This is an important and significant achievement for the Company, and the Board and I are extremely thankful to those of our employees who worked tirelessly to deliver it. Our capital position is now healthy on all measures that we monitor.
As an insurer we must anticipate and adapt our products and services to reflect social trends. As a business we must also be conscious of and meet society’s expectations of us.
Impact: Climate change is already having an impact on our environment, The frequency of catastrophic weather events is on the rise, and related insured-losses have increased fourfold over the past 30 years. With growing pressure on resources, people are having to do more with less.
RSA Annual Report and Accounts 20156 Strategic report – Business model
SAFE SECURE WORLD Developing products, and programmes that give our customers confidence to lead their lives
Core premium income is up 1% on an underlying basis (down 9% post disposals, Group reinsurance and FX), meeting our goal of stabilising top line erosion.
Current year underwriting profits at £129m are up 77% and a record1 for RSA. This was driven by improved underlying profits and a swing on volatile weather/large losses of £20m2 vs 2014 (£68m worse than planned). The storm and flood events in December cost £76m within this total (£174m pre-reinsurance recoveries, which shows the risk management conservatism of our business).
We can’t say that all claims are handled that fast but it demonstrates our commitment to providing the best possible service for all our customers, whether coming to us direct, from brokers or through our affinity partners.
Executive Development Programme (EDP) The EDP programme focuses on building the commercial acumen and strategic thinking of senior people regarded as having the potential to be amongst the top leadership of the organisation.
Outlook We target improving attritional loss ratios in the medium-term in line with our ambition of best-in-class performance.
Commentary Strong customer satisfaction translates to improved underwriting results. By ensuring customers are at the heart of everything we do we can optimise business performance.
I am delighted to be presenting my first financial review at RSA. These are a strong set of results and the business now has real momentum; both are testament to the hard work put in across the Group over the past two years.
Commissions The Group commission ratio in 2015 of 15.9% was up from 15.2% in 2014, driven mainly by an increase in the non-core commission ratio (up 4.5pts to 24.5%). The Core Group commission ratio was relatively stable at 14.3% (2014: 14.1%). We currently expect the Core Group commission ratio to be at or around 14% over the medium-term.
At 31 December 2015 we reported an estimated Solvency II capital surplus of £0.9bn which gives coverage of 143% over the solvency capital requirement (SCR). The completion of the Latin American disposals during 2016 is expected to add around 12 points to this coverage ratio.
We maintain a measured approach to capital management, targeting a single ‘A’ capital rating. RSA is a diversified, multi-channel, multi-product general insurer and is not exposed to significant volatility from the business mix.
Group investment income (excluding Latin America) is expected to be c.£315m and to stay around that level for 2017 assuming current market implied rates. Volatile financial markets are a risk factor for RSA and industry competitors which could present challenges to our plans during the year.
How RSA embeds a culture of risk management throughout the business RSA supports a healthy approach to risk management by integrating risk management principles throughout the business and reinforcing its role as a business enabler. Risk management principles are embedded within performance management for all employees across the Group regardless of function, who all share a joint responsibility to effectively manage business risk. We have also introduced a cultural health index to help Business Leaders spot early signs of cultural risk within the business.
Framework activities: 1. Board sets strategy The risk management framework operates within the context of the business strategy, set by the Board and incorporated in to the Group and regional operational plans 2. Set risk strategy The risk strategy reflects the business strategy of developing a focused, stronger and better general insurer and defines the over-arching risk principles to support business goals 3. Set risk appetite Risk appetite statements and tolerances enable the business to convert the strategic principles into well-defined and well-articulated risk limits. Detailed risk policies then set out the required processes and controls that the business functions are required to follow to deliver the operational plan within these limits.
• Reserves are set by the Group Reserving Committee, attendees at which include the Group Chief Actuary, the CRO, CFO and CEO
In this report you can see some of the ways it has impacted the business. For example, the way we have presented the Group’s Key risks and Mitigants has been updated to demonstrate how our risk profile informs and aligns to our capital requirements (SCR). We have also updated our Key Performance Indicators on pages 22-23 to reflect the importance of the Solvency II position to the effective management of our business.
