WE ARE MAKING THINGS BETTER, TOGETHER With over 300 years’ experience, we’ve learnt a thing or two about risk and uncertainty and the value of insurance to our customers. As the world evolves so do the needs of those we serve, and we must respond with an agile yet resilient business that always strives to do better.
This Annual Report and Accounts contains ‘forward-looking statements’ with respect to certain of the Group’s plans and its current goals and expectations relating to its future financial condition, performance, results, strategic initiatives and objectives. For further details, reference should be made to the ‘important disclaimer’ on the inside back cover. The Strategic Report, set out on pages 4 to 41, and the Directors’ and Corporate Governance Report, set out on pages 42 to 96, together represent the management report for the purpose of compliance with DTR 4.1.8R of the UK Listing Authority’s Disclosure and Transparency Rules. Both the Strategic Report and the Directors’ and Corporate Governance Report have been drawn up and presented in accordance with and in reliance upon applicable English company law, and the liabilities of the directors in connection with those reports shall be subject to the limitations and restrictions provided by such law.
Underwriting is our core discipline. It’s what we do. We want to be the best we possibly can, and amongst the very best in our industry.
WE ARE A LEADING INTERNATIONAL GENERAL INSURER, FOCUSED ON SELECTED REGIONAL MARKETS
Our vision is to better serve customers by making it easier than ever to insure the things they care about and to provide support when life doesn’t go to plan.
For more information see pages 14-15 2017 Net written premiums Distribution and brands a. Direct 26% b. Broker 55% c. Agent/affinity 19%
In Scandinavia, we operate in Sweden as Trygg-Hansa and in Denmark and Norway as Codan.
In the UK, we operate through our MORE TH>N and RSA brands and in Ireland through our 123.ie and RSA brands. In the Middle East we operate through Al Alamiya in Saudi Arabia and Al Ahlia in Oman.
£6.7bn Net written premiums in 2017 £1.8bn Net written premiums in 2017 £1.6bn Net written premiums in 2017 £3.2bn Net written premiums in 2017
Employees 2017 Net written premiums by product 2017 Net written premiums 2017 Net written premiums 2017 Net written premiums a. Household 22% b. Motor 22% c. Other 10% d. Property 19% e. Liability 9% f. Commercial motor 9% g. Marine & other 9%
Premium income rose 4 percent, as more customers both stayed with RSA and brought their business to us. We delivered record underwriting results and a profit after tax of £322m (2016: £20m). At the same time, we increased underlying earnings per share by 10 percent and we delivered a 23 percent dividend increase for shareholders.
As I reflect on your Company’s progress since 2013, it is gratifying to be able to report on a transformed RSA. Our financial performance has gone from losses to very strong levels of profitability. Our capital strength and resilience has built equally strongly. And behind these measures sits huge progress in capability, culture and competitiveness which I believe can drive our performance for customers and shareholders still further in the years to come.
In many ways insurers are on the ‘front line’ of these changes. We are deeply engaged in harnessing technology and deeper access to data to serve customers better and more conveniently. We can become more and more accurate in pricing risk and so offering better value products to customers. RSA’s market leading presence in the UK telematics market for young drivers is a fine case in point. We seek to work closely with government and others on a range of social questions – such as greater apprenticeship training and opportunities for young people – road safety campaigns and codes of practice in data usage.
Board governance and composition This has been a year in which the topic of corporate governance has rarely been out of the headlines. In April, the Business, Energy and Industrial Strategy Committee published its recommendations on corporate governance, remuneration and boardroom diversity, and in parallel, the Government published its green paper, leading to proposed legislation to strengthen standards. In December, the Financial Reporting Council proposed a number of changes to the UK Corporate Governance Code, bringing it up to date and promoting continued improvement in the quality of governance.
We are, for the first time, reporting on our gender pay gap. Whilst this gap is predominantly driven by the structure of our workforce, we have programmes and initiatives in place designed to improve it over time. RSA is a signatory of the Women in Finance Charter, and as such, we have made a public commitment to achieving 33 percent representation of women in our Management Group by 2020. Across our business, we continue to support the promotion of talented colleagues, and have recently appointed a Group Head of Diversity and Inclusion to drive and implement our plans. We are active participants in mentoring schemes such as the 30% Club in the UK, and our Group Technical Academy delivered over 7,000 training hours in 2017. We are confident that men and women are paid equally for equivalent work across our business, and we undertake regular equal pay audits in line with ACAS Guidance.
Your Board is confident in RSA’s ability to deliver on its strategic objectives and to drive further value for customers and for shareholders. I would also like to thank all our shareholders for the continued support you have shown, and look forward to welcoming you to our Annual General Meeting on 11 May.
Your Board is largely supportive of the underlying objectives of the proposed reforms, particularly around strengthening accountability, diversity and promoting meaningful dialogue with investors and the workforce. I am pleased to report that RSA was recently ranked as one of the top 10 companies in the 2017 Institute of Directors’ Good Governance Index, underlining our commitment in this area. As we progress these proposals, we are mindful that effective governance will still require companies to make decisions in the context of their own individual businesses. Competitiveness of the UK as a place to do business should not be eroded as an unintended consequence of significant and important governance reforms.
• Global insurance volumes are relatively insensitive to normal fluctuations in GDP growth
SOCIAL As an insurer we must evolve our products and services to reflect social trends. As a business we must also be conscious of, and meet, society’s expectations of us. Polarising social views, including some reaction against inequality.
Litigious culture, higher ongoing compensation awards and more expensive vehicle parts have all contributed to the rising cost of driving, particularly for young people.
• For over 300 years, RSA’s core values and social purpose has been to be there for our customers in a crisis
• Business focused on mainstream customer needs and product areas of value across the age spectrum
POLITICAL New phase of unsettled geopolitical activity fuelled by protectionism. G20 economies are introducing new protectionist trade measures at a faster pace.
This introduces new political tensions, which is complicated by existing longer term tensions in Russia, Middle East and Asia.
• Our international Commercial Lines are only modestly exposed to trade volumes.
Previous technological breakthroughs have disrupted the job pattern although ultimately created growth and new jobs. It is unclear whether the introduction of robotics and artificial intelligence will follow a similar trend.
• We are continuing to invest for our customers, be that through better customer journeys, new products or digital interfaces
• We can be more competitive through harnessing big data and advanced modelling capability to assess and price risk more efficiently
• We are also evolving our technical capability strategy and staff development programmes in the light of the changing mix of skills needed.
CLIMATE CHANGE & EXTREME WEATHER Climate change poses risks to people, property and the natural environment: • Catastrophic event weather insured losses have increased fourfold over the past 30 years
• RSA’s reinsurance treaties ensure that our exposure is within our risk appetite, but we also promote prevention, investment in civil defences and risk pooling schemes to preserve access to insurance
• The project is proceeding well and is scheduled to complete in 2018.
• The disposal of ‘long tail’ UK legacy liabilities early in the year has reduced exposure to inflation risk.
CYBER RISK The cyber insurance market is rapidly expanding as the frequency, severity and sophistication of attacks increases: • RSA has developed a number of cyber specific products and continues to engage with customer demand
Brand quality With over 300 years of experience, we have developed trusted and recognisable brands in our markets, supporting our strong customer franchises.
Insights We understand that our business operates in a broader market context. By adapting to our environment, we ensure that our business remains responsive and relevant to our customers and markets.
Balance of scale and focus Our unique mix of scale and focus across our three regions enables agility and brings intense performance discipline. Operating in market-leading positions, we also benefit from diversification of capital and stable returns.
People RSA is a people-centred business. Over 12,600 employees across our business ensure that our operations run smoothly.
Strategy Focused A leading general insurer, focused on the UK & International, Canadian and Scandinavian regions.
Better Our ambition is to operate at best-in-class levels in our markets.
We aim to improve performance with key levers across the areas of customers, underwriting and costs.
Our strategy is executed within a robust risk management (see pages 33 to 37) and governance framework (see pages 42 to 96).
Responsible business Acting responsibly in everything that we do, helping to build trust in our business.
Understanding risk and pricing effectively We are in the business of risk management.
We strive hard to understand the risks our customers want us to insure and make sure that we price our products appropriately.
As an international business, we seek to maximise the benefits of our reach without losing touch with the differing needs of the markets we operate in.
Effective product distribution We distribute our products through many different channels, directly and through partners. Efficient access to customers is key if we are to continue to develop our business.
Our business generates significant assets which are prudently invested so as to be available to pay claims when they are due.
External conditions General insurance markets are relatively mature, consolidated and stable, though with some inevitable underwriting volatility. Attractive performance can be achieved through intense operational focus within a disciplined strategic framework.
2017 actions 2017 was another year of intense activity at RSA. The great majority of our efforts were focused on operational improvement in pursuit of our bestin -class ambitions. We also delivered the final pieces of RSA’s balance sheet restructuring successfully. We look forward to 2018 as the first clean ‘business as usual’ year since 2012.
Financial strength: RSA’s ‘A’ grade credit ratings are where we want them. The Solvency II capital ratio at 1632 percent (2016: 158 percent) is in a good place. The £834m disposal in February of our UK Legacy insurance liabilities removed a source of long-tail risk whilst funding
GROUP CHIEF EXECUTIVE’S STATEMENT In a tough period for insurance markets, we are delighted to produce another year of growing profits, dividends and return on equity for shareholders. Higher premium income also highlights the positive customer response to what we are offering.
The Group’s performance ambitions remain high and we target further improvement in 2018 and thereafter. Stephen Hester Group Chief Executive
a £640m retirement of high cost subordinated debt capital. This was the final piece of balance sheet work on our agenda. While we aspire to grow ‘core tier 1’ capital coverage further, the active phase of balance sheet repair is now complete.
Business improvement: Our goal is to systematically and determinedly hunt down performance improvement opportunities across the business to move RSA’s capabilities and then outcomes towards best-in-class levels. This involves particular focus on improving three areas; service to customers, underlying underwriting results and cost efficiency.
At a statutory level, net profit before tax rose to £448m (2016: £91m) reflecting a lower level (though still significant) of restructuring charges. It remains our ambition that 2017 be the last year of such charges.
Premium income was up 4 percent, in line with our plan, featuring modest policy count increases together with price and FX benefits.
Excellent underwriting results were achieved in absolute and relative terms across many of our businesses. Scandinavia led the way with a combined ratio of 82.9 percent. Canada also improved, in a challenging market, to a combined ratio of 93.9 percent. Middle East had record results (COR 87.7 percent) and the Irish turnaround delivered its first profits since 2012 (COR 97.0 percent).
Thanks RSA made good progress with customers and for shareholders in 2017, despite significant external challenges. In achieving this, we owe thanks to all stakeholders for their support. But most particularly to my colleagues at RSA, who have embraced our best- in-class ambition so effectively, go my sincere thanks and appreciation.
Reflecting RSA’s overall progress in 2017, a final dividend of 13.0p per share is proposed, making 19.6p per share total for 2017, up 23 percent. This represents a 45 percent payout of underlying EPS (higher than 2016 but in line with stated policy). RSA’s focused business strategy is designed to generate attractive levels of free cash flow, after meeting organic growth needs. With rising earnings targeted, no more restructuring costs and as bond pull-to-par impacts recede in coming years, RSA should have the potential for attractive further growth in shareholder distributions.
RSA’s entire focus is on the drive for outperformance in our markets. In that context, our many performance improvement initiatives continue to deliver progress. Stephen Hester Group Chief Executive
Our 2017 Strategic Report, on pages 1 to 41, has been reviewed and approved by the Board of Directors on 21 February 2018 and signed on its behalf by Stephen Hester, Group Chief Executive.
Further improve underwriting · Elevate underwriting disciplines · Ongoing business as usual portfolio re-underwriting · Invest in tools and technology · Optimise reinsurance
Our focus • Digital platforms for customer convenience, flexibility and speed
• Improving claims efficiency through automated claims handling in Sweden: 108,000 automatic SMS status sent continuing to reduce incoming calls
Agile and digital claims processing: An effortless customer experience is a key loyalty driver. By implementing digital claims tools, such as our new customer service portal in Denmark and automatic claims handling for simple, low value motor claims in Sweden, we can provide a smoother, quicker and more effortless claims experience for our customers.
Johnson’s digital platform: As customers increasingly move online, we need to serve them there, as well as maintaining excellence in our other channels. In Canada, our Johnson’s business is focused on delivering an effortless experience at every interaction. This is accelerating our digital capability development and is driving growth whilst improving customer satisfaction.
MACHINE LEARNING Postcode classification: Machine learning techniques and advanced analytics tools can rapidly process large datasets and through the use of algorithms, identify patterns and generate predictions and insights on structured data. Using traditional techniques, a typical postcode classification would take c.2 months to complete. Using machine learning, a new postcode classification is possible within four days and a refresh is possible in ½ day.
Early results in Swedish Personal Motor show increased ‘hit rate’ within target segments and new business starting to pick up.
Underwriting automation in Trygg-Hansa: New SME underwriting framework based on deep analysis of customer data and introduced automated case handling approach to handle high volume, low value cases.
Our progress • Attritional loss ratio 55.3 percent in 2017, improved from 58.31 in 2014
• First release of ‘ClaimCenter’ in Canada fully developed and live, enabling end-to-end claims lifecycle management
• Quartile analysis/triage performed on all large NatCat and property losses in the UK. Where required, immediate underwriting actions have already been taken
• Two robotics interventions now live in UK Home and Motor claims
• Auto-to-home cross-sell models implemented in direct and broker Auto (Canada)
• Claims cost models have been enhanced by the use of machine learning techniques.
• £395m gross costs savings to date, against upgraded cost savings target of > £450m by 2019
• Selective outsourcing (BPO): Outsourced voice calls in UK Motor; BPO projects underway in Scandinavia and Canada
• First process automation portal delivered in More Th>n Pet and Motor, reducing call wrap times from three minutes to 40 seconds through the use of robotics. Initial findings suggest that 30-40 percent of our processes could be semi or fully automated by 2020.
Ongoing initiatives • Future efficiency gains will be largely driven by technology, outsourcing and new analytical and cultural tools
CANADA ‘LEAN’ Deepening ‘lean’ capability across Canada to embed a continuous improvement mindset. At the end of 2017, 60 percent of RSA Canada has ‘lean’ practices in place. Over 20 percent of efficiencies have been achieved in some cases and approximately 500 ‘waste items’ have been identified in finance and human resources processes. The average Personal Lines policies underwritten per person and per day more than doubled. Our ambition is to have ‘lean’ in place across all of RSA Canada by the end of 2018.
Outlook We target improving attritional loss ratios in the medium term in line with best-in-class performance.
KPIs are linked to executive remuneration. To read more about executive variable remuneration, including the set of financial and non-financial performance measures on which it is based please turn to pages 190 to 197.
Commentary Reduction of controllable expenses is a key element of the Group’s turnaround strategy. We monitor both the absolute level of expense and the expense ratio as part of the turnaround and ongoing performance focus.
A year ago I reported that our 2016 results had been impacted by a significant number of accounting adjustments as we divested of non-core operations, de-risked our balance sheet and invested heavily in the business. For this reason, we believe that underlying measures provide a clearer way of fully understanding the performance and progress of RSA in 2017 whilst the Group’s turnaround continues to impact comparative measures. The number and quantum of these adjustments have decreased in 2017 and it is targeted to be the last year of below the line restructuring costs. The use of underlying measures will therefore reduce significantly in 2018. For further information on these measures and their reconciliation to IFRS statutory measures please refer to pages 190 to 197.
2017 financial highlights • Profit after tax of £322m, up from £20m in 2016. Underlying earnings per share of 43.5p, up 10 percent (2016: 39.5p)
• Premiums returned to growth (up 2 percent at constant FX and excluding disposals), with policy count and retention improving in many of our businesses
• Continued progress on cost reduction and efficiency. We have now achieved total cumulative savings to date of £395m, and have increased our target for a fourth time to over £450m gross savings by 2019
• Investment income was resilient, despite the continuing market uncertainty and low yield environment
• Significant further de-risking of RSA’s balance sheet. We disposed of £834m1 of UK legacy liabilities at the beginning of the year, by way of a reinsurance arrangement prior to a part VII transfer, improving capital and further focusing the business onto its core units. These liabilities relate to business written in
2005 & prior. Around 75 percent of these liabilities relate to asbestos, with the balance mainly comprising abuse, deafness, marine and aviation liabilities
• Overall debt levels significantly reduced (from £1.1bn down to £0.7bn), and some existing debt successfully refinanced. This has halved interest costs in 2017 and will more than halve them from 2018 onwards (versus 2016)
• Capital levels remain strong with a Solvency II ratio of 1632 percent (31 December 2016: 158 percent) and tangible equity of £2.8bn (31 December 2016: £2.9bn)
• Reflecting these results and our confidence in our future, the Board of Directors has proposed a 23 percent increase in our total dividend per ordinary share of 19.6p (interim dividend 6.6p; final dividend 13.0p), (2016: 5.0p; 11.0p). This represents a 45 percent pay out of underlying earnings.
Scandinavian premiums were up 7 percent at reported FX and up 0.3 percent at constant FX. Growth in Sweden and Norway was partly offset by a small contraction in Denmark. Personal Lines policy counts were up 1 percent, while Commercial Lines volumes were down 3 percent.
Canada premiums were up 12 percent at reported FX and 5 percent at constant FX. The region reported the fourth quarter of consecutive growth in Q4, with Personal Lines policy counts up 3 percent and Commercial Lines volumes up 1 percent. There was good growth in our broker channel (policy count up 4 percent in Personal broker) and our direct channel, Johnson, returned to organic growth in 2017.
UK & International premiums were up 4 percent at reported FX and up 2 percent at constant FX. UK premiums were up 3 percent, with Personal up 7 percent (policy counts up 2 percent) and Commercial flat (volumes up 1 percent). Premiums in Ireland were down 7 percent at constant FX, while Middle East premiums were up 6 percent.
Weather, large losses and prior year development Group weather costs were £168m or 2.6 percent of net earned premiums (2016: 2.63 percent at constant FX). Three major US/Caribbean hurricanes and Mexico earthquakes cost £72m net of reinsurance in 2017 (£115m gross). 2016 was also a year of elevated natural catastrophe losses with Alberta wildfires, UK & European floods and a US hurricane.
Our assessment of the margin in reserves for the Group (the difference between our actuarial indication and the booked reserves in the financial statements) returned to its target level of 5 percent of booked claims reserves.
Controllable costs Our cost reduction programme has now delivered total gross cost reductions of £395m. We have now raised our target for a fourth time to over £450m gross annualised savings by the end of 2019.
Group written controllable costs were down 63 percent at constant FX to £1,425m.
Group FTE4 is down 23 percent (excluding disposals) since the start of 2014 to 12,636 at 31 December 2017. It decreased by 6 percent during the course of 2017.
Non-operating items Non-operating items primarily relate to management action to de-risk the balance sheet as well as restructuring investment to reach cost saving targets by the end of 2019.
2017 also included a charge of £59m relating to the premium paid on the debt buybacks completed during the first half of the year.
