◊ Alternative performance measures RSA uses Alternative Performance Measures (APMs) including certain underlying measures, to help explain its business performance and financial position. Where not identified in the body of this report, further information is set out in the appendix on pages 190 to 197.
Recognising the importance of diversity We see diversity, not only in the Boardroom, but across our entire company as an important business issue. RSA is committed to promoting diversity of all types across all levels of our workforce, and to creating an inclusive environment that engages all of our colleagues effectively.
Globalisation and trade agreements have faced criticism, amid some protectionist reactions in established economies.
These rising tensions could impact on global economic growth, introduce sudden shocks and fuel social unrest.
Traditional products and business models are being challenged with a greater focus on ease and simplicity, and changing views on consumer wants and needs.
• We also partner with pioneers in the low-carbon agenda as the leading insurer of off-shore wind farms and insurer of the world’s largest single-site solar plant.
Expertise Technical excellence is crucial to gaining competitive advantage in insurance. Our intellectual capital is stored in the underwriting expertise of our people, which has built up over our history and is enhanced through our technical academies.
Data and technology RSA is harnessing the power of technology through e-enabled distribution and customer service, increased operational efficiency in policy and claims administration, enhanced data and pricing analytics that support greater customer responsiveness and market competitiveness.
Note: 1. Payments to charities, employee fundraising, value of volunteering and gifts in kind. 2. For information on our methodology please see page 96.
We are pleased to report record underwriting profits. However, the year also had some disappointment relative to our ambitions. Excellent underwriting results in Scandinavia, Canada, Middle East and Ireland were partly offset by poor UK (and related London market) results. It is our task in 2018 to deliver a bounce-back in the latter whilst sustaining underlying progress across the Group as a whole.
Cost efficiency remains a critical performance lever. We have now achieved £395m annual gross savings and are able to raise our savings targets for a fourth time to over £450m by 2019. Digitisation, lean operations, site consolidation, enhanced purchasing, robotics, zero based budgeting – all the tools in modern corporate armouries to boost people productivity – are being deployed effectively across our regions.
WE ARE ENHANCING CUSTOMER OFFERINGS IN ALL OF OUR MARKETS. IN 2017 WE ACHIEVED AN AVERAGE RETENTION ACROSS THE GROUP OF 80 PERCENT.
• Group FTE down 23 percent (excluding disposals) since the start of 2014 and 6 percent during 2017
Underwriting expenses and commissions The Group underwriting expense ratio of 14.4 percent was 0.6 points better than a year ago at constant FX (2016: 15.03 percent). Pleasingly, all regions contributed to this improvement. The Group commission ratio in 2017 of 13.7 percent was flat3 at constant exchange.
A responsive business Alongside customer improvements, our Canadian business is focused on ensuring its underlying systems and processes are fit for the future – whether by strengthening underwriting and pricing analysis, investing in new technology, or adapting our ways of working.
Our operations in UK & International In the UK, we are the second largest commercial insurer with key positions in property, motor, liability, and marine, and exposures across the SME, mid-market and global specialty customers. These global customers account for 53 percent of our UK Commercial Lines business, and include risks written through the ‘London market’ and our branches in France, Spain and Benelux.
In spite of these adverse market conditions, the underlying momentum of the UK business sustained through the year. Net written premiums increased 3 percent at constant exchange, including 7 percent growth in Personal Lines, underpinned by strength in motor telematics. Policy count rose 2 percent in Personal and Commercial net written premiums were flat at constant FX in a competitive market. We saw positive trends in net promoter scores. We anticipate that these positive trends will be sustained.
Our improvement programme is on track and delivering the required capability to adapt and succeed in the evolving market. 2017 has been another year of significant delivery in terms of streamlining and automating processes, replacing our legacy technology, introducing new pricing and underwriting tools and developing a new operating model.
All insurance groups are faced with a number of different risks which for example can range from adverse movements in asset prices, external cyber-attacks or significant losses from catastrophic events (details of all the key risk categories are set out on page 36).
