SecProbe.io

CORRESP
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Prepared and filed by St Ives Financial

 Mr. Jim B. Rosenberg

  Senior Assistant Chief Accountant

Division of Corporation Finance

United States Securities and Exchange Commission

Washington, DC 2054

U.S.A.

October 20, 2005

  Re:
  Royal & Sun
    Alliance Insurance Group plc

Form 20-F for the fiscal year Ended December 31, 2004

  File Number: 001-15146

Dear Mr. Rosenberg:

Thank you for your letter to our Chief Executive Officer, Andrew Haste, dated September 22, 2005, relating to your review of our Annual Report on Form 20-F for the fiscal year ended December 31, 2004 (the “Form 20-F”). As Chief Financial Officer of Royal & Sun Alliance Insurance Group plc (“Royal & SunAlliance”), I will respond on Royal & SunAlliance’s behalf.

As requested in your letter, the numbered paragraphs below correspond to the numbered comments set forth in your letter. For your convenience, we have reproduced each of the comments from your letter (in italics) immediately before our response. We will also ensure that this letter of response is filed on EDGAR under the form label CORRESP, as requested.

It is important to note that for our 2005 Form 20-F we will be transitioning from U.K. GAAP to International Financial Reporting Standards (“IFRS”).  The introduction of IFRS will cause us to significantly amend a number of the disclosures in the Form 20-F.  We therefore propose that where, in the following paragraphs, we have suggested the disclosure of additional background information, the additional disclosures be made as part of the 2005 Form 20-F along with the IFRS changes.

Form 20-F for the Fiscal year Ended December 31, 2004

Item 5. Operating and Financial Review and Prospects

Liquidity and Capital Resources, page 97

1.     We note that you have conducted substantive
restructuring of operations and that in 2004 you experienced significant negative
cash flow
of £1,581 million.  Please include a discussion that will provide investors
with a better understanding of the expected impact of your reorganization and
restructuring programs on known trends, demands, commitments and uncertainties.
For each major type of cost and reportable segment, discuss and quantify the
expected effects on future earnings, cash flows and financial position resulting
from these programs, including the aggregate costs expected to be incurred, cumulative
amount incurred to date, future periods when material cash outlays are anticipated
and whether ultimate cost savings may be offset by anticipated increases in other
expenses or reductions in revenues. Include a description of any remaining insurance
reserves related to your reorganization and restructuring programs and the expected
impact on future operations and financial condition of known trends in claim
frequency and severity related to these reserves.

1

Group response:

As disclosed on page F-97 of the Form 20-F, the U.S. basis of accounting shows a £1,581million net cash outflow for the year ended 31 December 2004. As set out in the table below, you can see that this reduction in cash balances arose primarily from the purchase of investments in the normal course of business and the inclusion of long term (life) policy holder cash flows, rather than as a direct consequence of any of the restructuring programs:

£’m

Notes

Net shareholder cash inflow from operating activities

697

a

Taxation paid

(52
)

a

Disposal of subsidiary undertakings

1,015

b

Net purchase of investments

(2,048
)

c

Policy holder cash flows (life business)

(909
)

d

Other

(232
)

e

Reduction in cash balances: U.S. basis of accounting

(1,581
)

Notes:

a)

The net shareholder cash flows from operating activities for the year ended 31 December 2004 were actually positive £697million.  As disclosed on page F-15, this positive shareholder operating cash flow arose from both positive net cash flow from the property and casualty business of £288million and net inflows from the discontinued Life business of £409million.  Net taxation paid amounted to £52million.

b)

In addition to the positive shareholder cash flows from operating activities, the Group received £1,015million net cash consideration from the disposal of subsidiary undertakings.  A break down of the total proceeds received for disposals is included in note 25 on page F-50 (by subsidiary disposed of) and in note 42 on page F-65 (by type of asset disposed of).

c)

The Group used the positive shareholder operating cash flows together with the proceeds from disposals to purchase additional investments of £1,666 million as measured on a U.K. basis or £2,048million as measured on a U.S. basis.  Details of the purchases and sales of investments are shown on page F-15 and in notes 38, 39 and 40 on pages F-61 to F-63.

d)

Policy holder cash outflows of £909million represent policy holder cash outflows from operating activities of £785million, and repayment of borrowings of £307million offset by investing activity of £183million.  It should be noted that the policy holder cash outflows of £909million include the impact of a reduction in cash and equivalents from the disposal of life businesses of £1,100million.

e)

“Other” cash flows of £232million includes dividends paid on equity shares of £107million, net purchases of tangible assets of £103million, reduction in borrowings of £119million, servicing of finance of £93million, foreign exchange translation of £108million offset by the issue of new dated loan capital of £295million.