Net gains of £47m in 2017 include a £66m gain relating to the UK Legacy disposal (mainly relating to the realised gain on the mark-to market of the assets transferred to the buyer); a £22m charge relating to the commutation of the Group’s adverse
development reinsurance cover, both as previously noted in 2016. Intangible software impairments of £23m relate to UK, Scandinavia and Ireland.
Tax The Group reported a tax charge of £126m, giving an effective tax rate (ETR) of 28 percent (2016: 78 percent). ETR is 23 percent excluding a one-off Canadian dividend paid as part of internal debt restructuring. The Group underlying tax rate was 22 percent (2016: 24 percent).
For more details please refer to our published Group tax strategy: media/2508/rsa-tax-strategy-22-11-17-final.pdf
RSA is a diversified, multi-channel, multi-product general insurer and its business mix reduces exposure to significant volatility. However, the UK pension scheme provides a degree of volatility under Solvency II. We consider a target Solvency II operating range of 130-160 percent capital coverage to be appropriate to the Group’s risk profile.
Dividend We are pleased to declare a final dividend of 13.0p per ordinary share, up 18 percent year-on-year (2016: 11.0p). Together with the interim dividend of 6.6p, this brings the total dividend for the year to 19.6p (up 23 percent), representing a 45 percent pay out of underlying EPS. Our medium term policy of ordinary dividend pay outs of between 40-50 percent of earnings remains, with additional distributions where justified.
Summary 2017 has been another year of growing profits at RSA, supported by a record underwriting performance. But we believe we can and will do better. We have ambitious plans for the business and 2017 represents another step along that journey. We will learn from the things we could have done better and build on those things that have gone well.
Our staff should feel proud of the progress we have made so far. Our customers should feel the benefit of our improvements again in 2018 and our shareholders can share in the improving performance. We look forward to continuing RSA’s journey in 2018.
Financial performance Scandinavia delivered operating profit of £389m, up 25 percent at reported FX. Driving this was an excellent underwriting profit performance of £315m in 2017, up 24 percent (at constant FX), alongside an investment result of £74m (2016: £72m).
The combined ratio of 82.9 percent was within our <85 percent best-in-class ambition for the first time on record. Current and prior year profitability were strong, at £255m and £60m respectively.
Type of business a. Household 20% b. Motor 19% c. Personal other 18% d. Comm. Property 18% e. Liability 8% f. Comm. Motor 12% g. Marine & other 5%
As part of its Alcobuoy campaign in 2017, Trygg-Hansa equipped 12 life buoys with breathalysers to enable people to assess their blood alcohol levels before swimming.
Around 50 percent of drowning victims in Sweden have alcohol in their blood. But by identifying locations popular for parties and outdoor swimming and installing breathalysers, Trygg-Hansa aims to reduce the number of alcohol-related drowning incidents in the country.
In Denmark, research conducted by Codan found that parents are much more likely to counsel their children on avoiding cyberbullying, than they are on the importance of measures to prevent their laptop or phone being hacked. In response, Codan developed a nationwide campaign to educate parents about the range of issues involved in keeping their families safe online, reaching 2 million people within the first five weeks. The campaign video was broadcast on Danish news stations and was used by corporations including Novo Nordisk and Santander Bank. Codan also designed a range of online security insurance products to further help tackle the issues raised by their research.
We are also positioning the business to reflect the changing risks and trends we see in the market.
Increasing productivity Alongside these initiatives, the Scandinavian performance improvement programme has continued to deliver well, with particular focus on operational efficiency through process redesign, robotics and automation.
Outlook We continue to expect our Scandinavian markets to grow in line with local economies and our goal is to achieve medium-term growth broadly in line with the market, sustaining high quality in our underwriting and customer experience.
While our 2017 result is within the target combined ratio of <85 percent, we see scope for further progress as we build the appeal of our brand, customer service levels and underwriting skills.
Type of business a. Household 31% b. Motor 38% c. Comm. Property 13% d. Liability 7% e. Comm. Motor 7% f. Marine & other 4%
Our operations in Canada In Canada we are the sixth largest general insurer.
Broker distribution remains the dominant channel in both our Personal and Commercial lines businesses. Alongside this, affinity partnerships and direct channels are gradually gaining market share in Personal lines.
Personal Household has continued to respond to an increasing volume of severe weather events in recent years, though 2017 weather experience was slightly more favourable than 2016, which had seen the particularly severe Fort McMurray wildfire losses.
Net written premiums of £1,619m were up 12 percent at reported FX and 5 percent at constant FX (2016: £1,443m). Growth was particularly strong in the broker channel, with Personal broker up 10 percent – policy count up 4 percent – and Commercial broker up 4 percent, both at constant FX. Johnson, our direct business, also returned to volume growth in the year (policy count up 2 percent).
STRATEGY & OUTLOOK Our strategy Our business in Canada is wellbalanced by province, customer, channel and product. We offer a broad and diversified offering to customers from Personal through to corporate and specialty risk.
Our Canadian transformation programme has seen continued progress in 2017, with performance improvements right across the business, but there is more that can be done. Our major focus areas for 2018 include enhancing our customer experience through improved processes and digital tools, investing in technology to decrease the cost of delivering to our customers and continuing to invest in our core skills of underwriting, pricing and claims.
In July colleagues helped to build affordable homes in Edmonton, Alberta, a city which just a year earlier played host to many evacuees of the Fort McMurray wildfires.
Earlier in the year 187 RSA employees took part in the Group’s first-ever Great Canadian Shoreline Clean-up campaign. Events took place in nine cities across the country where employees from RSA and Johnson’s 11 main offices worked together to pick up rubbish from various locations where water meets land.
Focusing on customer needs We have continued to enhance our customer offer, improving our ways of working with partners and strengthening our direct channels. Combined, these measures have helped to deliver an improvement in customer retention to 85.8 percent from 84.3 percent a year ago, with particular successes in Personal Lines.
We have mapped customer journeys to identify areas for improvement in their experience, and that work is now influencing our investments. The implementation of our new Guidewire system is reducing processing time, and enabling faster claims settlement. Our direct to consumer business, Johnson, has improved its digital platform to support customers to manage their policies online. Net promoter scores continue to improve and outperform benchmarks as a result of these efforts.
We have introduced a number of initiatives to support our excellent relationships with intermediaries, including implementing RSA Pro, a new digital tool that enables brokers to service clients remotely and reduces our time to quote from hours to minutes. Improved on the spot communication between brokers and underwriters around pricing decisions is driving better underwriting and cost efficiencies, as well as a better customer service.
Our key risks to business performance continue to be weather volatility and large losses. In 2017, large loss experience was elevated at 7.7 percent, compared to 6.4 percent in 2016 and a five year average of 5.1 percent. We are working hard to return large loss ratios back towards long term averages, by recognising trends early and taking any underwriting or pricing action required.
We are also progressing our business improvement programme, simplifying processes, cutting back on waste and consolidating our office space. Our new claims system has reduced the environmental impact of our work by facilitating a paperless process.
We also have strong positions in UK Personal Lines, particularly Household and Pet insurance, with a growing presence in the Personal motor market which leverages a successful telematics offering aimed at young drivers. As well as our innovative direct insurance brand MORE TH>N , and a broker portfolio focused on profitable segments, we have affinity partnerships with some of the UK’s major retailers, banks and building societies, underwriting insurance products for Nationwide Building Society, John Lewis and Marks & Spencer.
a. Household 21% b. Motor 11% c. Personal other 10% d. Comm. Property 25% e. Liability 11% f. Comm. Motor 8% g. Marine & other 13%
UK & International financial summary 2017 net written premiums Underwriting result COR
Our portfolio is well balanced across all lines of business and distribution channels, with brokers a strong channel in all markets.
Challenges in our UK business Our 2017 result in the UK was affected by a number of material market events, reflected in a higher combined ratio of 102.01 percent (2016: 95.4 percent).
Outlook Our business is building the agility it needs to meet the evolving needs of customers and a sustainable base from which to achieve best-in-class performance. For the UK & International region as a whole, we retain the performance ambition of a sustainable <94 percent combined ratio.
Notes: 1. Proforma for share of aggregate reinsurance recoveries and excludes the impact of the Ogden rate change. For more information see page 197.
For over 30 years, RSA has been a lead insurer of renewable energy
We also share our knowledge and expertise in other forums to support wider research and development of approaches to protecting against climate-related risks. Our Group Chief Financial Officer, Scott Egan, represents RSA on the ClimateWise Insurance Advisory Council, which this year has been leading research exploring how climate models can identify geographical concentrations of climate risk within real estate lending and investment portfolios.
We bolstered this position through investment in our customer and digital capability, completing phase one of our new ‘Digital Platform’, a substantial IT infrastructure programme that will improve and simplify our customer experience across all our Personal Lines products. Internally, our digital improvement agenda has continued to deliver benefits by simplifying processes to free up employee time for higher value and specialist tasks, and enhancing our data analytics capabilities to give them the information they need to do the job well.
Increasingly, we are building improved customer insight in our product design and development. For example, our Nationwide partnership is built around a flexible policy that allows customers to ‘pick and mix’ their level of cover, after research indicated that only paying for the cover required was a primary factor in choosing a provider. In the Commercial space, our specialist knowledge of sectors such as property, marine and renewables gives us the capability to tailor our offer to meet business needs.
We recognise too the importance of contributing to the communities we are a part of. Our long standing partnership with the School for Social Entrepreneurs pairs its students with mentors from across RSA, helping them to gain the skills and knowledge to become successful social enterprise leaders. In the Commercial broker market, we’ve continued our support for these important partners through our Broker Leader Programme, which provides career development and training to up and coming talent.
We expect underlying positive premium trends to continue into 2018, and weather and large losses to return towards long term trend levels.
Ireland financial performance Our Irish business has returned to profit, delivering an underwriting result of £9.5m and a combined ratio of 97 percent. Whilst there is more to do to ensure this result is sustained, we are seeing the benefit of coupling discipline in our underwriting with empathetic and high quality customer service.
For example, the year saw RSA supporting those hardest hit by Storm Ophelia – the strongest eastern Atlantic hurricane on record – by providing information and support via text message ahead of the worst of the damage. Our claims surge plan supported customers at speed, servicing some 1,200 related claims in the weeks following the storm, and maintaining the usual service levels in responding to calls.
Middle East financial performance The Middle East delivered an underwriting result of £25m with an excellent combined ratio of 87.7 percent, despite challenging economic conditions. 2017 included a brand refresh of Al Ahlia, our direct-toconsumer brand, and several regional insurance awards for the business.
Our risk management and controls frameworks have been created to ensure that we are able to identify, measure and effectively manage these risks, both at Group level and in each entity and business unit, before they adversely impact the business. This information, together with the strength of the Group’s capital position, allows the Board to set a risk strategy and appetite which sets out the level of risk the Board is prepared to take in the delivery of its strategic objectives. Achieving best-in-class risk management ensures we maximise longterm value by minimising the risks where our shareholders are not adequately rewarded and our customers are not well served e.g. vulnerability to cyber-attacks.
2. Risk Strategy creates the overarching principles for setting the Risk Appetite Indicators.
7. The internal model is run regularly throughout the year in order to assess the risks impacting the Group and determines how much capital the Group needs to hold to remain solvent even after a major stress event(s), which forms part of the ORSA process.
Against this evolving environment, we are further enhancing our focus on customer issues in each country, in the interest of long-term success.
RISK MANAGEMENT IN ACTION The risk function is closely involved in M&A and other major strategic initiatives. For example, in February 2017 RSA secured the disposal of UK Legacy business. The risk function participated actively in the transaction design and negotiations, including security assessment, asset and collateral arrangements and contractual safeguards for customers and shareholders. This involved both establishing the framework of considerations to satisfy and giving realtime advice, as well as providing an independent report to the Board. RSA’s internal model was central to evaluate a range of aspects of the deal including overall value, capital implications, financial risks and the structure and limits for interim reinsurance and collateral. Given the extended and complex nature of the transfer, the risk function has continued to oversee and challenge on execution and operational matters.
Far-term risk >10 years 1. Global economic slowdown 2. Financial market uncertainty 3. Interconnected nature of reinsurance market 4. Cyber risk 5. Data analytics changes underwriting 6. Critical infrastructure – solar storm 7. Technological advances 8. Persistent or more extreme weather patterns 9. Scarcity of resources leads supply shocks 10. Longevity Risk 11. Pandemic 12. Terrorist attack 13. Global socio-political uncertainty 14. Regulatory legislative change 15. Emerging stringent capital standards 16. Geopolitical tensions/conflict
14 • Our reinsurance programme significantly reduces our exposure to catastrophe risks with losses arising from the 2017 Hurricane season being well covered by our programme. Programme is designed to cover at least 1 in 200 year events.
Reserving risk This is the risk that the Group’s estimate of future claims is insufficient. Longer tail line of business present more uncertainty on the size and timing of payments, with our key exposure being the Swedish personal accident lines. Risk includes legislative changes e.g. Ogden rate change.
19 • Reserves are reviewed and challenged at the Group Reserving Committee which is attended by the Group Chief Actuary, the CRO, CFO and CEO
• The Reserve assurance programme has independently verified >90 percent of the Group’s net reserves over a three year period
Underwriting and claims risk This is the risk that underwritten business 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.
12 • Controlled through well-defined risk appetite statements which are rigorously monitored at quarterly portfolio reviews, with remediation actions taken where deemed necessary
• Claims case reserves are prudently set and reviewed at quarterly case reserving committees
Market, credit and currency risk This is the risk to our insurance funds arising from movements in macroeconomic variables including widening credit spreads, declining bond yields or currency fluctuations.
22 • RSA adopts a prudent investment strategy with the investment portfolio favouring high-quality fixed income bonds
• Asset Liability Committee ensures assets are closely duration and currency matched with insurance liabilities to hedge volatility
• Investment positions are regularly monitored to ensure limits remain within appetite.
Pension risk We face longevity and in particular market related risks which arise from our defined benefit pension schemes. The largest exposures arise from credit spread and equity movements, although these are partly hedged by offsetting movements in the Insurance Investment Fund.
• Reached an agreement to close the UK schemes to further accrual from 31 March 2017
10 • Extensive Line 2 and 3 challenge over the continued progress in executing the Group’s transformation programme
It is therefore essential the plan meets the right balance of achievable stretch targets with realistic assumptions and strategic actions for how this can be achieved. Risk take an active role in challenging the plan, including ensuring the validity of assumptions when compared to economic projections, peer reviews, past experience and current risk assessments, which also includes an assessment of the ability to deliver planned change activity.
Focus on best-in-class control framework – We continue to strive to deliver a best-inclass control framework. Across all our processes and territories, we have taken over 1,000 control enhancement steps in the last two years. This focus has ensured that our risks are well controlled within appetite whilst minimising unnecessary operational losses, which have reduced by around half in the aggregate view.
Additionally, the Solvency II Directive impacts how RSA manages risk and how it reports to both regulators and shareholders: Pillar one relates to the quantitative requirements including the calculation of the SCR.
Brexit Following earlier restructuring of the Group’s operational entities the impact of Brexit on the Group has been relatively light. The main action for the Group is the Part VII transfer of its European branches into a newly created Luxembourg entity.
OUR CONTRIBUTION IN A CHANGING WORLD We are committed to using RSA’s business assets, expertise and knowledge to address the issues that our customers care about most, and to help make the difficult times a little bit easier. Our five year Corporate Responsibility strategy, Making Things Better, Together, was launched in 2014 and informed by the issues most material to the Company, its stakeholders and customers.
Making things better, together Our strategy uses our business strengths and expertise to help build a safer world for our customers, support communities to thrive and contribute to addressing climate change, as well as ensuring we are managing the impact of our own business operations.
Our Danish business, Codan, is helping customers and their families stay safe online. In 2017, our educational seminars and practical advice on how to stay safe when connected to the Internet reached over two million people.
In Sweden, where outdoor swimming is a popular summer pastime, we’re also pursuing innovations to tackle water safety. Around 50 percent of drowning victims in Sweden are found to have alcohol in their blood, so we’ve been developing technologies which allow swimmers to assess their blood-alcohol levels before swimming in open water.
Thriving communities Our business cannot be successful unless the communities we operate in also flourish and thrive, and we see this as a core part of our role across our operations. We support and encourage our employees to contribute to the economic and social development of their local areas, by sharing their skills, offering their time, and fundraising for local causes.
Sustainable future 2017 reminded us of the devastating impact that extreme weather events can have on communities and businesses following the series of hurricanes in the Caribbean and the tragic earthquakes in Mexico. As an insurer, we feel the consequences of these events in our business particularly acutely through our interactions with affected customers. We support customers in the region to provide them with information and relief, and continue to do everything we can to get them back on their feet.
Recognising the shape and scope of our business operations and their limited environmental impacts, our efforts are focused on the role we play within the insurance sector. For example, we are contributing to the development of environmental, social and governance (ESG) guidance for underwriters through the UN Environment Programme Principles for Sustainable Insurance. We continue to be a leading insurer of renewable energy; through our Centre of Excellence for Wind in Denmark we have insured over 90 percent of the world’s current offshore operational windfarm capacity. Last year we were appointed as lead London insurer in the Muhammed bin Rashid Al
In 2017 we made significant progress to enhance the support we offer to colleagues and customers. In the UK we have been focusing on our training programmes for frontline staff and others to help them consider, recognise and support customers according to their individual circumstances. Across the Group we have invested in improving workplace health and wellbeing, with a specific focus on mental health in Canada and the UK. We have also strengthened our actions to promote diversity and inclusion in our business, outlined in the People section of this report.
Anti-bribery and corruption We take our commitments to preventing bribery and corruption risk very seriously. Bribery and corruption are not tolerated anywhere in our business and this standard, led by our Board and Group Executive, applies globally.
We strongly encourage our people to speak out if they have concerns about ABC. Our annually-reviewed Group-wide Whistleblowing Policy, available on our intranet, sets out the procedure for colleagues to confidentially raise concerns about suspected wrongdoing and malpractice.
Looking forward Our Making Things Better Together strategy runs from 2013-2018. Over the course of this year, we will be taking the opportunity to reflect on the impact delivered over the past five years and to review our approach to corporate responsibility, to ensure it continues to maximise our potential to generate positive impacts on society and the environment.
Trygg-Hansa has supported 16,500 children to improve their confidence and ability in the water
Note: The information required to be contained in the non-financial reporting statement under section 414CA Companies Act 2006 is set out on pages 33 to 41 of this Strategic Report. The relevant information contained in the sections on the Group’s business model and key performance indicators is also incorporated into the statement.
To build this capability, there has been a focus on defining and building our leadership skills at all levels to support us to win in each of our markets. In the UK for example, we have developed our new leadership development curriculum, including ‘Licence to Lead’, which equips our leaders with the foundation skills to drive performance and bring out the best in their teams. Similarly in Scandinavia, over 250 new leaders and functional heads will have attended a tailored leadership development programme by April 2018. In Canada, a new framework of Leader Expectations is underpinning assessment of leadership capability and a range of new development programmes will be designed to grow this critical capability. Senior leaders across the Group have continued to participate in a programme of 360 feedback and coaching to ensure that they continue to develop the style and capabilities which are aligned with the priorities of their businesses.
RSA leaders channel ambition into good outcomes Our success depends on delivering our promises to customers while creating value for our shareholders. We expect our people to be customer-focused and to do the right thing by customers – this is embedded into our pursuit of outperformance. Delivering for our customers also means equipping our people to perform their roles by providing them with the tools they need.