This is supported by our participation in the CRO Forum’s Emerging Risk Initiative Working Group, which RSA is chairing during 2018. The output of the deep dive is the emerging risks set out in the diagram opposite, which were presented to the Board Risk Committee for consideration, along with more detailed analysis on five selected risks. The more detailed analysis considers the appropriate responses and next steps.
Risk developments in 2017 Delivery of General Data Protection Regulation (GDPR) – The UK, Ireland and Scandinavian businesses are taking the necessary steps to enhance their data protection capabilities in order to address the specific requirements of the GDPR legislation. The project continues into 2018 and remains on track to meet the May 2018 deadline.
Diversity of thought, background and experience enables us to innovate and create better solutions for our customers and to build a sustainable, modern business.
Senior management reflects the same group reported in Women in Finance Charter goals. 2016 adjusted comparison group: M: 427, F: 198. As at 31 December 2017 there were 131 males and 43 females who were directors of undertakings included in the consolidation. This includes dormant companies. It is not a reference group that RSA uses and we do not believe it is an accurate indicator of diversity; however it is disclosed to comply with regulatory requirements.
The Group have continued to work towards the ambition of delivering improvements and efficiencies across customer service, underwriting effectiveness and controllable expenses. The Board’s role in the delivery of this ambition is oversight and challenge with responsibility for the overall strategy of the Group and the commitment to ‘best- in-class’ with careful consideration of the interests of customers.
• Annual review of training undertaken for each non-executive director by the Chairman
• The Board believes it provides information necessary for shareholders to assess the Company’s position and performance, business model and strategy
Compliance with the UK Corporate Governance Code The primary responsibility of the Board is to provide effective, entrepreneurial leadership to ensure that it promotes the long-term success of the Company for the benefit of its members as a whole.
Skills and experience: Before RSA, Scott was Interim Chief Executive Officer at Towergate Insurance having previously held the post of Chief Financial Officer. Scott also held the post of Chief Financial Officer at Brit Insurance, after four years at Zurich Financial Services, as Chief Financial Officer UK, and latterly as Group Financial Controller. He has also held various senior finance roles at Norwich Union Insurance and Aviva. Scott is a qualified accountant (ACMA), has an MBA from Cranfield University and is a member of the ClimateWise Insurance Advisory Council.
External appointments: Currently a Fellow of the National Academy of Human Resources in the USA and a Board Member of Edinburgh Business School.
• Review of progress against strategic goals, long-term objectives and performance against the three year operational plan
LEADERSHIP Through the annual Board evaluation process, the Board has confirmed it has the appropriate balance of skills, experience, independence and knowledge to enable it and its committees to discharge their duties and responsibilities effectively, and continues to work towards achieving external diversity recommendations.
EFFECTIVENESS The Board sets annual objectives for the business in line with the current Group strategy and monitors achievement against these objectives through regular reports.
The table below shows the attendance at the Board and committee meetings
Particular attention is given to directors being appointed for a third three-year term. The Committee gave detailed consideration to the expertise that Alastair and Joseph bring to the Group Audit Committee and Group Investment Committee respectively when considering their re-appointment.
The Committee has four main areas of responsibility: 1. Board and committee composition: • Leadership and Diversity: balance of skills and experience, recommendations from Davies Review
Executive and senior management succession planning is regularly reviewed by the Committee to ensure that any individuals identified as possible future candidates to join the Executive Committee/senior management team have tailored development plans. This approach develops a pipeline of talented individuals across the Group.
The Committee is responsible for overseeing and monitoring the objectivity and operation of both external audit and internal audit.
Review of 2017 Annual Report and Accounts At the request of the Board, the Committee considered whether the 2017 Annual Report and Accounts were fair, balanced and understandable, and whether the disclosures were appropriate.
All employees are required to complete online training every two years, to ensure they are aware of how and when to report concerns under the policy and the Committee has requested an analysis of cultural differences across the Group that may discourage some employees from reporting concerns to identify how these could be addressed.
GIA’s planning process is risk based and takes into consideration the key strategic and emerging risks facing the Group. GIA operates a six-monthly rolling audit plan, allowing for a frequent and dynamic risk assessment and the Committee may request additional audits throughout the year as required. Rolling plans were approved by the Group Audit Committee in May and December 2017.
