ASIA AND THE MIDDLE EAST • A leading international insurer in the
CAPABILITY Claims handling is a key differentiator for both customers and RSA. We have over 4,000 claims handlers across our businesses, around 500 of whom are devoted to handling large and complex claims. We employ specialists such as engineers, surveyors and mariners and this depth of claims expertise is often key in our ability to win business.
LEVERAGING GLOBAL CLAIMS EXPERTISE We demonstrated our commitment to leveraging global expertise in 2011, when we launched a programme of global claims improvement reviews, designed to find innovative ways to improve the claims experience. 105 reviewers from around the business spent a total of around 9,000 hours working together to share best practice and to identify improvements to take back to their own businesses.
The effective transition of responsibility had occurred by the end of October. The employment of Simon has led to an opportunity to strengthen our Executive Committee and expand the role of key managers, Mike Holliday-Williams in Scandinavia and Rowan Saunders in Canada. They both have had great success in running these operations within the International Division and will continue to report separately to Simon as CEO.
more scrutiny because of their massive scale. Responsibility for these issues rests elsewhere.
Much has been spoken and written externally on diversity. This is a complex and sometimes divisive subject. My empirical view is that diversity in all its aspects has been a key component of the success of the RSA Board and the Company. Diversity is about much more than a gender debate.
Canada delivered a record underwriting result of £116m, up 45% year on year despite the Slave Lake fire in May, the second most costly catastrophe in Canadian history.
The integration of GCAN is almost complete, and the business is performing ahead of expectations, delivering 18% premium growth and market-leading profitability in 2011.
Secondly, one of our main sources of competitive advantage is technical capability. Over the years we’ve recruited some high quality technical specialists as well as invested in ‘best in class’ training and development.
Thirdly, we have a powerful track record of delivering operational efficiencies. Since 2004, we have generated significant annualised cost savings and in 2011, the UK achieved its expense ratio target of around 14% a year ahead of schedule. This rigorous focus on efficiency will continue.
2011 OVERVIEW In 2011, our Scandinavian businesses performed strongly. Net written premium grew by 6% to £1.8bn (2% at constant exchange), the underwriting result was an excellent £264m and the COR was 85.4% despite a cloudburst over Copenhagen in July, during which two months’ rain fell in two hours, and storms across Scandinavia in November.
There was continued good growth momentum in Danish Bancassurance and our distribution capacity was strengthened in October 2011, when we launched our Household insurance offering with SEB, the second largest bank in Sweden.
Annual Report and Accounts 2011 | RSA | 19 visit www.rsagroup.com
Our underwriting result also continues to benefit from improved underwriting sophistication and segmentation. The Personal lines underwriting result was a very strong £74m and the COR was 92.3%, despite incurring a net loss of £11m from the Slave Lake fire. This was offset by improved loss ratios within our Motor portfolio resulting from reforms enforced by the Province of Ontario during 2010.
Johnson Our Direct business had another strong year with continued double digit top line growth to £555m, driven by strong new business in Household and Motor, excellent retention, rate and the addition of 17 new affinity partners during the year.
During the fourth quarter of 2011, we launched our Private Client Insurance offering tailored for high net worth customers, which evolves our advice based customer strategy and positions us well for the coming year.
We are repositioning the business to maximise its contribution to the Group and make it more focused. We plan to deliver improved underwriting profitability by focusing on areas where we have a strategic advantage such as Home, Pet, Marine and Risk Managed. In Motor, we will target fewer segments, while in Commercial Property we will work to convert our leading market share into sustained underwriting profitability. Our distribution will also become more targeted as we focus on a smaller number of key intermediaries.
The underwriting loss of £20m improved compared with last year and includes strong performances in Marine and Liability offset by Property and Motor. In Commercial Motor, the COR improved by 4.9 points to 104.8%, however, losses on a significant contract will continue to act as a drag on the result going forward.
UK Personal Our track record of strong top line growth continued in 2011, with premiums up by 10% to £1,364m driven by the Tesco Pet deal and Household partially offset by Motor, which remains very challenging.
