HOW WE CREATE VALUE FOR OUR CUSTOMERS OUR PRICING MAKES OUR PRODUCTS ATTRACTIVE TO THE CONSUMER, WHILE DELIVERING RETURNS TO THE SHAREHOLDER
6. In Riyadh, KSA, we are insuring one of the world’s largest metro projects: an automatic and driverless metro network covering 170km (equivalent 42% of the London tube system) and 87 stations.
INCREASING DEMAND FOR ENERGY RESPONSE RSA is underpinning the growth in renewable energy sources. We are one of the world’s leading insurers of wind farms. With more than 30 years’ experience in this sector, we insure wind energy projects at every stage of development. We insure the manufacturers of more than 25% of the world’s wind turbines and provide insurance to around 80% of the world’s offshore wind farms.
MARKET OVERVIEW Our role is to help protect our customers from the risks they encounter in everyday life. The global property and casualty (P&C) market currently generates USD 1,992bn of premiums each year (source: Swiss Re Sigma). As the world becomes a more wealthy place and more customers are seeking to insure their assets and liabilities, our market continues to grow. RSA operates across much of the global market. The world is returning to growth following the global financial crisis, although in some emerging market countries healthy growth has continued throughout the crisis. In 2012, the global P&C market grew by 2.6% which is almost back to pre-crisis levels (source: Swiss Re Sigma).
Competition remains strong across the world. Our markets range from highly concentrated to highly fragmented although we see increased competition in most, as new entrants seek to capture the value in our developed markets as well as accessing the exciting growth in emerging markets.
One effect of the global financial crisis has been to create a world with prolonged low interest rates in many of the countries we operate in. Lower rates means lower investment income, which means we need to ensure that underwriting returns improve.
Canada has a significant general insurance market with premiums of approximately $43bn, or 2.5% of GDP. It is a stable and consolidating industry that has been growing steadily at around 4% over the last five years, despite a recessionary period, and average global insurance growth of less than 2%.
Committee. Jos Streppel will succeed Malcolm Le May as Chair of the Group Investment Committee on the same date.
2. We are reviewing how we ensure that Group policies are adhered to and implemented appropriately locally, and tightening up the procedures where necessary.
Our 2013 results At a normalised level our 2013 results show the capabilities and potential of the core businesses we must build on. On £8.7bn net written premiums, the combined ratio was just 99.6% with an underwriting profit of £57m. But that would be a ratio of 96.8% and a £309m underwriting profit adjusting out the issues in Ireland, above trend weather and reserving actions in the year.
A new strategic focus RSA will be operated with discipline and effectiveness to serve customers well, and build shareholder value from a strong capital platform across its main core businesses. These are in the UK and Ireland, Scandinavia, Canada and Latin America. Our geographical spread will reduce considerably outside this core Group over the next few years. There will also be business lines within the core group which we adjust significantly. We target business where we can sustain leadership positions with customers whilst earning better than cost of capital for shareholders. We value diversity and balance provided it does not come at the expense of those core disciplines and provided our Group has the resources and capitalisation to succeed with the business we take on.
Our finances will be solidly based and provide a resilient platform from which to do business, and with a strength all can trust.
WELL RESERVED One of the biggest risks any insurance company runs is to ensure that reserves are adequate. When we write insurance business we make assumptions about the likely level of claims and book reserves to ensure that we put aside sufficient amounts to pay these claims when they fall due. Our philosophy is to ensure that these reserves are booked to the prudent side of our best estimates of the likely claims. This involves ensuring that claims are correctly assessed and involves the use of actuarial modelling to ensure that we have an informed view of the likely future cost of claims.
At the end of every quarter we undertake a full review of the adequacy of our claims reserves and, where appropriate, make adjustments to the reserves. This can lead to either reserve strengthening or, if experience is better than we have planned, reserve releases. Our track record is good with nine years of positive reserve releases, although in every year there are some portfolios which require strengthening. During 2013, we still delivered positive reserve development despite significant strengthening of reserves in Ireland and UK Liability.
• Introduced new disclosure on regional allocation of capital and regional returns on capital to help investors understand the relative performance of each region.
• In the UK, we have delivered a 13% reduction in headcount in the last two years.
Commentary An important metric that is widely used by investors and other stakeholders in the insurance industry to compare companies within the sector. When used as a relative metric against peers, it provides an indication of relative capital strength, but should be judged in the context of the diversification and geographical spread of the business. It underpins all of the capital metrics (IGD, ICA, ECA, rating agency) of the Group.
Definition The ratio of underwriting profit expressed in relation to premiums
Definition Insurance Groups Directive (IGD or ‘Solvency I’) and Economic Capital
Commentary A key measure of shareholder value. Can also be expressed as underlying return on tangible equity which excludes acquisitions and disposals costs, reorganisation costs and investment gains or losses.
