integral part of these financial statements. --- # STATEMENT OF CHANGES IN EQUITY For the year ended 31 December 2023 | | Ordinary share capital | Ordinary share premium | Fair value reserves | Foreign currency translation reserve | Retained earnings | Total equity | | --- | --- | --- | --- | --- | --- | --- | | | £m | £m | £m | £m | £m | £m | | Balance at 1 January 2023 | 90 | 1,854 | (132) | 40 | 869 | 2,721 | | Total comprehensive income | | | | | | | | Loss for the period | - | - | - | - | (167) | (167) | | Other comprehensive income (expense) for the period | - | - | 56 | - | (741) | (685) | | | - | - | 56 | - | (908) | (852) | | Transactions with owners of the Company | | | | | | | | Contribution and distribution | | | | | | | | Shares issued for cash | 1,046 | - | - | - | - | 1,046 | | | 1,046 | - | - | - | - | 1,046 | | Balance at 31 December 2023 | 1,136 | 1,854 | (76) | 40 | (39) | 2,915 | | For the year ended 31 December 2022 | | | | | | | | Balance at 31 December 2021 (as reported) | 90 | 1,854 | 525 | 38 | 962 | 3,469 | | Impact of IFRS adoption¹ | - | - | (437) | - | 511 | 74 | | Balance at 1 January 2022 (restated) | 90 | 1,854 | 88 | 38 | 1,473 | 3,543 | | Total comprehensive income | | | | | | | | Loss for the period | - | - | - | - | (109) | (109) | | Other comprehensive (expense) income for the period | - | - | (220) | 2 | (358) | (576) | | | - | - | (220) | 2 | (467) | (685) | | Transactions with owners of the Company | | | | | | | | Contribution and distribution | | | | | | | | Dividends | - | - | - | - | (137) | (137) | | | - | - | - | - | (137) | (137) | | Balance at 31 December 2022 | 90 | 1,854 | (132) | 40 | 869 | 2,721 | ¹ Refer to note 3 - First time adoption of IFRS for further information. The following explanatory notes form an integral part of these financial statements. --- # STATEMENT OF CASH FLOWS | For the year ended | | 31 December 2023 | 31 December 2022 | | --- | --- | --- | --- | | | Note | £m | £m | | Operating activities | | | | | Loss before tax | | (94) | (148) | | Income tax paid, net | | (6) | (1) | | Adjustments for non-cash items | 29 | 388 | 4,813 | | Changes in other operating assets and liabilities | 29 | (723) | (3,936) | | Net cash flows (used in) provided by operating activities | | (435) | 728 | | Investing activities | | | | | Business combinations, net of cash acquired | 6 | (520) | - | | Purchases of investments in subsidiaries | | (9) | (280) | | Proceeds from sale of investments | | 2,979 | 1,546 | | Purchases of investments | | (3,014) | (1,937) | | Purchases of intangibles and property and equipment | | (118) | (122) | | Dividends received from subsidiaries | | 17 | 111 | | Net cash flows used in investing activities | | (665) | (682) | | Financing activities | | | | | Payment of lease liabilities | | (6) | (9) | | Proceeds from issuance of ordinary shares | 20 | 1,046 | - | | Payment of dividends on ordinary shares | | - | (137) | | Net cash flows provided by (used in) financing activities | | 1,040 | (146) | | Net decrease in cash and cash equivalents | | (60) | (100) | | Cash and cash equivalents at beginning of the period | | 200 | 298 | | Effect of exchange rate changes on cash and cash equivalents | | (1) | 2 | | Cash and cash equivalents at end of the period | | 139 | 200 | | Composition of cash and cash equivalents | | | | | Cash | | 90 | 53 | | Cash equivalents | | 78 | 167 | | Overdrafts | | (29) | (20) | | Cash and cash equivalents, end of period | | 139 | 200 | | Other relevant cash flow disclosures – operating activities | | | | | Interest payable | | (8) | (291) | | Interest receivable | | 173 | 148 | | Dividends receivable | | 10 | 13 | The following explanatory notes form an integral part of these financial statements. --- 24 # NOTES TO THE FINANCIAL STATEMENTS ## 1. Status of the Company 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. At a local level, the Company is a member of the RSA Group headed by RSAIG, which is registered in England and Wales and has prepared its consolidated financial statements in accordance with UK-adopted International Accounting Standards and the requirements of Companies Act 2006. The registered office of the Company is St Marks Court, Chart Way, Horsham, West Sussex, RH12 1XL, United Kingdom. ## 2. Glossary of abbreviations | 12mECL | 12-month expected credit loss | HTC | Held-to-collect | | --- | --- | --- | --- | | AFS | Available-for-sale | HTC&S | Held-to-collect and sell | | AOCI | Accumulated other comprehensive income (loss) | IAS | International Accounting Standard | | CAD | Canadian Dollar, Canada's official currency | IASB | International Accounting Standards Board | | CPI | Consumer price index | IFRS | International Financial Reporting Standards | | DB | Defined benefits | LTECL | Lifetime expected credit loss | | ECL | Expected credit losses | OCI | Other comprehensive income | | EUR (€) | Currency of the Euro zone countries in Europe | PAA | Premium Allocation Approach | | FVTOCI | Fair value through other comprehensive income | RPI | Retail price index | | FVTPL | Fair value through profit or loss | SPPI | Solely payments of principal and interest | | GBP (£) | British pound sterling, UK's official currency | UK | United Kingdom | | GMM | General Measurement Model | USD | US Dollar, United States official currency | ## 3. First time adoption of IFRS The Company's financial statements for the year ended 31 December 2023 are the first annual financial statements that have been prepared in accordance with UK-adopted IAS and the requirements of the Companies Act 2006. They were previously prepared in accordance with Financial Reporting Standard 101 Reduced Disclosure Framework (FRS 101) and the requirements of Companies Act 2006. During the year, the Company transitioned from FRS 101 to the full IFRS basis of accounting. As a first time adopter of IFRS, IFRS 1 has been applied. The major adjustments arising from the transition to full IFRS Standards arose from the application of IFRS 17 Insurance contracts and IFRS 9 Financial instruments. In addition, on transitioning from FRS 101 to the full IFRS basis of accounting, the accounting basis for investments in subsidiaries has been changed from fair value to cost less accumulated impairment losses. The Company's transition date is 1 January 2022 and an opening IFRS Statement of financial position has been prepared at that date. IFRS 1 allows some exemptions from full retrospective application of certain standards. In preparing these financial statements in accordance with IFRS 1, the Company has applied the following mandatory exemptions from full retrospective application of IFRS: i. derecognition of financial assets and liabilities exception: financial assets and liabilities derecognised before 1 January 2022 are not re-recognised under IFRS; and ii. estimates exception: estimates under IFRS at 1 January 2022 are consistent with estimates made for the same date under FRS 101 and the requirements of Companies Act 2006. --- The following table provides a reconciliation of equity at 1 January 2022 and 31 December 2022. | Equity as at 31 December 2022 and 1 January 2022 | | 31 December 2022 £m | 1 January 2022 £m | | --- | --- | --- | --- | | Equity attributable to shareholders as reported under FRS 101 | | 2,609 | 3,469 | | Reinsurance contract assets (IFRS 17) | 3.1 (i) | | | | Discounting | a | (241) | (159) | | Risk adjustments and other remeasurement of claims liabilities | b | 203 | 168 | | Onerous contracts | c | 5 | - | | Other | d | (17) | (13) | | Insurance contract liabilities (IFRS 17) | 3.1 (i) | | | | Discounting | a | 570 | 311 | | Risk adjustments and other remeasurement of claims liabilities | b | (284) | (224) | | Onerous contracts | c | (52) | (9) | | Other | d | (3) | 1 | | Total impact of IFRS 17 adoption | | 181 | 75 | | ECL on amortised cost loans (IFRS 9) | 3.2 | (1) | (1) | | Impact of IFRS 1 adoption | | 180 | 74 | | Change in balance sheet value of investments in subsidiaries (IAS 27) | 3.3 | (68) | - | | Equity attributable to shareholders as reported under IFRS | | 2,721 | 3,543 | The following table provides a reconciliation of total comprehensive income for the year ended 31 December 2022: | Total comprehensive income for the year ended 31 December 2022 | | £m | | --- | --- | --- | | Profit for the year ended 31 December 2022 as reported under FRS 101 | | 198 | | Adjusted for: | | | | Reinsurance contract assets (IFRS 17) | 3.1 (i) | | | Discounting | a | (82) | | Risk adjustments and other remeasurement of claims liabilities | b | 35 | | Onerous contracts | c | 5 | | Other | d | (4) | | Insurance contract liabilities (IFRS 17) | 3.1 (i) | | | Discounting | a | 260 | | Risk adjustments and other remeasurement of claims liabilities | b | (60) | | Onerous contracts | c | (43) | | Other | d | (4) | | Total impact of IFRS 17 adoption | | 107 | | Reclassification of unreleased losses (net of tax) from Fair value reserves to the Income statement (IFRS 9) | 3.2 | (102) | | Impairment of subsidiaries recognised in the Income statement (IAS 27) | 3.3 | (312) | | Profit for the year ended 31 December 2022 as reported under IFRS | | (109) | | Total other comprehensive income for the year ended 2022 as reported under FRS 101 | | (921) | | Reclassification of unreleased losses (net of tax) from Fair value reserves to the Income statement (IFRS 9) | 3.2 | 102 | | Reversal of fair value of subsidiaries recognised in Fair value reserves | 3.3 | 243 | | Total other comprehensive income for the year ended 31 December 2022 as reported under IFRS | | (576) | | Total comprehensive income for the year ended 31 December 2022 as reported under IFRS | | (685) | ## Notes to the reconciliations of equity and total comprehensive income ### 3.1 IFRS 17 Insurance contracts The nature and the effect of the application of IFRS 17 is summarised as follows: #### i) Changes to classification, recognition and measurement The Company applies IFRS 17 to the same scope of contracts previously reported under FRS 101. As a result, the adoption of IFRS 17 did not change the classification of the Company's insurance contracts. However, IFRS 17 establishes specific principles for the recognition and measurement of insurance and reinsurance contracts. IFRS 17 introduces the GMM for the recognition and measurement of insurance contracts, which requires measuring insurance contracts using updated estimates and assumptions that reflect the timing of cash flows and any uncertainty relating to insurance contracts. In addition, entities have the option to use a simplified measurement model (the PAA), for short-duration contracts; this --- model is applicable to all of the Company's insurance and reinsurance contracts except in limited circumstances where the GMM is required. The accounting under the PAA differs from the policy applied under FRS 101 in the following key areas: a. **Discounting** – the liability for incurred claims is discounted at a rate that reflects the characteristics of the liabilities and the duration of each portfolio. The Company has established discount yield curves using risk-free rates adjusted to reflect the appropriate illiquidity characteristics of the applicable insurance contracts. Previously, only Provisions for losses and loss adjustment expenses (claims liabilities) where there is a long period from incident to claims settlement were discounted, using a rate that reflects the estimated market yield of the underlying assets backing these claims liabilities at the reporting date; b. **Risk adjustment** – the liability for incurred claims includes an explicit risk adjustment which replaces the risk margin under FRS 101. The previous risk margin reflected the inherent uncertainty in the net discounted claim liabilities estimates, whereas the IFRS 17 risk adjustment is the compensation required for bearing the uncertainty that arises from non-financial risk. Like the risk margin, the risk adjustment includes the benefit of diversification; c. **Onerous