We are seeking to transform RSA with the ambition of best-in-class performance in all our markets.
RSA’s strategy is the right one Despite challenges, we see good reasons for optimism for the future.
Our strategy is to concentrate on the regional insurance markets where we are strongest and sustain a platform of fi nancial strength that enables our ambition. We do this through a focus on improving operational delivery and investments in our people and capabilities.
Brand quality and customer franchise: With over 300 years of experience, we have developed trusted and recognisable brands in our markets, supporting our strong customer franchise.
· We are continuing to invest for our customers through better customer journeys and new products or digital interfaces.
In addition, urbanisation and an aging population have driven changes in the demographics of those seeking cover for their risks.
Project, which explores the potential impact of autonomous vehicles on our cities.
Financial strength: RSA’s ‘A’ grade credit ratings are where we want them. The Solvency II capital ratio strengthened further during 2018 (170% versus 163% in 2017). We also successfully negotiated a longer term funding settlement for our UK pension plan liabilities, designed to provide a more stable, lower risk future for the plans themselves and for RSA as sponsor.
2. Insurance markets present a range of challenges from natural catastrophes to high levels of competition and overcapacity in some areas. How is RSA responding to these challenges?
· We continue to sustain positive customer satisfaction: in Denmark, Codan has made impressive gains in 2018, improving from a CSAT1 score of 77 to 81; our Johnson business in Canada is performing well on loyalty measures and customer satisfaction with an agent NPS2 of +70; and in the UK, our intermediated brand Nationwide has maintained strong NPS2 scores.
3 Web-based application that enables direct submissions and servicing by brokers for SME policies.
A measure of operating expenses incurred by the Group, mainly comprising underwriting administrative costs and claims handling costs.
Our cost reduction programme has now delivered total gross cost reductions of £460m since 2013, reaching our target of £450m in savings a year early, and we have moved cost effi ciency into ‘business as usual’
A year ago I reported that I expected the use of underlying measures to reduce signifi cantly. In 2018, we have seen a signifi cant reduction in the value of adjustments to IFRS statutory measures. Adjustments to operating profi t have reduced from £215m to £37m, more closely aligning underlying to statutory measures.
· Investment income was resilient, despite the continuing market uncertainty and low yield environment.
We continue to see strong underlying customer activity where capability improvements take effect. Customer satisfaction measures, such as net promoter score (NPS) and sales and service metrics, are generally good although with improvement still targeted. Group retention was slightly lower at 80% (2017: 81%). In Personal Lines, Canada was up, Scandinavia was fl at and UK & International was down as a result of underwriting and rating action.
UK & International premiums were down 3% at reported FX and down 1% at constant FX and excluding reinsurance changes. Personal Lines PIFs were up 2%, and Commercial Lines volumes (excluding rate) were down 8%. Our partnership with Nationwide in the UK is doing well; retention was 85% in 2018 and NPS scores remained strong. However, overall premiums were down as we re-priced and re-underwrote certain portfolios, exited two domestic schemes and commenced the portfolio exits and changes in underwriting appetite which we announced for our Specialty and Wholesale London Market business. Net written premiums in Ireland were up 2% at constant FX, while premiums in the Middle East were down 1%.
The Group underwriting profi t was £250m (2017: £394m) with a combined ratio of 96.2% (2017: 94.0%).
Large losses were £758m or 11.6% of net earned premiums (2017: 10.8%; fi ve-year average5: 9.6%). Losses increased by 3.2 points in Scandinavia in 2018, mainly driven by the Interconnector segment (now exited) and a Commercial Property fi re loss in Denmark. Large losses were 1.7 points higher in Canada, with Property classes seeing an increase in the second half of the year. The UK & International ratio was down 1.3 points, although disappointingly it remained elevated versus our plans and the fi ve year average. This refl ected large loss volatility, mainly in Specialty and Wholesale, in addition to the need to improve underwriting in certain areas.
A goodwill impairment charge of £7m relating to the Group’s investment in Norway was recognised in 2018. The goodwill write-back of £17m in 2017 refl ected the re-measurement of the fair value of the Oman business following its IPO process.
We are pleased to declare a fi nal dividend of 13.7 pence per ordinary share (2017: 13.0 pence). Together with the interim dividend of 7.3 pence, this brings the total dividend for the year to 21 pence (up 7%), representing a 62% payout of underlying EPS. Our medium-term policy of ordinary dividend payouts of between 40–50% of earnings remains, with additional distributions where justifi ed.