The gender breakdown for the Group at 31 December 2013 was: Total Female Male
• The Executive Development Programme (EDP) – focuses on increasing the leadership capabilities of senior employees regarded as having the potential to be amongst the future top leadership of the Group.
Failure to create a culture and brand that supports Group strategy and will attract and retain diverse individuals in an environment that can harness their unique contributions
EMERGING RISKS AND GROUP STRATEGY We keep emerging risks under regular review and assess their impact on our strategy. During 2013, we identified the following clusters of emerging risk and incorporated them as key drivers into our group strategy process.
RATING AGENCIES S&P and Moody’s Investor Service provide insurance financial strength ratings for the Group and its principal subsidiaries. The Group was upgraded by S&P to a rating of A ‘stable outlook’ after the approval of the 2013 Annual Report, and is rated A2 ‘negative outlook’ by Moody’s.
Our 2013 Strategic Report, from page 8 to page 43, has been reviewed and approved by the Board of directors on 26 February 2014.
Skills and experience: Richard was appointed Group Chief Financial Officer in June 2012. Previous roles include Group CFO of Aspen Insurance Holdings Limited, COO and CFO at RBS Insurance, Finance Director of Ulster Bank, Finance Director of Direct Line and Accountant at Deloitte & Touche. He is a Fellow of the Institute of Chartered Accountants in England and Wales. External appointments: No external appointments to listed companies.
The Board reviews, on an annual basis, a schedule of matters reserved for the Board which includes the approval and regular review of the long-term objectives, operating plans, overall risk appetite and commercial strategy for the development of the Group.
• Review of Board evaluation • Regulatory compliance • UK Conduct update • Training and development
A balanced and understandable assessment of the Group’s position and prospects, and an explanation of its strategy for delivering the objectives of the Company are contained in the Strategic Report on pages 8 to 43 which includes: • Use of financial instruments by the Company, details of financial risk management objectives and policies of the Company, including the policy for hedging each major type of forecasted transaction for which hedge accounting is used
Further details of the Company’s employment policy are set out in the Strategic Report on pages 8 to 43 and is incorporated into this Report be reference.
In 2013, the Group commenced a programme of briefings for investors and analysts to provide more information on the businesses within the Group. There were two briefings in 2013. The first, in June, covered the Canadian business, and the second, in November, covered the Scandinavian business.
BlackRock, Inc 188,217,284 5.46% Indirect & CFD 188,217,284 5.46% Indirect & CFD
The Committee considered the risk management system, including risk assurance mapping and the three lines of defence model. The outputs and key assumptions of the internal capital model were reviewed, in conjunction with the approach and conclusions of our independent internal model validation function. Regular updates were provided to the Committee by management on the strategic direction of the Group’s response to Solvency II against the backdrop of confirmation of a start date of 2016, along with regular reviews of the reinsurance programme structure.
Members of the Committee, alongside management, have been involved in discussions following the independent PwC review surrounding the risks identified and subsequent recommendations. In 2014, in addition to regular matters, the Committee currently expects to oversee enhancements to the control and assurance framework following PwC’s review and the implementation of these along with the Group Audit Committee; to discuss the findings from thematic deep-dives on elements of underwriting and claims risks, and to consider how risk and control culture is defined and assessed.
• The Clawback Policy has been strengthened to cover a wider range of sanctions and scenarios where incentive awards can be reduced fully or partially, via malus adjustment.
• Executive Directors and other executives are required to hold a significant number of shares in the Company; they are encouraged to act in shareholders’ best interests by having a personal investment in RSA
• Performance conditions do not apply. • Benefits are valued and determined with reference to the benchmarking peer groups and other surveys reviewed by the Remuneration Committee. Details of the benefits received by the Executive Directors for 2013 are provided on pages 82 to 83.
• The LTIP is intended to support the delivery of the business strategy over a three-year time horizon, and it will therefore include at least two metrics which, typically, will be directly linked to value creation through performance of the Group’s share price, earnings/profitability, capital strength and balance-sheet strength. The measures can be assessed on an absolute and/or a relative basis. The metrics can be assessed through a scorecard. The performance conditions are not subject to re-testing.
RSA’s shareholders As previously noted in the shareholder letter on pages 69 to 70, the Committee is dedicated to maintaining an active and open dialogue with RSA’s shareholders. It believes that a transparent approach on all matters connected to boardroom pay is essential for building and maintaining trust and integrity. Similarly, the Committee values constructive feedback, regardless of whether it is from an institutional investor or a retail shareholder.
The dates when each Non-Executive Director was appointed to the Board and the expiry dates of their current terms of office are shown in the table on page 93. Details of the Non-Executive Directors’ fees are noted on page 92. Appointment letters are available for inspection by shareholders at the Company’s registered office.