contracts** – IFRS 17 requires the identification of groups of onerous contracts at a more granular level than the liability adequacy test performed under FRS 101. Under IFRS 17 the loss component of onerous contracts measured based on projected profitability is recognised immediately in the Income statement, resulting in earlier recognition; and d. **Other** – mainly comprise reinsurance non-performance risk. Under IFRS 17, for risks ceded under reinsurance contracts, the expected cash flows must be altered to reflect the chance of default by the reinsurer when it comes to paying claims or meeting other contractual obligation. Under FRS 101, the Company created bad debt provisions for amounts due from some reinsurers depending on their risk rating. The Company's classification and measurement of insurance and reinsurance contracts is explained in note 4 – Summary of material accounting policies. ii) Changes to presentation and disclosure IFRS 17 provides guidance for the presentation and disclosure of insurance and reinsurance contracts. **Statement of financial position** Changes in the Statement of financial position line items are introduced by IFRS 17. The previously reported line items debtors arising out of direct insurance operations, claims outstanding, and other related assets and liabilities are presented together by portfolio on a single line called Insurance contract liabilities or assets. The previously reported line items reinsurers' share of technical provisions, debtors arising out of reinsurance operations, creditors arising out of reinsurance operations, and other related assets and liabilities are presented together by portfolio on a single line called Reinsurance contract assets or liabilities. Portfolios are composed of groups of contracts covering similar risks and managed together. Portfolios of insurance and reinsurance contracts issued and reinsurance contracts held are presented separately between: i. portfolios of insurance and reinsurance contracts issued that are assets; ii. portfolios of reinsurance contracts held that are assets; iii. portfolios of insurance contracts and reinsurance contracts issued that are liabilities; and iv. portfolios of reinsurance contracts held that are liabilities. The portfolios referred to above are those established at initial recognition in accordance with IFRS 17. **Income Statement** The Income statement is no longer divided into a Technical account and a Non-technical account and changes in line items are introduced by IFRS 17, which requires separate presentation of Insurance revenue, Insurance service expenses and Insurance finance income or expense. The following previously reported line items are no longer disclosed: gross written premiums, net earned premiums, net claims and net operating expenses. **3.2 IFRS 9 Financial Instruments** On application of IFRS 9 on 1 January 2022, the Company's Equity attributable to shareholders was negatively impacted by £1m, which equates to the ECL calculated on its amortised cost loans. The application of IFRS 9 also resulted in reclassifications from Revaluation reserves to Retained earnings as follows: i. certain equity instruments previously classified as AFS are now classified as FVTPL; ii. the designation of some fixed income instruments changed on transition from AFS to FVTPL. The designation of other fixed income instruments changed from AFS to FVTOCI; and iii. the ECL calculated on instruments at fair value previously in OCI were recycled to Retained earnings (subsequently to the Income statement). As at 1 January 2022, the Company reclassified £2m of unrealised losses (after tax) from Revaluation reserves to Retained earnings. 26 --- The following table summarises the classification and measurement impacts of IFRS 9 on adoption. The adoption of IFRS 9 had no significant impact on the Company's other financial assets or liabilities. Impact of IFRS 9 on the classification and measurement of investments | As at 1 January 2022 | Measurement category | | Carrying amount | | | | --- | --- | --- | --- | --- | --- | | | FRS 101 | IFRS 9 | FRS 101 | Impact of IFRS 9 | IFRS 9 | | Cash and cash equivalents¹ | Amortised cost | Amortised cost | 66 | 249 | 315 | | Debt securities | AFS | FVTOCI | 4,059 | (1,410) | 2,649 | | | FVTPL | FVTPL | - | 1,410 | 1,410 | | Shares and other variable yield securities and units in unit trusts | AFS | n/a | 575 | (575) | - | | Equities | FVTPL | FVTPL | - | 326 | 326 | | Loans | Amortised cost | Amortised cost | 359 | (1) | 358 | | | | | 5,059 | (1) | 5,058 | ¹ £249m of cash equivalents have been transferred from being classified as Equities under FRS 101 to being classified as Cash and cash equivalents under IFRS. This presentational change is due to first time adoption of IFRS. ## 3.3 Investments in subsidiaries The accounting basis for investments in subsidiaries was fair value when the accounts were prepared in accordance with FRS 101 and the requirements of Companies Act 2006. On first time adoption of IFRS, the accounting basis for this item has been changed to cost less accumulated impairment losses, with impairment losses being recognised in the Income statement. As permitted by IFRS 1, at 1 January 2022, investments in subsidiaries are measured at deemed cost, being the fair value reported in the previous financial statements prepared under FRS 101 at 31 December 2021. --- 28 # 4. Summary of material accounting policies 4.1 Basis of presentation 28 4.2 Insurance and reinsurance contracts 28 4.3 Financial instruments 33 4.4 Derivative financial instruments 35 4.5 Business combination 35 4.6 Goodwill and intangible assets 36 4.7 Foreign currency translation 36 4.8 Investment in subsidiaries 36 4.9 Property and equipment 37 4.10 Investment property and rental income 37 4.11 Leases 37 4.12 Current and deferred tax 38 4.13 Share-based payments 38 4.14 Post-employment benefits and obligations 38 4.15 Current vs non-current 39 # 4.1 Basis of presentation These financial statements and the accompanying notes are prepared in accordance with IFRS, as adopted in the UK. They were authorised for issue in accordance with a resolution of the Board of Directors on 20 March 2024. Comparative information has been restated for first time adoption of IFRS (refer to note 3 - First time adoption of IFRS). The material accounting policies applied in the preparation of these financial statements are described below. These policies have been applied consistently to all periods presented. Except where otherwise stated, all figures included in the financial statements are presented in millions of pounds sterling (£m). ## Going concern The financial statements have been prepared on a going concern basis. In adopting the going concern basis, the Board have reviewed the Company's ongoing commitments for at least the next twelve months. 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. The risk profile, both current and emerging, has been considered, as well as the implications for capital. These assessments include sensitivity analysis and stress testing of the forward-looking capital projections, assessing a 1-in-10 year market risk shock and reduction of longer-term underwriting profitability. Key risk indicators demonstrate that the risk appetite is aligned to the available capital. 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 that would require disclosure 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 statement of financial position and the approval of the financial statements. # 4.2 Insurance and reinsurance contracts IFRS 17 requires management to use judgements, estimates and assumptions, further details of which are provided in note 13 - Insurance and reinsurance contracts. IFRS 17 accounting policies are described below. ## a) Classification Insurance contracts transfer significant insurance risk at the inception of the contract. Insurance risk is transferred when the Company agrees to compensate a policyholder on the occurrence of an adverse specified uncertain future event. As a general guideline, the Company determines whether it has significant insurance risks by comparing the benefits that could become payable under various possible scenarios relative to the premium received from the policyholder for insuring the risk. The Company issues insurance contracts in the normal course of business (direct business) and holds reinsurance contracts (ceded business), under which it is compensated by other entities for claims arising from one or more insurance contracts issued by the Company. The Company may acquire insurance and reinsurance contracts through a business combination or transfer of contracts. All references apply to insurance contracts issued and acquired and reinsurance contracts held by the Company, unless otherwise stated. ## b) Separating components from insurance and reinsurance contracts Insurance and reinsurance contracts are assessed to determine whether they contain components which must be accounted for under an IFRS other than the insurance contract standard. The Company's insurance and reinsurance contracts do not include any components that require separation. --- c) Level of aggregation Insurance and reinsurance contracts are aggregated into portfolios and groups for measurement purposes. Portfolios are comprised of contracts with similar risks which are managed together. The Company divides its direct and ceded business into portfolios. Management uses judgement in considering the main geographic areas, lines of business, distribution channels and legal entities in which it operates as the relevant drivers for establishing its various portfolios. Portfolios are then divided into groups of contracts based on expected profitability. Such groups do not contain contracts issued more than one year apart since they are further subdivided into annual cohorts. Portfolios of insurance contracts that are assets and those that are liabilities and portfolios of reinsurance contracts that are assets and those that are liabilities are presented separately in the Statement of financial position. d) Recognition Groups of insurance and reinsurance contracts are recognised from the earliest of the following: i. the beginning of the coverage period (except for proportionate coverage reinsurance that could be recognised at a later date when any underlying insurance contract is initially recognised); ii. the date that the first payment is due; or iii. the date when facts and circumstances indicate that the group of contracts is potentially onerous. Groups of contracts are established on initial recognition and their composition is not revised subsequently. Any premiums received before the recognition of the corresponding group of insurance contracts are recognised as deferred revenues in Other liabilities. When the group of contracts are recognised as per above the premiums received are reclassified to the liability for remaining coverage. e) Contract boundary The measurement of a group of contracts includes all the future cash flows within the boundary of each contract. Cash flows are within the boundary of insurance and reinsurance contracts if they arise from substantive rights and obligations that exist during the reporting period in which the Company can compel the policyholder to pay the premiums or has a substantive obligation to provide the policyholder with services. A substantive obligation or right ends when the Company has the practical ability to reassess risks and can set a price or level of benefits that fully reflects those risks. f) Measurement models The Company uses different measurement models depending on the type of contract. | Type of contract | Measurement model | | --- | --- | | All of the Company’s insurance and reinsurance contracts except for retroactive reinsurance contracts | PAA | | Retroactive reinsurance contracts (accepted and ceded) to cover adverse development of existing claims | GMM | The carrying amount of a group of insurance contracts at the end of each