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Notes to the income statement, other comprehensive income and distributions 146
What we do and how we create value 1 Products that protect our customers Our customers are our business. We strive to address their changing needs and continually improve our service.
Good business starts with our customers and we strive to keep them at the heart of what we do. To ensure that we offer the right products at the right price and on the right terms, we work hard to increase our understanding of our customers’ risks and their evolving needs. Customer satisfaction and customer retention are critical to the long-term sustainable prospects of the Group.
We define our workforce as our employees across all regions of the business, as well as those individuals on a contract for service, agency workers and remote workers.
At each AGM, the Group Chief Executive presents an update on the Company’s performance and activities during the year. The Chairman and each Board committee chair make themselves available to take questions from shareholders.
Senior management interacts regularly with Standard & Poor’s and Moody’s, our two key rating agencies. Board members are kept informed of the current views of the rating agencies through regular commentary and financial metric reporting at Board meetings.
In support of a good corporate culture, behaviours are taken into account when considering individual performance and determining remuneration.
· The Group Investment Committee discussed and approved the ESG ratings of the Group’s assets and the integration of ESG considerations into the operation of the Group’s portfolios.
Social Changes in society are changing consumer expectations and business needs Increasing interconnectivity and developing technology mean customers expect more from companies. Consumers demand seamless digital service, with 24/7, instant responses.
There is a growing awareness of the needs of vulnerable customers, which businesses are adapting to. With a growing interest in climate change, as evidenced by the growth in activism and the increasing criticism of single-use plastics and aeroplane travel, there has never been more interest in corporate responsibility.
· Our balanced footprint means we are well equipped to weather macropolitical risks. Most of our business is local and locally incorporated.
· Our exit of certain segments of London Market Commercial business means we’re less exposed to global trading volumes.
· Our Luxembourg hub protects our UK & International business from operational Brexit risks.
Climate change and extreme weather Climate change presents both short-term and long-term physical risk and a mid-term transition risk
Insurers are exposed to financial markets, and through them to political and macroeconomic challenges, despite insurance services themselves being relatively insensitive to GDP changes. 2019 saw yield declines in most bond markets off already low levels, which produces further income headwinds for insurers. It is striking that investment income made up c.90% of RSA operating profit in 2010 vs well under 50% today. The intense focus on improving underwriting margins has been a very necessary one. Similarly, since c.75% of RSA’s profits come from international business, Sterling’s strength post UK election produces an earnings translation challenge for 2020, though our individual business units are well matched in currency terms.
Our focus · Treating customers fairly and delivering good customer outcomes.
· The Group attritional loss ratio of 55.0% was 12 point better than prior year; with improvements across all regions. Personal Auto in Canada showed a c.2 point improvement, while UK Household improved 2.5 points, reflecting actions taken to address the ‘escape
Pleasingly, the ongoing UK Commercial business has performed well and our UK regional commercial business is showing promising signs of growth.
I am pleased to report a year of strong performance at RSA, reflecting good underlying performance plus significant actions taken to improve the areas with disappointing results in 2018. We report year-on-year increases in profit after tax, earnings per share and dividends. The Group underwriting result (excluding exits) was £405m. The total Group underwriting result of £346m was up 38% from 2018, with all regions contributing positively. Pleasingly, current year underwriting results improved to £314m for the Group, with all regions better than 2018.
1. £8m of prior year GVC recoveries relating to UK&I exited business has been reallocated from Central Functions to UK&I Exits and therefore to total UK&I.
2019 also included a £27m restructuring charge relating to the cost programme that has commenced in the UK business.
Tax The Group reported a tax charge of £109m for 2019, giving an effective tax rate (ETR) of 22% (2018: 23%). The tax charge largely
The key drivers included underlying capital generation5 which added 27 points of coverage. Market movements, including IAS 19 and other, added 1 point. Pull-to-par on unrealised bond gains accounted for a 4 point reduction and net capital investment after amortisation accounted for a 3 point reduction. Underwriting losses on Exit portfolios accounted for a 3 point reduction and reorganisation costs relating to the UK restructuring programme accounted for a 2 point reduction. The 2019 interim and final dividends reduced the coverage ratio by 14 points.
Read some of our other success stories here: rsagroup.com/ casestudy 1. International Monetary Fund.
