RSA.L Regulatory News (RSA)

24 March 2016

RSA INSURANCE GROUP PLC

(THE "COMPANY")

2015 ANNUAL FINANCIAL REPORT ANNOUNCEMENT

In accordance with Listing Rule 9.6 and Disclosure and Transparency Rule ("DTR") 4.1, the Company announces that the following documents have been posted to shareholders and have today been submitted to the UK Listing Authority via the National Storage Mechanism:

· Annual Report and Accounts for the year ended 31 December 2015

· Notice of the 2016 Annual General Meeting to be held on 6 May 2016

· Proxy form for the 2016 Annual General Meeting

The above mentioned documents (except for the Proxy form) are available on our website at www.rsagroup.com and www.rsagroup.com/agm2016 and will shortly be made available for inspection at www.morningstar.co.uk/uk/NSM. Shareholders can obtain additional copies of the Proxy form from our Registrar, Equiniti Limited at Aspect House, Spencer Road, Lancing, West Sussex BN99 6DA or view online at www.shareview.co.uk.

This announcement should be read in conjunction with the Company's announcement issued on 25 February 2016. Together these constitute the material required by DTR 6.3 to be communicated to the media in full unedited text through a Regulatory Information Service. This material is not a substitute for reading the Company's 2015 Annual Report and Accounts.

An indication of the important events that occurred in 2015 and their impact on the condensed consolidated financial statements, the condensed consolidated financial statements themselves and the responsibility statement were announced to the London Stock Exchange on 25 February 2016, forming part of the Preliminary Results announcement for the year ended 31 December 2015. Additional content forming part of the management report is in the Appendix below.

Enquiries:

Elinor Bell

Deputy Group Company Secretary

RSA Insurance Group plc

Tel: +44 (0) 20 7111 7000

IMPORTANT DISCLAIMER

Visit www.rsagroup.com for more information.

This press release (together with the Annual Report and Accounts referred to herein) has been prepared in accordance with the requirements of English company law and the liabilities of the directors in connection with this press release (together with the Annual Report and Accounts referred to herein) shall be subject to the limitations and restrictions provided by such law. This press release may contain 'forward-looking statements' with respect to certain of the Group's plans and its current goals and expectations relating to its future financial condition, performance, results, strategic initiatives and objectives. Generally, words such as "may", "could", "will", "expect", "intend", "estimate", "anticipate", "aim", "outlook", "believe", "plan", "seek", "continue" or similar expressions identify forward-looking statements. These forward-looking statements are not guarantees of future performance. By their nature, all forward-looking statements are inherently predictive and speculative and involve risk and uncertainty because they relate to future events and circumstances which are beyond the Group's control, including amongst other things, UK domestic and global economic business conditions, market-related risks such as fluctuations in interest rates and exchange rates, the policies and actions of regulatory authorities (including changes related to capital and solvency requirements), the impact of competition, inflation, deflation, the timing impact and other uncertainties of future acquisitions or combinations within relevant industries, as well as the impact of tax and other legislation or regulations in the jurisdictions in which the Group and its affiliates operate. As a result, the Group's actual future financial condition, performance and results may differ materially from the plans, goals and expectations set forth in the Group's forward-looking statements. The Group undertakes no obligation to update any forward-looking statements, save in respect of any requirement under applicable law or regulation. Nothing in this press release (together with the Annual Report and Accounts referred to herein) should be construed as a profit forecast.

APPENDIX

References to page numbers and notes to the accounts made in this Appendix refer to page numbers and notes to the accounts in the 2015 Annual Report and Accounts.

KEY PERFORMANCE INDICATORS

We consider the following nine key performance indicators important in measuring the delivery of our strategic priorities.http://www.rns-pdf.londonstockexchange.com/rns/1750T_-2016-3-24.pdf

Underlying return on tangible equity *

Definition: Operating profit attributable to ordinary shareholders less interest costs and underlying tax, expressed in relation to opening tangible shareholders' funds i.e. excluding goodwill and intangible assets.

Commentary: A key measure of shareholder value and one that informs overall valuation in the insurance sector.

Outlook: Targeting 12-15% in the medium-term. Currently expecting to be in the upper-half of this range in 2017.

Combined operating ratio1 *

Definition: A measure of underwriting performance - the ratio of underwriting costs (claims, commissions and expenses) expressed in relation to earned premiums.

Commentary: The COR is used as a measure of underwriting efficiency across the industry. The aim is to achieve a COR as sustainably low as possible - that is without uncompetitive pricing or compromising reserves.

Outlook: Initially targeting a sustainable COR in the mid-90s, improving thereafter.