reporting period is comprised of the following: | Component | Description | Relates to | | --- | --- | --- | | Liability for remaining coverage | The obligation to provide coverage after the reporting period for insured events that have not yet occurred. | Future service | | Liability for incurred claims | The obligation to investigate and pay valid claims for insured events that have already occurred, including events that have occurred but for which claims have not been notified, and other incurred insurance expenses. | Past service | Premium Allocation Approach The Company applies the PAA when measuring the liability for remaining coverage as follows: | Description | | | --- | --- | | Overview | Simplified measurement model which may be applied to insurance contracts when: i. the coverage period is one year or less; or ii. for contracts longer than one year, and there is no material difference in the liability for remaining coverage between the PAA and the GMM. | | Contracts applying this model | All insurance and reinsurance contracts, except in limited circumstances where the GMM is required. | --- 30 | | Description | | --- | --- | | Initial and subsequent measurement | The liability for remaining coverage includes: i. premiums received; ii. minus insurance acquisition cash flows paid net of the amortisation of the insurance acquisition cash flows recognised; iii. minus any amounts recognised as insurance revenue for the services provided; iv. minus any investment component paid or transferred to the liability for incurred claims; and v. plus any loss component for onerous contracts. | | Onerous contracts | The Company assumes that no contracts in a portfolio are potentially onerous at initial recognition unless facts and circumstances indicate otherwise. The Company has developed a methodology for identifying indicators of possible onerous contracts, which includes internal management information, forecast information and historic experience (refer to Onerous contracts below). | | Other policies | The Company: i. does not discount the liability for remaining coverage; and ii. allocates insurance acquisition cash flows to related groups and amortises them over the coverage period of those groups. | | Reinsurance contracts | Reinsurance contracts are measured on the same basis as insurance contracts. | General Measurement Model The Company applies the GMM when measuring the liability for remaining coverage as follows: | | Description | | --- | --- | | Overview | Default model to measure insurance contracts using updated estimates and assumptions that reflect the timing of cash flows and any uncertainty relating to insurance contracts. The liability for remaining coverage includes: i. fulfilment cash flows are measured using current estimates and are comprised of: • discounted estimates of future cash flows; and • a risk adjustment for non-financial risk (risk adjustment) which is the compensation required for bearing uncertainty. ii. contractual service margin, which is the unearned profit that is recognised as services are provided. | | Contracts applying this model | A limited number of contracts for retroactive reinsurance contracts covering adverse development of existing claims. | --- 31 # Description | Initial and subsequent measurement | At initial recognition, unless the group of contracts is onerous, the contractual service margin is measured at an amount that results in no income or expenses arising from: i. initial recognition of fulfilment cash flows; ii. any cash flows arising from the contracts in the group at that date; and iii. any amount arising from the derecognition of assets or liabilities previously recognised for cash flows related to the group. Subsequently, the contractual service margin is adjusted for: i. the effect of any new contracts; ii. interest accreted at the discount rates at initial recognition (locked-in discount rate); iii. changes in fulfilment cash flows relating to future service, except to the extent that such: • increases exceed the contractual service margin, in which case the excess is recognised as a loss in the Income statement and a loss component is recognised; • decreases are allocated to the loss component, reversing losses previously recognised in the Income statement; iv. the effect of any currency exchange differences; and v. amounts recognised as insurance revenue for services provided, determined by allocating the contractual service margin over the current and remaining service coverage period. Changes in fulfilment cash flows related to current services are recognised immediately in the Income statement which include: i. changes in risk adjustment for expired risk; and ii. experience adjustments which are the difference between estimated premiums and claims and other insurance service expenses incurred in the period. | | --- | --- | | Onerous contracts | Groups of contracts are assessed as onerous when fulfilment cash flows exceed the carrying amount of the liability for remaining coverage (refer to Onerous contracts below). | | Reinsurance contracts | Reinsurance contracts are measured on the same basis as insurance contracts, except: i. they include an allowance for non-performance risk by the reinsurer; ii. the risk adjustment represents the amount of risk being transferred to the reinsurer; iii. day 1 gains/losses are recognised initially as a contractual service margin and released to the Income statement as the reinsurer renders services, except for day 1 losses related to events before initial recognition; and iv. changes in fulfilment cash flows are recognised in the Income statement if changes in the fulfilment cash flows in the related underlying ceded contracts have been recognised in the Income statement as well. Otherwise, changes in the fulfilment cash flows adjust the contractual service margin. | # Onerous contracts For onerous contracts, a loss component determined based on estimated fulfilment cash flows is included in the liability for remaining coverage when insurance contracts are issued with a loss recognised immediately in the Income statement. The loss component is reversed to the Income statement over the coverage period, therefore offsetting incurred claims. The loss component is measured on a gross basis but may be mitigated by a loss recovery component if the contracts are covered by reinsurance. At initial recognition, the loss-recovery component is calculated by multiplying the loss recognised on the underlying insurance contracts and the percentage of claims on the underlying insurance contracts the Company expects to recover from the group of reinsurance contracts. The Company uses a systematic and rational method to determine the portion of losses recognised on the group to insurance contracts covered by the group of reinsurance contracts where some contracts in the underlying group are not covered by the group of reinsurance contracts. The loss-recovery component is included in the asset for remaining coverage and the recovery is recognised immediately in Income from reinsurance contracts. Where, during the coverage period, facts and circumstances indicate that a group of insurance contracts is onerous, the Company applies the same analysis it has performed for groups potentially onerous at initial recognition. # Liability for incurred claims For contracts measured under PAA, the Company measures its liability for incurred claims as follows: Generally, the liability for incurred claims is discounted to consider the time value of money. However, for contracts measured under the PAA only, the Company is not required to adjust future cash flows for the time value of money and the effect of financial --- risk if those cash flows are expected to be paid or received in one year or less from the date the claims are incurred. The Company has elected to discount all of its liability for incurred claims. The Company estimates the liability for incurred claims as the fulfilment cash flows related to incurred claims. The fulfilment cash flows incorporate, in an unbiased way, all reasonable and supportable information available without undue cost or effort about the amount, timing and uncertainty of those future cash flows. They reflect current estimates from the perspective of the Company and include an explicit risk adjustment. Liability for incurred claims include periodic payment orders which are settlements in the form of annuities awarded by UK courts on some high value injury claims where the claimant's quality of life has been impaired due to severe injuries. These annuities are payable until death and increase annually, applying a defined index set in the court decision, usually linked to care provider professionals' salaries. Refer to note 13.4 - Significant accounting judgements, estimates and assumptions for more details. g) Modification and derecognition The Company derecognises insurance contracts when: i. the rights and obligations relating to the contract are extinguished; or ii. the contract is modified such that it results in a change in the measurement, substantially changes the contract boundary, or requires the modified contract to be included in a different group. In such cases, the Company derecognises the initial contract and recognises the modified contract as a new contract. When a modification is not treated as a derecognition, the Company recognises amounts paid or received for the modification as an adjustment to the relevant liability for remaining coverage. h) Insurance revenue Insurance revenue on direct business is allocated over the coverage period and includes: i. premium receipts net of cancellations and sales taxes (excluding any investment component); and ii. other insurance revenue which includes fees collected from policyholders in connection with the costs incurred for the Company's yearly billing plans. i) Insurance service expenses Insurance service expenses include fulfilment and acquisition cash flows which are costs directly attributable to insurance contracts and are comprised of both direct costs and an allocation of indirect costs. It is composed of the following: i. incurred claims and other insurance service expenses, which are fulfilment cash flows and include direct incurred claims and non-acquisition costs directly related to fulfilling insurance contracts; ii. amortisation of insurance acquisition cash flows; and iii. losses and reversal of losses on onerous contracts. The Company has elected to present changes in risk adjustment related to the non-financial portion in Insurance service result and changes in the financial portion (unwinding and change in discount rates) in Net insurance financial result. j) Insurance acquisition cash flows Insurance acquisition cash flows are costs directly attributable to selling or underwriting a portfolio of insurance contracts and are presented in the liability for remaining coverage. These cash flows include direct costs such as commissions and indirect costs such as salaries, rent and technology costs. The PAA provides the option to expense insurance acquisition cash flows as they are incurred. The Company has elected to amortise these costs on a straight-line basis over the coverage period of the related groups. The related groups are the groups of contract containing the initial contract and groups that will include insurance contracts that are expected to arise from renewals of the insurance contract in that group. Where the insurance acquisition cash flows are paid before the related group of insurance contracts is recognised, an asset is recognised for each related group of insurance contracts. This asset is derecognised when the insurance acquisition cash flows are included in the measurement of the related group of insurance contracts. k) Insurance finance income and expense Insurance finance income or expenses comprise the change in the carrying amount of the group of insurance contracts arising from the discount unwinding and changes in discount rates and the effect of financial risk and changes in financial risk. The Company has elected to record the changes in discount rates in Net insurance financial result. l) Net expense from reinsurance contracts Net expense from reinsurance contracts comprises amounts expected to be recovered from reinsurers (Income from reinsurance contracts) and an allocation of reinsurance premium paid (Expense from reinsurance contracts). The Company treats reinsurance cash flows that are contingent on claims of the underlying contracts as part of the amounts expected to be recovered from reinsurers and includes commissions not contingent on claims as a reduction of the allocation of reinsurance premiums. 