RSA Annual Report and Accounts 2015 41Directors’ and Corporate Governance Report – Chairman’s governance letter
The Group Nomination and Governance Committee played a crucial role in Scott’s recruitment. It carried out an annual effectiveness review of the current Board and continues to work on the recruitment of new Non-Executive Directors.
Stephen was previously Chief Executive Officer of The Royal Bank of Scotland Group plc, 2008-13, where he led the largest ever corporate restructuring and recovery programme.
David joined RSA in March 2008 as Group Motor Portfolio Director and in February 2010 became Underwriting and Claims Director, Emerging Markets. David was appointed to the position of Group Underwriting Director in July 2013. Prior to his time with RSA Group, David was at Zurich Financial Services where he was Head of Personal Lines underwriting and Chief Pricing Actuary for the Zurich Group. Previously, he worked for a number of insurance companies in the UK & Ireland including Norwich Union, as Head of Pricing for Norwich Union Direct; Guardian; and New Ireland Assurance. David has 24 years of insurance experience in underwriting, pricing and actuarial related matters and is a Fellow of the Institute of Actuaries.
Darren was appointed Group Chief Information Officer in June 2013 and joined the Executive Committee in May 2014. Having joined RSA in 2007 as Chief Information Officer for the Group’s Baltic operations, he went on to lead IT and Operations in RSA’s Central and Eastern Europe region and, subsequently, its Emerging Markets business. Prior to RSA, Darren held roles at Compaq, Unilever, GE Commercial Finance and GE Capital Solutions.
The UK Corporate Governance Code (the Code) sets out standards and expectations on corporate governance matters for UK companies.
Delegated Authority Framework The Delegated Authority Framework specifies how executive authority is delegated from the Board to the Group Chief Executive and on to other executives in the Group. It forms part of the Internal Control System and links to the Corporate Governance Framework. Senior executives across the Group receive an executive licence setting out their specific limits of authority for entering into financial, underwriting, claims and other business commitments. Each executive is responsible for ensuring a similar process of delegation is in place within his or her area of responsibility.
The composition of each Committee is recommended by the Group Nomination and Governance Committee to the Board for approval. This is reviewed on an annual basis or more frequently if appropriate. When reviewing Committee membership, consideration is given to each individual’s expertise and experience.
RSA Annual Report and Accounts 201548 Directors’ and Corporate Governance Report – Corporate governance
Breakdown of topics discussed at Board meetings held during 2015 a. Strategy 31% b. Financial 29% c. Risk 19% d. Governance 21% a b d c
Notes: 1. Scott Egan was appointed as a director with effect from 1 October 2015. 2. Richard Houghton ceased to be a director with effect from 7 May 2015. 3. Joseph Streppel was unable to attend one scheduled meeting due to a family bereavement.
Effectiveness of the Board The Board considers that the information provided to the Board and its Committees is supplied in a timely manner and is of an appropriate quality to enable it to discharge its duties. The Board continually challenges management to ensure that the flow and quality of information to the Board is of a high standard. The Chairman sets the agenda for Board meetings, is responsible for the running of meetings and ensures sufficient time for discussion and constructive challenge.
The Group Nomination and Governance Committee reviews the rolling agenda for the Board at least twice annually, ensuring that sufficient time is dedicated to current or emerging topics and is satisfied that there is sufficient focus on major issues.
Public affairs The Group contributes to public policy debates on issues relevant to the business, either individually or through industry bodies such as the Investment Association and the Confederation of British Industry. This can include issues such as fraud, motor insurance, asbestos, renewable energy and financial services regulation. The Group engages with policymakers to improve understanding of the role the insurance industry plays in society and the economy.
