Parent Company Financial Statements
Notes to the separate financial statements
Notes 1 to 6
- Significant accounting policies
- First time adoption of International Financial Reporting Standards
- Investments
- Other debtors and other assets – to be settled within 12 months
- Share capital
- Loan capital
1. Significant accounting policies
Royal & Sun Alliance Insurance Group plc, domiciled in the United Kingdom is the ultimate Parent Company (the Company) for the Royal & Sun Alliance Insurance Group. The principal activity of the Company is to hold investments in its subsidiaries and the receipt and payment of dividends.
These separate financial statements are prepared in accordance with International Financial Reporting Standards (IFRS) as adopted by the European Union.
Except where otherwise stated, all figures included in the separate financial statements are presented in millions of British pounds sterling (£m), rounded to the nearest million.
In accordance with Section 230 of Companies Act 1985, the Company’s Income Statement and related notes have not been presented in these separate financial statements.
The accounting policies that are used in preparation of these separate financial statements are consistent with the accounting policies used in preparation of the consolidated financial statements of Royal & Sun Alliance Insurance Group as set out in those financial statements.
The additional accounting policies that are specific to the separate financial statements of the Company are set out below.
Investment in subsidiaries
The Company accounts for its investments in directly owned subsidiaries as available for sale financial assets, which are included in the accounts at fair value.
Changes in the fair value of the investments in subsidiaries are recognised directly in equity in the Statement of Changes in Equity. Where there is a decline in the fair value of a directly owned subsidiary below cost, and there is objective evidence that the investment is impaired, the cumulative loss that has been recognised in equity is removed from equity and recognised in the Income Statement.
Dividend income
Dividend income from investments in subsidiaries is recognised when the right to receive payment is established.
Top2. First time adoption of International Financial Reporting Standards
The Company’s separate financial statements for the year ended 31 December 2005 are the first separate financial statements that comply with IFRS.
The Company has applied IFRS 1 ‘First Time Adoption of International Financial Reporting Standards’, in preparing these separate financial statements. The Company’s transition date is 1 January 2004 and an opening IFRS Balance Sheet has been prepared at that date.
IFRS 1 allows some exemptions from full retrospective application of certain standards. In preparing these separate financial statements in accordance with IFRS 1, the Company has applied the applicable mandatory exceptions and the following optional exemption from full retrospective application of IFRS.
Estimates exception
Estimates under IFRS at 1 January 2004 are consistent with estimates made for the same date under UK Generally Accepted Accounting Principles (UK GAAP).
Reconciliations between IFRS and UK GAAP
The following reconciliations provide a quantification of the effect of the transition to IFRS on both the Income Statement for the year ended 31 December 2004 and Balance Sheets as at 31 December 2004 and 1 January 2004.
Explanations of the adjustments are also set out below.
Profit for the year ended 31 December 2004
| Note | £m | |
|---|---|---|
| Profit for the year ended 31 December 2004 as reported under UK GAAP | 379 | |
| Adjusted for: | ||
| Dividend income from subsidiaries | a | (260) |
| Loan capital – finance costs | b | 3 |
| Subordinated guaranteed perpetual notes | c | 10 |
| Other | d | (4) |
| Profit for the year ended 31 December 2004 as reported under IFRS | 128 |
Equity at 31 December 2004 and 1 January 2004
| Note | 31 December 2004 £m |
1 January 2004 £m |
|
|---|---|---|---|
| Total equity and reserves as reported under UK GAAP | 2,672 | 2,986 | |
| Adjusted for: | |||
| Dividend income from subsidiaries | a | (390) | (130) |
| Loan capital – derivatives | b | 2 | (1) |
| Subordinated guaranteed perpetual notes | c | 444 | - |
| Dividends | e | 86 | 83 |
| Investment in subsidiaries carried at fair value | f | 739 | 111 |
| Total equity and reserves as reported under IFRS | 3,553 | 3,049 |
Explanations
a) Dividend income from subsidiaries
Under UK GAAP, dividend income from a subsidiary proposed up to the date of the approval of the subsidiary’s financial statements was recognised in that accounting period. Under IFRS, only dividends approved by subsidiaries during the year are recognised as income. The adjustment reflects the impact of reversing dividends receivable, proposed but not approved at 31 December 2004. The effect of this was a reduction of equity and reserves of £390m at 31 December 2004 and a reduction in profit for the year of £260m.