32 --- m) Investment component The Company identifies the investment component of a contract by determining the amount that it would be required to repay to the policyholder in all scenarios with commercial substance. These include circumstances in which an insured event occurs or the contact matures or is terminated without an insured event occurring. Investment components are excluded from insurance revenue and insurance service expenses. 4.3 Financial instruments IFRS 9 requires management to use judgements, estimates and assumptions, further details of which are provided in note 12 - Financial risk. IFRS 9 accounting policies are described below: a) Classification and measurement of financial instruments Financial assets Business model assessment The Company determines its investment business model by considering its insurance business. In addition, judgement is used in concluding which model aligns best with its core business objectives and practices. Factors that are used in business model decisions include how insurance business generate profits and cash flow, significant risks facing the business on asset and liability fronts, how compensation is determined for portfolio managers responsible for managing investments, as well as historical and projected turnover of the investment portfolio to fund insurance business on a day-to-day basis. The Company's business models fall into two categories, which are indicative of the key strategies to generate returns: i. the Company's primary business model is HTC&S which provides a desired flexibility to support the Company's insurance business i.e., contractual cash flows from financial assets are collected by holding such investments, and these financial assets are sold when required to fund insurance contract liabilities; and ii. the Company also carries certain financial assets under a HTC business model where the emphasis is to collect contractual cash flows. Sales are incidental to this objective and are expected to be insignificant or infrequent. The Company also specifically designates, on an individual basis, a portion of investments as FVTPL to reduce accounting mismatch in the Income statement. This designation is irrevocable. SPPI assessment Financial assets which are held within HTC&S and HTC business models are assessed to evaluate if their contractual cash flows are comprised of SPPI. Contractual cash flows generally meet SPPI criteria if such cash flows reflect compensation for basic credit risk and customary returns from a debt instrument which also includes time value for money. Where the contractual terms introduce exposure to risk or variability of cash flows that are inconsistent with a basic lending arrangement, the related financial asset is classified and measured at FVTPL. Debt instruments The classification and measurement of debt instruments is dependent on the business (refer to Business model assessment above) model and cash flow characteristics of the asset as described below. They are reclassified when and only when business model for managing those assets changes. | Amortised cost | FVTOCI | FVTPL | | --- | --- | --- | | Assets held for the collection of contractual cash flows. | Assets held for the collection of contractual cash flows and for selling the financial assets. | Assets that do not meet the criteria for amortised cost or FVTOCI are mandatorily measured at FVTPL. | | Cash flows represent solely payments of principal and interest. | Cash flows represent solely payments of principal and interest. | Irrevocable election can be made (on an instrument-by-instrument basis) to designate assets as FVTPL instead of amortised cost or FVTOCI if doing so eliminates or significantly reduces an accounting mismatch. | Equity instruments There are two measurement categories under which an equity instrument could be classified: | FVTPL | FVTOCI | | --- | --- | | Default classification for all equity instruments. | Irrevocable election (on an instrument-by-instrument basis) on the date of acquisition. Designation is not permitted if the equity instrument is held for trading. | --- # Financial Instruments Classification and measurement of the Company's most significant financial instruments under IFRS 9 | Classification | Financial instruments | Description | Initial and subsequent measurement | | --- | --- | --- | --- | | FVTOCI | Debt securities | Investments intended to be held for an indefinite period and which may be sold in response to liquidity needs or changes in market conditions. | Initially measured at fair value using transaction prices at the trade date. Subsequently measured at fair value using bid prices at the end of the period (except as noted below for Level 3 instruments), with changes in fair value recognised in OCI when unrealised or in Net gains or losses when realised or impaired. | | Designated as FVTPL on initial recognition | Debt securities backing insurance and reinsurance contracts | A portion of the Company's investments backing its insurance and reinsurance contracts has been voluntarily designated as FVTPL to eliminate the accounting mismatch caused by fluctuations in fair values of underlying insurance and reinsurance contracts due to changes in discount rates. The Company ensures that the duration of debt securities designated as FVTPL is approximately equal to the duration of insurance and reinsurance contracts. | Initially measured at fair value using transaction prices at the trade date. Subsequently measured at fair value using bid prices (for financial assets) or ask prices (for financial liabilities) at end of period, with changes in fair value recognised in Net gains or losses. | | Classified as FVTPL | Equity instruments | All ordinary shares portfolios and certain preferred shares. | | | | Derivative financial instruments | Derivatives used for economic hedging purposes and for the purpose of modifying the risk profile of the Company's investment portfolio as long as the resulting exposures are within the investment policy guidelines. | | | | Other instruments | Investments in mutual and private funds. | | | Amortised cost - other financial assets | Cash and cash equivalents | Highly liquid investments held to meet short-term requirements that are readily convertible into a known amount of cash, are subject to an insignificant risk of changes in value and have an original maturity of three months or less. | Initially measured at fair value using transaction prices at the trade date. Subsequently measured at amortised cost using the effective interest method. | | | Loans | Direct lending under illiquid credit investments mandates. | | | Amortised cost - financial liabilities | Debt outstanding | Financial liabilities with fixed or determinable payments and maturity date. | Initially measured at fair value at the issuance date net of transaction costs. Subsequently measured at amortised cost using the effective interest method. | ## b) Revenue and expense recognition ### Net investment income Net investment income is recognised as follows: i. FVTOCI debt security interest is recognised in Interest income using the effective interest rate method, including the amortisation of premiums earned or discounts incurred as well as transaction costs; ii. FVTPL debt security interest is recognised in Interest income using the same methodology, except that transaction costs are expensed as incurred. iii. interest income from loans is recognised on an accruals basis, using the effective interest rate method; and iv. dividends are recognised when the shareholders' right to receive payment is established, which is the ex-dividend date. ### Net gains (losses) on investment portfolio Gains and losses on the sale of FVTOCI debt securities are calculated on a first in, first out basis. --- 35 # Transaction costs Transaction costs associated with the acquisition of financial instruments classified or designated as FVTPL are expensed as incurred; otherwise, transaction costs are capitalised on initial recognition and amortised using the effective interest rate method. Transaction costs incurred at the time of disposition of a financial instrument are expensed as incurred. ## c) Impairment The Company assesses, on a forward-looking basis, the ECL associated with its assets carried at amortised cost and FVTOCI debt securities. The impairment methodology applied depends on whether there has been a significant increase in credit risk or an actual default since the initial recognition of the financial asset. | Staging | Debt securities | | --- | --- | | Stage 1 (12 months) | Credit risk of the financial instrument is low (investment grade) or credit risk has not increased significantly since initial recognition (performing) | | Stage 2 (Life-time) | Credit risk has increased significantly since inception (underperforming) but the financial instrument is not credit impaired | | Stage 3 (Life-time) | Financial instrument is credit impaired. See note 12 – Financial risk. | At each reporting date, the Company recognises an allowance for debt instruments measured at FVTOCI or at amortised cost: i. the ECL does not reduce the carrying amount of FVTOCI financial assets, which remains at their fair value. Instead, an amount equal to the allowance and its subsequent changes is reclassified from OCI to the Income statement. Refer to note 12 – Financial risk for details; and ii. the ECL for financial instruments measured at amortised cost reduces the carrying amount of these financial assets with a corresponding expense recognised in the Income statement. IFRS 9 provides a simplification where an entity may assume that the criterion for recognising lifetime ECL is not met if the credit risk on the financial instrument is low (investment grade) at the reporting date. The Company will apply the low credit risk simplification to its investment grade assets with a quoted market price. This represents approximately 95% of the debt security portfolio at 31 December 2023 (31 December 2022: 97%). For Other debtors and accrued rent, the Company applies the simplified approach permitted by IFRS 9, which requires expected lifetime losses to be recognised from initial recognition of the receivables. ## d) Derecognition of financial assets and financial liabilities Financial assets are no longer recognised when the rights to receive cash flows from the instruments have expired or have been transferred and the Company has transferred substantially all the risks and rewards of ownership. Financial liabilities are no longer recognised when they have expired or have been cancelled. ## e) Offsetting of financial assets and financial liabilities Financial assets and financial liabilities are offset, and the net amount is recognised on the Statement of financial position, only when there is: i. a legally enforceable right to offset the recognised amounts; and ii. an intention to settle on a net basis, or to realise the assets and settle the liabilities simultaneously. ## 4.4 Derivative financial instruments The Company enters a variety of derivative financial instruments to manage its exposure arising from financial assets and financial liabilities. Derivative financial instruments are financial contracts whose value is derived from an underlying interest rate, foreign exchange rate, equity or commodity