ABOUT RSA We have a strong and diversified portfolio of businesses combining: Strong operations in the attractive mature markets of Scandinavia and Canada
Third largest in Denmark and Sweden and growing business in Norway
Business review 8 Chairman’s Statement 10 Group Chief Executive’s review 14 Financial review 18 Scandinavia business review 20 Canada business review 22 UK and Western Europe business review 24 Emerging Markets business review 26 Risk review 30 Corporate responsibility
Financial statements 74 Directors’ responsibilities 75 Independent auditor’s report to the members of RSA Insurance Group plc 76 Consolidated income statement 77 Consolidated statement of comprehensive income 77 Consolidated statement of changes in equity 78 Consolidated statement of financial position 79 Consolidated statement of cashflows 80 Significant accounting policies 88 Estimation techniques, risks, uncertainties and contingencies 92 Risk management 103 Notes to the financial statements 137 Independent auditor’s report to the members of RSA Insurance Group plc 138 Parent Company statement of comprehensive income 138 Parent Company statement of changes in equity 139 Parent Company statement of financial position 140 Parent Company statement of cashflows 141 Notes to the separate financial statements
Other information 148 Shareholder information 150 Financial calendar 151 Jargon buster
Underwriting result flat at £375m after negative impact from UK adverse weather and Italian earthquakes in first half
Investment income of £515m impacted by the continued low yield environment
In 2013 we expect to deliver strong premium growth, a COR of better than 95%, around £470m of investment income and return on equity of 10-12%.
A leading international insurer in the Middle East and number one in Oman
In Asia we have Commercial lines hubs in Hong Kong, Singapore and mainland China
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.
We insure the home of Captain James Cook, prior to the first of his legendary voyages.
Sun Insurance Office merges with Alliance Assurance Company to form Sun Alliance Insurance Limited.
Acquisitions of L’Union Canadienne in Quebec, and El Comercio and AC in Argentina.
We provide insurance solutions to individuals and businesses across the globe.
We operate in a combination of stable economies with excellent profitability, high growth economies with opportunities to build scale and economies recovering from the effects of the global recession where we can improve performance.
We have an enviable track record of delivering steady growth in premiums and a consistently strong underwriting result with combined operating ratios of around 95% over the last seven years.
We will invest in attractive growth markets where the creation of operating leverage will drive significantly improved profitability.
We will continue to build our global Specialty capabilities where we have strong positions in Marine, Renewable Energy, Construction & Engineering and Risk Managed business.
We have an experienced and capable management team who are committed to and incentivised by the delivery of increasing shareholder value.
In October 2012, we completed the acquisition of L’Union Canadienne, the third largest intermediated Motor and Property insurer in Quebec.
We operate as Codan in Denmark and Norway and as Trygg-Hansa in Sweden
In the Commercial market we operate as RSA through intermediaries and in Personal we operate through intermediaries, affinity partners as well as MORE TH>N and eChoice in the direct market.
Our Italian operation is purely intermediated, operating as RSA through brokers and non-tied agents
We have RSA branded Specialty operations in Belgium, France, Germany, the Netherlands, Spain and Italy.
In Latin America, we operate as RSA in Argentina, Brazil, Chile, Columbia, Mexico, and Uruguay
In Central and Eastern Europe, we operate as Lietuvos Draudimas in Lithuania, as Balta in Latvia, as RSA in Estonia, Link4 in Poland, and as InTouch in Russia
We protect people and businesses against the risks they face in their daily lives. Our global network provides Property, Casualty, Motor and Household insurance in over 140 countries worldwide
We are experts in the pricing of risk. Across the world our underwriters develop a deep understanding of the risks that our customers want to insure with us.
We take a similarly conservative approach to other risks within our business. We have completed various Group-wide assessments and rolled out activities to strengthen our operations and manage operational risk. On credit, market and liquidity risk, we continue to proactively manage our business to include factors such as the challenging economic climate. On regulatory risk, our active engagement with regulators and our close monitoring of regulatory requirements has helped safeguard our business.
Our customers rely on us to be there for them when they need to make a claim. Across all of our businesses we take customer service, especially in paying claims, very seriously.
Our response to the two earthquakes in the Emilia-Romagna region of Italy in May was focused on our customers and intermediaries. Within 24 hours, we had appointed loss adjusters to some of the largest and most important property claims, and set up a dedicated claims handling team. On the largest claim we faced, we made an interim payment of €1m within 45 days so that our customer could recommence production. We were the first insurer to pay a claim of this magnitude in the area.
Our aim is to maintain a strong balance sheet, retaining sufficient capital to protect stakeholders from all but the most extreme shocks.
Renewable Energy – Wind We are one of the world’s leading insurers of wind farms. We have more than 30 years’
experience in finding insurance solutions for our customers in this sector. With an extensive track record of insuring wind energy projects at every stage of development, from construction through to operation, we are one of the few insurers to offer both onshore and offshore cover. Indeed, today we insure manufacturers of more than 25% of the world’s wind turbines and are involved in the insurance of 80% of the world’s off-shore wind farms.
We reported good growth and financial performance in both our mature markets and our higher-growth emerging markets.
Financial highlights for 2012 included: NWP growth of 5% at constant exchange; A combined operating ratio of 95.4%; An investment result of £431m; Underlying return on equity of 10.1%.
Regulators remain very active but we continue to require greater recognition from them that the insurance sector in general, and non-life insurance in particular, continues to be well managed. Mature conversations about the best way to support the industry and the individuals and companies who rely on us are essential to our long-term success.
There are legitimate concerns over corporate behaviour but these need a measured response from regulators. Meanwhile the continuing delays in Europe in the implementation of Solvency II are a particular source of frustration to our business.
In the east and across many emerging markets there has been moderation of economic growth forecasts. Nonetheless, the attractiveness of these areas remains because of low insurance penetration levels, growing numbers of middle class families and continuing GDP growth.
Quantitative easing programmes across the globe continue to artificially depress bond yields creating downward pressure on insurers’ investment income. We are planning for a period of prolonged low interest rates. We will nevertheless continue to pursue our high quality, low risk investment strategy.
Finally, this year’s poor weather in the UK has again thrown into sharp relief the unpredictable nature of the climate. The UK suffered its second-wettest year since records began, and there were also natural disasters such as the earthquakes in Italy.
“Our financial performance, our culture and the quality of our people means we are well positioned for success”
This striving for excellence is one part of how we demonstrate our corporate and social responsibility. While passion for this is in everything we do, we also undertake specific work to underline our commitment, much of which is detailed later in this report
As stewards of the Group’s 300-year history we need the right strategy to continue building on our firm foundations. It is focused on achieving market-leading profitability in our mature markets, investing in those parts of the world which offer the best growth opportunities, leveraging our global specialty capabilities and showing sound judgement in capital allocation. I’m confident that by delivering this strategy we are assured of continued financial success and will be in a strong position when global growth returns.
Simon Lee has served an excellent first full year as Group Chief Executive, and in this has been supported by the welcome arrival of Richard Houghton as Group Chief Financial Officer. In addition, Hugh Mitchell has joined the Board as a NonExecutive Director.
Following the last Annual General Meeting, revisions were made to the Board committee structure: Alastair Barbour became Chairman of the Group Audit Committee; the Group Investment Committee was re-constituted to consist of Malcolm Le May, who continues as Chairman, Alastair Barbour, Simon Lee and Richard Houghton; and Hugh Mitchell became Chairman of the Group Remuneration Committee. Since my appointment I have joined the Board Risk Committee, the Group Investment Committee and the Group Nomination Committee, which I also chair.
We continue to perform well in our Global Engagement Survey – which 93% of staff completed this year. We are now in the 93rd percentile for large companies which is considered world-class.
I have been struck by the focus of the senior leadership team, but also by the commitment of staff across the Group and their dedication in making a real difference to our customers. I believe we should draw confidence from our performance as well as from our plans, ambition and talent.
The 2012 results showed solid underlying organic growth, supplemented by wellexecuted acquisitions. We delivered healthy premium growth of 5% on a constant exchange rate basis and our profits reflect good contributions from Scandinavia and Canada, improving trends in the UK & Western Europe and strong profit from Emerging Markets as operational leverage emerges.
We continue to successfully execute our strategy to grow premiums, improve underwriting profitability and focus our capital on those parts of our business which offer the highest growth and returns. As we do so, I have been encouraged by the response of our people, and by the leadership shown by my executive team.
The operating result was down 6% to £684m and profit before tax was £479m (2011: £613m). The proposed dividend for the year is 7.31p.
Our financial position includes a regulatory capital surplus of £1.2bn, which represents coverage of 1.9 times. Net asset value per share was 101p.
SUCCESSES AND OPPORTUNITIES We have seen sustained growth in both our Emerging Markets and Global Specialty Lines businesses. In addition to delivering strong organic growth, the year saw the successful acquisition of L’Union Canadienne in Quebec, as well as acquisitions in Argentina of El Comercio and Aseguradora de Créditos y Garantías.
“I’m looking forward to the opportunities ahead of us. We will take the Company from strength to strength”
The strategy to deliver this is five-fold: Firm operational grip and prudent financial management; Achieve market leading profitability in mature markets; Invest in attractive growth markets; Leverage our global specialty capabilities; Be disciplined about capital allocation.
FIRM OPERATIONAL GRIP AND PRUDENT FINANCIAL MANAGEMENT We will remain a pure-play general insurer with a well diversified portfolio of businesses. We will persist with our rigorous focus on underwriting discipline. We will keep our conservative approach to reinsurance and reserving. We will stick with our high quality, low risk investment strategy. We will continue to deliver a sustainable underwriting profit, the ultimate measure of an insurer’s success in delivering on its core purpose.
business has been underperforming and we have taken action to return it to break even during 2013.
INVEST IN ATTRACTIVE GROWTH MARKETS We have an exciting franchise in our Emerging Markets business, with strong positions in a number of Latin American markets, and focused businesses in Central and Eastern Europe, the Middle East and Asia. Strong GDP growth and increasing insurance penetration mean these markets will continue to do well and profitability will continue to increase as the businesses grow and development costs become a smaller fraction of the overall earnings profile. We will carry on investing in these attractive markets to strengthen and broaden our position and deliver further profitable growth for the Group. As we reshape this portfolio, our investment decisions will be governed by strict criteria: Can we achieve meaningful scale, either through a leading position in a large market, or a leading region-wide position?
In the UK, we have leading positions in both Personal and Commercial lines. The UK is an extremely competitive trading environment which brings real advantages to the Group in terms of technical expertise, pricing sophistication and channel innovation. We continue to make good progress on refocusing this business and improving its operational efficiency to improve cash earnings and extract capital. Our Italian
Can we generate cash and earn in excess of our cost of capital?
We already have strong positions in Marine, Renewable Energy, Construction & Engineering and Risk Managed business. We will continue to build on these strengths, deploying them across our global network to write profitable business, while acquiring and developing new technical capabilities.
In Canada, we expect to see further market consolidation which will allow us to grow market share and strengthen our position within the top three insurers. We aim to grow the business both organically and through selective bolt on acquisitions. We expect our Scandinavian businesses to grow in line with local economic growth. We expect Canadian and Scandinavian combined ratios to continue around current levels over the medium term.
We will continue to see the effect of falling investment yields on investment income and expect to deliver around £470m of investment income in 2013.
Effective leadership is crucial to driving operational efficiency and, in this, I am grateful for the support I receive from both the RSA Board of Directors and the Group Executive.
On 31 December 2012 John Napier stepped down as Group Chairman. During his decade-long tenure the business has successfully retrenched and then become stronger, more focused and more confident. Our performance during his time in office reflects the impact he has had. I would like to take this opportunity to offer my personal thanks and best wishes to John for the future.
RESULTS OVERVIEW In 2012, the Group delivered a solid performance in challenging conditions. Despite the continuation of historically low investment yields, adverse UK weather and the two earthquakes in Italy in May, we delivered premium growth of 5% at constant exchange, an underwriting result of £375m, a COR of 95.4% and underlying return on average equity of 10.1%.
NET WRITTEN PREMIUMS Net written premiums were up by 5% at constant exchange to £8.4bn (3% as reported). Rate on renewals has added 4 points as we continued to take action across the Group. Volumes were flat, with planned reductions in UK Personal Motor and Italy offsetting growth in Emerging Markets and Canada. Our acquisitions in Argentina and Canada during 2012 added 1 point, accounting for £43m and £38m of NWP respectively. Foreign exchange accounted for 2 points of adverse variance driven by the strengthening of Sterling against a number of currencies.
Underwriting result The underwriting result was £375m (2011: £375m). The current year underwriting result was a profit of £184m (2011: £146m) and the prior year result was a profit of £191m (2011: £229m). The combined operating ratio of 95.4% was 0.5 points higher than last year (2011: 94.9%).
The loss ratio (a measure of the value of claims as a proportion of premiums) is 0.4 points lower, driven by an improved underlying position. The commission ratio is 0.8 points higher than 2011 due to a change in business mix as affinity growth outpaces our direct channels in several regions. The expense ratio of 15.7% is marginally higher than the prior year.
In Scandinavia the underwriting profit was £237m (2011: 264m) driven by strong current year profits together with continued positive prior year development. The Canadian underwriting profit was £98m (2011: £116m) including a specific strengthening of prior year reserves in Personal Motor. In Emerging Markets, the underwriting result was £33m (2011: £3m) driven by a strong performance in our Latin America and Asia, Middle East businesses and an improved result in Central and Eastern Europe. In UK & Western Europe the underwriting result was £12m (2011: £1m) with a UK result of £39m, strongly supported by our Irish business. In Italy we continue to make progress and expect to be at break even by the end of 2013.
The prior year result of £191m reflected positive prior year development in all regions and across all years. In terms of accident year, 2011 has shown initial favourable development of £7m, which primarily comprises positive development in Scandinavian Personal Accident, Canada and UK Commercial Property. The earlier years continue to develop positively, with contributions from Scandinavian Personal and Commercial, Canada, UK Commercial Property and UK Liability.
The culture, methodologies and governance around the reserving process drive a prudent reserving policy and reserves remain significantly to the right side of best estimate. Historically, the prior year profit has been a consistent and high quality part of the result. Going forward, we expect positive prior year development to be a permanent and significant feature of the underwriting result.
Other items Other items which included gains, interest, reorganisation costs, amortisation and Solvency II costs were £205m (2011: £114m) driven by lower gains, partly offset by lower amortisation costs.
Total gains in 2012 of £28m (2011: £157m) mainly comprise gains on equities as we continue to manage the portfolio towards higher yielding blue chip names. As anticipated in the 2011 results, we restated the consolidated management income statement in 2012 to exclude total gains from the operating result to provide greater transparency and predictability.
Interest costs of £115m were in line with the previous year (2011: £117m), while Solvency II costs were £32m (2011: £30m) and we would expect a lower charge in 2013 as we manage our activity in light of recent delays to the implementation date for Solvency II. Amortisation costs were £42m (2011: £114m) reflecting the nonrepeat of goodwill write-downs in 2011 in UK Commercial and in Central and Eastern Europe. Reorganisation costs were £24m (2011: nil) and related mainly to the closure of our Czech Direct operation and the restructuring of our Group Corporate Centre where we reduced headcount by around one third.
BALANCE SHEET The total value of the investment portfolio (including cash) is £14.3bn and was broadly unchanged over the year. Of the total investment portfolio, 91% remains invested in high quality fixed income and cash assets.