The 30% Club cross company mentoring programme has been invaluable. As a mentee it has provided me with a ‘personalised’ development opportunity with access to an independent and objective perspective. My mentor encouraged me to explore outside the ‘obvious’ career enhancements and more importantly, to focus on developing as a person and not just a leader.
In a lean organisation, collaboration and best-practice sharing is vital. In November, we held our annual Group Senior Leaders event bringing together the community of our most senior leaders, enabling them to create new connections, learn about challenges and trends in the market and contribute to determining our future priorities. Use of our internal digital collaboration platforms continues to grow, enabling our employees to connect across multiple locations in more agile and innovative ways, and provide real-time feedback.
RSA has great technical know-how Technical capability is naturally at the heart of our business. We aim to be best in class in underwriting, claims, pricing, portfolio management and risk engineering to ensure that our people can deliver the best outcomes for both our customers and our shareholders.
In 2017, our Group Technical Academy supported our Regions with face-to-face development of over 150 people (totalling over 7000 training hours), and assisted with a number of continuing technical development events. We continue to develop and deliver a range of technical
capability development programmes to make us best-in-class, sustaining our technical advantage and providing a stimulating working environment for those with technical talent.
RSA is a place where fulfilling careers can be made We believe that RSA should be as diverse as the customers it serves. To attract and retain diverse and talented people who will thrive, we aim to offer exciting and meaningful careers at RSA. We are maintaining our focus on developing our internal emerging talent: the UK and Scandinavia’s talent programmes – Accelerate and Fast Track – for example, support the transition of talented people at various levels of the business through to more senior roles.
Group overall1 5,845 6,895 Notes: 1. Based on Group permanent and non-permanent headcount.
Throughout the year, the Board and its committees have focused on four key areas: 1. strategy and growth, including business transformation 2. risk management and internal control 3. financial performance and reporting 4. governance ensuring that a broad range of matters are considered and sufficient time is spent on these areas with deep dives into certain business processes as required. More information in respect of each of these areas is available in this report.
The Board has also spent time in the business both collectively and as individuals, exploring specific business areas through presentations, meetings and dialogue with management.
The effectiveness of the Board and its Committees was evaluated internally during 2017. The results of the evaluation concluded that the Board continues to operate in a cohesive and effective way.
I would like to thank the Board and employees for their contribution and commitment throughout the year, which is fundamental in ensuring the Board delivers for its shareholders, customers and wider stakeholder group.
• Role statements define the split of responsibilities between the Chairman and Group Chief Executive and provide a mandate to independent non-executive directors to challenge performance and bring an independent, objective opinion. No individual or small group of directors can dominate the Board’s decision-making
EFFECTIVENESS • Programme of scheduled Board and committee meetings throughout the year includes annual site visits, a two-day strategy meeting and in-depth management presentations to enable directors to discharge their duties effectively
• Board, committee and director evaluation undertaken annually with an in-depth external evaluation undertaken every three years (last external evaluation undertaken in 2016). The evaluations undertaken include an assessment of Board composition, expertise, time management and oversight of material provided to the Board.
ACCOUNTABILITY • The Board sets annual business objectives in line with the current Group strategy and monitors achievement against these objectives through regular functional reports
• A schedule of matters reserved for the Board and committee Terms of Reference are reviewed annually
• Rolling agendas for the Board and committees are continually refreshed in line with the needs of the business
• Certain responsibilities are delegated to Board committees to ensure detailed and focused consideration
• The Board, supported by its committees, operates within a framework of prudent and effective controls in the interests of shareholders and customers
REMUNERATION • Remuneration Committee established with oversight of remuneration decisions • Directors’ Remuneration Policy, approved by shareholders, supports operational plans, business strategy and short and long-term performance
• Performance measures are aligned to business strategy and have stretching targets
• Remuneration framework is designed to promote sound and effective risk management in line with the Company’s risk profile
• Remuneration Committee comprised of independent Non-Executive Directors with responsibility for executive reward decisions.
ENGAGEMENT • Importance of stakeholder engagement is key to the Board: shareholders, customers, employees, regulators and rating agencies
• Performance and expertise of the Group’s employees are key to the successful delivery of the Group’s strategy. The Board regularly engage with senior leaders in the business to gain a greater understanding of specific business areas
• Meetings with institutional shareholders took place throughout 2017. The Board receives regular updates in relation to institutional shareholder views
The current version of the Code, published in 2016 can be found at www.frc.org.uk.
RSA Board Committee Terms of Reference are available to view at www.rsagroup.com/termsofreference.
Appointment date: October 2011 Nationality: British Committee membership: A N I B
Board Contribution: Martin has held board positions for over 20 years. He brings valuable experience in developing strategy and evaluating business opportunities along with understanding of the financial services sector and how it operates. He ensures the Board operates effectively, promoting constructive engagement with shareholders and other stakeholders.
Board Contribution: Alastair’s extensive experience in advising on accounting and financial reporting, corporate governance and management issues in the financial sector adds value to his role on the Board. He brings in-depth knowledge and understanding of global governance, which is particularly useful in his role as Chairman of the Group Audit Committee as he leads the Committee to challenge the internal control and risk management systems to mitigate financial risks.
COMMIT TEE MEMBER KE Y A Group Audit Committee B Board Risk Committee I Group Investment Committee N Group Nomination and Governance Committee R Group Remuneration Committee
Board Contribution: Scott has substantial financial services experience and understanding of the financial sector which he brings to the Board when overseeing financial operations of the Group and setting the financial strategy.
Skills and experience: Isabel has significant experience in general insurance, both as an executive and non-executive director, along with a wealth of relevant board experience having served as committee member and committee Chairman of a number of listed companies including Standard Life plc and QBE Insurance Group Ltd, as well as The Pension Regulator. Her previous roles include Executive Director of Prudential’s UK business and Chairman of Prudential International Assurance between 2002 and 2006, Chief Executive of specialised pension buyout firm Synesis Life, Chief Financial Officer of Eureko and International Development Director for GE Insurance Holdings Limited.
Non-Executive Directors The role of the non-executive director is to challenge and approve the Group’s strategy and to assess and challenge performance against business plans, bringing an independent, objective view to the discussion. Each of the non-executive directors is a member of one or more committees for which they have the skills, knowledge and expertise required to consider topics delegated for in-depth assessment. They meet with the Chairman without the executive directors being present and meet with the Senior Independent Director without the Chairman being present to review the Chairman’s performance and discuss other matters. Each committee is chaired by a non-executive director who has the specialism and experience in the relevant field and with the applicable external stakeholders.
Skills and experience: Kath has over 25 years’ experience in global financial services. She was previously Chief Operating Officer, Wholesale Banking for Standard Chartered Bank and spent 22 years at UBS. Kath has gained a deep knowledge of control, governance and risk management, working in emerging markets and across different sectors and cultures.
Board Contribution: Enrico’s long-standing experience in the financial and insurance sector provides the Group with innovative ways to grow the business and contributes towards the successful operation of the Board.
Skills and experience: Until 31 December 2015, Chief Human Resources and Corporate Officer of Royal Dutch Shell plc, and a member of the Shell Executive Committee. Formerly a Director of Shell International Limited, Shell Aircraft Limited and the Shell Foundation. Advisory roles previously held at The Centre for Advanced Human Resources at Cornell University Advisory Board, IMD Business School Advisory Board in Lausanne, an Honorary Vice- President for the CIPD (UK) and Advisory Board Member of the National College for School Leadership (England and Wales).
Appointment date: May 2016 Nationality: Swiss Committee membership: B I A R N
External appointments: Non-Executive Director of Brewin Dolphin Holdings plc, Non-Executive Director of Threadneedle Investment Services Limited, Threadneedle Pensions Limited and Threadneedle Asset Management Holdings Sarl.
Board Contribution: Hugh’s previous roles provide him with extensive experience and the understanding of remuneration and reward systems and capabilities for his role as former Chair and current member of the Remuneration Committee and his work towards attracting and retaining new talent.
External appointments: Chairman of Duisenberg School of Finance, Chairman of the Advisory Board of the Royal Dutch Society of Actuaries, Chairman of Leaseplan Corporation and Chairman of Stichting Continuïteit Philips Lightning (Foundation Continuity Philips Lightning), a non-listed Company.
Board Contribution: Martin has over 25 years’ insurance and financial services experience, which provides the skillset required to be a member of the Audit, the Remuneration and Investment Committee and encourages constructive challenge of matters discussed. His understanding of the insurance market adds value to his role as Chairman of the Board Risk Committee.
Skills and experience: Charlotte joined RSA in February 2010 as Legal Counsel becoming Head of Group Legal in October 2011. Prior to joining RSA, Charlotte worked at law firm Linklaters LLP where she acted for a variety of corporates and banks, specialising in corporate advisory, public and private M&A and equity capital market transactions.
Key activities of the Board during 2017 Throughout the year, the Board and its committees have focused on four key areas: strategy and growth (including business transformation); risk management and internal control; financial performance and reporting; and governance matters. A rolling agenda of topics is kept under constant review and updated to make sure that sufficient time is spent on these focus areas and that across the year an appropriately broad range of topics are considered.
During 2017, the Board met with each of the regional businesses to discuss progress against transformation, cost reduction and developing trends and emerging risks. The Board also spent time in the business both collectively and as individuals, to gain a greater understanding of the operational side of the business including: • a two-day visit to Stockholm to meet with the Scandinavian team to discuss competitor trends, Scandinavian risks, underwriting and pricing
• hosting a variety of presentations and meetings with senior management from the Group’s Top 50 management and key businesses, in Ireland and the UK, focusing on specific business initiatives.
In addition, the Chairman and non-executive directors, together with senior members of the management team, have hosted meetings with external stakeholders: regulators, shareholders and other external advisers.
The Board are supported by the activities of each of the Board Committees and details of committee highlights for the year are contained in the various committee reports in this Report.
Summary of Matters Reserved for the Board • Responsibility for and approval of the overall management of the Group: business strategy, long-term objectives, Group risk appetite, delegation of authority, significant changes in Group and capital structure
• Oversight and challenge of the Group’s operations, performance and strategic planning
• Ensure the effectiveness of the Group’s systems of risk management and internal controls
• Approval of new business lines • Review of Board, committee and management effectiveness • Ensure the adequacy of accounting records, financial controls, accounting policies and financial reporting
• Following the recommendation from the Remuneration Committee, review of remuneration policies and share incentive plans for recommendation to shareholders for approval.
Service agreements and letters of appointment, for all the executive and non-executive directors, are available for inspection at the Company’s registered office and at the AGM.
Diversity The Group is committed to diversity and the promotion of equal opportunities. During the year, the Board approved a formal ‘Diversity, Inclusion and Equal Opportunities Group Policy’. The Board is aware of external diversity guidance issued by industry bodies from time to time, and considers the findings and recommendations of, for example,
The Board receives updates on the development of diversity, inclusion and equal opportunities, within the business and is supportive of an agreed programme of actions that focus on improving Groupwide diversity.
The Company signed the ‘Women in Finance Charter’ in November 2017 through which the Group are committed to achieving a 33% representation of women in our management group by 2020. The Group continues to invest in strengthening its pipeline of female employees for senior leadership positions to ensure progress towards this target and has developed a framework of initiatives designed to help retain, develop and promote female employees and improve diversity and inclusion more broadly.
The Group Nomination and Governance Committee undertakes a review of directors’ time commitment annually and, following a review in 2017, concluded that the commitment remained appropriate, with additional time to be spent in the business as required. During 2017, each of the directors has demonstrated flexibility and commitment by not only attending Board and committee meetings, and making themselves available to meet with the Prudential Regulatory Authority (PRA) as required, but also spending additional time in the business.
Appointment, Induction, Training and Development When appointing new directors, regard is given to the size of the Board, the balance of executive and non-executive directors and the benefits of diversity, including gender.
Updates to the Board from the Group Chief Executive, the Group Chief Financial Officer and other members of senior management are scheduled in respect of all material business matters to ensure that progress against strategy is monitored.
Formal minutes recording the decisions of all Board and committee meetings are prepared and circulated to each director. If a director objects to a particular decision, this is recorded in the minutes of the relevant meeting. If a director were to be unavailable to attend a meeting, their views would be canvassed by the Chairman prior to the relevant meeting, and the Board informed of their opinions and observations.
The Board is supported by its committees to which it delegates certain duties. The key functions of Risk, Actuarial, Compliance and Internal Audit all report directly to a Board committee providing expert advice on their remits to the relevant committee and senior management.
Details of each of the committee’s activities and priorities during 2017 are contained in the committee reports on pages 57 to 92, which are incorporated into this Report by reference. Following each committee meeting, a verbal update is presented to the Board ensuring that all directors are aware of relevant topics and specific matters. The composition of each committee is reviewed by the Group
Nomination and Governance Committee annually and when there is a change to the Board. Consideration is given to each individual’s expertise and experience. All committees have some members in common to ensure cross-committee awareness of matters discussed. For example, the Nomination and Governance Committee members are chairs of other Board committees, the chair of the Group
Audit Committee is a member of the Board Risk Committee, the chair of the Board Risk Committee is a member of the Group Audit Committee, and the chair of the Group Remuneration Committee is a member of the Group Audit Committee and Board Risk Committee. Full details of committee membership are set out above.
Members: M Strobel (Chair) K Cates A Barbour I Hudson H Mitchell
Members: K Cates (Chair) E Cucchiani I Hudson H Mitchell J Streppel M Strobel
Johanna Waterous2 4/4 2/2 1/1 3/3 Notes: 1. For the composition of the Board, please refer to pages 44 to 47. 2. Johanna Waterous resigned as a director with effect from 5 May 2017. 3. Group Audit Committee: Johanna Waterous ceased to be a member of the Committee on 5 May 2017. Regular attendees: Group CFO, Group Chief Auditor, Group & UK
Regulatory Compliance Director, Group Chief Risk Officer, Group Chief Legal Officer and Company Secretary and representatives from the External Auditor. The Chairman and the Senior Independent Director attend ahead of RSA’s full and half-year results.
4. Board Risk Committee: Kath Cates chaired the Committee throughout the year until Martin Strobel was appointed as member and chair on 1 December 2017. Regular attendees: Chairman, Group CFO, Group Chief Legal Officer and Company Secretary, Group & UK Regulatory Compliance Director and Group Underwriting Director.
5. Group Nomination & Governance Committee: Johanna Waterous and Hugh Mitchell ceased to be members of the Committee on 5 May 2017 and 1 December 2017 respectively. Isabel Hudson became a member of the Committee on 5 May 2017 and Martin Strobel became a member of the Committee on 1 December 2017. Regular attendees: Group CEO and Group Chief Legal Officer and Company Secretary.
7. Group Investment Committee: Stephen Hester and Scott Egan ceased to be members on 28 March 2017. Regular attendees: Group Investments Director, Group CEO, Group CFO and Group Chief Legal Officer and Company Secretary.
The Board meets frequently and is responsible for organising and directing the affairs of the Group in a manner that will promote the long-term success of the Company and its key subsidiaries and is consistent with good corporate governance practice, ensuring that the Group is carrying out its duties and continues to meet legal and regulatory requirements.
The Group Audit Committee reviews the effectiveness of the Internal Control System on an annual basis. The Group has an effective Internal Control System in place which sets out the processes and frameworks required to ensure effective and efficient delivery of the Group’s strategic objectives, including reliability and availability of information to identify and mitigate any potential risk of failure to achieve business objectives but it does not eliminate risk. In addition, assurance of the Financial Control Framework is carried out on a quarterly basis by the Group Audit Committee. For further details refer to the Group Audit Committee Report on pages 62 to 67.
Corporate Governance Framework • Provides a framework which supports the realisation of its business strategy and supports long-term success
• Ensures that both directors and employees act within a chain of delegated authority and specified powers
– Third line of defence: evaluation of the effectiveness of our risk management, control and governance processes.
• Supplemented by objective first line validation and independent second line assurance processes
• Authority delegated from the Board to the Group CEO through the Delegated Authority Framework
• Regulatory Compliance Policy sets out the standard control processes to minimise and/or prevent the risk of material loss, reputational damage or liability arising from the failure to comply with regulatory requirements
• Ensures that the Group deals with regulators in an open and co-operative manner
Shareholders During the year, the Group met with 355 institutional investors. In addition, a shareholder consultation was undertaken to understand the views of shareholders when reviewing the Remuneration Policy for adoption at the 2017 Annual General Meeting.
At each Annual General Meeting, the opportunity is taken to update shareholders on the Group’s performance and activities during the year. The Chairman and each Board committee Chair make themselves available to take questions from shareholders.
More information on shareholders can be found on pages 95, 186 and 187
Regulators The Board is committed to dealing with regulators in an open, co-operative and transparent manner and both collectively and individually take its regulatory responsibilities seriously. During the year the PRA and FCA conducted routine meetings with several members of the Board and executive management. Similar meetings take place with regulators in other jurisdictions. Regular management information is provided to assist the regulators with the supervision of the Group.
Rating Agencies The Group is rated on an interactive basis by Standard & Poor’s and Moody’s. Their insurance financial strength ratings as at 21 February 2018 are A (stable outlook) and A2 (stable outlook) respectively. These ratings were affirmed following the 2017 half-year results, and reflect the continued positive trend in operating performance and completion of balance sheet actions undertaken. In addition, both agencies have spent a day with senior management discussing Group strategy, financial plans, capital and risk management.
Key activities during 2017 The global economy saw a largely encouraging year of growth in 2017. Outside the UK, GDP levels in Europe were generally above expectations and within North America conditions were sufficiently positive for central banks to undertake further modest interest rate increases to dampen any build of inflationary pressures.
GROUP INVESTMENT COMMITTEE REPORT I am pleased to present the Group Investment Committee Report for 2017. Details of the Committee members and their attendance at meetings are shown on page 53.
a. Cash 8% b. Fixed Income 82% c. Property Investments 2% d. Equities 2% e. Alternatives and Other 6%
Market and Portfolio review • Review of portfolio dispositions to ensure consistency with strategy framework and risk appetite
Oversight of Defined Benefit Pension schemes • Challenge and approve changes to Pension Investment strategy • Review of disposition and performance of Pension Scheme investment portfolios.
represent just 4 percent. The Group has also maintained its commitment to high quality assets with 70 percent of bonds having credit ratings of AA or higher and just 2 percent rated lower than BBB.
Similarly, the Group’s pension investment exposures maintained a broadly unchanged conservative disposition with approximately 85 percent in bonds and other low risk assets and the remainder held in a diversified range of higher return strategies including equities.
The Committee has delegated authority from the Board to focus on Board effectiveness and good governance as well as Board and committee composition and succession planning.
During the year, the Committee made a number of recommendations to the Board: • Kath Cates succeeded Hugh Mitchell as Chair of the Group Remuneration Committee with effect from 1 December 2017
• Martin Strobel succeeded Kath as Chair of the Board Risk Committee with effect from 1 December 2017
• Alastair Barbour was re-appointed for a third three-year term on 10 October 2017
• Enrico Cucchiani was re-appointed for a second three-year term on 1 December 2017.