instrument or index. The Company uses derivatives for economic hedging purposes and for the purpose of modifying the risk profile of the Company's investment portfolio, as long as the resulting exposures are within the investment policy guidelines. Derivatives are initially measured at fair value at the trade date and subsequently remeasured at fair value at the end of each reporting date. Derivative financial instruments with a positive fair value are recognised as assets and presented in Other assets, while derivative financial instruments with a negative fair value are recognised as liabilities and presented in Financial liabilities related to investments. Changes in the fair value of Company's derivative instruments are recognised in Net gains (losses) on investment portfolio. Refer to note 9 - Derivative financial instruments for details ## 4.5 Business combinations Business combinations are accounted for using the acquisition method. The purchase consideration is measured at fair value at acquisition date. At that date, the identifiable assets acquired, and liabilities assumed, are measured at their fair value. Acquisition-related costs are expensed as incurred. When the Company acquires a business, it assesses the financial assets acquired and the financial liabilities assumed for appropriate classification and designation in accordance with the contractual term, economic circumstances, and relevant conditions at the acquisition date. The excess of the purchase consideration over the fair value of --- the net identifiable assets acquired and liabilities assumed in a business combination results in Goodwill. When the excess is negative, a bargain gain is recognised in the Income statement. ## 4.6 Intangible assets and goodwill ### Goodwill Goodwill is initially measured at cost, being the excess of the fair value of the consideration transferred over the Company's share in the net identifiable assets acquired and liabilities assumed in a business combination. After initial recognition, goodwill is measured at cost less any accumulated impairment losses. Goodwill is allocated to the CGU that is expected to benefit from the business combination in which it arose. Impairment testing is performed at least annually, or more frequently if there are objective indicators of impairment, by comparing the recoverable amount of a CGU with its carrying amount. Impairment testing is undertaken at the lowest level at which goodwill is monitored for internal management purposes, which corresponds to the Company's operating segments. Upon disposal of a portion of a CGU through a sale of a business as defined within IFRS 3, the carrying amount of goodwill related to the portion of the CGU sold is included in the determination of gains and losses on disposal. The carrying amount is determined based on the relative fair value of the disposed portion to the total CGU. ### Intangible assets The Company's intangible assets include internally developed software, externally acquired software and intangible assets relating to distribution networks, customer lists and trade names. Intangible assets with finite economic lives are amortised over their useful lives and assessed for impairment whenever there is an indication that the intangible asset may be impaired. Intangible assets with indefinite lives, as well as those intangible assets that are under development, are not subject to amortisation, but are tested for impairment on an annual basis at the CGU level. Amortisation of intangible assets is included in Other expense in the Income statement. Refer to note 17 - Goodwill and intangible assets for further information. ## 4.7 Translation of foreign operations 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: i. assets and liabilities for each statement of financial position presented are translated at closing exchange rates at the end of the period; ii. income and expenses for each income statement are translated at average exchange rates during each period; and iii. all resulting exchange differences are recognised in other comprehensive income and accumulated in 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 Transactions denominated in foreign currencies are initially recognised in the functional currency of the related entity using the exchange rates in effect at the date of the transaction. i. monetary assets and liabilities denominated in foreign currencies are translated using the closing exchange rates. Any resulting exchange difference is recognised in the Income statement; ii. non-monetary assets and liabilities denominated in foreign currencies and measured at historical cost are translated using historical exchange rates, and those measured at fair value are translated using the exchange rate in effect at the date the fair value is determined; and iii. revenues and expenses are translated using the average exchange rates for the period or the exchange rate at the date of the transaction for significant items. The rates of exchange used in the preparation of the financial statements are as follows: | | As at | | | Average rate for the years | | | --- | --- | --- | --- | --- | --- | | | 31 December 2023 | 31 December 2022 | 1 January 2021 | 2023 | 2022 | | EUR | 1.15 | 1.13 | 1.19 | 1.15 | 1.17 | | CAD | 1.69 | 1.64 | 1.71 | 1.68 | 1.61 | | USD | 1.27 | 1.20 | 1.35 | 1.24 | 1.23 | ## 4.8 Investments in subsidiaries The Company accounts for investments in subsidiaries at cost less accumulated impairment losses. Accumulated impairment is assessed against the recoverable amount. --- 37 # 4.9 Property and equipment Property and equipment is comprised of equipment (comprising fixtures, fittings and other equipment including computer hardware and motor vehicles) and Group occupied property and is initially recognised at cost. Equipment is measured at cost less accumulated depreciation and accumulated impairment. 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. After initial recognition, Group occupied property is measured at fair value. The estimated useful lives of property and equipment are as follows: | Group occupied buildings | normally 30 years | | --- | --- | | 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 income statement. 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 income statement except for reversals of impairment losses on revalued assets which are recognised in other comprehensive income similarly to the initially recorded impairment loss. Gains and losses on disposal are recognised based on the carrying amount of the asset. On disposal of buildings, any associated revaluation surplus is transferred to retained earnings. # 4.10 Investment property and rental income Investment property is initially measured at cost, including transaction costs, and is subsequently measured at fair value. The fair value methodology is set out in more detail in note 11 – Fair value measurement. Rental income and gains and losses are recognised in Net gains (losses) on investment portfolio in the Income statement. Rental income from operating leases on investment property is recognised as Net investment income in the Income statement on a straight line basis over the length of the lease. # 4.11 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 finance costs. 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 'Property and equipment' policy. The lease liability is subsequently re-measured 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. When the assets is reduced to zero, any remaining remeasurement is recognised in the income statement. ## 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 as an operating lease (refer to 'Investment property and rental income' 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. Amounts due from lessees under finance leases are recognised as receivables within Other assets 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. ## 4.12 Current and deferred tax Current and deferred tax are recognised in the income statement, except to the extent that the tax arises from a transaction or event recognised either in OCI or directly in equity. Any exceptions to this, as permitted under IAS 12 - 'Income Taxes', are disclosed in note 26 - Income tax. 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 income statement or OCI, as is the case typically for brought forward tax losses, then these amounts are attributed between the income statement 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 dividends receivable. 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 Uncertainty over income tax treatments 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. No provision for deferred tax is made for possible Pillar Two tax liabilities. ## 4.13 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 can be 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 income statement. 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 liabilities. 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. Further information on the share schemes the Company operates can be found in note - 27. ## 4.14 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 income statement in the period in which the underlying employment services are provided to the Company. 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 statement of financial position 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 statement of financial position in Other liabilities. For those schemes in a net asset (surplus) position, the net asset is recognised in the statement of financial position in 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 income statement relating to post-employment defined benefit schemes are as follows: i. the current service cost: this is the present value of additional benefits payable for employees' services provided during the reporting period; ii. 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 38 --- 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; iii. 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; and iv. the administration costs of operating the pension schemes. Remeasurements of the net defined benefit liability/asset recognised in OCI 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. Further information is provided in note 28 - Employee future benefits. ## 4.15 Current vs non-current In line with industry practice, the Company's statement of financial position is not presented using current and non-current classifications, but in order of liquidity. The assets and liabilities considered as non-current include: deferred tax assets, property and equipment, intangible assets, goodwill, deferred tax liabilities, outstanding debt including issued debt and elements of financial investments, insurance contract liabilities and reinsurance contract assets. The assets and liabilities considered as current include cash and cash equivalents, and elements of financial investments, insurance contract liabilities and reinsurance contract assets. The remaining balances are of a mixed nature. The current and non-current portions of such balances are provided in the respective notes. ## 5. Material accounting judgements, estimates and assumptions ### 5.1 Use of judgements, estimates and assumptions The preparation of financial statements in conformity with IFRS requires management to use judgements, estimates and assumptions that can have a significant impact on the recognised amounts of assets and liabilities, disclosure of contingent assets and liabilities as at the balance sheet date, as well as recognised amounts of revenues and expenses during the reporting period. Actual results could differ significantly from these estimates. The key estimates that have a risk of causing a material adjustment to the carrying amount of certain assets and liabilities in the next twelve months are 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; the assumptions used in the measurement of deferred tax assets; and the assumptions used in determining the useful economic lives and