• Carrying out an annual review of the Group’s System of Governance and recommending it to the Board for approval
Kath Cates Non-Executive Director and Chairman of the Board Risk Committee
The Group team leads and develops the relationship between the PRA, Group and businesses to achieve a mutually beneficial relationship. It also updates the FCA regarding relevant Group level strategic matters.
Each quarter, the Committee receives and reviews a report on non-audit services, together with information on fees agreed and billed by the other major accounting firms. During the year KPMG provided non-audit services totalling £0.9m (2014 £1.6m) which is equal to 17% of the audit fee.
The Policy is summarised on pages 83 to 90 for information, and the full Policy Report is contained in the 2013 Directors’ Remuneration Report, available on the Group’s website at: www.rsagroup.com/financial-reporting.
Business performance review The Group has delivered a strong set of results in 2015. The strategic refocus and capital strengthening are nearing successful completion, as outlined in the Chairman’s Statement on pages 2 to 3.
Details of how the Group has implemented its Remuneration Policy for directors in 2015 are set out on pages 71 to 78.
Strategic priorities Key performance indicators Annual Bonus Plan 2015 Long-term incentive cycle 2015-17
2. Information about the Group Remuneration Committee Purpose of the Committee The Group Remuneration Committee (the Committee) is a formal committee of the Board, accountable to shareholders through its policies and actions. It updates shareholders via the publication of the Directors’ Remuneration Report. At the AGM on 6 May 2016, this Annual Report on Remuneration on pages 69 to 82, together with the Committee Chairman’s letter on pages 66 to 67, will be put to an advisory vote. The Remuneration Policy was approved by shareholders at the AGM on 9 May 2014, and was effective from this date. The Policy is not subject to a vote this year, but is detailed in the Appendix on pages 83 to 90 for ease of reference.
To enable the Committee to fulfil its accountabilities to shareholders, it meets as often as is required and at least twice a year. It operates within an agreed set of terms of reference, which the Committee reviews annually. A copy of these terms can be viewed on the Group’s website at: www.rsagroup.com/termsofreference or alternatively a paper copy can be requested in writing from the Group Company Secretary.
• Approval of the terms of the long-term incentive grant 2015 and directors’ associated conditional share awards
11. Enrico Cucchiani was appointed as a Non-Executive Director effective 1 December 2014. 12. Edward Lea resigned as a Non-Executive Director with effect from 8 May 2014.
Financial performance (40% weighting – achieved 19.5%) As shown in the following table, RSA’s financial performance for each metric was around the level targeted, leading to an outcome under this element of 19.5% against a possible maximum of 40%.
Notes: 1. Interests of directors in ordinary shares of £1.00 each of the Company, including those of connected persons. 2. As at 23 February 2016, the interests in ordinary shares of the current Non-Executive Directors have not changed since 31 December 2015.
None of the Performance or Matching Shares shown above will vest (Performance Shares granted in 2012 lapsed on 15 June 2015 as their performance conditions were not met. Time-proration was applied to performance-linked awards granted in 2013 based on his employment end date, and the outstanding awards will lapse in 2016 as their performance conditions were not met, as noted on page 74). Compulsory Deferred Shares will vest in line with the normal vesting timetable, in accordance with his good leaver status.
The FTSE 100 Index is included as it comprises the 100 most highly capitalised companies in the UK market, of which RSA was a member in 2015.
RSA’s TSR performance relative to the indices is shown over the seven years from 31 December 2008 to 31 December 2015. The graph reflects the change in value of ordinary shares in a company over time, as represented by a hypothetical £100 holding in the shares. Any distribution of dividends is included. Data was provided by Datastream.
2. Stephen Hester was appointed Group Chief Executive effective 5 February 2014. The single figure of total remuneration for 2014 above is pro-rated for his time in the position.
The bonus opportunity remains unchanged at 80% of salary for on-target achievement, rising to a maximum of 160% of salary. Threshold performance represents 16% of salary (i.e. 10% of the maximum opportunity). Half of the total bonus will be awarded in cash where clawback can apply, the balance is deferred into shares for a three-year period where malus adjustment can apply.