During 2011 we reduced our exposure to equities and they comprised 5% of the portfolio at the start of 2012 (down from 9% at the start of 2011). At the end of 2012 our exposure to equities was 4%. We have increased the average duration of the bond portfolio across the Group from 3.4 years at the start of 2012 to 3.8 years to take advantage of opportunities on the yield curve and better match our liabilities.
Finally, our exposure to peripheral Europe remains minimal. We hold peripheral government bonds of £121m, these represent less than 1% of the total portfolio, mainly backing the liabilities of our businesses in Ireland and Italy.
On regulatory capital, our IGD surplus remains very strong at £1.2bn and coverage of 1.9 times the requirement.
SOLVENCY II On Solvency II, we continue to make good progress and remain at the forefront of progress towards internal model approval. It now appears likely that Solvency II implementation will be further delayed until at least 2016. This is both frustrating and potentially costly to the industry as a whole. We have adjusted our work programme accordingly.
RATING AGENCIES S&P and Moody’s Investor Service provide insurance financial strength ratings for the Group and its principal subsidiaries. We remain at our target credit rating level and the Group is rated A2 stable outlook by Moody’s and A+ negative outlook by S&P.
The UK pension fund position has deteriorated by £46m since 31 December 2011 to a deficit of £111m. This is driven by an increase in the pension inflation rate partially offset by an increase in the discount rate and greater than expected return on assets.
2012 DIVIDEND The Board will recommend at the Annual General Meeting to be held on 15 May 2013, that a final ordinary dividend of 3.90p (2011: 5.82p) per share be paid representing a decrease of 33%. The Board anticipates recommending a similar change to the interim dividend in 2013.
We are the third largest insurer in Denmark and Sweden, with a growing presence in Norway
DENMARK In Denmark our main focus has been on profitability, and we improved the underwriting result in both Personal and Commercial lines with the overall Danish business delivering an underwriting profit of £75m in 2012 compared to a loss of £11m in 2011. This was driven mainly by our Commercial Motor and Liability products, with our Personal Motor and Household products also delivering strongly. Premiums in Denmark were down 2% at constant exchange (8% decline as reported), driven mainly by our focus on profitability in Commercial lines.
NORWAY In Norway, once again, we saw double digit growth with premiums up 23% at constant exchange (up 19% as reported). This was driven by 39% growth in our Commercial lines business, with Personal lines delivering double digit growth of 11%. Our underwriting result in Norway improved from a loss of £15m in 2011 to a profit of £5m in 2012.
“Scandinavia continues to contribute strongly to the Group’s result. We have seen excellent underwriting profitability in 2012”
Commercial Property * Movement in renewal rate for December 2012 v December 2011
Our Think!Customer strategy is also about focusing on people. We have implemented activities such as a company site on LinkedIn, recruitment videos and improved introduction programmes to ensure we recruit and retain people with a real customer mindset.
In 2013, real GDP growth is expected to remain positive but at a low level in Denmark and Sweden while high oil prices and strong domestic demand in Norway will more than offset the international slowdown and the strong Norwegian Kroner.
Total NWP growth of 3% at constant exchange (down 2% as reported) to £1,791m
Commercial Lines NWP growth of 2% at constant exchange (down 3% as reported) driven by Renewable Energy, Marine and Norway
Net written premiums grew by 8% at constant exchange (9% as reported) to £1,614m, driven by strong organic growth, particularly within Commercial lines, and acquisitions, most notably L’Union Canadienne in the province of Quebec. The underwriting result was a robust £98m (2011: £116m) and the COR was 93.7% (2011: 91.6%) despite another year of above average severe weather, and the specific strengthening of prior year reserves in Personal Motor.
Through a series of acquisitions in recent years, our Canadian business is now positioned as the insurer with the broadest national Personal and Commercial proposition in Canada.
Our Personal Specialty Insurance (PSI) offering had strong contributions from each of its Auto, Travel and Credit Card portfolios. We expect to launch a Pet offering to the Canadian marketplace in 2013, which positions us well for future growth.
Net written premiums (£m) MARKET CONDITIONS Canada continues to weather the global economic downturn well relative to other parts of the world, with GDP growth, while low, remaining in positive territory. The Canadian dollar maintained its strong performance against major currencies, and employment rates are stable.
PEOPLE We maintained our status as a top quartile engagement employer in the Canadian marketplace, and Johnson was recognised as a Top 100 Employer in Canada for the fourth consecutive year.
Johnson growth of 5% at constant exchange (6% as reported) with 23 new affinity partners and two acquisitions
Personal Broker NWP growth of 9% at constant exchange (10% as reported) driven by Household
We are one of the UK’s largest Commercial and Personal lines insurers, and the largest insurer in Ireland
STRATEGY UK We have made good progress in 2012, targeting profitable growth and withdrawing from areas where we cannot achieve adequate returns.
The focus of the business is to maximise the contribution we make to the Group result, improving underwriting profitability by concentrating on those areas where we have strategic advantage, including Home, Pet, Marine and Risk Managed. UK Motor contributes less than 5% of Group premiums, and we have reduced the number of segments we operate in.
Western Europe In Ireland, our aim is to maintain and strengthen our market-leading position while outperforming our peers, and we continue to create excellent value from our leading direct insurer, 123.ie, which we purchased in 2010.
In Italy, remediation is ongoing, with the management team taking the right actions to achieve our strategic goals.
The underwriting profit of £12m (2011: £1m) reflected effective management actions and the impact of adverse weather in the UK, Superstorm Sandy and the Italian earthquakes. Weather in the UK was £68m worse than 2011 with 2012 being the second wettest year on record in the UK.
The underwriting loss of £31m (2011: profit of £2m) marked a deterioration from 2011 reflecting factors such as the impact of Superstorm Sandy, weather and large marine losses, including Costa Concordia, with soft market conditions also continuing. The COR of 100.4% (2011: 98.7%) was affected by Commercial Motor and, particularly, losses from the old tranches of one large three year contract. These old tranches will continue to act as a drag on the business for the next few years.
Growth of 18% in Pet to £233m was driven by a strong performance with our affinity partners including the commencement of new contracts with Home Retail Group and John Lewis. Tesco annual growth continues at 3% with an agreement to extend the contract to 2019.
In Motor there is much uncertainty and we continue to take action to protect our underwriting result. Execution on our strategy for sustainable profit has delivered a 19% reduction in net written premiums, in specific segments we have reduced capacity where target returns cannot be secured, for example, Motorcycle. These actions led to an improved COR of 99.9% (2011: 100.7%).
Despite the impact of poor weather, UK Personal had an excellent underwriting result of £70m (2011: £60m) and a COR of 95.6% (2011: 95.7%), led by Household.
European Specialty Lines In European Specialty Lines premiums were up by 11% at constant exchange (4% as reported) driven by strong growth in Spain.
PEOPLE In 2012 we featured in the Sunday Times ‘Best Big Companies to Work For’ list, ranked at number six. We have continued to focus on employee engagement by prioritising investment in three main areas: recognition; learning and development; and contributing to the communities in which our people work.
The market will remain very competitive throughout 2013. We believe that building on the actions taken in 2012 and the improvement to our underlying result we will be well placed to deliver greater levels of profitability across the UK and Western Europe region in the future and we are confident about our prospects.
Ranked six in 2012 Sunday Times ‘Best Big Companies to Work For’.
Motability team awarded winners of North West Contact Centre of the year
Underwriting loss of £31m, good performance in Marine, offset by Commercial Motor and Liability
COR of 95.6% (2011: 95.7%) despite weather costs which were £49m worse than 2011.
STRATEGY We remain committed to delivering organic growth, an improved underwriting result and an increase in return on capital.
We have strong strategic positions (top five) in a number of markets and look to achieve scale in others through bolt on acquisitions. We also aim to achieve organic growth and improved underwriting results through the development of differentiated business models or scale in niche market segments.
We are committed to a significant reduction in the expense ratio driven by strong growth in written premiums and restricted growth in expenses. We will also pursue tactical expense reduction programmes particularly in high expense ratio businesses.
Our strategy continues to focus on Affinity, Specialty, Motor, Marine and Small and Medium Enterprises (SME). In each of these areas we develop solutions which can be replicated across our regions effectively and efficiently.
Our growth ambitions in Asia and our focus on reducing management overheads have led us to reorganise our Asia Middle East region. As from January 2013 Asia will be a separate region and will include our associates in India and Thailand while the Middle East will be integrated into our Central and Eastern Europe region.
In July 2012 we completed the acquisition of El Comercio and ACG in Argentina, making RSA the sixth largest P&C insurer in the country. We have signed 31 new affinity deals in 2012 and we continue to invest in talent in our focus areas.
Net written premiums were up by 17% to £1,237m at constant exchange (12% as reported) and including our associates in India and Thailand total premiums were £1,540m.
Latin America Premiums were up by 20% to £766m at constant exchange (14% as reported), with double digit growth in four countries. Argentina grew particularly strongly with premiums up by 79% aided by the acquisition of El Comercio and ACG in July 2012 as well as underlying growth of 36%.
Asia and the Middle East Premiums were up 14% to £247m at constant exchange (15% as reported) driven by strong performance in Oman and Specialty with growth of 23% and 15% respectively, at constant exchange.
Our Indian associate premiums were up 10% at constant exchange to £153m (down 3% as reported) and our Thailand associate grew 13% to £150m at constant exchange (12% as reported) driven by Motor.
“Emerging Markets has delivered excellent top line growth and our underwriting result continues to improve as we achieve scale. We remain confident of achieving our net written premium target of £2.2bn by 2015”
NWP growth of 17% at constant exchange (12% as reported) in 2012
Argentina, Brazil, Mexico and Uruguay all delivered double digit growth at constant exchange.
Oman grew 23% at constant exchange and is the number one P&C insurer in the market
India and Thailand grew at 10% and 13% respectively at constant exchange with continued growth in the Motor market.
Central and Eastern Europe grew by 9% at constant exchange as a result of double digit growth in Estonia, Poland and Russia
MARKET CONDITIONS In 2012, market conditions remained positive in most of the countries in which we operate, although the global economic downturn had greater impact as the year progressed. In Latin America, unemployment rates continue to improve on historic lows and consumer demand continued to increase in each of our markets although we saw a slow down in Brazil in the second half of the year. Across Asia and the Middle East economies enjoyed healthy growth. GDP grew across the Baltics and unemployment levels stabilised.
CUSTOMER In 2012 we ran customer engagement surveys across Emerging Markets. We are using the results of these surveys to continue to enhance our differentiated service propositions based on being ‘Easy to Deal With’. We are already seeing improvements in many of our businesses in customer retention and satisfaction.
We continue to invest in people and to provide exciting opportunities for people to work and gain experience across a diverse region.
This focus on talent development helps provide a strong pipeline of leadership talent and I’m pleased to say that 14 of our 20 business CEO’s have been promoted from previous roles within the Group.
TECHNICAL EXCELLENCE We have continued our focus on increasing sophistication in our underwriting and pricing processes. We have improved our underwriting tools for Personal and Commercial lines and also increased the number and capability of our pricing resources.
OUTLOOK Emerging Markets offers huge growth potential for the Group. We are confident that we will achieve increased scale in the markets we operate in through in-market acquisitions, affinity distribution deals and improved customer experience.
We will also grow profitably as we see the benefits of operating leverage and the results of our expense reduction programmes flow through to the operating result.
GROUP RISK POLICY STATEMENTS Our policy statements set out the minimum standards to be maintained by the Group’s operations to manage their risks in a way that is consistent with the risk appetite.
RISK CATEGORIES Risks are viewed under categories that broadly correspond to those used in the Financial Services Authority’s Prudential Sourcebook for Insurers (INSPRU) and Senior Management Arrangements, Systems and Controls (SYSC). Additional information is provided in the Risk Management section on page 92. Some of the key current practices and tools for each risk category are set out overleaf alongside our risks and uncertainties.
We operate under a common framework through which risk management and control is embedded throughout the Group.
The Board is responsible for the Group’s Risk Management System and for defining the Group’s risk appetite.
Executive management is responsible for implementing systems and controls that manage our risk exposures in line with our risk appetite. Each Group business is required to follow a consistent process to identify, measure, manage, monitor and report its risks.
RISK FRAMEWORK The Group operates a ‘three lines of defence’ model for the oversight and management of risk as follows: 1st line – Management
Establishment of sub Risk Committees, strengthening our 1st Line ownership of risk management principles and practices and further supporting our Regional Risk Committees and Board Risk Committee
Continued to promote risk informed decision making, with more explicit consideration of risk and reward
Continued development of the validation process across the Group, to provide assurance of the results, design and workings of the Internal Model and the adequate reflection of the Group’s risk profile
We shared the strength of our risk experts around the business to develop excellence across the Group
We continue to invest in our people, in particular continuing to strengthen our capabilities for insurance and financial risk management through training, recruitment and transfer of skilled staff.
CREDIT, MARKET & LIQUIDITY RISK We continue to proactively manage our financial risks during the challenging economic climate.
REGULATORY RISK Responding to demanding and more intrusive regulatory environment across the Group to ensure compliance and safeguard our business.
INSURANCE RISK Our insurance risk strategy has enabled us to continue delivering strong insurance results through our diversified portfolio.
Reinsurance strategy and appetite recommended to the Board by the Board Risk Committee
Regional and Group Reserving Committees held to determine a recommended level of outstanding claims and aggregate outstanding claims reserves
Various modelling tools used to determine retention strategies and analyse the effectiveness of major treaty purchases
Monitoring of exposure against limits set out in the investment limits framework
Monthly reporting of significant regulatory developments and mitigation of emerging risks.
Impact on investment portfolio and investment income due to lower interest rates and market volatility
Underwriting strategy set to ensure risks written are well diversified and within risk appetite
Emerging trends in large losses, frequency and severity are investigated and corrective action taken
Conservative reserving policy ensuring that claims reserves will be more likely than not to result in positive prior year development
Reviews assess each portfolio against key performance and risk indicators. Portfolios that trigger key risk indicators are investigated. Corrective measures are implemented where required
Able to influence or encourage mitigation Direct control or ability to mitigate
Our Corporate Responsibility (CR) strategy is increasingly important to our customers, our employees, investors and regulators. It is a core part of how we operate, with ‘Doing the Right Thing’ an intrinsic part of our values. We strive always to conduct our business with integrity and in a fair, transparent manner, adhering to ethical standards and responding appropriately to our stakeholders’ needs.
In 2012 we carried out a strategic review of the programme to ensure it remains appropriate to our stakeholders and responsive to our business needs. As part of this, we conducted a number of interviews with senior managers to understand both their aspirations and the aspects they see as critical to the success of the programme.
Our review evaluated the 2012 materiality issues matrix, that sets out the issues of most importance to our stakeholders, that are core to our business operations and should be addressed by our CR programme. These issues include the increasing need for transparency within our sector, the need to identify and mitigate the potential impacts of climate change and disasters, and help adapt our economies to support financial inclusion. The matrix is developed through external stakeholder engagement, informed by
analysis by Forum for the Future and internal engagement, including our annual CR employee survey.
Our materiality framework and non-financial 2012 data has been assured by external auditors PricewaterhouseCoopers against standards AA1000 and ISAE3000.