Capital surplus2 *

Definition

Eligible capital above the Solvency Capital Requirement (SCR) under Solvency II. The coverage ratio represents total eligible capital as a proportion of the SCR.

Commentary: The Solvency II SCR is a measure of the capital adequacy of insurance companies. Our SCR is calculated on our risk profile using the Group's internal capital model.

Outlook: We target a Solvency II coverage ratio in the range of 130% - 160%.

Customer retention

Definition: We use direct measures of satisfaction, such as NPS and indirect measures, including retention.

Commentary: Strong customer satisfaction translates to improved underwriting results. By ensuring customers are at the heart of everything we do we can optimise business performance.

Outlook: Target a growing level of customer satisfaction and maintain retention around 80%.

Carbon emissions per FTE

Definition: Gross tonnes of carbon dioxide equivalent per full time equivalent (FTE).

Commentary: We endeavour to reduce our emissions as far as possible by operating efficiently, procuring sustainable alternatives and promoting sustainable business practices. In the UK we have offset unavoidable operational emissions by purchasing certified carbon credits in projects in Honduras, Africa and Vietnam.

Outlook: We aim to reduce our emissions by 12% per FTE by 2018 (2015 baseline).

TNAV:NWP*

Definition: The ratio of TNAV to NWP.

Commentary: This metric can be used to assess companies across the sector for relative capital strength, when judged in the context of product and geographical diversification. It is used as a high-level guide along other capital metrics used in the Group.

Outlook: We expect TNAV:Premium to be greater than or equal to 35%.

Controllable expenses*

Definition: Operating expenses incurred by the Group in undertaking business activities

Commentary: Reduction of controllable expenses is a key element of the Group's turnaround strategy. The absolute level of expense and the expense ratio (expenses as a proportion of earned premium) are both monitored as part of the turnaround and ongoing performance focus

Outlook: We target >£350m reduction in gross controllable expenses by 2018 and improving expense ratios in the medium-term, in line with our ambition of best-in-class performance.

Tangible net asset value*

Definition: Total shareholders' funds, excluding goodwill, intangibles, and preference share capital. TNAV represents the underlying net asset value of the business.

Commentary: Growing TNAV generally indicates improving capital metrics, it also represents the underlying asset value of the business, though is sensitive to external market movements.

Outlook: We expect TNAV to increase through retained earnings and completion of remaining disposals.

Core Group attritional loss ratio3*

Definition: This is the underlying loss ratio (net incurred claims and claims handling expense as a proportion of net earned premiums) of our business prior to volatile impacts from weather, large

losses and prior year reserve developments.

Commentary: Attritional loss ratios are a key lever in the Group's turnaround of financial performance. Improvements in the business mix together with investments in digitally-enabled underwriting and claims excellence are targeted at reducing the attritional loss ratio.

Outlook: We target improving attritional loss ratios in the medium-term in line with our ambition of best-in-class performance.

* This icon indicates those KPIs directly linked to executive remuneration. To read more about executive variable remuneration, including the set of financial and non-financial performance measures on which it is based, please turn to page 68.

Notes:

1. Combined ratios prior to 2014 do not reflect expense reallocations made during 2015.

2. Capital surplus under Solvency II introduced in 2015.

3. Core group in 2013 includes Latin America.

RISK MANAGEMENT

Our risk strategy supports our ambition as a focused general insurer. By leveraging expertise in risk selection we aim to protect customers and maximise risk-adjusted returns for shareholders.

Our risk management approach

Our risk strategy supports the execution of the wider business strategy. Risk appetite and tolerances establish the principles through which we operate, enabling us to retain only risks residing within our core areas of expertise. We use a risk and control framework to ensure that risks are appropriately managed, mitigated or avoided in-line with our risk appetite.

The Group's risk appetite sets the overarching approach to risk, as well as more granular tolerances within our insurance portfolios. This supports our goals of providing customers with products that protect them from risk and uncertainty, with those risks collectively managed to maximise risk-adjusted returns to our shareholders.

Our risk appetite continues to evolve in line with changing risk, regulatory and economic environments, with a recent focus on preparations for the Solvency II regime, which launched on 1 January 2016.

The Board retains ultimate responsibility for the risk appetite and for maintaining a robust risk management system via the Board Risk Committee, supported by the Chief Risk Officer.

How RSA embeds a culture of risk management throughout the business

RSA supports a healthy approach to risk management by integrating risk management principles throughout the business and reinforcing its role as a business enabler. Risk management principles are embedded within performance management for all employees across the Group regardless of function, who all share a joint responsibility to effectively manage business risk. We have also introduced a cultural health index to help Business Leaders spot early signs of cultural risk within the business.