The table below shows the Non-Executive Director fee structure. The Company reviewed the Non-Executive Directors’ fees during 2015 in accordance with the Remuneration Policy and the fees effective from 1 July 2013 will remain unchanged in 2016.
Annual Bonus Plan (variable remuneration) Supports RSA’s shortterm objectives. Targets are directly linked to the operational plan and reflect RSA’s priority to create shareholder value through sustained growth and profitability, based on its risk profiles. Deferral into shares creates shareholder alignment.
Pension (fixed remuneration) Pension benefit forms a part of a market competitive package and enables executives to save for retirement.
• Pension cash allowances are set referencing practice within the benchmark peer groups and specialist survey data may also be obtained. The Committee has regard to the market median allowance data.
Note to table: Members of the Executive Team and selected senior leaders across the Group are also required to hold shares in RSA.
Appointment treatment Ensures a consistent and transparent approach is taken when appointing executives to the Board, in line with best practice.
Share Capital The Company is listed on the London Stock Exchange under the ticker symbol ‘RSA’. The Company has two classes of shares: Ordinary Shares of £1.00 each and Preference Shares of £1.00 each. The Ordinary and Preference Shares rank equally in respect of winding down of the Company, the Preference Shares have preference over the Ordinary Shares in respect of dividends.
The Company may purchase any of its own shares (including any redeemable shares). An authority from ordinary shareholders for the Company to purchase up to 101,570,553 of its own Ordinary Shares (representing 10% of its issued share capital as at 3 March 2015 was passed at the 2015 AGM. This authority will expire at the conclusion of the 2016 AGM and a new authority will be sought.
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.
Preference Shareholders are only entitled to receive notice of, attend, speak and vote at general meetings if the dividend payable on the Preference Shares is in arrears at the date of the Notice, a resolution is proposed that affects the rights of the Preference Shareholders, a resolution is proposed to wind up the Company, a resolution is proposed to reduce the capital of the Company (other than a redemption or purchase of shares), or in such other circumstances as the Board shall determine. In any of these situations the Preference Shareholders may only vote on the relevant resolution and not on all the business of the general meeting.
Notes to the separate financial statements 1 Significant accounting policies 176 3 Other debtors and other assets 177 4 Share capital 177 5 Loan capital 177 6 Current and deferred tax 177 8 Cash generated from operations 178 9 Related party transactions 178 10 Share based compensation 178 11 Risk management 178
Our audit procedures included challenging the key assumptions driving the forecast of future taxable profits on which the recognition of the deferred tax asset relies – particularly in the UK business to which the largest element of the deferred tax asset relates.
We also assessed the adequacy of the Group’s disclosures in respect of the sensitivity of the surplus/(deficit) to these assumptions.
Refer to note 22 for further details on the revaluation reserve. During the year a reclassification was made between Retained Earnings and the Foreign Currency Translation Reserves of £29m to more accurately reflect the underlying transactions. There is no impact to basic and diluted earnings per share. The attached notes on pages 108 to 172 form an integral part of these consolidated financial statements.
RSA Annual Report and Accounts 2015 105Financial statements – Group consolidated financial statements
Reinsurance Written premiums ceded to a reinsurer are recognised in the period in which the reinsurance contract is entered into and include estimates where the amounts are not finalised at the end of the reporting period. The ceded written premiums are recognised in earnings over the period of the reinsurance contract, based on the expected earning pattern in relation to the underlying insurance contract(s).
Financial Liabilities Other borrowings. Financial liabilities with fixed or determinable payments.