We also continued to focus on night-time visibility for road users – a priority for many of our countries, particularly in the winter months – by continuing our long-running reflector programmes. Staff volunteers across multiple countries handed out more than 140,000 high-visibility vests and 135,000 reflectors.
ENVIRONMENT Environment and climate change are critical factors affecting our business. We believe insurers have an important role to play in the development of an adequately adapted, low-carbon global economy. We understand the urgent need for our industry to identify and respond to environmental risk, including by developing appropriate products and services. At the same time, we will continue to reduce the impact of our own operations and those of our supply chains. We are committed to leading the debate on climate change and participating in forums including Climatewise and the United Nations Environment Programme Finance Initiative (UNEP FI) – Sustainable Insurance initiative.
We published joint thought-leadership pieces looking at how Ireland’s electricity sector could be de-carbonised and a briefing on sustainable aquaculture. We will continue to work with WWF in 2013 to provide insight to our business and the wider industry on environmental risks.
By better understanding emerging trends, we can identify opportunities for new products and services that promote sustainability, building on our work in 2012.
In the UK, our Engineering division and the Carbon Trust committed to working together to raise our customers’ awareness of energy efficiency; In Canada, our green home endorsement policy ensures any repairs are carried out with environmentally friendly, safe materials; and
Scope 2: Indirect GHG emissions from consumption of purchased electricity, heat or steam
Our Impacts We understand the importance of reducing our own environmental impact, and this is supported by our policies. We are on track to achieve a 50% reduction in CO
Our operations in the UK, Ireland and Group Corporate Centre are carbon neutral, offsetting their equivalent emissions in renewable-energy projects in China, India and South America which are certified to the Voluntary Carbon Standard.
We understand that engaging employees in our environmental programme is crucial to achieving its goals. In 2012, we launched an environmental champion online forum, the Green Network, and hosted a webinar with WWF on water efficiency.
For the second year running, we held our global environmental employee engagement campaign – ‘Seeing is Believing’ – with WWF. RSA’s ‘Rainforest Challenge’ asked staff for novel, practicable ways we can reduce our environmental impact and save customers money. The winning idea was to link eco-friendly domestic improvements with cheaper home insurance, and its creators won an expedition to the Brazilian Atlantic Rainforest to see for themselves why ideas like theirs matter.
Responsible Investments The majority of our UK equity assets continue to be managed by F&C Asset Management. F&C has one of the largest governance and sustainableinvestment teams in Europe, enabling it to follow a policy of active engagement on environmental, social and governance issues. Last year, F&C engaged with 16 companies on a wide range of issues from climate change to labour standards across our portfolios.
38 Executive team 40 Directors’ and corporate governance report 55 Directors’ Remuneration report
Director in January 2013. Previous roles include 34 years at Deloitte LLP including 26 years as Partner, Chairman of Deloitte LLP
Adrian is a qualified management accountant and has been with the RSA Group since 1989.
Officer with responsibility for Claims, Sales and Service, IT and Change across Personal and Commercial lines, and prior to that he was UK Director of Personal lines, leading the launch of MORE TH>N.
Chief Executive of the Group’s International region since April 2003 and an Executive
Director of Direct Line and Accountant at Deloitte & Touche. He is a Fellow of the
Director in October 2011 and has a comprehensive understanding of the insurance market globally and good knowledge of international and emerging markets. He was
Chief Financial Officer of Aegon until 2009 and has extensive financial services expertise.
Non-Executive Director in July 2003. Previous roles include Executive Director of Prudential
Officer of Citibank International plc, Director of Logica plc and Impellam Group plc.
Development and Advisory Board Member of the National College for School Leadership.
(Europe) at UBS, Deputy CEO of ING-Barings and Morley Fund Management and President
Rowan has held progressive leadership positions in the areas of underwriting, marketing, sales and finance. He is a member of the Board of Directors of the Insurance Bureau of Canada (IBC)
July 2010 and has over 18 years’ experience in the insurance industry. From 2002, he served as Group General Counsel at
Benfield Group Limited, where he was responsible for the global legal, company secretarial and compliance teams. Prior to that, Derek held positions in law firms
Paul has over 35 years’ experience in the insurance industry, having joined RSA in 1976. He has held a number of leadership roles in RSA, including CEO for the
Resources Director in March 2012. She joined RSA in 2005 as UK Human Resources
Previously David was CIO at Barclays and a member of the Group Executive
Director for RSA’s UK Personal lines operation, which includes MORE TH>N
Tim was appointed Group Underwriting and Claims Director in November 2007 when he joined the Group. Tim has nearly 40 years’ experience in the insurance industry. He joined RSA from
“The Board is committed to ensuring high standards of corporate governance and believes that a solid corporate governance framework enables efficient and effective decision-making with clear responsibilities, leading to the achievement of the Company’s objectives and the delivery of long-term value to shareholders. Key areas of focus for the Board include developing the Group’s strategy, monitoring financial performance and ensuring standards of conduct and accountability across the Group”
Throughout the year, the Company has complied with the Principles and
Changes to the financial and legal structure and share capital of the Company
Approving the 2013 Operational Plan and risk appetite for the Group
Considering corporate merger, acquisition and disposal activity material to the Group as a whole
Ensuring ongoing compliance with regulatory requirements and maintaining a positive relationship with the Company’s regulators
The Board sets annual objectives for the business in line with the current Group strategy and monitors achievement of the Company’s objectives through regular reports which include updates from the
The Board held ten scheduled meetings during the year and two additional single purpose meetings. Where a Director was not available to attend a meeting, where possible their views were canvassed by the Chairman prior to the relevant meeting and the
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.
2. George Culmer resigned as a Director on 14 May 2012.
The Group operates a Delegated Authority Framework which specifies how Executive authority is delegated from the Board to the Group
Group. Senior executives across the Group receive an executive licence setting out their specific limits of authority in terms of entering into financial, underwriting, claims and other business commitments. Each executive is responsible for ensuring a similar process of delegation is in place within his or her area of responsibility. Further detail on the overall risk framework is set out on pages 26 to 29.
Company’s shares, are shown in the Directors’ Remuneration Report on pages 55 to 71 and are incorporated into this report by reference.
The Non-Executive Directors challenge and agree the Group’s strategy with Executive management and assess their performance against it.
Independent Director held meetings with the Non-Executive Directors without the Chairman present which, in addition to other matters, reviewed the Chairman’s performance.
The roles of the Chairman and the Group Chief Executive are separate and complementary, with responsibilities clearly divided and set out in role statements, which are available on the Company’s website, www.rsagroup.com.
Ensuring the Board operates effectively including the receipt of accurate, timely and clear information
Ensuring that appropriate and related objectives are established for the Group Chief Executive and Executive Team
Ensuring the Board has the right balance of skills and experience to support the needs of the business
Consulting with the Senior Independent Director on Board matters as required.
Monitoring the performance of the Group and its main subsidiaries, ensuring that objectives agreed upon are achieved and reported to the Board
Liaising with the Chairman on issues which relate to the Board and keeping the Chairman informed on all material matters relating to the performance of the Company and its strategic and market circumstances
Reviewing the organisational framework to ensure that policies relating to management selection, performance review, development and change are appropriate, enabling the Company to operate in the upper quartile of management effectiveness, ensuring that management succession plans are in place
are in place and that the Company complies with relevant legal and regulatory requirements
Representing the Company as required in the industry and business community.
Edward Lea is the Senior Independent Director. A role statement setting out the responsibilities of this position is available on the
The principal responsibilities of the Senior Independent Director are: Providing support, as requested by the Chairman, in the delivery of his responsibilities
Assisting, if requested by the Chairman, in matters of Board evaluation
Ensuring that the views of each of the Non-Executive Directors are given due consideration and facilitating communication between
The Board believes that it has the appropriate balance of skills, experience, independence and knowledge to enable it and its
Committees to discharge their duties and responsibilities effectively, as required by the Code. The Board is satisfied that it is of a size appropriate to the needs of the business and that no individual
Board, the balance of Executive and Non-Executive Directors and the benefits of diversity, including gender. The Board considers the skills, experience, independence and knowledge already represented when making decisions on new appointments and ensures that succession planning processes are in place.
Committee meetings; however, the Committee or its chairman may invite any Directors, other executives of the Group or any external professional advisers to attend all or part of any meetings as and when required.
The independence of those Directors who have been on the Board for more than nine years has been subject to particular scrutiny. The Group
Nomination Committee and the Board are satisfied that each of them continue to bring to the role all the skills and attributes required from them and that the term of their appointment has no bearing on their continued independence. The Board considers that no relationships or circumstances exist as specified in the Code which may be relevant to the determination of independence and no Executive Director will have served on the Board for the same nine year period. The Directors offering themselves for election or re-election at the 2013 AGM are shown in the Notice of Meeting.
Service agreements and letters of appointment, for both the Executive and Non-Executive Directors, are available for inspection at the
Company’s registered office and at the AGM. The letters of appointment for each of the Non-Executive Directors state that in accepting the appointment, the Director confirms that he/she is able to allocate sufficient time to meet the expectations of the role, with an anticipated time commitment of 28-32 days per year.
Directors receive updates from the Group Executive on the financial and operational performance of the business. Development and training for the Directors is an ongoing process which includes briefings on legislative and regulatory changes and on corporate governance matters affecting the Group and other topics such as employee engagement and corporate responsibility. To date the Company has included questions regarding training requirements in the Board and Committee annual evaluations. Training requests have been recorded and actioned; however, individual training plans were not agreed. It is the intention that each Director will agree their training requirements with the
Chairman in 2013. During the year, one Board meeting was held overseas, affording the Non-Executive Directors an opportunity to gain further insight into the business, the local management team and the culture. It is intended that a Board meeting will be held overseas in 2013, allowing a similar opportunity in a different business region.
The Chairman and Non-Executive Directors also visit different parts of the Group to meet with local management and deepen their understanding of the business. In 2012 these included John Napier visiting Canada to meet with the President & CEO of RSA Canada and the Canadian Senior Management team, Alastair Barbour attending a
The Board considers that the information provided to the Board and its Committees is supplied in a timely manner and is of an appropriate quality to enable it to discharge its duties.
AGM are subject to the approval of the Board, taking into account the recommendations of the Group Nomination Committee.
Shareholders may, by ordinary resolution of which special notice has been given, remove any Director before the expiration of his period of office.
A balanced and understandable assessment of the Group’s position and prospects, an explanation of its business model and the strategy for delivering the objectives of the Company are contained in the Business
In considering the appropriateness of the going concern basis, the Board has reviewed the Group’s ongoing financial commitments for the next 12 months and beyond. The Board’s review included consideration of the Group’s underwriting plans, regulatory capital positions, diverse insurance risk profile, undrawn financing facilities and investment portfolio. As a result of this review, the Directors have satisfied themselves that it is appropriate to prepare these financial statements on a going concern basis.
To recommend the Group framework of risk limits and risk appetite to the Board
To ensure that material risks have been identified and mitigated appropriately
To review the Remuneration Policy for any implications for risk and risk management
Reviewing and challenging the Group’s risk appetite and material risk profile
Reviewing the Remuneration Policy and any implications for risk and risk management
The terms of reference are reviewed to ensure they reflect the requirements of the Group and meet current best practice and industry guidance. The BRC has a standing agenda to ensure that all items within its terms of reference are covered by the Committee.
In addition to monitoring risks that are already recognised as material to the
Solvency II has been postponed and the FSA is working towards an implementation date of January 2016. Solvency II requires regulated insurers and reinsurers to have an effective system of governance in place which provides for sound and prudent management of the business. This includes ensuring that Board members possess sufficient relevant professional qualifications, knowledge and experience to ensure that, collectively, they provide sound and prudent corporate stewardship. There is an ongoing programme to document the governance policy and processes within each regulated Group company within the EU to ensure that a consistent and high standard of governance is maintained throughout the Group, which includes training
The evaluation of the Board Risk Committee, which was conducted by way of a structured questionnaire, included a review of the annual planning cycle, the number and length of meetings and the quality of information provided. It also considered the responsiveness of management to the Committee’s requests and the Committee’s challenge of management. Priorities identified by the evaluation for focus in 2013 included training for new Committee members, continued focus on both key areas of risk by type and region and the ongoing challenge of management’s risk assessments.
“Global economic and market conditions remained challenging during 2012. Against this background the Committee has continued to ensure that the Group maintains its prudent approach to the management of investment assets whilst successfully taking advantage of selective opportunities to enhance portfolio income”
2. Noel Harwerth, Edward Lea, John Maxwell, John Napier, Jos Streppel and Johanna
Waterous resigned from the Committee prior to the first meeting of the year following a review of the Committee’s constitution.
3. Richard Houghton was appointed to the Committee with effect from 12 June 2012.
To monitor the execution of that strategy and the Group’s investment performance.
During the year, the membership of the Committee was reviewed and revised to become the Group Chief Executive, Group CFO and two Non-Executive Directors. The Group Investments Director attends all meetings of the Committee to provide an update on the economic and market background and outlook affecting the Group, the investment activities taken since the Committee last met and any portfolio actions which require the Committee’s approval. The
“During the year the Committee continued to focus on ensuring that the right balance of skills, experience, knowledge and independence is represented on the Board both currently and in the future. In doing so, the Committee identified potential new appointees and made recommendations to the Board regarding the appointment of a new Executive Director, a new Non-Executive Director and a new Chairman, all of whom bring complementary skills to maintain the quality of the Board”
Notes: 1. John Napier retired as a Director and member of the Committee with effect from
To make recommendations to the Board in relation to the re-appointment of any Non-Executive Director at the conclusion of his/her specified term of office.
The Chairman chairs the Committee unless it is dealing with matters regarding his succession. The Chairman, Martin Scicluna, was appointed to the Committee with effect from 8 February 2013 and with effect from 1 March 2013, John Maxwell ceases to be a member of the
Board, the balance of Executive and Non-Executive Directors and the benefits of diversity, including gender. The Committee considers the skills, experience, independence and knowledge already represented when making recommendations to the Board on new appointments.
Committee can be found in the Directors’ Remuneration Report on pages 55 to 71.
Full details of the activities and duties of the Group Audit Committee can be found in the Group Audit Committee Report on pages 52 to 54.
Directors are available to meet with institutional shareholders as required. Executive Directors attended 68 meetings with investors during 2012. The Board is made aware of significant issues raised by shareholders. The Board receives regular reports from the Investor
Information Policy and the Disclosure and Transparency Rules to ensure that inside information is not disclosed prior to it being made available to shareholders generally.
Rules as at 31 December 2012 and the date of this Report.
The AGM will be held at 200 Aldersgate, St Paul’s, London EC1A 4HD
on Wednesday, 15 May 2013 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 at www.rsagroup.com.
Separate resolutions are proposed on each substantive issue. In accordance with the provisions of the Articles of Association (Articles), any proxy form sent by the Company to shareholders in relation to any general meeting must be delivered 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).
London Stock Exchange and will be available on the Company’s website, www.rsagroup.com.
Preference shareholders are only entitled to receive notice of, attend, speak and vote at general meetings if the dividend payable on the preference shares is in arrears at the date of the Notice, a resolution is proposed that affects the rights of the preference shareholders, a resolution is proposed to wind up the Company, a resolution is proposed to reduce the capital of the Company (other than a
Substantial Share Interests At 31 December 2012 At 19 February 2013
Schroders plc 170,851,201 4.95 Direct and Indirect 170,851,201 4.95 Direct and Indirect
Governance Report, which is comprised of those reports, the information set out below and the other information which is incorporated by reference. The Group’s results for the financial year are shown in the consolidated income statement on page 76.