b) Loan capital
Under UK GAAP, the separate financial statements reflect an accrual or prepayment for the interest accrued on derivatives on dated loan capital. Under IFRS, this accrual or prepayment is reversed and the fair value of the derivative contracts is reflected in the separate financial statements. At 31 December 2004 the impact was an increase in equity and reserves for the year of £2m. A further increase of £1m arose regarding the calculation of a loss of the cancellation of interest rate swaps during the year.
c) Subordinated guaranteed perpetual notes
Under UK GAAP, the subordinated guaranteed perpetual notes issued during 2004 are classified as a liability. As described in note 6, IFRS requires the perpetual notes to be classified as equity and the interest payments to be recognised directly in equity. The impact of this adjustment is to increase the profit for the year by £10m and to increase equity and reserves by £444m.
d) Other
Other includes other miscellaneous adjustments.
e) Dividends proposed
Under UK GAAP, all dividends relating to an accounting period that are proposed up to the date of the approval of the financial statements by the Board of Directors were accrued in that accounting period. Under IFRS, only dividends approved during the year are accrued. The adjustment reflects the impact of reversing the proposed dividend, which at 31 December 2004 was £86m.
f) Investment in subsidiaries
Under UK GAAP, investments in subsidiaries are carried at current value and unrealised gains and losses are recognised in the revaluation reserve. Under IFRS, investments in subsidiaries are recognised in the Balance Sheet at fair value. The adjustment reflects the reversal of the current asset value adjustment under UK GAAP and the impact of the recognition of the fair value of investment in subsidiaries.
Cashflow reconciliation for year ended 31 December 2004
The Company’s Cashflow Statement is presented under IFRS in accordance with IAS 7 ‘Cashflow Statements’. No Cashflow Statement was presented under UK GAAP.
3. Investments
| 2005 £m |
2004 £m |
|
|---|---|---|
| Investments at 1 January – at valuation | 3,981 | 3,549 |
| (Disposals)/additions during the year | (85) | 394 |
| Fair value adjustments | 974 | 53 |
| Impairments | - | (15) |
| Investments at 31 December – at valuation | 4,870 | 3,981 |
The balances at 31 December comprise:
| 2005 £m |
2004 £m |
|
|---|---|---|
| Investment in subsidiaries | 4,547 | 3,573 |
| Loans to subsidiaries | 323 | 323 |
| Other equity investments | - | 85 |
| 4,870 | 3,981 |
The investments in subsidiaries are recognised in the Balance Sheet at fair value measured in accordance with the Company’s accounting policies. Fair value of the Company’s significant subsidiary is determined by reference to the market value (derived from relevant indices) of the Company’s ordinary shares and loan capital instruments at the Balance Sheet date, being the most transparent independent available indicator. The market value is adjusted for the fair value of the Company’s preference shares, assets and liabilities, excluding directly owned subsidiaries. The adjusting items have been fair valued by determining the present value of future cashflow projections, using an appropriate arms length discount rate. The remaining subsidiaries are held at fair value which has been determined to be net asset value.
The directors believe that the methodology used supports the inclusion of the investments in subsidiaries on the Balance Sheet, at the fair values ascribed to them. The market value of the Company’s ordinary shares at 31 December 2005 was 125.75p. A movement of 1% in the share price would have an impact of £37m on the fair value.