At RSA we ensure risk management is fully integrated throughout the Group using a 'three lines of defence' model.

The first line of defence represents the business as a whole, operating within a robust control environment, designed to be effective in managing risks independent of the second and third lines. This first line is a key element and includes control testing performed by objective business experts.

The second line includes the risk management and compliance functions and has responsibility for monitoring and assuring first line activities.

The third line includes the independent Audit function, including the Group Audit Committee and Internal Audit. This line conducts periodic reviews of the first and second lines, providing a further review of the Group's risk and control environment.

Proactive response - Putting the customer first

Whilst we design our policies and processes to avoid security breaches, with the evolving cyber risk landscape it is important that we remain alert and prepared to respond if incidents do occur.

During 2015, a data storage device went missing from an access controlled data server room, but our proactive response ensured affected parties were quickly notified with no customers suffering a financial loss.

In reacting to this event we rapidly engaged a multi-disciplined team of experts, including the Regional Executive Team, business partners and compliance and communications professionals, as well as all relevant regulatory bodies, to ensure that the situation was dealt with efficiently and effectively.

Whilst we continue to enhance our control framework to avoid incidents such as this it is reassuring to know that we have effective response processes in place if events do occur and that customers suffered no financial loss as a result of this incident.

Understanding the risk management framework

The risk management framework is integral to our system of governance and incorporates both the risk management system and the internal control system, discussed further on page 46.

http://www.rns-pdf.londonstockexchange.com/rns/1750T_-2016-3-24.pdf 

Governance structure:

The Board is ultimately responsible for ensuring that RSA operates an effective system of risk management, which is monitored via the Board Risk Committee, (further detail on pages 57-58) in turn supported by regional risk and control committees attended by senior leaders and risk management professionals in each of our core regions.

Framework activities:

1. Board sets strategy

The risk management framework operates within the context of the business strategy, set by the Board and incorporated in to the Group and regional operational plans

2. Set risk strategy

The risk strategy reflects the business strategy of developing a focused, stronger and better general insurer and defines the over-arching risk principles to support business goals

3. Set risk appetite

Risk appetite statements and tolerances enable the business to convert the strategic principles into well-defined and well-articulated risk limits. Detailed risk policies then set out the required processes and controls that the business functions are required to follow to deliver the operational plan within these limits.

4. Monitor against risk appetite

Risks are monitored and controlled by the business in line with risk policies, with oversight provided by the second and third lines of defence. Risks identified outside of appetite are raised at regional risk and control committees and action plans agreed. Further escalation of risks to local Boards, Executive management and the Group Board will follow, as required.

5. Solvency capital modelling

The overall assessment of the Group's risk profile is used to inform the Internal Solvency Capital Model, which calculates our Solvency Capital Requirement (SCR), as part of the Groups Own Risk Solvency Assessment (ORSA). The Internal Solvency Capital Model is run on a regular basis throughout the year with outputs sense-checked to ensure that they provide a robust and reliable basis on which to make key business decisions. Outputs from the model are reported to the Board and where relevant amendments are made to fine-tune the Group's operational plans.

KEY RISKS AND MITIGANTS

Note:

1. Legacy includes asbestos, disease and abuse.

Quantifying risks

The table details the proportion each risk type contributes to our total Solvency II Capital Requirement (SCR) (please read Solvency II and solvency capital requirement for more information on the new regime). Consistent with our strategy of focusing on risks within our core area of expertise, our SCR is primarily comprised of insurance related risks. These include higher than expected underwriting losses, large retained catastrophe losses, such as flooding or earthquake, and deterioration in our stock of reserves for future claims.

Our investment strategy is intentionally conservative relative to the industry to minimise market risks to both customers and shareholders. However, we still look for opportunities to capture additional return from less liquid investment-grade assets, where the cashflow profile can be matched with that of our liabilities, this is especially relevant for our longer tail liabilities. For more information on our market risks please refer to the financial statements and supporting notes on page 116.

Another key element of our SCR is risk relating to our defined benefit corporate pension scheme, which is closed to new members. While the scheme is well funded (95% following latest triennial review) and in an accounting surplus, under the rules of Solvency II capital is held for a 1 in 200 year adverse event, which increases the level of capital required against the scheme. For more information on the pension scheme, see note 38 of the financial statements.

Solvency II and Solvency Capital Requirement (SCR)

Solvency II is a new EU-wide insurance regulatory regime relating principally to how insurers manage capital to mitigate the risk of insolvency. Originally adopted by the European Parliament and Council in 2009, the Solvency II Directive became effective on 1 January 2016.