recoverable amounts for intangible assets. The key areas where management has applied judgement are the valuation of financial assets and intangible assets. Further information on the key judgements, estimates and assumptions is provided in the following notes: | Descriptions | Reference | Descriptions | Reference | | --- | --- | --- | --- | | Global economic environment | Note 5.2 | Impairment of goodwill and intangible assets | Note 17.2 | | Business combinations and disposals | Note 6 | Valuation of financial assets | Note 11 | | Insurance and reinsurance contracts | Note 13.3 | Measurement of income taxes | Note 26.5 | | Valuation of intangible assets | Note 17 | | | ### 5.2 Global economic environment #### Global financial market volatility The Company continued to observe a significant volatility in financial markets. Several recession indicators are pointing to difficult quarters ahead. Inflation has cooled but remains above targets, with central banks reaffirming their intention to bring it into line. The increase in interest rates is affecting asset values and the Company is closely monitoring the impact of lower commercial real estate values and the decrease in lending appetite from US banks. The increased uncertainty required management to use judgements, estimates and assumptions related to the Company's exposure to the Global economic environment. As a result, additional disclosures are provided on the Company's exposure to the Global economic environment in the following areas: i. the valuation of investments (note 11); and ii. the valuation of the liability for incurred claims (note 13). #### Climate change Climate change trends are giving rise over time to different weather patterns and therefore general insurance claims experience. The judgements made in respect of the valuation of the liability for incurred claims takes our observed reported experience into account and use common actuarial techniques to estimate ultimate costs. When selecting our future weather event claims --- experience assumption for our operational plan, we consider average experience over a recent period plus a judgmental allowance in recognition of climate change trends, along with any other relevant considerations such as exposure changes. Russia-Ukraine and Israel-Gaza wars The wars in Ukraine and Gaza have caused instability in the global economy and markets. While its direct exposure to Russia-Ukraine and Israel-Gaza is immaterial, the Company continues to closely monitor for any indirect impacts. ## 6. Business combinations and disposals ## 6.1 Business acquisition completed in 2023 On 6 September 2023, the Company announced that it had entered into an agreement to acquire the brokered Commercial lines operations of DLG, a general insurer with leading market positions in the UK (the DLG brokered commercial lines acquisition). The acquisition is expected to strengthen the Company's UK Commercial lines platform, broaden its broker distribution network and expand its current Commercial lines product offering. The acquisition was approved by the Board of Directors of both companies and closed on 26 October 2023, following approval by DLG's shareholders on 19 October 2023. The purchase price includes an initial cash consideration of £520m paid on 26 October 2023, with potential for up to a further £30m contingent payment under earnout provisions relating to the financial performance of the acquired business lines. The acquisition was structured through several agreements as described below: i. business combination - the business transfer agreement related to new business franchise and certain operations, renewal rights, data, brands, employees, contractors, third party contracts and premises for which the operational transfer is expected to occur in the second quarter of 2024. The business transfer agreement resulted in a business combination as the Company assumes control from the closing date. As a result, the acquired net assets are reported from that date; and ii. quota share reinsurance agreement - the reinsurance agreement related to premiums written but not yet earned starting from 1 October 2023. As a result, substantially all of the future economics of the business were transferred to the Company before policies will be renewed by the Company starting in the second quarter of 2024. The reinsurance agreement was recognised in direct insurance results in the fourth quarter of 2023. In addition, if approved by the High Court of Justice in England and Wales, these policies will be legally transferred to the Company. The quota share reinsurance arrangement was not part of the business combination; and iii. administration and transitional services arrangements - the Company entered into certain arrangements to ensure the servicing of policies during the transition. As part of the acquisition, DLG will retain claims incurred related to premiums earned pre 1 October 2023. As a result, the Company is not exposed to any development on prior-year claims related to premiums earned pre 1 October 2023. The purchase price of £520m and expected related integration costs of approximately £45m were funded through a capital injection by IFC, via a subscription of one share in the Company at a premium of £565m. Refer to note 30 - Related party transactions for further information. 40 --- The following table summarises the consideration and the preliminary fair value of the assets acquired and liabilities assumed as at the acquisition date. The final determination of the fair value will be completed within the prescribed period of one year following the acquisition. | As at the acquisition date (26 October 2023) | £m | | --- | --- | | Purchase price | | | Cash consideration | 520 | | Contingent consideration^{1} | 3 | | Fair value of the identifiable assets acquired and liabilities assumed | 523 | | Assets | | | Intangible assets^{2} | 229 | | Other | 2 | | Liabilities | | | Deferred tax liabilities^{3} | (32) | | Other | (2) | | Total identifiable net assets acquired | 197 | | Goodwill | 326 | 1 Recorded at fair value based on estimates of future profitability metrics, discounted using information as of the measurement date and classified in Level 3 of the fair value hierarchy. 2 Intangible assets are comprised of distribution channels (£188m), trade names (£31m) and acquired technology (£10m). 3 The valuation of deferred tax liabilities involves an element of Management judgement in relation to contractual arrangements to be finalised in 2024. The distribution networks are amortised over a 15-year period and trade names are amortised over an 8-year period. The fair value of the acquired distribution networks was determined using discounted cash flows with the key estimates and assumptions as follows: i. cash flow projections, including estimated growth rates and profitability, broker attrition rates, synergies and contributory asset charges such as capital required to operate; and ii. the discount rate was based on the weighted-average cost of capital for comparable companies with similar activities. Trade names were determined using the relief-from royalty method, an income approach using a projection of growth to which a royalty rate is applied. The key estimates and assumptions are the growth rate, the useful life, the royalty rate and the discount rate. The fair values of the intangible assets recognised at the acquisition date are sensitive to the assumptions used, as shown in the following table: | As at 31 December 2023 | Distribution Channels | Trade Names | | --- | --- | --- | | | £m | £m | | 1 year increase in useful life | 5 | 4 | | 50 basis point decrease in the royalty rate | n/a | (11) | | 50 basis point decrease in the discount rate | 13 | - | Goodwill reflects new business growth, tax synergies and the quality of the acquired businesses. Goodwill is not deductible for tax purposes. From 1 October to 31 December 2023, the contribution from the acquisition, including the Quota share agreement to Insurance revenue and Loss before tax was £153m and £16m respectively for the year ended 31 December 2023. On a pro-forma basis from 1 January 2023, the contribution to Insurance revenue would have been £549m. The pro-forma basis was calculated using historical information and is not necessarily indicative of the Insurance revenue that would have been derived if the acquisition occurred on 1 January 2023, or the Insurance revenue that may be obtained in the future. The contribution to Loss before tax on a pro-forma basis cannot be determined based on historical information as the business acquired was operated in conjunction with other business activities that have not been acquired by the Company. On a pro-forma basis from 1 January 2023, the amortisation expense related to the acquired intangible assets would have been £20m. For the year ended 31 December 2023, the Company recognised integration costs of £5m in the line Integration and restructuring costs in relation to the acquisition. ## 6.2 Disposals ## UK Personal lines On 28 March 2023, the Company announced its exit from the Personal lines motor market in the UK as part of initiatives aimed at improving the strength and sustainability of the business. The exit includes an agreement to introduce MORE THAN direct motor customers to Swinton Insurance, a brand of Atlanta Insurance Intermediaries Limited, upon renewal. --- Subsequently, on 7 December 2023, the Company announced it had entered into an agreement to sell its UK direct Personal lines operations to Admiral for an initial cash consideration of £85m, with a potential for up to £33m of further consideration subject to the fulfilment of certain retention thresholds. The sale was approved by the Boards of Directors of both the Company and Admiral and is expected to close during the first half of 2024. The transaction will result in the transfer of renewal rights, brands and employees. However, the Company will retain claims incurred prior to closing. Consequently no assets or liabilities on the Statement of financial position are held for sale at 31 December 2023. On the same date, the Company announced its exit from the UK Home and Pet partner and broker contracts resulting in a complete exit from the UK Personal lines market. The results for UK Personal lines are included in continuing operations for 2023 as it did not represent a separate major line of business or geographical area of operation. The Company recorded restructuring costs of £89m in Integration and restructuring costs for the year ended 31 December 2023 in respect of these transactions. ## 7. Investments ### 7.1 Classification of investments | | FVTPL | | | FVTOCI | Amortised Cost | Total carrying amount | | --- | --- | --- | --- | --- | --- | --- | | | Designated as FVTPL | Mandatorily measured at FVTPL | Measured at FVTPL | | | | | As at 31 December 2023 | £m | £m | £m | £m | £m | £m | | Cash and cash equivalents | - | - | - | - | 168 | 168 | | Investment property | - | - | 283 | - | - | 283 | | Equity securities | - | 179 | - | - | - | 179 | | Debt & fixed income securities | 1,698 | 314 | - | 2,351 | - | 4,363 | | Loans | - | - | - | - | 391 | 391 | | | 1,698 | 493 | 283 | 2,351 | 559 | 5,384 | | | FVTPL | | | FVTOCI | Amortised Cost | Total carrying amount | | --- | --- | --- | --- | --- | --- | --- | | | Designated as FVTPL | Mandatorily measured at FVTPL | Measured at FVTPL | | | | | As at 31 December 2022 | £m | £m | £m | £m | £m | £m | | Cash and cash equivalents | - | - | - | - | 220 | 220 | | Investment property | - | - | 289 | - | - | 289 | | Equity securities | - | 185 | - | - | - | 185 | | Debt & fixed income securities | 2,138 | 285 | - | 1,766 | - | 4,189 | | Loans | - | - | - | - | 433 | 433 | | | 2,138 | 470 | 289 | 1,766 | 653 | 5,316 | --- 7.2 Carrying amounts of investments The following tables analyse the cost/amortised cost, gross unrealised gains and losses, and fair value of financial assets. | | FVTPL investments | Other investments | | | | Total investments | | --- | --- | --- | --- | --- | --- | --- | | | Carrying amount | Cost/ amortised cost | Unrealised gains | Unrealised losses | Carrying amount | Carrying amount | | As at 31 December 2023 | £m | £m | £m | £m | £m | £m | | Cash and cash equivalents | - | 168 | - | - | 168 | 168 | | Investment property | 283 | - | - | - | - | 283 | | Equity securities | 179 | - | - | - | - | 179 | | Debt & fixed income securities | 2,013 | 2,449 | 24 | (123) | 2,350 | 4,363 | | Loans | - | 391 | - | - | 391 | 391 | | | 2,475 | 3,008 | 24 | (123) | 2,909 | 5,384 | | | FVTPL investments | Other investments | | | | Total investments | | | Carrying amount | Cost/ amortised cost | Unrealised gains | Unrealised losses | Carrying amount | Carrying amount | | As at 31 December 2022 | £m | £m | £m | £m | £m | £m | | Cash and cash equivalents | - | 220 | - | - | 220 | 220 | | Investment property | 289 | - | - | - | - | 289 | | Equity securities | 185 | - | - | - | - | 185 | | Debt & fixed income securities | 2,423 | 1,947 | 8 | (189) | 1,766 | 4,189 | | Loans | - | 433 | - | - | 433 | 433 | | | 2,897 | 2,600 | 8 | (189) | 2,419 | 5,316 | 7.3 Collateral The following table summarises the investment-related collateral: | | 2023 | 2022 | | --- | --- | --- | | As at 31 December | £m | £m | | Collateral pledged | 1,379 | 1,319 | | Collateral accepted | 451 | 446 | At 31 December 2023, collateral pledged included government debt securities of £52m (2022: £40m), non-government debt securities of £324m (2022: £313m), and cash and cash equivalents of £1m (2022: £6m). The debt securities of £376m (2022: £353m) are included in the Statement of financial position as FVTOCI debt securities and the Company's right to recover the cash pledged of £1m (2022: £7m) is included in other assets. The terms and conditions of the collateral pledged are market standard in relation to letter of credit facilities, derivative transactions and repurchase agreements. Total collateral pledged is £1,379m (2022: £1,319m) including the collateral pledged pertinent to reinsurance arrangements with related parties (note 30). At 31 December 2023, collateral accepted consisted of government and non-government debt securities of £418m (2022: £416m), which the Company is permitted to sell or repledge in the event of default by the owner. £416m of debt securities on the Statement of financial position are lent out under stock lending arrangements (2022: £339m). Cash and cash equivalents of £33m (2022: £30m) is also accepted as collateral. The obligation to repay the cash is included in the Statement of financial position in Other liabilities. The fair value of the collateral accepted is £451m (2022: £446m). The terms and conditions of the collateral held are market standard. The assets held as collateral are readily convertible into cash. --- # 8. Financial liabilities related to investments | As at 31 December | 2023 | 2022 | | --- | --- | --- | | | £m | £m | | Accounts payable to investment brokers on unsettled trades | 15 | 1 | | Derivative financial liabilities (Note 9) | 25 | 25 | | | 40 | 26 | # 9. Derivative financial instruments The following table summarises the types of derivatives used by the Company. Types of derivatives used | Derivatives | Description | Objective | Designation | | --- | --- | --- | --- | | Forwards | Contractual obligation to exchange: | | | | Currency | One currency for another at a predetermined future date | Mitigate risk arising from foreign currency fluctuations on: | | | | | • foreign currency cash inflows and outflows impacting the Company's operations; and | Not designated | | | | • the Company's net investment in foreign operations. | Not designated | | Swaps | Over-the-counter contracts: | | | | Interest rate | In which two counterparties exchange a stream of future interest payment for another, based on a specified principal amount | Modify or mitigate exposure to interest rate fluctuations | Not designated | | Cross currency interest rate | In which two counterparties exchange a stream of future interest payment for another, based on a specified principal amount and in two different currencies | Modify or mitigate exposure to interest rate and foreign currency fluctuations | Not designated | | Equity | In which two counterparties exchange a series of cash flow based on a basket of stocks, applied to a notional amount | Mitigate exposure to equity market fluctuations | Not designated | | Inflation | That transfer inflation risk from one party to another | Modify exposure to inflation risk | Not designated | The following table presents the notional amount by remaining term to maturity and fair value of the derivatives held by the Company based on their designation in qualifying hedge accounting relationships. | As at 31 December 2023 | | Term to maturity (notional amount) | | | | Fair Value | | | --- | --- | --- | --- | --- | --- | --- | --- | | | | Less than 1 year | From 1 to 5 years | Over 5 years | Total | Asset | Liability | | Type of hedge | Instrument type | £m | £m | £m | £m | £m | £m | | Not designated for hedge accounting | Currency forward contracts | 586 | - | - | 586 | 7 | 2 | | | Cross currency interest swaps | 3 | 28 | 16 | 47 | - | 6 | | | Interest rate swaps | - | - | 54 | 54 | 18 | - | | | Equity swaps | 96 | - | - | 96 | - | 4 | | | Inflation swaps | - | - | 120 | 120 | 34 | 13 | | | | 685 | 28 | 190 | 903 | 59 | 25 | --- 45 | As at 31 December 2022 | Instrument type | Term to maturity (notional amount) | | | | Fair Value | | | --- | --- | --- | --- | --- | --- | --- | --- | | | | Less than 1 year | From 1 to 5 years | Over 5 years | Total | Asset | Liability | | Type of hedge | | £m | £m | £m | £m | £m | £m | | Not designated for hedge accounting | Currency forward contracts | 472 | - | - | 472 | 4 | 7 | | | Cross currency interest swaps | - | 34 | 16 | 50 | - | 8 | | | Interest rate swaps | - | - | 54 | 54 | - | - | | | Inflation swaps | - | - | 120 | 120 | 46 | 10 | | | | 472 | 34 | 190 | 696 | 50 | 25 | The Company enters into derivative transactions under International Swaps and Derivatives Association (ISDA) master netting arrangements. In general, under such agreements the amounts owed by each counterparty on a single day in respect of all transactions outstanding in the same currency are aggregated into a single net amount that is payable by one counterparty to the other. In certain circumstances, such as a credit default, all outstanding transactions under the agreement are terminated, the termination value is assessed and only a single net amount is payable in settlement of all transactions. The ISDA agreements do not meet the criteria for offsetting in the statement of financial position. This is because the Company does not have any current legally enforceable right to offset recognised amounts, because the right to offset is enforceable only on the occurrence of future events. The tables below provide information on the impact of the netting arrangements. | | Amounts subject to enforceable netting arrangements | | | | | | | --- | --- | --- | --- | --- | --- | --- | | | Effect of offsetting in balance sheet | | | Related items not offset | | Net amount | | | Gross amounts | Amounts offset | Net amounts reported | Financial instruments | Financial collateral | | | As at 31 December 2023 | £m | £m | £m | £m | £m | £m | | Derivative financial assets | 59 | - | 59 | (23) | (32) | 4 | | Derivative financial liabilities | 25 | - | 25 | (23) | - | 2 | | | Amounts subject to enforceable netting arrangements | | | | | | | --- | --- | --- | --- | --- | --- | --- | | | Effect of offsetting in balance sheet | | | Related items not offset | | Net amount | | | Gross amounts | Amounts offset | Net amounts reported | Financial instruments | Financial collateral | | | As at 31 December 2022 | £m | £m | £m | £m | £m | £m | | Derivative financial assets | 50 | - | 50 | (19) | (31) | - | | Derivative financial liabilities | 25 | - | 25 | (19) | (6) | - | # 10. Investments in subsidiaries | | Subsidiaries | | --- | --- | | | £m | | Investments at 1 January 2022 | 5,518 | | Purchases | 280 | | Impairment | (4,571) | | Investments at 31 December 2022 | 1,227 | | Purchases | 9 | | Impairment | (376) | | Investments at 31 December 2023 | 860 | Impairment of investments in subsidiaries in 2023 and 2022 largely relates to RSA Group-wide project to rationalise the intra-group loan position. Further information on these projects is provided in the Business review. The impairment recorded for 2022 also includes impairment based on level 3 fair valuation for two subsidiaries, RSA Luxembourg and RSA Insurance Ireland. For these subsidiaries, 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 benefits. Discounted cash flows are based on the latest 3 year Board approved operational plan, with the final year being forecasted to perpetuity, by applying a long term growth assumption. --- 46 # 11. Fair value measurement The fair value of financial instruments on initial recognition is normally the transaction price, being the value of the consideration. After initial recognition, the fair value of financial instruments is based on available information and categorised according to a three-level fair value hierarchy. ## Fair value hierarchy The three-level fair value hierarchy comprises: i. Level 1 fair value measurements are those derived from quoted prices (unadjusted) in active markets for identical assets or liabilities; ii. Level 2 fair value measurements are those derived from data other than quoted prices included within level 1 that are observable for the asset or liability, either directly (i.e. as prices) or indirectly (i.e. derived from prices); and iii. Level 3 fair value measurements are those derived from valuation techniques that include significant inputs for the asset or liability valuation that are not based on observable market data (unobservable inputs). A financial instrument is regarded as quoted in an active market (Level 1) if quoted prices for that financial instrument are readily and regularly available from an exchange, dealer, broker, industry group, pricing service or regulatory agency and those prices represent actual and regularly occurring market transactions on an arm's length basis. For Level 1 and Level 2 investments, the Company uses prices received from external providers who calculate these prices from quotes available at the reporting date for the particular investment being valued. For investments that are actively traded, the Company determines whether the prices meet the criteria for classification as a Level 1 valuation. The price provided is classified as a Level 1 valuation when it represents the price at which the investment traded at the reporting date, taking into account the frequency and volume of trading of the individual investment, together with the spread of prices that are quoted at the reporting date for such trades. Typically, investments in frequently traded government debt would meet the criteria for classification in the Level 1 category. Where the prices provided do not meet the criteria for classification in the Level 1 category, the prices are classified in the Level 2 category. Market traded securities only reflect the possible impact of climate change to the extent that this is built into the market price at which securities are trading. In certain circumstances, the Company does not receive pricing information from an external provider for its financial investments. In such circumstances the Company calculates fair value, which may use input parameters that are not based on observable market data. Unobservable inputs are based on assumptions that are neither supported by prices from observable current market transactions for the same instrument nor based on available market data. In these cases, judgement is required to establish fair values. Changes in assumptions about these factors could affect the reported fair value of financial instruments. The principal assets classified as Level 3, and the