Customer demand for online access to insurance has increased, prompting widespread digitisation. The popularity of tech-enabled cars and electric vehicles in Scandinavia puts upward pressure on claims costs, though we expect this to be offset by reducing frequency of claims.
Regulation in Canada differs by region: in a number of our larger provinces, auto insurance pricing is tightly regulated, creating a more challenging and less dynamic pricing environment for all insurers.
Operating ethically is an important part of our company culture and we have robust governance structures in place to support this. Our Group policies and standards, including our values and codes of conduct, set clear expectations on behaviour and are monitored as part of our risk appetite and policy framework.
A valued, capable workforce RSA is building a culture of high performance driven by passionate team players who are encouraged to bring their very best selves to work.
Scandinavia is running a mandatory leadership programme with almost 300 leader participants so far. The programme focuses on the transition between different leadership roles (leading others, leading leaders, functional leader and business leader) and what behaviours, work values and time application a leader needs to apply to be successful in a role.
Note that there are 147 independent contractors in Canada and 141 independent contractors in Scandinavia for whom gender data cannot be collected. These individuals have been excluded from the gender headcount analysis shown above.
Canada has had the exciting opportunity to grow a part of its business to help support a new white label insurance product it has secured with Scotiabank. This has provided the opportunity to employ 50 new employees for Johnson. Canada has invested time to fi nd the best people for the fi rst cohort of Customer Service Agents, all with fresh ideas and perspectives.
Climate Change trends have been recognised as a key emerging risk for insurers for some time, however, the recent work of the IPCC* has increased understanding.
Management of operational risk is key to servicing and supporting our customers, as well as an SCR
T o ta l In s u ra n c e
Enrico has over 35 years’ experience in the fi nancial and insurance sector, in both global executive and non-executive positions. Previously, he was
Previously, Patrick held senior fi nance roles at Electrolux and If Skadeförsäkring.
February 2010 as Legal Counsel, becoming Head of Group Legal in October 2011.
He is a chartered accountant with extensive risk management and fi nance experience with a number of blue-chip fi nancial institutions, including
Board and committee meetings are prepared and circulated to each director. If a director objects to a particular decision, this is recorded in the minutes of the relevant meeting. If a director were to be unavailable to attend a meeting, their views would be canvassed by the Chairman prior to the relevant meeting, and the Board informed of their opinions and observations.
At each meeting, the Board reviews and challenges the monthly Group performance pack, which includes a discussion on capital.
The Board sets annual objectives for the business in line with the current Group strategy and monitors achievement against these objectives through regular reports. Updates to the Board from the Group Chief Executive, the Group Chief Financial Offi cer and other members of senior management are scheduled in respect of all material business matters to ensure that progress against strategy is monitored.
The Committee provided oversight of the implementation of the GDPR and continues to review the process and procedures the Company has adopted in this respect.
Committee is well briefed and continues to fulfi l its duties to shareholders and other stakeholders.”
I am pleased to present the Group Audit Committee Report for 2018. The Committee oversees and, as we believe appropriate, challenges the integrity of the Company’s fi nancial statements and the robustness of the Group’s systems of internal control and fi nancial and regulatory risk management.
The Framework is an integral element of the Group’s Internal Control System and aims to embed and promote a strong culture of fi nancial control across the Group, delivering a consistent and robust approach to mitigating the risks of material fi nancial misstatement through the design, operation and validation of key fi nancial controls, thereby providing an acceptable degree of assurance around the fi nancial control environment.
The Committee received quarterly updates on the assessment and testing of controls as part of the Framework, including any control defi ciencies and the action taken.
In December 2018, the Group Chief Auditor also provided the Committee with an assessment of the skills and capabilities required to conduct the audit work for 2019, and whether the budget is suffi cient to recruit and retain staff with the expertise and experience necessary to provide effective challenge throughout the Group and to executive management.
GIA is governed by an Internal Audit Charter which sets out the function’s role, mandate and authority, and includes independence and objectivity criteria. An updated Charter was approved by the Committee in July 2018.
The Company has complied with the Statutory Audit Services for Large Companies Market Investigation (Mandatory Uses of Competitive Tender Process and Audit Committee Responsibilities) Order 2014 for the year ended 31 December 2018. It is the intention of the Committee that the Company will tender the external auditor appointment at least every 10 years.