One of the key aims of Solvency II is to introduce a harmonised prudential framework for insurers promoting transparency, comparability and competitiveness amongst European insurers.

The Directive has three pillars that have impacted how RSA manages risk and how it reports to regulators, policyholders and shareholders:

Pillar I relates to the quantitative requirements and introduces a risk based methodology to calculating the Group's Solvency Capital Requirement (SCR). Insurers are required to calculate the level of capital required based on their unique risk profile. For RSA this is calculated using our own Internal Model that was approved by the regulator in December 2015.

Pillar II incorporates qualitative governance requirements, including the way the risk management function operates within the business and how key systems and controls are documented and reviewed.

Pillar III relates to enhanced and standardised disclosure requirements, including increased transparency of the risk strategy and risk appetite of the business.

RSA has been preparing for the introduction of the Solvency II regime since it was announced in 2009 to ensure we were ready for the change and able to respond to its requirements. In this report you can see some of the ways it has impacted the business. For example, the way we have presented the Group's Key risks and Mitigants has been updated to demonstrate how our risk profile informs and aligns to our capital requirements (SCR). We have also updated our Key Performance Indicators on pages 22-23 to reflect the importance of the Solvency II position to the effective management of our business.

In the coming years Solvency II will continue to develop and inform the way the Group manages risk and capital. In 2017 the Group will, for the first time, report its Solvency and Financial Condition Reports (SFCR), which will provide a standardised disclosure of performance, risk management and capital position of insurers.

Future and emerging risks

In addition to those risks that inform our capital requirements the Group constantly considers the broader risk landscape, including new and emerging risks and how they may impact the business, our customers and shareholders. One such area, that we have been focusing on recently is the threat posed by cyber attacks. During 2015 we performed a deep-dive assessment of the impact a cyberattack would have on the UK power distribution network and shared the results with the PRA. The exercise involved interviews with various industry specialists both internally and externally and led to an assessment of the impact for the UK power network and RSA as a company. The assessment included:

• Identifying sources of both primary (such as damage) and secondary (such as business interruption) losses which could arise from an incident

• A detailed review of policies and assessment of RSA's potential exposure

• Assessment of the mitigating actions the Group has in place, including reinsurance covers.

As well as broadening our appreciation of the risk landscape and potential threat of emerging risks, this and other deep-dive assessments are presented to the Board to help inform and refine the Group's risk strategy and risk appetite.

Outlook for 2016

During 2016 the risk team will continue to work with the business to streamline control processes and increase efficiency. They will also focus on monitoring market risks (including the impact of inflation shocks) and IT risks and controls. The external environment and ongoing IT transformation has made this a priority focus for 2016.

RISK AND CAPITAL MANAGEMENT

Insurance risk

The Group is exposed to risks arising from insurance contracts as set out below:

· Underwriting risk

· Reinsurance risk

· Reserving risk

A) Underwriting risk

Underwriting risk refers to the risk that underwritten business is less profitable than planned due to insufficient pricing.

The majority of underwriting risk to which the Group is exposed, is of a short-term nature, and generally does not exceed 12 months. The Group's underwriting strategy aims to ensure that the underwritten risks are well diversified in terms of the type, amount of risk, and geography in order to ensure that the Group is not exposed to a concentration of risk which would result in a volatile insurance result.

Underwriting limits are in place to enforce appropriate risk selection criteria and pricing with all of the Group's underwriters having specific licences that set clear parameters for the business they can underwrite, based on their expertise.

The Group has developed enhanced methods of recording exposures and concentrations of risk and has a centrally managed forum looking at Group underwriting issues, reviewing and agreeing underwriting direction and setting policy and directives where appropriate. The Group has a quarterly portfolio management process across all its business units where key risk indicators are tracked to monitor emerging trends, opportunities and risks. This provides greater control of exposures in high risk areas as well as enabling a prompt response to claims from policyholders should there be a catastrophic event such as an earthquake.

Pricing for the Group's products is generally based upon historical claims frequencies and claims severity averages, adjusted for inflation and modelled catastrophes, trended forward to recognise anticipated changes in claims patterns after making allowance for other costs incurred by the Group, conditions in the insurance market and a profit loading that adequately covers the cost of capital.

B) Reinsurance risk

Reinsurance risk refers to the risk of loss to the Group from the failure of one or more of its reinsurers to pay or the ability to enforce payment under the contracts.