Personal: Commercial: Financial summary 2019 net written premiums Underwriting result ◊ COR ◊
The earned controllable expense ratio of 16.9% was 0.4 points lower than last year and better than our plans.
UK&I weather costs of 2.5% (2.3% ex. exits) were 3.2 points lower than 2018 with better experience across all parts of the region. Large losses of 11.2% (10.4% ex. exits) improved by 3pts versus prior year driven by UK Commercial, Europe and Ireland. The attritional loss ratio of 49.1% (48.7% ex. exits) improved by 1 point with improvements seen particularly across the UK and Europe. Within the UK, Household was 2.5 points better as strong rate earned through. Prior year development added 0.35 points to the COR (0.1 point benefit ex. exits) compared to a benefit of 2.4 points in 2018. This was mainly due to the impact of the Ogden discount rate change and strengthening on recent accident years including 2018. This was offset by strong positive development in Ireland and the Middle East.
Conditions in the UK Commercial market remain competitive, despite hardening in the specialty and wholesale and London market, as capacity reduces, following a few years of elevated losses. The most successful players in both UK regional trading centres and international markets trade off strong brand reputation, robust broker relationships and industry-specific expertise. Digital trading is also maturing, with brokers seeking faster ways to process quotes for small and medium-sized businesses in particular.
· A set of early warning indicators and horizon scanning reports have been developed, covering underwriting, actuarial and compliance to support forward-looking analysis.
Underwriting and claims risk This is the risk that underwritten business is not in line with appetite or is less profitable than planned due to insufficient pricing and setting of claims case reserves. Key exposures arise from large portfolios where claims trends are slow to emerge, such as UK Commercial and Marine.
· Shaping a smarter tomorrow – using partnerships and innovation to help people and businesses learn about the risks they face and how to manage them effectively.
In Canada, we have introduced improved customer feedback and governance mechanisms. We have also piloted and introduced a Claims Advice Line, enabling our customers to contact us for advice before submitting a claim. In Scandinavia, we have invested in improving customer journeys through the introduction of digital platforms that are more convenient and flexible.
Managing the everyday well During 2019, we focused on ensuring the right policies, systems and processes are in place to manage risks effectively and make informed decisions.
During 2019, we also analysed the carbon emissions associated with our broader supply chain activities and increased our promotion of the principle of ‘repair over replace’.
· Invested in leadership development with programmes targeting managers and directors.
This year, for the first time, we are beginning to report in line with the Task Force on Climaterelated Financial Disclosures (TCFD) framework. Doing so will enable our stakeholders to understand the ways in which climate change is affecting our business now, and in the future.
This year, we have explored ways to enable and support a more flexible workforce; we intend to turn our plans into action and measure our progress in this area.
2019 progress In the UK, an evolving people strategy, which recognises changes to the UK business, has been of key strategic importance. A key pillar has been to create a clearly defined culture and organisation designed to deliver high performance and achieve our best-in-class ambitions.
Non-Executive Director of Partners Group Holding AG and member of the supervisory board of MSG Life AG.
Sonia has over 25 years’ experience in the banking and financial services industry in Canada. She is an experienced business leader and has run large global businesses and has served at operating board level at Canadian Imperial Bank of Commerce. Since stepping down from Canadian Imperial Bank of Commerce in 2011, Sonia has held a number of non-executive positions.
Ken is a fellow of the Chartered Insurance Institute (CII) and has held positions as President of the Insurance Institute of Ireland and the representative body for Insurance companies, Insurance Ireland.
Previously, Martin was Senior Vice President, commercial insurance and global specialty lines, with RSA Canada. Martin has held progressively senior roles at RSA across the three major regions since joining in 1997.
* As at 31 December 2019. Senior management reflects the same group reported in Women in Finance Charter goals. Full workforce headcount by gender information is provided on page 50.
· Supplemented by objective first-line validation and independent second-line assurance processes
The Committee reviewed the additional disclosure included in the 2019 full-year results announcement to provide a number of APMs relating to the impacts of the UK&I exited portfolios, in line with those provided at the half year 2019.
During the course of 2019, the Board met with a range of employees and other members of the workforce to understand their roles within the business and their priorities through events such as town halls and site visits. Members of the Committee were pleased to meet with our regional D&I Councils to discuss initiatives and progress to date.
· The model validation plan was agreed, and the final report approved, on completion. Model governance updates have been discussed and agreed during the year.