The Group’s approach and employment policies reflect its belief that motivated, engaged and skilled employees are critical to its success.
The Group is committed to the promotion of equal opportunities for all employees and creating a working environment that fosters diversity and inclusion. The Group seeks to ensure that recruitment, talent selection and development, reward, performance management and internal promotion are all carried out solely on the grounds of ability and are entirely free from any form of discrimination. To do this, all reasonable adjustments are made, where it is appropriate to do so, to our policies, practices, processes and terms and conditions of employment. The Group is also committed, wherever possible, to employing people who are disabled or become disabled during their career with the Group. Diversity and inclusion are encouraged and supported and in 2012 a Global Forum was established, sponsored by Group and Regional CEOs, to ensure further focus and progress
operation in British Columbia, Canada, there is a collective bargaining agreement with the Canadian Office and Professional Employees
Union. The European Works Council (EWC) is a cross European body that meets annually and was created to enable information sharing and consultation on transnational issues affecting our European workforce.
The Executive Development Programme is a challenging, world class development programme for the Group’s top leaders which aims to build strategic leadership capability. It is sponsored by the Executive
Chartered Institute of Personnel Development (CIPD) award for the Organisational Learning category, aims to develop business, growth and people leadership skills in those with the potential to move into a country or regional senior management role. It is a nine month programme consisting of three modules, designed to build capability in core areas of leadership. This incorporates a strategic project based on current business challenges.
Centres of Excellence and Academies that support specialist and technical expertise and the sharing of best practice globally. There are Centres of Excellence for Marketing and eBusiness, as well as a long established Technical Academy.
Global Technical Graduate Programme which had 25 participants in the 2012 cohort.
Through the Marketing Centre of Excellence, the Group aims to build a world class marketing community. The award winning Marketing
Academy provides both e-learning and face to face training throughout the year and to date over 350 people, from 12 countries, have attended the foundation course as well as further specialist master classes. In addition, the marketing community regularly takes part in monthly online meetings to share knowledge, experience and insights in order to leverage expertise and best practice.
The Group is committed to having an engaged and motivated workforce, believing that this has a direct impact on customers’ experience and overall long-term success. Therefore every September the Group runs a global engagement survey of employees using the Gallup Q12 questions, which measure the key drivers of engagement. The survey is completed by circa three million people globally and is open to all employees. The
Since 2008, significant progress has been made on improving employee engagement. In 2012, a Grand Mean score of 4.29 (out of a maximum score of 5) was achieved, which places the Group in Gallup’s top decile for companies with over 1,000 employees. The Group has also won a range of awards in 2012 for our engagement programme including: the
Gallup Global Workplace Award, presented to the world’s most engaged and productive organisations; 6th in the Sunday Times Best
The Group has a long-standing philosophy of encouraging employee share ownership, operating two HMRC-recognised share schemes: Sharebuild and Sharesave. Details of the Executive Directors’ interests in Sharesave and Sharebuild are noted on pages 69 and 71. Currently, a total of 6,543 employees from across the Group participate in
Sharesave, contributing an average of £73.94 per month for the three year savings plan and an average of £61.17 for the five year savings plan.
Furthermore, the UK operates a flexible benefits scheme which provides employees with additional opportunities to tailor their benefits package to meet individual circumstances. Over 50% of employees elected to participate in the scheme in 2012.
Employees are kept well informed of the overall performance and objectives of the Group. Communications are regularly provided through face to face meetings and presentations, by email, intranet articles and staff publications. Key messages from the biannual Group
The Group actively encourages employees to become involved in supporting their local communities. Further details are provided in the Corporate Responsibility Report on pages 30 to 33.
Group as a whole, together with a description of the principal risks and uncertainties which may affect the Group. It may not be relied upon for any other purpose.
Information about the use of financial instruments by the Company and its subsidiaries and its risk management policies is disclosed in the Business Review on pages 8 to 33, in the Significant Accounting
Policies on pages 80 to 87. Risk Management on pages 26 to 29 and
Details of our environmental programme can be found on pages 32 to 33 of the Business Review. The 2013 Corporate Responsibility
Report will be published in May 2013 and will be available on the
transfer of shares, which are both governed by the general provisions of the Articles and legislation. 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. Further information on the rights attaching to the shares can be found in note 18 and is incorporated into this report by reference. 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 353,231,818 of its own ordinary shares (representing 10% of its issued share capital as at 15 March 2012) remained in force at 31 December 2012.
(Sharebuild) Trust is operated of which Capita IRG Trustees is the
Trusts but has no obligation to do so and, in respect of the Royal & Sun
It is the Group’s policy to agree appropriate terms and conditions in advance with its suppliers and to make payment in accordance with those terms and conditions, provided the supplier has complied with them. In most cases, agreements for the supply of goods or services are made under standard terms of contract that lay down payment terms.
The Company’s outstanding indebtedness to trade creditors on 31 December 2012 amounted to £2.45m, corresponding to 14 days’ payment when averaged over the year.
The Company and its subsidiaries worldwide made charitable donations of £1.6m (2011: £2.6m) during the year, of which £0.5m (2011: £0.7m)
Each Director is required to notify the Group General Counsel and
conflicts of interest during the year and that the procedure in place operated effectively in 2012.
Company’s ordinary shareholders. The current Articles were adopted at the 2010 AGM and are available on the Company’s website at www.rsagroup.com.
Group is not, without the previous sanction of an ordinary resolution of the Company, more than one and a half times the aggregate of: The amount paid up on the issued share capital of the Company
The total of the capital and revenue reserves of the Group (subject to certain adjustments).
Fund Limited, a majority owned subsidiary of the Group, in relation to its role as Trustee of an occupational pension scheme. This indemnity constitutes a qualifying indemnity provision under section 235 of the
To monitor compliance with regulations, industry codes and legal requirements which affect the Group’s operations
To provide assurance on the effectiveness of the Group’s financial and regulatory risk management systems
To manage the effectiveness of the Group’s systems of internal controls
To review and monitor the independence and performance of the external auditor and develop policy in relation to the provision of non-audit services.
Reviewing all results announcements and the 2011 Annual Report and Accounts with particular emphasis on their fair presentation, the reasonableness of judgements made, valuation of assets and liability balances and the appropriateness of significant accounting policies used in their preparation together with the application of those policies
Committee, the Group Chief Actuary, regional audit or management control committees, the external auditor, the
Assessing the independence of the external auditor and overseeing the process for tendering the appointment of the Group’s Auditor.
Head of Regulatory Risk & Compliance and representatives of the external auditor are regular attendees by invitation. The Chairman and other members of executive management are also invited to attend from time to time.
The terms of reference set out the authority of the Committee to carry out its duties. The Committee reviewed its terms of reference during the period and these are available on the Company’s website at www.rsagroup.com.
delegated to a Disclosure Committee. The Disclosure Committee comprises members of senior management from Finance, Legal, Investor
Relations, Company Secretarial and Risk and is chaired by the Group
The GAC is satisfied that, during 2012, it has received sufficient, reliable and timely information from management to enable it to fulfil its responsibilities.
Priorities for focus were identified as refining the relationship between the GAC and the BRC and a review of the training programme for 2013.
for ensuring compliance with the Group’s UK insurance regulatory obligations. The Board attaches great importance to its regulatory responsibilities and is committed to dealing with the regulator in an open, cooperative and transparent manner.
In addition, the Group includes a number of regulated entities which rely on various licences to carry out their business. Accordingly, maintaining effective relationships with the Group’s regulators across the world is integral to the success of the Group’s strategy and its long-term value.
A tender process for the external audit contract has recently concluded and the GAC has recommended to the Board that a resolution be put to the 2013 AGM for the appointment of KPMG LLP as external auditor.
Director has taken all steps necessary as a Director in order to make himself/herself aware of, and to establish that the external auditor is aware of, any relevant audit information.
Group Chief Auditor and a member of the Group Executive team. Her biography is on page 39. Her predecessor, Anne Jæger, became Chief
The GIA reports to management on the effectiveness of the Company’s systems of internal controls and the adequacy of these systems to manage business risk and to safeguard the Group’s assets and resources.
The GAC reviews and approves the annual Group Internal Audit Plan following presentations from the regional CEOs and regional auditors.
Group’s systems of internal control in order to safeguard the Group’s assets and shareholders’ investment. This system includes governance, financial controls, the risk management framework and the process to deliver regulatory and compliance requirements. The systems are 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 2013, the GAC and the Board reviewed the systems of internal control in operation during 2012.
Group has been in place during 2012 and up to the date of approval of the Annual Report and Accounts. This process is regularly reviewed by the Board and accords with the revised Turnbull Guidance.
Framework for 2013 62 Section 3 – Executive Directors’ Contracts and
External Appointments 62 to 65 Section 4 – Remuneration Outcomes and other
I am delighted to present this report for your approval covering the year to 31 December 2012. However, before I begin, I would like to thank my predecessor, John Maxwell, for his long-standing and valued contribution to the Committee.
Operating Ratio of 95.4%, Net Written Premium of £8,353m and profit before tax of £479m for the year. Against this context, the Executive
Directors’ 2012 cash and compulsory deferred shares bonus awards have ranged from 69% to 80% of salary out of a maximum 160% of salary. This reflects RSA’s performance against challenging targets and the strong individual performance of the Executive Directors; however, cash bonus awards have decreased by around one third in relative percentage of salary terms from 2011. In the year, the performance shares vested at 31% of the maximum, as did the matching shares derived from the compulsory deferral from the bonus awarded in 2009 earned for the 2008 financial year. The matching shares derived from the voluntary deferral from the 2008 bonus vested at 44% of the maximum. These outcomes reflect RSA’s 11.5% average underlying
Shareholder Return (TSR) was below median. Further details of the remuneration outputs for the year are on pages 62 to 65.
We appointed Richard Houghton on 12 June 2012 as Group Chief
Culmer who left RSA on 14 May 2012 to join Lloyds Banking Group.
There were other changes to the Board in the year. The Group’s
In accordance with recommended practice, the Committee sets remuneration levels having regard to appropriate market data.
The Committee has agreed that, from 2013 onwards, market data will be taken from two distinct peer groups which will be used to inform the judgement on appropriate pay positioning. These peer groups reflect the markets where RSA typically competes for talent and where remuneration structures and award levels are most similar to RSA; these are noted on page 60. Prior to 2012, RSA’s policy was to benchmark executive remuneration against the FTSE 100 and the
RSA’s strategic focus is on generating sustainable earnings growth to increase shareholder value. In support of this, the annual bonus plan for 2013 will cease to incentivise growth in Net Written Premium. All executives will be targeted on profit performance, as measured by
The current LTIP has been in place since 2006 when it was first approved by shareholders, and the Committee has refined it for the 2013 grant cycle following a robust modelling and testing process: a) The Committee has removed those companies which are reinsurers or predominantly life insurers from the current relative TSR peer group to ensure that its constituents more closely align with RSA’s insurance lines and geographies. The new peer group is noted on page 61; b) Following careful consideration, the relative TSR outcome will be derived through using the peer group as an unweighted index, rather than a rank. The level of outperformance to be reached in the index approach will be equivalent in stretch to the current ranking methodology used by RSA, i.e. median rank for entry-level awards and upper quintile rank for maximum-level awards for this element. The reason for this decision is that, for RSA, an index produces a more stable and equitable outcome than a simple ranking method. In particular, although the basket of companies chosen provides, in its totality, a good comparator for RSA, individual constituents within the group in a number of cases reflect just a part of RSA’s business. This means that comparing RSA’s performance with the comparator group as an index is a more robust measure of performance. The Committee believes that the measure should be fair, so it can act as an effective incentive; and c) The final LTIP change concerns the performance targets used to measure the underlying ROE performance condition. Since the economic downturn commenced, the decline in ‘risk free’ rates and subsequently bond investment yields have had a significant impact upon RSA, as they have upon other financial service sector companies.
The current ROE target range of 10%-16% has been in place since the LTIP was launched in 2006, with the exception of one year, 2008, when it was raised to 12%-18%. The Committee has carefully considered the landscape in which RSA operates, together with its future plans. It has agreed that conditional awards granted in 2013 will be against a target scale of 9%-14%. This does not soften the degree of performance that needs to be achieved by executives, as inherent stretch is being maintained through the constraints being placed on RSA to grow its earnings in the context of its risk appetite and the current investment environment – consistent with the same challenge being faced by its competitors. The Committee will continue to monitor the external conditions in which RSA
operates and will review the target range annually; it will revise them as is appropriate.
In 2011, the Committee reduced the maximum number of matching shares that could be earned through the LTIP from 2.5x to 2x, applying to both compulsory and voluntary deferred bonus shares. This level of award quantum will be maintained for the 2013 grant. The normal maximum number of performance shares that can be awarded also remains at 150% of salary.
It is the Committee’s intention to develop a new long-term incentive plan in 2013, with a view to seeking shareholder approval for its launch at the AGM in 2014. The design will be simple and relevant, so that it is straightforward for both participants and shareholders to understand.
I am committed to building strong relationships with RSA’s shareholders and communicating its remuneration policy, practices and decisions in a transparent way. I hope you find this report clear and informative, and the Board looks forward to your support at the AGM.
This report follows the UK requirements of the Companies Act 2006 and the Large and Medium-sized Companies and Groups (Accounts and Reports) Regulations 2008, the Listing Rules and the UK Corporate
Directors of RSA Insurance Group plc for the year ended 31 December 2012. The Board has approved this report and it will be presented to shareholders for approval at the 2013 AGM.
Board, accountable to shareholders through its policies, actions and decisions which are contained in the annual Remuneration Report, upon which shareholders make an advisory vote at the AGM. Its accountabilities include: To determine the terms and conditions and remuneration of the
To oversee the operation of the executives’ incentive plans, including approving the value and timing of awards and setting and monitoring performance conditions
The Committee’s terms of reference were significantly updated and strengthened in 2012; they are available on RSA’s website at: www.rsagroup.com or upon written request from the Group
Committee’s principal independent adviser from January to June 2012 and it also supplied executive remuneration benchmarking data. In addition to providing advice to the Committee, Towers Watson advised
PwC was formally appointed as the Committee’s independent adviser in September 2012 following a market tender exercise. It is a member of the Remuneration Consultants’ Group and a signatory to its Code of
Under its terms of reference, the Committee is required to meet at least twice each year, but it meets as often as is necessary to ensure that it can fully report to the Board and shareholders on all relevant matters. In the year, the Committee met on seven occasions – six regular meetings and one ad hoc meeting – and discussed, amongst other things, the subjects described in the next table. Over the course of several months, the Company reviewed its remuneration arrangements and members of the Committee were invited to give their input to it via six steering group meetings convened for this purpose. The letter to shareholders on pages 55 to 56 summarises the conclusions of the remuneration review.
January Performance update and associated payout projections of the annual bonus plan 2011 and LTIP cycle 2009-2011
February Testing of the performance conditions underpinning the annual bonus plan 2011 and the LTIP cycle 2009-2011.
Appointment terms of Martin Scicluna as Chairman for submission to the Board for approval.