Decisions on how much insurance risk to pass on to other insurers through the use of reinsurance is another key strategy employed in managing the Group's exposure to insurance risk. The Group Corporate Centre determines a minimum level of risk to be retained by the Group as a whole and, therefore, the amount of central reinsurance cover purchased. This is then distributed across the Group in accordance with deemed risk appetite. Local operations may also purchase additional reinsurance within agreed local reinsurance appetite parameters.

Reinsurance arrangements in place include proportional, excess of loss, stop loss, catastrophe and adverse development coverage. These arrangements ensure that the Group should not suffer total net insurance losses beyond the Group's risk appetite in any one year.

The Group remains primarily liable as the direct insurer on all risks reinsured, although the reinsurer is liable to the Group to the extent of the insurance risk it has contractually accepted responsibility for.

C) Reserving risk

Reserving risk refers to the risk that the Group's estimates of future claims will be insufficient.

The Group establishes a provision for losses and loss adjustment expenses for the anticipated costs of all losses that have already occurred but have not yet been paid. Such estimates are made for losses already reported to the Group as well as for the losses that have already occurred but are not yet reported losses together with a provision for the future costs of handling and settling the outstanding claims.

There is a risk to the Group from the inherent uncertainty in estimating provisions at the end of the reporting period for the eventual outcome of outstanding notified claims as well as estimating the number and value of claims that are still to be notified. In particular, the estimation of the provisions for the ultimate costs of claims for asbestos and environmental pollution is subject to a range of uncertainties that is generally greater than those encountered for other classes of business due to the slow emergence and longer settlement period for these claims.

The Group seeks to reduce its reserving risk through the use of experienced regional actuaries who estimate the Actuarial Indication of the required reserves based on claims experience, business volume, anticipated change in the claims environment and claims cost. This information is used by local Reserving Committees to recommend to the Group Reserving Committee the appropriate level of reserves for each region - which will include adding a margin onto the Actuarial Indication as a provision for unforeseen developments such as future claims patterns differing from historical experience, future legislative changes and the emergence of latent exposures such as asbestosis. The Group Reserving Committee review these local submissions and recommend the final level of reserves to be held by the Group. The Group has a Group Reserving Committee which is chaired by the Group Chief Financial Officer and includes the Group Chief Executive, Group Underwriting Director, Group Chief Actuary and Group Chief Risk Officer. A similar committee has been established in each of the Group's major operating segments. The Group Reserving Committee monitors the decisions and judgements made by the business units as to the level of reserves to be held. It then recommends to the Group Board via the Group Audit Committee for the final decision on the level of reserves to be included within the consolidated financial statements. In forming its collective judgement, the Committee considers the following information:

· The Actuarial Indication of ultimate losses together with an assessment of risks and possible favourable or adverse developments that may not have been fully reflected in calculating these indications. At the end of 2015 these risks and developments include: the possibility of future legislative change having retrospective effect on open claims; changes in claims settlement procedures potentially leading to future claims payment patterns differing from historical experience; the possibility of new types of claim, such as disease claims, emerging from business written several years ago; general uncertainty in the claims environment; the emergence of latent exposures such as asbestos; the outcome of litigation on claims received; failure to recover reinsurance and unanticipated changes in claims inflation.

· The views of internal peer reviewers of the reserves and of other parties including actuaries, legal counsel, risk directors, underwriters and claims managers.

· The outcome from independent assurance reviews performed by the Group actuarial function to assess the reasonableness of regional Actuarial Indication estimates.

· How previous Actuarial Indications have developed.

Financial risk

Financial risk refers to the risk of financial loss predominantly arising from investment transactions entered into by the Group, and also to a lesser extent arising from insurance contracts, and includes the following risks:

· Credit risk

· Market risk including price, interest rate and currency rate risks

· Liquidity risk

The Group 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, equity prices and long term inflation. The Group does not use derivatives to leverage its exposure to markets and does not hold or issue derivative financial instruments for speculative purposes. The policy on use of derivatives is approved by the Board Risk Committee (BRC).

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 Group. The Group's credit risk exposure is largely concentrated in its fixed income investment portfolio and to a lesser extent, its premium receivables, and reinsurance assets.

Credit risk is managed at both a Group level and at a local 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 these exposures are within the risk appetite of the local operations. Exposure monitoring and reporting is embedded throughout the organisation with aggregate credit positions reported and monitored at Group level.

The Group's credit risk strategy appetite and credit risk policy are developed by the BRC and are reviewed and approved by the Board on an annual basis. This is done through the setting of Group policies, procedures and limits.

In defining its appetite for credit risk the Group looks at exposures at both an aggregate and business unit level distinguishing between credit risks incurred as a result of offsetting insurance risks or operating in the insurance market (e.g. reinsurance credit risks and risks to receiving premiums due from policyholders and intermediaries) and credit risks incurred for the purposes of generating a return (e.g. invested assets credit risk).