“The Group’s investment portfolios continued to concentrate on high-quality assets focussed on delivering income while maintaining a low risk structure.”
In response to the new Code and the reporting required under s.172 of the Companies Act, the Committee received a paper on the outcome of an exercise to map the Group’s stakeholders to the Board’s activities and discussed the level of direct and indirect engagement with these stakeholders. The key priorities for stakeholder engagement in 2019 are customers, employees and regulators. The current level of engagement with other stakeholders would continue.
· The approach to Solvency II model validation was also enhanced, with more deployment of top-down tools analysing the outputs. The model validation plan was agreed, and the fi nal report approved, on completion. Model governance updates have been discussed and agreed during the year.
∙ Employee recognition program in Canada saw over 30,000 ‘thank yous’ to colleagues.
April 2019, bringing a further level of harmonisation to historic rates.
∙ We aim to explain our pay framework clearly and ask leaders to dedicate time to communicating their decisions to their team members.
The Executive Directors’ salaries and Chairman’s fee will increase by 2% from 1 April 2019, below the average salary increase levels for our UK based employees.
At the 2019 AGM, this report on pages 70 to 84, together with the Committee Chairman’s letter on pages 66 to 67, will be put to an advisory vote.
3 LTIP 2018: Estimated value of Performance Shares and accrued dividend equivalents under the 2016-18 LTIP cycle due to vest on 4 March 2019. Estimate refl ects the performance conditions having been met to the extent noted on pages 73 to 74, and uses an average share price over the last quarter of 2018 of £5.373.
2 Represents the award after downwards discretionary adjustment as detailed above.
· Risk profi le: targeting strong fi nancial control, actuarial reporting, capital reporting and audit results.
· Positive input on Diversity & Inclusion, sponsored corporate responsibility strategy review.
· Financial delivery: driving achievement of Group’s fi nancial and capital plans, focused particularly on controllables including cost.
Outperform index by 13% (RSA TSR 38% vs. Index of 23%)
Notes: 1 Relative TSR index of comparators includes: Admiral, Allianz, Aviva, Chubb (formerly ACE), Direct Line, Gjensidige Forsikring, Hiscox, Intact, Mapfre, QBE, Topdanmark,
Notes: 1 Cumulative earnings defi ned in common with the underlying ROTE measure of earnings adjusted for disposal gains and restructuring charges which were also key management activities. The Committee assessed all other items falling outside of this defi nition to determine if they should adjust the Committee’s view of progress upwards or downwards (namely non-cash, non-capital accounting items). Comparison is versus original 2016-18 Plans incorporating the planned costs and benefi ts of the additional cost programmes announced subsequently.
The table below shows the total remuneration for the incumbents appointed as the most senior Executive Director. The annual bonus award rates include both cash and deferred shares components.
Notes: 1 Martin Scicluna was appointed Executive Chairman effective 13 December 2013 until 4 February 2014.
5% over 10 years for discretionary schemes, including long-term incentives 2.27%
The Annual Bonus Plan is aligned with the core priorities for focus in 2019. The Executive Directors will be expected to deliver against stretching targets, which are geared towards making continued performance improvement. The Group Chief Executive and CFO are targeted against the performance of the entire Group, taking into account their contribution thereto. From the time of his appointment as CEO UK & International, Scott Egan will be targeted against a combination of the performance of his region and the Group, taking into account his contribution thereto.
- The Committee may agree to reduce the value of the compensatory award below the anticipated or actual loss value if the compensation is paid at an advanced date (i.e. early settlement).
Note: 1 Weight will be given to new corporate governance guidelines in this area ahead of the 2020 Policy renewal.
Termination payment · There are no pre-determined special provisions for Directors with regard to compensation for loss of offi ce.
· Executive Directors must build up a shareholding in RSA according to specifi ed levels, expressed as a salary multiple.
· The Executive Directors’ shareholding levels as at 31 December 2018 are noted on page 76.
Non-Executive Directors are not employed by RSA, but they are engaged on a contract for services basis. They are issued with an appointment letter for an initial three-year term, which can be extended with the Board’s agreement. The term of offi ce can end prior to its expiry with either the individual or the Company serving one month’s notice, or three months in respect of the Chairman. No notice will be served by the Company in the event of gross misconduct. Appointment letters are available for inspection by shareholders at the Company’s registered offi ce.
The Company’s Preference Shares receive a dividend at the rate of 7.375% per annum paid in two instalments on, or as near as practicably possible to, 1 April and 1 October each year, subject to approval by the Board.