Committee advisors PwC was formally appointed by the Committee, as its independent advisor in September 2012. It was selected following a market tender exercise. During 2013, PwC also provided wide-ranging advice and consultancy services across RSA globally on matters including business processes, IT, internal audit, corporate social responsibility, direct and indirect tax and governance. PwC is a member of the Remuneration Consultants’ Group and a signatory to its Code of Conduct. In addition, the Committee has satisfied itself that the advice it receives is objective and independent as the firm has confirmed there are no conflicts of interests arising between it, its advisors and RSA. The fee paid for services to the Committee in the year was £104,000 excluding VAT, based on a fixed fee for a defined scope of work, and hourly rates for specific projects.
Note: 1. The Board met to agree the treatment of Simon Lee’s remuneration and terms following his resignation on 12 December 2013.
Notes: 1. Taxable benefits: includes reimbursement in respect of travel and accommodation. Adrian Brown received a car allowance of £19,685 (2012: £21,791), Richard Houghton received a car allowance of £16,260 (2012: £9,047) and Simon Lee received a car allowance of £17,979 (2012: £17,812). In 2012, George Culmer received a company car benefit of £5,856. In addition, each of the Executive Directors received medical benefits valued at £2,153 in 2013, which included family cover from 1 January 2013 (2012: £861). Alastair Barbour received benefits of £12,370 (2012: £4,735) for taxable travel where relief under HMRC rules is not available.
Notes: 1. The market price of ordinary shares on 3 April 2013, the date on which long-term incentive plan interests were granted during the year, was 111.4p. 2. Voluntarily Invested Deferred Shares are purchased by Capita Trustees Limited on behalf of each participant using part of the net annual bonus paid to them and are held in trust for three years. These deferred shares are not at risk of forfeiture and may be withdrawn from the Trust at any time but any associated Matching Shares lapse if this occurs. 3. Compulsory Deferred Shares have a service condition of three years from date of grant. 4. The performance condition for Voluntarily Invested Deferred Matching Share grants made in 2011, 2012 and 2013 was Group ROE (100% weighting). 5. The performance conditions for Compulsory Deferred Matching Share grants made in 2011, 2012 and 2013 were Group ROE (70% weighting) and relative TSR (30% weighting). 6. The performance conditions for Performance Share grants made in 2011, 2012 and 2013 were Group ROE (70% weighting) and relative TSR (30% weighting). 7. The date by which performance and other conditions for LTIP awards must be met is as follows: 2011 awards by 31 December 2013, 2012 awards by 31 December 2014 and 2013 awards by 31 December 2015.
Annual Bonus Plan As noted in the Committee Chairman’s letter on pages 69 to 70, the Annual Bonus Plan has been revised for 2014. Its performance measures are aligned with the core priorities for focus in 2014, chiefly centring on actions arising from the business review as set out in the Group Chief Executive’s statement on pages 18 to 19. The Executive Directors will be expected to deliver against stretching targets which are geared towards making significant performance improvement. Specifically, the Business Review Scorecard is a new element of the bonus plan, and it covers two components: capital strength and management actions, required to deliver the business review. The Personal Scorecard consists of ‘SMART’ objectives bespoke to the Director covering such matters as: financial control, operational performance, customer and employee engagement and risk management.
The Directors are responsible for keeping proper accounting records that are sufficient to show and explain the Group’s and Parent Company’s transactions and disclose with reasonable accuracy at any time the financial position of the Group and Parent Company and enable them to ensure that the financial statements comply with the Companies Act 2006. They are also responsible for safeguarding the assets of the Group and Parent Company and hence for taking reasonable steps for the prevention and detection of fraud and other irregularities.
• The risk review section on pages 32 to 35, which is incorporated into the Directors’ report, includes a description of the principal risks and uncertainties faced by the Group.
• The risk: Significant judgement is required over the recoverability of deferred tax assets because the realisation of tax benefits is often dependent on future taxable profits and there are inherent uncertainties involved in forecasting, which is the basis of the assessment of recoverability. The deferred tax asset in the UK is particularly subjective given its sensitivity to expectations about the profitability of the UK business.
• The response: In this area our audit procedures included, among others, challenging the key assumptions underlying the taxable profit projections prepared by the directors to support the Group’s assessment of its ability to recover deferred tax assets. The key assumptions are the growth rates and profit margins which drive the emergence of future profit projections, particularly in the UK business to which the largest element of the deferred tax asset relates. Our audit procedures over the future projections included comparing the expected growth rates to business forecasts, assessing the accuracy of that forecasting process in the past, and considering whether projected margins are achievable with reference to the business’s recent performance and plans and our own industry knowledge. Our own tax specialists were involved in considering the extent to which projected profits were taxable. We have also evaluated the adequacy of the Group’s disclosures in respect of taxes, and in particular the disclosures around the assumptions supporting the deferred tax asset valuation and recognition.