IRELAND • NWP growth of 16% due mainly to the acquisition of 123.ie
Throughout the year we have continued to maintain underwriting discipline despite intense competition. Where necessary, we have taken strong pricing action to achieve our target returns and we have maintained a tight grip on expenses. Our underwriting result of £3m (2010: £12m) reflects a strong performance from Latin America offset by the Baltics and Asia and the Middle East, which were impacted by large and weather losses, including the floods in Thailand and Oman. The COR of 98.7% was in line with last year.
Central and Eastern Europe Premiums are up by 8% to £219m (8% at constant exchange). Growth returned to the Baltics during 2011 and we maintained our market-leading position. Our Direct businesses in Poland, Russia and the Czech Republic now insure over 400,000 vehicles.
• India grew at 19% with continued growth in the Motor market.
Other movements Other movements which included interest, amortisation and Solvency II costs were up by 72% to £261m (2010: £152m) driven by increased amortisation and Solvency II costs. Interest costs of £117m were in line with the previous year (2010: £118m), while Solvency II costs were £30m (2010: £5m) and we would expect a similar charge in 2012. Amortisation costs increased by £85m to £114m (2010: £29m) and included goodwill write-downs in UK Commercial of £41m from the acquisitions of Martello in 2006 and Fyfe in 2008, where we have significantly scaled back activity as a result of the economic downturn, and in Central and Eastern Europe of £30m, reflecting slower than originally planned growth expectations.
Acquisition costs were £10m and include the integration costs for GCAN and 123.ie.
On peripheral Europe, we have also further reduced our already limited exposure to government bonds from £209m at the beginning of 2011 to £138m. This represented less than 1% of the total portfolio. We also have limited exposure to bank debt in these countries with a holding at 31 December 2011 of just £132m, of which £50m related to Santander in the UK.
The economic capital surplus is sensitive to changes in risk free yield curves, which impact both future investment income and the asset/ liability mismatch under the stressed scenarios generated by our internal model. The downward movement in risk free yields over 2011 of around 140 basis points accounted for £0.4bn of the decline in the surplus.
SOLVENCY II On Solvency II, we continue to make good progress and remain at the forefront of internal model approval. The implementation date has currently been delayed until January 2014, and
PENSION FUND The pension deficit of £140m was broadly unchanged over the year, with the impact of lower discount rates offset by asset outperformance. The asset outperformance was driven by our prudent asset mix which generated over £500m of after tax return. These assets comprise a low equity exposure combined with an extensive swap programme, built up since 2005, that has locked in future real yields well in excess of market rates. We have also benefited from the insurance arrangements we entered into in 2009.
Strong culture • Board set ‘tone from the top’ of open communication and engagement
• Promoted risk informed decision making, which is focused on achieving a desired outcome and considers both risk and reward
• Further developed our global programme of comprehensive stress and scenario testing, reinforcing our understanding of our risk profile and the effectiveness of our control environment. Analysis considered our financial and operational resilience to the Euro sovereign debt crisis.
We continue to proactively manage our financial risks despite the challenging economic climate.
In Canada, we experienced 99% customer satisfaction levels thanks to fast track claims handling, specialised claims and empathy training for employees, coupled with ‘Voice of the Customer’ telephone surveys which give customers the opportunity to provide immediate feedback.
Engagement remains an important focus, to encourage employees to participate in charity committees, green teams and wellbeing programmes.
Greenhouse gas emissions for RSA Insurance Group (Tonnes of CO2e *)
Non-Executive Directors The Non-Executive Directors challenge and help develop strategy and scrutinise performance against it. Each Non-Executive Director is a member of at least two of the following Board committees: Group Audit Committee; the Remuneration Committee; the Nomination Committee; the Investment Committee; and the Board Risk Committee. Financial controls and systems are assessed through the Group Audit Committee, Board Risk Committee and the Board as necessary. The Remuneration Committee sets levels of remuneration for the Executive Directors. The Nomination Committee keeps under review the capabilities required by the Board and the leadership needs of the Group and makes recommendations to the Board on matters relating to the Board’s membership.
Edward Lea was appointed as the Senior Independent Director in January 2011 and a role statement setting out his responsibilities in this position was approved and adopted by the Board in March 2011. The Senior Independent Director’s role statement provides that the Senior Independent Director should be available to shareholders if they have concerns which have not been resolved through normal contact with the Chairman, Group CEO or other Executive Directors.
Reviews of the Board committees took place in November and December 2011.