Directors do not participate in any debate or decision about their own re-appointment.
2. Succession planning: • Ensure appropriate succession plans are in place for members of the Board
• Monitor the Group’s compliance with the UK Corporate Governance Code
4. Effectiveness: • Evaluate Board and committee performance • Review of Board rolling agenda and scheduling • Review of time commitment of the non-executive directors.
Succession planning During the year, the Committee undertook a detailed review of Board and committee composition for the next 10 years, from both a short and long-term succession planning perspective, ensuring that the Board has individuals with a diverse yet relevant set of skills, knowledge and experience who will work well together to lead the Group, whilst ensuring statutory requirements are met.
As part of the Board succession planning process the tenure of each director is considered as well as the applicable statutory requirements.
Diversity The Committee periodically monitors diversity through the lens of gender as well as considering the balance of skills, experience, independence and knowledge on the Board. As at the date of this report, the Board comprises 80 percent male and 20 percent female directors, however the Company remains committed to Lord Davies’ target for female board composition. All appointments are made on merit against agreed selection criteria to ensure a balance of skills, experience, independence and knowledge. As a matter of Group Board policy, the importance of diversity of gender, social and ethnic backgrounds, and of cognitive and personal strengths is recognised by the Board. Further information relating to diversity is included on pages 40, 41 and 50.
Governance The Committee monitors the Group’s compliance with the Code ensuring that there are clear governance processes in place to aid effective, efficient and riskaware decision-making at a Group level. A formal assessment of compliance against the Code is carried out by the Company Secretary twice a year and reviewed by the Committee. Any non-compliance is discussed and it is agreed whether action is required to remedy the non-compliance, or, if there are circumstances which justify the non-compliance, an explanation is agreed. The Company has complied with the Principles and Provisions of the Code throughout the year.
The Committee has also undertaken a review of board governance of the regulated subsidiaries of the Group. During 2018, the Committee will focus on subsidiary Board governance matters such as subsidiary Board composition, governance and oversight.
During 2017, the Committee undertook a review of the Committee’s disclosures in the Annual Report and reviewed its Terms of Reference.
Effectiveness The Committee has reviewed the time commitment of Non-Executive Directors and considers that each Non-Executive Director devotes sufficient time to discharging their duties. The Committee considers new external appointments to ensure that they do not give rise to conflicts of interests and do not impact the director’s time commitment to the Company. In each case considered in the year, the Committee was satisfied that external appointments could be approved.
The Committee reviews the Board rolling agenda at least twice a year to ensure that the focus and balance of presentations scheduled for discussion at the Board is in line with business requirements. At the Committee meeting in December 2017, some additions were suggested to reflect some of the emerging themes in the FRC’s proposed revisions to the Code issued for consultation in December 2017.
The Committee has a pivotal role in ensuring the key risks to the Group are understood, are effectively managed within risk appetite and appropriately reflected in the Internal Model, in the interests of shareholders and policyholders alike.
Pensions and investment risk has been considered during the year, given their importance to the financial stability of the Group and the dependence on market conditions. Whilst the risks remain inside risk appetite there is significant exposure, which the Committee wished to explore in order to confirm they are appropriately understood and managed. This exploration included a detailed report on pensions risk by the Group Chief Risk Officer. Based on this analysis the Committee is satisfied the right steps are being taken and there is sufficient prudence in the approach.
BOARD RISK COMMITTEE REPORT I am pleased to present the Board Risk Committee Report for 2017. The Committee members, their attendance at meetings and regular meeting attendees are shown on page 53.
Role and responsibilities The Committee’s main duties are to: • Review and recommend to the Board the Group’s System of Governance, which includes the Group’s Risk Management System
• Approve and monitor the outputs from the Annual Risk Management Plan and assurance activities within the risk functions
• Review results of stress and scenario testing and implement actions to mitigate identified risk
• In conjunction with the Group Remuneration Committee, ensure risk is properly considered within the Group’s Remuneration Policy
• Provide advice to the Board on strategic transactions identifying risk and the impact on the Group’s risk appetite and risk tolerance.
Following on from 2016, IT has remained an area of focus as the Committee continues to monitor progress in responding to the revised risk appetite framework and execution of priority remediation steps committed to in 2016. Given the range of external security threats and the complexity of mitigating these risks, IT will remain a focus for 2018 as these priority remediation steps continue to be delivered and any new steps required are responded to.
In addition, compliance with General Data Protection Regulation (GDPR) has received attention in 2017 ahead of the May 2018 deadline.
During 2017, a Resolution Plan was developed as requested by the regulator, following the creation of the Recovery Plan in 2016, which the Committee reviewed and recommended to the Board for approval. The plans were developed using subject matter experts with the support of external specialists.
Risk and governance matters The Committee oversees the System of Governance and Group’s Risk Management System to ensure they remain robust and operate effectively. Further information can be found in the risk management section of the Strategic Report on pages 33 to 37.
Martin Strobel Non-Executive Director and Chairman of the Board Risk Committee a. ORSA/ Risk and Compliance Overall 26% b. Insurance Risk 22% c. Capital and Financial Risk 20% d. Specific Risk Topics / Deep Dives 13% e. Governance 12% f. Regional CRO Dialogue 7%
The Committee’s key activities during the year are described later in this report. The role of the Committee with regard to the oversight and challenge of Solvency II judgements and reporting is now fully embedded in the Committee’s annual process and reflected in the terms of reference, which were reviewed in October 2017.
• Solvency II technical provisions and disclosures to ensure compliance with regulatory requirements
• The robustness of evidence to support internal audit control environment assessments
• Sufficient resourcing to support internal audit and Group regulatory compliance plans
• Satisfactory levels of training and awareness concerning the prevention of financial crime
• Planning concerning non-audit services to ensure the widest pool of audit firms remains available should there be a need to put the audit to tender in future.
Committee composition, skills and experience Details of membership and attendance at Committee meetings are shown on page 53.
• Provide assurance to the Board on the effectiveness of the Group’s financial and regulatory risk management arrangements.
Key activities during the year In addition to the significant issues in relation to the Annual Report and Accounts set out below, the Committee considered the following issues during the year: • Monitored compliance with the Group’s reserving policy by each business to ensure that the Group’s reserve margin remained adequate and that the uncertainty considerations were appropriate
• Reviewed the quarterly Solvency II balance sheets and technical provisions produced by management and monitored the Group’s ongoing development of the Solvency and Financial Condition Report providing appropriate challenge to key judgement areas and the adequacy of disclosures
• Considered whether it was appropriate to adopt the ‘going concern’ basis of accounting for the 2017 Annual Report and Accounts and the basis on which the viability statement is made, recommending to the Board that both were appropriate.
Financial reporting and significant financial issues Management reports key accounting matters, financial controls assurance and financial results to the Committee at least quarterly.
The Committee attaches considerable importance to the work, opinions and findings of the external auditor, KPMG, who participates in all Committee meetings and who met with the Committee in private on two occasions during the year.
• At the half year and year end, detailed discussion and consideration of their findings and opinions in relation to the key risk areas, judgements made, any changes to the plan and to materiality and discussion of the underlying reasons
The main matters and primary areas of judgement addressed and concluded on by the Committee were as follows: Valuation of insurance liabilities The Committee has ensured that management exercised appropriate judgement and control in estimating insurance contract liabilities including assessing the impact of claims trends and other influencing factors consistent with previous years.
During the year, the Committee received and reviewed actuarial reserving reports, which described the basis for judgement in valuing insurance liabilities. Particular areas of focus for the Committee were: • The impact of the changes to the Ogden discount rate announced during 2017
• Reserve estimates for catastrophe losses in 2017 where estimates are inherently uncertain given the timing and nature of these losses
The Committee also confirmed that the planned programme of future reviews provided adequate coverage.
IT Systems and controls The Group’s IT infrastructure, including retained legacy systems, is complex and financial reporting is dependent on the operational and financial IT systems operating correctly and the control environment in which they operate. This is a key area of focus for both Audit and Risk Committees and during the year they received updates from management on progress to enhance IT general controls, the oversight of IT testing processes and improvements in documentation and standards, together with regular reporting from internal audit on the results of their reviews and testing.
In light of the ongoing transformation activity, the Committee closely monitored IT and information security to ensure the control environment was maintained.
With respect to financial reporting controls, the Committee received detailed updates from KPMG on their assessment of general IT controls including information on areas where additional controls or substantive testing was required, the reasons therefore and the conclusions reached in support of the audit.
After consideration and discussion with management and KPMG, the Committee concluded that the financial results as prepared from the IT systems were appropriate and reliable.
The Group’s position with regard to adopting new accounting standards due to come into force in the future is disclosed. This highlights no significant change to revenue recognition under IFRS 15 and the election to defer the implementation of IFRS 9, Financial Instruments, until the effective date of implementation of IFRS 17, Insurance Contracts.
In August 2017, the Group received comments from the Financial Reporting Council (FRC) following their review of the 2016 Annual Report and Accounts. Such reviews are intended to support continuous improvement in the quality of corporate reporting and not to verify statements or provide assurance that they comply with the legal and accounting framework. In response, the Committee reviewed and approved options for enhancing the quality and clarity of disclosures, reflected in this year’s Annual Report and Accounts, which includes expanded labelling of Alternative Performance Measures (APMs) and additional reconciliation of the same to the reported financial statements.
Financial Control Framework The Financial Control Framework (the Framework) aims to deliver a consistent approach to finance-related controls across the Group and embed a control culture that strengthens the Group’s finance environment by ensuring that financial processes are managed effectively in order to mitigate the risk of financial misstatement. The process involves documenting and testing the operation of key financial controls, thereby providing an acceptable degree of assurance around the financial control environment.
The Board has overall responsibility for the effectiveness of the Group’s Internal Control System, which is designed to identify and mitigate, rather than eliminate, the potential risk of failure to achieve business objectives and can only provide reasonable and not absolute assurance against material financial misstatement or loss.
In February 2018, the Committee reviewed the effectiveness of the Internal Control System during 2017 and concluded that it was appropriate and operated effectively during the year.
A summary of all whistleblowing incidents, underlying investigations and actions undertaken is provided to the Committee on an annual basis. Any material incident would be reported to the Committee immediately.
The policy’s effectiveness during the year has been assessed and the Committee is satisfied that it is appropriate, fit for purpose and effective and is sufficiently embedded across the Group.
The Group and UK Regulatory team leads and develops the relationship between the PRA, FCA, Group and businesses to achieve a mutually beneficial relationship.
During the year, the Committee has monitored progress towards delivery of regulatory requests, the outcome of on-site visits and received updates on regulatory developments and issues.
The function’s annual Compliance Plan sets out the work to be undertaken in the upcoming year to ensure: • Compliance with regulatory requirements
• To provide assurance, advice and guidance to the Board and the business.
The results of the latest assessment were reviewed by the Committee in December 2017 and the Committee was satisfied that GIA was operating effectively, sufficiently resourced and that the risk to their independence and objectivity was low.
Compliance with professional standards is monitored within GIA through a quality assurance process, outsourced to Deloitte and operated on a continuous basis. GIA is governed by an Internal Audit Charter which sets out the function’s role, mandate and authority, and includes independence and objectivity criteria. An updated Charter was approved by the Committee in July 2017. The charter is available upon request.
External auditor Appointment, tenure, independence and objectivity KPMG was appointed as the Group’s external auditor in 2013 following a formal competitive tender process and has been reappointed at each subsequent AGM.
In October 2017, the Committee discussed the findings of the FRC’s Audit Quality Review team, which as part of its annual inspection of audit firms reviewed KPMG’s audit of the 2016 RSA Insurance Group plc financial statements. The FRC review found no significant areas requiring improvement and indeed noted that the work of the pensions and actuarial teams was of a high standard. KPMG’s UK Head of Audit was requested to meet with the Committee to discuss plans and progress concerning improvements to audit quality. The limited improvements that were suggested by the FRC have been implemented and the Committee remains satisfied that there is no impact on the appointment of KPMG.
The Company complies with the requirements of The Statutory Audit Services for Large Companies Market Investigation (Mandatory Use of Competitive Tender Processes and Audit Committee Responsibilities) Order 2014, which relates to the frequency and governance of tenders for the appointment of the external auditor and the setting of a policy on the provision of non-audit services.
It is the intention of the Committee that the Company will tender the external auditor appointment at least every 10 years and in accordance with the FRC’s best practice notes concerning the conduct of such tenders.
The total value of non-audit fees incurred by the external auditor is capped at 70 percent of the average of the audit fees paid over the last three consecutive financial years, calculated in line with FRC guidance.
Details of KPMG’s remuneration during 2017, including that for provision of nonaudit services, are provided in the notes to the financial statements on page 136.
Effectiveness The Company undertakes a thorough review of the effectiveness of the external auditor on an annual basis, usually on completion of the audit process. The review is compliant with the UK Corporate Governance Code, covering the mindset, culture, skills and knowledge, quality control and judgement of the external auditor through an assessment of their perceived quality, effectiveness, objectivity and independence.
On the basis of the review, the Committee is satisfied with the work of KPMG and that they are objective and independent. Accordingly the Committee has recommended to the Board that a resolution be put to the 2018 AGM for the reappointment of KPMG LLP as external auditor, and the Board has accepted this recommendation.
Key performance indicators include Group underlying Return on Tangible Equity at 15.5% (2016: 14.2%) in the upper half of the target 13-17% range, Combined Operating Ratio at 94.0% (2016: 94.2%), a new record for RSA, and underlying pre-tax profit up 12% at £620 million, as detailed on pages 20 to 25.
RSA’s capital position has been further strengthened, reporting a Solvency II coverage ratio of 163% at the top of the targeted range.
The strong underwriting headline results were supported by outperformance on cost targets. Underwriting profit of £394 million set a new record for the Group. While underwriting performance overall was strong and better than prior year, it did fall short of the still higher ambitions we held. This was due to disappointing results in the Company’s UK & International division offset by excellent results in our overseas divisions which form the majority of our business.
Linking remuneration to performance The Committee seeks to maintain a strong linkage between business performance, shareholder outcomes, risk management and reward.
Based on the Committee’s assessment of performance: • The Group Chief Executive and Group Chief Financial Officer will receive bonus awards for 2017 at 63% of the maximum, of which half is deferred into shares for three years.
The conditional long-term incentive awards granted during 2017 are subject to stretching performance conditions. Awards which vest will do so after three years, with a further two year retention period applying to Executive Directors.
Remuneration Committee 71 3. Total remuneration 2017: ‘single figure’ tables 73 4. Components of variable remuneration 73 5. Directors’ shareholding 78 6. Payments to Directors for loss of office 80 7. Payments to former Directors 80 8. Historical TSR and executive remuneration 80 9. Percentage change in remuneration 81 10. Relative importance of spend on pay 81 11. Implementation of
Plans for 2018 Our Directors’ Remuneration Policy was renewed and approved by shareholders at the 2017 AGM, and no changes are proposed this time.
The on-target performance levels for both the 2018 Annual Bonus Plan and the 2018-20 long-term incentive are set in line with the Group’s operating plan.
Stakeholder engagement The Committee appreciates the ongoing dialogue it has with shareholders. Consultation took place with the Group’s largest shareholders during the year, and the Committee engaged with ISS, the Investment Association (IA) and Pension and Lifetime Savings Association (PLSA). The feedback received was considered in finalising the Policy in early 2017, and more recently when determining the incentive plan performance measures for 2018.
The Committee seeks to maintain a strong linkage between business performance, shareholder outcomes, risk management and reward. Kath Cates Independent Non-Executive Director £620m Underlying Profit before tax (PBT)
We will fully adhere to forthcoming disclosure requirements in this area once finalised, as announced in the UK government proposals published in the latter half of 2017.
The Committee is grateful to shareholders for their support in the past year. This report seeks to provide a transparent account of our remuneration decisions, and I hope to receive your support for it at the AGM.
Business Scorecard (including controllable expenses, attritional loss ratio, capital and customer)
Shareholder returns Relative TSR Performance targets, results and narrative on pages 75 to 77 0/33.3%
Notes: 1. Shareholding % figures do not include unvested share awards in the Group’s incentive plans (i.e. Deferred Bonus Shares and Performance Shares), which are shown separately in the table above.
2. Awards which vest must be retained until the relevant shareholding level is reached, excluding any sold to satisfy statutory deductions.
Remuneration Policy • Policy renewed in May 2017 with no significant changes.
• Limited changes for 2018: Annual Bonus and LTIP measures similar to 2017 cycle.
Committee meetings held in 2017 In 2017, the Committee met on five occasions and the table below summarises the matters it discussed.
September • Update on the performance of the Annual Bonus Plan 2017 and long-term incentive cycles 2015-17, 2016-18 and 2017-19.
• Update on the supplementary grant of conditional long-term incentive awards in September 2017 for non-Board employees.
3. LTIP 2017: Estimated value of Performance Shares and accrued dividend equivalents under the 2015-17 LTIP cycle due to vest on 7 April 2018. Estimate reflects the performance conditions having been met to the extent noted on pages 75 to 76, and uses an average share price over the last quarter of 2017 of £6.142.
4. Components of variable remuneration (audited) Annual Bonus Plan 2017 For the 2017 financial year, the Executive Directors’ Annual Bonus Plan consisted of financial and business targets aligned to the Group’s operational plans. These included: Group underlying Return on Tangible Equity (ROTE), Group underlying Profit before Tax (PBT), Group Combined Operating Ratio (COR), a Business Scorecard and role-specific personal objectives.
In determining 2017 bonus awards under this Plan, the Committee considered how goals had been met and took account of key risk factors.
Financial Performance (40% weighting – achieved 18.0%) As shown in the following table, RSA’s financial performance was better than 2016’s record results and above target at EPS and ROTE level. However, growth of underwriting profits was held back by external factors – US/Caribbean hurricanes, UK Ogden governmental action and UK household ‘escape of water’ inflation. As a result, the headline financial performance element overall achieved 18/40. Had external loss factors been in line with normal averages, the score would have been 40/40.
Business Scorecard (30% weighting – achieved 22.5%) The Business Scorecard component focuses on key areas of management activity essential to the success of the Company spanning Underlying Performance, Risk and Resilience (including Capital) and Business Sustainability (including Customer Franchise). Achievement is measured against a range of objective measures, with the overall Scorecard outcome being determined using judgement in the round. The Scorecard outcome will vary from the financial metrics’ outcome if these are considered over or under representative of the underlying actions of management and their results.
Achievement under the Scorecard was assessed to have been strong overall, although less so than in 2016. As a result, an award of 22.5% out of a maximum of 30% in this category was made (compared to 30% awarded in 2016).
In terms of Underlying Performance, underwriting profit set a new RSA record at £394 million, despite external loss pressures. Controllable costs and cost ratio improved again, well ahead of targeted reduction levels, and cost saving ambitions were raised for a fourth time. Attritional loss ratios improved in every overseas market, but UK results dragged the Group ratio down to broadly flat versus 2016’s record level. Strategic plan initiatives are discussed at length in the body of the Annual Report. They support the achievement of the financial progress noted, and the potential for more in future years. This affirms the Committee’s positive view of underlying progress.