Limits are set at both a portfolio and counterparty level based on likelihood of default, derived from the rating of the counterparty, to ensure that the Group's overall credit profile and specific concentrations are managed and controlled within risk appetite.

The Group's investment management strategy primarily focuses on debt instruments of high credit quality 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 each of the Group's investment managers as to the level of exposure to various rating categories including unrated securities.

The 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 Group.

The Group Reinsurance Credit Committee oversees the management of credit risk arising from the reinsurer failing to settle its liability to the Group. Group standards are set such that reinsurers that have a financial strength rating of less than 'A-' with Standard & Poor's, or a comparable rating, are removed from the Group's authorised list of approved reinsurers unless the Group's internal review discovers exceptional circumstances in favour of the reinsurer. Collateral is taken, where appropriate, to mitigate exposures to acceptable levels. At 31 December 2015, the extent of collateral held by the Group against reinsurers' share of insurance contract liabilities was £69m (2014: £90m).

The Group's use of reinsurance is sufficiently diversified that it is not concentrated on a single reinsurer, or any single reinsurance contract. The Group regularly monitors its aggregate exposures by reinsurer group against predetermined reinsurer Group limits, in accordance with the methodology agreed by the BRC. The Group's largest reinsurance exposures to active reinsurance groups are Munich Re, Lloyd's, and Berkshire Hathaway Inc. At 31 December 2015, the reinsurance asset recoverable from these groups does not exceed 3% of the Group's total financial assets. Stress tests are performed by reinsurer counterparty and the limits are set such that in a catastrophic event, the exposure to a single reinsurer is estimated not to exceed 7% of the Group's total financial assets.

The credit profile of the Group's assets exposed to credit risk is shown below. The credit rating bands are provided by independent rating agencies. The table below sets out the Group's aggregated credit risk exposure for its financial and insurance assets as at 31 December 2015 and 2014.

As at 31 December 2015

Credit rating relating to financial assets that are neither past due nor impaired

Note:

1. The insurance and reinsurance debtors classified as not rated comprise personal policyholders and small corporate customers that do not have individual credit ratings. The overall credit risk to the Group is deemed to be low as the cover could be cancelled if payment were not received on a timely basis.

As at 31 December 2014

Credit rating relating to financial assets that are neither past due nor impaired

Note:

1. The insurance and reinsurance debtors classified as not rated comprise personal policyholders and small corporate customers that do not have individual credit ratings. The overall credit risk to the Group is deemed to be low as the cover could be cancelled if payment were not received on a timely basis.

With the exception of AAA rated government debt securities, the largest single aggregate credit exposure does not exceed 3% of the Group's total financial assets.

Ageing of financial assets that are past due but not impaired

The following table provides information regarding the carrying value of financial assets that have been impaired and the ageing of financial assets that are past due but not impaired as at 31 December 2015, excluding those assets that have been classified as held for sale.

As at 31 December 2015

Financial assets that are past due but not impaired

As at 31 December 2014

Financial assets that are past due but not impaired

Market risk

Market risk is the risk of adverse financial impact resulting, directly or indirectly from fluctuations from equity and property prices, interest rates and foreign currency exchange rates. Market risk arises in our operations due to fluctuations in both the value of liabilities and in the value of investments held. At Group level, it also arises in relation to the overall portfolio of international businesses. Market risk is subject to the Board Risk Committee risk management framework, which is subject to review and approval by the Board.

Market risk can be further broken down into three key components:

i. Price risk

Price risk arises as a result of fluctuations in the market prices of investments held, primarily equity. The price of debt investments is primarily driven by interest rate fluctuations, which is addressed below. The Group is also subject to property price risk due to the potential changes in fair market value of the property portfolio held as part of the Group's investment strategy.

The table below illustrates the impact to the income statement of a hypothetical 15% change in equity prices or a 15% change in property prices.

Changes in the income statement and equity:

This analysis assumes that there is no correlation between equity price, interest rate and property market rate risks. It also assumes that all other assets and liabilities remain unchanged and that no management action is taken. This analysis does not represent management's view of future market change, but reflects management's view of key sensitivities.

This analysis is presented gross of the corresponding tax credits/(charges).

The equity price risk sensitivity analysis is indicative and is based on the Groups equity portfolio as at 31 December 2015.

ii. Interest rate risk

Interest rate risk arises primarily from the Group's investments in long-term debt and fixed income securities and their movement relative to the value placed on the insurance liabilities. This impacts both the fair value and amount of variable returns on existing assets as well as the cost of acquiring new fixed maturity investments.