Composition of Executive Directors’ remuneration package at different levels of performance
For over 300 years, RSA has consistently been respected by its customers and peers for its expertise in assessing and underwriting risk, and this still remains the backbone of the Group. Attracting, retaining and rewarding high calibre talent has never been more critical in today’s competitive, global insurance market and RSA has developed an effective remuneration strategy in response to these pressures.
RSA believes that people are core to its business, whether they are customers, shareholders, employees or regulators. The remuneration strategy is aligned closely to the business strategy and draws on the interests of each of these stakeholder groups – how this is achieved is explained in the table on pages 60 to 61, alongside the remuneration policy for 2013. RSA operates a pay-for-performance culture across the Group and the reward principles and incentive framework applied to Executive Directors informs the remuneration policy and incentives for the Executive Team and other employees.
A significant proportion of the Executive Directors’ remuneration is variable, i.e. it is subject to performance conditions and is therefore
(below expectations), on-target (in line with expectations) and maximum (outstanding). In the on-target scenario, around 65% of the
Executive Directors’ package consists of variable remuneration, rising to around 80% of the package for outstanding performance. The analysis assumes that the maximum voluntary bonus deferral is made into the LTIP in each case, and an average value of pension and other benefits is applied. No share price growth has been factored into the calculations, nor have accrued dividends or their equivalents.
Salaries are set at a level sufficient to attract and retain executives, taking account of their roles and individuals’ expertise and experience.
Pension and other employment benefits are provided at market competitive levels, reflecting the role, company size and sector.
Awards are calculated against annual targets and are made in cash and compulsory deferred shares
Share awards further the alignment of executives’ and shareholders’ interests, supported by RSA’s Shareholding
LTIP grants are made annually to a range of senior employees across the Group
Awards are made in the form of performance shares and matching shares which vest subject to performance conditions
Performance conditions are measured over three financial years and are not retested. Conditions are reviewed annually
Executives who resign or are dismissed for cause are, by default, not eligible for an annual bonus if they have left or are under notice at date of payment, and forfeit all deferred bonus shares and LTIP shares, other than those shares that have been voluntarily deferred into the LTIP
Deferred bonus shares will normally vest in line with the normal timetable, and LTIPs may vest subject to performance and time-prorating.
Performance conditions do not apply to this element of remuneration 2013 base salary for Executive Directors (with effect from 1 April 2013): – Simon Lee: £824,000
As a result of a review, RSA no longer benchmarks pay against the FTSE 100 and the UK financial services sector; it introduced two new peer groups in 2012.
On-target bonus opportunity is 80% of salary, rising to 160% of salary for maximum performance
A new clawback policy has also been introduced for 2013, noted on page 65.
Any matching shares linked to voluntary deferral will vest solely according to ROE
25% of the ROE part of the award will vest for three-year average ROE of 9%
The methodology for measuring TSR performance has also been changed from a ranked to an unweighted index basis to deliver a more robust measure of performance for this peer group
Where good leavers receive pro-rated bonus or LTIP awards, performance is tested in line with the normal performance timetable.
Each of the Executive Directors is employed under a service agreement, which contains a variety of contractual terms and conditions. Under normal circumstances, the service agreement in respect of each Executive Director continues until age 65; the agreements may, however, be terminated earlier by the Company or the individual, by the serving of 12 months’ notice. Each of the
None of the Executive Directors have terms in their service agreements which allow them additional rights or payment in the event of a reconstruction or amalgamation of the Group. The Company has the contractual right to place the Executive Directors on garden leave for part or all of their notice period.
The Executive Directors’ service agreements became effective on the following dates: Director Effective date
Note: 1. George Culmer ceased to be employed by the Group on 14 May 2012.
The Board recognises the value that can be gained from its executives obtaining wider experience outside of RSA. Where appropriate, and with the Chairman or Group Chief Executive’s prior approval, Executive
The Committee reviewed the Executive Directors’ salaries during 2012 and did so referencing a range of information including market data taken from the insurance sector and the FTSE 50-100, UK inflation figures and the average reviews applied elsewhere in the Group, including those for employees subject to collective bargaining agreements. The Committee made salary review decisions through the application of judgement, so as to avoid an automatic ‘upward ratcheting’ of remuneration.
On 1 November 2011, Simon Lee was appointed to succeed Andy
Haste as Group Chief Executive on a salary of £800,000; his salary remained unchanged throughout 2012. Richard Houghton was appointed as Group Chief Financial Officer on 12 June 2012 on an annual salary of £480,000. Adrian Brown’s role expanded significantly at the start of the year with the inclusion of Western Europe to his UK
Richard Houghton a taxable cash supplement of 13.18% of base salary.
George Culmer member of Stakeholder Pension Plan and, until he left RSA on 14 May 2012, received an employer contribution of 8% of base salary and a taxable cash supplement of 22% of base salary.
The Executive Directors received a range of employment benefits during the year and the value of these is noted in the table on page 67.
During 2012, the Executive Directors’ bonus plan consisted of stretching targets aligned to Combined Operating Ratio (COR), Net Written
Premium (NWP) and operational objectives personal to their roles which were assessed against a performance scorecard. Seventy per cent of the bonus award is subject to COR and NWP targets.
The Executive Directors’ award opportunity is set out in the table below.
To ensure that Richard Houghton was covered by a bonus arrangement for 2012, his bonus award has not been pro-rated for time based on his appointment date of 12 June 2012; it reflects the Group’s performance across the full financial year. No other exceptional remuneration has been paid or awarded to him. The inclusion of Mr Houghton in the 2012 LTIP cycle is noted below.
Group’s financial performance and his operational goals. In summary, the Group reported good growth and financial performance despite a tough trading environment. It is successfully executing its strategy to grow premiums, improve underwriting profitability and focus its capital to generate shareholder value. The UK & Western Europe division made good progress in the year, targeting profitable growth and taking action to remediate key portfolios, but sustained significant losses higher than forecast reflecting weather and other exceptional events.
The cash bonuses awarded to Executive Directors for 2012 are noted below, out of a maximum of 120% of salary. For comparison, the value of the bonuses awarded to the Executive Directors in 2011 is noted in brackets as a percentage of salary; this highlights that bonuses have decreased year-on-year in relative percentage of salary terms by around one third. In accordance with RSA’s LTIP, compulsory deferred shares will be granted in April 2013 valued at 33% of the executives’ cash bonus awards. The cash awards are included in the emoluments table on page 67 and both the cash and compulsory deferred share awards are noted in the ‘single figure’ table on page 64.
Note: The bonus awards were determined by the Committee relative to the following annual gross basic salaries, and in the case of Mr Lee for 2011, his actual earnings for the year.
Form of award Weighting of performance conditions Proportion of awards that vested
During the year, conditional awards of performance shares and matching shares were made to Simon Lee and Adrian Brown. Simon Lee received performance shares equal to 150% of his salary and, as was disclosed in the 2011 Remuneration Report, the Committee agreed to award Adrian Brown performance shares worth 250% of his salary due to the critical nature of his role. Matching shares were awarded at 2x the number of shares that Mr Lee and Mr Brown had deferred from their 2011 bonus awards.
Richard Houghton received a conditional award of performance shares worth 150% of his salary shortly after his commencement date in line with RSA’s standard practice for newly-hired senior executives. Mr Houghton was not granted any matching shares.
The proportion of the awards that are subject to these conditions is as noted in the table above. The policy for 2013 grants is set out on page 60. The Committee is not expecting to make any performance share awards to the Executive Directors or Executive Team in excess of 150% of salary in 2013, which is the normal policy level. As mentioned in the shareholder letter on page 55, the LTIP will be reviewed during 2013 with the expectation that a new plan will be put to shareholders for approval in 2014.
6. The aggregate gain made in 2012 through the exercise of Sharesave options as noted on page 69, and the Sharebuild matching shares granted in 2012 valued at £1.257, as at 31 December 2012 as noted on page 71.
The Committee has introduced a clawback policy which, at its discretion, reduces or forfeits bonus and LTIP awards that have yet to be paid or vest. Three circumstances have been defined where the principle of clawback (technically termed a ‘malus’ adjustment) could be applied: employee misconduct; error in the basis of the award calculation or other term; and material financial misstatement of the results underpinning the award. ‘Material’ will not be defined, but will be at a level the Committee considers is appropriate. As the adjustment of deferred bonus awards has not previously been communicated to employees, the clawback policy will apply to bonuses earned for 2013 performance and onwards thereafter.
RSA believes it is in shareholders’ interests for its executives to hold shares in RSA. Its current share ownership guidelines have been in place since 2004 and they will be reviewed by the Committee in 2013. Under the guidelines, executives are expected to build up a minimum holding over a five year period and maintain it thereafter. Executives should not sell more than 50% of their net shares awarded through the Company’s incentive plans until their guideline holding has been reached. The required shareholding levels are as follows: Level of executive
The number of shares held by Simon Lee and Adrian Brown as at 31 December 2012 is shown in the table below; their holding exceeds the required shareholding level. Richard Houghton will start to acquire shares during 2013.
Notes: 1. The shareholding excludes all unvested share awards and those otherwise subject to forfeiture or a holding period. It includes Voluntarily Invested Deferred Shares and shares acquired through RSA’s all-employee plan, Sharebuild.
3. The gross basic annual salary as at 31 December 2012.
Dec 07 Dec 08 Dec 09 Dec 10 Dec 11 Dec 12
Executive Directors is determined by the Board, within limits set by shareholders. Non-Executive Directors are not entitled to participate in RSA’s incentive arrangements, nor do they receive any benefits. The fees were last adjusted in 2010 and were benchmarked during 2012. The current Non-Executive Directors’ fees are set out in the table below.
Additional fee for sitting on one or more Committees in a capacity other than Chairman
World Europe Non Life Insurance Index and the FTSE 100 Index.
The FTSE World Europe Non Life Insurance Index comprises a range of European insurance businesses which are considered to be key competitors to RSA. The FTSE 100 Index comprises the 100 most highly capitalised companies of the UK market. TSR
The table of Directors’ defined contribution pensions on page 68 and associated footnotes
In constitution and operation the Committee complies fully with the UK Corporate Governance Code as described in the Directors’ and
Corporate Governance Report on pages 40 to 54. The information required by paragraph 1, schedule 5 of the Large and Medium-sized
2. 2012 cash bonuses were calculated in accordance with the plan described on page 56 of this Report and will be paid in March 2013.
3. Adrian Brown’s allowances include 17.5% of basic salary as a retirement allowance, paid monthly with effect from February 2012 when Adrian Brown opted out of the defined contribution scheme. In addition, he received medical benefits worth £861 and additional taxable travel benefits worth £60k .
In addition, he received payment in lieu of holiday not taken. His allowances included medical, car and travel benefits of £10k. He received a pension allowance of 22% of basic salary.
5. Richard Houghton was appointed as a Director on 12 June 2012. Accordingly the table above shows his salary, allowances and benefits for the period from 12 June 2012 to 31 December 2012. His allowances include 13.18% of basic salary as a retirement allowance, paid monthly with effect from his appointment. In addition, he received car and medical benefits worth £10k.
The interests of Directors in ordinary shares of 27.5p each of the Company were as follows: Director
2. As at 19 February 2013, the interests in ordinary shares of the current Non-Executive Directors and Richard Houghton had not changed since 31 December 2012. Changes in the interests of Simon Lee and Adrian Brown are disclosed in the notes to the Sharebuild table on page 71. The above table does not reflect any subsequent changes in shareholdings of those Directors who have left the Company.
4. John Napier retired as a Director and Chairman of the Company on 31 December 2012. The above schedule reflects his shareholding as at 31 December 2012.
The 1999 ESOS is an executive share option scheme under which options were granted with an exercise price equal to the fair value of the shares at the date of grant. Any outstanding options expire ten years from the date of grant. No grants have been made under the 1999 ESOS since 2006.
Unexpired options held during 2012 in respect of the ordinary shares of the Company as a result of executive and Sharesave share option schemes are shown below. All options were granted for nil consideration.
2. Deferred Shares are inclusive of Voluntarily Invested Deferred Shares and Compulsory Deferred Shares. Voluntarily Invested Deferred Shares are purchased by Capita Trustees Limited on behalf of each participant using part of the net annual bonus paid to them and are held in trust for three years. These Deferred Shares are not at risk of forfeiture and may be withdrawn from the trust at any time but any associated Matching Shares lapse if this occurs.
7. The aggregate value of share awards vested for Directors during the year under the LTIP amounted to £619,739.44. Voluntarily Invested Deferred Shares which are shown in the table above are not included in this value.
8. No other current Directors of the Company held long-term incentive scheme interests during 2012.
2. Under the terms of the Company’s all employee Sharebuild Plan (an HMRC approved Share Incentive Plan), the Matching Shares awarded between December 2009 and February 2010 have vested. Any Matching Shares which have vested under the rules have remained in the Trust and are included in the above table.
Chairman of the Group Remuneration Committee, on behalf of the Board
Present information, including accounting policies, in a manner that provides relevant, reliable, comparable and understandable information
Make an assessment of the Company’s ability to continue as a going concern.
The Directors are responsible for the maintenance and integrity of the corporate and financial information included on the
We confirm to the best of our knowledge: The financial statements on pages 76 to 145, prepared in accordance with International Financial Reporting Standards as adopted by the EU, give a true and fair view of the assets, liabilities, financial position and profit of the Group
The risk review section on pages 26 to 29, which is incorporated into the Directors’ report, includes a description of the principal risks and uncertainties faced by the Group.
Statement of Comprehensive Income, the consolidated Statement of Changes in Equity, the consolidated Statement of Financial Position, the consolidated Statement of Cashflows and the related notes 1 to 34. The financial reporting framework that has been applied in their preparation is applicable law and International Financial
Our audit work has been undertaken so that we might state to the company’s members those matters we are required to state to them in an auditor’s report and for no other purpose. To the fullest extent permitted by law, we do not accept or assume responsibility to anyone other than the company and the company’s members as a body, for our audit work, for this report, or for the opinions we have formed.
An audit involves obtaining evidence about the amounts and disclosures in the financial statements sufficient to give reasonable assurance that the financial statements are free from material misstatement, whether caused by fraud or error. This includes an assessment of: whether the accounting policies are appropriate to the group’s circumstances and have been consistently applied and adequately disclosed; the reasonableness of significant accounting estimates made by the directors; and the overall presentation of the financial statements. In addition, we read all the financial and non-financial information in the annual report to identify material inconsistencies with the audited financial statements. If we become aware of any apparent material misstatements or inconsistencies we consider the implications for our report.
In our opinion the consolidated financial statements: give a true and fair view of the state of the group’s affairs as at 31 December 2012 and of its profit for the year then ended; have been properly prepared in accordance with IFRSs as adopted by the European Union; and have been prepared in accordance with the requirements of the Companies Act 2006 and Article 4 of the IAS Regulation.
We have nothing to report in respect of the following: Under the Companies Act 2006 we are required to report to you if, in our opinion: certain disclosures of directors’ remuneration specified by law are not made; or we have not received all the information and explanations we require for our audit.
Under the Listing Rules we are required to review: the directors’ statement, contained within the Directors’ Report, in relation to going concern; and the part of the Corporate Governance Statement relating to the company’s compliance with the nine provisions of the UK
Corporate Governance Code specified for our review; certain elements of the report to shareholders by the Board on directors’ remuneration.