• The long-term incentive awards from the 2015–17 cycle will partially vest at 58% of the maximum.
Incentive award opportunities will remain unchanged as a percentage of salary. Conditional performance share grants in the 2018-20 long-term incentive cycle have been agreed in principle at 230% and 200% of salary for Stephen Hester and Scott Egan respectively.
Implementation of Policy • Executive Director salary increases of 2.5% effective 1 April 2017.
• Approval of the terms of the long-term incentive grant 2017 and Directors’ associated conditional share awards.
5. Pension 2017: Scott Egan and Stephen Hester received taxable cash allowances of 15% and 30% of base salary respectively. The aggregate value paid by the Company into the RSA Pension Scheme (a defined contribution plan) for the Executive Directors in 2017 was £0 (2016: £19,688). No Executive Director has a prospective entitlement to a defined benefit pension in respect of their service with RSA.
Relative Total Shareholder Return (33.3% weighting – no vesting) While RSA’s share price appreciation beat the index of comparators, Relative TSR (which combines share price and dividend returns), fell 1% short of the vesting threshold. The lower dividend return reflected the challenges of RSA’s starting position and the capital constraints influencing distributions during the period.
Business Review Scorecard (33.3% weighting – achieved 33.3%) The vesting outcome on this element was determined by the Committee assessing RSA’s progress during the turnaround in the round, particularly relating to capital, strategy implementation and earnings improvement. The 2015-17 Scorecard targets were strengthened compared to 2014-16, taking account of progress made including enhanced controllable expenses targets. The Scorecard differs from that applied to the 2017 Annual Bonus Plan both in timescale (three years vs one year) and some of the performance measures.
Director Granted number of shares Vesting number of shares Estimated value (including dividend equivalents)1
Notes: 1. The Company granted conditional awards over Ordinary Shares under the PSP at nil cost. The number of shares was calculated based on the mid-market closing price averaged over the five business days preceding the grant date of 3 March 2017, of £5.972.
6. Payments to Directors for loss of office (audited) There were no payments to Directors for loss of office in 2017.
11. Implementation of Remuneration Policy in 2018 This section outlines how the Committee intends to implement the Directors’ Remuneration Policy during 2018.
Tryg and Zurich. A straight-line calculation is applied to determine the portion of awards that vest for performance between the threshold and maximum targets. 2. Group underlying ROTE will be calculated on a three-year average basis. A straight-line calculation is applied to determine the portion of awards that vest for performance between threshold and on-target, and between on-target and maximum. The average required for on-target vesting (62.5% vesting) is set in line with, and therefore signals, the Group’s forward plan for the period and for this reason is considered commercially sensitive. Disclosure will be provided retrospectively following the end of the performance period.
Pension benefits take the form of employer contributions to a pension plan, or a full/partial cash allowance in lieu. The RSA UK defined benefit pension schemes are closed to all new entrants and future accrual.
This element incentivises the achievement of short-term financial and non-financial goals, in line with RSA’s risk profile.
Notice period • No Director will be appointed on a notice period exceeding 12 months. The current Executive Directors’ employment can be terminated by the Company or the individual, by the serving of 12 months’ notice.
• In cases of death in service and, with Committee discretion, medical severance, performance can be tested and awards made sooner than the scheduled date.
Existing incentive awards granted under the Remuneration Policy approved by shareholders in 2014 will continue in place.
Fees • This element ensures competitive remuneration is paid to attract high calibre non-executives and recognise their time commitment on the Board.
Statement by directors Section 414A of the Companies Act 2006 requires the directors to present a Strategic Report of the Company for the financial year ended 31 December 2017. The information that fulfils the requirements of the Strategic Report set out in section 414C of the Companies Act 2006 can be found on pages 4 to 41.
So far as each director of the Board is aware, there is no relevant audit information (as defined in section 418(3) of the Companies Act 2006) of which the Company’s external auditor is unaware, and each director has taken all reasonable steps to make himself/herself aware of, and to establish that the external auditor is aware of, any relevant audit information.