In terms of Business Sustainability, across the Company activities delivered successful improvements in line with RSA’s Best in Class agenda. A key achievement in 2017 was premium growth of 4%, the first return to growth since 2013. This was accompanied by rising customer retention rates, good NPS and equivalent scores and key new business wins like the Nationwide home partnership.
Notes: 1. Defined on a Core Group basis excluding Claims Handling Expenses (which are part of the expense measure). 2. Half of the bonus is awarded in Deferred Bonus Shares which vest three years from the grant date, and are subject to malus adjustment as noted on page 78.
Personal Scorecard This component focuses on personal performance vs the priorities set by the Board for the Executive Directors in 2017. The Committee noted very strong achievement in respect of these areas, as shown in the following tables: Scott Egan, Group Chief Financial Officer (30% weighting – achieved 22.5%) Overview Progress
Scott’s objectives included: • Strategy work: centred on effective Group planning and benchmarking, upgrading of Finance function and introduction of zero based budgeting.
• Financial delivery: driving achievement of Group’s financial plans, legacy disposal and debt repurchase, capital plans and ratings, investment income and functional cost goals.
Stephen Hester, Group Chief Executive (30% weighting – achieved 22.5%) Overview Progress
Stephen’s objectives included: • Strategy work: driving Best in Class capability improvements and sustaining plan trajectory.
• Financial delivery: driving achievement of Group’s financial and capital plans, focused particularly on controllables including cost.
• Customer progress: driving initiatives to improve customer service and resume profitable growth.
Long-term incentive awards vesting from 2015-17 cycle Conditional long-term incentive awards were granted in 2015. In 2018, these Performance Shares will partially vest at 58% of the maximum, based on the achievement of the three performance conditions described below.
Group underlying ROTE (33.3% weighting – achieved 24.4%) The Group underlying ROTE required for an on-target vesting (62.5% vesting) was a three-year average of 12% as envisaged by RSA’s operating plan for the period and being a level significantly in excess of the Group’s cost of equity. The average achieved was 13.1%, up from the 11.2% achieved for the 2014-16 LTIP cycle. The target average was arithmetically less than the mid-point of the 11-16% range reflecting the nature of the turnaround where ROTE performance was targeted to improve substantially over the three year averaging period taking into account the operating plan. For context, in the year prior to this LTIP cycle, i.e. 2014, RSA’s ROTE result was 9.7%. RSA’s continuing progress allowed the on-target value required for the 2016-18 LTIP cycle to be set higher to reflect progress of the turnaround and to continue to incorporate an appropriate degree of stretch, and the ROTE target range itself was increased for the 2017-19 LTIP cycle.
Business Review Scorecard See narrative See narrative See narrative 33.3% 33.3%
Notes: 1. Relative TSR index of comparators includes: Admiral, Allianz, Aviva, Chubb (formerly ACE), Direct Line, Gjensidige Forsikring, Hiscox, Intact, Mapfre, QBE, Topdanmark, Tryg and Zurich. Amlin and Catlin were originally included in the index, but were delisted during the performance period and so the Committee determined to exclude them from the calculation. A straight-line calculation is applied to determine the portion of awards that vest for performance between the threshold and maximum targets.
2. Group underlying ROTE is calculated on a three-year average basis. A straight-line calculation was applied to determine the portion of awards that vest for performance between threshold and on-target, and between on-target and maximum. The average required for on-target vesting (62.5% vesting) in this cycle was 12%.
The 2015-17 LTIP period captures the bulk of the Company’s turnaround activity following the recovery plan road map laid out in 2014. The Committee reviewed how the Business Review activities that make up this plan have succeeded. It considered that excellent progress had been made with significant improvement in capability and performance. RSA’s widely acclaimed transformation is shown across all the metrics below and drove the ROTE outperformance. The Committee’s assessment of the Business Review Scorecard is therefore at the same level as for the Scorecard in the 2014-16 LTIP last year.
Notes: 1. Solvency II coverage ratio was introduced as a measure of capital strength to reflect the new Solvency II regime implemented from 1 January 2016, replacing IGD and ECA, as noted in the 2015 Annual Report and Accounts on page 67.
2. Cumulative earnings defined in common with the underlying ROTE measure of earnings adjusted for disposal gains and restructuring charges which were also key management activities. The Committee assessed all other items falling outside of this definition to determine if they should adjust the Committee’s view of progress upwards or downwards (namely non-cash, non-capital accounting items). Comparison is versus original 2015-17 Plans incorporating the planned costs and benefits of the additional cost programmes announced subsequently.
4. These indicators were not separately listed in the Scorecard Key Performance Indicators but were key underlying targets and reviewed by the Committee as additional context on the transformation. Defined on a Core Group basis. Attritional loss ratio excludes Claims Handling Expenses (which are captured in the expense measure).
Valued using an average share price over the last quarter of 2017 of £6.142. 2. Scott Egan was appointed effective 1 October 2015, and does not have awards in this cycle.
Long-term incentive awards granted in 2017 Conditional long-term incentive awards were made to the Group Chief Executive and Group Chief Financial Officer on 3 March 2017. These Performance Share awards will vest in 2020, subject to the satisfaction of the plan’s performance conditions based on Group underlying ROTE, relative Total Shareholder Return and a Business Scorecard.
straight-line calculation is applied to determine the portion of awards that vest for performance between the threshold and maximum targets. 2. Group underlying ROTE will be calculated on a three-year average basis. A straight-line calculation is applied to determine the portion of awards that vest for performance between threshold and on-target, and between on-target and maximum. The average required for on-target vesting (62.5% vesting) is positioned requiring demanding increases in underlying performance vs 2016 and is considered commercially sensitive because it is set in line with, and therefore signals, the Group’s forward plan for the period. Disclosure will be provided retrospectively following the end of the performance period.
4. The face value of the award is calculated as the maximum number of shares that would vest if all performance measures and targets are met at maximum, multiplied by the mid-market closing price of an RSA ordinary share averaged over the five business days preceding the date of grant (3 March 2017), of £5.972.
Material financial misstatement of results for any financial year or the material financial loss/under-performance of a business unit that could have been reasonably risk-managed
Material financial loss of a business unit as a result of circumstances that should reasonably have been risk-managed by the individual
Error or material misstatement leading to an overpayment Material error or financial misstatement of results which has resulted in an overpayment
Deterioration in the financial health of the Company leading to severe financial constraint
Required shareholding level Unvested scheme interests held at 31 December 2017
Shares owned outright and counting towards shareholding at 31 December 20171 Valuation2
Notes: 1. Shareholding figures do not include unvested share awards in the Group’s incentive plans (i.e. Deferred Bonus Shares and Performance Shares), which are shown separately in the above table. 2. The valuation is against the mid-market closing price of an RSA ordinary share as at 31 December 2017 of £6.325 per share. 3. Calculated using the gross annual base salary as at 31 December 2017. 4. Includes Deferred Bonus Shares as detailed in the following table. 5. Includes Performance Shares as detailed in the following table.
Scheme interests held by Executive Directors Details of Executive Directors’ existing awards in the Company’s share plans for the financial year are set out in the following table. The interests shown were granted under the long-term incentive plan approved by shareholders at the 2014 AGM, the Performance Share Plan (PSP).
7. Payments to former Directors (audited) No payments were made to former Directors in 2017.
RSA’s TSR performance relative to the indices is shown over the nine years from 31 December 2008 to 31 December 2017. 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.
Notes: 1. Martin Scicluna was appointed Executive Chairman effective 13 December 2013 until 4 February 2014. 2. Stephen Hester was appointed Group Chief Executive effective 5 February 2014 and did not have any long-term incentive awards in the 2012-14 and 2013-15 cycles. 3. Details of the 2016 and 2017 figures are given on pages 73 to 77.
9. Percentage change in remuneration The table below sets out the percentage change in salary, benefits and bonus for the individual undertaking the most senior Executive Director role in the Company compared with Group employees on average between 2016 and 2017.
10. Relative importance of spend on pay The table below shows the all-employee pay spend and returns to shareholders by way of dividends for 2017. Figures from 2016 are provided for comparison. The employee pay data covers the Group’s employees globally, and therefore includes the impact of exchange rate changes.
Minimum remuneration receivable: • Fixed remuneration (includes the value of base salary and pension for 2018, and benefits based on the value included in the total remuneration ‘single figure’ for 2017)
Note: 1. There are no assumptions relating to share price growth or dividend equivalents included in the above scenarios.
The remuneration structure is intended to promote the long-term interests of the Company and its shareholders. The table below illustrates when each variable component of the Executive Directors’ remuneration package would be delivered to them once any performance conditions or other restrictions have ended.
In respect of benefits and pension, the Policy will continue to be implemented the same way as it was at the end of 2017.
The Business Scorecard component focuses on key areas of management activity essential to the success of the Company including Underlying Performance, Risk and Resilience and Business Sustainability (including Customer franchise). The Personal Scorecard consists of SMART objectives bespoke to each Director, with a focus on both what is achieved and how goals are delivered.
For the 2018 grant, performance measures will be assessed against a performance period of 1 January 2018 to 31 December 2020, taking into account underlying business performance and material risk factors.
Performance measures 2018–20 Weighting Threshold target: 25% vesting Maximum target: 100% vesting
Notes: 1. The TSR index of comparators for this cycle includes: Admiral, Allianz, Aviva, Chubb, Direct Line, Gjensidige Forsikring, Hiscox, Intact, Mapfre, QBE, Topdanmark,
Note: 1. A fee of £5,000 applies for each committee a Non-Executive Director is a member of other than as Committee Chairman.
5% over 10 years for discretionary schemes, including long-term incentives 2.37%
15. Directors’ contracts The Executive Directors’ service agreements became effective on the following dates: Executive Director Effective date
Note: 1. Hugh Mitchell is retiring as a Non-Executive Director with effect from the Company’s 2018 AGM on 11 May 2018.
For ease of reference, elements of the Policy referenced in Committee activity during 2017 are re-presented on the following pages 86 to 92, including the policy tables and information on Directors’ contractual terms. The full Policy Report is contained in the 2016 Annual Report and Accounts (pages 80 to 87), which is available at www.rsagroup.com/financial-reporting.
2. RSA’s remuneration principles The remuneration philosophy and strategy are directly informed by the business strategy. The remuneration principles that the Group Remuneration Committee (‘the Committee’) follows are: • Remuneration is aligned to the long-term term interests of the Company, its business strategy and performance; • The remuneration framework is designed to promote sound and effective risk management in line with the company’s risk profile; • Each component of the total remuneration package is simple and transparent, so as to be effective and understood by executives, shareholders and regulators; • Pay is linked to performance, with variable remuneration fully contingent on the achievement of stretching short- and long-term objectives which directly support the achievement of strategic priorities and are aligned to shareholders’ interests; • 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; • Competitive remuneration packages are offered in order to attract, retain and reward the levels of high calibre talent which are essential to RSA’s success in today’s competitive global insurance market; and
Some benefits are delivered as taxable cash-in-lieu allowances. Tax changes are not compensated.
Benefits are determined with reference to market practice within the same peer group companies referred to in respect of salaries. The Committee can also source information from bespoke benefit surveys to aid decision-making.
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 92.
The Committee can exercise discretion to change the bonus measures, how they are weighted, calculated and targeted. It can adjust bonus outcomes provided this is appropriate and in shareholders’ interests, including adjustment downwards for current or future risk exposure, and make such amendments as are necessary to respond to regulatory, legal or accounting requirements. Shareholders will be notified if this has been carried out by disclosure in the relevant Directors’ Remuneration Report.
– no bonus • Threshold – 10% of maximum opportunity • Target – 50% of maximum opportunity • Maximum – 100% of maximum opportunity
Vested shares must be retained until the relevant shareholding level is reached, excluding any sold to satisfy statutory deductions, as detailed on page 92.
Awards are subject to the Malus and Clawback Policy, which is reviewed annually, and is noted on page 78.
Dividend equivalents accrue during the performance period and are added to the shares that vest.
The Committee can act within the parameters of the Plan’s rules as approved by shareholders and its performance conditions, enabling the LTIP to be appropriately administered under both normal and exceptional circumstances.1 The Committee can make such amendments as may be necessary to respond to legal, accounting or regulatory changes. Awards can be reduced or otherwise amended, provided the action is fair and justifiable, for example, to guard against a windfall award or the converse generated by an accounting treatment. Vesting can be adjusted downwards for current or future risk exposure.
For recruitment purposes, or in highly exceptional circumstances, such as for retention, the Committee may agree to a conditional performance-related award being made up to an additional 170% of salary. This would be considered a ‘oneoff ’ award. Where an exceptional award is made, full disclosure will be given on the rationale.
Notes: 1. The current LTIP, referred to as the Performance Share Plan 2014 (PSP), was approved by shareholders at the 2014 AGM. It is also used as a vehicle for granting deferred bonus shares, and restricted shares where these are awarded as part of an Executive Director buy-out as noted on page 89.
2. The overall remuneration principles in this Policy apply across the Group. Employee remuneration packages are set with reference to the relevant competitive markets in which the Group operates, and remuneration levels therefore reflect differences in location and job role. All permanent UK-based employees are eligible to receive a bonus award, but deferral is only operated for senior leaders and where required by Solvency II. The LTIP policy provisions are the same for all other participants who receive performance-based awards, with exception to the two-year post-vesting retention period which only covers Executive Directors. LTIP award opportunities vary for individuals below the Board. Members of the Executive Team and selected senior leaders across the Group are also required to hold shares in RSA.
• Same as those offered to current Executive Directors, but the Committee may exercise judgement to flex the package to accommodate any specific terms bespoke to the individual, e.g. related to health, annual leave, pension or insurance benefits.
• If the director is entered into an RSA LTIP and made an award of Performance Shares, these will be subject to the same performance conditions and vesting terms as applies to other plan participants.
Buy-outs • Where the Director is an external appointment, the Committee may agree to a compensatory package reflecting the value and terms of incentives or benefits forfeited upon resignation. – This will only be permitted on receipt of reasonable evidence of loss. – Typically, the form of award that is being forfeited (e.g. cash or shares) will be replaced by the same form of award at RSA.
– Performance-linked awards will normally only be compensated with Restricted Shares where a performance condition has been achieved or is nearing testing and there is a reasonable expectation of the vesting level.
– Cash bonuses may be bought out with Restricted Shares in order to give the Director an early ‘stake’ in RSA. – The Committee may agree to reduce the value of the compensatory award below the anticipated or actual loss value if the compensation is paid at an advanced date (i.e. early settlement).
5. Service contracts and policy for payments on loss of office Each of the Executive Directors is employed under a service agreement, which contains a variety of contractual terms and conditions. Contracts are available for inspection by shareholders at the Company’s registered office. Terms are designed to ensure fair treatment for departing executives while avoiding reward for failure.
• In the case of summary dismissal, no notice will be served by the Company and no compensation will be paid in lieu of it.
• Notice periods are approved by the Committee, and at its discretion, can be reduced in the event an Executive Director resigns and wishes to leave prior to the end of his or her contractual notice period.
• The Company can require accrued annual leave related to the year of termination to be used during a notice period or garden leave, although payment of untaken days can alternatively be made in lieu.
Garden leave • The Company has the contractual right to place the Executive Directors on garden leave for part, or all, of their notice period.
• Salary, benefits and pension contributions continue during garden leave, but this time will not count towards the calculation of any Annual Bonus award that may subsequently be due.
• A Director may be paid in lieu of an unexpired portion of their notice period, covering base salary, pension and benefits, regardless of which party has served notice.
• Generally, in the event of termination and in all cases of termination on performance grounds, PILON would be made on a phased basis subject to mitigation, and would be reduced or ceased if the Director starts to receive payment or remuneration from alternative employment.
• In the normal course of events, reasonable professional fees may be paid in relation to a Director’s employment termination.
• Restrictive covenants are in place to help protect RSA’s interests should the individual leave the Company for any reason.
• Executive Directors may hold one external non-executive position of a FTSE 100 company 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.
• In cases of death in service and, with Committee discretion, medical severance, awards can vest sooner than the scheduled date.
• In cases of death in service and, with Committee discretion, medical severance, performance conditions can be tested early and awards vest sooner than the scheduled date.
• Performance conditions are tested early and awards can vest sooner than the scheduled date.
• Executive Directors must build up a shareholding in RSA according to specified levels, expressed as a salary multiple.
• The shareholding levels to be reached are: – Group Chief Executive: 300% of salary – Other Executive Directors: 200% of salary
• The shares which count towards the holding level are those held either in the executive’s own right or that of immediate family members and any awarded by RSA which cease to be bound by any performance or service conditions. Vested Performance Shares count towards the holding level during the two-year retention period.
• The shareholding levels were determined with reference to the practice across the Company’s benchmark peer groups.
8. Policy for Non-Executive Directors The following table outlines the components of Non-Executive Directors’ remuneration: Purpose and Strategic Link Operation and maximum level of remuneration
• Non-Executive Directors (aside from the Chairman) receive a base fee, further fees are then paid to reflect membership of a committee, and for chairing a committee. A separate fee is paid to the Senior Independent Director.
• Director Fees will not exceed the limit stated in the Company’s Articles of Association, as approved by shareholders.
• Fees are paid in cash, subject to any required statutory deductions.
• The Company has the discretion to introduce new fees or change the Non-Executive Directors’ terms.
• Non-Executive Directors may claim expenses in accordance with RSA’s business and travel policies, including tax thereon where such expenses do not qualify for tax relief.
The Companies Act 2006 also requires the Company to provide a Directors’ Report for the year ended 31 December 2017. The information that fulfils this requirement and which is incorporated by reference into, and forms part of, this report is set out on pages 4 to 96 and includes the information on financial risk management objectives and policies contained in Note 5 in the consolidated financial statements.
• The Company’s exposure to price risk, underwriting risk, reserving risk, credit risk, liquidity risk and cashflow risk
A full list of the Group’s subsidiaries and related undertakings is in Appendix B on pages 175 to 178.
The Directors have determined that a three year period is an appropriate basis to provide its viability statement as the operational planning process focuses on this period and is aligned to the short-tail nature of insurance contracts that the business underwrites.
The directors have also considered the prospects of the Group through review of the longer term strategy as set in the Strategic Report on pages 4 to 41 and the principal risks and uncertainties that are of a longer term nature, as detailed in the Risk Management Report on pages 33 to 37.
Going concern The Board has reviewed the Group’s ongoing commitments for the next twelve months and beyond. The Board’s review included the Group’s strategic plans and updated forecasts, capital position, liquidity including credit facilities and investment portfolio.
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 Preference Shares are entitled to a fixed income, but the Ordinary Shares carry no right to a fixed income. The Preference Shares rank on a winding-up in priority to the Ordinary Shares.
As at 31 December 2017, the Ordinary Shares and Preference Shares represented 89 percent and 11 percent respectively of the Company’s total issued share capital. Directors are limited as to the number of shares they can allot (save in respect of employee share schemes). Renewal of the directors’ authorities to allot shares will be sought at the 2018 AGM. In addition, directors are restricted by the limits set out by the Investment Association. During 2017, the directors exercised their authorities to allot shares only in respect of employee share schemes.