• The risk: Significant estimates are made in valuing the Group’s post-retirement defined benefit schemes and small changes in assumptions and estimates used to value the Group’s net pension deficit would have a significant effect on the financial position of the Group.
Total comprehensive expense for the year (note 18) – – – – (256) – (116) (341) (713) 5 (708)
CHANGES IN ACCOUNTING POLICIES, PRESENTATION, DISCLOSURE AND COMPARATIVE INFORMATION The Group has adopted the following revisions to existing IFRS and new IFRS during 2013: IAS 19 Employee Benefits – Restatement The Group has adopted the revised version of IAS 19 ‘Employee Benefits’.
SELECTION OF ACCOUNTING POLICIES The Group exercises judgement in selecting each Group accounting policy. The accounting policies of the Group are selected by the Directors to present financial statements that they consider provide the most relevant information. For certain accounting policies there are different accounting treatments that could be adopted, each of which would be in compliance with IFRS and would have a significant influence upon the basis on which the financial statements are presented.
For securities whose fair values are readily determined and where there is objective evidence that such an asset is impaired, including for equity investments a significant or prolonged decline in the fair value below cost, the net loss previously charged to other comprehensive income is reclassified to the income statement.
Differences between the estimated cost and subsequent settlement of claims are recognised in the income statement in the period in which they are settled or in which the provisions for losses and loss adjustment expenses are re-estimated.
The calculation of the present value of accrued benefits includes an actuarial assumption of future interest rates, which is used to discount the expected ultimate cost of providing the benefits. The discount rate is determined at the end of each reporting period by reference to current market yields on high quality corporate bonds identified to match the currency and estimated term of the obligations.
OPERATING SEGMENTS Operating segments are identified on the basis of the regional structure of the Group. Internal reports about these segments are regularly reviewed by the Board of Directors (determined to be the chief operating decision maker) to assess their performance and to allocate capital and resources.
REGULATORY ENVIRONMENT The legal, regulatory and accounting environment is subject to significant change in many of the jurisdictions in which the Group operates, including developments in response to changes in the economic and political environment. The Group continues to monitor the developments and react accordingly.
Repurchase arrangements and other similar secured borrowing 300 – 300 (300) – – 300
Capital appetite The Group’s objective is to maintain sufficient capital, which comprises shareholders’ equity and subordinated loan capital, to meet its plan and objectives. This represents sufficient surpluses for both regulatory and economic capital, as well as sufficient capital to support the Group’s aim of maintaining single ‘A’ ratings. To assist in managing its capital position, the Group has set internal target coverage ratios for each of the principal capital measures. Further discussion of capital risks and how they are monitored and managed is included in the Risk Management section of the Strategic Report.
The Group received its latest Individual Capital Guidance (based on its ICA submission) from the PRA in February 2014 and at the request of the PRA remains confidential. The ICA is a forward looking, economic assessment of the capital requirements of the Group based on its assessment of the risks to which it is exposed. The models used to determine the ICA have been integrated into the Group’s business processes and are used to enhance the management of the Group.
Other segment items included in the income statement: NOTES TO THE FINANCIAL STATEMENTS CONTINUED
Equity securities: At fair value through the income statement 7 – 1 – (1) 6 – – 7 6
Direct operating expenses (including repairs and maintenance) arising from investment properties were not material in 2013 or 2012.
The average number of employees during the year was as follows: 2013 Number 2012 Number
Weighted average number of ordinary shares in issue (thousands) 3,632,180 3,534,577
Adjustments for share options and contingently issuable shares (thousands) – 41,954
At 31 December 2013 the Group has in place a US$1bn (2012: US$1bn) Euro commercial paper programme. There are no amounts outstanding at 31 December 2013 (2012: £nil).
Key management personnel comprise members of the Group Executive Committee (including Executive Directors) and Non-Executive Directors.
36. EVENTS AFTER THE REPORTING PERIOD After the year end the Group incurred claims due to flooding in the UK and Ireland and ice storms in Canada of between £75m and £100m.
The profit for the year net of tax includes a tax charge of £1m (2012: tax credit of £10m). There is no tax relating to fair value (losses)/gains.
Shares issued by scrip 18 (18) – – – 75 75
PARENT COMPANY STATEMENT OF FINANCIAL POSITION AS AT 31 DECEMBER 2013
Other transactions Year end balances with related parties are set out below: 2013 £m 2012 £m
11. RISK MANAGEMENT The risks faced by the Company are derived from its investment in subsidiaries and are therefore the same as those of the RSA group of companies. Details of the key risks to the Group and the steps taken to manage them are disclosed in the risk management section of the consolidated financial statements.
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TUESDAY 1 APRIL 2014 Payment date for the first preference dividend for 2014.