The evaluation of the Group Audit Committee focused on the composition of the committee and the number and length of meetings held each year, the information received by the committee and its timeliness and the effectiveness of the committee’s reviews of specific areas. Priorities for change were agreed to be preparatory work for Solvency II, the need to work more closely with the subsidiary audit committees and the executive and the main challenges facing the committee over the next three years, which included change and uncertainty in the regulatory regimes and responding to the risks inherent in a continuing uncertain global economic environment.
Re-election The Directors and the Company (by ordinary resolution) may appoint a person who is willing to be a Director either to fill a casual vacancy or as an additional Director. In accordance with the Code, the Directors shall submit themselves for election or re-election at each AGM. Resolutions to reappoint Directors at the AGM are subject to the approval of the Board, taking into account the recommendations of the Nomination Committee. The Company may (by ordinary resolution of which special notice has been given) remove any Director before the expiration of his period of office.
Notes: 1. Alastair Barbour was appointed to the GAC with effect from 27 October 2011. 2. John Maxwell retired from the GAC with effect from 27 October 2011.
The GIA reports to management on the effectiveness of the Company’s systems of internal controls and the adequacy of these systems to manage business risk and to safeguard the Group’s assets and resources. The GAC reviews and approves the annual Group Internal Audit Plan following presentations from the regional CEOs and regional auditors.
In 2010, an independent assessment of the internal audit function’s effectiveness was carried out by PricewaterhouseCoopers LLP. The report concluded that the GIA was ‘generally conforming’ (the highest rating) with the standards of the Institute of Internal Auditors. Overall the function was in the upper quartile of internal audit functions within financial services companies. The report also concluded that there was a good relationship between the GAC and the regional audit or management control committees.
The Board, through the GAC, receives reports from the Group Chief Auditor and her team on the integrity of the control environment and also receives reports from the external auditor based upon its audit work. The GAC also receives reports on the adequacy of the Group’s arrangements for ensuring regulatory compliance from the Group Head of Regulatory Risk & Compliance. The Board, through the Board Risk Committee, considers reports from risk specialists across the Group and reviews Group-level risk management information.
RSA also encourages employees to participate in discount schemes for employees and their families. The Staff Saver Scheme in the UK currently has approximately 11,800 Staff Saver policies in force (2010: approximately 7,800 policies in force).
• To oversee the operation of the Company’s cash and share-based incentive plans, including approving the value and timing of awards and setting and monitoring performance conditions
Individual targets are approved by the Committee and reflect stretching financial and non-financial measures.
Annual Incentive Plan The Executive Directors and the Executive Team participate in an annual incentive plan. The Committee reviewed the incentive opportunity of the Executive Directors and the Executive Team and determined that it should reduce from a maximum of 180% of salary to 160% of salary for 2011 and 2012. At an on-target level of performance, Executive Directors can receive a cash bonus of 60% of base salary and shares worth up to 20% of base salary can be awarded. For outstanding performance, a maximum cash bonus of 120% of base salary and shares worth up to 40% of base salary can be awarded. At the Committee’s discretion, executives may be invited to voluntarily invest up to a further 33% of the net cash element of their bonus into shares (Voluntarily Invested Deferred Shares), which are held for a three-year deferral period.
Role-specific measures are reviewed and approved by the Committee early in the financial year. The Group Chief Executive’s performance is assessed annually by the Chairman of the Board and members of the Committee. The Group Chief Executive carries out a similar assessment for each of his direct reports, subject to review and approval by the Committee in the case of Executive Directors. Assessments also take account of appropriate leadership styles and each executive receives a performance rating against a standard scale used at all levels in the business.
Non-Executive Directors do not have service contracts but each has a letter of appointment. With the exception of the Chairman, all Non-Executive Directors are subject to a three-year period which may be terminated by either party giving not less than one month’s notice to the other.
Notes 1. Adrian Brown was appointed as a Director on 5 July 2011. Accordingly, the table above shows the number of options held by him on that date and not 1 January 2011. 2. The aggregate gain made by Directors during the year on the exercise of share options amounted to £486.00.
Notes 1. Adrian Brown was appointed as a Director on 5 July 2011. Accordingly, the table above shows the share awards held by Adrian Brown on 5 July 2011 and not 1 January 2011 and Partnership Shares and Matching Shares purchased since 5 July 2011.