The directors are not aware of any agreements between the Company’s shareholders that may result in restrictions on the transfer of securities or on voting rights. 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 102,016,572 of its own Ordinary Shares (representing 10 percent of its issued share capital as at 14 March 2017), was passed at the 2017 AGM. This authority will expire at the conclusion of the 2018 AGM and a new authority will be sought. The authority was not exercised during 2017. Other than the standard compulsory transfer provisions in respect of US shareholders contained in the Company’s Articles of Association, there are no specific restrictions on the size of a shareholding nor on the transfer of shares, which are both governed by the general provisions of the Articles of Association and legislation.
Conflicts of interest and related party transactions In accordance with section 175 of the Companies Act 2006, each director has a duty to avoid conflicts of interest. Under Articles 91 and 92 of the Company’s Articles of Association, conflicts of interest may be authorised by the Board or a Board Committee. Directors are required to notify the Company Secretary when a potential conflict of interest arises. Each director’s conflicts of interest are reviewed on an annual basis. Any director who has declared a conflict of interest shall not count towards the quorum or vote on any resolution to authorise the conflict of interest and, at the Board’s discretion, may be excluded from any meeting at which the conflict of interest is under consideration. Where a conflict of interest is authorised, restrictions may be imposed on the conflicted director, such as excluding the director from the discussion or restricting the receipt of information in connection with the conflict of interest. The Board confirms that it has reviewed the schedule of directors’ conflicts of interest during the year and that the procedure in place
Essential contracts and change of control The Company does not consider that there are any significant agreements to which the Company is a party that take effect, alter or terminate upon a change of control of the Company following a takeover bid that are required to be disclosed pursuant to paragraph 13(2) (j) of Schedule 7 of the Large and Medium Sized Companies and Groups (Accounts and Reports) Regulations 2008 (as amended).
Employment information The Group recognises and actively promotes the benefits of a diverse workforce and is committed to treating all employees with dignity and respect regardless of race, gender, disability, age, religion or belief. We therefore welcome applications from all sections of the community. The Group is committed, wherever possible, to employing and supporting people who are disabled, or become disabled during their career with the Group. Our ‘Equal Opportunities’ and ‘Dignity at Work’ policies support this commitment to employees.
The Group has a close working relationship with trade unions and employee associations in all parts of the business where they exist and consults with employees and representatives on relevant matters, taking their views into consideration. The European Works Council (‘EWC’) consults with employee representatives on transnational matters across UK, Ireland, Sweden, Norway, Denmark, France, Spain, the Netherlands, Belgium and Germany. The annual meeting of the EWC took place in Rotterdam in March 2017. Regular consultations with employee representatives took place throughout the year.
More information on employees can be found on pages 40, 41 and 56.
The Company’s current Articles of Association are available on the Company’s website at www.rsagroup.com/articles.
The table below shows the holdings of major shareholders as disclosed to the Company in accordance with the Disclosure Guidance and Transparency Rules (DTR) as at 31 December 2017 and at the date of this Report.
Shares % of voting rights Nature of holding No of Ordinary
values independently assured by PwC in accordance with ISAE 3000 (Revised) and ISAE 3410. For further information, please refer to our reporting criteria and PwC’s assurance opinion which can be found on our Corporate Responsibility pages at www. rsagroup.com/responsibility
Business travel: Emissions from flights, trains, taxis, hotels and vehicles not owned by the organisation.
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 above include emissions from all operations with 50 or more full time equivalent employees, covering the period 1 January 2017 – 31 December 2017.
Modern Slavery As per section 54(1) of the Modern Slavery Act 2015, our Slavery and Human Trafficking Statement is published annually on our Group website. The statement covers the activities of RSA Insurance Group plc and its subsidiaries and details policies, processes and actions we have taken to ensure that slavery and human trafficking are not taking place in our supply chains or any part of our own business.
Directors’ Responsibility Statement The Directors’ Responsibility Statement appears on page 98 and is incorporated by reference into this Report.
Group Consolidated Financial Statements Directors’ responsibilities 98 Independent auditor’s report 99 Primary statements 106
Significant Transactions and Events 6 Discontinued operations and disposals 127 7 Reorganisation costs 130
Other Commitments and Contingent Liabilities 43 Other commitments 170 44 Other contingent liabilities 170
Appendices A Other accounting policies 171 B Subsidiaries and associates 175
The Directors are responsible for preparing the Annual Report and Accounts and the Group and Parent Company financial statements in accordance with applicable law and regulations.
Company law requires the Directors to prepare Group and Parent Company financial statements for each financial year. Under that law they are required to prepare both the Group and the Parent Company financial statements in accordance with International Financial Reporting Standards as adopted by the European Union (IFRSs as adopted by the EU) and applicable law.
Under company law the Directors must not approve the financial statements unless they are satisfied that they give a true and fair view of the state of affairs of the Group and Parent Company and of the profit or loss of the Group for that period. In preparing each of the Group and Parent Company financial statements, the Directors are required to: • select suitable accounting policies and then apply them consistently; • make judgements and estimates that are reasonable, relevant and prudent; • state whether they have been prepared in accordance with IFRSs as adopted by the EU; • assess the Group and Parent Company’s ability to continue as a going concern, disclosing, as applicable, matters related to going concern.
Under applicable law and regulations, the Directors are also responsible for preparing a Strategic Report, Directors’ and Corporate Governance Report, Directors’ Remuneration Report and Corporate Governance Statement that comply with that law and those regulations.
Responsibility statement We confirm that to the best of our knowledge: • The financial statements on pages 106 to 185, prepared in accordance with the applicable set of accounting standards, give a true and fair view of the financial position of the Group and Parent Company and profit or loss of the Group; and
• The Management Report on pages 4 to 96 includes a fair review of the development and performance of the business and the position of the Group, together with a description of the principal risks and uncertainties the Group face.
In our opinion: • The financial statements give a true and fair view of the state of the Group’s, and of the Parent Company’s affairs as at 31 December 2017 and of the Group’s profit for the year then ended; • The Group financial statements have been properly prepared in accordance with International Financial Reporting Standards as adopted by the European Union (IFRSs as adopted by the EU); • The Parent Company financial statements have been properly prepared in accordance with IFRSs as adopted by the EU and as applied in accordance with the provisions of the Companies Act 2006; and
• The financial statements have been prepared in accordance with the Group requirements of the Companies Act 2006 and, Article 4 of the IAS Regulation.
Insurance liabilities (2017: £9,477 million gross, £7,954 million net; 2016: £9,365 million gross, £7,929 million net)
Refer to page 62 (Group Audit Committee Report), page 112 (accounting policy) and pages 158 to 162 (financial disclosures)
Subjective valuation Insurance liabilities represent the single largest liability for the Group. Valuation of these liabilities is highly judgmental because it requires a number of assumptions to be made with high estimation uncertainty such as loss ratios, estimates of the frequency and severity of claims and, where appropriate, the discount rates for longer tail classes of business by territory and line of business. The determination and application of the methodology and performance of the calculations are also complex.
A margin is added to the actuarial best estimate of insurance liabilities to make allowance for specific risks and uncertainties that are not specifically allowed for in establishing the actuarial best estimate. The appropriate margin to recognise is a subjective judgement and estimate taken by the directors, based on the perceived uncertainty and potential for volatility in the underlying claims.
With the assistance of our actuarial specialists, we performed the following procedures: • Control design and observation: Evaluation of the governance around the overall Group reserving process, including the scrutiny applied by the Local, Regional and Group Reserving committees, as well as Group level actuarial reviews. We assessed qualifications and experience of those responsible and examined the output of the reviews to assess the scope and depth of these processes. Our evaluation of the methodologies and key assumptions for the most significant and subjective classes of business enabled us to assess the quality of challenge applied through the Group’s reserving process.
• Independent re-performance: Independent re-projection of the reserve balances using our own models for certain classes of business. The determination of which classes to reproject was based on risk assessment and consideration of the evidence available from other alternative data analysis procedures.
• Sector experience and Benchmarking: Comparison of assumptions, reserving methodologies and estimates of losses to expectations based on the Group’s historical experience, current trends, externally-derived data and benchmarking against industry trends including information relating to forthcoming legislation that may affect claims settlement speed or amount.
• Sensitivity analysis: Review of sensitivity analysis over key judgements and assumptions, such as the discount rates for longer tail classes of business and Periodic Payment Order projections.
• In addition, we tested the operation of controls over the valuation of individual claims reserves, such as large loss review controls, internal peer reviews and claims approvals. We assessed whether such controls were performed in line with the Group’s policies and with reference to underlying claims data.
• We also compared samples of claims case reserves, including large loss reserves, to appropriate documentation, such as reports from loss adjusters in order to test valuation of individual claims reserves. We used sampling techniques and data analysis to focus our procedures on significant or anomalous claims.
• Assessing transparency: Considering the adequacy of the Group’s disclosures in respect of the insurance contract liabilities.
IT systems and control environment Refer to page 62 (Group Audit Committee Report).
• Extended scope: Where general IT controls and compensating manual controls did not operate to mitigate a risk, we performed additional substantive testing, such as using extended sample sizes and performing data analysis routines over impacted accounts to test the integrity of the transactional level data that is flowing into the Group financial statements.
Refer to page 62 (Group Audit Committee Report), page 116 (accounting policy) and pages 163 to 168 (financial disclosures).
The valuation of defined benefit pension obligations is dependent upon complete and accurate data about the members of the pension scheme.
With the assistance of our own pension actuarial specialists, our procedures included: • Membership data: Compared the data received from the third party administrator of the pension scheme to the data sent to the third party external expert who valued the pension obligation.
• Assessing transparency: Considering the adequacy of the Group’s disclosures in respect of the sensitivity of the defined pension obligation to these assumptions.
Refer to page 62 (Group Audit Committee Report), page 115 (accounting policy) and pages 153 to 154 (financial disclosures).
• Historical comparisons and our sector experience: Comparing the expected growth rates to the Group’s approved operating plan and assessing the accuracy of that forecasting process in the past. We considered whether projected margins are achievable with reference to the business’s recent performance and operating plans, as well as our own industry knowledge.
• Own tax expertise: With the support of our own tax specialists and their knowledge of tax legislation, we also assessed the extent to which projected profits were taxable, in particular the Group’s assumptions about how accumulated tax losses and other associated tax attributes can be utilised within the group against UK business, and RSAI plc as the taxable legal entity, in particular.
Recoverability of Parent Company’s investment in subsidiaries (2017: £5,765 million, 2016: £4,970 million)
Subjective valuation The Parent Company holds its investment in subsidiaries at fair value, representing 72% (2016: 65%) of the company’s total assets. For the most significant subsidiary, fair value is based on market value of the Group, after adjusting for certain items. Whilst there is not a high degree of subjectivity, the estimation of some of the adjusting items is dependent on assumptions of future cash flows discounted to present value.
Our procedures included: • Comparing valuations: We compared the market value of the Group, used as the base for the Company’s valuation, to an independent source of market capitalisation.
• Historical comparisons: In respect of the adjusting items, we compared the expected cash flows to the Group’s operating plan, and considered the historical accuracy of previous projections.
Our results • We found the assessment of the recoverability of the Parent Company’s investment in subsidiaries to be acceptable.
Determining Group materiality The materiality for the Group financial statements as a whole was set at £35m (2016: £35m) determined with reference to a benchmark of net earned premiums of £6,605m (2016: £6,340m), of which it represents 0.5% (2016: 0.6%). We continue to believe that the benchmark of net earned premiums is a fair reflection of revenue from the Group’s operations as it is not subject to the volatility arising from multi-year insurance contracts that net written premium would be. We have not considered profit before tax to be a suitable benchmark due to historical volatility in this metric.
4) We have nothing to report on going concern We are required to report to you if: • We have anything material to add or draw attention to in relation to the directors’ statement in note 1 to the financial statements on the use of the going concern basis of accounting with no material uncertainties that may cast significant doubt over the Group and Company’s use of that basis for a period of at least twelve months from the date of approval of the financial statements; or
• in our opinion those reports have been prepared in accordance with the Companies Act 2006.
• The directors’ explanation in the Company’s viability statement of how they have assessed the prospects of the Group, over what period they have done so and why they considered that period to be appropriate, and their statement as to whether they have a reasonable expectation that the Group will be able to continue in operation and meet its liabilities as they fall due over the period of their assessment, including any related disclosures drawing attention to any necessary qualifications or assumptions.
Under the Companies Act 2006, we are required to report to you if, in our opinion: • adequate accounting records have not been kept by the parent Company, or returns adequate for our audit have not been received from branches not visited by us; or
• the Parent Company financial statements and the part of the Directors’ Remuneration Report to be audited are not in agreement with the accounting records and returns; or
Auditor’s responsibilities Our objectives are to obtain reasonable assurance about whether the financial statements as a whole are free from material misstatement, whether due to fraud, other irregularities (see below), or error, and to issue our opinion in an auditor’s report. Reasonable assurance is a high level of assurance, but does not guarantee that an audit conducted in accordance with ISAs (UK) will always detect a material misstatement when it exists. Misstatements can arise from fraud, other irregularities or error and are considered material if, individually or in aggregate, they could reasonably be expected to influence the economic decisions of users taken on the basis of the financial statements.
In addition, we considered the impact of laws and regulations in the specific areas of regulatory capital, conduct, and market abuse regulations, and certain aspects of company legislation recognising the financial and regulated nature of the Group’s activities. With the exception of any known or possible noncompliance, and as required by auditing standards, our work in respect of these was limited to enquiry of the directors and other management and inspection of regulatory and legal correspondence. We considered the effect of any known or possible non-compliance in these areas as part of our procedures on the related financial statement items.
We communicated identified laws and regulations throughout our team and remained alert to any indications of noncompliance throughout the audit. This included communication from the Group to component audit teams of relevant laws and regulations identified at group level, with a request to report on any indications of potential existence of irregularities in these areas, or other areas directly identified by the component team.
As with any audit, there remained a higher risk of non-detection of irregularities, as these may involve collusion, forgery, intentional omissions, misrepresentations, or the override of internal controls.
Stuart Crisp (Senior Statutory Auditor) for and on behalf of KPMG LLP, Statutory Auditor Chartered Accountants 15 Canada Square London E14 5GL
Profit on disposal of business and realised gains on held for sale assets 6(iii) 69 –
Items from continuing operations that may be reclassified to the income statement: Exchange (losses)/gains net of tax on translation of foreign operations 21 (36) 228
Fair value (losses)/gains on available for sale financial assets net of tax 21 (197) 151
Other comprehensive (expense)/income for the year from continuing operations (187) 64
Total comprehensive income for the year from continuing operations 135 111
Non-controlling interests from continuing operations 18 13 from discontinued operations – (1)
Total comprehensive income Profit for the year – – – – – – – 27 27 – (7) 20 Other comprehensive income/(expense) (note 21) – – – – 181 – 299 (315) 165 – 19 184
Changes in shareholders’ interests in subsidiaries – – – – (6) – – (3) (9) – (6) (15) Total transactions with owners of the Group 3 3 – – 22 – – (147) (119) – (9) (128)
Shares issued for cash (note 32) 1 3 – – – – – – 4 – – 4 Share based payments (note 18/32) 2 – – – – – – 14 16 – – 16 Issue of Tier 1 notes (note 33) – – – – – – – – – 297 – 297 Other reserve transfer – – – – (7) – – 7 – – – –
Changes in shareholders’ interests in subsidiaries – – – – – – – 1 1 – 12 13 Total transactions with owners of the Group 3 3 – – (7) – – (178) (179) 297 2 120
Consolidated Statement of Changes in Equity for the year ended 31 December 2017
Assets of operations classified as held for sale 6(ii) 668 807
Liabilities of operations classified as held for sale 6(ii) 668 750
The attached notes on pages 111 to 178 form an integral part of these consolidated financial statements.
The financial statements were approved on 21 February 2018 by the Board of Directors and are signed on its behalf by: Scott Egan Group Chief Financial Officer
Net cash flows from operating activities – continuing operations 365 (17)
Net cash flows from operating activities – discontinued operations – (18)
Cash element of reinsurance premium on UK Legacy assets 6(ii) (96) –
Effect of changes in foreign exchange on cash and cash equivalents (11) 92
Cash and cash equivalents at the end of the year 31 1,049 1,087
Notes: 1. A reconciliation of net profit before tax to cash flow from operating activities is now shown as a separate note.
Consolidated Statement of Cash Flows for the year ended 31 December 2017
RSA Insurance Group plc (the ‘Company’) is a public limited company incorporated and domiciled in England and Wales. The Company through its subsidiaries and associates (together the ‘Group’ or ‘RSA’) provides personal and commercial insurance products to its global customer base, principally in the UK, Ireland, Middle East (together ‘UK & International’), Scandinavia and Canada.
The remaining balances are of a mixed nature. The current and non-current portions of such balances are in the notes on pages 111 to 178 or in the Risk and Capital Management note (note 5).
Except where otherwise stated, all figures included in the consolidated financial statements are presented in millions of pounds sterling (£m).
IFRS 17 ‘Insurance Contracts’ The International Accounting Standards Board (IASB) issued IFRS 17 ‘Insurance Contracts’ in May 2017, which it is expected will replace IFRS 4 ‘Insurance Contracts’ at the latest for annual reporting periods beginning on or after 1 January 2021. A Transitional Resource Group has been set up by the IASB to support implementation of the new standard. The European Financial Reporting Advisory Group (EFRAG) have been requested by the European Commission to provide their advice by the end of 2018 which should lead to endorsement some time in 2019. There is currently no certainty of what the endorsement process will be if this has not happened by the time the UK leaves the EU, and RSA continue to monitor this.
IFRS 15 ‘Revenue Recognition’ IFRS 15 ‘Revenue Recognition’ is effective from 1 January 2018 and does not apply to insurance and financial instrument income. The impact of IFRS 15 on the recognition of relevant revenue has been evaluated during the year with no significant changes identified.
The Group has completed an initial assessment of the potential impact of adopting the standard but has still to complete its detailed assessment or to incorporate into its financial reporting systems and processes, which will take place during 2018. The actual impact of implementing IFRS 16 on the Group’s financial statements will depend on future economic conditions, including the Group’s borrowing rate at 1 January 2019, the composition of the Group’s lease portfolio at that date, the Group’s latest assessment of whether it will exercise any lease renewal options and the extent to which the group chooses to use practical expedients and recognition exemptions.
Other standards The following amended standards and interpretations are not expected to have a significant impact on the Group’s consolidated financial statements: • Annual improvement to IFRSs 2014-2016 Cycle – Amendments to IFRS 1 and IAS 28; • Classification and Measurement of Share-based Payment Transactions (Amendments to IFRS 2); • Transfers of Investment Property (Amendments to IAS 40); • Sale or Contribution of Assets between an Investor and its Associate or Joint Venture (Amendments to IFRS 10 and IAS 28); • IFRIC 22 Foreign Currency Transactions and Advance Consideration; • IFRIC 23 Uncertainty over Income Tax Treatments.
The Group has not made any significant changes to its accounting policies during 2017.
Gross claims incurred and insurance contract liabilities Gross claims incurred represent the cost of agreeing and settling insurance claims on insurance contracts underwritten by the Group. Provisions for losses and loss adjustment expenses are recognised at the estimated ultimate cost, net of expected salvage and subrogation recoveries when a claim is incurred.
Further information on net claims can be found in note 10, and insurance contract liabilities in note 37.
