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Financial Statements

Notes to the Financial Statements

Notes 31 to 36

Subsidiaries
Business combinations
Cash generated from continuing operations
Related party transactions
Commitments
Discontinued operations, non current assets and assets and liabilities of operations held for sale

Country of incorporation		Principal activity
United Kingdom (note 1)	Royal Insurance Holdings plc (note 2)	Holding company
Royal & Sun Alliance Insurance plc	General insurance
British Aviation Insurance Company Limited (57.1%)	General insurance
The Globe Insurance Company Limited	General insurance
The Marine Insurance Company Limited	General insurance
Royal International Insurance Holdings Limited	General insurance
Royal & Sun Alliance Reinsurance Limited	General insurance
Sun Alliance and London Insurance plc	General insurance
Sun Insurance Office Limited	General insurance
Argentina	Royal & Sun Alliance Seguros (Argentina) SA	General insurance
La Republica Compania Argentina de Seguros Generales SA	General insurance
Bahrain	Royal & Sun Alliance Insurance (Middle East) Limited E.C. (50.01%)	General insurance
Brazil	Royal & Sun Alliance Seguros (Brasil) SA	General insurance
Canada	Roins Financial Services Limited	Holding company
Compagnie d’Assurance du Quebec	General insurance
The Johnson Corporation	General insurance
Royal & Sun Alliance Insurance Company of Canada	General insurance
Western Assurance Company	General insurance
Chile	Royal & Sun Alliance Seguros (Chile) SA (97.5%)	General insurance
Compania de Seguros Generales Cruz del Sur SA	General insurance
Colombia	Royal & Sun Alliance Seguros (Colombia) SA (86.5%)	General insurance
Denmark	Codan A/S (71.7%)	Holding company
Codan Forsikring A/S (71.7%)	General insurance
Guernsey	Insurance Corporation of the Channel Islands Limited	General insurance
Hong Kong	Royal & Sun Alliance Insurance (Hong Kong) Limited	General insurance
Isle of Man	Tower Insurance Company Limited	General insurance
Mexico	Royal & Sun Alliance Seguros (Mexico) SA	General insurance
Netherlands Antilles	Royal & Sun Alliance Insurance (Antilles) NV (51.0%)	General insurance
Singapore	Royal & Sun Alliance Insurance (Singapore) Limited	General insurance
Sweden	Trygg-Hansa Försäkrings AB, Publikt (71.7%)	General insurance
United States of America	Royal & Sun Alliance USA, Inc	Holding company
Guaranty National Insurance Company	General insurance
Royal Indemnity Company	General insurance
Royal Surplus Lines Insurance Company	General insurance
Security Insurance Company of Hartford	General insurance
Uruguay	Royal & Sun Alliance Seguros (Uruguay) SA	General insurance
Venezuela	Royal & Sun Alliance Seguros (Venezuela) SA (99.9%)	General insurance
Notes: 1. All UK companies are incorporated in Great Britain and are registered in England. 2. 100% direct subsidiary of Royal & Sun Alliance Insurance Group plc. 3. Except where indicated all holdings are of equity shares and represent 100% of the nominal issued capital. In all cases the proportion of voting power held equals the proportion of ownership interest. 4. Some subsidiaries have been omitted from this statement to avoid providing particulars of excessive length but none materially affects the results or assets of the Group.

On 15 November 2005 the Group acquired 100% of the share capital of Compania de Seguros Generales Cruz del Sur SA located in Chile and on 1 December 2005 the Group acquired 100% of the share capital of La Republic Compania Argentina de Seguros Generales SA located in Argentina. The total consideration was £69m and goodwill of £42m arose on the acquisitions.

	£m
Investments	37
Cash and cash equivalents	6
Other assets	79
Insurance contract liabilities	(82)
Other liabilities	(13)
Net assets	27
Cash consideration including acquisition costs	69
Goodwill on acquisition	42
Fair value adjustment	(4)
Goodwill	38

The total income and profit after tax of the acquired entities for the 11 months to 30 November 2005 was £49m and £nil respectively. The total income and profit after tax of the acquired entities for the one month to 31 December 2005 was £5m and £nil respectively.

During 2004, the Group acquired for £5m further minority interests in existing subsidiaries.

Disposal of subsidiaries

During the year, disposals of subsidiary undertakings and books of business were made for a total consideration of £181m, giving rise to a pre tax profit of £136m. Group disposals during the year comprise:

The disposal of its Japanese business on 28 February 2005. The transaction generated proceeds, net of costs, of £59m and generated a pre tax profit of £59m.
The disposal of its specialty US Nonstandard Auto business, Viking Insurance Company of Wisconsin, on 2 November 2005. The transaction generated proceeds, net of costs, of £112m and generated a pre tax profit of £71m.
The disposal of its Latvian life interests and adjustments relating to prior year disposals generated proceeds of £10m and a pre tax profit of £6m.