We have reported separately on the parent company financial statements of RSA Insurance Group plc for the year ended 31 December 2012 and on the information in the Directors’
INDEPENDENT AUDITOR’S REPORT TO THE MEMBERS OF RSA INSURANCE GROUP PLC
Depreciation transfer – – – – (12) – – 12 – – –
The financial statements were approved on 19 February 2013 by the Board of Directors and are signed on its behalf by: Richard Houghton
Cash and cash equivalents at beginning of the year 1,258 1,314
CONSOLIDATED STATEMENT OF CASHFLOWS for the year ended 31 December 2012
The cost of an acquisition is measured as the fair value of the assets given, equity instruments issued and liabilities incurred or assumed at the date of exchange.
Except where otherwise stated, all figures included in the consolidated financial statements are presented in millions of Pounds
Sterling, being the currency in the primary economic environment of the Company, shown as ‘£m’, rounded to the nearest million.
Directors to present financial statements that they consider provide the most relevant information. For certain accounting policies there are different accounting treatments that could be adopted, each of which would be in compliance with IFRS and would have a significant influence upon the basis on which the financial statements are presented. The bases of selection of the accounting policies for the accounting for financial assets and for the recognition of actuarial gains and losses related to pension obligations are set out below: The Group designates financial assets that are held as investments on the basis on which the investment return is managed and the performance is evaluated internally. Where the investment return is managed on the basis of the periodic cashflows arising from the investment, a financial asset is designated as an available for sale financial asset with unrealised gains recognised in the statement of comprehensive income. Where the investment return is managed on the basis of the total return on the investment
Goodwill, being the difference between the cost of a business acquisition and the Group’s interest in the net fair value of the identifiable assets, liabilities and contingent liabilities acquired, is initially capitalised in the 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. 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. Goodwill is allocated to cash generating units for the purpose of impairment testing. Goodwill is subject to an impairment review at least annually. An impairment review is also carried out whenever there is an indication that goodwill or other intangible assets are impaired.
When calculating the goodwill arising on an acquisition, provisions for losses and loss adjustment expenses are discounted to present value. Immediately following the acquisition, the provisions for losses and loss adjustment expenses are valued at full nominal value. This increase in liabilities is matched by the recognition of an intangible asset arising from acquired provisions for losses and loss adjustment expenses, representing the present value of future investment income implicit in the claims discount. The intangible asset is amortised over the expected run off period and is tested within the liability adequacy test of insurance contract liabilities where the balances of intangible assets associated with insurance contracts are deducted from the carrying amount of the insurance contract liabilities. The run off period is normally between five and 11 years.
Group’s share of losses in an associate equals or exceeds its interest in the associate, including any unsecured receivables, the Group does not recognise further losses, unless it has incurred obligations or made payments on behalf of the associate.
A financial asset is initially recognised on the date the Group commits to purchase the asset at fair value plus, in the case of all financial assets not classified as at fair value through the income statement, transaction costs that are directly attributable to its acquisition. A financial asset is derecognised when the rights to receive cashflows from the investment have expired or have been transferred and when the Group has substantially transferred the risks and rewards of ownership of the asset.
Group occupied property are credited to revaluation reserves in equity. Decreases that offset the previous increases of the same asset are charged against revaluation surplus directly in equity; other decreases are charged to the income statement. Each year the difference between depreciation based on the fair value of the asset charged to the income statement and depreciation based on the asset’s original cost is transferred from revaluation surplus to retained earnings.
The methods and assumptions used by the Group in estimating the fair value of financial assets and liabilities are: For fixed maturity securities, fair values are generally based upon quoted market prices. Where market prices are not readily available, fair values are estimated using either values obtained from quoted market prices of comparable securities or estimated by discounting expected future cashflows using a current market rate applicable to the yield, credit quality and maturity of the investment
Level 1, 2 or 3 based on the degree to which fair value is observable: Level 1 fair value measurements are those derived from quoted prices (unadjusted) in active markets for identical assets or liabilities
Level 3 fair value measurements are those derived from valuation techniques that include inputs for the asset or liability that are not based on observable market data (unobservable inputs).
and the reversal recognised in the income statement. Impairment losses on equity investments are not reversed.
On derecognition of an investment classified as available for sale, the cumulative gain or loss previously recognised in equity is recognised in the income statement.
Derivatives are recognised in the statement of financial position on a trade date basis and are carried at fair value. Derivatives are carried as assets when fair value is positive and as liabilities when fair value is negative. The method of recognising the resulting gain or loss depends on whether the derivative is designated as a hedging instrument and the nature of the item being hedged.
Where a derivative is not designated as a hedging instrument, changes in its fair value are recognised in the income statement.
Premiums payable in respect of reinsurance ceded are recognised in the period in which the reinsurance contract is entered into and include estimates where the amounts are not determined at the end of the reporting period. Premiums are expensed over the period of the reinsurance contract, calculated principally on a daily pro rata basis.
The reinsurers’ share of each unexpired risk provision is recognised on the same basis.
Cash and cash equivalents are short-term, highly liquid investments that are subject to insignificant changes in value and are readily convertible into known amounts of cash. Cash equivalents comprise financial assets with less than three months’ maturity from the date of acquisition.
Own shares are deducted from equity. No gain or loss is recognised on the purchase, sale, issue or cancellation of the own shares. Any consideration paid or received is recognised directly in equity.
Loan capital comprises subordinated bonds which are initially measured at the consideration received less transaction costs.
An exchange with an existing lender of loan capital with substantially different terms is accounted for as an extinguishment of the original
The provision for unearned premium represents the portion of the premiums written relating to periods of insurance coverage subsequent to the end of the reporting period after the deduction of related acquisition costs.
At the end of each reporting period an assessment is made of whether the provisions for unearned premiums are adequate.
A separate provision is made, based on information available at the end of the reporting period, for any estimated future underwriting losses relating to unexpired risks. The provision is calculated after taking into account future investment income
The past service cost for additional benefits granted in the current or earlier periods
The calculation of the present value of accrued benefits includes an actuarial assumption of future interest rates, which is used to discount the expected ultimate cost of providing the benefits.
The discount rate is determined at the end of each reporting period by reference to current market yields on high quality corporate bonds identified to match the currency and estimated term of the obligations. The interest cost for the period is calculated by multiplying the discount rate determined at the start of the period by the defined benefit obligations during the period.
Taxation in the income statement is based on profits and income for the year as determined in accordance with the relevant tax legislation, together with adjustments to provisions for prior years. UK tax in respect of overseas subsidiaries and principal associated undertakings is recognised as an expense in the year in which the profits arise, except where the remittance of earnings can be controlled and it is probable that remittance will not take place in the foreseeable future, in which case UK tax is based on dividends received.
Group companies operate various pension schemes. The schemes are generally funded through payments to trustee administered funds, determined by periodic actuarial calculations. The Group has both defined contribution and defined benefit schemes.
A defined contribution scheme is a pension scheme under which the Group pays fixed contributions into a separate entity. A defined benefit scheme is a pension scheme that defines an amount of pension benefit that an employee will receive on retirement, usually dependent on one or more factors such as age, years of service and salary.
share capital (nominal value) and share premium when the options are exercised.
Where there are a number of similar obligations, the likelihood that an outflow will be required in settlement is determined by considering the class of obligations as a whole. A provision is recognised even if the likelihood of an outflow with respect to any one item included in the same class of obligations may be small.
Discontinued operations are presented on the face of the income statement as a single amount comprising the total of the net profit or loss of discontinued operations and the after-tax gain or loss recognised on the sale or the measurement to fair value less costs to sell of the net assets constituting the discontinued operations.
The value recognised in the statement of financial position for each individual post retirement scheme is calculated as follows: The present value of defined benefit obligation of the scheme at the end of the reporting period
Group recognises termination benefits when it is demonstrably committed to either: terminating the employment of current employees according to a detailed formal plan without possibility of withdrawal; or providing termination benefits as a result of an offer made to encourage voluntary redundancy. Benefits falling due more than 12 months after the end of the reporting period are discounted to present value.
The value of the employee share options and other equity settled share based payments is calculated at fair value at the grant date using appropriate and recognised option pricing models. The value of liabilities in respect of cash settled share based payment transactions is based upon the fair value of the awards at the end of the reporting period.
The comparative information will be restated when applying the above changes.
Other new and revised IFRSs that are not mandatory for adoption in 2013
The IASB has issued a new IFRS and a number of changes to existing IFRSs that have not yet been adopted by the EU. The most significant of these ongoing developments for the Group is the project to replace IAS 39 ‘Financial Instruments: Recognition and
Measurement’. The new IFRS on financial instruments is expected to be mandatory for the 2015 financial statements.
Unless otherwise stated, in the period where an operation is presented as discontinued, the notes to the financial statements contain amounts attributable to continuing operations only. The comparatives for the notes to the income statement are restated.
Assets are classified as current when expected to be realised within the Group’s normal operating cycle of one year. Liabilities are classified as current when expected to be settled within the
The remaining balances are of a mixed nature. The current and non current portions of such balances are set out in the respective notes or in the risk management section.
Board (IASB) and adopted by the EU but which are not yet mandatory for adoption and have yet to be adopted in the Group financial statements are described below: New and revised IFRSs that will be applied by the Group in its 2013 financial statements
The uncertainty inherent in insurance is inevitably reflected in the financial statements of insurance companies. The uncertainty in the financial statements principally arises in respect of the insurance contract liabilities of the Company.
The Group’s estimates of losses and loss expenses are reached after a review of several commonly accepted actuarial projection methodologies and a number of different bases to determine these provisions. These include methods based upon the following: The development of previously settled claims, where payments to date are extrapolated for each prior year
Notified claims development, where notified claims to date for each year are extrapolated based upon observed development of earlier years
In addition, the Group uses other methods such as the Bornhuetter-
The Group also uses bespoke methods for specialist classes of business. In selecting its best estimate, the Group considers the appropriateness of the methods and bases to the individual circumstances of the provision class and underwriting year. The process is designed to select the most appropriate best estimate.
It should be emphasised that the estimation techniques for the determination of insurance contract liabilities involve obtaining corroborative evidence from as wide a range of sources as possible and combining these to form the overall estimate. This technique means that the estimate is inevitably deterministic rather than stochastic.
The pension assets and pension and post retirement liabilities are calculated in accordance with International Accounting Standard 19 (IAS 19). The assets, liabilities and income statement charge, calculated in accordance with IAS 19, are sensitive to the assumptions made from time to time, including inflation, interest rate, investment return and mortality. IAS 19 compares, at a given date, the current market value of a pension fund’s assets with its long-term liabilities, which are calculated using a discount rate in line with yields on ‘AA’
rated bonds of suitable duration and currency. As such, the financial position of a pension fund on this basis is highly sensitive to changes in bond rates and will also be impacted by changes in equity markets.
The uncertainty arising under insurance contracts may be characterised under a number of specific headings, such as: Uncertainty as to whether an event has occurred which would give rise to a policyholder suffering an insured loss
Uncertainty over the timing of a settlement to a policyholder for a loss suffered.
There may be significant reporting lags between the occurrence of the insured event and the time it is actually reported to the Group.
The Group has exposures to risks in each class of business within each operating segment that may develop and that could have a material impact upon the Group’s financial position.
The estimation of insurance contract liabilities involves the use of judgements and assumptions that are specific to the insurance risks within each territory and the particular type of insurance risk covered. The diversity of the insurance risks results in it not being possible to identify individual judgements and assumptions that are more likely than others to have a material impact on the future development of the insurance contract liabilities.
The estimation of the provisions for the ultimate cost of claims for asbestos and environmental pollution is subject to a range of uncertainties that is generally greater than those encountered for other classes of insurance business. As a result it is not possible to determine the future development of asbestos and environmental claims with the same degree of reliability as with other types of claims, particularly in periods when theories of law are in flux.
Factors contributing to this higher degree of uncertainty include: The long delay in reporting claims from the date of exposure
For US liabilities from the Group’s London market business, developments in the tactics of US plaintiff lawyers and court decisions and awards.
Legislative changes may affect the Group’s liability in respect of unsettled claims in the use of predetermined factors used by courts to calculate compensation claims. For example, in the UK, standard formulae are used as an actuarial measure by the courts to assess lump sum damages awards for future losses (typically loss of earnings arising from personal injuries and fatal accidents). The calibration of these standard formulae can be updated by the UK Government and the Lord Chancellor may review the methodology to be applied in determining the discount rate to calculate the appropriate settlements, or the discount rate itself, in due course. A reduction in the prescribed discount rate would increase the value of future claims settlements.
The Group is exposed to disputes on, and defects in, contracts with its reinsurers and the possibility of default by its reinsurers. The Group is also exposed to the credit risk assumed in fronting arrangements and to potential reinsurance capacity constraints. In selecting the reinsurers with whom the Group conducts business its strategy is to seek reinsurers with the best combination of financial strength, price and capacity. The Group Corporate Centre publishes internally a list of authorised reinsurers who pass the Group’s selection process and which its operations may use for new transactions.
The Group monitors the financial strength of its reinsurers, including those to whom risks are no longer ceded. Allowance is made in the financial position for non recoverability due to reinsurer default by requiring operations to provide, in line with Group standards, having regard to companies on the Group’s ‘Watch List’. The ‘Watch List’ is the list of companies which the directors believe may not be able to pay amounts due to the Group in full.
The Group has, however, very limited direct exposure via its investment portfolio to the Eurozone and to the peripheral
Eurozone countries in particular. As with all other invested assets, limits are set in line with the Group’s risk appetite. The Group continues to monitor the situation closely and takes action to manage its exposure as required.
Moody’s. A worsening in the ratings could have an adverse impact on the ability of the Group to write certain types of general insurance business.
The new solvency framework for insurers being developed by the EU, referred to as ‘Solvency II’, is intended in the medium term to achieve greater harmonisation of approach across EU member states to assessing capital resources and requirements. There remains continued uncertainty as delays in agreeing the rules have caused the planned implementation date of 2014 to be delayed. The
Group is actively participating in shaping the outcome through its involvement with European and UK regulators and industry bodies, whilst appropriately progressing its implementation plans and the
Directors are confident that the Group will continue to meet all future regulatory capital requirements.
Underwriting limits are in place to enforce appropriate risk selection criteria. For example, the Group generally has the right not to renew individual policies, it can impose deductibles and it has the right to reject the payment of a fraudulent claim. In certain territories, legislation imposes a minimum amount for which employers can be liable for claims for compensation from employees injured at work. These liabilities are usually insured under an employer’s liability (or similar) insurance policy. All policies issued by the Group comply with minimum statutory requirements.
Reinsurance arrangements in place include proportional, excess of loss, stop loss and catastrophe coverage. The effect of such reinsurance arrangements is that the Group should not suffer total net insurance losses beyond the Group’s risk appetite in any one year.
The Group establishes loss reserves to account for the anticipated ultimate costs of all losses and related loss adjustment expenses (LAE)
These are risks that have been identified as potentially affecting the Group but are not able to be quantified. Existing or potential future risk exposures are identified and investigated in a structured way, using internal and external resources, and actions to mitigate, contai n or remove these risks are taken.
Group has in addition developed its own expertise in catastrophe modelling that is used in conjunction with outside consultants. The accurate estimation of the potential expected maximum loss for a catastrophe is critical and is the primary factor considered in designing the Group’s catastrophe reinsurance programme.