Classification and measurement of financial assets and financial liabilities The Group initially recognises financial instruments at their fair value on the date at which they are purchased.
Designated fair value through profit & loss (FVTPL) on initial recognition
Consist of cash and highly liquid investments that are readily convertible into a known amount of cash, are subject to insignificant risk of changes in value and have a maturity date of 90 days or less from the date of acquisition
Loans and receivables Loans, reinsurance deposits, other deposits and financial assets arising from noninvestment activities, and loans made for investment purposes
Loan capital Financial liabilities with fixed or determinable payments and maturity date
Derivatives are carried as assets when fair value is positive and as liabilities when fair value is negative
Hedge of future cash flows – effective portion is initially recognised in OCI; subsequently recognised in the income statement when the hedged cash flows affect profit or loss
Investment income Dividends on equity investments are recognised as investment income in the consolidated income statement on the date at which the investment is priced ‘ex dividend’. Interest income is recognised in the consolidated income statement using the effective interest rate method.
Unrealised gains and losses on AFS investments are recognised in other comprehensive income, except for impairment losses and foreign exchange gains and losses on monetary items which are recognised in the consolidated income statement. On derecognition of an investment classified as AFS, the cumulative gain or loss previously recognised in other comprehensive income is recognised in the consolidated income statement. Further information can be found in note 9.
An impairment loss in respect of debt instruments is calculated as the difference between its carrying amount and the present value of the estimated future cash flows discounted at the original effective interest rate of the instrument. Interest on the impaired asset continues to be recognised using the effective interest rate method.
Current and deferred tax Current and deferred tax are recognised in the consolidated income statement, except to the extent that the tax arises from a transaction or event recognised either in other comprehensive income or directly in equity. Any exceptions permitted under IAS12 are disclosed in the notes.
Post-retirement benefits and obligations The Group operates both defined contribution and defined benefit schemes.
The value of the net defined benefit liability/asset recognised in the consolidated statement of financial position for each individual post-retirement scheme is calculated as the difference between the present value of the defined benefit obligations of the scheme and the fair value of the scheme assets out of which the obligations are to be settled.
Goodwill Goodwill is the difference between the cost of a business acquisition and the net fair value of the identifiable assets, liabilities and contingent liabilities acquired. Goodwill is initially capitalised in the consolidated statement of financial position at cost and is subsequently recognised at cost less accumulated impairment losses. The cost of the acquisition is the amount of cash paid and the fair value of other purchase consideration.
Impairment of goodwill, other intangible assets and internally developed computer software Goodwill and intangible assets not yet available to use are subject to an impairment test on an annual basis. Other intangible assets, which includes internally generated software, are reviewed for indications of impairment on an annual basis and are subject to an impairment test only if there is an indication of impairment.
Assets and liabilities held for sale Assets and liabilities are classified as held for sale if it is considered highly probable that the carrying amount of the assets and directly associated liabilities will be recovered principally through a sale, rather than through continuing operations. This includes the expectation that the sale will be completed within 12 months of the classification date as held for sale, subject to extension in certain circumstances, including where disposals have been committed to subject to regulatory and legal approval.
The profit from discontinued operations is shown separately on the face of the income statement as a single amount. It comprises the profit or loss after tax from discontinued operations together with the gain or loss after tax recognised on completed sales or the gain or loss after tax on the discontinued operations arising from revaluing the carrying value of a held for sale operation to its fair value less costs to sell. Further information can be found in note 6(i).
In the period in which an operation is first classified as discontinued, the consolidated income statement, statement of other comprehensive income, statement of cash flows, earnings per share and diluted earnings per share for the comparative prior period is re-presented to present those operations as discontinued.
In circumstances where the Group is entering into an arrangement to make a legal transfer of a significant book of business, which includes an interim economic transfer of risk to the intended acquirer prior to obtaining court approval for the transfer, the accounting gain or loss arising from the reinsurance is considered as being incremental to the disposal and is consequently presented as a gain or loss arising from the disposal of the business.
Reorganisation costs Reorganisation costs represent external and clearly identifiable internal costs that are necessarily incurred and directly attributable to the Group’s restructuring programme. The aim of the restructuring programme is to both reduce operating costs and improve profitability. Employee termination costs are only recognised when they are part of a restructuring programme that has been communicated to those affected or when a detailed plan of redundancies is announced.
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 quarterly 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.
Reinsurance arrangements in place include proportional, excess of loss, stop loss, catastrophe and adverse development coverage. These arrangements aim to prevent the Group suffering total net insurance losses beyond the Group’s risk appetite in any one year.
Credit risk is managed at both a Group level and at a local level. Local operations are responsible for assessing and monitoring the creditworthiness of their counterparties (e.g. brokers and policyholders). Local credit committees are responsible for ensuring these exposures are within the risk appetite of the local operations. Exposure monitoring and reporting for fixed income investments and premium receivables is embedded throughout the organisation with aggregate credit positions reported and monitored at Group level.
The credit profile of the Group’s assets exposed to credit risk is shown below. The credit rating bands are provided by independent rating agencies. The table below sets out the Group’s aggregated credit risk exposure for its financial and insurance assets.
Reinsurers’ share of insurance contract liabilities1 – 617 1,574 605 45 41 2,882 636 2,246
2. The insurance and reinsurance debtors classified as not rated comprise personal policyholders and small corporate customers that do not have individual credit ratings. The overall credit risk to the Group is deemed to be low as the cover could be cancelled if payment were not received on a timely basis.
With the exception of government debt securities, the largest single aggregate credit exposure does not exceed 3% (2016: 3%) of the Group’s total financial assets.
Reinsurers’ share of insurance contract liabilities 2,246 – – – – 6 2,252 –
Loans and receivables 88 – – – – – 88 (10)
Reinsurers’ share of insurance contract liabilities 2,247 – – – – 5 2,252 –
This analysis assumes that there is no correlation between interest rate and property market rate risks. It also assumes that all other assets and liabilities remain unchanged and that no management action is taken. This analysis does not represent management’s view of future market change, but reflects management’s view of key sensitivities.
The Group manages interest rate risk by holding investment assets (predominantly fixed income) that generate cash flows which broadly match the duration of expected claim settlements and other associated costs.
iii. Currency risk The Group incurs exposure to currency risk in two ways: • Operational currency risk – by holding investments and other assets and by underwriting and incurring liabilities in currencies other than the currency of the primary environment in which the business units operate the Group is exposed to fluctuations in foreign exchange rates that can impact both its profitability and the reported value of such assets and liabilities; • Structural currency risk – by investing in overseas subsidiaries the Group is exposed to the risk that fluctuations in foreign exchange rates impact the reported profitability of foreign operations to the Group, and the value of its net investment in foreign operations
At 31 December 2017, the Group’s total shareholders’ equity deployed by currency was: Pounds Sterling £m
The following table summarises the contractual repricing or maturity dates, whichever is earlier. Provision for losses and loss adjustment expenses are presented and are analysed by remaining estimated duration until settlement.
Interest on perpetual bonds and notes 25 23 21 21 21 60 1 172
Guaranteed subordinated notes due 2045 – – – – – 400 – 400 395
Guaranteed subordinated step-up notes due 2039 – – 300 – – – – 300 298
Provisions for losses and loss adjustment expenses 3,583 1,728 1,150 805 556 1,300 1,887 11,009 9,365
Deposits received from reinsurers 67 – – – – – – 67 67
Interest on perpetual bonds and notes 63 49 32 21 21 81 2 269
Pension risk The Group is exposed to risks through its obligation to fund a number of schemes. These risks include market risk (assets not performing as well as expected), inflation risk and mortality risk over the lives of the members. The Group and trustees of the schemes work together to reduce these risks through agreement of investment policy including the use of interest rate, inflation rate and mortality swaps. Further information on the Groups management of pension risk is included within note 38.
The Group’s overall capital position is primarily comprised of shareholders’ equity, Tier 1 notes and subordinated loan capital and aims to maximise shareholder value, while maintaining financial strength and maintaining adequate regulatory capital. In addition the Group also aims to hold sufficient capital so as to maintain its single ‘A’ credit rating.
The impact on the Solvency II coverage ratio of a range of sensitivities is set out below: Unaudited
Notes: 1. Interest rate sensitivities use a non-parallel shift to reflect that the long end of the yield curve is typically more stable than the short end. 2. The IAS 19 surplus cap will dampen upside credit spread sensitivities, so these should not be extrapolated.
The above sensitivities have been considered in isolation. Should sensitivities impact in combination there may be some natural offsets between them.
The revenue, expenses and related income tax expense in 2016 relating to these discontinued operations is set out below.
Fair value gains recycled on disposal of discontinued operations net of tax – 1
Items from discontinuing operations that will not be reclassified to the income statement: Movement in property revaluation, net of tax – 2
Other comprehensive income for the year from discontinued operations – 120
Total comprehensive income for the year from discontinued operations – 93
Reclassification of items from other comprehensive income on disposals: Foreign currency translation reserve (99) (11) (110)
Losses on disposal of discontinued operations before tax on disposal (7) (10) (17)
Losses on disposal of discontinued operations after tax (19) (10) (29)
Remeasurement of disposal groups to fair value less costs to sell (204) 204 –
Assets of operations classified as held for sale 685 (17) 668
Liabilities of operations classified as held for sale 685 (17) 668
The value of insurance contract liabilities £595m (net of reinsurance £90m) as at 31 December 2016 was £834m on an undiscounted basis (excludes claims handling provision and margin).
Remeasurement of disposal groups to fair value less costs to sell (204) – – (204)
Liabilities directly associated with assets classified as held for sale: Insurance contract liabilities 685 50 – 735
Notes: 1. At 31 December 2016 it was probable that the Group would lose control over its Oman business as a result of a government required public offering of 40% of the group holding. In 2017, the actual required sale was only 25% meaning control was maintained and as a result it is no longer held for sale.
6(iii) Profit on disposal of business and realised gains on held for sale assets The net gain of £69m includes £66m relating to the realised gain on the investments transferred as part of the UK Legacy reinsurance transaction, offset by a charge of £22m on the commutation of the Group’s Adverse Development Cover reinsurance protection bought partly to protect the UK Legacy book.
The reversal of part of the valuation adjustment on the Group’s Oman business has resulted in a gain of £17m and the Group recognised a gain of £7m on the disposal of the Accident and Repairs business in the UK.
7) Reorganisation costs In 2017, the reorganisation costs of £155m (notes 8, 12 and 39) are directly associated with continuing operations (2016: £160m). The amounts are directly attributable to redundancy £68m (2016: £49m) and other restructuring activity of £87m (2016: £111m). Restructuring costs in 2017 relate to amounts incurred across the Group for activities such as process re-engineering, office footprint consolidation and reduction, reducing spans of control, and outsourcing.
Underwriting result, COR and operating result are Alternative Performance Measures (APMs), the key internal measures of profitability of the operating segments. The COR reflects the ratio of claims costs and expenses (including commission) to earned premiums, expressed as a percentage.
Central costs and other activities – – – (23) (23) – (23) – (23)
Deposits, cash and cash equivalents 5 7 – – – – – – 5 7
Net movement recognised in other comprehensive income £m £m £m £m £m £m £m £m
Gross changes in provision for losses and loss adjustment expenses 42 (14)
Reinsurers’ share of changes in provision for losses and loss adjustment expenses (74) (354)
Total other operating income 150 170 12) Other operating expenses, reorganisation costs and impairments £m £m
Notes: 1. On 7 July 2016, the Group bought back £200m of its holding of 9.375% Lower Tier 2 guaranteed subordinated step-up notes on which a premium was paid of £39m for early redemption. 2. In 2017 the Group bought back loan capital of £608m on which total premiums of £59m were paid for early redemption.
Notes to the Income Statement, Other Comprehensive Income and Distributions continued
Average number of employees during the year relating to continuing operations 13,363 13,674
Average number of employees during the year relating to discontinued operations – 754
Included in the ‘Audit related assurance services’ for 2017 is £0.9m (2016: £1.4m) of assurance work in respect of Solvency II reporting, The remainder of £0.4m (2016: £0.3m), together with ‘Other services’ of £0.1m (2016: £0.1m), is ancillary non–audit work representing in aggregate 11% (2016: 9%) of the Group IFRS audit fee of £4.7m (2016: £4.6m).
Financial statements 17) Income tax The tax amounts charged/(credited) in the income statement are as follows: 2017 £m 2016 £m
Tax at the UK rate of 19.2% (2016: 20.0%) 86 20
Increase of tax provided in respect of prior periods – 2
Different tax rates of subsidiaries operating in other jurisdictions 11 17
Remeasurement of net defined benefit pension liability – – 15 64 15 64
Total credited/(charged) to other comprehensive income 20 5 (3) 40 17 45
Current Tax Deferred Tax Current Tax Deferred Tax 18) Share based payments The total amount included within staff costs in the consolidated income statement in respect of all share scheme plans in 2017 is £16m (2016: £16m).
Performance Share Plan This plan is the Group’s current Long-Term Incentive Plan. Awards of performance shares to executive directors and other selected executives and senior managers are subject to performance conditions. These consist of the Group’s underlying return on tangible equity; relative total shareholder return; and business scorecard / business review scorecard targets over a three year performance period. Typically awards vest on the third anniversary of the date of grant to the extent that the performance conditions have been met.
The Remuneration Committee may also make conditional awards of restricted shares to other executives and senior managers, which are not subject to performance conditions.
Additionally, the Remuneration Committee may defer a portion of an individual’s gross bonus into an award over shares referred to for the purpose of the plan as deferred bonus shares, which are also not subject to performance conditions.
However, the Remuneration Committee has the discretion to modify the treatment of leavers’ share awards that have yet to be released, based on the leaving circumstances, where this is appropriate and in shareholders’ interests. Awards retained will vest on the normal vesting date.
Financial statements 19) Earnings per share (EPS) The earnings per ordinary share are calculated by reference to the profit attributable to the ordinary shareholders and the weighted average number of shares in issue during the year. These were 1,021,417,775 for basic EPS and 1,028,498,695 for diluted EPS (excluding those held in Employee Stock Ownership Plan (ESOP) and Share Incentive Plan (SIP) trusts). The number of shares in issue at 31 December 2017 was 1,022,677,174 (excluding those held in ESOP and SIP trusts).
Profit/(loss) attributable to the shareholders of the Parent Company (£m) 289 – 54 (27)
Less: Tier 1 notes coupon payment (£m) (11) – – –
Profit/(loss) for the calculation of earnings per share 269 – 45 (27)
Total weighted average number of ordinary shares for diluted earnings per share (thousands) 1,028,499 1,024,449
Diluted loss per share (p) relating to discontinued operations – (2.6)
20) Dividends paid and proposed The final dividend to equity holders is recognised as a liability when approved at the Annual General Meeting (AGM). The Company and its subsidiaries may be subject to restrictions on the amount of dividends they can pay to shareholders as a result of regulatory requirements. However, based on the information currently available, the Group does not believe that such restrictions materially limit the ability to meet obligations or pay dividends. At the AGM on 5 May 2018, a final dividend in respect of the year ended 31 December 2017 of 13.0p per ordinary share amounting to a total dividend of £133m is to be proposed. The proposed dividend will be paid and accounted for in shareholders’ equity as an appropriation of retained earnings in the year ending 31 December 2018.
Interim paid in respect of current year 6.6 5.0 68 51
Exchange gains/(losses) net of tax 2 – – 2 (24) – (22) (14) (36)
Pension – remeasurement of net defined benefit liability net of tax – – – – – 44 44 – 44
Fair value gains net of tax 154 – – 154 – 1 155 – 155
Pension – remeasurement of net defined benefit liability net of tax – – – – – (316) (316) – (316)
Movement in property revaluation net of tax – 3 – 3 – – 3 – 3
Held for sale valuation adjustment 30 – – 1 – 31
In 2016, legislation was issued by the Oman Government requiring a proportion of the company to be offered to the public. This was expected to result in the Group losing control and therefore the Oman business was classified as held for sale. Consequently the business was measured at fair value less costs to sell resulting in a valuation adjustment in 2016 of £30m.
The proportion of business sold in 2017 was lower than expected resulting in control being retained by the Group. Goodwill of £17m has been reinstated in 2017 as a consequence.
Impairment sensitivity Following completion of the Group impairment testing, it was identified that the Norway CGU was sensitive to changes in key assumptions.
Less: Assets classified as held for sale – – – 4 – 4
Carrying amount at 31 December net of held for sale 35 69 104 34 75 109
Other includes fixtures, fittings and other equipment. Group occupied property was revalued on 31 December 2017 by independent valuers using the basis of valuation as set out in note 26.
Notes to the Statement of Financial Position continued 24) Investment Property Investment property, consisting of £308m (2016: £333m) freehold and leasehold land and buildings, is held for long term rental yields and is not occupied by the Group.
The movement in the carrying value of investment property is detailed below: £m £m
Total financial assets net of held for sale 11,315 483 (155) 11,643 12,325
Collateral At 31 December 2017, the Group had pledged £514m (2016: £763m) of financial assets as collateral for liabilities or contingent liabilities. The assets pledged are included within the balance sheet as follows: government securities of £461m (2016: £636m), cash and cash equivalents of £43m (2016: £114m) and debt securities of £10m (2016: £13m). The terms and conditions of the collateral pledged are market standard in relation to letter of credit facilities.
Currency risk (net investment in foreign operation) 1,271 – – 1,271 7 (20)
The use of derivatives can result in accounting mismatches when gains and losses arising on the derivatives are presented in the income statement in accordance with the Group’s accounting policies and corresponding losses and gains on the risks being mitigated are not included in the income statement. In such circumstances the Group may apply hedge accounting in accordance with IFRS and the Group accounting policy on hedging.
The total gains on cash flow hedge instruments during 2017 were £3m (2016: £6m gain) in the consolidated statement of other comprehensive income, and the amount reclassified to the income statement was £1m (2016: £1m). The ineffectiveness recognised in the income statement was £nil (2016: £nil).
In addition, during 2017, the Group took out borrowings from credit institutions under repurchase agreements of £119m (2016: £249m) (note 36). The Group continues to recognise debt securities in the statement of financial position as the Group remains exposed to the risks and rewards of ownership.
Reverse repurchase arrangements and other similar secured lending 249 – 249 (249) – –
Cash and cash equivalents, loans and receivables, other assets and other liabilities For cash, loans and receivables, commercial paper, other assets, liabilities and accruals, their carrying amounts are considered to be as approximate fair values.
Group occupied property and investment property Group occupied properties are valued on a vacant possession basis using third party valuers. Investment properties are valued, at least annually, at their highest and best use.
Group occupied property – land and buildings – – 35 – 35
Available for sale financial assets: Financial assets at FVTPL: Equity securities – – – – –
Total value of liabilities not measured at fair value – 507 – – 507
Total gains/(losses) recognised in: Other comprehensive income 16 2 – – 18
Level 3 financial assets at 31 December 2017 350 327 – 18 695
Group occupied property – land and buildings1 Property valuation 35 (5) 38 (5)
Notes: 1. The Group’s property portfolio (including the Group occupied properties) is almost exclusively located in the UK. Reasonably possible alternative valuations have been determined using an increase of 100bps in the discount rate used in the valuation.