The fair value of assets and liabilities disposed of were as follows:

	£m
Investments	78
Cash	68
Other assets	37
Technical provisions	(123)
Other liabilities	(15)
Profit on disposal	136
Total cash consideration	181

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33. Cash generated from continuing operations

	2005 £m	2004 £m
Net profit for the year before tax on continuing operations	865	35
Adjustments for:
Depreciation	37	39
Amortisation	56	40
Fair value (gains)/losses (including (gain)/loss on disposal) on property and equipment	3	10
Fair value (gains)/losses (including (gain)/loss on disposal) on investments	(186)	(120)
Fair value (gains)/losses (including (gain)/loss on disposal) on investment property	(51)	(27)
Impairment charge on available for sale financial assets	5	16
Share of (loss)/profit from associates	(3)	(8)
(Profit)/loss on disposal of subsidiaries	(136)	2
Foreign exchange loss/(gain)	25	(32)
Amortisation of available for sale investments	70	82
Other non cash movements	24	24
Changes in operating assets/liabilities:
Movement in technical provisions
Unearned premiums	18	(664)
Outstanding claims	(318)	(135)
Movement in working capital	(345)	802
Movement in deferred acquisition costs	32	201
Reclassification of interest (received)/paid	(558)	(509)
Cash generated from continuing operations	(462)	(244)

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34. Related party transactions

The ultimate Parent Company of the Group is Royal & Sun Alliance Insurance Group plc which is incorporated in England.

The following transactions were carried out with related parties:

Key management compensation
	2005 £m	2004 £m
Salaries and other short term employee benefits	5	4
Bonus awards	3	3
Pension benefits	1	2
Share based awards	1	1
Total	10	9

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 on normal commercial terms except that executive directors and key managers are entitled to special rates which are also available to other members of staff.

Year end balances arising from insurance transactions
	2005 £m	2004 £m
Receivables from associates	1	4

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35. Commitments

Capital commitments

The Group’s significant capital commitments in respect of investment property, property and equipment, intangible assets and associates are detailed in the table below:

	2005 £m	2004 £m
Property and equipment	4	4

Financial instrument commitments

The Group has a number of guarantees and commitments.

Bank loan guarantees

In Canada, the Group guarantees outstanding loan repayments in the event of bank loan default by broker subsidiaries and special relationship brokers. The bank loan guarantees amount in total to £9m (2004: £11m) and have a term of up to 10 years. It is not anticipated that any of the brokers will default, and full recourse is available on any default. Scandinavia has financial and performance guarantees totalling £2m (2004: £2m). The fair value of the guarantees did not materially impact the consolidated financial position of the Group.

Financial enhancement products

Within the financial enhancement product portfolio of the UK operations, are a number of credit default swaps, residual value insurance contracts, bonds, residential property loan and lease guarantees. The guarantees are accounted for as derivative instruments at fair value. The carrying amount of the guarantees in total is a liability of £21m (2004: £29m) and the maximum term is 16 years 4 months. The total maximum potential amount of future payments in respect of these guarantees is £112m (2004: £104m). There is recourse available on one of the above guarantees of £39m (2004: £38m). The majority of the guarantee contracts are 100% reinsured with the relating recoverable held as a derivative asset.

Operating lease commitments

The Group leases various outlets and offices under non cancellable operating lease agreements. The leases have varying terms, escalation clauses and renewal rights.

Operating lease commitments where the Group is the lessee

The future aggregate minimum lease payments under non cancellable operating leases are as follows:

	Land and buildings		Other
	2005 £m	2004 £m	2005 £m	2004 £m
One year or less	58	62	5	4
Between one and five years	179	186	2	5
After five years	162	182	–	–
	399	430	7	9
Recoveries under sub tenancies	(104)	(131)	–	–
Total	295	299	7	9

Operating lease commitments where the Group is the lessor

The future aggregate minimum lease payments under non cancellable operating leases are as follows:

	Land and buildings
	2005 £m	2004 £m
One year or less	4	9
Between one and five years	4	9
After five years	2	1
Total	10	19

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36. Discontinued operations, non current assets and assets and liabilities of operations held for sale

Discontinued operations

The UK Life, Codan Life, Poland Life and Peru Life operations (part of the Life business segment) have been presented as discontinued operations following their sale. The completion dates for the transactions were 30 September 2004 (UK Life), 1 October 2004 (Codan Life), 16 April 2004 (Poland Life) and 1 January 2004 (Peru Life).

An analysis of the result of discontinued operations, and the result recognised on the remeasurement of assets of the disposal group is as follows:

	2005 £m	2004 £m
Net earned premiums	–	890
Net investment return	–	1,276
Claims incurred	–	(1,885)
Policy acquisition costs	–	(46)
Movements in funds for future appropriations	–	48
Other expenses	–	(93)
Profit before tax of discontinued operations	–	190
Tax	–	(110)
Profit after tax of discontinued operations	–	80
Loss after tax on disposal (tax: £nil)	–	(107)
Loss for the year from discontinued operations	–	(27)

Non current assets and assets and liabilities of operations held for sale

At 31 December 2005 a Group occupied property within the UK segment was presented as held for sale following the decision to dispose of it and the sale being considered highly probable. At 31 December 2004 the assets and liabilities relating to the Group’s operations in Japan (part of International segment) were presented as held for sale following the approval by the Group’s management to sell and initiation of an active programme to locate a buyer. The disposal transaction was completed in February 2005.

	2005 £m	2004 £m
Assets
Total investments	36	46
Insurance and reinsurance debtors	–	11
Deferred acquisition costs	–	2
Other debtors and other assets	–	7
Cash and cash equivalents	–	15
Total assets	36	81
Liabilities
Insurance contract liabilities	–	81
Insurance and reinsurance liabilities	–	4
Other liabilities	–	34
Total liabilities	–	77

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