NOTES: 1. Charlotte Jones ceased to be independent in February 2019 when she agreed to assume the role of Group CFO. 2. Martin Strobel succeeded Isabel Hudson as the Senior Independent non-executive director on 1 August 2019. 3. Sonia Baxendale joined the Board, GAC and GIC on 1 March 2019. Sonia was appointed as Chair of GIC on 9 May 2019, when Joseph Streppel stepped down. 4. Isabel Hudson resigned as director with effect from 31 July 2019. Isabel was unable to attend the BRC meetings in March and June and the June and July Board meetings, as well as the June NomCo meeting due to extenuating personal circumstances. 5. Joseph Streppel resigned as director with effect 9 May 2019.
44.5p, · Underlying pre-tax profit £624 million, · Group underlying Return on Tangible Equity at 16.0%, · Combined operating ratio at 93.6%, · Solvency II coverage ratio at 168%.
∙ Canada bonus award timing brought forward to align with annual results.
Considering workforce remuneration The Committee considered RSA’s workforce remuneration throughout its activity in the year. For example, we reviewed the employee salary increase budgets, bonus funding levels and internal pay relativities ahead of determining the incentive awards for the executives.
Committee members have dialogue with employees across the Group through our wider Board engagement program, including on pay-related topics. I have shared information about the Committee’s role and the alignment of executive and employee reward on our internal social media network, which gives individuals a chance to feedback their views directly to me.
Proportionality The Committee is satisfied the reward opportunities of the Executive Directors remain within market norms, and are considered to appropriately balance the desire not to pay unnecessarily with the need to attract, retain and incentivise appropriately for the delivery of stretching performance targets. No variable remuneration will be delivered for below threshold performance.
Pension (fixed remuneration) This element forms part of a market competitive package and enables executives to save for retirement.
Vested shares must be retained until the relevant shareholding level is reached, excluding any sold to satisfy statutory deductions. The applicable shareholding levels are detailed on page 84.
· Executive Directors may hold one external non-executive position provided this does not give rise to any conflict of interest, with the approval of the Group Nomination and Governance Committee. If there is any remuneration arising from this role, the individual can retain it.
· Managed the exit of underperforming lines of business and ensured smooth execution of the separation plan to manage costs.
Stephen’s objectives included: · Strategy: Drive implementation of Strategic Plan and its further evolution, continue buildout of best in class capabilities and performance culture, refine plans for digital/data and further customer initiatives.
· Ensured capital and other policies maintained to sustain “A stable” S&P credit rating. Core Tier 1 capital remained strong at 106%.
· Strong leadership of Finance Leadership Team, managing succession in core roles with a strong focus to onward development.
Within the Business Scorecard indicators, performance overall was assessed to have been excellent. The Scorecard’s indicators shown in the following table form the basis of this judgement. In every case, the delivery has exceeded the targets set in 2017 where financially quantifiable. The qualitative judgements in each category are more fully recorded in the Annual Report commentary for each relevant period. The overall judgement is that RSA has continued to progress towards its “best in class” ambition. In the last three years covered by this award, RSA has produced two of its best underwriting results this century1. The strategy and business initiatives have been well thought through and executed. While industry-wide loss challenges hit results in 2017 and 2018 particularly, RSA’s risk and capital resilience coped well, allowing dividend growth to continue uninterrupted. The determined reaction of management, exiting relevant portfolios, restructuring senior leadership and UK costs was also considered a distinctive positive.
information systems are operated, it is relatively time-efficient to calculate while remaining appropriately specific, and therefore is used in preference to Options A or C. Under this option, gender pay gap data as at April 2019 is used to identify the best equivalents for the three RSA UK employees paid at the 25th percentile, median and 75th percentile. A 2019 total remuneration figure is then calculated for each of these employees, and for a sample of employees with hourly remuneration rates either side to ensure that a representative employee is selected. Each of the three identified individuals was a full-time employee during the year.
3. The total pay and benefits for the individuals identified at the 25th percentile, median and 75th percentile was £23,152, £33,754 and £59,663 respectively. The base salary for the individuals identified at the 25th percentile, median and 75th percentile was: £20,212, £29,520 and £48,747 respectively.
Executive Directors must retain all vested shares arising from this incentive plan for two years post-vesting (except those sold to cover statutory deductions), and they are subject to clawback provisions as set out on page 83. The table below summarises the LTIP’s structure.