valuation techniques applied to them, are described below. ## Investment property Investment property valuations are carried out in accordance with the latest edition of the Valuation Standards published by the Royal Institution of Chartered Surveyors (RICS), and are undertaken by independent RICS registered valuers. Valuations are based on the comparative method with reference to sales of other comparable buildings and take into account the nature, location and condition of the specific property together with factoring in the occupational lease terms and tenant covenant strength as appropriate. The valuations also include an income approach using discounted future cash flows, which uses unobservable inputs, such as discount rates, rental values, rental growth rates, vacancy rates and void or rent free periods expected after the end of each lease. These valuations reflect yield ranges between 5.4% to 12.1% and a weighted average of 6.4% as at 31 December 2023 (5.0% and 10.8% and 6.3% respectively, as at 31 December 2022). ## Private fund structures Loan funds are principally valued at the proportion of the Company's holding of the Net Asset Value (NAV) reported by the investment vehicle. Several procedures are employed to assess the reasonableness of the NAV reported by the fund, including obtaining and reviewing periodic and audited financial statements and estimating fair value based on a discounted cash flow model that adds spreads for credit and illiquidity to a risk-free discount rate. Discount rates employed in the model at 31 December 2023 range from 4.2% to 9.5% and have a weighted average of 7.1% (31 December 2022: 3.0% to 11.6% and 7.6% respectively). If necessary the Company will adjust the fund's reported NAV to the discounted cash flow valuation where this more appropriately represents the fair value of its interest in the investment. ## Derivative financial instruments Derivative financial instruments are financial contracts whose fair value is determined on a market basis by reference to underlying interest rate, foreign exchange rate, equity or commodity instrument or other indices. The items presented in the following table are measured in the Statement of financial position at fair value. The table does not include financial assets and liabilities not measured at fair value for which the carrying value is a reasonable approximation of fair value. ## Cash and cash equivalents, loans, other assets and other liabilities For cash and cash equivalents, loans, commercial paper, other assets, liabilities and accruals, their carrying amounts are considered to be as reasonable approximation of their fair values. Loans represent direct lending for investment purposes. --- # 11.1 Fair value hierarchy The items presented in the following table are measured in the Statement of financial position at fair value. The table does not include financial assets and liabilities not measured at fair value for which the carrying value is a reasonable approximation of fair value. | | Level 1 | Level 2 | Level 3 | Total | | --- | --- | --- | --- | --- | | | | Valued using models | | | | As at 31 December 2023 | Valued using quoted (unadjusted market prices) | with observable inputs | without observable inputs | | | | £m | £m | £m | £m | | Equity securities | 130 | - | 49 | 179 | | Debt securities | 891 | 3,158 | 314 | 4,363 | | Derivative assets | - | 59 | - | 59 | | Group occupied property | - | - | 19 | 19 | | Investment properties | - | - | 283 | 283 | | Total assets measured at fair value | 1,021 | 3,217 | 665 | 4,903 | | Derivative liabilities | - | 25 | - | 25 | | Total liabilities measured at fair value | - | 25 | - | 25 | | | Level 1 | Level 2 | Level 3 | Total | | | | Valued using models | | | | As at 31 December 2022 | Valued using quoted (unadjusted market prices) | with observable inputs | without observable inputs | | | | £m | £m | £m | £m | | Equity securities | 120 | - | 65 | 185 | | Debt securities | 661 | 3,243 | 285 | 4,189 | | Derivative assets | - | 50 | - | 50 | | Group occupied property | - | - | 18 | 18 | | Investment properties | - | - | 289 | 289 | | Total assets measured at fair value | 781 | 3,293 | 657 | 4,731 | | Derivative liabilities | - | 25 | - | 25 | | Total liabilities measured at fair value | - | 25 | - | 25 | --- 11.2 Fair value categorisation (level 3 assets) | As at 31 December 2023 | Classified as FVTPL | Mandatorily measured as FVTPL | Investment property | Group occupied property | Total | | --- | --- | --- | --- | --- | --- | | | Equity securities | Debt securities | | | | | Balance, beginning of period | 65 | 285 | 289 | 18 | 657 | | Total gains/(losses) recognised in: | | | | | | | Income statement^{1} | (3) | 1 | (8) | - | (10) | | Other comprehensive income | - | - | - | (3) | (3) | | Purchases | - | 127 | 12 | 4 | 143 | | Disposals | (13) | (87) | (10) | - | (110) | | Exchange adjustment | - | (12) | - | - | (12) | | Balance, end of year | 49 | 314 | 283 | 19 | 665 | 1 Includes £15m of losses in relation to securities and property recognised on the Statement of financial position at 31 December 2023. These losses are recognised in Net gains (losses) on investment portfolio. | As at 31 December 2022 | Classified as FVTPL | Mandatorily measured as FVTPL | Investment property | Group occupied property | Total | | --- | --- | --- | --- | --- | --- | | | Equity securities | Debt securities | | | | | Balance, beginning of the period | 80 | 250 | 368 | 18 | 716 | | Total gains/(losses) recognised in: | | | | | | | Income statement^{1} | 2 | 8 | (13) | 13 | 10 | | Other comprehensive income | 5 | (3) | - | (3) | (1) | | Purchases | 12 | 141 | 7 | 3 | 163 | | Disposals | (34) | (128) | (73) | (13) | (248) | | Exchange adjustment | - | 17 | - | - | 17 | | Balance, end of year | 65 | 285 | 289 | 18 | 657 | 1 Includes £27m of losses in relation to securities and property recognised on the Statement of financial position at 31 December 2022. These losses are recognised in Net gains (losses) on investment portfolio. --- # 11.3 Fair value sensitivity (level 3 assets) The following table shows the level 3 available for sale financial assets carried at fair value as at the balance sheet date, the main assumptions used in the valuation of these instruments and reasonably possible decreases in fair value based on reasonably possible alternative assumptions. | | | Reasonably possible alternative assumptions1 | | | | | --- | --- | --- | --- | --- | --- | | | | 2023 | | 2022 | | | | | Current fair value | Decrease in fair value | Current fair value | Decrease in fair value | | Available for sale financial assets and property | Main assumptions | £m | £m | £m | £m | | Group occupied property - land and buildings | Property valuation | 19 | (1) | 18 | (1) | | Investment properties | Cash flows; discount rate | 283 | (20) | 289 | (20) | | Level 3 available for sale financial assets: | | | | | | | Equity securities | Cash flows; discount rate | 49 | (1) | 65 | (1) | | Debt securities | Cash flows; discount rate | 314 | (5) | 285 | (3) | | Total | | 665 | (27) | 657 | (25) | 1 The Company's investments in financial assets classified at level 3 in the hierarchy are primarily investments in various private fund structures investing in debt instruments where the valuation includes estimates of the credit spreads on the underlying holdings. The estimates of the credit spread are based upon market observable credit spreads for what are considered to be assets with similar credit risk. Reasonably possible alternative valuations for these instruments have been determined using an increase of 50bps in the credit spread used in the valuation (31 December 2022: 50bps). Reasonably possible alternative assumptions for property have been determined using an increase of 50bps in the equivalent yield (31 December 2022: 50bps). # 12. 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: i. Credit risk ii. Market risk, including price, interest rate and currency rate risks iii. 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 use of derivatives is governed by the Group Investment Policy. The adoption of IFRS 17 and IFRS 9 has not changed the way the Company manages financial risk. # 12.1 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'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, loans and cash and cash equivalents. Credit risk is managed at both an RSA 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 RSA Group level. In addition, the Credit Ratings Review Committee reviews the credit ratings of material investment exposures and unrated investments. The RSA Group's credit risk appetite and credit risk policy are reviewed by the BRC and approved by the Board on an annual basis, to ensure limits remain within its quantitative appetite. This is done through the setting of RSA Group policies, procedures and limits. In defining its appetite for credit risk, the RSA Group looks at exposures at both an aggregate and operating segment 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 RSA 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 --- on the Company's core fixed income investment manager as to the level of exposure to various credit rating categories including unrated securities. The RSA Group is also exposed to credit risk from the use of reinsurance in the event that a reinsurer fails to settle its liability to the RSA Group. The Reinsurance Credit Committee oversees the management of credit risk arising from the reinsurer failing to settle its liability to the Company. Company 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 Company'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 2023 the extent of collateral held by the Company against reinsurance contract assets was £36m (2022: £44m), which in the event of a default would be called and recognised on the Statement of financial position. This collateral consists of letters of credit and security agreements. 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 depend on various factors including the Reinsurer's financial credit rating. The three active reinsurance groups to which the Company has the largest reinsurance asset recoverable are Berkshire Hathaway, Lloyd's of London and Talanx. At 31 December 2023 the reinsurance asset recoverable from each of these groups does not exceed 6.3% (2022: 7.3%) of the Company's total financial assets. On 27 February 2023 the Trustees of the Company's two major UK DB pension plans (the UK plans) entered into an agreement with PIC, a specialist insurer of defined benefit pension plans, to purchase buy-ins, as part of its de-risking strategy. The buy-in agreement transferred the remaining economic and demographic risks associated with these plans to PIC and removed the volatility in relation to these plans from the Company's Statement of financial position. The main risk that the Company retains is counterparty risk, with market risk on the assets that were remaining in the UK plans at the transaction date now largely removed. The credit profile of the Company's assets exposed to credit risk is shown below. The table below sets out the Company's Maximum exposure to credit risk. ## Credit quality The Company's risk management strategy, for public fixed income, is to invest in high quality issuers and to limit the amount of credit exposure within respect to any one issuer by imposing limits based on credit quality. The Company's public fixed income investment portfolio has over 99% invested in investment grade securities. This excludes indirect investment through debt funds. In the case of funds, specific policy limits apply to manage the overall exposure to these investments. Management monitors subsequent credit rating changes on a regular basis. The following tables present the credit quality of the Company's debt securities. | As at 31 December | 2023 | 2022 | | --- | --- | --- | | | £m | £m | | Debt & fixed income securities: | | | | AAA | 34% | 33% | | AA | 25% | 25% | | A | 23% | 22% | | BBB | 17% | 19% | |