Given the composition of our investments as at 31 December, the table below illustrates the impact to the income statement and other comprehensive income of hypothetical 100bps change in interest rates on long-term debt and fixed income securities that are subject to interest rate risk.

The Group manages interest rate risk by holding investment assets (predominantly fixed income) that generate cashflows which broadly match the duration of expected claim settlements and other associated costs.

The sensitivity of the fixed interest securities of the Group has been modelled by reference to a reasonable approximation of the average interest rate sensitivity of the investments held within each of the portfolios. The effect of movement in interest rates is reflected as a one time rise of 100bps on 1 January 2016 and 1 January 2015.

iii. Currency risk

The Group incurs exposure to currency risk in two ways:

· Operational currency risk - by holding investments and other assets and by underwriting and incurring liabilities in currencies other than the currency of the primary environment in which the business units operate the Group is exposed to fluctuations in foreign exchange rates that can impact both its profitability and the reported value of such assets and liabilities.

· Structural currency risk - by investing in overseas subsidiaries the Group is exposed to the risk that fluctuations in foreign exchange rates impact the reported profitability of foreign operations to the Group, and the value of its net investment in foreign operations.

Operational currency risk is principally managed within the Group's individual operations by broadly matching assets and liabilities by currency and liquidity. Operational currency risk is not significant.

Structural currency risk is managed at a Group level through currency forward contracts and foreign exchange options within predetermined limits set by the Group Investment Committee. In managing structural currency risk the needs of the Group's subsidiaries to maintain net assets in local currencies to satisfy local regulatory solvency and internal risk based capital requirements are taken into account. These assets should prove adequate to support local insurance activities irrespective of exchange rate movements but may affect the value of the consolidated shareholders' equity expressed in sterling.

At 31 December 2015, the Group's total shareholders' equity analysed by currency is:

Shareholders' equity is stated after taking account of the effect of currency forward contracts and foreign exchange options. The analysis aggregates the Danish Krone exposure and the Euro exposure as the Danish Krone continues to be pegged closely to the Euro. The Group considers this aggregate exposure when reviewing its hedging strategy.

The table below illustrates the impact of a hypothetical 10% change in Danish Krone/Euro, Canadian Dollar or Swedish Krona exchange rates on shareholders' equity when retranslating into sterling:

Changes arising from the retranslation of foreign subsidiaries' net asset positions from their primary currencies into Sterling are taken through the foreign currency translation reserve and so consequently these movements in exchange rates have no impact on profit.

Liquidity risk

Liquidity risk refers to the risk of loss to the Group as a result of assets not being available in a form that can immediately be converted into cash, and therefore the consequence of not being able to pay its obligations when due. To help mitigate this risk, the BRC sets limits on assets held by the Group designed to match the maturities of its assets to that of its liabilities.

A large proportion of investments is maintained in short-term (less than one year) highly liquid securities, which are used to manage the Group's operational requirements based on actuarial assessment and allowing for contingencies. In addition the Group has committed credit facilities available if needed as set out in note 36.

The following table summarises the contractual repricing or maturity dates, whichever is earlier. Provision for unearned premium and provision for losses and loss adjustment expenses are also presented and are analysed by remaining estimated duration until settlement.

As at 31 December 2015

As at 31 December 2014

The maturity analysis above is presented on an undiscounted basis. The carrying values in the statement of financial position are discounted where appropriate in accordance with Group accounting policy.

The capital and interest payable on the bonds and notes have been included until the dates on which the Group has the option to call the instruments and the interest rates are reset. For further information on terms of the bonds and notes, see note 35.

Capital Management

It is a key regulatory requirement that the Group maintains sufficient capital to support its exposure to risk. Accordingly, the Group's capital management strategy is closely linked to its monitoring and management of risk. The Group's capital objectives consist of striking the right balance between the need to support claims liabilities and ensure the confidence of policyholders, exposure to other risks, support competitive pricing strategies, meet regulatory capital requirements, and providing adequate returns for its shareholders.

The Group's overall capital position is primarily comprised of shareholders' equity and subordinated loan capital and aims to maximise shareholder value, while maintaining financial strength and maintaining adequate regulatory capital. In addition the Group also aims to hold sufficient capital so as to maintain its single 'A' credit rating.

The Group operates in many countries, and its regulated entities hold appropriate levels of capital to satisfy applicable local regulations. Compliance with local regulatory requirements is embedded within the BRC mandate, for the protection of the Group's policyholders and the continuation of the Group's ability to underwrite.