The Board believes that its stakeholder engagement programme provides meaningful insight into the views, priorities and issues facing each of its stakeholders. The Board’s engagement activities undertaken in 2019 are set out on pages 8 to 11.
The NomCo is dedicated to ensuring that an effective succession plan is maintained for both Board and senior management positions.
The Board reviewed the effectiveness of the Company’s risk management and internal control systems, including financial, operational and compliance controls, and concluded that they were appropriate and had operated effectively during the year.
The Company’s Articles of Association may be amended by special resolution of the Company’s Ordinary shareholders.
The directors and officers of the Company and its subsidiaries also have the benefit of Directors & Officers insurance which provides suitable cover in respect of legal actions brought against them. In addition, the Company also maintains a pension trustee liability insurance policy for the directors of SAL Pension Fund Limited, RIGPS Pension Trustee Limited and Royal & Sun Alliance Pension Trustee Limited, subsidiaries of the Group, in relation to such company’s role as a trustee of an occupational pension scheme. This insurance constitutes a qualifying pension scheme indemnity provision under section 235 of the Companies Act 2006. These insurances were in force during the year ending 31 December 2019 and remain in force as at the date of this report.
Greenhouse gas emission reporting Approach Our disclosures cover all sources of greenhouse gas emissions as required by the Companies Act 2006 (Strategic Report and Directors’ Report) Regulations 2013, covering everything within the boundary of our operational control. Figures below include emissions from all operations with 50 or more full time equivalent employees, covering the period 1 January 2019 – 31 December 2019.
This resolution is proposed in the event that the funding of seminars, functions and charitable donations by the Group may be regarded as political in nature.
Overview Materiality: Group financial statements as a whole £35m (2018: £35m)
· Margin evaluation: Evaluation of the appropriateness of the Reserve Committee’s recommended margin to be applied to the actuarial best estimate. In order to do this we assessed the Directors’ approach to, and analysis performed, in setting the margin with respect to recognised actuarial methods. In particular we considered the allowance for uncertainties inherent in the data and assumptions in developing the actuarial best estimate through inquiry with the Directors and with respect to our understanding of any changes in the Group’s risks and our own sector experience of approaches to setting the margin and the level of margin held by the Group’s peers.
With the assistance of our own pension actuarial specialists, our procedures included: · Membership data: Compared the data received from the third party administrators of the pension schemes to the data sent to the third party external expert who valued the pension obligation.
Valuation of parent company’s investment in subsidiaries (2019: £4,986 million, 2018: £4,476 million)
The financial statements were approved on 26 February 2020 by the Board of Directors and are signed on its behalf by: Charlotte Jones Group Chief Financial Officer
The lease liability is subsequently re-measured when there are changes in lease term, in the expectation regarding whether a purchase option would be exercised or not, in any expected residual value guarantee or changes in variable lease payments that are dependent upon an index or rate (from the date that these take effect).
Discounted using the lessee’s incremental borrowing rate at the initial application 278
The effect of the adoption of IFRS 16 is as follows: Impact on the Consolidated Statement of Financial Position (increase/(decrease))
1. 2019 includes £42m depreciation charge, whereby £50m lease payment cost and £2m sublease income would have been recognised in accordance with IAS 17. 2019 also includes £7m costs for leases classified as low value and short term for which the financial impact is unchanged.
IFRS 9 ‘Financial Instruments’ IFRS 9 ‘Financial Instruments’ has been issued to replace IAS 39 ‘Financial Instruments: Recognition and Measurement’ and primarily changes the classification and measurement of financial assets. As described above the Group has elected to implement IFRS 9 ‘Financial Instruments’ alongside IFRS 17. Further information can be found in note 25.
Basis of preparation and significant accounting policies continued 4) Significant accounting policies continued Financial Instruments continued The table below summarises the classification and treatment of the Group’s financial assets and financial liabilities.
The Group has developed enhanced methods of recording exposures and concentrations of risk and has a centrally managed forum looking at Group underwriting issues, reviewing and agreeing underwriting direction and setting policy and directives where appropriate. The Group has a monthly portfolio management process across all its business units where key risk indicators are tracked to monitor emerging trends, opportunities and risks. This provides greater control of exposures in high risk areas as well as enabling a prompt response to adverse claims development.