Taken together, we believe that this provides appropriate disclosure of the consolidated cash flows.

2

We also believe that we have included appropriate disclosure of the re-organisation and restructuring programs within the document.  Pages 15 and 16 include an executive summary of the Group strategy and the restructuring programs that we have undertaken.  Greater detail of each element of the restructuring programs is then discussed in more detail in the regional business overviews on pages 22 to 34.  As noted in the Form 20-F the most significant elements of the restructuring are as follows:

Restructuring the U.S. operation.  Details of the restructuring are given on pages 27 to 30.  The operating results of the U.S. operation are shown on page 30.  The net cash flows of the restructured U.S. operation are included within the positive shareholder operating cash flows of £697million.

A Group wide expense reduction program.  The Group expense saving target of £270million, on an annualised basis is disclosed on page 15.  As noted on page 15, the cost of achieving this expense saving target is expected to be approximately £300million incurred over the five year period ending 31 December 2006.  Of this amount £241million was expensed during 2002 to 2004. The net cash flows of this program are included within the positive shareholder operating cash flows of £697million.

The sale of the life operations.  Pages F-3 to F-10 show separately the results of the life operations for the three years to 31 December 2004 and note 40 on pages F-62 to F-64 shows the cash flows from the life operations over the last three years.  The Group has now disposed of its material interests in the life businesses.

However, in order to provide additional information to the reader, we would propose to also include in the 2005 Form 20-F by major type of re-organisation cost the amount expected to be incurred, the amount incurred in the period and the cumulative amount incurred to date.

There are no insurance reserves directly related to the expense reduction program or the sale of the life businesses.  We have included a discussion of the U.S. loss reserves in the response to comments 2 to 4.

Critical Accounting Policies, page 103

2.     We believe your disclosure relating to U.S.
GAAP critical accounting policies and estimates could be improved to include
a discussion
of the uncertainties in applying these accounting policies, the likelihood that
materially different amounts would be reported under different conditions or
using different assumptions and quantification of the related variability in
operating results that you expect to be reasonably likely to occur. Focusing
on your continuing businesses, please disclose the uncertainties in applying
these accounting policies, the historical accuracy of these critical accounting
estimates, a quantification of their sensitivity to changes in key assumptions
and the expected likelihood of material changes in the future. Refer to the Instructions
to Item 5 of Form 20-F.

Group response:

I will discuss each of the critical accounting policies in turn:

Loss Reserves (life)

As noted earlier, we have now disposed of our material interests in Life businesses.

3

Loss Reserves (property and casualty)

We have included a high level discussion of the uncertainties and judgements involved in the setting of loss reserves under the U.K. GAAP accounting policy section for “Technical Provisions”.  More detailed descriptions of both the reserving process and most significant risk factors in the setting of loss reserves are included earlier in the Form 20-F, as described below. A more detailed description of the risk factors pertaining to loss reserves is included in Part I on pages 7 to 9.  In particular this section covers:

The use of actuarial projections and estimates and the estimates inherent therein;

Significant variability factors such as loss cost inflation and changes in the legal environment;

Discussion of asbestos and environmental reserves in the U.K. and U.S., employer’s liability reserves in the U.K. and workers compensation reserves in the U.S. as being longer tail reserves with more inherent risks in the actuarial calculations;

Specific uncertainties attaching to asbestos and environmental reserves that are greater than those for other reserve classes;

Availability of asbestos data;

Proposed U.S. legislation regarding U.S. asbestos liability.

A more detailed description of the loss reserving process is included in Item 4 on page 40.  Specifically this section covers:

The overall process for setting loss reserves;

The use of claims discounting;

The setting of equalisation reserves.

Item 4 also includes the loss development tables together with the discussion of reserve development for each accident year.

Given the above disclosures, we believe that the Form 20-F taken as a whole appropriately discloses both the key elements of the reserving process and the key risks in setting the appropriate level of loss reserves.