Reinsurers’ share of insurance contract liabilities 1,984 – – – – 4 1,988 1
Movement in shareholders’ equity at 31 December 2014 (37) 46 (61) 75 (34) 42
Total comprehensive income for the year from discontinued operations 50 165
Profits on sales of discontinued operations before tax 23 77 24 124 29 21 174
RSA Annual Report and Accounts 2015 127Financial statements – Significant transactions and events
Gross changes in provision for losses and loss adjustment expenses (78) (488)
Notes to the Income Statement and Other Comprehensive Income – continued 16) Related party transactions The following transactions were carried out with key management: £m £m
Tax at the UK rate of 20.2% (2014: 21.5%) 21 11
Total credited/(charged) to other comprehensive income 49 (67) (49) 9 - (58)
Carrying amount at 31 December 2015 net of held for sale 318 1 21 197 79 616
Where the value in use is less than the current carrying value of the CGU in the Statement of Financial Position, the goodwill is impaired in order to ensure that the CGU carrying value is not greater than its future value to the Group.
Goodwill is allocated to the Group’s CGUs, which are contained within the following operating segments as follows: £m £m
Revaluation adjustments charged to Income Statement (2) – (2) – – –
The following table summarises the cost/amortised cost, gross unrealised gains and losses and fair value of financial assets.
Cash and cash equivalents, loans and receivables For cash, loans and receivables, commercial paper, other assets, liabilities and accruals, their carrying amounts are considered to be as approximate fair values.
Investment properties are valued using discounted cashflow models which take into account the net present value of cashflows to be generated from the properties. The cashflow streams reflect the current rent (the gross rent) payable to lease expiry, at which point it is assumed that each unit will be re-let at its estimated rental value. Allowances have been made for voids and rent free periods where applicable. The appropriate rent to be capitalised is selected on the basis of the location of the building, its quality, tenant credit quality and lease terms amongst other factors.
Quoted prices are not always available, or the asset may not be traded very often or not at all on a market. In these instances, internal calculations that maximise the use of observable data are used to estimate fair value. The valuation technique, which is predominantly used is discounted cashflows. This incorporates all the factors that market participants would take into account in pricing a transaction. When all significant inputs to the calculation are observable, then the valuation is classified as a Level 2 valuation.
Cash Money Market funds Short term cash deposits 296 – 296 365 – 365
During 2015, the dividends paid to the non-controlling interests in the Middle East were £2m (2014: £2m).
• Notified claims development, where notified claims to date for each year are extrapolated based upon observed development of earlier years
Less: Held for sale provision for unearned premiums 163 (38) 125
At end of accident year 9,929 2,204 2,475 2,377 2,293 2,545 2,707 2,563 2,829 2,572 2,593
Defined contribution pension schemes Costs of £52m (2014: £62m) were recognised in respect of defined contribution schemes by the Group. The Group’s Swedish subsidiaries are part of a multi-employer defined benefit scheme along with other financial institutions in Sweden. As it is not possible to determine the assets and liabilities in respect of any one employer under this scheme, it is included in these accounts as a defined contribution scheme. Contributions of £9m (2014: £9m) were paid to this scheme during 2015 and are included in the costs shown above. The expected contributions in 2016 are £9m. Total estimated contributions to the scheme from all employers in 2015 were £51m. The latest information regarding the funding of this scheme is taken from the interim report for the first half of 2015, when the scheme funding rate was 114% (2014: 110%).
a. Canada 82% b. Ireland 16% c. Scandinavia 2% d. Colombia 0%
Net pension and post-retirement surplus/(deficit) at 31 December net of held for sale 64 (72)
Investment property and rental income Investment property is recorded at fair value. The fair value methodology is set out in more detail in note 27. Unrealised gains and unrealised losses or changes are recognised in net investment income in the consolidated income statement. Rental income from operating leases on investment property is recognised in the consolidated income statement on a straight-line basis over the length of the lease.
Further information on the share schemes the Group operates can be found in note 19 and in the Directors Remuneration Report.
Cash and cash equivalents at beginning of the year 10 3
Cash and cash equivalents at end of the year 4 10
Effect of change in tax rates – income statement (1) –
RSA Annual Report and Accounts 2015 179Other information – Shareholder information
RSA Annual Report and Accounts 2015180 Other information – Shareholder information
Capital • The money invested in the Group. This includes the money invested by shareholders and profits retained within the Group.