Notes: Please note, emissions reported above have been restated versus numbers previously disclosed, in accordance with GHG protocol guidelines. 1. Removed the impact of all divested businesses, including sale of our Quality Repair Centres (QRCs), Russian and Latin American businesses, to allow for fair comparison year on year 2. Conversion factors have been updated to reflect most recent publications.
Notes to the Statement of Cash Flows 41 Reconciliation of cash flows from operating activities 169
2) Key audit matters: Our assessment of risks of material misstatement Key audit matters are those matters that, in our professional judgment, were of most significance in our audit of the financial statements and include the most significant assessed risks of material misstatement (whether or not due to fraud) identified by us, including those which had the greatest effect on: the overall audit strategy; the allocation of resources in the audit; and directing the efforts of the engagement team. We summarise below the key audit matters, which are unchanged from 2016, in decreasing order of audit significance, in arriving at our audit opinion above, together with our key audit procedures to address those matters and, as required for public interest entities, our results from those procedures. These matters were addressed, and our results are based on procedures undertaken, in the context of, and solely for the purpose of, our audit of the financial statements as a whole, and in forming our opinion thereon, and consequently are incidental to that opinion, and we do not provide a separate opinion on these matters.
Our results • As a result of our work we found the level of deferred tax assets recognised to be acceptable.
• Sector experience: With the support of our own valuation specialists, we independently recalculated the weighted average cost of capital used to discount the cash flows to determine the value of the adjusting items.
The components within the scope of our work accounted for the percentages illustrated opposite. For the remaining components we performed analysis at an aggregated Group level to reexamine our assessment that there were no significant risks of material misstatement within these.
Disclosures of principal risks and longer-term viability Based on the knowledge we acquired during our audit, we have nothing material to add or draw attention to in relation to: • The directors’ confirmation within the Group’s viability statement (page 93) that they have carried out a robust assessment of the principal risks facing the Group, including those that would threaten its business model, future performance, solvency and liquidity; • The principal risks disclosures describing these risks and explaining how they are being managed and mitigated; and
Cash and cash equivalents at the beginning of the year 1,087 902
2) Adoption of new and revised standards There are a small number of narrow scope amendments arising from annual improvements to standards that are applicable to the Group for the first time in 2017, none of which have had a significant impact on the consolidated financial statements.
Other intangible assets comprise renewal rights, customer lists, brands, computer software and other acquired identifiable nonmonetary assets without physical form. The useful economic lives are generally between one and five years and are estimated considering relevant metrics such as customer retention rates, contract length, and forecast period to technological obsolescence. The asset is amortised on a straight-line basis across this period.
Discontinued operations and business disposal A discontinued operation is a component of the Group that has either been disposed of, or is classified as held for sale, and represents a separate major line of business or geographical area of operation.
B) Reserving risk Reserving risk refers to the risk that the Group’s estimates of future claims payments will be insufficient.
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. This 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. 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 primary 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 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 2017, 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; the outcome of litigation on claims received; failure to recover reinsurance and unanticipated changes in claims inflation; Risk and Capital Management
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 2018 and 1 January 2017 on the following year’s income statement and other comprehensive income. The impact of an increase in interest rates on the fair value of fixed income securities that would be initially recognised in OCI will reduce over time as the maturity date approaches.
Direct insurance creditors 108 – – – – – – 108 108
Solvency II Sensitivities (change in coverage ratio): Interest rates: +1% non-parallel1 shift 11% 6%
Liabilities directly associated with assets classified as held for sale: Insurance contract liabilities 685 (49) 636
Group excluding disposals The Group’s primary operating segments comprise Scandinavia, Canada, UK & International and Central Functions which is consistent with how the Group is managed. The primary operating segments are based on geography and are all engaged in providing personal and commercial general insurance services. Central Functions include the Group’s internal reinsurance function and Group Corporate Centre.
Loans secured by mortgages 2 2 – – – – – – 2 2
Fair value gains and losses 20 5 (18) (24) 2 (19)
Weighted average number of ordinary shares in issue (thousands) 1,021,418 1,018,174
Exchange gains net of tax 24 – – 24 299 – 323 19 342
The carrying amount of group occupied property that would have been recognised had the assets been carried under the cost model including assets held for sale at 31 December 2017 is £26m (2016: £30m).