We do, however, propose to modify our disclosures in the 2005 Form 20-F, for ease of reference of the reader.  The changes we propose to make in 2005 are as follows:

Firstly we will consolidate a greater level of the discussion of the reserving process and the significant reserving risks into the critical accounting policies section.  Specifically we will include:

o

A description of the overall process for setting loss reserves;

o

The use of actuarial projections and estimates and the inherent uncertainties therein;

o

Significant variability factors such as loss cost inflation and changes in the legal environment;

o

Discussion of asbestos and environmental reserves in the U.K. and U.S. and workers compensation reserves in the U.S. as being longer tail reserves with more inherent risks in the actuarial calculations;

o

Specific uncertainties attaching to asbestos and environmental reserves.

We will tailor our discussion of the reserving process and the significant reserving risks to discuss each of the reserving segments shown below.

We will disclose the breakdown of the Group loss reserves between the primary reserving segments as follows:

4

Commercial
Personal
Total

£’m
£’m
£’m

U.K.
X
X
X

U.S.
X
X
X

Scandinavia
X
X
X

International
X
X
X

Total
X
X
X

As noted in the response to comment 4 below, approximately 90% of the increases in loss reserves relating to prior years in the period 2002 to 2004 has related to asbestos and the U.S. business.  While we believe that there is already significant disclosure relating to these reserving segments (see in particular pages 7 to 9 and page 40), we intend to focus additional sensitivity analysis on those reserving segments.  Specifically we intend to include quantified sensitivities relating to the following key assumptions:

o

U.S. workers compensation:  loss development factors.

o

U.K and U.S. asbestos: case emergence rates.

We also intend to include a table of survival ratios (both paid and incurred) for asbestos risks written in both the U.K. and U.S., as we believe that this is the most appropriate and widely accepted  measure of asbestos reserves.  We have shown below an example of what the table would look like:

Asbestos Reserves

The technical provisions include £xxmillion (net of discount) for asbestos in the U.K. and U.S.  These provisions can be analyzed by where the risks were written and by survival ratio.  Survival ratio is an industry standard measure of a company’s reserves expressing recent year claims payments or notifications as a percentage of liabilities.

The following table outlines the proposed disclosure of asbestos provisions as at 31 December 2005 analysed by risk and survival ratio for U.K. and U.S.:

As at 31 December 2005
Total
UK risks

  written in UK
US risks

  written in UK
US risks

  written in US

Provisions
£m
£m
£m
£m

Net of re-insurance
x
x
x
x

Net of discount
x
x
x
x

Survival ratios – On payments

(Gross of discount)

One year
x
x
x
x

Three year average
x
x
x
x

Survival ratios – On notifications

(Gross of discount)

One year
x
x
x
x

Three year average
x
x
x
x

As at 31 December 2004

Provisions
£m
£m
£m
£m

Net of reinsurance
x
x
x
x

Net of discount
x
x
x
x

Survival ratios – On payments

(Gross of discount)

One year
x
x
x
x

Three year average
x
x
x
x

5

Survival ratios – On notifications

(Gross of discount)

One year
x
x
x
x

Three year average
x
x
x
x

As at 31 December 2003

Provisions
£m
£m
£m
£m

Net of reinsurance
x
x
x
x

Net of discount
x
x
x
x

Survival ratios – On payments

(Gross of discount)

One year
x
x
x
x

Three year average
x
x
x
x

Survival ratios – On notifications

(Gross of discount)

One year
x
x
x
x

Three year average
x
x
x
x

U.K. risks written in the U.K.

  Average claim cost is monitored from claim notifications over time and, from this data, after adjustment for inflation, a view is taken of current average claims cost taking into account evidence of trends etc.  The average costs observed will reflect the proportion of claims cost being borne by the Group as a result of current sharing agreements amongst insurers, which in turn reflects the Group’s proportion of claimant exposure periods.

We have used the U.K. Government Health & Safety Executive projections of probable numbers of future deaths from Mesothelioma, published in December 2003, as the basis to determine our U.K. reserves for future expected asbestos cases and applied this to our average cost, which is adjusted to allow for future inflation. The effect of using this data on our reserves is to increase the anticipated number of asbestos claims which are spread over an extended reporting period.

  U.S. risks written in the U.K.

U.S. asbestos exposure arises from a variety of sources including London market ‘direct’ business written through Marine operations many years ago, inward reinsurance exposures also written through the London market and from participation in U.K. aviation pools.

Estimation on all areas of exposure is primarily based on a ground up analysis of direct insureds or cedents, reflecting the likelihood and timing of any breaches of the different layers of exposure written by the Group, and thereby the financial costs and cash flows involved.

  U.S. risks written in the U.S.

Claimants include both primary defendants and peripheral defendants.  Primary asbestos defendants manufactured and di