The Company does not have agreements with any director or employee that would provide compensation for loss of offi ce or employment resulting from a takeover, except that provisions of the Company’s share schemes and plans may cause some options and awards granted to employees under such schemes and plans to vest in such circumstances.
· Assessing transparency: Considering the adequacy of the group’s disclosures in respect of the sensitivity of the insurance liabilities to key assumptions.
Our results We found the valuation of the insurance liabilities to be acceptable (2017 result: acceptable).
· Assessing transparency: Assessing adequacy of the Group’s disclosures in respect of the assumptions and sensitivity supporting the deferred tax asset valuation and recognition.
Recoverability of parent company’s investment in subsidiaries (2018: £4,476 million, 2017: £5,765 million)
· the related statement under the Listing Rules set out on page 92 is materially inconsistent with our audit knowledge.
We are required to report to you if the Corporate Governance Statement does not properly disclose a departure from the eleven provisions of the UK Corporate Governance Code specifi ed by the Listing Rules for our review.
Total transactions with owners of the Group 3 3 – – (7) – – (178) (179) 297 2 120
The assets and liabilities considered as non-current include: investments in associates, deferred tax assets, property and equipment, intangible assets, goodwill, deferred tax liabilities, outstanding debt including loan capital and elements of fi nancial investments, insurance contract liabilities and reinsurers’ share of insurance contract liabilities.
Assets and liabilities are classifi ed as held for sale if it is considered highly probable that the carrying amount of the assets and directly associated liabilities will be recovered principally through a sale, rather than through continuing operations. This includes the expectation that the sale will be completed within 12 months of the classifi cation date as held for sale, subject to extension in certain circumstances, including where disposals have been committed to subject to regulatory and legal approval.
Reserving risk refers to the risk that the Group’s estimates of future claims payments will be insuffi cient.
RSA Annual Report and Accounts 2018120 rsagroup.com 5) Risk and capital management continued
Loans and receivables 249 – – – – – 249 –
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 Solvency II directive introduced a requirement for undertakings to conduct an ORSA.
(Decrease) of tax provided in respect of prior periods (6) –
Further information can be found in the Directors’ Remuneration Report within the Corporate Governance section.
Total weighted average number of ordinary shares for diluted earnings per share (thousands) 1,030,450 1,028,499
During 2018 the software impairment charge was £2m (2017: £20m), which was recognised in underwriting and policy acquisition costs (2017: £nil).
In 2016, legislation was issued by the Oman Government requiring a proportion of the company to be offered to the public. This was expected to result in the Group losing control and therefore the Oman business was classifi ed as held for sale. Consequently the business was measured at fair value less costs to sell resulting in a valuation adjustment in 2016 of £30m. The proportion of business sold in 2017 was lower than expected resulting in control being retained by the Group. Goodwill of £17m was reinstated in 2017 as a consequence.
At 31 December 2018, the Group had pledged £550m (2017: £514m) of fi nancial assets as collateral for liabilities or contingent liabilities. The assets pledged are included within the balance sheet as follows; government debt securities of £475m (2017: £461m), cash and cash equivalents of £75m (2017: £43m) and non-government debt securities of £nil (2017: £10m). The terms and conditions of the collateral pledged are market standard in relation to letter of credit facilities and derivative transactions.
At 31 December 2018, the Group has accepted £313m (2017: £31m) in collateral. The assets accepted are included within the balance sheet as follows; government debt securities of £281m (2017: £4m), cash and cash equivalents of £21m (2017: £16m) and non-government debt securities of £11m (2017: £10m). The Group is permitted to sell or repledge collateral held in the event of default by the owner. The fair value of the collateral accepted is £313m (2017: £31m). The terms and conditions of the collateral held are market standard. The assets held as collateral are readily convertible into cash.
Companies within the Group that are applying IFRS 9 and disclose relevant information in their own published fi nancial statements in addition to that already included in these consolidated fi nancial statements are indicated in Appendix B.
Level 3 available for sale fi nancial assets: Equity securities2 Cash fl ows; discount rate 355 (10) 350 (10)
2 The Groups investment in fi nancial assets classifi ed at level 3 in the hierarchy are primarily investments in various private fund structures investing in debt instruments where the valuation includes estimates of the credit spreads on the underlying holdings. The estimates of the credit spread are based upon market observable credit spreads for what are considered to be assets with similar credit risk. Reasonably possible alternative valuations have been determined using an increase of 100bps in the credit spread used in the valuation.