The Marine team comprises both technical insurance experts and people who have worked within the marine industry for many years, providing a unique blend of industry experience and product expertise. This combination enables us to deliver the best solutions for our customers.
The Directors are responsible for preparing the Annual Report and Accounts in accordance with applicable laws and regulations. Company law requires the Directors to prepare such financial statements for each financial year. Under that law the Directors are required to prepare group financial statements in accordance with International Financial Reporting Standards (IFRS) as adopted by the European Union and Article 4 of the IAS Regulation and have also chosen to prepare the Parent Company financial statements under IFRS as adopted by the European Union. Under company law the Directors must not approve the accounts unless they are satisfied that they give a true and fair view of the state of affairs of the Company and of the profit or loss of the Company for that period. In preparing these financial statements, International Accounting Standard 1 requires that Directors: • Properly select and apply accounting policies • Present information, including accounting policies, in a manner that provides relevant, reliable, comparable and understandable information • Provide additional disclosures when compliance with the specific requirements in IFRS is insufficient to enable the users to understand the impact of particular transactions, other events and conditions on the entity’s financial position and financial performance and
Cash and cash equivalents at beginning of the year 1,314 1,105
IFRS 13 comes into effect for annual periods beginning on or after 1 January 2013, but early adoption is permitted. It will be applied prospectively. This new standard has not yet been endorsed by the EU.
• Consideration is also made of the views of internal peer reviewers of the reserves and of third parties including actuaries, legal counsel, risk directors, underwriters and claims managers
Financial assets that are past due but not impaired Financial assets that have been impaired £m
Reinsurers’ share of insurance contract liabilities 2,638 – – – – 14 2,652 (3)
Movement in shareholders’ equity at 31 December 2010 (86) 105 (45) 54 (47) 57
Changes in the income statement and equity: Increase/(decrease) in income statement
Tax at the UK rate of 26.5% (2010: 28.0%) 163 133
The subordinated guaranteed US$ bonds (‘Yankee Bonds’) have a nominal value of $24m and a redemption date of 15 October 2029. The rate of interest payable on the Yankee Bonds is 8.95%.
At end of accident year 7,633 2,687 2,484 2,325 2,498 2,521 2,624 2,678 2,571 2,718 2,996
Current year provision before discounting 1,787 162 321 191 254 381 495 654 862 1,315 2,996 9,418
The fair value of the hedging instruments at 31 December 2011 are a liability of £12m (2010: £39m) and an asset of £14m (2010: £nil). The hedge ineffectiveness recognised in the income statement during 2011 is £nil (2010: £nil).
If the acquisitions had occurred on 1 January 2011, the contribution to the Group’s net written premiums and fee income for the year would have been £132m and the contribution to the Group’s profit after tax for the year would have been £20m. The total net written premiums and fee income of the acquired businesses since the acquisition dates included in the Group’s net written premiums for the year is £117m. The total profit after tax of the acquired businesses since the acquisition dates included in the Group’s profit for the year is £16m.
Fair value gains (including gains on disposal) on financial assets (194) (37)
Fair value losses/(gains) (including losses/(gains) on disposal) on investment property 4 (27)
• The Parent Company financial statements are not in agreement with the accounting records and returns or • Certain disclosures of Directors’ remuneration specified by law are not made or • We have not received all the information and explanations we require for our audit.
Deferred tax assets of £22m (2010: £25m), which are in excess of profits arising from the reversal of existing taxable temporary differences and that relate to tax jurisdictions in which the Company has suffered a loss in either the current or preceding period, have been recognised on the basis that future taxable profits will be available against which these can be utilised. The evidence for the future taxable profits is a forecast consistent with the three year operational plans prepared by the relevant businesses, which are subject to internal review and challenge. Where relevant, the forecast includes extrapolations of the operational plans using assumptions consistent with those used in the plans.
Many of our customers have similar insurance requirements, but require their own specific underwriting and risk management solutions.
Our bespoke solutions allow us to provide that flexibility and innovation in our insurance policies, whilst ensuring there are no gaps in cover. We employ a large number of experienced underwriters across all major industry sectors with expertise in complex, non-conventional arrangements and compliance programmes.
26 September 2012* Ex dividend date for the ordinary interim dividend for 2012.
1 October 2012* Payment date for the second preference dividend for 2012.