In both cases the estimated fair value would increase/(decrease) if: • The estimated rental value is higher/(lower); • Void periods were shorter/(longer); • The occupancy rates were higher/(lower); • Rent free periods were shorter/(longer); • The discount rates were lower/(higher).
Employee share schemes 157,866 Ordinary Shares (2016: 414,049 Ordinary Shares) are held by the Share Incentive Plan Trust which may subsequently be transferred to employees (including Executive Directors) to satisfy Sharebuild Matching Share awards. These shares are presented as own shares. Own shares are deducted from equity. No gain or loss is recognised on the purchase, sale, issue or cancellation of the own shares. Any consideration paid or received is recognised directly in equity.
Danish Krone 650m at 3 month Cibor +485bps (equivalent to c.4.6% coupon on issue)
The provisions for losses and loss adjustment expenses are estimated using previous claims experience with similar cases, historical payment trends, the volume and nature of the insurance underwritten by the Group and current specific case reserves. Also considered are developing loss payment trends, the potential longer term significance of large events, and the levels of unpaid claims, legislative changes, judicial decisions and economic, political and regulatory conditions.
Provision for losses and loss adjustment expenses at 31 December net of held for sale 9,477 (1,523) 7,954
Provision for unearned premiums (gross of acquisition costs) at 31 December net of held for sale 3,986 3,974
Provision for losses and loss adjustment expenses The following changes have occurred in the provision for losses and loss adjustment expenses during the year: £m £m
Subsidiaries Subsidiaries are entities over which the Group has control. The Group controls a subsidiary if the Group has all of the following: • power over the subsidiary; • exposure, or rights, to variable returns from its involvement with the subsidiary; and
The estimated useful lives of property, plant and equipment is as follows: Group occupied buildings normally 30 years
Policy acquisition costs Policy acquisition costs incurred in acquiring insurance contracts include commissions and premium taxes directly related to the writing or renewal of insurance policies. These acquisition costs are deducted from unearned premiums and recognised in the consolidated income statement on the same basis as the unearned premiums.
Western Assurance Company 208-4940 No. 3 Road, Richmond BC V6X 3A5, Canada
Canadian Northern Shield Insurance Company 2475 Laurier Blvd., Quebec City, Québec G1T 1C4, Canada
Purchase of own shares – – (1) – – – – – (1)
IFRS 16 ‘Leases’ IFRS 16 ‘Leases’ which replaces the existing standard IAS 17, becomes effective, at the latest, for periods beginning on or after 1 January 2019 and is not expected to have any impact on the Company.
Full details of the principal subsidiaries of the Company are set out in Appendix B to the consolidated financial statements.
The movement in the net deferred tax assets recognised by the Company was as follows: £m £m
The Company’s corporate website provides shareholders with a broad range of information about the Group’s heritage, social and environmental responsibilities and investor information such as the Group’s financial statements, current and historic share prices, Annual General Meeting (AGM) materials, events, governance information and answers to frequently asked questions in respect of shareholder matters. Visit the investor website at www.rsagroup.com/investors for further information.
Registered shareholdings by size as at 31 December 2017 No of Holdings No of Shares % of Holdings % of Shares
It takes profit after tax, excluding the proportion that is attributable to non-controlling interests, preference shareholders and Tier 1 note holders and adds back the after tax impact of non-operating charges.
Earned CY commission (883) (883) K (883) Earned PY commission (28) (28) L (28) Earned CY operating expenses (1,093) (1,093) M (1,093) Earned PY operating expenses (3) (3) N (3) Underwriting and policy acquisition costs (2,007) – (2,007) (2,007) Unwind of discount (34) – (34) (34)
Income Gross written premiums 7,220 256 7,476 7,476 Less: reinsurance premiums (981) (87) (1,068) (1,068) Net written premiums 6,239 169 6,408 6,408 Change in gross provision for unearned premiums 109 38 147 147 Less: change in provision for unearned reinsurance premiums (8) (19) (27) (27) Change in provision for unearned premiums 101 19 120 120 Net earned premiums, analysed as 6,340 188 6,528 A 6,528
Less tax effect of: Withholding tax on intercompany dividend (5) –