The principal subsidiaries of the Company are set below.
| 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 & SunAlliance Seguros (Mexico) SA | General insurance |
| Netherlands Antilles | Royal & Sun Alliance Insurance (Antilles) NV (51.0%) | General insurance |
| Saudi Arabia | Royal & Sun Alliance Insurance (Middle East) Limited E.C. (50.01%) | 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: 2. 100% direct subsidiary of the Company. 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 4. Some subsidiaries have been omitted from this statement to avoid providing particulars of excessive length. |
||
4. Other debtors and other assets – to be settled within 12 months
| 2005 £m |
2004 £m |
|
|---|---|---|
| Accrued interest and rent | - | 1 |
| Other prepayments and accrued income | 3 | 66 |
| Other debtors | 4 | 6 |
| Total other debtors and other assets | 7 | 73 |
5. Share capital
Ordinary and preference shares
During the year 2,137,513 (2004: 449,832) ordinary shares were issued on the exercise of employee share options for a cash consideration of £2m (2004: £0.3m). The Parent Company also issued 20,661,210 (2004: 31,669,408) ordinary shares during the year under the scrip scheme approved by the shareholders at the 2005 Annual General Meeting (AGM). The total nominal value of ordinary shares issued during the year was £6m (2004: £9m).
| 2005 £m |
2004 £m |
|
|---|---|---|
| Authorised | ||
| 3,923,636,364 ordinary shares of 27.5p each (2004: 3,923,636,364 ordinary shares of 27.5p each) | 1,079 | 1,079 |
| 300,000,000 preference shares of £1 each (2004: 300,000,000 preference shares of £1 each) | 300 | 300 |
| Issued and fully paid | ||
| 2,935,117,294 ordinary shares of 27.5p each (2004: 2,912,318,571 ordinary shares of 27.5p each) | 807 | 801 |
| 125,000,000 preference shares of £1 each (2004: 125,000,000 preference shares of £1 each) | 125 | 125 |
| 932 | 926 |
The preference shares carry a right to a fixed cumulative preferential dividend of 7.375% per annum, payable in half yearly instalments, and are not redeemable. On a return of capital on a winding up (liquidation), the holders are entitled, in priority to holders of all shares of the Parent Company, to receive out of the surplus assets of the Parent Company any arrears and accruals of the dividend together with the greater of the price at which the gross yield on 3.5% War Loan or such Government Stock as may be agreed (but not exceeding twice the nominal amount of the preference share) and the nominal amount of the share together with any premium paid on issue. The holders of preference shares have the right to vote at a general meeting of the Group only if at the date of the notice of the meeting the dividend payable on the share is in arrears or otherwise on a resolution to vary the rights attaching to the preference shares.
6. Loan capital
| 2005 £m |
2004 £m |
|
|---|---|---|
| Subordinated guaranteed US$ bonds | 285 | 255 |
| Subordinated guaranteed Euro bonds | 341 | 352 |
| Total dated loan capital | 626 | 607 |
| Subordinated guaranteed perpetual notes | 445 | - |
| Total loan capital | 1,071 | 607 |
| Subordinated guaranteed perpetual notes | - | 444 |
The subordinated guaranteed US$ bonds have a redemption date of 15 October 2029.
The subordinated guaranteed Euro bonds (€500m) have a redemption date of 15 October 2019. €200m of the Euro bonds bear interest at a fixed rate of 6.875% until 15 October 2009 and a floating rate thereafter. €300m of the Euro bonds bear interest at a floating rate from the date of issue. The Company has the option to repay the Euro bonds on specific dates from 15 October 2009.
Subordinated guaranteed perpetual notes of £450m (£444m net of discount and fees) were issued on 23 July 2004. The notes pay an annual coupon of 8.50% with an option to call the notes, or if not called for the coupon rate to be reset, on 8 December 2014 and every five years thereafter.
IFRS require perpetual debt to be classified as equity where the issuer has no contractual obligation to deliver cash (or another financial asset) to another party. Once classified as equity the subsequent interest payments (and related income tax benefits) are recognised directly in equity. Under the original terms of the loan agreement the Company had an option to defer interest payments indefinitely, provided no dividend was declared or distribution paid in respect to any class of share capital since the most recent AGM. Accordingly, the interest payments for the year ended 31 December 2004 of £14m (net £10m) were recognised directly in equity .
During the year ended 31 December 2005, the loan agreement was amended such that the subordinated guaranteed perpetual notes became a financial liability.
The bonds and the notes are contractually subordinated to all other creditors of the Company such that in the event of a winding up or of bankruptcy, they are to be repaid only after the claims of all other creditors have been met.
The fair value of the loan capital and subordinated guaranteed perpetual notes at 31 December was £1,271m (2004: £1,206m).
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