Subordinated guaranteed US$ bonds1 35 – – – – – 7 – 7 6
Strategic report Governance Financials 6) Held for sale disposal groups and loss on disposal of businesses The assets and liabilities of the businesses held for sale are shown below.
Foreign exchange arising on the revaluation of current and deferred tax balances is reported through other comprehensive income within the foreign currency translation reserve.
Profit for the calculation of earnings per share (£m) 336 326
RSA Annual Report and Accounts 2019160 rsagroup.com 25) Financial assets continued The total losses on cash flow hedge instruments during 2019 were £2m (2018: £nil) in the consolidated statement of other comprehensive income, and the amount reclassified to the income statement was a gain of £1m (2018: £1m). There was no ineffectiveness recognised in the income statement in respect of these hedges during 2019 or 2018.
Collateralised debt obligations Structured debt security backed by bonds 212 50 262 223 42 265
Provisions for losses and loss adjustment expenses at 31 December net of held for sale 9,141 9,468
Strategic report Governance Financials 37) Insurance contract liabilities continued Insurance and reinsurance liabilities 2019 £m 2018 £m
Net IAS19 surplus/(deficits) in the schemes 254 (60) 194 231 (69) 162
After retirement, pensions in payment are increased each year based on the increases in the Government indices for inflation. A cap of 2.5% applies to benefits accrued post 31 December 2005 (a cap of 5% applied to benefits in excess of Guaranteed Minimum Pension prior to this date).
Strategic report Governance Financials 38) Post-employment benefits and obligations continued The maturity profile of the undiscounted cash flows of the two main UK schemes is shown below: Cash flow – total liability £m
Other (including annuity contracts, infrastructure and growth alternatives) 456 23 479 460 26 486
Other (including annuity contracts, infrastructure and growth alternatives) – 479 479 – 486 486
During 2019, the Group recognised £19m of rental income within its net investment return (2018: £19m).
Avenida Major Sylvio de Magalhães Padilha, 5200, America Business Park, Ed. Dallas, conj. 31, sala 02, Jardim Morumbi, Zip Code 05693-000, City of São Paulo, State of São Paulo, Brazil
Roins Holding Limited 18 York Street, Suite 800, Toronto ON M5J 2T8, Canada
Fort William Building, 10 Factory Lane, St. John’s Newfoundland A1C 6H5, Canada Preferred
Unifund Claims Inc. Fort William Building, 10 Factory Lane, St. John’s Newfoundland A1C 6H5, Canada 10122033 Canada Inc. 90 Allstate Parkway Suite 500 Markham ON L3R 6H3 Canada Common 10122033 Canada Inc.4 90 Allstate Parkway Suite 500 Markham ON L3R 6H3 Canada
Fitzwilliam House, 10 St Mary Axe, London, EC3A 8EQ, United Kingdom 57.10
Group. 4. Indicates ownership of non-voting shares. 5. There is no subsidiary where the Group holds less than 50% of the voting rights.
The attached notes form an integral part of these parent company financial statements.
In accordance with section 408 of the Companies Act 2006, the Company’s income statement and related notes have not been presented in these parent company financial statements.
Amounts owed from subsidiaries The Company accounts for amounts owed from subsidiaries at amortised cost and determines an expected credit loss (ECL) based on those default events that are possible within 12 months after the reporting date, or where the credit risk has increased significantly since initial recognition on the basis of all possible default events over the life of debt. Specifically the probability of default is considered together with the expected subsequent loss.
11) Issued debt Full details of the issued debt of the Company are set out in note 35 to the consolidated financial statements.
Net Asset Value (NAV) per Share Net asset value per share is calculated as closing shareholders’ funds, less preference share capital, divided by the number of shares in issue at the end of the period.
Attritional loss ratio G/B R 55.0% Weather loss ratio H/B S 2.6% Large loss ratio I/B T 10.0% Prior year effect on loss ratio V-R-S-T U (0.6%) Loss ratio F/A V 67.0% Commission ratio (K+L)/A W 12.9% Expense ratio (E+M+N)/A X 14.7% Combined operating ratio V+W+X Y 94.6%
Low-cost share dealing facilities Shareholders may purchase or sell their RSA Ordinary Shares through their stockbroker, a high street bank or one of the providers detailed below.
A letter from the Chairman and the notice convening the AGM (Notice) is made available to all ordinary shareholders at least 20 working days before the meeting and can be found on the Company’s website at www.rsagroup.com/agm2020.