The expertise within the Group on catastrophe modelling is shared through the Worldwide Reinsurance Practice Group, which also provides an overview of the groupwide catastrophe exposures and reinsurance adequacy. A reinsurance programme is considered to be ‘adequate’ only if it covers possible events that could happen in at least 199 out of 200 years. This is referred to as the ‘1 in 200 year expected maximum loss’.
Corporate Centre authorises the operations’ proposed treaty purchases to check that they at least meet the Group’s appetite, for example the ‘1 in 200 year’ standard for catastrophe risk. Group Corporate Centre also checks to see that total Group exposures are within the limits set out above and also are consistent with the required risk based capital. In addition, local facultative arrangements may be purchased where deemed appropriate.
Operational risk is the risk of direct or indirect losses resulting from human factors, external events and inadequate or failed internal processes and systems. Operational risks are inherent in the Group’s operations and are typical of any large enterprise. Major sources of operational risk can include operational process reliability, information security, outsourcing of operations, dependence on key suppliers, implementation of strategic and operational change, integration of acquisitions, fraud, human error, customer service quality, inadequacy of business continuity arrangements, recruitment, training and retention of staff, and social and environmental impacts.
The Group manages operational risk using a range of techniques and tools to identify, monitor and mitigate its operational risk in accordance with Group’s risk appetite. These tools include Risk and Control Self Assessments, Key Risk Indicators (e.g. fraud and service indicators),
Scenario Analyses and Loss Reporting. In addition the Group has developed a number of contingency plans including Incident Management and Business Continuity Plans. Quantitative analysis of operational risk exposures material to the Group is used to inform decisions on the overall amount of capital held and the adequacy of contingency arrangements.
Credit risk is the risk of loss of value of the financial assets due to counterparties failing to meet all or part of their obligations. The Board
Risk Committee (BRC) is responsible for ensuring that the Board approved Group credit risk appetite is not exceeded. This is done through the setting and imposition of Group policies, procedures and limits. In defining its appetite for credit risk the Group looks at exposures at both an aggregate and business unit level distinguishing between credit risks incurred as a result of offsetting insurance risks or operating in the insurance market (e.g. reinsurance credit risks and risks to receiving premiums due from policyholders and intermediaries) and credit risks incurred for the purposes of generating a return (e.g. invested assets credit risk).
Notes: 1. The insurance and reinsurance debtors classified as not rated comprise personal policyholders and small corporate customers that do not have individual credit ratings.
With the exception of AAA rated government debt securities, the largest aggregate credit exposure does not exceed 3% of the Group’s total financial assets. Holdings of government bonds in Greece, Italy, Ireland, Spain and Portugal are £121m at 31 December 2012 and comprises around 1% of the total bond portfolio (2011: around 1%). In addition to this the Group holds £227m of senior and subordinated bank debt and £122m of other corporate holdings in these countries.
The Group is exposed to credit and concentrations of risk with individual reinsurers, due to the nature of the reinsurance market and the restricted range of reinsurers that have acceptable credit ratings. The reinsurance strategy is to purchase reinsurance in the most effective manner from reinsurers who meet its security standards. Reinsurance counterparties are subject to a rigorous internal assessment process on an ongoing basis to ensure that their creditworthiness continues to be satisfactory and the potential impact from reinsurer default is measured regularly and managed accordingly. The Group Reinsurance Credit Committee oversees the management of these risks.
HDI-Gerling. At 31 December 2012 the reinsurance asset recoverable from these groups does not exceed 3% of the Group’s total financial
The following table provides information regarding the carrying value of financial assets that have been impaired and the ageing of financial assets that are past due but not impaired as at 31 December 2012.
At 31 December 2012, the Group had pledged £895m (2011: £901m) of financial assets as collateral for liabilities or contingent liabilities and had accepted £827m (2011: £936m) in collateral. The nature of the assets pledged as collateral comprises government securities of £831m
(2011: £855m), cash and cash equivalents of £32m (2011: £13m) and debt securities of £32m (2011: £33m). The terms and conditions of the collateral pledged are market standard in relation to letter of credit facilities.
At 31 December 2012, the Group had entered into short-term sale and repurchase agreements for UK government securities. The Group continues to recognise the debt securities in the statement of financial position as the Group remains exposed to the risks and rewards of ownership. The carrying value of these debt securities recognised in the statement of financial position is £295m (2011: £297m) and the carrying value of the associated liabilities is £295m (2011: £297m).
The Group is exposed to the risk of potential losses from adverse movements in market prices including those of interest rates, equities, property, exchange rates and derivatives. The Group’s exposure to these risks is governed by the market risk policy.
Exposures are controlled by the setting of investment limits and managing asset-liability matching in line with the Group’s risk appetite.
The Group’s portfolio of equity securities is subject to equity risk arising from changes in market price. Thus if the value of equities rise so will the fair value of its portfolio and vice versa as set out in the sensitivity analysis on page 99.
The Group makes use of derivative products as appropriate to manage equity exposure and to protect the portfolio from losses outside of its risk appetite.
The Group’s portfolio of properties is subject to property price risk arising from changes in the market value of properties. Further information on the valuation approach is included in Significant Accounting Policies. Thus if the value of property falls so will the fair value of the portfolio as set out in the sensitivity analysis on page 99.
The Group incurs exposure to currency risk in two ways: Operational currency risk – by underwriting liabilities in currencies other than the currency of the primary environment in which the business units operate (non functional currencies)
have been set. In managing structural currency risk, the needs of the Group’s subsidiaries to maintain net assets in local currencies to satisfy local regulatory solvency and internal risk based capital requirements are taken into account. These assets should prove adequate to support local insurance activities irrespective of exchange rate movements. Consequently, this may affect the value of the consolidated shareholders’ equity expressed in Sterling.
Shareholders’ equity is stated after taking account of the effect of currency forward contracts and foreign exchange options. On this basis, a 10%
change in Pounds Sterling against Danish Krone/Euro, Canadian Dollar or Swedish Krona would have the following impact on shareholders’ equity: strengthening in Pounds
The Group may use derivative financial instruments for the purpose of reducing its exposure to adverse fluctuations in interest rates, foreign exchange rates, equity prices and long-term inflation. The Group does not use derivatives to leverage its exposure to markets and does not hold or issue derivative financial instruments for speculative purposes. Forward contracts and foreign exchange options are used to reduce the risk of adverse currency movements on certain forecast future cash transactions and for structural hedging. The policy on use of derivatives is approved by the BRC.
US equity markets decreased by 15%, the impact of these derivatives as at 31 December 2012, would be to decrease the impact of the decline by £26m (2011: £30m).
During 2011 the Group entered into a series of swap contracts which collectively provide limited cover against a sharp increase in longterm inflation. In total the swap contracts provide inflation cover over a nominal value of £180m (2011: £180m) and are split over different contract terms.
Direct impact on equities of a 15% fall in equity markets (25) (28) (84) (116)
Notes: 1. This analysis assumes that there is no correlation between equity price, 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.
6. This analysis is presented gross of the corresponding tax credits/(charges).
To provide protection against material events or shocks, the Group would normally expect to hold appropriate levels of capital to maintain sufficient economic and regulatory surpluses.
The Group’s regulated entities hold appropriate levels of capital to satisfy applicable local regulations. In certain instances this could restrict the subsidiaries’ ability to transfer funds to the UK parent where retained earnings form part of the local required regulatory capital.
Additionally, regulation in certain countries in which the Group’s subsidiaries operate may also impose other limitations such as foreign exchange control restrictions.
From 1 January 2012, the Group is organised into four operating segments, Scandinavia, Canada, UK & Western Europe, and Emerging
Markets with each operating segment managed by a Chief Executive Officer (CEO) who is directly accountable to the Group Chief
UK & Western Europe represent the major geographical areas in which the Group operates through established businesses in mature markets. The UK is the Group’s country of domicile and one of its principal markets. Western Europe includes the operations in Ireland and
Additionally, the investment result now comprises investment income and the unwind of discount. The comparative information has been restated.
The Group uses the following key measures to assess the performance of its operating segments: Net written premiums
Other activities comprise administration expenses, ongoing investment in the Group’s operations in Central and Eastern Europe and other expenses of £89m (2011: £99m), which includes the Group share in the loss after tax of its associates of £6m (2011: £9m). In addition there are investment expenses and charges of £33m (2011: £34m).
Other investments: Loans secured by mortgages 1 1 – (1) – – – – 1 –
The net investment return on derivatives represents the investment return on financial assets that the Group is required to classify as held for trading investments. The derivatives are used to provide an economic hedge for fair value changes of assets held within the investment portfolio.
During 2012 or 2011 there was no significant accrued interest income on impaired financial assets.
Direct operating expenses (including repairs and maintenance) arising from investment properties were not material in 2012 or 2011.
Unrealised capital gains and losses recognised directly in equity for available for sale assets are as follows: Net unrealised gains/(losses)
Gross changes in provisions for losses and loss adjustment expenses (181) (853)
Reinsurance recoveries on losses and loss adjustment expenses paid (555) (1,099)
Reorganisation costs relate to the closure of the Czech Republic operation and the restructuring of Group Corporate Centre.
The aggregate emoluments of the Directors, including amounts received from subsidiaries, were as follows: Emoluments of Executive Directors 3,233 5,230
Different tax rates of subsidiaries operating in other jurisdictions – (1)
The earnings per ordinary share are calculated by reference to the profit attributable to the ordinary shareholders and the weighted average of shares in issue during the year.
Adjustments for share options and contingently issuable shares (thousands) 41,954 29,824
Weighted average number of ordinary shares for diluted earnings per share (thousands) 3,576,531 3,541,004
Ordinary dividend: Final paid in respect of prior year 5.82 5.70 206 198
Interim paid in respect of current year 3.41 3.34 121 118
At the Annual General Meeting (AGM) on 15 May 2013, a final dividend in respect of the year ended 31 December 2012 of 3.90p per share amounting to a total dividend of £140m 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 2013.
The trustees of the Royal & SunAlliance ESOP Trust and the Royal & SunAlliance ESOP Trust No 2 waived their entitlement to dividends
Additions of software development comprise £12m (2011: £9m) of external software and £128m (2011: £147m) of internally developed software.
When testing for impairment, the recoverable amount of a CGU is determined based on value in use calculations. These calculations use cashflow projections based on financial budgets approved by management covering a five to ten year period. Cashflows beyond this period are extrapolated using the estimated growth rates which do not exceed the long-term average past growth rate for the insurance business in which the CGU operates.
Group occupied property reserve at 31 December 22 31 10. INVESTMENT PROPERTY
None of the Group’s insurance contract liabilities are measured at fair value. There were no transfers between Level 1, Level 2 and Level 3 during 2012 or 2011.
Level 3 financial assets at 31 December 2012 35 10 33 38 116
Of the total gains/(losses) for the period recognised in other comprehensive income (shown in the reconciliation above), £1m (2011: £1m)
relate to assets held at the end of the reporting period and is reported in movements in the revaluation reserves in the statement of changes in equity.
Reinsurers’ share of provision for unearned premiums at 1 January 302 299
Reinsurers’ share of portfolio transfers and acquisitions/(disposals) of subsidiaries 6 27
Reinsurers’ share of provision for unearned premiums at 31 December 299 302
Reinsurers’ share of portfolio transfers and acquisitions/(disposals) of subsidiaries 22 125
Reinsurers’ share of provisions for losses and loss adjustment expenses at 31 December 1,650 1,771 14. INSURANCE AND REINSURANCE DEBTORS
Total insurance and reinsurance debtors 3,592 3,328 15. OTHER DEBTORS AND OTHER ASSETS
Fair value gains/(losses) net of tax 118 – (3) 115 1 116
Other comprehensive income/(expense) for the year 113 (61) (164) (112) (3) (115)
Fair value gains/(losses) net of tax 26 – – 26 – 26
The issued share capital of the Parent Company is fully paid and consists of two classes; ordinary shares with a nominal value of 27.5p each and preference shares with a nominal value of £1 each. The issued share capital at 31 December 2012 is: £m £m
During 2012, the Company issued a total of 64,930,085 new ordinary shares ranking pari passu with ordinary shares in issue (2011: 35,070,353 new ordinary shares), on the exercise of employee share options and in respect of employee share awards and under the scrip dividend scheme. The number of ordinary shares issued, their nominal value and the associated share premiums are as follows: Number of shares
The preference shares are not redeemable but the holders of the preference shares have preferential rights over the holders of ordinary shares in respect of dividends and of the return of capital in the event of the winding up of the Parent Company.
Holders of preference shares are entitled to a cumulative preferential dividend of 7.375% per annum, payable in half yearly instalments out of the profits available for distribution and resolved by the Board, to be distributed in priority to any payment of dividend to other shareholders (other than any dividend not exceeding 0.1p per share). Preference shareholders have no further right to participate in the profits of the Parent Company.
Employee share schemes 6,153,749 ordinary shares (2011: 5,514,248 ordinary shares) are held by various employee share trusts which may subsequently be transferred to employees (including Executive Directors) to satisfy options exercised under the Group employee share option plans and share awards vesting to Group employees under the long-term incentive plans and under the Sharebuild plan. These shares are presented as own shares.
The provision for unearned premiums is shown net of deferred acquisition costs of £938m (2011: £845m). The movement in deferred acquisition costs during 2012 is attributed to £1,187m (2011: £1,119m) acquisition costs deferred during the year, £1,114m (2011: £1,060m) amortisation charged during the year, £13m exchange losses (2011: £13m exchange losses), and £33m (2011: £16m) due to acquisition of subsidiaries.
The reinsurers’ share of deferred acquisition costs is shown within accruals and deferred income.
Provisions for losses and loss adjustment expenses at 31 December 11,002 11,097
The total value of provisions for losses and loss adjustment expenses less related reinsurance recoveries before discounting is £9,943m (2011: £9,939m).
The tables below present changes in the historical provisions for losses and loss adjustment expenses that were established in 2002 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.
The estimated provisions for ultimate incurred losses changes as more information becomes known about the actual losses for which the initial provisions were set up and as the rates of exchange change.
Credit/(charge) to other comprehensive income for the year – 12 – 18 (1) 29
Credit/(charge) to other comprehensive income for the year – 50 – (45) (2) 3
Charge to equity for the year (2) – – – – (2)
At the end of the reporting period, the Group has unused tax losses of £2,130m (2011: £2,128m) and unused tax credits of £15m (2011: £15m)
available for offset against future profits. A deferred tax asset of £141m (2011: £148m) has been recognised in respect of losses and unused tax credits. In addition, the Group recognised £89m (2011: £80m) in respect of other deferred tax reliefs. These are included within other temporary differences at 31 December 2012. No deferred tax asset has been recognised in respect of £1,568m (2011: £1,572m) tax losses and unused tax credits of £11m (2011: £11m) due to the unpredictability of future profit streams. Tax losses include £176m (2011: £194m) which will expire between 2013 and 2032, of which £68m (2011: £87m) have been recognised for deferred tax. Other tax losses and unused credits may be carried forward indefinitely.
The Group does not recognise deferred tax on the unremitted earnings of overseas subsidiaries, as the Group is able to control the remittance of earnings to the UK and there is no intention to remit any such earnings to the UK in the foreseeable future if the remittance would trigger a material incremental tax liability. The temporary difference in respect of the retained earnings of overseas subsidiaries and associates is £893m (2011: £965m).
Of the above, £396m is due to be settled outside of 12 months (2011: £324m).