However, the Group invests in unleveraged entities created by and managed by external specialist investment managers where investments are pooled within an investment vehicle to provide a diversified exposure to particular classes of underlying investments. The use of these products allows the Group to broaden the diversification of its investment portfolio in a cost-efficient manner. The Group normally limits its exposures in individual structured entities to less than 20% of the total capital of the entity.
Cash money market funds Short term cash deposits 332 – 332 436 – 436
Total reinsurers’ share of insurance contract liabilities net of held for sale 2,252 2,252
Reinsurers’ share of portfolio transfers and disposals of subsidiaries (27) (137)
Reinsurers’ share of provision for unearned premiums at 31 December 729 818
Total reinsurers’ share of provision for unearned premiums at 31 December net of held for sale 729 816
Reinsurers’ share of provisions for losses and loss adjustment expenses at 1 January 1,530 1,264
The following are the major deferred tax assets/(liabilities) recognised by the Group: £m £m
The Group has temporary differences in respect of the retained earnings of overseas subsidiaries not held for sale of £509m (2016: £1,006m) on which overseas taxes, including withholding taxes, might be incurred on the remittance of these earnings to the UK. This amount relates to the Group’s subsidiaries in Canada. The Group is able to control the remittance of earnings to the UK and there is no intention to remit the retained earnings in the foreseeable future if the remittance would trigger a material incremental tax liability. As such the Group has not recognised any deferred tax in respect of the potential taxes on the temporary differences arising on unremitted earnings of continuing overseas subsidiaries and associates.
To be settled after 12 months 188 100 31) Cash and cash equivalents £m £m
Cash and cash equivalents and bank overdrafts (consolidated statement of cash flows) 1,049 1,087
Issued in respect of employee share options and employee share awards 2,495,144 3 3
33) Other equity instruments – Tier 1 Notes On 27 March 2017, the Company issued two floating rate Restricted Tier 1 (RT1) Notes totalling £297m in aggregate size and with a blended coupon of c.4.7%. The Notes are as follows: Swedish Krona 2,500m at 3 month Stibor +525bps (equivalent to c.4.8% coupon on issue)
Financial statements 34) Non-controlling interests The non-controlling interests (NCI) of the Group includes the interests in the following Group entities: NCI shares at 31 December 2017 NCI shares at 31 December 2016
Royal & Sun Alliance Insurance (Middle East) BSC (c) 50 139 50 113
The dated guaranteed subordinated step-up notes were issued on 20 May 2009 at a fixed rate of 9.375%. The nominal £500m bonds have a redemption date of 20 May 2039. On 12 July 2016, the Group bought back £200m in nominal value of these step-up notes, with a further £245m being bought back on 31 March 2017, £15m in Q2 2017 and £1m in Q3 and Q4 2017. The remaining £39m has a first call date of 20 May 2019.
36) Other borrowings The Group’s other borrowings as at 31 December 2017 are £123m (2016: £251m). The 2017 other borrowings relate to borrowings from credit institutions under repurchase agreements of £119m (2016: £249m) and bank accounts in overdraft £4m (2016: £2m).
There is also considerable uncertainty in regard to the eventual outcome of the claims that have occurred by the end of the reporting period but remain unsettled. This includes claims that may have occurred but have not yet been notified to the Group and those that are not yet apparent to the insured.
The Group uses a number of commonly accepted actuarial projection methodologies to determine the appropriate provision to recognise. These include methods based upon the following: • The development of previously settled claims, where payments to date are extrapolated for each prior year; • Estimates based upon a projection of claims numbers and average cost; • Notified claims development, where notified claims to date for each year are extrapolated based upon observed development of earlier years; • Expected loss ratios; • Bornhuetter- Ferguson method, which combines features of the above methods; • Bespoke methods for specialist classes of business.
Discount assumptions The total value of provisions for losses and loss adjustment expenses less related reinsurance recoveries before discounting for continuing operations is £8,520m (2016: £8,784m).
In determining the average number of years to ultimate claims settlement, estimates have been made based on the underlying claims settlement patterns.
Less: Held for sale provision for unearned premiums – – –
Less: Held for sale provisions for losses and loss adjustment expenses 636 (636) –
Less: Held for sale provision for unearned premiums 17 (2) 15
Provision for unearned premiums at 31 December net of held for sale 3,311 (816) 2,495
Provision for losses and loss adjustment expenses at 31 December net of held for sale 9,365 (1,436) 7,929
The provision for unearned premiums is shown net of deferred acquisition costs of £670m (2016: £663m). The reasons for the movement in deferred acquisition costs during 2017 are as follows: £m £m
The reinsurers’ share of deferred acquisition costs is included within accruals and deferred income.
Provision for losses and loss adjustment expenses at 1 January 10,083 9,457
Provision for losses and loss adjustment expenses at 31 December net of held for sale 9,477 9,365
Claims development tables The tables below present changes in the historical provisions for losses and loss adjustment expenses that were established in 2007 and the provisions for losses and loss adjustment expenses arising in each subsequent accident year. The tables are presented at current year average exchange rates on an undiscounted basis and have been adjusted for operations that have been disposed of.
Consolidated claims development table gross of reinsurance prior £m 2008 £m 2009 £m 2010 £m 2011 £m 2012 £m 2013 £m 2014 £m 2015 £m 2016 £m 2017 £m
Current year provision before discounting 1,007 95 130 119 311 365 583 789 945 1,397 3,088 8,829
At end of accident year 8,017 2,388 2,287 2,455 2,625 2,584 2,776 2,531 2,403 2,263 2,319
Current year provision before discounting 889 102 109 128 249 342 533 702 843 1,168 2,319 7,384
Present value recognised in the consolidated statement of financial position 7,954
Present value of funded obligations (8,326) (434) (8,760) (8,314) (460) (8,774)
Net IAS19 (deficits) in the schemes (51) (90) (141) (137) (115) (252)
Active members – members in employment with the Group and accruing benefits –
Deferred members – members no longer accruing and not yet receiving benefits 26,119
Accrued benefits are revalued up to retirement in accordance with Government indices for inflation. A cap of 2.5% per annum applies to the revaluation of benefits accrued post March 2010 (a cap of 5% per annum applies for benefits which accrued prior to this date).
During 2009 the Group entered into arrangements that provide coverage against mortality risk for 55% of the retirement obligations relating to pensions in payment of the two largest UK schemes at that time (c.40% coverage based on current pensioner population). The arrangement provides for reimbursement of the covered pension obligations in return for the contractual return receivable on portfolios of assets (including some interest rate swaps) held by the pension funds at the inception of the arrangement. The arrangement is accounted for as a longevity swap. The longevity swap is measured at fair value under IFRS 13 by discounting all future cash flows using a discount rate that appropriately reflects the terms of the arrangements. The pension schemes continue to hold the original assets used to fund the arrangements.
At the most recent funding valuations, the main UK funds had an aggregate funding deficit of £392m, equivalent to a funding level of 95%. The Group and the Trustees agreed funding plans at that time to eliminate the funding deficits by 2025. Details of the deficit contributions paid in 2016 and 2017 and that are due to be paid in 2018 under these plans are disclosed below. The funding plans will be reviewed again following the next triennial funding valuations which will have an effective date of 31 March 2018.
Non UK schemes The Group also operates defined benefits schemes in other countries. The most significant of these schemes are in Canada and Ireland.
The Group also provides post-retirement healthcare benefits to certain current and retired Canadian employees. The benefits are not prefunded. Life insurance benefits, which provide varying levels of coverage, are provided at no cost to retirees. Healthcare benefits, which also provide varying levels of coverage, require retiree contributions in certain instances and benefits are generally payable for life.
The split of post-retirement liabilities across other countries is shown below: Non-UK liability split by country a. Canada 85% b. Ireland 14% c. Scandinavia 1%
Return on scheme assets less amounts in interest income – 1,279 – 1,279
Other (including infrastructure, commodities, hedge funds, loans) 519 26 545 484 27 511
Value of asset and longevity swaps (2,387) – (2,387) (2,232) – (2,232)
Total assets in the schemes 7,408 1,391 8,799 7,142 1,499 8,641
Where assets are classified as unquoted the values are: • provided by an independent surveyor (in the case of direct property)
• taken from the underlying managers in the case of non-developed market equity and cash pooled funds – these funds themselves will be subject to annual (or more frequent) audit
• taken at the mark to market valuation used for collateral purposes in the case of derivative contracts
Assumptions used in calculation of retirement benefit obligations: Annual rate of inflation (RPI) 3.13 3.37 – –
Reductions in future mortality rates are allowed for by using the CMI 2016 tables with a long term rate of 1.25%. The weighted average assumptions imply that a current pensioner aged 60 has an expected future lifetime of 27.8 (2016: 28.1) years for males and 28.9 (2016: 29.2) years for females and a future pensioner aged 60 in 15 years’ time has a future expected lifetime from age 60 of 28.9 (2016: 29.3) years for males and 30.1 (2016: 30.7) years for females.
Notes: 1. The impact shown is for the appropriate increase in the revaluation of deferred pensions and the increases to pensions in payment resulting from the specified increase in RPI and CPI. 2. Reducing the mortality assumption by 12% is the equivalent of increasing the life expectancy of a male aged 60 years by 1 year. 3. 2016 comparatives have been re-presented gross of tax.
Of the above, £308m (2016: £320m) is due to be settled outside of 12 months.
The balance consists of a number of provisions none of which are individually significant.
Other creditors of £411m (2016: £299m) mainly includes payroll and other indirect taxes £163m (2016: £165m), outstanding settlements for investment purchases £61m (2016: £nil), non-insurance creditors £41m (2016: £32m) and other creditors £146m (2016: £102m).
Profit for the year before tax from continuing operations 448 101
42) Leases The operating lease payments recognised as an expense during the year are £50m (2016: £54m). The Group has no significant lease agreements that include contingent rent.
Operating lease commitments where the Group is the lessee The future aggregate minimum lease payments under non-cancellable operating leases are as follows: Land and buildings Other £m £m £m £m
Capital Commitments The Group’s significant capital commitments in respect of property and equipment and intangible assets are detailed in the table below: £m £m
Funding commitments to structured entities and invested assets The future commitments to structured entities are disclosed in note 27 of these financial statements. In addition, the Group has committed to invest £22m (2016: £24m) in other classes of investments.
44) Other contingent liabilities In Canada the Group has purchased annuities from regulated Canadian life insurers in order to pay fixed and recurring payments to certain claimants. This arrangement exposes the Group to a credit risk that the life insurers are unable to make these payments which is mitigated by an industry compensation scheme which in that event would assume a significant majority of the remaining outstanding obligations. The likelihood of both a Canadian regulated life insurer and the industry compensation scheme being unable to pay their obligations is considered very remote and so no provision has been recognised in respect of this risk.
• the ability to use its power over the subsidiary to affect its returns.
For business combinations completed on or after 1 January 2010 the cost of acquisition include the fair value of deferred and contingent consideration at the acquisition date and subsequent changes in the carrying value of the consideration are recognised in the consolidated income statement. For business combinations completed prior to 31 December 2009, the cost also includes costs directly attributable to the acquisition and the value of contingent consideration on settlement.
• All resulting exchange differences are recognised in other comprehensive income and accumulated in the foreign currency translation reserve.
Hedge Accounting Transactions are classified as hedging transactions when the following conditions for hedge accounting are met: • There is a formal designation and documentation of the hedging relationship and the Group’s risk management objective and strategy for undertaking the hedge
• The hedge is assessed on an ongoing basis and determined to have been highly effective
Property, Plant and Equipment Property, plant and equipment is comprised of Group occupied land and buildings and other equipment (comprising of fixtures, fittings and other equipment including computer hardware and motor vehicles) and is initially recognised at cost.
The useful economic life and residual value are reviewed on an annual basis. Where the carrying value of an asset is deemed to be greater than its recoverable amount, the asset is impaired as outlined in the significant accounting policies note. Gains and losses on disposal are recognised based on the carrying amount of the asset. On disposal of buildings, any associated revaluation surplus is transferred to retained earnings.
Investment property and rental income Investment property is stated at fair value. The fair value methodology is set out in more detail in note 26. Unrealised gains and unrealised losses or changes are recognised in net investment return 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.
• Premium policy instalment fee income: is received from policyholders as a finance charge on premiums paid in instalments and is recognised over the period that the instalments are made on a straight line basis.
Operating lease commitments The Group leases various properties and equipment under non-cancellable operating lease agreements. The leases have varying terms, escalation clauses and renewal rights. Payments made under operating leases are charged on a straight line basis over the term of the lease.
Al foo, Building, office no. 21, 2nd floor, Building no. 662, Road no. 2811, Black no. 428, Al Seef, Manama, Kingdom of Bahrain
RSA House, Dundrum Town Centre, Sandyford Road, Dublin 16, Ireland 123 Money Limited(4) B1 Ordinary 123 Money Limited(4) B2 Ordinary 123 Money Limited(4) B3 Ordinary 123 Money Limited(4) B4 Ordinary 123 Money Limited(4) B5 Ordinary 123 Money Limited(4) C Ordinary 123 Money Limited
Isle of Man 33-37 Athol Street, Douglas, IM1 1LB, Isle of Man
Caunce O’Hara & Company Limited(3) 39 c/o UCL Business Plc, The Network Building 97, Tottenham Court Road, London, W1T 4TP, United Kingdom
Notes: 1. Directly owned by the parent company RSA Insurance Group plc. 2. No subsidiary holds a disclosable interest in the shares of RSA Insurance
7. In relation to Al Ahlia Insurance Company SAOC, (listed on the Muscat Securities Market, Oman Stock Exchange) and Al Alamiya for Cooperative Insurance Company (listed on the Tadawul, Saudi Stock Exchange), the percentage held relates to the actual percentage of the share capital held and not the effective percentage held (which is 26.25% and 25.04% respectively).
The loss for the year net of tax includes a tax credit of £16m (2016: charge £6m). There is no tax relating to fair value gains.
Profit for the year net of tax – – – – – – 347 – 347
Fair value gains net of tax – – – – 1,285 – – – 1,285
Share based payments 1 – – – – – 15 – 16
Dividends – paid (note 5) – – – – – – (200) – (200)
Parent Company Statement of Financial Position as at 31 December 2017
The loss for the year net of tax was £18m (2016: £347m profit).
The separate financial statements were approved on 21 February 2018 by the Board of Directors and are signed on its behalf by: Scott Egan Group Chief Financial Officer
Parent Company Statement of Cash flows for the year ended 31 December 2017 £m
Cash and cash equivalents at the beginning of the year 3 4
Notes: 1. 2016 Cash flow has been re-presented to provide further analysis of adjustments for non-cash movements and changes in operating assets and liabilities and to bring into line with the Consolidated Statement of Cash flows.
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, depending on the business model under which they are held, as well as hedge accounting requirements and recognising expected credit losses.
The amounts charged in respect of these services to the Company’s subsidiaries totalled £56m (2016: £80m).
Payable to related parties: Payable to subsidiaries, interest bearing loans 53 15
Interest is receivable on interest bearing loans to subsidiaries, which are repayable on 24 hours written notice. The rates of interest charged are at three months LIBOR plus margins ranging from 0.60% to 2.50%.
Interest received from subsidiaries is £37m (2016: £72m), and interest paid to subsidiaries is £1m (2016: £3m).
The investments in subsidiaries are recognised in the statement of financial position at fair value measured in accordance with the Company’s accounting policies. The Company’s investments are classified as level 2 financial assets. Fair value of the Company’s significant subsidiary is determined by reference to the market value (derived from relevant indices) of the Company’s ordinary shares and loan capital instruments at the end of the reporting period, being the most transparent independent available indicator. The market value is adjusted for the fair value of the Company’s preference shares, assets and liabilities, excluding directly owned subsidiaries. The adjusting items have been fair valued by determining the present value of future cash flow projections, using an appropriate arm’s length discount rate. The remaining subsidiaries are held at fair value which has been determined to be net asset value.
The subordinated loan to a subsidiary has the same terms as the external loan capital from which the loan to the subsidiary was financed. The fair value of the loan is based on the quoted prices for the external loan capital. The nominal value of the loan is £32m (2016: £292m) with an interest rate of 9.375%. During the year the outstanding value of a further loan to a subsidiary was repaid, this had a nominal value at 31 December 2016 of £78m.
The Directors believe that the methodology used supports the inclusion of the investments in subsidiaries in the statement of financial position, at the fair values ascribed to them. The market value of the Company’s ordinary shares at 31 December 2017 was 632.5p. A movement of 1% in the share price would have an impact of £65m on the fair value.
The current tax relating to items that are credited to equity is £nil (2016: £nil).
Effect of change in tax rates – income statement – (1)
Net deferred tax assets of £6m (2016: £nil), 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.
Total other debtors and other assets 1 1 9) Share capital Full details of the share capital of the Company are set out in note 32 to the consolidated financial statements.
10) Tier 1 notes Full details of the Tier 1 notes are set out in note 33 to the consolidated financial statements.
The Company’s share register is maintained by Equiniti Limited (Equiniti). Any administrative enquiries relating to shareholdings, such as dividend payment instructions or a change of address, should be notified to Equiniti, Aspect House, Spencer Road, Lancing, West Sussex, BN99 6DA, Telephone: 0371 384 2048.
Annual General Meeting The 2018 AGM will be held at 200 Aldersgate, St Paul’s, London EC1A 4HD on Friday, 11 May 2018 at 11.00am.
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/AGM2018.
Separate resolutions are proposed on each item of business. In accordance with the provisions of the Articles of Association, any proxy form sent by the Company to shareholders in relation to any general meeting must be returned to the Company, whether in written form or in electronic form, not less than 48 hours before the time for holding the meeting, excluding non-business days (or, in the case of a poll taken otherwise than at, or on, the same day as the meeting, not less than 24 hours before the time appointed for the taking of the poll). At any general meeting, every Ordinary Shareholder present shall have one vote on a show of hands and on a poll, every Ordinary Shareholder present in person or by proxy shall have one vote for each Ordinary Share of which he/she is the holder. Each resolution will be put to a poll at the AGM in 2018. The results of the vote on each resolution will be announced to the London Stock Exchange and will be available on the Company’s website, www.rsagroup.com/AGM2018.
Ordinary Share performance The average total daily trading volume on the London Stock Exchange during 2017 was approximately 2.99m Ordinary Shares. The opening market price of an ordinary share on 3 January 2017 was 588.5 pence and the closing market price on 29 December 2017 was 632.5 pence. The highest daily closing price of an ordinary share during 2017 was 666.5 pence on 31 August 2017 and the lowest daily closing price was 562.5 pence on 23 January 2017.
Distribution of shares by geography as at 29 December 2017 (threshold 25,000 Ordinary shares and above)
Analysis of Beneficial Holders as at 29 December 2017 (threshold 25,000 Ordinary shares and above)
a. UK 43.2% b. Europe 25.0% c. US and Canada 24.4% d. Rest of World 5.0% e. Unknown and below threshold 2.4%
a b c d e a. Unit Trust/Mutual funds 56.48% b. Private/Retail 4.32% c. Pension funds 7.32% d. Insurance 3.02% e. Other 20.48% f. Unknown and below threshold 8.38%