The Group does not securitise any of its investments in fi nancial instruments and does not create, promote or administer structured entities on behalf of third party investors. The Group therefore considers that it does not act as a sponsor for any structured entity.
Total reinsurers’ share of provisions for losses and loss adjustment expenses at 31 December net of held for sale 1,532 1,523
The non-controlling interests (NCI) of the Group includes the interests in the following Group entities: NCI shares at 31 December 2018
Provisions for losses and loss adjustment expenses at 1 January 10,113 10,083
Present value of funded obligations (7,474) (401) (7,875) (8,326) (434) (8,760)
If actual experience differs from the assumptions used, the expected obligation could increase or decrease in future years. Due to the complexity of the valuation and its long-term nature, the defi ned benefi t obligation is highly sensitive to changes in the assumptions. Assumptions are reviewed at each reporting date. As such, the IAS 19 valuation of the liability is highly sensitive to changes in bond rates and will also be impacted by changes in equity markets.
Value of asset and longevity swaps – (2,506) (2,506) – (2,387) (2,387)
Other creditors of £399m (2017: £411m) mainly includes payroll and other indirect taxes £146m (2017: £163m), outstanding settlements for investment purchases £60m (2017: £61m) and other creditors £193m (2017: £187m).
Adjustments for non-cash movements in net profi t for the year
Where non-sterling loans are provided by RSA Insurance Group plc to its subsidiaries, the settlement of which is neither planned nor likely to occur in the foreseeable future, they are treated as part of its net investment in subsidiary in the consolidated fi nancial statements which results in foreign exchange gains and losses being recognised in revaluation reserves.
Where a foreign exchange derivative is designated as a hedging instrument against a net investment in foreign operations, the effective portion of the hedge is recognised in other comprehensive income; the gain or loss relating to the ineffective portion is recognised immediately in the consolidated income statement. At the point at which the net investment in the foreign operation is derecognised, the gains and losses accumulated in other comprehensive income are transferred to the consolidated income statement.
The fi nal dividend is recognised as a liability when approved at the Annual General Meeting.
Western Assurance Company 208–4940 No. 3 Road, Richmond BC V6X 3A5, Canada
Fair value gains net of tax – – – – 753 – – – 753
In accordance with section 408 of Companies Act 2006, the Company’s income statement and related notes have not been presented in these separate fi nancial statements.
Payable to related parties: Payable to subsidiaries, interest bearing loans 99 53
The current tax relating to items that are credited to equity is £nil (2017: £nil).
Full details of the Tier 1 notes are set out in note 33 to the consolidated fi nancial statements.
Controllable Costs/Expenses A measure of operating expenses incurred by the Group in undertaking business activities, predominantly underwriting and policy acquisition costs, excluding commission and premium related costs such as levies. They are adjusted to include claims handling costs that are reported within net claims incurred.
Operating Profi t Operating profi t is profi t before tax less non-operating charges. ◊ 1 AC
The regulatory authority with responsibility for the prudential regulation and supervision of the UK fi nancial services industry.
Underlying Profi t after Tax This provides a key measure of shareholder value and one that informs overall valuation in the insurance sector.
Income tax expense (126) Z AA AB AC AD Profi t for the year 322 C+J+L+N P 157 PY Underwriting Z – P Q 237 CY Underwriting
Note: the impact of new UK reinsurance cover is assumed to be broadly neutral when exits taken into account.
Separate resolutions are proposed on each item of business. In accordance with the provisions of the Articles of Association, any proxy form sent by the Company to shareholders in relation to any general meeting must be returned to the Company, whether in written form or in electronic form, not less than 48 hours before the time for holding the meeting, excluding non-business days (or, in the case of a poll taken otherwise than at, or on, the same day as the meeting, not less than 24 hours before the time appointed for the taking of the poll). At any general meeting, every ordinary shareholder present shall have one vote on a show of hands and on a poll, every ordinary shareholder present in person or by proxy shall have one vote for each Ordinary Share of which he/she is the holder. Each resolution will be put to a poll at the AGM in 2019. The results of the vote on each resolution will be announced to the London Stock Exchange and will be available on the Company’s website, www.rsagroup.com/ agm2019.
· Keep any documentation that contains your shareholder reference number in a safe place and destroy any documentation you no longer require by shredding.