See note 26 for further information regarding the pensions and post retirement benefit obligations.
The Group operates defined contribution pension schemes, funded and unfunded defined benefit pension schemes, and has other post retirement obligations.
Trustees and consultation with the members, the UK defined benefit schemes were altered from providing benefits on a final salary basis to benefits on a revalued average salary basis with effect from 1 January 2006. Under the new benefit formula, the accrued benefits of current active members are based on salaries at the date of change and will increase in line with inflation each year (limited to 5% in any year) up to their retirement date. Benefits earned in each year from 1 January 2006 are based on salaries in that year and are revalued up to retirement.
UK schemes. The arrangements comprise assets and interest rate swaps combined with an insurance contract that provide for the full payment of the pensions in return for the actual investment return on a segregated portfolio of assets held by the pension funds at the inception of the arrangement. The pension schemes continue to benefit from the assets held in the portfolio and retain the obligation to meet the insured pension obligations. The assets and pension obligations are therefore not derecognised in the financial statements and an asset (representing the recovery of the insured pension obligations) and a liability (to pay the investment return on the portfolio of assets to the insurer) are recognised.
During 2010 changes were made to the benefit structure of three UK schemes. Changes affected future accrual from 1 March 2010 onwards.
For the two main UK defined benefit schemes, the level of contributions in 2012 were £94m (2011: £73m) of which £70m (2011: £51m)
were additional contributions in line with the plan to reduce their funding deficits. Expected contributions to the two schemes for the year ending 31 December 2013 are approximately £44m including £30m of additional contributions to reduce the deficit. Further additional contributions may become due once the results of the March 2012 funding valuations are known (results expected in 2013).
Deferred tax in respect of net pension and post retirement deficit 67 49
The amounts recognised in the income statement are as follows: UK
Actual return on assets in excess of expected 227 9 236 379
The accumulated actuarial losses since 1 January 2004 are £811m (2011: £602m).
Value of asset and longevity swaps under insurance arrangement (489) – (489) (438)
The UK pension funds have swap arrangements in place to ensure that the assets backing the liabilities under the insurance arrangement exactly fund the amounts payable. Additionally these funds have purchased inflation swaps and interest rate swaps to reduce investment risk within the funds.
Present value of defined benefit obligations 6,492 6,002 5,467 5,178 4,536
Assumptions used in calculation of retirement benefit obligations: Annual rate of general inflation 2.5 2.8 2.2 2.2
Assumptions used in calculation of income statement credit/(charge) in the year: Expected return on: Expected return on schemes’ assets
The weighted average expected return on schemes’ assets across the Group for 2012 was 5.5% (2011: 6.1%). The expected return on schemes’
Light Normal base table with percentage adjustments to reflect the schemes’ recent experience compared with that expected under these tables. The next funding valuation has an effective date of March 2012, with results expected in 2013.
years (females) and a future pensioner aged 60 in 15 years’ time has a future expected lifetime from age 60 of 28.3 (2011: 28.3) years (males) and 28.7 (2011: 28.7) years (females).
In 2011 and 2012, the Group followed the 2009 funding valuation assumptions, and an allowance was made for future commutation using the current commutation factors.
A 0.1% increase in the discount rate would reduce the defined benefit obligations in the UK not covered by the insurance arrangement by £63m (2011: £55m). A 0.1% increase in the inflation rate assumption would increase the defined benefit obligations in the UK not covered by the insurance arrangement by £47m (2011: £51m). An increase of one year in life expectancy would increase the defined benefit obligations in the UK not covered by the insurance arrangement by approximately £97m (2011: £84m). The Group has no material exposure to the effect of changes in medical costs.
The Group will adopt the revised version of IAS 19 ‘Employment Benefits’ at 1 January 2013. The changes to IAS 19 are described in the
In 2012, the impact of the changes to IAS 19 for the main UK schemes is to increase the charge recognised in the income statement by £28m (£22m net of taxes). There is a corresponding reduction in the actuarial losses recognised in other comprehensive income.
The balance of the value of the awards will be charged to the income statement during the remaining vesting periods.
The structure of the plan allows for a number of different types of awards to be made. Voluntary Deferred Shares are purchased by participants from net bonus payable (limited to a maximum value of 33% of net bonus); in addition, for senior executives, the Remuneration
Committee may defer a portion of an individual’s gross bonus (limited to 33% of that bonus) into an award over shares referred to for the purpose of the plan as Compulsory Deferred Shares. Voluntary Deferred Shares are held in trust for three years. Compulsory Deferred
Committee may make a conditional award of shares on a ‘matched’ basis to Voluntary and Compulsory Deferred Shares (‘Matching Shares’)
up to a maximum of 2:1 and these are normally forfeited on an employee leaving the Group.
Additionally, the Remuneration Committee may make conditional awards of Performance Shares to senior executives and conditional awards of Restricted Shares to other executives and senior managers.
Awards of Performance Shares and Matching Shares related to Compulsory Deferred Shares are subject to a performance condition consisting of a combination of a return on equity target and a total shareholder return target (with performance measured by comparison against other European insurance companies) over a single three year performance period. Matching Shares related to Voluntary Deferred
Shares are subject only to the return on equity performance condition. Restricted Shares are not subject to performance conditions.
All awards vest on the third anniversary of the date of grant to the extent that the performance conditions have been met. Performance
Shares and Restricted Shares are normally forfeited on an employee leaving the Group.
The Group designates certain forward foreign exchange contracts and foreign exchange options as hedging instruments against the net investment in designated subsidiaries to reduce the foreign exchange risk exposure.
Company Limited on 1 January 2012. Following this transfer, the principal activity of Royal International Insurance Holdings Limited is as a holding company.
6. On 1 January 2012, general insurance business from The Sea Insurance Company Limited and National Vulcan Engineering Insurance Group Limited legally transferred to Sun Insurance Office Limited.
On 31 July 2012, the Group acquired 96.7% of the share capital of El Comercio Compañía de Seguros a Prima Fija SA and 99.9% of the share capital of Aseguradora de Créditos y Garantías SA, two sister companies in Argentina. The fair values of identifiable assets acquired comprise investments of £2m, intangible assets (excluding goodwill) of £11m, other assets of £68m and cash and cash equivalents of £70m.
During the year a number of small acquisitions were completed in Canada. These acquisitions principally comprised of insurance intermediaries and increase the Group’s insurance activity in each of the countries. The total cash consideration paid was £28m and goodwill of £15m arose on these acquisitions.
The above values are provisional pending the final agreement of completion accounts which will determine the consideration payable.
The fair value of the financial assets acquired, included within other assets, includes premiums and insurance debtors of £146m, with no reduction of their nominal value to take account of balances that are expected to be uncollectable.
Acquisition related costs for acquisitions concluded during the period (included in other operating expenses in the income statement for the year ended 31 December 2012) amounted to £2m.
As a result of the above acquisitions the Group recognised £2m of non controlling interests. The non controlling interests are measured as the proportionate share of the identifiable acquired net assets.
No subsidiaries were disposed of during the year. There was a £1m profit on disposal of subsidiaries in 2011.
Fair value losses/(gains) (including losses/(gains) on disposal) on property and equipment 1 (1)
Fair value gains (including gains on disposal) on financial assets (70) (194)
Changes in operating assets/liabilities: Movement in insurance contract liabilities: Losses and loss adjustment expenses 8 (52)
As at 31 December 2012, there are interest free loans totalling £5,000 (2011: £10,000) outstanding to members of the key management team under standard terms of the Group’s UK Car Ownership Scheme, which is open to all UK managers within a qualifying salary band.
There are no assets held for sale at the end of 2012 (2011: £17m). Profit on disposal of assets held for sale of £2m (2011: less than £1m)
In our opinion: the part of the Directors’ Remuneration Report to be audited has been properly prepared in accordance with the Companies Act 2006; and the information given in the Directors’ Report for the financial year for which the financial statements are prepared is consistent with the Parent
David Barnes (Senior statutory auditor) for and on behalf of Deloitte LLP
The loss for the year net of tax includes a tax credit of £10m (2011: £10m). There is no tax relating to fair value gains.
The movement in equity for the year net of tax includes a net tax charge of £1m (2011: £1m).
The separate financial statements were approved on 19 February 2013 by the Board of Directors and are signed on its behalf by: Richard Houghton
PARENT COMPANY STATEMENT OF FINANCIAL POSITION as at 31 December 2012
Except where otherwise stated, all figures included in the separate financial statements are presented in millions of Pounds Sterling
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 cashflow 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.
Full details of the principal subsidiaries of the Company are set out in note 29 to the consolidated financial statements.
The current tax relating to items that are credited to equity is £2m (2011: £2m).
Deferred tax assets of £22m (2011: £22m), which are in excess of profits arising from the reversal of existing taxable temporary differences and that relate to tax jurisdictions in which the Company has suffered a loss in either the current or preceding period, have been recognised on the basis that future taxable profits will be available against which these can be utilised. The evidence for the future taxable profits is a forecast consistent with the three year operational plans prepared by the relevant businesses, which are subject to internal review and challenge. Where relevant, the forecast includes extrapolations of the operational plans using assumptions consistent with those used in the plans.
Issue of share options and share awards to employees of subsidiaries. Costs are charged for annually, based on the underlying value of the awards granted calculated in accordance with the guidance set out within IFRS 2.
A number of the Directors, other key managers, their close families and entities under their control have general insurance policies with subsidiary companies of the Group. Such policies are on normal commercial terms except that executive directors and key managers are entitled to special rates which are also available to other members of staff.
As at 31 December 2012, there are interest free loans totalling £5,000 (2011: £10,000) outstanding to members of the key management team under the standard terms of the Group’s UK Car Ownership Scheme, which is open to all UK managers within a qualifying salary band.
Receivable from related parties: Receivable from subsidiaries, interest bearing loans 567 842
(2011: £78m) and £604m (2011: £492m) are subordinated loans on which interest is charged at 8.5%, 6.701% and 9.375% respectively.
Details of share based compensation plans are provided in note 27 to the consolidated financial statements.
The risks faced by the Company are derived from its investment in subsidiaries and are therefore the same as those of the RSA Group of companies. Details of the key risks to the Group and the steps taken to manage them are disclosed in the Risk Management section of the consolidated financial statements.
Transit & Cargo and second in the overall Marine market. We are also a leader in the automotive segment with a specialised Marine automotive offering. Our key clients include some of the world’s largest multinational automotive manufacturers and technology companies. In 2012 our Brazil Marine premiums grew 5% and represent 9% of our total business in Latin America.
The Company’s corporate website provides shareholders with a broad range of information about the Company’s heritage, social and environmental responsibilities and investor information such as the Group’s financial statements, current and historic share prices,
AGM materials, events, governance information and answers to frequently asked questions in respect of shareholder matters. Visit the investor website at www.rsagroup.com for further information.
When contacting Equiniti, please quote your shareholder reference number which can be found on your share certificate or dividend tax voucher. Calls cost 8p per minute plus network extras.
Overseas callers should use +44(0) 121 415 7064. Shareholders with a text phone facility should use +44(0) 871 384 2255 or alternatively use the Text Relay service by dialling 18001 0121 415 7064 directly from the text phone.
St Paul’s, London EC1A 4HD at 11.00am on 15 May 2013.
Company’s website. Details of the 2013 scrip election dates can be found in the Financial Calendar on page 150.
Shareholders may purchase or sell their RSA ordinary shares through their stockbroker, a high street bank or one of the providers detailed below: Equiniti offer a telephone and internet dealing service. Commission is currently 1.5% with a minimum charge of £45 for telephone dealing and currently 1.5% with a minimum charge of £40 for internet dealing. For telephone sales call +44(0) 845 6037 037 between 8.30am and 4.30pm, Monday to Friday. For internet sales log on to www.shareview.co.uk/dealing. Please quote your shareholder reference number.
A postal dealing service is also available upon request. For telephone sales call +44(0) 131 240 0414 between 8.00am and 4.30pm,
Please note that rates quoted are as at February 2013 and may be subject to change. Please contact either provider for further guidance on their full terms and conditions.
Be aware of dividend payment dates and contact Equiniti if you do not receive your dividend cheque, or better still, make arrangements to have the dividend paid directly into your bank account
The issued share capital of the Company consists of two classes; ordinary shares with a nominal value of 27.5p each and preference shares with a nominal value of £1 each. Further details of the
The Company is listed on the London Stock Exchange under the code RSA. The average total daily trading volume during 2012 was approximately 12m ordinary shares. The closing market price of an ordinary share on 3 January 2012 was 107.8p and the closing market price on 31 December 2012 was 125.7p. The highest daily closing price of an ordinary share was 127.9p on 24 December 2012 and the lowest daily closing price was 97.65p on 1 June 2012.
Equiniti. Further details can be obtained from www.sharegift.org or by calling +44(0) 20 7930 3737.
Ex dividend date for the first preference share dividend for 2013.
Announcement of the scrip dividend price for the ordinary final dividend for 2012.
Payment date for the ordinary final dividend for 2012 (subject to shareholder approval at the AGM).
June 2013, the ordinary interim dividend for 2013 and the second preference dividend for 2013.
Affinity Selling insurance through a partner’s distribution network, usually to a group of similar customers, e.g. store card holders, alumni groups, unions and utility company customers.
Capital The money invested in the Group. This includes the money invested by shareholders and profits retained within the Group.
Percentage of Net Earned Premiums which is paid out in claims and Claims Handling Expenses.
Measures how much we pay out in claims and expenses for each unit of net premium received
A COR of less than 100% indicates that we are writing profitable business
Commission Ratio Ratio of net commission costs to Net Written Premiums.
Current Year Result The underwriting profit or loss earned from business for which protection has been provided in the current financial period.
Economic Capital The Group’s assessment of the capital we must hold to have a high confidence of meeting our obligations given our risk appetite.
Expense Ratio Percentage of Net Written Premiums which is paid out in operating expenses e.g. salaries, premises costs, etc.
The regulatory authority for the UK financial services industry (or its successor(s) for the UK insurance industry).
The value of the Group calculated by subtracting our total liabilities including loan capital from our total assets.
The portion of Net Written Premiums for which we have already provided protection. This is included as income in the period.
Portfolio Management Management of a group of similar risks, these are usually grouped by geography and line of business.
Prior Year Result Profit or loss generated by settling claims incurred in a previous year at a better or worse level than the previous estimated cost.
Reinsurance The practice whereby we transfer part or all of the risk we have accepted to another insurer (the reinsurer).
Run-off A situation where an insurer is no longer underwriting new business but continues to meet its liabilities under existing contracts.
Solvency II New capital adequacy regime for the European insurance industry. Establishes a revised set of EU wide capital requirements and risk management standards.
Total Shareholder Return A measure of performance based on the overall value to shareholders of their investment in the
Group over a period of time. Includes the movement in the share price and dividends paid, expressed as a percentage of the share price at the beginning of the period.
A measure of the profits the Group earns, adjusted for profit/loss on disposal of subsidiaries, reorganisation and integration costs and acquisition costs, relative to average funds attributable to ordinary shareholders.
This document contains ‘forward-looking statements’ with respect to certain of the
Group’s forward-looking statements. The Group undertakes no obligation to update any forward-looking statements, save in respect of any requirement under applicable law or regulation. Neither the content of RSA’s website nor the content of any other website accessible from hyperlinks on RSA’s website is incorporated into, or forms part of, this document.