Regulatory solvency position during 2015

The Group remained compliant with both the PRA's risk based ICA requirements and Solvency I, which is used to calculate the Insurance Groups Directive (IGD) requirement.

For the Group's senior regulated insurance company, Royal & Sun Alliance Insurance plc, the capital position will be reported under Solvency I at 31 December 2015 for the last time before it is replaced by Solvency II.

As at 31 December 2015 the Group has an IGD surplus of approximately £1.6bn (unaudited) (2014: £1.8bn). The IGD surplus as at 31 December 2015 reflects capital generation including disposal gains offset by market movements (strengthening of GBP and rising yields). The coverage ratio stood at 2.2 times (unaudited) at 31 December 2015 (2014: 2.2 times).

The ICA was a forward looking, economic assessment of the capital requirements of the Group based on its assessment of the risks to which it is exposed. The internal model used to determine the ICA has been amended to calculate the Solvency II SCR, and this model was approved by the Group's regulators in December 2015. These models have been integrated into the Group's business processes and are used to enhance the management of the Group.

Solvency II

Historically, economic capital has been the Group's preferred measure of capital sufficiency. This has been focused around the Group conducting its own assessment of the amount of capital it needs to hold to meet its obligations given the Group's risk appetite and has been referred to as the economic capital assessment (ECA). Given the introduction of Solvency II and the approval of the Group's internal model in December 2015, the Group's capital assessment is now focused on the SCR calculated by the internal model.

At 31 December 2015, the estimated SCR and corresponding eligible own funds were as follows:

The first annual Solvency II reports will be in respect of the year ended 31 December 2016 including the publicly available Solvency and Financial Condition Report.

The internal model is used to support, inform and improve the Group's decision making across the Group. It is used to determine the Group's optimum capital structure, its investment strategy, its reinsurance programme and to determine the pricing and target returns for each portfolio. The internal model is also used for the ORSA process.

ORSA

The Solvency II directive introduces a requirement for undertakings to conduct an ORSA. In anticipation of this requirement, the Group has updated its risk and capital management processes; and in the preparatory phase for Solvency II submitted to its regulators the Forward Looking Assessment of Own Risk, the precursor to the Solvency II ORSA.

The Group defines its ORSA as a series of inter-related activities by which it establishes:

· the quantity and quality of the risks which it seeks to assume;

· the level of capital required to support those risks; and

· the actions it will take to achieve and maintain the desired levels of risk and capital.

The assessment considers both the current position and the positions that may arise during the planning horizon of the firm (typically the next three years). It looks at both the expected outcome and the outcome arising when the plan assumptions do not materialise as expected.

The assessments of how much risk to assume and how much capital to hold are inextricably linked. In some situations, it may be desirable to increase the amount of risk assumed or retained in order to make the most efficient use of capital available or else to return excess capital to capital providers. In other situations, where the risks assumed give rise to a capital requirement that is greater than the capital immediately available to support those risks, it will be necessary either to reduce the risk assumed or to obtain additional capital.

The assessment of risk and solvency needs is in principle carried out continuously. In practice, the assessment consists of a range of specific activities and decisions carried out at different times of the year as part of an annual cycle, supplemented as necessary by ad hoc assessments of the impact of external events and developments and of internal business proposals.

Papers are presented to the Board throughout the year dealing with individual elements that make up the ORSA. The information contained in those papers and the associated decisions taken are summarised in an annual ORSA report, which is submitted to the Group's regulators as part of the normal supervisory process.

Related party transactions

The following transactions were carried out with key management:

Key management personnel comprise members of the Group Executive Committee, Executive Directors, and Non-Executive Directors.

Included in salaries and other short-term employee benefits and bonus awards is £5,378,000 (2014: £3,899,000) paid in respect of Directors. These amounts exclude the value of share options granted to Directors and gains made on the exercise of such options, Group contributions paid in respect of pension schemes and cash or other assets received or receivable under long-term incentive schemes. The total value of the Directors' remuneration (including values for these excluded items) and other details are disclosed in the Directors' Remuneration Report.

A number of the Directors, other key managers, their close families and entities under their control have general insurance policies with subsidiary companies of the Group. Such policies are available at discounted rates to all employees including Executive Directors

Responsibility statement

We confirm to the best of our knowledge:

• the financial statements on pages 103 to 107, 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 Group and Parent Company; and

• the Strategic Report on pages 2 to 39, includes a fair review of the development and performance of the business and the position of the Group, together with a description of the principal risks and uncertainties they face.

Signed by order of the Board

Stephen Hester Scott Egan

Group Chief Executive Group Chief Financial Officer

24 February 2016 24 February 2016